Information About Future Cash Flows in Fair Value Disclosures of Equity and Debt Securities of Property-Liability Insurance Companies

This study analyzes the relation between fair values of equity and fixed maturity debt securities and future cash flows of property-liability insurance companies. We find that fair values of equity investments U.S. Government bonds and municipal bonds are explained by future cash flows to these securities after controlling for book values and differences in risk. However fair values for corporate and other bonds are not reliable predictors of future cash flows. The results of this study contribute to the ongoing debate over the relevance and reliability of fair value disclosures of assets and liabilities. In particular these results shed some light on prior research on the valuation of implications of fair value estimates of investments (Barth 1994 Petroni and Wahlen 1995)