Abstract
AbstractA variety of research has investigated the impact of rating changes on stakeholder and firm behavior. This article provides a unique setting to analyze the effect for both stock and mutual firms and with a class of nontraditional investors, owners of retained asset accounts (RAAs). These individuals become creditors of the insurer upon receipt of life insurance proceeds, which are held in the general accounts of the insurer. The funds receive limited guaranty fund and no Federal Deposit Insurance Corporation protection, thus subjecting the owner to the financial risk of the insurer. Some owners of RAAs may not understand the risk; thus, it is unclear if these owners act as other creditors to changes in the financial stability of the insurer. This provides a setting to analyze reaction to firm risk, as reflected in ratings changes, to stakeholders other than stockholders or customers. We find that RAA owners do act in a manner consistent with traditional investors. Specifically, we find that abnormal retention in the RAAs indicates significant declines in the level of accounts open and funds deposited in the year following a threshold downgrade (falling below an A–) of the A.M. Best rating.
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