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fair points and appreciate the contributions.

 

my understanding (from reading long ago and I can't find corroboration of this) is that BNSF is held at National Indemnity for tax efficiency purposes.

 

For tail risk purposes, I would prefer it be held at the Berkshire/holdco level and away from insurance liabilities (I understand we're getting into wacky / tail scenarios)

 

it seems it would not drastically impact NI surplus (to distribute/dividend out the BNSF LLC interest to Berkshire) if BNSF is counted at a discount to book.

 

On the flip side, this does seem to be a good reason for Berkshire to float a little BNSF and get a public mark. Overcapitalization would become even greater overnight (even if they applied a bigger haircut than to normal stocks).

 

anyways, this is all very tail / not relevant, so I'll shut up.

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fair points and appreciate the contributions.

 

my understanding (from reading long ago and I can't find corroboration of this) is that BNSF is held at National Indemnity for tax efficiency purposes.

 

For tail risk purposes, I would prefer it be held at the Berkshire/holdco level and away from insurance liabilities (I understand we're getting into wacky / tail scenarios)

 

it seems it would not drastically impact NI surplus (to distribute/dividend out the BNSF LLC interest to Berkshire) if BNSF is counted at a discount to book.

 

On the flip side, this does seem to be a good reason for Berkshire to float a little BNSF and get a public mark. Overcapitalization would become even greater overnight (even if they applied a bigger haircut than to normal stocks).

 

anyways, this is all very tail / not relevant, so I'll shut up.

 

Thats something I've never thought about. Does anyone know how much of BRK net worth is in the insurance subs and how much is at the holdco?

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Not too contaminate this thread with Brookfield, but wouldn't the Canadian Pacific deal value for Kansas be more applicable for a smaller name like Genesee & Wyoming which is now under Brookfield. Given its smaller size, Genesee & Wyoming would be both marketable to a larger buyer and also the current owner's business is to flip.

 

Lastly, (i dont know if it was mentioned here), it was said on news that an earlier all-cash offer for Kansas by Blackstone was rejected.

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On 3/22/2021 at 11:50 PM, bizaro86 said:
Quote

fair points and appreciate the contributions.

 

my understanding (from reading long ago and I can't find corroboration of this) is that BNSF is held at National Indemnity for tax efficiency purposes.

 

For tail risk purposes, I would prefer it be held at the Berkshire/holdco level and away from insurance liabilities (I understand we're getting into wacky / tail scenarios)

 

it seems it would not drastically impact NI surplus (to distributeidend out the BNSF LLC interest to Berkshire) if BNSF is counted at a discount to book.

 

On the flip side, this does seem to be a good reason for Berkshire to float a little BNSF and get a public mark. Overcapitalization would become even greater overnight (even if they applied a bigger haircut than to normal stocks).

 

anyways, this is all very tail / not relevant, so I'll shut up.

 

Thats something I've never thought about. Does anyone know how much of BRK net worth is in the insurance subs and how much is at the holdco?

bizaro & thepupil,

At the 2012 AGM, there was a question from Gary Ransom [#31]: "Why is BNSF owned by National Indemnity?". It's on p. 3,303 in Joel's Buffett compilation, and should be possible to find on the CNBC website.

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BNSF was a brilliant acquisition.  period.

 

I remember watching it in slow motion.  BNSF was cash-flowing well its rights to scarce physical pathways across U.S. 

 

After learning about Bill Gates' railroad purchase, I had started following it before Berkshire bought it.  I started paying more attention as Berkshire started buying shares.  As the # of shares purchased kept on going up, I remember realizing that Berkshire is probably looking to purchase it outright.

 

My memory is a little faint, but I think Buffett tried to hide the purchase of shares on that also a little bit.  During the big recession, I remember when price was around $70 per share, I was waiting for it to fall further, and then Berkshire snapped up the remaining shares at $100 per share.

 

Now, I see VZ with its cash-flowing rights to scarce spectrum across U.S. in similar situation and wonder if it might be too big to swallow, or if there is a probability that it might be a way to pick up BRK shares for cheap.  In inflationary times, VZ's rights also don't need as much higher maintenance as would BNSF's rolling stock.

 

Wonder how the ratio of VZ's Market Cap of $230B to Cashflow from operations of $41.8B compares to BNSF's valuation in Buffett's mind.  That $41.8B annual cashflow from operations ideally belongs in Buffett's hands to invest further as he will likely be able to make better investments with it than arguably VZ has been.

 

I remember writing a lot of puts on BNI, from around 60-strike all the way up to 90-strike in 2008-2009. It was like an ATM spitting out cash.

 

I've written some 55- and 56-strike puts on VZ, but at an order of magnitude smaller volume for now than I was doing with BNI.

 

Way to go!

 

If I remember correctly, Berkshire also picked up some BNI shares by writing puts perhaps in an attempt buy shares without raising the price.

 

Did your puts end up getting exercised?  In hindsight, did you make more money by selling puts than you would have made by buying BNI shares at the time to get BRK shares for cheap?

 

Just so that I understand, is your volume with writing VZ puts lower than it was for BNI because you like to be more diversified now or because you're not as sure yet if BRK will acquire VZ as you were with BNI?  If the April 13F shows a lot more VZ share purchases, would that change your mind?

 

I responded yesterday, but now I don’t see my response. So, I’ll try again!

 

I did get put to on BNI and I would turn around and sell covered calls. I never looked at whether I would have been better off just purchasing BNI and waiting for the deal to close. I like writing puts to play these risk arbitrage situations because I set the date for the close rather than buying the stock and not knowing when, or if, the deal will close. Also, I was writing so many puts on BNI I would have been heavily on margin if I had just bought the stock. Yes, I could have gotten heavily on margin if I was put to on everything, but I was staggering in price and time throughout 2009.

 

The best thing about the BRK’s purchase of BNI was the introduction of the B shares. As soon as there were B shares, I started writing puts and accumulating BRKB by being put to. I have gotten to 80% of my portfolio being BRKB, so I am really concentrated.

 

I am keeping my volume of VZ puts low because I am essentially fully invested and don’t want to end up on margin.

 

I was already interested in BNI pre-Buffett. So, I was confident ramping up my put volume. VZ only came on my radar because of BRK’s purchases so I am being more cautious.

 

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...

At the 2012 AGM, there was a question from Gary Ransom [#31]: "Why is BNSF owned by National Indemnity?". It's on p. 3,303 in Joel's Buffett compilation, and should be possible to find on the CNBC website.

In that exchange, there was this component of the response:

From Mr. Buffett: "Very interesting, the rating agencies — at least one rating agency — said they didn’t want to give us any credit for that asset in there [ie a 100% capital haircut], although if we had 20 percent, like we had had earlier, they would have given us full credit for the market value. I didn’t push them too hard on that."

This is called financial and thought process independence on a large scale.

In Q1 2020, the mark to market change in equity positions at NI was simply huge (21% decrease in surplus) but its capital position was still nowhere near being challenged.

https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/2-us-p-c-insurers-combined-for-48b-plus-decrease-in-net-unrealized-gains-in-q1-58638162

i wonder if the value of this optionality is underestimated at this point.

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John, thanks for pointing me to page 3,303 of Joel's document. I am very impressed with your recall/searching capabilities!

 

I don't find the answer overly satisfying, but in the end, owning Berkshire is an act of deserved faith/trust, so moving on.

 

And the best place — obviously, the number one place where we like to have money is in the

holding company. And we’ve got about 10 billion in the holding company right now. That, you

have the ultimate flexibility with.

Most of our operating businesses keep more cash around than they need, but it’s there. And

I’m — as long as I have 20 billion someplace, I feel comfortable. We’ll never have anything that

can come up, remotely, that would cause me to lose any sleep as long as I start with the 20

billion.

That’s probably considerably more than we need, but it just leaves us comfortable, and it

makes us feel we can do other things aggressively, as long as we know the downside is

protected.

The — having the railroad in National Indemnity was just something we thought was nice to

have a huge asset like that there that should make the rating agencies and everyone feel

comfortable, and there’s no disadvantage to us.

Very interesting, the rating agencies — at least one rating agency — said they didn’t want to

give us any credit for that asset in there, although if we had 20 percent, like we had had earlier,

they would have given us full credit for the market value. I didn’t push them too hard on that.

But there’s a fair amount of logic, I think, to where things are placed. If we were to make a big

acquisition, it might require shifting some funds from one place to another, but we’ll always

leave every place more than adequately capitalized.

And if you can figure out a way that I could use the life funds more like I can use the propertycasualty funds, call me. I’ve got an 800 number. (Laughs)

CHARLIE MUNGER: Well, two things are peculiar about that casualty operation. One is that it

has so much more capital, in relation to insurance premiums, than anybody else. And the other

is that it has, among the assets in that great surplus of capital, is something like the Burlington

Northern Railroad, which makes it immensely stronger from the viewpoint of the policyholder.

It’s a huge advantage you’re talking about, not a disadvantage.

WARREN BUFFETT: Yeah. Here’s a property-casualty company that has an asset in it that,

unrelated to insurance, will probably make $5 billion pretax or more.

So if we’re writing — well, in that entity, we’re writing less than that — but let’s say we’re

writing 25 billion of premiums. That means we can write at 120, and just our railroad operation will bring us an underwriting neutrality. I mean, it’s a terrific — it’s like having a royalty or

something.

CHARLIE MUNGER: It’s a wonderful position we have.

WARREN BUFFETT: And nobody else has it.

CHARLIE MUNGER: And nobody else has it. And they wouldn’t let us do it if we weren’t so

strong.

 

 

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John, thanks for pointing me to page 3,303 of Joel's document. I am very impressed with your recall/searching capabilities!

 

I don't find the answer overly satisfying, but in the end, owning Berkshire is an act of deserved faith/trust, so moving on.

 

And the best place — obviously, the number one place where we like to have money is in the

holding company. And we’ve got about 10 billion in the holding company right now. That, you

have the ultimate flexibility with.

Most of our operating businesses keep more cash around than they need, but it’s there. And

I’m — as long as I have 20 billion someplace, I feel comfortable. We’ll never have anything that

can come up, remotely, that would cause me to lose any sleep as long as I start with the 20

billion.

That’s probably considerably more than we need, but it just leaves us comfortable, and it

makes us feel we can do other things aggressively, as long as we know the downside is

protected.

The — having the railroad in National Indemnity was just something we thought was nice to

have a huge asset like that there that should make the rating agencies and everyone feel

comfortable, and there’s no disadvantage to us.

Very interesting, the rating agencies — at least one rating agency — said they didn’t want to

give us any credit for that asset in there, although if we had 20 percent, like we had had earlier,

they would have given us full credit for the market value. I didn’t push them too hard on that.

But there’s a fair amount of logic, I think, to where things are placed. If we were to make a big

acquisition, it might require shifting some funds from one place to another, but we’ll always

leave every place more than adequately capitalized.

And if you can figure out a way that I could use the life funds more like I can use the propertycasualty funds, call me. I’ve got an 800 number. (Laughs)

CHARLIE MUNGER: Well, two things are peculiar about that casualty operation. One is that it

has so much more capital, in relation to insurance premiums, than anybody else. And the other

is that it has, among the assets in that great surplus of capital, is something like the Burlington

Northern Railroad, which makes it immensely stronger from the viewpoint of the policyholder.

It’s a huge advantage you’re talking about, not a disadvantage.

WARREN BUFFETT: Yeah. Here’s a property-casualty company that has an asset in it that,

unrelated to insurance, will probably make $5 billion pretax or more.

So if we’re writing — well, in that entity, we’re writing less than that — but let’s say we’re

writing 25 billion of premiums. That means we can write at 120, and just our railroad operation will bring us an underwriting neutrality. I mean, it’s a terrific — it’s like having a royalty or

something.

CHARLIE MUNGER: It’s a wonderful position we have.

WARREN BUFFETT: And nobody else has it.

CHARLIE MUNGER: And nobody else has it. And they wouldn’t let us do it if we weren’t so

strong.

 

I never thought that earning in operating compagnies have an effect on underwriting ratio. So they can write coverage at the same price than Markel or Fairfax and have a better underwriting ratio. Now i understand even more the huge advantage of buying bond like company in the insurance subsidiary.  I always tough that investment revenus wasn't include in the underwriting ratio just in earnings. And I follow Berkshire since 1990  :-\ Every body talking about breaking up Berkshire never mentioned that the insurance operations will be worth less if BRK sell BNSF.

 

 

 

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John, thanks for pointing me to page 3,303 of Joel's document. I am very impressed with your recall/searching capabilities!

 

I don't find the answer overly satisfying, but in the end, owning Berkshire is an act of deserved faith/trust, so moving on.

 

And the best place — obviously, the number one place where we like to have money is in the

holding company. And we’ve got about 10 billion in the holding company right now. That, you

have the ultimate flexibility with.

Most of our operating businesses keep more cash around than they need, but it’s there. And

I’m — as long as I have 20 billion someplace, I feel comfortable. We’ll never have anything that

can come up, remotely, that would cause me to lose any sleep as long as I start with the 20

billion.

That’s probably considerably more than we need, but it just leaves us comfortable, and it

makes us feel we can do other things aggressively, as long as we know the downside is

protected.

The — having the railroad in National Indemnity was just something we thought was nice to

have a huge asset like that there that should make the rating agencies and everyone feel

comfortable, and there’s no disadvantage to us.

Very interesting, the rating agencies — at least one rating agency — said they didn’t want to

give us any credit for that asset in there, although if we had 20 percent, like we had had earlier,

they would have given us full credit for the market value. I didn’t push them too hard on that.

But there’s a fair amount of logic, I think, to where things are placed. If we were to make a big

acquisition, it might require shifting some funds from one place to another, but we’ll always

leave every place more than adequately capitalized.

And if you can figure out a way that I could use the life funds more like I can use the propertycasualty funds, call me. I’ve got an 800 number. (Laughs)

CHARLIE MUNGER: Well, two things are peculiar about that casualty operation. One is that it

has so much more capital, in relation to insurance premiums, than anybody else. And the other

is that it has, among the assets in that great surplus of capital, is something like the Burlington

Northern Railroad, which makes it immensely stronger from the viewpoint of the policyholder.

It’s a huge advantage you’re talking about, not a disadvantage.

WARREN BUFFETT: Yeah. Here’s a property-casualty company that has an asset in it that,

unrelated to insurance, will probably make $5 billion pretax or more.

So if we’re writing — well, in that entity, we’re writing less than that — but let’s say we’re

writing 25 billion of premiums. That means we can write at 120, and just our railroad operation will bring us an underwriting neutrality. I mean, it’s a terrific — it’s like having a royalty or

something.

CHARLIE MUNGER: It’s a wonderful position we have.

WARREN BUFFETT: And nobody else has it.

CHARLIE MUNGER: And nobody else has it. And they wouldn’t let us do it if we weren’t so

strong.

 

I never thought that earning in operating compagnies have an effect on underwriting ratio. So they can write coverage at the same price than Markel or Fairfax and have a better underrating ratio. Now i understand even more the huge advantage of buying bond like company in the insurance subsidiary.  I always tough that investment revenus wasn't include in the underwriting ratio just in earnings. And I follow Berkshire since 1990  :-\ Every body talking about breaking up Berkshire never mentioned that the insurance operations will be worth less if BRK sell BNSF.

 

I grok it. Won't bring it up again.

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Jeff,

 

You're a Southern US citizen, so it happens - from time to time - that I'm at a loss, to really get what you're posting.

 

With regard to "grok", I've found this :

 

... 'Grok' means all of these. It means 'fear,' it means 'love,' it means 'hate'—proper hate, for by the Martian 'map' you cannot hate anything unless you grok it, understand it so thoroughly that you merge with it and it merges with you—then you can hate it. By hating yourself. ..

 

Is this OK with you? [i'm cracking up now!]

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BNSF was a brilliant acquisition.  period.

 

I remember watching it in slow motion.  BNSF was cash-flowing well its rights to scarce physical pathways across U.S. 

 

After learning about Bill Gates' railroad purchase, I had started following it before Berkshire bought it.  I started paying more attention as Berkshire started buying shares.  As the # of shares purchased kept on going up, I remember realizing that Berkshire is probably looking to purchase it outright.

 

My memory is a little faint, but I think Buffett tried to hide the purchase of shares on that also a little bit.  During the big recession, I remember when price was around $70 per share, I was waiting for it to fall further, and then Berkshire snapped up the remaining shares at $100 per share.

 

Now, I see VZ with its cash-flowing rights to scarce spectrum across U.S. in similar situation and wonder if it might be too big to swallow, or if there is a probability that it might be a way to pick up BRK shares for cheap.  In inflationary times, VZ's rights also don't need as much higher maintenance as would BNSF's rolling stock.

 

Wonder how the ratio of VZ's Market Cap of $230B to Cashflow from operations of $41.8B compares to BNSF's valuation in Buffett's mind.  That $41.8B annual cashflow from operations ideally belongs in Buffett's hands to invest further as he will likely be able to make better investments with it than arguably VZ has been.

 

I remember writing a lot of puts on BNI, from around 60-strike all the way up to 90-strike in 2008-2009. It was like an ATM spitting out cash.

 

I've written some 55- and 56-strike puts on VZ, but at an order of magnitude smaller volume for now than I was doing with BNI.

 

Way to go!

 

If I remember correctly, Berkshire also picked up some BNI shares by writing puts perhaps in an attempt buy shares without raising the price.

 

Did your puts end up getting exercised?  In hindsight, did you make more money by selling puts than you would have made by buying BNI shares at the time to get BRK shares for cheap?

 

Just so that I understand, is your volume with writing VZ puts lower than it was for BNI because you like to be more diversified now or because you're not as sure yet if BRK will acquire VZ as you were with BNI?  If the April 13F shows a lot more VZ share purchases, would that change your mind?

 

I responded yesterday, but now I don’t see my response. So, I’ll try again!

 

I did get put to on BNI and I would turn around and sell covered calls. I never looked at whether I would have been better off just purchasing BNI and waiting for the deal to close. I like writing puts to play these risk arbitrage situations because I set the date for the close rather than buying the stock and not knowing when, or if, the deal will close. Also, I was writing so many puts on BNI I would have been heavily on margin if I had just bought the stock. Yes, I could have gotten heavily on margin if I was put to on everything, but I was staggering in price and time throughout 2009.

 

The best thing about the BRK’s purchase of BNI was the introduction of the B shares. As soon as there were B shares, I started writing puts and accumulating BRKB by being put to. I have gotten to 80% of my portfolio being BRKB, so I am really concentrated.

 

I am keeping my volume of VZ puts low because I am essentially fully invested and don’t want to end up on margin.

 

I was already interested in BNI pre-Buffett. So, I was confident ramping up my put volume. VZ only came on my radar because of BRK’s purchases so I am being more cautious.

 

Thanks boilermaker for sharing.  Feels like comrades sharing stories from the trenches :-). 

 

Hopefully, we'll get to tell the VZ story some day :-).

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Jeff,

 

You're a Southern US citizen, so it happens - from time to time - that I'm at a loss, to really get what you're posting.

 

With regard to "grok", I've found this :

 

... 'Grok' means all of these. It means 'fear,' it means 'love,' it means 'hate'—proper hate, for by the Martian 'map' you cannot hate anything unless you grok it, understand it so thoroughly that you merge with it and it merges with you—then you can hate it. By hating yourself. ..

 

Is this OK with you? [i'm cracking up now!]

 

It's from Robert Heinleins' "Stranger in a Strange Land",

 

In Heinlein's invented Martian language "grok" literally means "to drink" and figuratively means "to comprehend", "to love", and "to be one with". The word rapidly became common parlance among science fiction fans, hippies, and later computer programmers and hackers, and has since entered the Oxford English Dictionary.

 

I still cling to the idea of impermanence but grok the present capital structure of BRKs insurance operations, nonetheless.

 

;)

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Maybe people are just finally coming to their senses. Big Daddy Buff has told us $240 or lower and we're getting 6-10% a year run rate on the buybacks, maybe more. Inflation protected- check. Downturn protected - cough, laugh, check. Real, relevant, systematically important businesses trading at stupid cheap valuations? check. What more do folks want? A rerating here is inevitable. There arent many scenarios where 2% 10 yr treasuries, 30x on the S&P, and a Berkshire at its current price make sense enough to last very long.

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7 hours ago, Charlie said:

Get the money when it is cheap:

Buffett’s Berkshire Returns to Yen Market With 4-Part Bond Sale

https://finance.yahoo.com/news/buffett-berkshire-hathaway-returns-yen-002143670.html

Cheers!

From the link:

"Berkshire Hathaway is offering a five-year bond at 17-20 basis points over mid-swaps, which at current market levels is equivalent to a coupon of about 0.2%. The deal also includes 10-year, 15-year and 20-year notes, with expected ratings from Moody’s Investors Service and S&P Global Ratings higher than those given to Japanese sovereign debt."

BRK has a better credit rating than the 3rd largest economy in the world..

In September 2019 when BRK issued yen-denominated debt, their 10-yr yield was at about 0.44% with the 10-yr JGB at -0.25%. Today, the JGB 10-yr yield is at 0.11 (with presumably a lower yield on BRK debt with same duration).

The net position (investments in yen assets vs yen debt) is subject to change but the currency aspect seems to be at least 100% hedged.

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5 hours ago, ValueMaven said:

still heavy trading vol in the A shares over the past few weeks.  Yesterday at 1,900 shares alone.  We will find out in a few weeks what all of this means...

The volume spike seems a bit much for one institution only, although...maybe a sovereign wealth fund. The Goverment Pension Fund of Norway (Global) has over $1T in assets. They are also trying to become greener, and Berkshire recently mentioned that they would invest billions in renewable energy infrastructure.

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