bsilly Posted November 20, 2015 Share Posted November 20, 2015 I have been looking at some long term valuation metrics for Fairfax, one of which is the combined ratio. I plotted the reported combined ratios since inception - 1985, and then overlaid a ten year trailing average. I like the ten year average because it eliminates the noise of annual fluctuations and will also tend to average out the ups and downs of insurance cycles (it will include a few hard market years & a few soft market years). Note that the arithmetic average differs from the weighted average. A weighted average will tend to skew results towards years of higher net premiums written. Accident year results are also an excellent way to look at reserving, as Prem did in the most recent annual letter, but I am looking at it differently - on an as reported basis, which includes reserve deficiencies/redundancies in the year reported. Over 10 years, issues of over/under reserving should more or less come out in the wash. This year is of note, because, as you can see from the image below, Fairfax' ten year average 'as reported' combined ratio, barring a major disaster between now and year end, will go below 100 for the first time ever. I think this is an interesting indicator. The trend reflects the effect of reserve surprises, and the fact that Fairfax has gone from a company that tended to report reserve deficiencies (negative surprises), to one that is tending to report redundancies (positive surprises). You can see that after 2001, there has been a steady long term trend towards stable underwriting profitability. Part of this is due to industry dynamics. Even though I did not plot industry averages, I think the trend would compare favorably. Fairfax is improving it's underwriting results relative to the industry. I now feel justified, perhaps for the first time (and I have owned and followed Fairfax for a long time), in projecting average combined ratios for Fairfax of 100 or better going forward. Comments? http://i.imgur.com/4xRm1Pw.jpg Link to comment Share on other sites More sharing options...
Create an account or sign in to comment
You need to be a member in order to leave a comment
Create an account
Sign up for a new account in our community. It's easy!Register a new account
Already have an account? Sign in here.Sign In Now