Mungerville

Ericopoly, That's right. Plus at that stage the market is hard as a rock for P&C insurance as half the industry would not be able to write as much business. I would take a 12% hit to book for that opportunity. 35% is one hell of a margin of safety.

In terms of the puts, they are all expensive. I re-loaded a 10% out of the money position on XLY (consumer discretionary) in December and doubled down at 15% out of the money in late December/early January. Even with what now looks like great timing, I have made only marginal money given time value erosion. Its going to be tough to make substantial money in puts/hedging this year buy I hope to make a bit. Shorting or the option equivalent of deep in the money puts is the cheapest but if the markets turn you can get burnt pretty quickly. There is no good way at this point. Maybe try and hedge when opportunities arise in individual securities you hold as opposed to index puts at this point. It is very costly and some would argue there is minimal cost-benefit rationale for a long-term investor.

Ericopoly, I think with that perspective, given lower stock market exposure, one can get comfortable with the downside in ORH pretty quickly. I would think management would look at their downside potential in mark-to-market (not necessarily long-term value but mark-to-market value) book value in the same manner as I described above.

I think that on an unhedged basis, there is probably more money to be made in select corporate bonds more so than equities. In equities, I am sticking with highest quality stocks yet staying hedged as I believe quality will outperform.

I just bought some BRK. Again this year, I remain fully hedged against equity markets however.

I will speak to ORH. My plan is to factor in the worst for this year from an investment point and figure out how much book value could erode. Everyone is factoring in a gain for the year and following years from investments. Figure out what happens in a worst case. Figure out the implications and if you are OK with those, ORH at this price is good. SO Ericopoly, for example, I would invert your post. The market is down 20% or so from its highs of early this year. Start working with that instead of assuming 15% growth in stocks. Assume a combined ratio of 100% and see how much the stock market needs to collapse, assume the bond market stays firm for ORH given CDS hedges, assume the munis will payout and BRK will not be toast. So take the yield on all those bonds with no decline in value in the bonds (this may not be the most conservative from a mark-to-market as confidence in BRK would get hit - this would however be offset by the fact that the CDS hedges corp bonds and recoverables and the recoverables are not marked to market while the munis are - so call that mark-to-market issue a wash, i.e. forget this sidebar). Just take the yield on the bonds - gross them up to pre-tax. Assume they don't fall in value cause CDS would offset. Calculate different scenarios for stock market and after-tax hit to book value. Stocks down 20% (currently the case), down 30%, down 40% down 50%. At 50%, don't forget to take 70% to get back to after-tax. If you don't like the result of the book value hit (keep in mind competitors will be destroyed at this point and a very hard-market will develop and underwriting expansion will commence for ORH), hedge yourself at whatever level you get anxious - might be reasonably cheap to do so. I think it makes sense to do this analysis both on the upside and downside for the stock market in terms of my investment in ORH - that way, you just get pleasantly surprised, no anxiety, and all it might cost is a tad of insurance in the form of out-of-the money puts on ORH. Analyse the upside and invert to figure out the downside to book value in a potentially very bad year. ::) ??? :P

OK - that was easy, I just found it!!!

Link01 - Can you point me to that article where he says inflation will be a problem a year from now?

I am an investor in ORH. I see this as a blow-out quarter for ORH on the investment side. Govt bonds surging into year-end, their stocks surging into year end after they simultaneously covered their equity index and other puts near the lows of Oct/Nov and bought stock. No-brainer blow-out quarter for ORH on the investment side.