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Evaluating Loss Reserves Changes
The Situation
A large US insurer was accused of manipulating accounting data and failing to disclosure material information. In subsequent litigation involving companies providing services to the insurer, Plaintiffs alleged that loss reserve adjustments were intentionally misstated in order to avoid a decrease in the share price rather than resulting from a shift in the business mix as stated at the time.
NERA's Role
NERA was retained to analyze the economics behind Plaintiff’s theories. NERA experts analyzed the impact of changes in the business mix on loss reserves and evaluated the effect of an unexpected decrease in loss reserves on the stock price. NERA developed an analysis showing that the shift in business mix from lines with longer claims payment periods to lines with shorter claims payment periods was consistent with the observed changes in the insurer’s loss reserve over the period. NERA experts also constructed a statistical study of insurers’ stock price response to unexpected changes in loss reserves. The statistical study found that stock prices increased in response to unexpected decreases in the loss reserve.
The Result
NERA’s analyses were used to demonstrate that the reported changes in loss reserves were consistent with shifts in the insurer’s business mix. NERA’s work also showed that the typical stock price reaction to unexpected changes loss reserves was not consistent with the Plaintiff’s theory in the case.