Fair value information and regulatory capital management using financial asset reclassification by Korean insurers*

This study examines whether and when insurers adjust their classification of financial assets to manage regulatory capital. Using a sample of Korean insurers during 2013 to 2019, we document the following. First, insurers exhibit a tendency to adjust the classification of debt securities between held-to-maturity (HTM) and available-for-sale (AFS) financial assets when the companies have lower regulatory capital ratios. Second, the reclassification of debt securities from HTM to AFS is more pronounced when the excess of fair value over the carrying amount of the securities becomes larger. Third, the tendency to reclassify debt securities from AFS to HTM becomes greater when the accumulated valuation gains on AFS are larger. Overall, our study provides evidence that insurers use accounting discretion to manage regulatory capital and that fair value information can predict such behavior.