On the “double leverage” of US insurance groups

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Abstract

We show that a high degree of “double leverage” inside US insurance groups affects in a negative way their financial strength. Double leverage occurs when the parent firm finances the purchase of subsidiaries’ equity using external debt proceeds, i.e., without changing its stand-alone capital. The previous evidence shows that the double leverage of US Bank Holding Companies leads the firms to become riskier (Bressan, 2018b) and less efficient (Bressan et al., 2021). While regulators give instructions for the assessment of double leverage inside banking groups, in the insurance sector this topic has not received enough attention from either regulators or scholars. This article aims to fill this lack of knowledge by using data from the balance sheets of US insurance groups during the years 2000–2021, showing that indicators for the solvency and the performance of insurers decrease significantly in measures of double leverage. These findings deliver important implications for future policymaking. As we analyze accounting data from consolidated balance sheets, we argue that regulators should more carefully consider whether consolidation rules are sufficiently informative about the financial stability of insurance groups. This is an important task in relation to the systemic relevance of insurance corporations. Finally, this article is a starting point for follow-up research testing, for example, the link of double leverage to captive insurance (Weterings, 2014) and reinsurance (Park & Xie, 2014; Bressan, 2018a).

Keywords: Insurance Groups, Double Leverage, Financial Strength

Authors’ individual contribution: The Author is responsible for all the contributions to the paper according to CRediT (Contributor Roles Taxonomy) standards.

Declaration of conflicting interests: The Author declares that there is no conflict of interest.

JEL Classification: G22

Received: 12.01.2023
Accepted: 13.03.2023
Published online: 15.03.2023

How to cite this paper: Bressan, S. (2023). On the “double leverage” of US insurance groups. Risk Governance and Control: Financial Markets & Institutions, 13(1), 26–36. https://doi.org/10.22495/rgcv13i1p3