Asbestos and Environmental Reserves Increases and Shareholder Wealth

Between 1992 and 2000, significant reserves increase announcements were made by several major property/liability insurers. These reserves increases were for the purpose of funding expected asbestos and environmental liability. Although most analysts agree that U.S. insurers are underreserved for asbestos and environmental liability, how the market reacts to an insurer's announcement of an increase in these reserves has not been analyzed. An insurer that is significantly underreserved is likely to be viewed by the market as lacking financial stability for the long term. However, when a company increases its reserves there is a charge to income and a reduction in capital. If surplus is diminished sufficiently as a result of the increased reserving, regulatory attention and eroding shareholder and market confidence could result as well.