Our evidence indicates that U.S. life insurers’ decisions to buy and sell individual corporate bonds are correlated across companies within the life insurance industry. On average, the correlation in sell decisions is greater in smaller bonds, bonds with lower ratings, bonds that have been downgraded, and bonds that have recently experienced relatively large abnormal returns. Correlated trading was also elevated during the financial crisis. In addition, correlated buying and selling are greater when insurers designated as systemically important financial institutions are actively trading. We also find that the bonds that insurers sell in a correlated manner exhibit negative average abnormal returns during the quarter in which insurers are selling. One explanation is that insurers’ correlated selling is temporarily pushing bond prices below their fundamental value. In this case, we would expect prices to bounce back in the subsequent quarter. However, we do not find a rebound in prices and therefore our evidence supports the alternative explanation that insurers’ correlated selling is impounding information into bond prices.

I find that life insurers with bank affiliates had higher premium growth rates than did other life insurers in 2008. The higher growth is derived mainly from annuity products (deposit‐type insurance products), which are often viewed as substitutes for bank certificates of deposit (CDs). The growth effect is consistent with cross‐selling between affiliated banks and affiliated life insurers. The spread between the guaranteed rates on annuity products and CDs in financial conglomerates widened in 2008, consistent with headquarters differentiating prices to move customers within the same group. In addition, the premium growth effect in 2008 is stronger for life insurers that suffered larger balance sheet shocks, as measured by the change in the risk‐based capital (RBC) ratio. The results support that headquarters used internal markets to reallocate resources to weaker divisions.

Analyzing major US property-liability insurers, we find that their cost of equity capital is negatively associated with their underwriting performance, but not with their investment performance. We provide cross-sectional evidence that the difference is attributable, at least in part, to investor learning about opaque insurer liabilities. We also find that capital market and product market imperfections are important determinants of insurers' cost of equity capital. Overall, our evidence contributes to the important literature examining insurers' cost of equity capital, and it suggests that opaque liabilities are a distinguishing feature of insurers in determining their cost of equity capital.

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