S&P Warns P/C Insurers on Reserving Practices

[Viking]

Here is the bear case for not buying P/C insurers right now... appears some have been swimming naked and the tide is starting to go out.

 

http://www.insurancejournal.com/news/national/2010/06/03/110422.htm

[Parsad]

If some of you have ever wondered why Fairfax's combined ratios seem a bit more elevated than their competitors, now you know why.  There is no fudging of the reserves at Berkshire, Fairfax or Markel.  The set their reserves higher than most of the competition.  Cheers!

[Viking]

Sanj, I hope you are right. My guess is once FFH proves to investors that its reserving practices are in the same league as the industry leaders we will see multiple expansion. BV growth + multiple expansion = investing nirvanna

[twacowfca]

If some of you have ever wondered why Fairfax's combined ratios seem a bit more elevated than their competitors, now you know why.  There is no fudging of the reserves at Berkshire, Fairfax or Markel.  The set their reserves higher than most of the competition.  Cheers!

 

 

True, but BRK may be in a class by itself.  A few years ago the SEC subpenaed BRK requiring them to doccument how they set the amount of their reserves for long lived liabilities like A&E.  This was peculiar because BRK had the most conservative reserves of any P&C insurer.  It seems that the SEC wanted to use BRK as a standard of comparison for other cos like FFH that they were investigating then.  The doccuments were eye opening.  FFH had strengthened their A&E reserves then to a level of about 9 years or 9 times its annual payments, a level that was above average compared to their peers.  BRK's reserves were 17 years, far above the reserves of any P&C competitor!

[nodnub]

True, but BRK may be in a class by itself.  A few years ago the SEC subpenaed BRK requiring them to doccument how they set the amount of their reserves for long lived liabilities like A&E.  This was peculiar because BRK had the most conservative reserves of any P&C insurer.  It seems that the SEC wanted to use BRK as a standard of comparison for other cos like FFH that they were investigating then.  The doccuments were eye opening.  FFH had strengthened their A&E reserves then to a level of about 9 years or 9 times its annual payments, a level that was above average compared to their peers.  BRK's reserves were 17 years, far above the reserves of any P&C competitor!

 

Are you referrring to the AIG related subpoenas from January 2005 that are discusssed in the BRK 2006 Annual Report?

[Myth465]

If some of you have ever wondered why Fairfax's combined ratios seem a bit more elevated than their competitors, now you know why.  There is no fudging of the reserves at Berkshire, Fairfax or Markel.  The set their reserves higher than most of the competition.  Cheers!

 

 

True, but BRK may be in a class by itself.  A few years ago the SEC subpenaed BRK requiring them to doccument how they set the amount of their reserves for long lived liabilities like A&E.  This was peculiar because BRK had the most conservative reserves of any P&C insurer.  It seems that the SEC wanted to use BRK as a standard of comparison for other cos like FFH that they were investigating then.  The doccuments were eye opening.  FFH had strengthened their A&E reserves then to a level of about 9 years or 9 times its annual payments, a level that was above average compared to their peers.  BRK's reserves were 17 years, far above the reserves of any P&C competitor!

 

Very Interesting. Things like this make book value a very difficult metric to rely on and make trust in Management an important key for insurers.

[twacowfca]

True, but BRK may be in a class by itself.  A few years ago the SEC subpenaed BRK requiring them to doccument how they set the amount of their reserves for long lived liabilities like A&E.  This was peculiar because BRK had the most conservative reserves of any P&C insurer.  It seems that the SEC wanted to use BRK as a standard of comparison for other cos like FFH that they were investigating then.  The doccuments were eye opening.  FFH had strengthened their A&E reserves then to a level of about 9 years or 9 times its annual payments, a level that was above average compared to their peers.  BRK's reserves were 17 years, far above the reserves of any P&C competitor!

 

Are you referrring to the AIG related subpoenas from January 2005 that are discusssed in the BRK 2006 Annual Report?

 

 

Yes.

[twacowfca]

If some of you have ever wondered why Fairfax's combined ratios seem a bit more elevated than their competitors, now you know why.  There is no fudging of the reserves at Berkshire, Fairfax or Markel.  The set their reserves higher than most of the competition.  Cheers!

 

 

True, but BRK may be in a class by itself.  A few years ago the SEC subpenaed BRK requiring them to doccument how they set the amount of their reserves for long lived liabilities like A&E.  This was peculiar because BRK had the most conservative reserves of any P&C insurer.  It seems that the SEC wanted to use BRK as a standard of comparison for other cos like FFH that they were investigating then.  The doccuments were eye opening.  FFH had strengthened their A&E reserves then to a level of about 9 years or 9 times its annual payments, a level that was above average compared to their peers.  BRK's reserves were 17 years, far above the reserves of any P&C competitor!

 

Very Interesting. Things like this make book value a very difficult metric to rely on and make trust in Management an important key for insurers.

 

Yes. Things are not always what they seem, especially for P&C cos that have a lot of long tail casualty business.  That's why I like short tail property insurers and only a handful of companies like BRK that have a substantial long tail book.  Even with these, there is always the chance that some latent liability will blow up as many years of time pass.

[Myth465]

Very Good Point, Asbestos is a good example. Makes LRE all the better.

 

 

[twacowfca]

Very Good Point, Asbestos is a good example. Makes LRE all the better.

 

 

 

There's risk with property cat insurers, but the risk becomes apparent soon after an event.  No mystery meat.  It's difficult to fudge short tail property reserves for more than a quarter, although losses on a hundred year event like KRW may take a little longer to fully develop.  That's why

Bermuda Re property cat insurers are incentivized by quick loss developments to be generally over reserved.  This gives them a little cushion when they have a bad year.

[Guest HarryLong]

Here is the bear case for not buying P/C insurers right now... appears some have been swimming naked and the tide is starting to go out.

 

http://www.insurancejournal.com/news/national/2010/06/03/110422.htm

 

S&P is exactly right on this one. If reserving is not accurate, reported book value is meaningless.