Stock analyst David Merkel at The Aleph Blog follows up on his previous post about AIG reserving practices with this chart:
- ACE — ACE Limited
- BRK — Berkshire Hathaway
- CB — Chubb
- CINF — Cincinnati Financial
- CNA — CNA Financial
- MKL — Markel
- PRE — PartnerRe
- TRV — Travelers
- WRB — W. R. Berkley
- WTM — White Mountains Insurance
- XL — XL Capital Limited
The chart shows development on prior reserves as a percentage of underlying reserves, as taken from each company’s 10-K. David is focusing on AIG, so he notes that – looking at the ‘Average’ row near the bottom – AIG’s average development on prior is 2.1%, worse than any company except CNA.
The column ‘AIG – Total’ is also worth a look. It is the column labeled ‘AIG’ minus the column labeled ‘Total.’ (That sounds silly to write, but I don’t think it is intuitive.) Essentially, it shows that even in years when AIG drew down reserves, it did so in an environment when most companies drew down reserves, and it drew them down less than other companies did.
The money quote:
Among all the other difficulties that AIG had, from a yield-seeking derivatives subsidiary, to life and mortgage insurance subsidiaries in trouble, this was just another facet of a company that played it fast and loose. They under-reserved their P&C divisions, and there can be no reasonable defense on that topic.
PS — I like investing in P&C insurers and reinsurers that regularly release reserves for the business of prior years. Conservative companies have high earnings quality, and are reasonable investments, despite all of the uncertainty.
David’s a stock analyst, but he is open about where his biases might lie. He is long on Partner Re and Chubb. And though he has publicly stated his opinion in the past (slide 31 in this presentation) – “AIG will die” – he is fair-minded enough to say that he does not know how adequate current AIG reserves are.
He gathers together his writing on insurance companies in this post.
Update: Just to add what I always thought was one of the most interesting facts about the genius that was Jack Welch (via ActionForex.com):
Jack Welch, General Electric’s demanding former chief executive, delighted in setting the bar high. When he stepped down a few days before Sept. 11, 2001, he left his successor, Jeffrey Immelt, the challenge of matching a remarkable string of years of strong profit growth. What was most remarkable about those years, however, wasn’t apparent to anyone outside the company until recently. The bar might have been set artificially high.
During the last five years of the Welch era, ended in 2001, GE’s reported earnings jumped from 72 cents a share to $1.37, a rise of 65 cents a share, or 90.2% — spectacular for a behemoth like GE. But without a massive under-reserving at its reinsurance unit, the company would have shown a cumulative earnings gain of just four cents, or 5.6%. [Barron’s, December 26, 2005]