Maverick47

Add Howard Lutnick to RFK Jr. as a yet more egregious example of a sycophant who has tried to normalize bad percentage math in the prescription drug price reduction discussion. It’s potentially okay for RFK and Trump to (as you charitably put it) look stupid…one might argue that with their worm-eaten or aging brains, perhaps they simply are both mathematically stupid these days, (along with having a narcissistic inability to admit to a simple mathematical mistake.). But as a finance/investment person, Lutnick should know better, so his willingness to spread numerical falsehoods about how percentages work and what they mean is, in my opinion, much worse.

Good point, particularly for Americans who tend to lack numeracy. I recall in the late 90’s that State Farm had introduced 2% hurricane deductibles for their Home insurance customers in coastal Mississippi. That was explained as 2% of the insured value of the home. This was different from the standard dollar deductibles that had applied to home insurance policies previously (and those dollar deductibles still applied to all insured losses other than from hurricanes). Fast forward to some actual hurricanes hitting Mississippi a few years later, and the Mississippi state insurance commissioner at the time told State Farm that their claims adjusters would not be allowed to apply the 2% hurricane deductibles to customers with hurricane losses. I think the reasoning must have been something along the lines of “how can you expect an average Mississippian customer of yours , with, for example, a home insured for $237,000, to possibly be aware of what 2% of $237,000 would be when converted to a dollar amount.” Fair point, and since then all US home insurance customers anywhere, who have percentage deductibles, will now see on their yearly bills, both the percentage and the calculated dollar amount of that percentage.

Exactly right! I also love RFK Jr’s lame attempt to explain this. He says “if a drug was $100 and increased to $600, that’s a 600% rise”. Wrong. It increased by $500, meaning it was a 500% increase on the original $100 cost, not 600%. A 600% increase in a $100 drug would get you a new price of $700. Maybe if these folks had gone to public school like I did they could figure out basic grade school math and at least attempt to lie about math in an intellectually consistent fashion. But these are simply alternative facts in the MAGA world. So glad we have a very stable genius in the White House these days. So glad they’re in charge of the finances of the country.

Thanks for posting the skit…it really is a good analogy to what is happening these days! I do look back with nostalgia on the first term before the more negative impacts of age, rage, vengeance and lack of qualified advisors that we’ve been living through in the second term. The change in corporate income tax to a 21% rate was a benefit in the first term. The only bright spot I can see in the second term is that he no longer listens to political advisors who can help curb his worst instincts or act as a filter, so his approval rating has dropped to only about a third of all US voters…pretty much his political base less those within his own base that he is ticking off with negative economic impacts, attacks on their intelligence, faith, etc. Repairing relationships with our good neighbors to the north and the good neighbors in Europe will be the major task of whatever future political regime gets installed, whether the party affiliation is Republican or Democratic.

Thanks for sharing, @Parsad! Really appreciate the color, particularly about your conversation with Ajit back in 2004! And your assumptions about why Berkshire seems not to have pursued a major acquisition of Fairfax also ring true. Buffett was historically interested in insurance companies that had both great underwriting and intelligent investment strategies. If he could find a company that was dramatically underpriced, he might bend on the investment side of things if the underwriting was extremely strong and the market price was extremely attractive. That would have been back in his cigar butt days when, for example, he was happy to pick up shares of small midwestern insurers that were extremely undervalued (selling for only a few times normalized annual earnings) even to the extent of advertising in local papers for local holders to sell him their shares. Back sometime in the mid ‘70’s, Berkshire made acquisitions of large amounts of shares of two US insurers at roughly the same time: GEICO and SAFECO. In his annual report, he describes SAFECO as a much better underwriting company than those he already owned, and further commented that “their investment policies make great sense”. For GEICO, we know he was aware that a temporary problem with reserving was being addressed by new management under Jack Byrne, and from his knowledge of the company since he became aware that Ben Graham was a large holder (maybe even a director?) back in the 1950’s, he was aware of their large expense advantage over the rest of the industry. And we are aware that at some time in the 1970’s Buffett helped GEICO interview investment managers for their float, and selected Lou Simpson. So with GEICO he also had both great underwriting/pricing in place, and knew that their investment policies would make great sense under Lou going forward. Over the years, he became a trusted partner, owner of the company, such that his final acquisition of all of its shares was seen as a fair and friendly acquisition. SAFECO by contrast, was not mentioned much in the next few years, and disappeared from the major investee list of Berkshire a few years later. I happened to get my first insurance job there myself as an underwriter about a decade after it had dropped off the Berkshire investee list. Never learned exactly why that occurred from the SAFECO side of things, but have my own guesses…first, the company’s directors were probably very suspicious of the motives of Berkshire…may have been why in the annual report introducing the buy, Buffett took a paragraph or two in the annual letter to highlight that he was NOT interested in taking control of the entire company. I suspect that the fairly insular local directors of the company were hostile to the idea of an investor from Omaha picking up a large block of their shares, and distrusted his motives for doing so. Secondly, the longtime treasurer at SAFECO who was in charge of their investment strategy retired a few years after the Berkshire share purchases, and by the time I arrived years later, their investment policies were very much in line with the rest of the industry, focusing on bonds alone, and so no longer would have “made great sense” from Buffett’s perspective. Your own observations about Fairfax would indicate that Buffett would have been somewhat skeptical of the underwriting side of things at least until 2015 or so. And since he would have known that Prem controlled more than 40% of the voting shares, he probably knew that it would be unlikely that he would be able to consider acquiring the entire company, which probably would have been the only way he would have been interested in the company after the 2015 time frame given the size of the market cap. Instead, he negotiated the purchase of all of Alleghany, in 2021 or 2022 if memory serves. There he had the advantage of a former Berkshire exec, Joe Brandon, who had become CEO of Alleghany, and was willing to entertain a bid from Berkshire for the entire company. So I think Berkshire does want to “move the needle” by either buying entire insurers that are significantly smaller than themselves, or are willing to consider less than controlling share sizes of only the very largest market cap insurers like Chubb. Buffett probably is aware that Prem would not be open to a fair and friendly acquisition of all of Fairfax by Berkshire, and even a 10 or 20% share ownership of the company would not move the needle for Berkshire, so that probably explains the current situation. But as you noted, one should never say never!

The fact that he removed the post rather than doubling down on it tells you all you need to know about whether this was a calculated snub of political opponents, a self-inflicted wound against his own far right religious political base of support, or merely an idle way of making his supporters prostrate themselves even further. Like a horror movie trope, turns out that the loudest complaints this time were coming from calls inside the house of his own supporters. I don’t think he’s seeing as many of his supporters debase themselves on this issue as he might have expected given the laying on of hands he experienced in the Oval Office just a short time go. I’m just settling down with a tub of popcorn myself.

Okay, we all know Trump’s not big on reading lots of text….so I suppose we can cut him some slack for not knowing the later commandments, such as not stealing, or not committing adultery….but for Heaven’s sake, this image apparently violates the first commandment, to have no other gods before Me. Didn’t he at least read the first one? At least he’s an equal opportunity offender, slighting Moslems, Catholics and Protestants with his posts over the last few weeks. Not sure why he is going after groups who’ve tended to support him politically, but I’m beginning to wonder whether the only person who really has Trump Derangement Syndrome is the current occupant of 1600 Pennsylvania Avenue.

I think you’re on the right track here. One of Herb Cohen’s negotiating books included an appendix where he wrote about advice he gave to US negotiators back in the 70’s during the Iranian hostage crisis. My recollection is that he told the US folks that they need to consider the Iranian perspective and determine what makes the hostages most valuable to them…and in his opinion it was the fact that they knew Carter had an election coming up in November…so the closer they got to the election, the more valuable it would be to Carter to try to negotiate a settlement. So they really wouldn’t be interested in agreeing to release hostages much before that. And of course the demands got more onerous as the election neared, and Carter couldn’t politically see giving in so significantly before the election either….so a deal wasn’t made then after all. Then when Reagan was elected, his hardline rhetoric made keeping the hostages after he took power seem more of a liability to the regime than releasing them. Of course they hated the idea of giving in to Carter, but releasing them on Inauguration Day to a politically defeated and neutered outgoing Carter regime was better than facing the unpredictability of what a former actor/hardline new President would do. The current situation is more complex, because it isn’t solely a binary US/Iran negotiation, We have Israel and the Gulf neighbors to consider too, as well as the rest of the world’s economies impacted by the stranglehold of the Strait of Hormuz’s closure/potential blockade. But if past is prologue, you’re not wrong in pointing to the timing of US political events as an important consideration in the Iranian negotiating stance.

I’m reminded of Munger’s comment that “People who create systems that are easily gamed belong in the lowest circle of hell.” Seems appropriate.

Trump will find a way personally to benefit from this tolling situation. He may have a “ joint enterprise” with Iran, finding a way for his share of the tolls to find their way into some offshore Trump bank account. Or if he doesn’t do that, he will encourage the Iranians to continue to collect tolls in digital token currencies(maybe even Trump coins?). Whatever the tolling situation ends up at, the net result is almost certain to be a negative for the global economy.

Good point. No flexibility results in a doubling down on a threat to use air power to destroy civilian infrastructure. Unfortunate that the folks who might be tasked with carrying out such orders are likely unaware that the presidential pardon power only covers federal crimes, not war crimes under international law.

. You got that right!

Nope. This is an asymmetrical war. Trump just confirmed to the leaders of Iran that what they are doing to interfere with maritime traffic through the Strait is working. Will they have to pay for this in terms of their own people and infrastructure? Sure. But I don’t think they care. After all, that’s why Trump called them “crazy bastards”. He knows they aren’t acting rationally. Why should we expect his threats to work against crazy people?

Trump is putting on a master class in how to destroy one’s own bargaining position in a negotiation. Herb Cohen wrote a book titled something like “How to negotiate by caring, but not THAT much.” The point being that you don’t want the other party to know exactly what REALLY is important to you in a negotiation, so your threat to walk away without a deal remains credible in the eyes of the other party…and you might end up getting what you wanted all along without having to overpay for it. Trump has maintained that the closing of the Strait of Hormuz is of no importance to the US…because it doesn’t buy a significant amount of the oil that passes through it. It will “open naturally” or other countries who need the oil shipped through it will have to open it themselves. Or they can just buy all the oil and jet fuel they want from the US, which has plenty to sell to make up what is lost from the Gulf states….sure those are falsehoods, but at least he was attempting to pretend that the Strait of Hormuz was not THAT important to the US. But with his latest screed, demanding that the “F’in Strait be opened by the “crazy bastards”.. he has completely reversed himself and let Iran know just exactly how important the Strait being opened is to him after all. So much being a master negotiator.

Wow. Just wow. This is inappropriate on so many levels. I was 99% sure that this was a fake post, until I investigated further.

Excellent advice…both for children and countries!

I might try to look back at the triangles in reports before the IFRS 17 accounting change. Meanwhile, I can share a couple of observations about the triangle that @CapitalAlloc showed from page 80 of the Annual Report, which I just received today. ( I find it a bit easier to flip back and forth in a paper document than the online pdf). The paragraph before the triangle, found on the bottom of page 79, says that: “The loss development tables below represent the estimates of undiscounted cumulative claims, excluding the risk adjustment, on both a gross and net of reinsurance basis for insurance contracts issued by the property and casualty insurance and reinsurance reporting segments at the end of each calendar year.” Page 218 in the paper Annual Report notes that: “References in this MD&A to the company’s property and casualty insurance and reinsurance operations do not include the company’s life insurance and run-off operations….References to “insurance and reinsurance” operations includes property and casualty insurance and reinsurance, life insurance and run-off operations.” So we now know the triangle didn’t include either life insurance, run-off or non-financial risk adjustment, which latter item in the aggregate adds several billion dollars to the discounted insurance contract liabilities on the balance sheet, with information below the triangle indicating that prior year release of this risk adjustment amounted to more than $800 million in both 2024 and 2025. What I’ll be interested in seeing if I can find out is whether before the IFRS 17 accounting change, the undiscounted triangles were shown including any sort of management’s conservative reserving philosophy which may have been the analog (in the IFRS 17 world) of today’s non-Financial risk adjustment. Was there a level of conservatism in the loss reserves shown in pre-IRFS 17 report triangles that disappears in the triangles shown in the current annual report? In any event, run-off can’t explain any apparent reserve development in the 2025 triangle, since we’re told that neither life insurance nor run-off losses are included in it….

Thanks Sanjeev! This is the kind of wisdom that makes membership on the COBF so valuable to me….

Interesting that both situations involve fluid dynamics — flows of money versus flows of petroleum and petroleum products. I’m also somewhat curious about the increased demand for fuel driven by the military actions. Seems to me that sustained aerial combat has to be consuming significant amounts of jet fuel. But the knock-on effects of limitations on oil supplies for the rest of the global economy may be analogous to the interconnectedness of balance sheets that was uncovered by the GFC. Obviously not a direct historical repeat, but something that is likely to strongly rhyme. Central banks can certainly try to inject financial liquidity into the system, but we are likely to find out the difference between monetary flows and oil flows and the ability of one to address scarcity in the other. ”May you live in interesting times.”

@CapitalAllocAs I’m reading the annual report in more detail, I noticed that the paragraph right before the development of gross reserves chart that you’ve shown clearly indicates that this view does NOT include the risk adjustment. I was confused, as were you, by the apparently not insignificant adverse development for many of the calendar years prior to 2025. How to square that with the statements by management that there has been favorable reserve development in each of the last 19 years? The answer has to be that the risk adjustment margin that management includes in their booked reserves are more than sufficient to outweigh any adverse development on the undiscounted reserves shown in the chart…values that do not include this margin.

Interesting @Gregmal. Human psychology tells us that folks hate losing something much more than they like gaining the same thing. The wealthy Gulf nations are understanding just how much they have to lose with Iran controlling the Strait and holding a gun to their heads via threats to destroy their oil and gas infrastructure.

I would like to think that the humans involved in the war management and the political negotiations are all rational actors, but given the actors involved, I suspect that emotions and fears may play a larger part in what happens than I’d otherwise hope to see. Iran seems to have found some leverage over the oil traffic through the Strait of Hormuz. They have already begun charging tolls of a few million dollars paid in yuan for tankers to transit. Buffett has said that his preferred business would be to own a toll road. The Iranians may have found that they own a lucrative toll road which could be a source of financial stability for them in the future if they are allowed to keep control of the Strait. I also can’t help but wonder whether there might not be rational actors on either or all sides who might take advantage of volatility in the markets to make leveraged bets on the future of oil and other asset prices, interest rates etc. which might pay off in the event of some sort of a settlement of the conflict. Just idle speculation, but not unreasonable given the large bets made 15 minutes before Trump released a statement announcing talks were under way earlier this week. If folks on both sides were to make large bets that would pay of handsomely in the event of a settlement, an event over which they could exert influence, perhaps that could provide some sort of financial incentive to settle things in an other than zero sum game manner.

I actually don’t like this. I happen to live in a state with only mail ballots, though when completed the ballot can either be dropped off in the mail or in a secure ballot collection box. To register, I provided my driver’s license years ago and a signature card, as did my wife. We attested under penalty of perjury that we were both US citizens. We have to sign and date our ballots. Once, when my wife was ill, her signature was shaky and she was asked to validate her signature, otherwise her ballot would be discarded. The process is convenient for me, and it’s clear that someone is validating my identity. Each ballot is individually numbered, and mailed to the last known address of the individual who registered. I can’t just pick up a generic ballot and vote it, let alone do so multiple times. My wife has been on hospice for over a year now and I am her main caregiver. Neither of us can leave the house for more than about a half hour at a time, and with access to shelter and a portable oxygen container. Consequently, neither she nor I would be able to vote in person any longer. Under the SAVE act, I would need to provide either a passport or a certified birth certificate, neither of which I have readily available. I also can’t find my wife’s birth certificate, which, since she was adopted, is only available from a state level governmental organization, not the county recorder. There is a multiple month delay and a cost associated with doing so. I did it once when we needed it to enter Canada without a passport several decades ago, but have misplaced it since then. I don’t know about you, but I have never had to provide a passport or a certified birth certificate when buying beer…just a driver’s license. If that was really all I would need to show to vote, I wouldn’t have a problem with it, but would still appreciate mail in voting as opposed to having to wait in line in person, which I can no longer do. So we two US citizens, who have voted legally our entire lives, would be effectively disenfranchised by the SAVE act. This is like a statistical error where the SAVE act would prevent many more legal voters from voting than the current situation allows illegal voters to vote. i think the 75% favorable polling is based on an erroneous stating of the act, just as you have noted that it would be no more of a barrier than identification needed when buying beer, which turns out to be inaccurate.

@CapitalAlloc Really good question. A couple of things might help reconcile this gross undiscounted claims view to what we see in the financials. I don’t have the answers, but maybe some others can chime in. I am assuming that what we see in the financials would be on a discounted, IFRS 17 basis, net of the impact of ceded reinsurance premiums and losses, and the notes in the annual report a page or two after why you’ve shown also refer to a release of a risk adjustment on prior years’ claims, along with prior year loss development. The risk adjustment is, I believe, a cushion that management elects to include in the loss reserves. When management speaks of the impact of prior year loss development, the release of this risk adjustment, when no longer needed, is included under the overarching category of prior year reserve development, is not explicitly shown in the chart you show…yet can be quite significant — not that far away from a billion dollars in value in 2025 if I’ve read this correctly. The notes also refer to management setting this risk adjustment at a confidence level of approximately 85%. If I had to guess how to interpret that, I might suggest that the reserving actuaries first make a central estimate of what they believe the historical data indicates should be held as gross undiscounted loss reserves, and then provide management with a reasonable range around that estimate. Selecting exactly what the actuaries work indicates is the central estimate, would be at the 50th percentile, meaning that there would be an equal chance the final reserve would end up higher or lower than that. An 85% percentile selection, may include enough of an additional reserve estimate that it would be expected to be adequate or redundant 85% of the time, with only an estimated 15% chance it would prove to be inadequate. Prem in his letter indicates that for the last 19 years, Fairfax has had net reserve releases each year, for an aggregate benefit to earnings of just under $7 billion. I expect that the release of the risk adjustment on prior claims is a large part of this. The above is largely speculation and guesswork on my part. Happy to be corrected if anyone knows more about the nuances of prior year development as reported in Fairfax’s financials.

Agreed. However, I don’t think Trump takes advice from anyone except himself on how best to win the midterms: Key Aspects of Trump’s Comments on Obama and Iran: Re-election Strategy: In November 2011, Trump tweeted, "Our president will start a war with Iran because he has absolutely no ability to negotiate. He's weak and he's ineffective. So the only way he figures that he's going to get re-elected... is to start a war with Iran". Predicting Attacks: Trump claimed in August 2012, "I always said Barack Obama will attack Iran, in some form, prior to the election". "Saving Face": In 2013, he stated, "I predict that President Obama will at some point start a war with Iran in order to save face!". Accusations of Weakness: He frequently stated that Obama's negotiating skills were poor and that he would use military action to "show how tough he is". To a man with a hammer (the US military) every problem looks like a nail.