Fair value hierarchy asset valuation. Does it have any predictive power? An international research on the insurance sector

Abstract

The objective of the work is to identify any significant relationships between different levels of fair value hierarchy for the valuation of financial assets and two main variables: market capitalization and net income. We considered a sample of 506 insurance companies in two main areas –in the US and in Europe - all listed between 2013 and 2008. Results confirm the hypothesis of correlation between fair value hierarchy adopted in assessing the asset value and market capitalization of the companies, consistently with previous results of Laghi et al. (2012). Moreover, introducing the market-to-book ratio, results show a problem of undervaluation for insurance companies with a relatively larger amount of Level 2 and Level 3 financial assets than Level 1 assets. Nevertheless, results for companies listed in European markets do not provide strong evidence. Moreover, the relationship between different levels of fair value assets and net income is confirmed for the US market but not strongly enough for European companies to consider Level 3 as anti-cyclical instruments for financial reporting. The research results can be useful in helping investors to assess the impact of fair value hierarchy practice on financial reporting of insurance companies. However, a limitation of the analysis is represented by the use of aggregate data for each class of fair value asset, without considering the specific impact related of composition of each category of financial asset evaluated with fair value hierarchy in financial portfolios.