longterminvestor

this thread has me thinking a lot about the auto insurance market. I could sit down and crack open the 10-K's of the publicly traded auto insurance companies....or maybe someone already did that. Does anyone know of a good - recently up to date within the past 1-2 years - of research on auto insurance companies as a business? Like a research report (dirty word and I cringe saying it out loud). Just Curious - someone may have a link or something?

Mr. Buffett is not a fan of homeowners as a line of business. He has spoken about the lack of premium for total loss scenario and the additions of supplemental coverages aggregating. I tend to agree with Mr. Buffett, happy GEICO is staying out of homeowners business. Still can not get my head around how GREAT Progressive's underwriting results are looking compared to others - they are crushing the competition. Regarding California - its a troubled state for lots of reasons in the insurance, the latest saga is the HO line due to fires - I have seen some accounts in Cali doing crazy things due to fire rates. Quake is separate issue all together. TBD on status of Cali post these latest storms. We got a bunch of binding restrictions last week for the entire state of California. Fun times to be an insurance broker. Did you try Mercury? They are a California based auto/home carrier. Run by a guy who is literally 100 years old and still goes to work every day.

Ssshhhh, it will be our secret. Not surprised no one talks about brokers - its a boring business and no one, absolutely no one actually ENJOYS the buying process of insurance. Its like going to the dentist, you dread going but when you are done - you are happy you did it. BRO is a 100X bagger from sleepy Daytona Beach Florida. Its amazing to think about. Another proof - The fact that AssuredPartners (AP)was started in 2011 from scratch by 2 ex-Brown executives with PE money and today is probably closing in on $2B in revenue is INCREDIBLE. It took Brown 80ish years to get to $1B, and AssuredPartners got to $2B in 10yrs, I am unaware of a record like that. It just shows the proof of the business model and what smart acquisitions can do. AP has been bought and sold I think 3 or 4 times and still growing. When AP goes public, I will be watching. Jim Henderson is a class act and very much a gem of a manager. His son is a big time broker at AmWins - wholesale broker and competes heavily with RYAN.

BRO is one of the best, well run, well managed businesses around - insurance broker or not. Closely held by employees (Brown family still owns a big chunk). Run by the grandson of founder Powell Brown. Hyatt, his father, really built the business. Hyatt bought it from his dad when they had like $60K of revenue so officially 3rd generation but it was Hyatt's vision and dogged discipline that built BRO. Powell's brother works there as well. Pat Ryan, CEO of AON forever and now founder of RYAN, put it best - "We are fine with nepotism as long as they perform" or to that effect. The debt for BRO is manageable due to the price they pay for the businesses - its a cash flow cow. Regarding the recent growth of debt, BRO's debt reflects some of the large deals secured over the past 5-7 years. Forever the typical acquisition was sub $25M consideration and now they are competing on some big ones - paying $800M+ for a single acquisition. Regarding expenses, a significant portion correlates with revenue - 20% of all renewal revenue for BRO goes to the individual producer who places the account (the split) and the rest of the comp is for admin/service/headquarters - there are some house accounts but most accounts are either written new with a producer or assigned a broker when the producing broker leaves/retires. New business the split is double - 40% of revenue. So in down times, the producer expense moves with lowering revenue. Watch overall comp for brokers - sub 50% of revenue is a good marker. True that revenue correlates with the cycles of the insurance market. BRO used to be very tied to Florida market cycles however lately with the growing footprint, BRO is less dependent on FL for business. We are in a hard market for CAT property so brokers/carriers are feasting on big increases on property driven accounts however professional lines (D&O, Cyber, Professional) are seeing signs of softening - Commercial Auto has been hardening for a while with the tougher classes (trucking, dump trucks, mixers, accounts with losses) are hardening faster. RYAN mentioned all systems go for professional lines on call recently and I somewhat disagree but I'm open to being wrong there. I am just seeing/hearing big decreases in Public D&O and Cyber specifically. Some of the bigger brokers work on fixed fee based comp so the client negotiates the fee for the broker to place the insurance for a 1-2-3yr deal and the actual price of the insurance "is what it is". Bigger accounts manage their insurance portfolio like this - just depends on the buyer. The aging population of agents is the opportunity for acquirers in brokerage. Perpetuation of the book/business is not lined up so its a natural area for acquisitions. If you really want to learn what BRO, BRP, and others are buying...go here:https://reaganconsulting.com/research/best-practices/ Reagan is a consulting firm who does alot of things in the space and one of them is compiling a study every year. You gotta pay for the current version but the prior ones are on the website for free. talks about every metric in the business - and talks valuations over the years creeping up. @Spekulatius - If you are looking at BRP, I am concerned with their capital allocation - they seem to be overpaying for deals. My opinion.

I would like to find that quote. if you have, pls share. I have likened insurance brokers to insurance companies are same as car dealerships to car manufacturers. Car dealers are wonderful businesses. And there are some similarities. For example, when a broker has a policy that the carrier will not provide a payment plan for - brokers go to a premium finance company. Some of the shadier PFC's are like pawnshops - there are some legit ones out there. But the broker makes pretty solid fees just placing the financing with the PFC. There is some tail risk on credit for the agent however rare is the day with an issue on ultimately collecting. and the late fees are "take you to the cleaners" sky high. I read an agreement once where the broker not only got the fees for placing the financing but in addition received a portion of the late fee as additional compensation. Contingents are still a big part of the profit for any agency/broker. There is no commission expense to the agent handling the account for the contingent. its all to the bottom line.

Insurance Brokerage has been a sleepy business for a long time. Thought of as a non-sexy, run-the-ball every play type of business. You get your start because of family/friend either as a captive agent (State Farm/All State, Farmers, ect) or an independent agent. No one wakes up and says “I want to be an insurance agent”. A couple folks figured out the business early – Pat Ryan of AON (Ryan now is chairman of Ryan Specialty), Hyatt Brown of Brown & Brown, and Lockton Family as well – there are some others. What these guys figured out is the capital light structure, no capx, recurring revenue, and the ability to acquire are all significant tail winds to building a strong franchise with a good moat. Pat Ryan was acquiring agency’s early, Hyatt caught on in the 1990’s. HUB, Marsh, Willis, ect all were growing their businesses organically as well as through acquisition. Goldman Sachs was in it for a bit with USI however sold their stake (way too early). Recently, from 2010ish, PE money started giving it a go in a big big way. AssuredPartners (started by x-leadership of Brown & Brown - AP has already been bought/sold like 3 times), Acrisure, Alliant, HighSteet, NFP, BroadStreet, Risk Strategies…the list is endless with PE backed brokers. They are buying books of business or the complete agency with people who are willing to stay, service the book, and grow it. Baby boomers are the sellers, these are 2nd/3rd generation family businesses where the liquidity event is significant. Good news for the acquirer, the sellers are mostly not sophisticated (less so now with consultants) but in the early days they were stolen based on todays multiples. BRP was a longtime regional agent in Tampa, FL who found some money going public (more on their deals below). Its purely an arb play. You are doing $10M in topline revenue, buy a business doing $5M revenue for 7.5X EBITDA and now you’re a $15M shop with a value of 15X EBITDA. Its incredible. And its filled with leverage. Banks have this love/hate relationship with insurance. They still don’t really know what it is. Couple of the big banks like it but really don’t do it well. I’m talking about true Commercial Insurance brokerage – not personal lines - BB&T bought McGriff and that is their operation, Wells sold theirs to USI and Well’s insurance operation was really Wachovia’s acquired in 2010. Regions Banks sold theirs to BB&T. These are all independent insurance brokers. And the model got the best endorsement ever when Liberty Mutual sold their brokerage service division in 2009. Forever Liberty was vertically integrated – their sales force could only sell Liberty paper and they had a service team for Liberty. When Liberty sold that to a couple different regions across the county, it was a huge WIN for brokers – it was the proof that independent agency system is the best way to buy insurance. If you are good on the phone, follow up, can keep decent relations with people, you are gonna make a lot of money in the insurance brokerage space. and no one young is getting into the business. Everyone wants to be a hedge fund manager, PE deal jockey, or a Financial Advisor. Funny enough, insurance brokerage touches all those arenas - always a deal to be had in the insurance business for a client - buying a new building, refinancing an old one, or just renewing what they have in place. PEOPLE DO NOT BUY SLEEP INSURANCE. People buy insurance because it is mandated by a contract, required by a state/federal statute, or a bank lender requires coverage. Pat Ryan calls the the difference: discretionary insurance vs. compulsory insurance. Brokers LOVE to sell compulsory insurance. Chris Mayer, 100 Baggers, wrote a nice piece of insurance brokerage - https://www.woodlockhousefamilycapital.com/post/the-greatest-industry-in-the-history-of-mankind With regards to acquisitions, things recently have gotten…a little…toppy. 2 deals listed below. BRP Acquires WGBI BRP has, in my calculation, overpaid for acquisitions here and in the past. They overpay in 2 ways – 1 – the multiple and 2 – they have not bought 100% of the businesses in some cases. Only buying a percentage of an elevator asset business is dangerous (my opinion). Brown/AON/other public brokers have always bought 100% of the pie when acquiring. $30M revenue shop is a large agency – BRP paid $139M Cash and at time of disclosure $37M worth of stock and earn out of an additional $99.5M of stock. That’s sky high valuations for sure. Link to filing - https://ir.baldwinriskpartners.com/static-files/66cc2ee0-83f7-48aa-b38c-09c874fe078b CARLYLE BUYS NSM FROM WHITE MOUNTAIN https://investor.whitemountains.com/static-files/5c7c4d09-f923-47bd-9e27-b94ffcde8d6a I took the summary financials out of the White Mountains 2021 10K. Quick breakdown on multiples at $1.78B purchase price: 5.4X on Topline revenue of $330.4M 25X on $70.9 Adjusted EBITDA 50X on $35.8 EBITDA Kicker is NSM showed a Pre-Tax GAAP Loss in 2021 of ($28.1M) and a GAAP Net Income Loss of ($22.5M). Insurance brokerage is a wonderful business and will be for the foreseeable future. The Insurtech start ups can have the $500-$1000 policies. There is money in them but the real money is in the middle market/large deals. And the insurance market is still super fragmented with no liquidity on screens – the risks are tough to put on a spreadsheet – so many different lines of coverage to follow D&O/EPLI, Cyber, Professional Liability, GL, Umbrella, Auto, Property, Workers Comp, and more. Every account has its own issues – losses, price sensitive, industry issues, exposure expansion. And the agent has to manage all these for each account. Its also important to point out each of those lines of business listed above – DO NOT CORRELATE in the cycles of Hard/Soft markets. So a big account, you are negotiating each line separately with carriers individually. Sometime a carrier will come in a swoop the whole account but as an agent you are probably leaving money on the table for your client. An old salt in the biz told me – The uglier the placement – the better the broker did their job getting best deal. Brown & Brown hit the skids due to a Captive Insurance program during conference call/Q3 10Q and the analysts were a little stunned there. RYAN followed suit with earnings and had a huge drop in a day. RYAN is not a retailer, they are pure Wholesale Insurance Brokerage. The Big 4 - Marsh, AON, Willis, AJG are similar businesses with similar clientele. Brown & Brown/BRP are pure middle market outfits. and lastly, Goosehead, the Chuck Akre play. Still havent figured this one out. They write personal lines and have created some kind of funnel with banks/mortgage brokers where they have a direct channel and a franchise channel. Good for them, I have looked and it and still cant figure it out. People still lump brokers in with insurance companies which I find a little funny. Best question to ask yourself when looking at something in the insurance space...who is selling it and who is bearing the risk? This quickly defines the players. Insurance is just a weird business and there are so many parts to the distribution or the risk bearing side that make it incredibly difficult to make sense of - so people just throw themselves to someone they trust and say "handle this for me".

BERKSHIRE HATHAWAY INC. NEWS RELEASE FOR IMMEDIATE RELEASE December 19, 2022 Omaha, NE (BRK.A; BRK.B) – Thomas S. Murphy, Jr. has been elected to the Board of Directors of Berkshire Hathaway Inc. Mr. Murphy co-founded Crestview Partners in 2004. Crestview is a private equity firm based in New York City. Prior to starting Crestview, Mr. Murphy was a Partner at Goldman, Sachs & Co. Additionally, Mr. Murphy serves on the boards of New York University, NYU – Langone Health and The Inner-City Scholarship Fund. About Berkshire Berkshire Hathaway and its subsidiaries engage in diverse business activities including insurance and reinsurance, utilities and energy, freight rail transportation, manufacturing, retailing and services. Common stock of the company is listed on the New York Stock Exchange, trading symbols BRK.A and BRK.B. — END — Contact Marc D. Hamburg 402-346-1400

Auto insurance specifically is admitted meaning state insurance commissioners approve the rate filings. Inside the filings are rates charged (what consumers care about) but also is the actual contract language so if the insurance company wants to change the language of how a policy reads it must be approved by state insurance commissioner. All increases (and decreases funny enough) need to be "Approved" individually by each state - some are easy others are tougher. Covid had an interesting effect on auto insurance business with respect to exposures, rates, loss costs, and underlying risks. #1 initially carriers were making too much money so they gave money back (short memory - insureds were not complaining when premium was returned) - interesting mechanics to how much/how fast/why carriers gave money back for another time. #2 the value of new/used cars soared about 12-18 months into Covid and the previously approved rate filings did not account for the increase in car valuations - a good amount of the increases seen today are accounting for the increase in costs to repair a vehicle where insurers were losing because claims occurring today are based on car valuations 12-18 months ago depending upon when filings were approved - there is a lag on when rates are calculated, approved, and put into use. #3 Insurance commissioners were slow (incredibly slow) to allow rate increases for risk bearers coming out of Covid (remember the commissioner is usually elected and protects constituents from the big bad insurance company) - for example California put a 2 year rate freeze on auto rates. So increases seen today are a function of the lag there as well. #4 Some but not all carriers bundle (Home, Auto, Umbrella, ect) so you get multiline discount, the multiline discount can be a big advantage so when considering situation monoline auto maybe treated differently than bundled homeowner package. #5 - auto insurance is a commodity and if low rate/best rate is the goal - you gotta shop a lot - agents/brokers can help with this but only with the carriers they are appointed with. Good example was mentioned, Nationwide was captive agent (only could provide 1 quote from Nationwide) and then Nationwide sold/gave their books to the captive agents and they got ability to shop against Nationwide with new carriers. Key with picking agent is carrier representation - if the agent has all the carriers actively writing in your market - the quoting process is in a 3rd party rater - super easy process to provide multiple quotes. #6 - simple and 1 word - inflation. Inflation on nuclear verdicts and plaintiff cases as well as general cost of parts, supply chain, ect - some of that is settling. Specifically with GEICO vs Progressive. This is first time I have seen GEICO pull back when earnings are not great (unknown why they are pulling back - not enough info to just say its because they are not as profitable b/c Mr. Buffett does not care about short term earnings). I personally think Todd is trying some new things and filling out his shoes as CEO. They gotta figure out telematics and they will. Progressive is getting rate on renewal however they seem very competitive in my market (south Florida) vs GEICO for the past 12 months and that was not the case for a long, long time. In south Florida the bundle doesn't work well at all because GEICO/Progressive don't write Homeowners. So in Florida (south Florida specifically) its monoline auto all the way in a big way. Both are stable over time. Nationwide on other hand in Florida is streaky - you can watch them buy market share and instead of just tick up rates there have been times where Nationwide will straight up non-renew an entire book. I have always seen Nationwide as a market timer. That's a personal opinion and not backed up with data - just have seen it over the years. I personally have not shopped my auto in 7 years. but that's more cultural for me. Pro tip, if you qualify by age - the Hartford AARP auto program has always been solid. That deal beats us out when they quote. and Hartford is a great carrier.

Tax implications of S&P index ETF, any ETF really, are an important consideration. If you buy and hold an ETF for 10yrs, you pay tax on annual dividend and capital gain tax on the ultimate sale of ETF 10yrs later. However, when the S&P re-shuffles its allocations, adds new companies, removes companies - the ETF re-allocates the index fund and that is a tax free transaction. For example, if Apple's allocation in the S&P is 10%, then there is a re-shuffle, Apple's allocation is reduced to 8%, the holder of the ETF does not pay on the gain of Apple inside the ETF. I am probably missing some pieces but this is my understanding. The structural tax advantage of ETF is pretty strong. Especially vs a Mutual Fund that pays taxes on a shuffle of the allocation. To that point, Berkshire's tax implications are better compared to a mutual fund rather than an index ETF. I understand returns can be compared but the tax implications are different all together.

iSavings bonds going to 6.47% after todays CPI Print.

Here is data for insurance companies exposed in Florida. This does not include Auto and its state wide. I don't know if its possible to pull data by county - maybe total exposure by county but doubt data is available by carrier by county (for competitive reasons) According to this data, in Florida there is $2.9Trillion of exposure for wind. Again, does not include auto/marine and other lines. https://floir.com/tools-and-data/residential-market-share-reports FL - STATEWIDE - BY POLICY TYPE - INCLUDING WIND.pdf FL STATEWIDE - PERSONAL & COMMERCIAL INSURANCE RANKING.pdf

Auto will be a portion of loss because auto policies include flooding, homeowners does not cover flood. Flood is backed by US Gov through National Flood Program. Some private players have started to underwrite flood - mostly Lloyds and have seen some AIG. GEICO does not write homeowners on GEICO paper, they act as agent - similar model to USAA in Florida. BoatUS is a Berkshire company and they write boats - will be some claim activity in recreational marine as well. GEICO also writes boats on GEICO paper.

BRK.A - Berkshire Hathaway Inc Class A Stock Analysis & Rating - NYSE _ Morningstar.pdfMorningstar commentary. Gregg needs to update his picture.

Saw this and don't know if it was previously posted on cobf. Video uploaded in 2020. cheers!

Just got off phone with trading partner who told me they placed a $5M Primary with Berkshire (50% participation), Lloyds (40% participation), and another market (10% participation) for $900K Premium (17.5% total commission for retail/wholesale brokers). So to break that down for Berkshire's P&L/Balance Sheet - thats $2.5M of "all risk property" exposure on Berkshire for $371.25K premium for a very short tail risk. I do not pretend to know what the exact amount Berkshire actual places on liability side of the balance sheet however max exposure is $2.5M - unless they bought facultative reinsurance (FAC) to reduce the risk from a third party. There would be an expense attached to FAC reducing the amount of premium however highly doubt at these rates Berkshire is buying FAC. 3 years ago, the entire placement ($60M TIV) traded for $200K premium. There's probably more to this story (claims, ect) but that is a extracting a pound of flesh for sure. This is a risk in Tri-County Florida. Crazy times. At these rates, I am VERY surprised why I am not seeing them more and more on these placements. What is keeping them (and others) on the sidelines?

I am a retail agent in FL. Market is really tough for Florida Property/CAT Wind. Coastal Condo placement I just heard went from $400K premium to $1.3M Premium and broker still hasn't placed the top layers for the 5/31 renewal date. I have personally seen/placed accounts with 100%-150% premium increases. Counterparties comparing this market to buying Terrorism post 9/11. Have not seen any Berkshire paper on a retail placement for large deals, they last quoted in 2013-2014 but pulled out because market was getting too soft. Excerpt from article linked below. I am not a reinsurance expert, but the "one reinsurance company" has to be GenRe and clearly they are getting their price. For context, I do know these reinsurance placements are largely on homeowners business and some residential condos. “Market reports are that most domestic carriers have placed less than 80% of their required external placements prior to the Memorial Day weekend, and many far less than that. In one case, as of early Friday: zero. The current shortfall is well over $10B of unplaced limit. Their brokers are hard pressed for solutions,” says Stonybrook, a specialist strategic advisory and investment banking firm focused exclusively on the insurance and reinsurance industry. The firm goes on to note that it’s aware of at least one large reinsurance company and one large catastrophe fund that are actively quoting new limits, albeit at unacceptable terms. https://www.reinsurancene.ws/well-over-10bn-of-unplaced-limit-at-june-1-further-downgrades-expected-stonybrook/

Mr. Buffett addresses this question specifically in below videos. Mr. Buffett has also intentionally "lodged" the operating businesses inside the insurance companies so spinning off would have additional hurdles not mentioned here.

new Bloomstran Podcast: https://podcasts.apple.com/us/podcast/410-chris-bloomstran-semper-augustus-buffett-berkshire/id1128955736?i=1000558885829 on youtube:

Charlie Rose interviews Mr. Buffett. came out today. https://charlierose.com/videos/31221

As a broker, we write cargo policies with "world wide coverage" - some policies have war/confiscation exclusions and some do not. I have received some mid term endorsements excluding Ukraine and war/confiscation recently. None of these accounts have direct exposure to Ukraine - they are US distributors who source product from Asia. Berkshire is not the primary risk bearer on these cargo deals (unknown if they participate on a reinsurance basis) however trying to provide some color on this question. Unknown on the carriers who underwrite 1st party multi-peril (property insurance) in Ukraine - not my market.

In other random news, Yahoo Finance got the boot! CNBC is now hosting the live feed via internet. Wonder what caused that change. Daily Journal had Becky doing questions with Yahoo doing the feed. Just an interesting note, obviously no financial implication to the business.

I understand the thought/sentiment here and find it curious that Mr. Buffett is ruthless when buying assets he finds at a discount however he has mixed feelings when it comes to buying Berkshire. Still looking for the lesson - there's usually a lesson to learn with Mr. Buffett's actions. $27B in buy backs for 2021 and $24B in 2020. For context, largest deal in Berkshire history was Precision Cast for $37B (admittedly overpaid) followed Apple at $36B - purchased over 3 years and lastly BNSF - $34B (debatable to come up with ultimate cost - partial ownership at acquisition and paid for with cash+stock). Energy Business is another place Berkshire is stuffing capital. Was hoping for more buybacks but I'll take it.

Bloomstran says letter is going to clients now and will be posted to "soon".

Came out last year on Friday night, day before BRK posted full year earnings and Mr. Buffett's letter. That's when I'll look again.

Found this audio and transcript regarding Financial Crisis Inquiry Commission interview of Mr. Buffett. Audio below and transcript attached. http://fcic.law.stanford.edu/interviews/view/19 2010-05-26-Transcript-of-Interview-With-Warren.pdf