Equity Investment Decisions of Operating Firms: Evidence from Property and Liability Insurers

During the 2007–2009 financial crisis, almost 10% of Property and Liability (P&L) insurers completely liquidated their equity portfolios, and more than half of them never resumed equity market investments. In contrast, those P&L insurers that continued investing in equities after the crisis, increased their portfolio allocation substantially. To understand these findings, we develop and estimate models that explain P&L insurers’ dynamic equity investment decisions, in terms of firm, group, and market characteristics over the period 2002–2018. We study three different approaches to equity investments, a pure investment strategy, internal capital market contributions, and an outsourcing option and find that the factors driving the decision to invest in equities differ from those that explain the extent of their equity investments. Moreover, we find that while equity portfolio losses drive the decision to temporarily cease investments in equities, the decision to permanently exit equity markets is driven by both equity market losses and underwriting losses. These findings shed some light on the factors driving the demand for equity investments by operating firms.