The Role of Holding Company Financial Information in the Insurer-Rating Process: Evidence from the Property-Liability Industry

We examine data for the year ended December 31, 1997 for 80 publicly traded property-liability insurers that have Best financial strength ratings of their consolidated insurance-operating subsidiaries. These firms employ a holding company structure, in which a parent owns the stock of multiple insurance-operating subsidiaries. The operating subsidiaries prepare a consolidated annual report using the Statutory Accounting Principles (SAP), and an analogous set of financial statements based on the Generally Accepted Accounting Principles (GAAP) is released by the parent. We find that the financial characteristics important in determining ratings at the individual firm level - capitalization, liquidity, profitability, and size - are also important at the group level. Further, financial ratios from holding company statements are incrementally useful in the ratings' process, after group-level ratios have been taken into account. Robustness tests based on a subsample of holding companies with minimal investment outside of the property-liability industry reinforce our conclusion that parent company statements influence consolidated group ratings. However, our data do not allow us to separate the relative contribution of the GAAP model and underlying transactions to the ratings decision.