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The Characteristics and Valuation of Loss Reserves of Property Casualty Insurers

Author

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  • William H. Beaver

    (Stanford University)

  • Maureen F. McNichols

    (Stanford University)

Abstract

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.

Suggested Citation

  • William H. Beaver & Maureen F. McNichols, 1998. "The Characteristics and Valuation of Loss Reserves of Property Casualty Insurers," Review of Accounting Studies, Springer, vol. 3(1), pages 73-95, March.
    • Handle: RePEc:spr:reaccs:v:3:y:1998:i:1:d:10.1023_a:1009676300318
    DOI: 10.1023/A:1009676300318
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    References listed on IDEAS

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    1. Petroni, Kathy Ruby, 1992. "Optimistic reporting in the property- casualty insurance industry," Journal of Accounting and Economics, Elsevier, vol. 15(4), pages 485-508, December.
    2. Bernard, Victor L. & Thomas, Jacob K., 1990. "Evidence that stock prices do not fully reflect the implications of current earnings for future earnings," Journal of Accounting and Economics, Elsevier, vol. 13(4), pages 305-340, December.
    3. Scholes, Myron S & Wilson, G Peter & Wolfson, Mark A, 1990. "Tax Planning, Regulatory Capital Planning, and Financial Reporting Strategy for Commercial Banks," The Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 625-650.
    4. Beaver, William H. & Engel, Ellen E., 1996. "Discretionary behavior with respect to allowances for loan losses and the behavior of security prices," Journal of Accounting and Economics, Elsevier, vol. 22(1-3), pages 177-206, October.
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    Cited by:

    1. Kathy R. Petroni & Stephen G. Ryan & James M. Wahlen, 2000. "Discretionary and Non-Discretionary Revisions of Loss Reserves by Property-Casualty Insurers: Differential Implications for Future Profitability, Risk and Market Value," Review of Accounting Studies, Springer, vol. 5(2), pages 95-125, June.
    2. Baruch Lev & Stephen G. Ryan & Min Wu, 2008. "Rewriting earnings history," Review of Accounting Studies, Springer, vol. 13(4), pages 419-451, December.
    3. Kenton K. Yee, 2004. "Forward Versus Trailing Earnings in Equity Valuation," Review of Accounting Studies, Springer, vol. 9(2), pages 301-329, June.

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