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Cigarbutt

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  1. ^About the share-based compensation aspect, FFH's program is quite unique and includes several shareholder-friendly features: share-based not option-based, pre-funded in substance, long vesting period but the program has been growing significantly; one has to determine if this manager-friendly posture is (and will be) shareholder-friendly. Opinion: a qualified yes. To be 'fair' (@Thrifty3000), if one uses the diluted share count, one should add back the amortization of share-based payment awards to the operating income (found in the operating section of cash flows). Note: this line item is included in corporate expense. The long term trend (in M USD): 2010 3.2 2011: 11.3 2012: 16.6 ... 2020: 84.3 2021: 104.1 2022: 146.1 2023: 147.0
  2. Interesting. Just in case this is useful, here's a short discussion with a picture. ----- i recently used that concept with one of my daughters who's more into math and statistics and not into investing. She wonders if, going forward, she should invest her excess earning power into an index (which is great in a lot of ways) and she wonders (the downside part in her) how long her initial investment could be under water after the initial period. i used the graph below which is a typical potential catastrophe loss graph (exceedance probability graph) showing the likelihood of loss and the 'modelled' loss per return period with, in this specific picture, how present undiscounted factors could be integrated to shift the graph line, in this case, for example, how the use of specific mitigation measures could bring down the potential loss and the potential likelihood of loss, such as improved building codes and wildland management versus wildfire costs. Anyways, the graph was used in a way to show the likelihood of marked-to-market loss sufficient to remain underwater on the y-axis against time on the x-axis (1yr, 5yrs, 10yrs, 20 yrs? etc). One can then figure out the time it would take to "recover" from a sentimental and fundamental point of view given a relatively low likelihood of loss following the initial phase. With her, several factors were discussed including present valuation levels which could influence the loss curve especially for the lower duration period ie 10 years or less. Anyways, if you can weather the loss, it's not really an issue. Or is it? ----- Anyways, for the topic at hand (use of leverage to buy BRK), a similar concept can be applied with the likelihood of margin calls on the y-axis and time duration on the x-axis. The loss curve can be approximated from history (previous BRK drawdowns, frequency of such drawdowns and other factors etc). Many underlying assumptions do not follow the stationarity principle and could be used to 'adjust' the curve for different potential foresight scenarios. Of those assumptions, one has to consider the trend that BRK's market returns have been becoming more and more correlated with the S&P index (no longer such an uncorrelated pillar of strength in time of uncertainty). Another factor to consider is the growing proportional revenue and net income/cash flow streams coming from energy, a sector not appreciated for these qualities presently in an environment that is causing various degrees of transitory 'regulatory (un-)friendliness'. Bottom line, your approach to avoid becoming nervous appears reasonable and does not require fancy models and all but i've spent some time recently on the potential for catastrophe results to impact targeted investments and this post required 5 minutes to share so..
  3. Many moving variables. The most significant being -higher adjusted operating profits/overall profits ahead of net premiums growth at relevant subs in 2023, -reported (and expected for the full year) relatively low capital sent to relevant subs in 2023.
  4. Impressive amount of info indeed but recovering from a hip replacement is not what it used to be. There were some comments about profit margins (overall market and some specific companies). Mr. Bloomstran suggests that we've seen a peak in margins but this is a dangerous area to forecast it seems. Below is a graph suggesting that the NPM/GDP ratio has entered a new era with a positive slope instead of the cyclicality within a "band of normalcy" from decades before? Below is what Mr. Buffett included in his 'market valuation and rational expectations' 1999 article. It's hard to forecast even if the underlying reasoning is sound. ----- In the letter, there is a section showing that many BRK's subs have benefitted from rising profit margins in the last 20 years. Not Geico however, which showed a variable margin (combined ratio) over time; its value was more into growth and resilience (although many predicted an ominous demise not so long ago, especially compared to Progressive). Unaudited numbers for 2023, Geico 90.7%, Progressive 94.9%.
  5. First apologies. These 'money' questions are incredibly interesting but is it worthwhile to discuss? For entertainment value only then The ivory tower experts define excess money growth as excess broad money measures growth over GDP growth. Similar to:
  6. A word about Timothy Kenesey, who may have some work to do in his main line of business. And a word about MedPro, the gem bought by BRK in 2005 for 825M. A gem like so many others hidden in plain sight within consolidated numbers. The MedPro topic is expanded upon here slightly as there may be a correlated message to another contemporary topic here related to unrecognized value when an insurer has recently entered a hard market. When BRK bought MedPro, their market was in a mess but an unrecognized recovery was already under way (i guess it felt like then what is felt like now in relation to BHE's prospects?). Retrospective look to the period before the 2005 acquisition: The above is the total return curve for the industry's lines where MedPro has been evolving. The poor numbers reported in the 2001-3 period were affected by poor investment results but especially by bad underwriting results (both accident and calendar year reporting). So BRK bought in 2005 for 1.5x surplus value. And then: The above are MedPro's results in the years following the acquisition. Ok this may be simply boring historical stuff but the MedPro gem is very likely about to (next few years) report very strong results. Of note: the 'premium' paid in 2005, in retrospect, suggests that what GE accepted as a 'price' was not exactly efficient.
  7. To the question "Is capitalism working?" who knows. i'd say it'll be fine. (may have some bumps along the way?) Similar picture: The 'market' had it right? Too early can be seen as wrong though? ----- As far as the forces outside of capitalism, forces trying to modulate it (for better or for worse), there has got to be a link with recent excess money creation at large, accepting the possibility of lag events, confusing what transitory means?
  8. Some more thoughts about the evolving hard market. The following is about the US property-casualty market: The recent hard market is similar in extent (area under the curve) to the 2000-4 hard market and FFH, once again, was able to grow much more than peers but, this time around, at least at this point, they don't have to absorb losses that materialized before (late 90s) and which are yet to be reported. The best scenario would be for the hard market to continue and the ideal scenario would be that new momentum be given to more hardening as a result of pain from the asset side of the balance sheets at large with FFH potentially remaining more flexible during a relative downturn. However, it seems like the hard market may be abating. If that's the case, it will be interesting to see how FFH (at the holding company) use the dividend capacity at the subs. Summary table form the last few years: The dividend capacity at end of 2023 is (estimation/guess) likely between 3.6 to 4.5B. So, dividend capacity has been growing at a higher rate than equity during rising premiums requiring more capital. Interesting (forward-looking), no?
  9. Maybe it's a way to play the regulatory competition game across states of the union or just a way to cap damages and obtain a pass-through mechanism to clients. Yes, don't hold your breath because, if BHE plans to leave Oregon (or hyper-regulated California or whatever), they certainly don't act that way presently. Just following a significant rate increase obtained last January in Oregon, Pacific Power filed 10 days ago for a plan aiming at a 16.9% rate "adjustment" including innovative insurance-related solutions and an inspired by PC&G recent travails but improved catastrophic fire fund with significant contributions from parties other than the utility itself (which keeps skin in the game obviously). Oregon rate proposal (pacificpower.net) 06_Joelle_R_Steward_Direct_Testimony.pdf (pacificpower.net) They also just produced an extensive 420-page document (date Feb 22, 2024, 2 days after the annual report release, what a coincidence..) which would provide a framework to sort of ring-fence this issue across the following relevant states (perceived as less friendly? and relevant to BHE liabilities, known and to be reported), Oregon, Washington, California and Utah. The report's main theme is Lessons Learned, which may be the carrot that Greg Abel will be seen to carry. Charlie Munger on Greg Abel: The Warren Buffett of Tomorrow? | Collection: Charlie Munger #304 (yapss.com) Opinion: What Mr. Buffett is doing appears to be an assist (with the meaning associated to ice hockey). Adapted meaning of an assist: In ice hockey, an assist is attributed to the player of the scoring team who shot, passed or deflected the puck towards the scoring teammate. Apologies for the hockey example but i played outside hockey today and the girl taking care of the ice rink (who happened to play very well) told me this was likely the last day of the year (very very unusual for this time of year at this latitude, from memory first time ever in February) so one has to adapt to changing circumstances (players, climatic conditions) i guess.
  10. From my understanding, Mr. Buffett suggests that 'we' have to figure out what 'we' want (for energy delivery to clients) and i guess that should be the result of rational and constructive discussions (with COBF as a microcosm of these discussions). ----- In the previous post, you suggest that as a result of "CA over-regulates everything not just utilities", "I expect this to eventually lead to a slim down of BHE perhaps even a complete exit." (my bold) The logical extension of this statement would be for BRK to exit all regulated businesses in CA. So why will they continue to write a massive amount of insurance contracts in the "over-regulated" state of CA? ----- Maybe Mr. Buffett's long term assumption that people in charge will do "the right thing", as recently as in 2008, no longer holds?
  11. The link you mention also discusses the potential advantages of specialty lines. One of the keys for the transformation (survival) of Crum & Forster about 25 years ago was the rapid move out of commodity lines to more specialized lines with very obvious positive underwriting results. The specialty market has been growing faster than the general market and FFH has followed. When using a similar proportional table as the one you've included above (using the last 8 to 12 years), specialty lines (as defined by FFH) have grown a lot but not significantly versus total premiums at large. For some years now, S&P Global has produced a ranking with the last one being: "The U.S. Property and Casualty Insurance Performance Rankings are based on statutory financial results collected and compiled by S&P Global Market Intelligence. They are determined using 13 financial metrics from 2022 statutory filings grouped into six buckets: rates of return, underwriting profitability, balance sheet expansion, investment performance, prior-accident-year reserve development and premium growth." S&P Global describes how the above rankings show that some relatively small players have been able to grow profitably a lot from a small base and expanding into specialty markets. They also describe that FFH was able to grow profitably both their niche specialty segments and also their much larger portfolio of commodity-like products. i would venture to say that there is some 'moat' in there, especially when considering the now longer-term track record.
  12. Then, you may want so send a memo to Omaha to help them realize they are doing some regulated business in California.
  13. A few words on the evolving Energy situation. Yes, of course, one has to wonder how the US ('We') will navigate the meanders between deregulation an reregulation in the energy universe (especially relevant now with the democratic drift question, the unusually high level of bipolarization, unusual inability to "get things done" etc versus the actual present challenges: wildfire costs, distributed energy, climate-related issues, huge capital needs etc). Opinion: Mr. Buffett is a great communicator but also a great negotiator. For Geico in the 1970s, he let Jack Byrne be the contractor and carry the stick while he remained the architect and became personally involved (with the carrot part) interacting with Max Wallach, a key DC insurance regulator, in order to reverse what seemed to be an obvious end of going concern destination for Geico. For the Solomon scandal, he also became personally involved with regulators and law makers (especially Nicholas Brady) in order to actually reverse a government decision with ominous implications for the company. Not so long ago (2015, NV Energy vs SolarCity), there was some drama (potential unfairness of return on equity for the utility with net metering over distributed solar energy) and there were negotiations but who actually remembers now the relatively deep questioning about the potential ability to resolve this issue? The issues now are larger (1-how to deal with wildfire costs and 2-is the trend for less-friendly regulated approved reasonable returns a secular one?) and it's not clear who Mr. Buffett needs to talk to but he somehow decided to use the stick and is clearly sending a message (the annual report will obviously be read by relevant regulators all around the country). For the wildfire costs which are very large, the damages to be paid have been and will be determined by juries and the court systems and that's unlikely to change. What needs be figured out is a way to cap those damages (outside of clear negligence and recklessness) and to pass those costs to the electricity consumers. It will happen somehow. Interesting reference: Microsoft Word - 2024_02_14 Utility Companies with Wildfire Liability Exposure Pose Unique Considerations for Investors.docx (clearygottlieb.com) For the regulated ROE question, much has been said about "energy justice" inputs which have had, at least so far, a limited and patchy impact on rates approved. It's about a balance of forces and some of those forces underline the unusually high executive compensation (an idea that Mr. Buffett certainly approves) as an excessive input into the approved rate decision. Also, now that approved rates sometimes go down from something like 10% to 9%, before mounting the barricades, an historical perspective may be helpful keeping in mind that interest rates, apparently, at least in some instances, act like gravity on valuations. Any idea as to why this has suddenly become such an existential issue?
  14. Maybe and the aim should be to try to (constructively) destroy the thesis, but in this specific case (expected underwriting results within the next few years, absent extrinsic material surprises)... Every hard market is different: and how a specific company opportunistically takes advantage of a specific hard market is different (just think of the opportunistic capital that comes in the market after very large catastrophe years): Will string of startups truly benefit buyers? | Business Insurance FFH has grown premiums very significantly during this last hard market (net premiums earned 2018: 12066.0M, estimated net premiums earned 2023: about 22100-22300M). Not as impressive as the growth in 2001 to 2004 but quite significant. During a hard market, price of policies increase very likely ahead of underlying policy costs and underwriting standards tighten which very very typically results in reserves linked to "current" accident year policies to become redundant over the duration of the reserves. For all hard markets (not only the last three) (the opposite applies for soft markets but in the other direction), some time after the hardening starts, the accident year combined ratio will tend to (not always) go down (as was the case during the 2001-4 period for FFH) and reserve redundancies will very typically get recognized (as was the case for FFH in the years that followed the 2008-2012 hard market). As far as catastrophe losses, it appears that FFH management is quite mindful of the potential lumpiness of results (in both directions) and they've periodically commented on that aspect, including after the difficult 2011 year and they seem to be focused on making a reasonable return over time and, in the last two years, have been reporting adjustments including reduced exposure at Brit. ----- From now on, i will try to focus on the downside but (opinion) the progress that FFH has shown over the years on the underwriting front has been very impressive and (another opinion hopefully ahead of the cheery consensus) underwriting results are likely to drive various measures of return on capital.
  15. One has to wonder if your time is well spent on some shared minutiae here but your posts triggered some kind of trip to memory lane (and a thick file). Disclosure (variable position sizing for me over time) and opinion: the 'market' has often gotten FFH's valuation approximately right but not always. For example around +/- 2001-2, the market's quotes resulted in an opportunity to buy an uncomfortable asset at quite a steep discount, meaning, as an equivalent, that one could buy an insurer with a price embedding some kind of an additional adverse reserve development cover and potential upside for better underwriting going forward (and some other potential upside to be uncovered over time). Now, from the underwriting point of view (a key ingredient for FFH), it looks like the market presents (has been presenting for some time) another opportunity by being too slow in applying a premium necessary for a much improved and consistent insurance underwriter (the picture has been changing for some time now but, from the legend, apparently Newton only realized some deep insights about gravity when the apple actually fell). ----- The following is a fragment of stuff i've been following. Warning: it may contain errors and some 'in-house' numbers are clearly not up to USGAAP/IFRS standards. Ok, we could talk hours but i aim to visit my mother-in-law today (who shows significant cognitive decline) in order to play Bingo with her so i'll stick to some essentials? Some comments -AY CR adj. is an in-house measure to represent FFH accident year combined ratio adjusted for reserve development (including run-off) and catastrophes % points. -CR as reported is FFH as reported. -comm. CR is a reasonable proxy to compare under, ie US commercial lines Some 'messages' -AY CR is a reasonable way to assess performance over time. For FFH, compare 2007-16 to 2017-23. -When compared to US commercial lines, FFH has done better for reported combined ratios but (opinion based on some minutiae not included here), it would look even better if their reserving process was less conservative (precision: conservative reserving is something to look for and not a comparative disadvantage). Also some years (2011 19.3, 2017 13.7, 2021 7.5), FFH had to absorb higher than usual catastrophe combined ratio points which helps to explain poorer performance vs commercial insurers in general. Also for the period 2017-23, FFH on average reported 7.3 catastrophe points compared to a slightly lower level of catastrophe combined ratio points before which also helps to 'justify' the lower superior more recent performance compared to commercial line insurers. My understanding is that FFH aims to maintain average catastrophe points to 6 combined ratio points or lower (something like that) and it appears that they are taking real actions to achieve this. Anyways, with FFH becoming international, more diversified and with more exposure to reinsurance, the commercial group comparative is becoming less relevant. -The most important message perhaps is the fact that recently reported numbers over the last 2 or 3 years seem to confirm quite clearly a more positive path for further significant underwriting profitability. Starting with a baseline 87.8 and adding 6 points of catastrophe points and adjusting for expected reserve releases, it's very reasonable to expect reported combined ratios between 90 and 95% and likely closer to 90 than 95.
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