ADVISEN EXAMINES INVESTOR AND MARKET REACTION TO
DEFICIENCIES IN LOSS RESERVES AT MAJOR INSURERS
Advisen QuickNote Models Impact of Loss Reserves on Share Prices
NEW YORK, February 20, 2004 – Advisen, Ltd., the leading provider of information, analytics and benchmarking for the commercial insurance industry, today announced it will release an Advisen QuickNote next week suggesting that the impact of loss reserves deficiencies has not been fully priced into the share prices of major insurers and “significant new announcements hold the potential to further drive down industry share prices.”
The QuickNote, one in a series of brief analyses Advisen prepares for its clients, tracks the influence of the continuing loss reserve deficiencies on the market value of major insurers. The note demonstrates a gap between the performance of insurance companies compared to the overall equity markets which Advisen attributes directly to loss reserve deficiencies and the industry’s inability to manage the market’s expectations as more and more insurers reveal their poor loss reserve positions.
“Major insurers are lining up like confessors seeking absolution from the equity markets for the sin of not managing their loss reserves, and the markets are not reacting favorably,” said David Bradford, founder and senior vice president at Advisen and author of the QuickNote. “We have developed a discreet model which will help the industry gauge potential future revelations and demonstrate quantifiably how the industry has absorbed the existing ones.”
The QuickNote does applaud the way some insurers have managed expectations in the market, singling out Hartford Financial Services Group, noting that the company experienced an increase in its share price after announcing reserve increases. But the note also points out that other companies who mismanaged similar announcements have been hammered in the markets experiencing stock prices plunges of as much as 61 percent.
In some cases, these companies are also experiencing shareholder backlash outside the markets and inside a courtroom. Class action suits are beginning to crop up, according to the QuickNote, in which investors are claiming that management violated its responsibility to shareholders by withholding information on the undervalued loss reserves and thereby artificially maintained inflated share prices.
Advisen analyzed the impact of 27 reserve announcements on share prices in 2003 and then modeled the impact on the market capitalization of the companies making announcements, as well as the effect of the announcements on the overall market. Tracking the Standard & Poor’s Insurance Index against the S&P 500 Index shows a tight correlation between the two indices until early last year when Traveler’s – and later AIG and Chubb – made announcements about loss reserves. The two indices quickly began to diverge and continued to diverge – with a slight abatement in the spring – throughout the year, even as the overall market was climbing, suggesting the market has not yet fully absorbed the impact of these announcements.
“There isn’t a pandemic industry crisis here, but the problem is out there and the sooner we as an industry get our arms around the impact, assess it and move on, the better for everyone involved, from insurer to shareholder,” said Tom Ruggieri, CEO of Advisen. “This QuickNote represents the kind of dispassionate analysis the industry lacks and if we can turn a critical mirror on ourselves and understand the implications of these kinds of trends sooner and more in depth, then the entire industry benefits.”
The Advisen QuickNote, titled “Truth or Consequences: Investor and Market Reaction to Loss Reserve Increases,” is available to all Advisen clients through the Market Analysis section of the Advisen platform.
About Advisen
Advisen Ltd. offers strategic information services to the global commercial insurance industry, combining comprehensive market data with proprietary analytic and benchmark modeling software. Advisen serves the world’s leading insurance companies, brokers and risk managers by providing a systematic perspective on writing, marketing and purchasing lines of commercial insurance.
