jay21

Thanks so much for your participation, twacowfca. I feel like I am learning a lot and feel much more comfortable increasing my positions in BRK and MKL. I will most likely make LRE a big position as well (once I get the tax situation figured out) and I started looking into FFH too.

Do you ever think about the overlap/diversification between your insurers? For instance most of your insurers are exposed to cat losses. If a big one hits, you will lose a good amount of capital. Do you take that into account when thinking about your portfolio? Although, it seems like most of your insurers think about the maximum they could lose and charge appropriate prices for that risk. So maybe you feel comfortable being exposed to that risk?

I guess. I could easily imagine those getting breached though. Some of my favorite moats: Most alcohol, MDLZ, I'm agreed on Coke, Google, deposit franchises, Microsoft Office, etc.

Wow. I would love to hear your explanation of these because I don't think of most of those having strong moats.

I think some of their moat may have to do with fraud (as in, they know how not to get killed by fraud). That's what I learned from Paypal... almost all of Paypal's competitors have been killed by fraud. Paypal figured out how to keep fraud at a minimal level while maintaining convenience for Paypal users. It has algorithms that spot patterns of likely fraud and automatically shut it down. And if you look at Amazon dropping Paypal as a payment option, that might also suggest some things about the moat that Visa and Mastercard enjoy. Personally I don't think that advertising affects people's decisions to choose Visa over Mastercard or cash or debit. There are huge amounts of marketing aiming to sign people up for credit cards (each signup is worth $15-40+... check affiliate marketing networks for better information). But I don't think that their brands are valuable. I don't think the moat would be in the brand name. It's the switching costs and barriers to entry. I would imagine it would be pretty difficult to launch a company that would compete with them.

From the 2003 Annual Report: Anyone know what he is talking about?

He's better in Always Sunny. Also, a few retailers and tech companies could learn a thing or two from him. It's pretty good. It's a comedy though really, not some Oscar-winning drama or anything. I wouldn't rent it though. If you have it on Netflix or something, that's probably better. One of my favorite movies regarding stocks or the markets is "Trading Places", and I think the underlying social commentary was pretty darn good. It's a Christmas movie too, so it's always on around this time of year. Probably the best role Dan Akroyd ever had. Cheers! Check out "Margin Call" which is a fairly recent movie. Pretty good imo.

Maybe this is a trend that will hurt, maybe not. People still do unhealthy things even when they know they are unhealthy (drink alcohol, smoke, eat junk food, etc.)

I just graduated college recently and I am trying to come up with a great portfolio. Initially, I thought I could spot easy 50 cent dollars. However, after looking at numerous net-nets and low multiple stocks and finding most of them uninvestable, I am trying to develop a portfolio as follows: 50% high quality companies like BRK, MKL, LRE, NICK, MTB, MDLZ, RI.PA. Probably weighted towards BRK, MKL, and LRE. 30% special situations that I feel comfortable with such as HII, JPM, BAC, 20% cash to take advantage of new opportunities. I'd love to hear others thoughts.

One thing I noticed when reading Buffet is that he will never risk all of BRK's capital. In other words, insurance losses can't wipe out everything. Is there anyway to verify this? How about my two other favorite insurers: MKL and LRE?

Definitely not Buffett, but I think he's as good as Weschler and Combs who will be running things. He's also got a hell of lot more runway than them. Hamblin-Watsa is as good if not better than Gaynor, and the leverage there should help. If I had to choose one, it would be Fairfax hands down...but investors will do better than the markets with any of them. Cheers! From what I do know about these people (maybe too little), Weschler is seems to be the best investor. Gayner seems alright, definitely alpha generative, but he doesn't strike me as a superstar. Care to enlighten me?

I don't know anything about these guys, but I find reliance on relative performance to be pretty ridiculous. Especially if they are a hedge fund as opposed to a mutual fund.

Also, that was just an example of a structure. I just found this link: http://www.mondaq.com/unitedstates/x/131334/Insurance/A+Reinsurance+Sidecar+Checklist and it shows how tailored this vehicles could be.

Thanks. I always have a problem with off balance sheet transactions or people laying off risk (cat bonds, reinsurance, sidecars, etc.). If the policy is attractively written, why would you want to unload it? It appears that the sidecar can help insurers raise capital quickly to take advantage of hard markets. It appears that these SPEs are tranched. Do you know if retained interests are always equity or can they be a mix across the capital structure? How levered are these vehicles usually (how about LRE's)? Sidecars can have different purposes. The advantages include: limited lifespan. They can be liquidated when the reason for their existence is no longer there, for example if extraordinary rates go down. They don't have to be concerned with downgrades if they experience large losses because they are fully collateralized. Therefore, they can take on more risk if their owners like high risk/high return opportunities. Insurance companies that need to lay off tail risk like them because they help lower the risk of a downgrade. Hedge funds like them because their gains and losses are not generally positively correlated with financial risks. They generally aren't leveraged with debt, but some have preferred equity in their structures. :) Right. But let's walk through a structure. A hard market starts, then I think the SPE/sidecar ("B") is activated. 1. The premiums written by the Company ("A") will be shared on a quota basis with B 2. B books the premiums received and the LAE 3. Investors in B contribute securities to B and receive debt or equity in B in return 4. Losses develop and are paid. B pays down the waterfall/capital structure A usually invests in B. I am guessing they are in the equity. How levered is that equity piece? In other words, how risky is their investment? Let me know if those steps don't match your understanding.

Thanks. I always have a problem with off balance sheet transactions or people laying off risk (cat bonds, reinsurance, sidecars, etc.). If the policy is attractively written, why would you want to unload it? It appears that the sidecar can help insurers raise capital quickly to take advantage of hard markets. It appears that these SPEs are tranched. Do you know if retained interests are always equity or can they be a mix across the capital structure? How levered are these vehicles usually (how about LRE's)?

Based the statutory requirements and inherent difficulty of value investing, I think most insurers think of themselves as spread based business. Their cost of capital is X and their investments earn Y-X. One of the biggest problems I have with most insurers is that they are asset gatherers. This ensures average performance from the left hand of your balance sheet. When the market softens, they have a choice: 1. Lessen premiums and put the extra capital into average investments, which will cause you to not earn your cost of capital 2. shrink the B/S (not too many do this from what I have seen) 3. continue to write insurance to lever your balance sheet to provide adequate returns (probably the most chosen) 4. Invest in higher return investments (most people reach for yield). What makes firms like MKL and BRK so great is that they have/seek safe higher return activities (growing CF companies at reasonable prices) . This allows them to earn their cost of capital without levering the balance sheet so they have the luxury of writing less in soft markets and more in hard markets. LRE is one of the few firms that chooses 2. They will only keep capital they can use effectively. This is the biggest flaw I have. If I cannot identify a bad insurer, how do I know the insurers I like are good?

As many people on this board know, insurance companies can be some of the best companies in the world. I thought it would be helpful to have a thread where we can ask questions about and discuss the insurance industry. First, can someone explain to me sidecars? I saw they were discussed in the LRE thread, but I feel like I still do not understand their structure. Is there a primer (or even prospectus) that someone could give me?

Posted some thoughts re: GLRE in the investment idea board.

My expectation/interpretation would be slightly different. Short tails will benefit from this environment, but it will only help them earn their cost of capital while rates are low. I think its the long tails that could benefit more. They should be able to lock in very favorable costs of capital for years (a gift that keeps on giving). I think its hard to predict what rates will be in the future. Firms like MKL and BRK I think will especially benefit because they invest in high quality equities with growing cash flows, which can help offset some risk of multiple contraction as the earnings will be higher. Regardless, I anticipate any high quality insurer to do well. twacowfca, I have learned a lot about insurance from you. If I were to start an "Insurance Questions" thread, would participate? From what i know about GLRE, they are primarily short tail.