No. of Recommendations: 2
Belatedly, But are you suggesting that there is something wrong with what Fairfax is doing, or different in nature from other runoff operations, where there is a known future liability that has to be managed in a different way from regular insurance policies?
The effect of what Fairfax does by using Riverstone is, they take 6 or 7 of THEIR companies' worth of "bad"/catastrophic loss policies off of the books of those companies and dump them into an account (RS) where they can under-estimate the loss provisions in total by many percent. The 6 or 7 companies combined ratios drop substantially - "cleaned" so their capitalization & profitability looks much better.
The trick is with these guys, because its internal, they can declare whatever future liabilities they want and provide an operating budget refreshed annually to manage expenses, payouts and (mostly) settlements. An entity like Riverstone, like any runoff, is incentivized to settle aggressively and cheaply to close down the future liabilities. But, they can use the prospect of future underwriting from the other FFXHF as an incentive to settle quickly. They also centralize or virtually organize the legal fraud-fighting units from the satellite companies into one entity to countersue the endless paid-expert witness frauds and re-litigating "ambulance chasing" law firms that take most of whatever they win from the plaintiffs. Oh, and manage reinsurance as well.
So, it's not wrong, it's just business. But several years ago, at least one of the satellites (Zenith? Odyssey?) was able to grow its premium book by something like 100% over 3 or 5 years once its toxic policies were extracted, making the regulators happy and their new underwriting pricing very attractive. And Fairfax didn't have to pay a dime to anyone else to take the toxic stuff on.
FC
