Have any of the FFH short sellers said their analysis was wrong?

[twacowfca]

BRK'S agreement with Lloyds was to take on about 6 or 7 billion dollars of assets and estimated liabilities and get that monkey off Lloyds back.  However, that contract provided that if ultimate claims should accumulate over the years to the amount of something like $13B, BRK had the option of putting that monkey back on Lloyds.  That cap makes the potential losses to BRK finite.   Lloyds still has latent liability, although it looks increasingly unlikely that they will ever have to carry that monkey around again.  :)

 

If future loss development is as was predicted, BRK gets billions in free float to invest for many years.  If loss development is adverse to the extent of $13B, BERK still gets the use of that float at a reasonable cost of perhaps about 5%/year.  :)

 

Re: insurance companies having liquidity problems.  It happens.  Chanos' first big expose was that Baldwin United appeared to be paying current claims by dipping into reserves that were supposed to have been set aside to pay claims for past loss events.  It took about a year, but their regulator finally determined that was what they were doing, and the regulator seized that company and put them out of business.

[claphands22]

BRK'S agreement with Lloyds was to take on about 6 or 7 billion dollars of assets and estimated liabilities and get that monkey off Lloyds back.  However, that contract provided that if ultimate claims should accumulate over the years to the amount of something like $13B, BRK had the option of putting that monkey back on Lloyds.  That cap makes the potential losses to BRK finite.   Lloyds still has latent liability, although it looks increasingly unlikely that they will ever have to carry that monkey around again.  :)

 

If future loss development is as was predicted, BRK gets billions in free float to invest for many years.  If loss development is adverse to the extent of $13B, BERK still gets the use of that float at a reasonable cost of perhaps about 5%/year.  :) 

 

 

Thanks for clearing it up. So finite insurance is definitely not a one size fit all type of reinsurance. It's depends heavily on what the definitions of the contract.

 

Are insurance companies required to disclose all finite insurance contracts?

 

 

Re: insurance companies having liquidity problems.  It happens.  Chanos' first big expose was that Baldwin United appeared to be dipping into reserves that were supposed to have been set aside to pay claims for past loss events to pay current claims.  It took about a year, but their regulator finally determined that was what they were doing, and the regulator seized that company and put them out of business.

 

Excellent, but the regulatory agency were able to catch on.  That's what I wonder about FFH, if there were never insolvent but illiquid, why didn't the regulatory agencies never catch on? And if FFH was never illiquid but just insolvent, how could have that happened without it being very noticeable to the shareholders?  And if FFH was never insolvent or illiquid, why raise capital at such harsh rates?

[twacowfca]

FFH was never insolvent nor illiquid, but the short sellers thought they were approaching that state, and tried to speed up that development by questionable if not nefarious means.  Realize that FFH is a holding company and that some of its subsidiaries had gotten in trouble.  The easy out for FFH would have been to turn over one or more of the troubled subs to their regulators and attempt to walk away from those problems.  However, doing that would have created its own set of problems: outraged regulators, policyholders and rating agencies, not just with a troubled subsidiary but horrible reputational problems for the holding company.

 

FFH chose the better, but painfully difficult way of supporting all of their subs while working closely with the rating agencies to meet their concerns.  Things never got so bad that the regulators of their subs became overly concerned.

[ERICOPOLY]

I always thought they could have done something like just sell the rest of NB or ORH.

 

[claphands22]

So FFH raised capital because if they turned over the subsidiaries to regulators, there would be outrage on part of the other stakeholders (policyholders, regulators, rating agencies) and a likely bad reputation? Did FFH ever said that's why they decided not to turn over the subs to the regulators?   

 

Are there in cases insurance companies turning over their failed subsidiaries. I didn't even know companies could actually do that.  I thought their only option would be runoff or going bust.  

[twacowfca]

So FFH raised capital because if they turned over the subsidiaries to regulators, there would be outrage on part of the other stakeholders (policyholders, regulators, rating agencies) and a likely bad reputation? Did FFH ever said that's why they decided not to turn over the subs to the regulators?    

 

Are there in cases insurance companies turning over their failed subsidiaries. I didn't even know companies could actually do that.  I thought their only option would be runoff or going bust.  

 

Again, FFH was not quite in extreme straits where walking away would be an option.  I don't think they would have even considered that as a last resort.  A company that does that in insurance becomes a pariah.

[twacowfca]

I always thought they could have done something like just sell the rest of NB or ORH.

 

 

That was certainly an option, but that would have gotten rid of a big chunk of float that would have potentially enabled them to earn their way out of trouble by doing what they do best: investing.  Had they sold 100% of their two best substantial companies, they would have had more liquidity at the holding company, but little capacity in the normal course of investing to support the crappy business and run off.  The potential grand slam home run with the CDS was yet to come.

 

Also, when that option of selling their good businesses was posed to them in a question at the AGM in the spring of '06, Prem answered, "You wouldn't like the price we would get."  Recall that that was only a few months after Katrina et al. when Odyssey Re and Northbridge had taken a beating.

[twacowfca]

3) Uncovering 3 frauds in a row does not make you an expert, you just think you are. No different to being in a casino & correctly predicting red 3 spins in succession. Because you were right on the last 3 spins you must know what you’re doing, so if you predict the 4th spin will be red it MUST be red – it cannot possibly come up black.   

 

SD

 

Haha, your post literally made me LOL. You guys really don't like Hempton. Fair enough. But that doesn't mean you should forget basic mathematic probabilities when his name comes up. I mean, this is a message board named after two INSURANCE companies, after all.

 

The odds of the roulette wheel hitting red on one spin is about 47.4%, after rounding. Saying uncovering a fraud is "no different" than hitting red on the roulette wheel is akin to saying that 47.4% of large corporations are frauds.

 

This assumption, if correct, has wide implications for the capital markets I suspect!  :D

 

Actually, Accounting firm Deloitte recently did a study and found that from 2000-2007, about 3.9% of US stocks with a market cap above $100 million were "subject of enforcement actions reported by the U.S. Securities and Exchange Commission" (AKA, they were frauds).

Hempton's uncovered frauds were mostly much bigger than $100 million, and the odds that a larger company/firm is a fraud is smaller, and Hempton's frauds had more fraud and illegal activity than many on the Deloitte report, but we'll be super liberal and assume that just throwing darts at a stock board has a 3.9% of hitting a fraud.

 

Thus, the chances of randomly uncovering 3 frauds in a row (with no skill, all luck) is about 1 in 16,700.

The odds of correctly predicting red on a roulette wheel 3 times in a row is less than 1 in 10. (1 in 9.4 actually).

 

So saying uncovering 3 frauds in a row is "No different to being in a casino & correctly predicting red 3 spins in succession" is, to borrow a word, misleading.

 

You have a good point about the statistics of accounting fraud.  Very few companies in developed countries set out to commit fraud deliberately.  What usually happens is that reality doesn't match expectations, and the managers massage the numbers.  Then, results continue to be disappointing , and there is more manipulation.  The next time they cross over the fraud line.  This leads to coverup and more elaborate fraud.

 

FFH's circumstance fit the pattern of a company that might be tempted to commit fraud.  That they did not speaks to their admirable character and says much about the character of their accusers.