Seasonal bond maturities in the U.S. insurance industry
Authors: Giedre Lenciauskaite (Vienna Graduate School of Finance)
Title: Seasonal bond maturities in the U.S. insurance industry
Abstract: Capital regulation in the U.S. insurance industry imposes higher capital requirements on riskier bonds. Capital requirements are calculated once per year at the calendar year-end. This allows insurers to hold risky high-yield bonds during the year and remove them from the portfolio before capital requirements are calculated. As selling is costly, a more cost-efficient way is to purchase high-yield bonds which mature at the year-end. In this paper, I analyze U.S. life insurers' bond purchases during 2009-2017 and provide empirical evidence that capital-constrained insurers buy from 7% to 16% higher share of a newly issued high-yield bond if it matures at the year-end. I also examine the composition of insurers' yearly bond purchases and find that capital-constrained insurers buy a higher share of high-yield bonds maturing at the year-end. Finally, at the end of the year capital-constrained insurers hold a lower share of high-yield bonds in their portfolios.