Credit Risk Determinants of Insurance Companies

This paper investigates the determinants of credit risk in insurance companies in the U.S. and Europe. Consistent with recent results for non-financial firms in the U.S., we find that equity volatility is a major determinant and predictor of CDS spreads for both U.S. and European insurers, even after controlling for the composition of their investment portfolios and other firm-specific characteristics such as leverage and macro controls. Furthermore, we find macroeconomic factors to affect the credit risk of European but not U.S. insurers, whereas cash holdings seem to be relevant in explaining the credit spreads of U.S. insurance companies. We find that cash holdings and credit spreads of U.S. insurers are positively correlated. However, the availability of cash reduces the credit risk of firms experiencing positive solvency shocks. Overall, our results are economically significant and suggest that equity and credit markets incorporate quickly relevant information on the creditworthiness of large insurers.