Buffett/Berkshire - general news

[gfp]

Thanks for the on-the-ground color.  It is really interesting.  I had posted this article on Sunday over on the Joe thread - recounts a similar situation as of Sunday.  Berkshire and DE Shaw are quoting but at their price.  Nice to see a few large deals getting done though.  One of my favorite Berkshire deals in Florida was years ago when they wrote a policy where all they had to do in the event of a super-cat above a certain size was agree up-front to buy municipal bonds from the state insurance fund.  Didn't end up being a big year for storms and Berkshire didn't buy the bonds, but what a concept - instead of paying a claim you just buy muni bonds...

 

In New Orleans, I expected some of our policies to go way up based on what is happening to other people here.  Our Flood policies, which are priced by Fema under a new opaque formula for the first time this year (risk rating 2.0), went down by 25%.  Our homeowners and rental property policies stayed approximately the same.  I think the new standing seam roof ended up offsetting a rate rise at home and our other properties didn't have claims for Ida.  We use USAA for insurance though, and most other carriers are just exiting the market.  USAA seems to stick with their members or at least we hope so.

 

Here is the Sunday blurb out of Insurance Insider -

 

"Storm clouds gather over the Sunshine State

The 1.6 renewals in Florida are proving to be the toughest in a generation. With only three days to go before the deadline for the 1 June reinsurance renewals, there is still a plethora of unplaced business in the market.

As this publication reported in a deep-dive analysis piece earlier this week, the property treaty market is now in a “state of chaos” as a sense of acceptance builds that a number of placements will not get over the line in time. 

Late on Wednesday, Florida governor Ron DeSantis signed into law two key bills in an attempt to limit surging property loss costs. However, the response to the action has been muted. 

Among the concerns raised have been whether the size of the announced $2bn reinsurance fund – which will sit beneath the Florida Hurricane Catastrophe Fund and provide cedants with much-needed access to low-layer limit – is adequate.

One market source described the first of the two bills – which would establish the so-called Reinsurance to Assist Policyholders (RAP) program as “sticking a Band-Aid on a broken leg”.

And analysts at KBW said that they did not expect the initiative to “meaningfully impact” demand or the soaring costs of private reinsurance.

In an exclusive interview with this publication, Demotech’s Joe Petrelli said the ratings agency will not lower its minimum reinsurance requirements despite the likelihood of major holes in the cat programs of a significant number of Florida carriers.

He also noted that the RAP reinsurance fund does not cover tropical storms or other non-hurricane events, leaving carriers who utilise it and don’t buy low down private cover bare for those perils.

Meanwhile on Friday, we reported that, for those carriers with deep enough pockets for private deals, Berkshire Hathaway (BH) and DE Shaw – often described as reinsurers of last resort – were understood to have been quoting private layers in recent days.

"

[gfp]

BNSF was able to borrow $1B for 30 years at 4.5% - still an extremely attractive environment for high quality corporate borrowers.  This was priced yesterday -

 

https://www.sec.gov/Archives/edgar/data/934612/000119312522164076/d358107dfwp.htm

[gfp]

Some here might be interested in the minutiae of National Indemnity's business - this lawsuit was recently filed by NICO against 7 reinsurers for not paying their share of an asbestos settlement NICO agreed to with the state of Montana arising from policies written by NICO in 1973-75 (after Berkshire bought NICO but before Ajit was hired).

 

NICO settled with Montana in April 2022 for $157 million to resolve the matter (some of this had already been paid) and sent a bill to each of the 7 reinsurers who basically indicated they weren't paying.  

 

Page 6 and 7 of the lawsuit show the figures.  NICO has billed the reinsurance companies (many of them successors to the original companies) a total of $104.5m.

show_temp.pl-11.pdf

[alpha]

Howard Buffet is meeting with President Zelensky in Ukraine - 

 

 

[DooDiligence]

3 hours ago, alpha said:

Howard Buffet is meeting with President Zelensky in Ukraine - 

 

 

 

My first thought was holy fuck, they're gonna open a Nebraska Furniture Mart.

 

Then I started reading this.

 

www.thehowardgbuffettfoundation.org/wp-content/uploads/2021/05/2019-2020-AR.pdf

 

I like the way he addresses US migrant workers.

This is a TL/DR but you can scan for keywords.

Howard might be a serious guy.

[cubsfan]

10 hours ago, gfp said:

Some here might be interested in the minutiae of National Indemnity's business - this lawsuit was recently filed by NICO against 7 reinsurers for not paying their share of an asbestos settlement NICO agreed to with the state of Montana arising from policies written by NICO in 1973-75 (after Berkshire bought NICO but before Ajit was hired).

 

NICO settled with Montana in April 2022 for $157 million to resolve the matter (some of this had already been paid) and sent a bill to each of the 7 reinsurers who basically indicated they weren't paying.  

 

Page 6 and 7 of the lawsuit show the figures.  NICO has billed the reinsurance companies (many of them successors to the original companies) a total of $104.5m.

show_temp.pl-11.pdf 107.22 kB · 14 downloads

Damn - that is what you call Long tail...

[Munger_Disciple]

Alleghany shareholders approve the deal with Berkshire: 

 

https://finance.yahoo.com/news/alleghany-corporation-stockholders-approve-acquisition-151300741.html

[Cigarbutt]

On 6/8/2022 at 8:23 AM, gfp said:

Some here might be interested in the minutiae of National Indemnity's business - this lawsuit was recently filed by NICO against 7 reinsurers for not paying their share of an asbestos settlement NICO agreed to with the state of Montana arising from policies written by NICO in 1973-75 (after Berkshire bought NICO but before Ajit was hired).

 

NICO settled with Montana in April 2022 for $157 million to resolve the matter (some of this had already been paid) and sent a bill to each of the 7 reinsurers who basically indicated they weren't paying.  

 

Page 6 and 7 of the lawsuit show the figures.  NICO has billed the reinsurance companies (many of them successors to the original companies) a total of $104.5m.

show_temp.pl-11.pdf 107.22 kB · 22 downloads

Interesting. Thank you for sharing here.

The largest reinsurer on the hook is TIG, an FFH's subsidiary..

-----

Anything can happen but it's likely that National Indemnity will get paid by reinsurers.

NICO has already paid 16.1M in 2009 (with the intention to recuperate the sum). The final amount due went from 43.6M in 2011 to 97.8M in 2019 to 157.2M last April. That's what they mean by 'social' inflation..

Montana obtained policies from NICO during 1973-5 and started to receive asbestos-related lawsuits in the early 2000s and first notified NICO in 2002. NICO (opinion) appropriately denied coverage because Montana knew about toxic levels of asbestos since 1942 and, in 21 different occasions after inspections over the years, failed to take action. The strategy NICO used was to argue that Montana had failed to share this info when the policies were contracted, that it should only be responsible for the years during the policies were written on a pro-rata basis coverage (and not on a cumulative basis) and chose a specific definition of "occurrence" that was reasonable and limited $ coverage. The courts, as the issues moved up, decided that NICO had failed to assist Montana in its defense against litigants (potential link with the reinsurers' refusal to pay) and was therefore responsible for damages. The late 2021 Montana Supreme Court decision was particularly acute against NICO vs its arguments as the decisions from lower courts were maintained and even expanded and the "occurrence" definition was remanded to lower courts for factual and technical evaluation but with guidance. Ouch.

A major guide for the contractual relationship between the insurer and the reinsurer is the follow-the-fortunes doctrine which is related to the follow-the-settlements doctrine. Basically, unless fraud, bad faith or obvious behavior only to maximize reinsurance recovery is present, the right to 'discovery' is limited and reinsurers are expected to defer to the reinsured parties for both claims handling and allocation of damages and settlements. In this case, NICO chose a reasonable strategy that did not work out and the allocation/settlement scheme has been pretty much imposed on them by the courts.

TIG and the rest will likely have to pay, with interest.

Clearwater, another FFH's sub involved in toxic runoff helped to build case law:

Lexington Ins. Co. v. Clearwater Ins. Co. (Mass. Sup. Ct. July 26, 2011). Follow-the-fortunes and follow-the-settlements binds a reinsurer to post-settlement allocations absent gross negligence or bad faith on the part of the cedent.

[gfp]

Thanks for the detailed run down.  You may be interested in (or entertained by) this case if you haven't already seen it.  Seems possible that it is another case of denying coverage and having it look like you chose not to defend your insured in court and then having the whole thing blow up on you without ever having the opportunity to defend your interests in court.

 

https://www.courts.mo.gov/file.jsp?id=187183

 

Cliffs notes: A couple get intimate in a GEICO insured vehicle.  One catches HPV from the other.  GEICO told to pay $5.2 million.  The HPV-giving party knew they had HPV because they were previously told that their throat cancer tumor tested positive for HPV.  GEICO denies claim.  The intimate couple appears to be working together (likely fraud imo), went to arbitration, were awarded a ton of money and GEICO is told to pay it.  Of course they also offered to settle within the policy liability limits earlier ($1m), which I understand to have the effect of effectively eliminating the policy liability limit once GEICO declines to accept the settlement offer within the policy limits.  The linked case is GEICO's appeal (which they lost).

 

 

[Cigarbutt]

12 minutes ago, gfp said:

Thanks for the detailed run down.  You may be interested in (or entertained by) this case if you haven't already seen it.  Seems possible that it is another case of denying coverage and having it look like you chose not to defend your insured in court and then having the whole thing blow up on you without ever having the opportunity to defend your interests in court.

 

https://www.courts.mo.gov/file.jsp?id=187183

 

Cliffs notes: A couple get intimate in a GEICO insured vehicle.  One catches HPV from the other.  GEICO told to pay $5.2 million.  The HPV-giving party knew they had HPV because they were previously told that their throat cancer tumor tested positive for HPV.  GEICO denies claim.  The intimate couple appears to be working together (likely fraud imo), went to arbitration, were awarded a ton of money and GEICO is told to pay it.  Of course they also offered to settle within the policy liability limits earlier ($1m), which I understand to have the effect of effectively eliminating the policy liability limit once GEICO declines to accept the settlement offer within the policy limits.  The linked case is GEICO's appeal (which they lost).

 

 

Funny you mention that. Just a few minutes ago, i read this (from a specialized legal publication medium, MSN), saw a potential link with social inflation and decided not to put it here to avoid thread derailment.

Geico may have to pay $5.2 million to woman who claims she contracted STD in a car insured by the company (msn.com)

-----

There is something broken in the US legal system but am confident it's more a relative low in your typical but unusual cycles.

-----

Personal note

For about 20 years, as a peripheral and marginal sideline activity, i provided expert testimony and participated in administrative decisions. The typical case meant to appear in court and find out, on the spot, who would be responsible for the hearing and decision. That designation was often the determinant factor in the outcome, sometimes almost irrespective of underlying merit and forced parties to settle immediately, before appearing. This meant for me full payment and release, allowing time to prepare for the next case and this single day honorarium equivalent was almost enough to bring the family (to Spain a few times) on vacation for a few weeks. In this Montana specific case, i'd say NICO had to to play a similar strategy: If you can't beat them, join them (and share the bill).

-----

Back to relevant news.

[gfp]

Bloomberg is running an article today saying that big tech companies (Google, Meta & Microsoft) are opposing MidAmerican's proposed $3.9 Billion "Wind PRIME" project (2042 megawatts of wind + 50 megawatts of solar).  MidAmerican is asking state regulators for approval and an 11.25% guaranteed return.

https://www.midamericanenergy.com/newsroom/2022-wind-prime-announcement

 

bloomberg article (some paywall)

https://www.bloomberg.com/news/articles/2022-06-10/it-s-warren-buffett-versus-big-tech-in-iowa-s-latest-wind-farm-debate?srnd=premium#xj4y7vzkg

[Spekulatius]

3 hours ago, Cigarbutt said:

Funny you mention that. Just a few minutes ago, i read this (from a specialized legal publication medium, MSN), saw a potential link with social inflation and decided not to put it here to avoid thread derailment.

Geico may have to pay $5.2 million to woman who claims she contracted STD in a car insured by the company (msn.com)

-----

There is something broken in the US legal system but am confident it's more a relative low in your typical but unusual cycles.

-----

Personal note

For about 20 years, as a peripheral and marginal sideline activity, i provided expert testimony and participated in administrative decisions. The typical case meant to appear in court and find out, on the spot, who would be responsible for the hearing and decision. That designation was often the determinant factor in the outcome, sometimes almost irrespective of underlying merit and forced parties to settle immediately, before appearing. This meant for me full payment and release, allowing time to prepare for the next case and this single day honorarium equivalent was almost enough to bring the family (to Spain a few times) on vacation for a few weeks. In this Montana specific case, i'd say NICO had to to play a similar strategy: If you can't beat them, join them (and share the bill).

-----

Back to relevant news.

Seems like the same method could be applied to lay off child rearing expenses to an insurer.

Edited June 10, 2022 by Spekulatius

[gfp]

Microsoft has joined Google and Facebook to participate in a group potentially opposing MidAmerican's proposed $3.9B Wind PRIME wind+solar project in Iowa.  MidAmerican is seeking approval and would like an 11.25% regulated return.

 

https://finance.yahoo.com/news/warren-buffett-versus-big-tech-130015233.html

[gfp]

This is the CEO of soon-to-be-consolidated-subsidiary Pilot Corporation talking about Union Pacific's demands that Pilot reduce their rail shipments by up to 50% on some routes.  Pilot distributes 20% of the diesel and 30% of the diesel exhaust fluid (DEF) in the country.  Much of this is shipped by rail.  I wonder what Union Pacific's side of this story is?

 

 

[Cigarbutt]

50 minutes ago, Spekulatius said:

Seems like the same method could be applied to lay off child rearing expenses to an insurer.

The meaning (message?) is not clear. Can you elaborate?

[LC]

30 minutes ago, Cigarbutt said:

The meaning (message?) is not clear. Can you elaborate?

"I got pregnant in a Geico insured car, now Geico you've got 18 years of support to pay..."

[aws]

Leaving aside the bizarre interpretation of what can be considered a covered loss, shouldn't the liability of the insurer be capped at the policy limit, which would surely be less than $5 million?

[gfp]

3 minutes ago, aws said:

Leaving aside the bizarre interpretation of what can be considered a covered loss, shouldn't the liability of the insurer be capped at the policy limit, which would surely be less than $5 million?

 

In my experience, or at least in my state, if a plaintiff offers to settle with the insured for the policy limit or below and the insurance company declines to take that settlement - the insurer is now on the hook for paying ultimate awards beyond the policy limits.  That is why there will frequently be a settlement proposed a couple bucks below the policy limit even when it seems bonkers at the time.

 

In this case, she offered to settle the claim for $1 million and GEICO did not take her up on it.  That was pre-arbitration.

[aws]

That makes sense. So you have to choose between a potentially outrageous settlement offer or risk unlimited liability in a trial or arbitration, and you have to defend every lawsuit against an insured no matter how frivolous to avoid risking a default judgment. No wonder insurance is a tough business. 

[Spekulatius]

10 hours ago, LC said:

"I got pregnant in a Geico insured car, now Geico you've got 18 years of support to pay..."

Yep, imaging doing this and having an “accident”. No worries, this why you have auto insurance:

[Red Lion]

8 hours ago, aws said:

That makes sense. So you have to choose between a potentially outrageous settlement offer or risk unlimited liability in a trial or arbitration, and you have to defend every lawsuit against an insured no matter how frivolous to avoid risking a default judgment. No wonder insurance is a tough business. 

 

So I work in this field, and the deal is that insurance is a contractual arrangement. Most, if not all states, have an implied warranty of good faith and fair dealing implicit in every contract (insurance or otherwise). A lawsuit can be brought for "bad faith" or breach of the warranty of good faith and fair dealing, and the damages for bad faith are not limited to the contractual limits set in the first place. 

 

So if an insurance company has an underinsured/uninsured motorist coverage for $100k, you're rear ended by an uninsured motorist and suffer severe injuries, medical treatment, physical therapy, out of work, in severe pain, miss a family vacation to Portugal, etc. etc. and then your insurance company refuses to pay out your policy limits, and offers a $50k. Then you go to arbitration, and your damages come in at $300k. This would be a good case for a bad faith lawsuit, and damages can include the attorney's fees for arbitration, emotional distress related to your insurance company negotiating in bad faith, and even punitive damages. 

 

Your insurance company never has to accept an outrageous settlement offer. If they offer $90,000, and the arbitration comes back at $95,000 or $101,000, it's unlikely that a bad faith lawsuit would make it very far IMHO. 

 

So these issues do make insurance a tough business, but they're also all baked into the underwriting. So the more insurance claims, higher payouts, and higher legal fees on every case = higher premiums = growth in float. More expenses are actually a GOOD thing, as long as they're adequately underwritten. One of the tough things right now is that used car values are going up in an unprecedented fashion, so property damage losses are coming in higher than expected. With inflation, there will likely also be inflation in pain and suffering awards which can cause a short term hit to underwriting results, but also should result in higher premiums and more float on a long term outlook. 

[Cigarbutt]

9 hours ago, Spekulatius said:

Yep, imaging doing this and having an “accident”. No worries, this why you have auto insurance:

Funny.

The topic is social inflation (already mentioned by Mr. Buffett in 1977) and is worth pursuing here?

RedLion is right vs a BRK investment and social inflation: unless unexpected, insurance subs simply have to adapt.

-----

Still.

To make a link from video above to social inflation, there's been developing case law for wrongful pregnancies ie getting pregnant as a result of another party's negligence. Social inflation has two components (opinion): a normal evolution according to social norms and an unproductive aspect. For 'normal' children, it's been established that compensation should not be considered although recently there have been signs (raising children can be expensive propositions well above government 'benefits') that a certain degree of court openness is on the way. For children with disabilities or special needs however, there's been legal developments in favor of larger payouts, which kinda makes sense (opinion). The problem however is when Geico may be on the hook for back seat love action.

-----

Here's an Geico example which does not even cover the potential underlying material absence of objective correlation between the real physical impairment and 'damages'.

GEICO Must Pay $2.7M to Settle Claim After Rejecting $30,000 Payout (carriermanagement.com)

Geico has produced poor underwriting results for some time and there are many factors apart from social inflation but they will eventually 'benefit' from inflated loss ratios as they remain well positioned to pass through cost increases, eventually.

Underlying Q4'21 underwriting results rank among GEICO's worst this century | S&P Global Market Intelligence (spglobal.com)

-----

Still.

To make money, companies need a fairly predictable landscape and a solid rule-of-law framework. Also, the driving forces behind the social inflation (gaining speed in the last 10 years) include widening inequality, spreading resentment and well entrenched anti-establishment (including big business) sentiment. Courts' decisions, even if often grotesque in appearance, are more a symptom than a disease.

-----

Back to BRK financial news.

[Spekulatius]

AC erst ing inflation cant be good for insurance companies writing a long tail insurance. I would  think that any underwriting assumes a certain inflation rates for the claims to be paid in the future.

One measure I quickly look at when looking at an is ursnce co and the “length of the tail “ is to calculate  the reserve to premium ratio. I think property insurers have a ratio of reserves /premiums of about 3 typically, which implies a 3 year tail (it takes 3 years to lay a claim on average). So you have exposure to 3 years if inflation. now if you underwrite with the assumption that we see 2% inflation in the next 3 years, but inflation is really 8% for threes years, well thats a 18% delta in payout.

 

This get much more fun , if you think about long term care insurance, which had already underwriting issues before that and now get hit with an additional dash of inflation. Haven’t seen much issues yet, but I sure would not want to have exposure to this sector right now.

 

I admit the above is all a simpletons view and there much more nuance to it.

[StevieV]

15 hours ago, RedLion said:

 

So I work in this field, and the deal is that insurance is a contractual arrangement. Most, if not all states, have an implied warranty of good faith and fair dealing implicit in every contract (insurance or otherwise). A lawsuit can be brought for "bad faith" or breach of the warranty of good faith and fair dealing, and the damages for bad faith are not limited to the contractual limits set in the first place. 

 

So if an insurance company has an underinsured/uninsured motorist coverage for $100k, you're rear ended by an uninsured motorist and suffer severe injuries, medical treatment, physical therapy, out of work, in severe pain, miss a family vacation to Portugal, etc. etc. and then your insurance company refuses to pay out your policy limits, and offers a $50k. Then you go to arbitration, and your damages come in at $300k. This would be a good case for a bad faith lawsuit, and damages can include the attorney's fees for arbitration, emotional distress related to your insurance company negotiating in bad faith, and even punitive damages. 

 

Your insurance company never has to accept an outrageous settlement offer. If they offer $90,000, and the arbitration comes back at $95,000 or $101,000, it's unlikely that a bad faith lawsuit would make it very far IMHO. 

 

So these issues do make insurance a tough business, but they're also all baked into the underwriting. So the more insurance claims, higher payouts, and higher legal fees on every case = higher premiums = growth in float. More expenses are actually a GOOD thing, as long as they're adequately underwritten. One of the tough things right now is that used car values are going up in an unprecedented fashion, so property damage losses are coming in higher than expected. With inflation, there will likely also be inflation in pain and suffering awards which can cause a short term hit to underwriting results, but also should result in higher premiums and more float on a long term outlook. 

 

From the article:

 

"The insurance company denied her claim, but when the woman pressed the issue, the company and the woman agreed to approach an arbitrator to resolve the matter.

 

The arbitrator decided in the woman's favor, awarding her $5.2 million last year."

 

This is the wild part.  Hard to imagine what the policy could say that could support that decision.  Just imagine the homeowners insurance claims.

[Cigarbutt]

2 hours ago, Spekulatius said:

AC erst ing inflation cant be good for insurance companies writing a long tail insurance. I would  think that any underwriting assumes a certain inflation rates for the claims to be paid in the future...

I admit the above is all a simpletons view and there much more nuance to it.

Your view is appreciated as you tend to be mostly right on most topics most of the time, a perspective which complements my tendency to be mostly wrong on most topics most of the time.

But i would bring some nuance to the above (rising inflation and negative P+C insurers' profitability). 

Disclosure: this is not an endorsement about sustainable inflation at this point; back on topic---)

 

Rising inflation will tend to mean rising yields and, typically insurers invest in safe fixed income, so, with a lag perhaps, investment returns from float will tend to at least partially mitigate poorer underwriting results from inflation, especially since most insurers tend to practice duration matching (payout curves with fixed income maturities) and tend to hold fixed income to maturity. But insurers will hurt with lasting inflation as the underwriting side may take time to catch up.

 

A lot has been said about the inflation in the 70s, how insurers fared badly and how Mr. Buffett allocated poor results to 'inflation'.

This shows investment returns for insurers which tended to rise with fixed income yields (return on common stocks was more variable but is blunted in the total portfolio return curve; Berkshire was again an outlier with higher common stock allocation and wildly positive excess returns on that part of the float portfolio). 

This shows the underwriting returns for insurers which don't reflect adequate poor investment return but more poor underwriting not mitigated by higher investment returns.

Again, the threat of an adverse event like inflation has negative implications but could correspond to an opportunity ie buying Geico in the late 70s when inflated reserve payments seemed to overcome Geico's intrinsic capacity to pay for them with a declining premium base..