The Characteristics and Valuation of Loss Reserves of Property Casualty Insurers

The Characteristics and Valuation of Loss Reserves of Property Casualty Insurers

Review of Accounting Studies. March
1998, Vol. 3, Issue 1-2, Pages 73-95

This study examines characteristics and valuation of claim loss reserves of property casualty insurers. Using SEC disclosures of revisions (development) in loss reserve estimates, we document substantial serial correlation in loss reserve development, indicating that reported loss reserves do not fully reflect available information, consistent with management exercising discretion over reported loss reserves. We find that loss reserve development reported one year after the balance sheet date has significant explanatory power for firm value incremental to book value of equity and earnings, suggesting investors at least partially identify management’s influence on reported loss reserves, and adjust firm values accordingly.