Capital required to be set aside in order to cover a company against unexpected debt. The asset valuation reserve serves as a backup for equity and credit losses. A reserve will have capital gains or losses credited or debited against the reserve account.
Usually the asset reserve consists of two components, a default component and an equity component. The default component protects future credit related losses, and includes arrangements for corporate debt securities, preferred stock, mortgage backed securities, farm, commercial and residential mortgages. For example, the National Association of Insurance Commissioners (NAIC) has to keep a liability reserve to cover claims in real estate and mortgages. The equity component has provisions for common stocks and real estate.