Munger_Disciple

I just posted the whole article (see my previous post).

Berkshire Hathaway Inc. bet big earlier this year that Florida’s reinsurance market would deliver huge premiums with minimal losses. Hurricane Idalia is about to offer a test of that calculus, with months of potential storms left this season. Warren Buffett’s firm ramped up its reinsurance exposure to the state, looking to take advantage of rising prices. The move has left the firm exposed to as much as $15 billion of losses in the event of a major storm, Berkshire’s head of insurance said in May, while it could lead to several billions in gains. “We have a very unbalanced portfolio,” Ajit Jain, vice chairman of insurance operations, said at the conglomerate’s May investor event. “What that means is, if there is a big hurricane in Florida, we will have a very substantial loss.” A representative for the company didn’t respond to an emailed request for comment on Tuesday. The riskiness of the approach is coming into focus now as Hurricane Idalia bears down on the state’s Gulf Coast, where it’s expected to make landfall Wednesday. Water temperatures are warm enough to set the storm up to intensify further before then, however the sense is that it still won’t deliver major losses for insurers, and thus won’t be a big blow for Berkshire’s reinsurance business. The Atlantic hurricane season runs through November. Depending on its path, Idalia is forecast to cause a fraction of the cost Hurricane Ian inflicted when it struck the state in September as a Category 4 storm, killing at least 150 people and causing more than $112 billion in damage. “I am skeptical that this will impact them much,” said Matthew Palazola, an analyst at Bloomberg Intelligence. “This event is not what they were describing when they were talking about a worst case.” Reinsurance capital has been hard to come by in Florida due to the severity of losses from insurance fraud in the state. When policies came up for renewal on April 1, “prices zoomed up again” and created a window for Berkshire to deploy capital, Jain said at the event in May.

Bloomberg article on Berkshire's exposure to FL storms: https://www.bloomberg.com/news/articles/2023-08-29/buffett-s-bet-on-mild-florida-storm-season-faces-test-in-idalia?srnd=premium#xj4y7vzkg

If the homeowner carries a mortgage, he is required to purchase homeowner insurance.

Thanks @Parsad! That was very helpful.

Thanks @Parsad. Do you know what % of 62 does Prem own? Also what happens to multiple voting shares after Prem? Presumably whoever gains control of 62 which in turn controls Fairfax? Also is Hamblin Watsa completely owned by Fairfax?

Question on Prem's ownership for Fairfax experts on the board. I am not very familiar with SEDAR filings but I looked at the annual information filing for Fairfax for 2023. It states Prem "controls" 100% of multiple voting shares of 1,548,000 and 3.5% of subordinate voting shares which comes to an additional 794,000 shares (I got this from 2023 Proxy). So from this filing, he "controls" a total of 2,342,000 shares (economic interest). Question is what does this mean? Do Prem & his family own these shares outright or does Prem control some limited partnership in which he owns the GP/ control interest? In that case what exactly is Prem's economic interest in Fairfax? Thanks in advance. Edit: Here is the additional info in 2023 Proxy (I used to think EDGAR is bad but SEDAR is worse): Mr. Prem Watsa controls Sixty Two, which owns 50,620 of our subordinate voting shares and 1,548,000 of our multiple voting shares, and himself beneficially owns an additional 741,985, and exercises control or direction over an additional 2,100, of our subordinate voting shares.

Yes, Berkshire overpaid for the 41% of Pilot they acquired in 2023. As @gfp pointed out, it was based on a formula (of prior years earnings which were artificially high due to COVID effects) so Berkshire's hands were tied. IIRC Buffett hinted at this during the 2023 annual meeting by saying they should have bought the whole company when they purchased their initial stake (but couldn't).

No, FFH doesn't publish GAAP book (sadly). But they did get a jump up in book value per share of roughly $100 not that long ago, so I am using that as the difference between IFRS and GAAP book values.

+1. If you use GAAP book instead, FFH is probably trading around 1.15x GAAP Book right now. If one wants to compare FFH to BRK or MKL this is a fairer comparison IMO.

Berkshire (stock price) CAGR since 1996 is roughly 11.1%. Pretty decent though short of the 15% Buffett aimed for in 1996. Most likely the result of very low interest rates from 2001 onwards.

There is no way FFH or any other insurer can maintain a 94 CR over the long term. The best one can hope is 100 CR over a full cycle. Insurance is too much of a commodity business to expect anything else. That's why BRK's goal is to have cost free float. Having said that, it is quite possible for FFH to do quite well in the next 2-3 years in a hard market.

@Viking certainly made me a take a look at FFH with a fresh pair of eyes. I am glad I did thanks to his prodding & bought FFH after re-analyzing it this year. I agree with you however that it would be nice to see less leverage & more unencumbered cash at the parent.

Thanks for posting your work @Viking. You are certainly the most enthusiastic & prolific FFH poster.

BTW I love Berkshire's bond portfolio which is basically cash equivalents in my book. I am sure Buffett is not thrilled with Moynihan's balance sheet management at BAC but he owned > 10% so couldn't get out. That's why he sold all the other banks.

I found the Q2 results to be as I expected. A few things I found interesting: The real estate brokerage revenues are down significantly compared to 2022, with the unit making $0 profit during the first six months of 2023. Building product revenues are down significantly in the MSR segment. I think there was a significant slowdown in the residential real estate market during Q2 contrary to what we hear in the press which seems to say CRE is bad but residential is ok. Consumer product revenues in MSR are also down which seems to indicate that the consumer is pulling back. Doesn't seem like we are going to have a soft landing. Berkshire was a net seller of stocks to the tune of $8B in Q2.

As you correctly pointed out, Warren's interests are narrower than Munger's. So Warren's business & investing skills are unmatched. On the other hand Munger's knowledge and wisdom are so broad that they really helped Buffett (and by extension Berkshire) make the right high level decisions at very critical points in the company's evolution. They really complement each other and Berkshire shareholders are fortunate to have these two running the show for so long.

The problem is Company A's cash flows maybe almost impossible to estimate a priori in your example DCF. This type of companies tend to be very cyclical like commodity companies and IV tends to fall in a very broad range as opposed to B type companies. For FFH, the cash flows are mainly from its investment portfolio (& not from operating subs like Berkshire) and can only be estimated in the near/medium term of 2-3 years and hence (rightly so as @Parsadexplained) the valuation discount relative to BRK.

I agree book value & its growth are excellent metrics for FFH which resembles early years of Berkshire before its transformation into a collection of cash flow generating operating businesses in addition to the insurance mother ship with its associated marketable securities. I don't think ROE is a good metric to use for insurance companies because earnings can be so volatile. Instead, I just focus on the rolling 5-year rate of growth in book value.

+1, Excellent post @Parsad! Clearly summarizes the difference between BRK & FFH.

@Viking I think you need to make allowance for the fact that FFH now reports book value based on IFRS unlike US domiciled insurers which still use GAAP, so head-to-head comparison needs to take the differences into account. Not disagreeing with your overall thesis but the P/B differences are narrower than they appear in your table. I wish FFH reported their book value according to both GAAP & IFRS as we digest this accounting change.

Sorry that's a typo. I meant selling naked puts not calls. The main problem I see is that you will go into debt if stock gets put so it can be risky depending on the amount of leverage. With interest rates being this high, we agree that it doesn't make much sense. But even if rates were lower, one needs take into account leverage & additional risk before writing naked puts.

If you are selling naked calls & the stock gets put, you have to buy the underlying stock on margin & carry it forward with the associated debt + added risk. It seems like naked put writing isn't all that attractive with margin rates going up.

Yeah that's a good point.