Did Insurance Company Insiders Anticipate the 2007–2009 Financial Crisis and Recovery after Government Intervention? Evidence from Insider Trades

We examine the association between insider trades and subsequent returns in shares of publicly traded insurance companies before, during, and after the financial crisis of 2007–2009. Insurance firms in the U.S. are heavily regulated by the states. Larkin and Casscles (2003) argue that state regulators are very effective at monitoring and regulating insurance companies. In the face of such heavy scrutiny by regulators, consumer advocacy groups, and the media, we expect insurance company insiders to refrain from questionable trading practices. Our paper has three main results: (1) Insider trading in insurance company shares was not associated with unusual returns in our overall sample (August 2002–December 2018); (2) insiders of insurance firms were not able to predict the onset of the financial crisis; and (3) insider purchases of insurance firms’ shares were followed by abnormally large returns after the govern-ment announced bank bailouts in October 2008. Our results have implications for investors and regulators and add to the evidence in the insider trading literature.