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fareastwarriors

By fareastwarriors
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Krapdivad
Krapdivad

There was a pre-Berkshire meeting by Yahoo Finance today with Laurence Cunningham, Robert Hagstrom, Carol Loomis, and Tom Gayner.    Took a few notes if anyone was interested:   La

fareastwarriors
fareastwarriors

$tsm 👀     

nwoodman
nwoodman

Fascinating purchase by Berkshire.  A couple of thoughts.  1. Is this a cheap way to ride the Apple juggernaut?  2. Is this more Munger than Buffett?  Charlie being interviewed tomorrow on CNBC - coin

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  • 2 weeks later...
John Hjorth Mentor

John Hjorth

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Don't we all have those attractions to certain industries? [<- place smiley here]. Mr. Buffett was quite candid about it at the last shareholder AGM, that both insurance and reinsurance as industries aren't any longer what they used to be.

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gfp Veteran

gfp

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Insurance Insider article ->

--------------------------------

 

Swiss Re and Berkshire Hathaway explore legacy alliance

David Bull and Dan Ascher

 

Swiss Re is in talks with Berkshire Hathaway as part of a $1bn+ internal restructure of its legacy business that will put important new regulations for run-off books in the US to the test, The Insurance Insider can reveal.

 

If the transaction goes ahead it could pave the way for the two industry titans to collaborate on future deals enabled by the new Rhode Island legislation, carving up legacy books between themselves.

 

Sources said that Swiss Re is considering using the new rules - which are expected to be a boon for the $100bn US legacy market - to divest itself of the $1bn portfolio, freeing up capital.

 

The pioneering transaction would see Swiss Re transfer those liabilities into a separately capitalised cell company in Rhode Island, for which it would then write the retro programme in conjunction with Berkshire.

 

If the precedent-setting deal goes ahead, the two carriers would look to benefit from first-mover advantage in order to grow their foothold in the US legacy sector.

 

The complex deal is still in its formative stages but the wheels have already been put into motion, with industry outsourcer and consultancy Pro Global Insurance Solutions - which used to be owned by the Swiss reinsurer - in the process of establishing a cell company.

 

The vehicle, named ProTucket, would be used to house the mammoth book of liabilities.

 

Swiss Re is hoping to transfer the business into the new entity and put in place a 100 percent retrocession programme to protect the cell.

 

Sources have said that the Swiss giant is locked in talks with Berkshire about the structure of the proposed cover.

 

It is understood that Berkshire would write the cover for any asbestos, pollution and health (APH) liabilities in the portfolio as Swiss Re looks to reduce its exposure to such risks.

 

Swiss Re would write the retro for all other liabilities contained within the cell.

 

Both Swiss Re and Pro are understood to be working closely with Rhode Island's regulator to get the deal completed.

 

If it is rubber-stamped, the Swiss reinsurer would have to seek commercial court approval.

 

Swiss Re, Pro and Berkshire would then look to replicate the process for other carriers with legacy books, which could effectively be lifted and dropped into a similar structure to ProTucket.

 

The new regulations are intended to give US carriers an exit mechanism much like that offered by the Part VII transfer in Europe.

 

Pro announced its intention to test the new legislation earlier this year.

 

The new Rhode Island regulations provide a way for run-off portfolios to be transferred in a way that offers legal finality. Previous methods of disposing of discontinued US insurance books did not provide true final risk transfer.

 

Swiss Re said it does not comment on market rumour and Pro declined to comment. Berkshire could not be reached.

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Dynamic Contributor

Dynamic

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If you don't subscribe to WSJ, ValueWalk also had this story the other day:

http://www.valuewalk.com/2016/10/interview-ted-weschler-says-likes-apples-subscription-element/

 

Re-reading my purchase notes (bought at $95, mostly by selling BRK.B at $142), I pretty much concur with Ted's views on the customer loyalty and lock-in and the consistent services revenue which should remain healthy even if the device upgrade cycle slows down. I have almost 30% of my concentrated portfolio in Apple right now. I was slightly nervous of having the stake get too high. While it still COULD "do a Nokia" and be supplanted by something new, I believe it's less risky than that, but 25% of my portfolio was a pretty big bet for this kind of company (whereas I'd be comfortable with 100% in BRK.B) and I'd be tempted to trim my position if it rose to nearer 50% of my portfolio, and/or if the price/value margin of safety was very much reduced.

 

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Guest longinvestor

Guest longinvestor

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Today, I had the chance to visit Chemtool in IL. Very well run company that makes primarily manufacturing/industrial specialty greases/lubricants.

 

http://chemtool.com/

 

Turns out they were bought by Lubrizol, in Dec 2011, almost immediately after joining Berkshire. Terms of purchase unknown. Also read that Lubrizol was a supplier to Chemtool for a long time. Sort of explains the connection.

 

Chemtool is the archetype of BRK's MSR businesses. Products that will likely be used for as far as the eye can see, well run family business (son of founder in charge now). Don't know the moat for this business but being a manufacturing guy myself, once something like a specialty grease/lubricant is specified for an application, it is very unlikely to be switched out. Maintenance guys typically don't take that kind of risk. "no messin around". This is rather similar to ISCAR's moat, metalworking tools tends to be very sticky business.

 

To paraphrase Munger, I'd love for them to keep buying more such businesses; Most importantly this kind of deal gets made from somewhere other than Omaha. Good for the future.

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dcollon Contributor

dcollon

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From none other than Bruce Greenwald:

 

 

"It’s a crazy deal.  It’s an insane deal.  We looked at Burlington Northern at $75 and I’ll give you the exact calculation we did.  You don’t have a high earnings return.  They are paying 18 times earnings, but it’s really much worse than that.  They report maintenance cap-ex very carefully.  They report depreciation and amortization, and they report only about 70% of the maintenance cap-ex.  So they are under-depreciating, and their profit numbers are lower than the true profit numbers – and in a bad way, because the tax shield for the depreciation is undergone too.  Their profitability is much lower than it looks.

 

Buffett’s paying 18-times [at $100/share] and at $75 he was paying 16-times.  Our calculation is he was paying 21-times.

 

Secondly, there are two kinds of assets.  There are the rights-of-way, which you can’t get rid of.  So there’s no issue about having to earn a return on them because you have to keep it in the business, and because there’s nothing they can do with those rights-of-way.  If you look at the asset value of the non-right-of-way equipment, and you write it up because it’s more expensive than it was originally, you get an asset value that’s very close to the earnings power value.  We didn’t see a lot franchise value or hidden asset value.

 

The other thing is that if you try to calculate sustainable earnings, you have to cope with the fact that earnings are up enormously since 2003, when oil went up.  There is a simple calculation you can do, which compares the cost-per-ton-mile for freight for a truck versus a railroad.  If you build the increase in the price of diesel fuel into the post-2003 experience, when revenues suddenly start to grow, what you see is that the entire growth of the revenue is accounted for by the energy advantage that the railroads have and therefore how much business they can capture from the truckers, and how much pricing they can get because the competition is now more expensive.

 

There is nothing special about the railroads.  It’s entirely an energy play.

 

If you look at what their margins should have gone up by, given the energy efficiency, the margins go up by only about half of that.  So you don’t have a good aggressive management over these five years producing outsized returns.

 

We looked back at when they did the merger with Santa Fe, because then they did increase margins.  But they got bored with it, and margins started to come down.  The same thing happened recently.  We don’t see a lot of hidden profitability in the culture of the company.

 

It looked to us like an oil play.  He has a history of making bad oil play decisions.  And that was at $75/share, we thought there were better oil plays.  At $100/share we think he has lost his mind."

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gfp Veteran

gfp

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Berkshire filed a standard correspondence note back and forth with the SEC today - no big deal, but some might find management's summary of Precision Castparts' business and the oligopoly markets it sells into interesting.  I did.  Starts on page five on this section of correspondence "As background, PCC..."  ->

 

https://www.sec.gov/Archives/edgar/data/1067983/000119312516732679/filename1.htm

 

edit :  Bloomberg wrote a piece about the exchange ->

https://www.bloomberg.com/gadfly/articles/2016-11-22/warren-buffett-and-berkshire-a-matter-of-trust

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Guest longinvestor

Guest longinvestor

Posted
Posted

Berkshire filed a standard correspondence note back and forth with the SEC today - no big deal, but some might find management's summary of Precision Castparts' business and the oligopoly markets it sells into interesting.  I did.  Starts on page five on this section of correspondence "As background, PCC..."  ->

 

https://www.sec.gov/Archives/edgar/data/1067983/000119312516732679/filename1.htm

 

Interesting.

 

There is a thing called "back-to-birth-traceability" that aerospace parts come under. That in effect means switching out suppliers is darn near impossible. In my work, I've worked with a small aerospace parts supplier that was poorly run and went into bankruptcy. Their main customer (one of the eight oligopolies named in the above filing) played a pivotal part in nursing this co back to health. That's how sticky aerospace business can be.

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flesh Contributor

flesh

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Berkshire filed a standard correspondence note back and forth with the SEC today - no big deal, but some might find management's summary of Precision Castparts' business and the oligopoly markets it sells into interesting.  I did.  Starts on page five on this section of correspondence "As background, PCC..."  ->

 

https://www.sec.gov/Archives/edgar/data/1067983/000119312516732679/filename1.htm

 

Sweet, thanks for posting! Can anyone articulate the relevant effects on the financial statements in which brk would benefit from having these intagibles subjected to impairment opposed to amortization?

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Guest longinvestor

Guest longinvestor

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Posted

Berkshire filed a standard correspondence note back and forth with the SEC today - no big deal, but some might find management's summary of Precision Castparts' business and the oligopoly markets it sells into interesting.  I did.  Starts on page five on this section of correspondence "As background, PCC..."  ->

 

https://www.sec.gov/Archives/edgar/data/1067983/000119312516732679/filename1.htm

 

Sweet, thanks for posting! Can anyone articulate the relevant effects on the financial statements in which brk would benefit from having these intangibles subjected to impairment opposed to amortization?

 

 

Although WEB does not specifically address impairment versus amortization as it relates to intangibles, here is something on the subject and it's potential to boost earnings 5 years or so down the road. The below is from the 2014 letter.

 

 

Our income and expense data conforming to GAAP is on page 49. In contrast, the operating expense

figures above are non-GAAP and exclude some purchase-accounting items (primarily the amortization of certain

intangible assets). We present the data in this manner because Charlie and I believe the adjusted numbers more

accurately reflect the true economic expenses and profits of the businesses aggregated in the table than do GAAP

figures.

I won’t explain all of the adjustments – some are tiny and arcane – but serious investors should understand

the disparate nature of intangible assets. Some truly deplete over time, while others in no way lose value. For

software, as a big example, amortization charges are very real expenses. The concept of making charges against

other intangibles, such as the amortization of customer relationships, however, arises through purchase-accounting

rules and clearly does not reflect reality. GAAP accounting draws no distinction between the two types of charges.

Both, that is, are recorded as expenses when earnings are calculated – even though from an investor’s viewpoint

they could not be more different.

14

In the GAAP-compliant figures we show on page 49, amortization charges of $1.15 billion have been

deducted as expenses. We would call about 20% of these “real,” the rest not. The “non-real” charges, once nonexistent

at Berkshire, have become significant because of the many acquisitions we have made. Non-real

amortization charges will almost certainly rise further as we acquire more companies.

The GAAP-compliant table on page 67 gives you the current status of our intangible assets. We now have

$7.4 billion left to amortize, of which $4.1 billion will be charged over the next five years. Eventually, of course,

every dollar of non-real costs becomes entirely charged off. When that happens, reported earnings increase even if

true earnings are flat.

Depreciation charges, we want to emphasize, are different: Every dime of depreciation expense we report

is a real cost. That’s true, moreover, at most other companies. When CEOs tout EBITDA as a valuation guide, wire

them up for a polygraph test.

Our public reports of earnings will, of course, continue to conform to GAAP. To embrace reality, however,

you should remember to add back most of the amortization charges we report

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