tag:blogger.com,1999:blog-4815867514277794362.post8065205500949886262..comments2024-03-08T06:18:28.125+11:00Comments on Bronte Capital: Thoughts on the Berkshire meeting and a comment on long term care reinsurnaceJohn Hemptonhttp://www.blogger.com/profile/03766274392122783128noreply@blogger.comBlogger34125tag:blogger.com,1999:blog-4815867514277794362.post-15980220796700645782012-05-26T16:01:09.156+10:002012-05-26T16:01:09.156+10:00Another Warren Buffet mistake:
Between the period...Another Warren Buffet mistake:<br /><br />Between the period 2004 and 2007, WB sold about US$37bn dollars of equity index puts (S&P500, FTSE, Nikkei, and Eurostoxx) maturing between 2019 to 2028 (European; 15 to 20 year contracts). This was a huge position as Berkshire Hathaway’s total investments in 2007 were $141bn (26% of the portfolio).<br /> <br />In 2007, he mentioned that he had received $4.5bn in option income from the sold equity index puts (S&P500, FTSE, Nikkei, and Eurostoxx). And in 2008, he had received a total of $4.9bn. He was obviously selling more puts as the markets were falling.<br /> <br />Unfortunately for WB most of his put options were sold close to the top of the market.<br /> <br />In 2011, because the sold puts are in the money WB said that if the indices remain where they were at year end to the end of the contract life Berkshire Hathaway would have to pay $6.2bn on their $37bn exposure. Note that he only earned $4.9bn in put income.<br /> <br />There are still many years before the sold put options expire and WB reasoning is that the $4.9bn option premium will be reinvested to earn the superior Berkshire Hathaway returns. Plus who knows all the indices may end up higher than their 2007 levels. If this happens then the put option income would be banked for free (even though capital was at risk during the tenure).<br /> <br />My comment:<br />The run rate on WB’s sold equity index positions is not great to date. He has earned $4.2bn (+11% return) to so far lose $6.2bn (-17%) on $37bn delta 1 exposure in 2011.<br />Things haven't improved mch better since the end of 2011. Between the 31 Dec 2007 to 21 May 2012 all the indices still have negative returns:<br />SP500 FTSE Nikkei DAX (my proxy for Eurostoxx)<br />-7% -16% -42% -19%<br /><br />WB may be right that the option premium can be reinvested for the next 20 years. But<br />(i) He won’t be around when the position is closed (these are European options)<br />(ii) Its cheating to say that the income can be re-invested, because he could have easily bought the various indices and re-invest the dividends <br /> <br />The key to selling puts is to sell during market panics as the market will be on its knees and implied volatilities will be extremely high (as the market will be irrationally paying for put protection). Unfortunately, WB committed a large exposure prior to the GFC and had limited scope to increase his exposure further in 2008.<br /><br />The $37bn sold put exposure on various indices may end up being a very ordinary investment for Berkshire Hathaway.<br /><br />TJAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-35938786303867502242012-05-10T21:26:10.687+10:002012-05-10T21:26:10.687+10:00Speaking of letters.
When's the next Bronte C...Speaking of letters.<br /><br />When's the next Bronte Capital performance letter going online?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-55990291069967814702012-05-09T05:25:48.492+10:002012-05-09T05:25:48.492+10:00Slightly OT, but one's Apolipoprotein E's ...Slightly OT, but one's Apolipoprotein E's profile is a huge factor for Alzheimer's.<br /><br />http://en.wikipedia.org/wiki/Apolipoprotein_EMrs. Watanabehttps://www.blogger.com/profile/17409842578762602196noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-91852672083345691062012-05-08T19:57:43.677+10:002012-05-08T19:57:43.677+10:00I thought Life Reinsurance is a ok business. Certa...I thought Life Reinsurance is a ok business. Certainly if you are reinsuring mortality risk- long term contracts, decent barriers to entry (you need the databases, expertise combined with giving primaries confidence that you will be around in 30 years means you don't get new startups forming just because they fancy it). Its a relationship driven business with 3-4 players dominant. You will know more about Life & Annuity Re than me, but I think they blew up because they took on investment risk and got it wrong. (A post on it would be welcome) Reinsuring mortality risk is a good business (trends in your favuor, reasonable predictability of what your risks are, etc). Reinsuring minimum interest rates or policyholder behaviour is a terrible business (punt on markets). I think that is what WB +(and the fellow talking abotu RGA) is getting at.Willnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-73509641884136995492012-05-08T17:00:36.705+10:002012-05-08T17:00:36.705+10:00I thought Genworth was struggling with long term c...I thought Genworth was struggling with long term care insurance as well, that they admittedly had underpriced it, and were asking for price increases? <br />also, if Canada is in a property bubble, as some are suggesting, including Prem Watsa at Fairfax Financial, then Genworth's book of business in Canada may also be toxic.marknoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-72328084078249059942012-05-08T16:34:15.021+10:002012-05-08T16:34:15.021+10:00Great post on incentives.
Funny that some insuran...Great post on incentives.<br /><br />Funny that some insurance companies still don't get it. Surely losses should show up relatively quickly?Timhttp://www.eurosharelab.comnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-10616477198867635882012-05-08T06:54:06.921+10:002012-05-08T06:54:06.921+10:00Hi Conscience of Conservatives,
Your point about...Hi Conscience of Conservatives, <br /><br />Your point about derivatives in insurance companies is a little hard to follow. <br /><br />You see, in many instances, derivative contracts are used as a form of insurance, albeit structured in a legal manner which neatly avoids all the tiresome regulatory issues involved in writing insurance contracts. <br /><br />In principle, a good insurer, ie, one who has the ability to understand the risks and to price appropriately, is probably in a better position to write derivative contracts than anybody else. <br /><br />However, the experience of AIG a few years ago provides a notorious example of how things can go wrong. How did that happen? Judging by the published material, it seems that the didn't understand what they were getting into (eg, they too thought that real estate price always go up) and, at least to some extent, they were gamed by their IB counterparties. <br /><br />Cheers, Nemo.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-25756833668005707072012-05-08T05:11:42.958+10:002012-05-08T05:11:42.958+10:00LTC has had the same experience as Disability Inco...LTC has had the same experience as Disability Income Insurance. <br /><br />Underpriced initially by insurance companies (no premium increase ever, lifetime benefits, etc), and gamed by the policy holders. <br />Throw in a bad economy, which always triggers claims, and the backdrop of lousy real life investment experience for the general public, is it any wonder that the policy holders would rather see a return on their premium dollars instead of touching their sputtering investment portfolio. <br /><br />BTW John, married couples have always gotten huge discounts on premium compared to individual policies. This is no secret.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-64710529882067659732012-05-08T01:37:38.990+10:002012-05-08T01:37:38.990+10:00John,
oh, a few more things: Genworth does in fac...John, <br />oh, a few more things: Genworth does in fact have a small direct business unit, but the majority of their business is done by commissioned agents, many of whom are financial planners. Financial planners generally represent a fairly affluent crowd that will buy insurance at a younger age as a part of their overall retirement planning. The average age of a Genworth new client I believe is a shade under 60, which gives Genworth over 20 years to play the float. <br /><br />I do agree that inflation is a concern for insurance companies in general, but the inflation rider for LTCi is expensive and thus not a problem. Insurance companies in general price policies pretty well, except, as mentioned previously, when sales and bonuses outweigh long-term corporate health. <br /><br />An analysis of the sales strategy and insurance company management is the most important step in evaluating an insurance company. I was short Conseco for a time when I was first securities licensed after I saw that they would in fact take virtually anybody for their LTCi plans. Only Bankers Life survived that mess as they had tighter underwriting. The parent hurt them obviously, but I believe that is the surviving entity. A poker buddy of mine is now an exec with them.<br /><br />Hancock and NML are the other good companies in this business btw. Omaha appears to be borderline, hard to tell with TransAmerica now that they have re-entered.<br />UlyssesUlysses Benjamin Doverhttps://www.blogger.com/profile/13883591724573915989noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-30737324336007062422012-05-08T01:26:38.767+10:002012-05-08T01:26:38.767+10:00that was the silliest explanation of long term car...that was the silliest explanation of long term care insurance I have ever read. LTCi has been under-priced by insurance companies seeking to ramp sales so that the execs could pull out bonuses. When the company gets into trouble because the premiums collected were inadequate the execs are long gone living on a beach or on to the next scam. It is a similar problem that health insurance in America has, where execs have pulled more per premium dollar to their bonuses (which have tripled in the past 30 years, despite a low growth environment) while raising premiums and always looking for an excuse to blame- right now it is Obamacare that is the scapegoat. John, you make some good observations, but twist to some very wrong conclusions. Ulysses.Ulysses Benjamin Doverhttps://www.blogger.com/profile/13883591724573915989noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-45629148913177058352012-05-08T00:29:00.912+10:002012-05-08T00:29:00.912+10:00Ah Dr Robert Weed
I think they people who buy you...Ah Dr Robert Weed<br /><br />I think they people who buy your policies get a better deal than those that sell them.<br /><br />Also you did not short Conseco.<br /><br />JJohn Hemptonhttps://www.blogger.com/profile/03766274392122783128noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-90280922598756658772012-05-07T23:25:35.611+10:002012-05-07T23:25:35.611+10:00This was one of the most off based articles I have...This was one of the most off based articles I have read in years. Most long term care insurance is sold by career agents. They help people who respond to marketing or went to websites. People understand they need a plan for the the physical, emotional and financial burdens long term care places on family and friends.<br /><br />The risk is real. As medical science contiunues to improve we survive health events and accidents and we live to older ages. When you get old you have age related issues from memeory to physical.<br /><br />Commission sales people are used since this is a hard product to sell because of denial. Insurance premiums would actually increase if you used salary folks which is why most insurance is sold by commssion sales people.<br /><br />This is not unlike many products. Few people have the skills required to listen to a clients needs and help solve the problem the client might have ... no matter what the product.<br /><br />The problem some insurance companies have in long term care insurance is underwriting since so many people do end up needing care. In the past many companies expected a large number of people to laspe the policy before ever using the product.<br /><br />The actual lapse rates are very low. Some companies like Genworth have been doing this since the 1970's so they understand the real risks and price the product properly.<br /><br />The other area companies have a problem with is they must reserve large amounts of money for claims. This is an expensive business to be in because of the reserve requirements. Now that interest rates are so low only the best will survive.<br /><br />This is still a solid business. A huge marketplace exists (people aged 40 to 70) who have assets to protect and who need a plan for the the physical, emotional and financial burdens long term care places on family and friends.<br /><br />Tax incentives and partnership products are available as well. A good place to look at this product is www.completelongtermcare.comDr. Robert Weednoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-50168119480621176682012-05-07T21:57:25.996+10:002012-05-07T21:57:25.996+10:00I love Charlie :D
Brilliant post John, cheers.I love Charlie :D <br />Brilliant post John, cheers.tiruhttps://www.blogger.com/profile/09576188203768579619noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-28907487403228948542012-05-07T21:56:43.850+10:002012-05-07T21:56:43.850+10:00I love Charlie!! :D
Brilliant post John. CheersI love Charlie!! :D <br />Brilliant post John. Cheerstiruhttps://www.blogger.com/profile/09576188203768579619noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-38243182747154833652012-05-07T14:22:34.979+10:002012-05-07T14:22:34.979+10:00Hi Thanks for sharing your observations and experi...Hi Thanks for sharing your observations and experience.<br /><br />Why didn't you ask the questions you wanted to ask? You make salient points.<br /><br />I've never known an Australian to be shy, but I guess I would have been awed too. For some it's K-pop idols, and I guess for us, it's a couple of elderly gentlemen.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-10370350892028769782012-05-07T12:48:44.556+10:002012-05-07T12:48:44.556+10:00I'm not familiar with how Genworth operates in...I'm not familiar with how Genworth operates in Australia, but in the States, the company does not have a salaried sales force. They are all non-employees working strictly on commission.<br />Your otherwise correct. Genworth is the one company that has done a excellent job making LTCI work.<br />.sunrisernoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-16636509860002051662012-05-07T11:03:13.489+10:002012-05-07T11:03:13.489+10:00John,
Bravo! I learned more about the insurance b...John,<br /><br />Bravo! I learned more about the insurance business in this single post than a whole year worth of reading. Long Hempton, short Buffett! LOL.<br /><br />Btw, wanted to ask you: (1) how did you find out their sales strategies? (2) how would you "short" the toxic Aussie house market?Johnhttps://www.blogger.com/profile/14682393043392310140noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-33798668061508972892012-05-07T10:54:26.833+10:002012-05-07T10:54:26.833+10:00Everything is alright, until it isn't.
Account...Everything is alright, until it isn't.<br />Accountants will continue to publish balancing figures until they don't...Insidernoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-25684848843952796872012-05-07T10:08:41.163+10:002012-05-07T10:08:41.163+10:00I agree with your assessment of LTC insurance, but...I agree with your assessment of LTC insurance, but your analysis of Genworth as a winner in the group is way off. I hope you are not long GNW.<br /><br />What you say about their sales force may be true, but it is just a matter of time before that block goes sour, and some would argue that it already has. That means the rate increases are just around the corner and they will have the same fate with LTC insurance as the other big boys (MET, CNA, CNO, Penn Treaty, Allianz,...)Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-1323924365398273632012-05-07T06:38:34.221+10:002012-05-07T06:38:34.221+10:00National Indemnity has liabilities that last for t...National Indemnity has liabilities that last for the next 50 years (Equitas' asbestos claims). Now National Indemnity has assets that last for the next 50 years (railway).<br /><br />That's the reason why Buffett bought BNSF.<br /><br />The reason why BNSF is a subsidary of National Indemnity is regulatory capital. National Indemnity's regulatory capital surplus went up by $30+ billion in 2010 when Buffett put BNSF under National Indemnity.<br /><br />If BNSF gives out a dividend to National Indemnity --- it becomes part of National Indemnity's regultory capital surplus. If BNSF spends money on capex, that becomes part of BNSF's shareholder equity which eventually beomes part of National Indemnity's regulatory capital surplus.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-52223160380473340942012-05-07T03:04:07.616+10:002012-05-07T03:04:07.616+10:00Re: BNSF. You cannot pay claims with bridges or r...Re: BNSF. You cannot pay claims with bridges or rails. But BNSF shares can be sold in a worst-case catastrophic insurance payout. As Buffett has observed, the BNSF right-of-way simply cannot be recreated today. The other Class I Railroads would also know this, and they would also be faced with the need to respond to what their competitors were doing. Thus, BNSF would be worth a great deal even in a fire-sale situation.<br /><br />As for insurance, I'd like to know what's in the General Re run-off book that Warren Buffett keeps complaining about. Just for curiosity's sake. After all, Buffett liquidated most of the General Re derivatives, many of them at a loss. Thus, the General Re run-off book is filled with the ones that **nobody else wanted to buy**. Just how crazy do these derivatives get?Tomnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-21629611082051423582012-05-07T02:31:46.953+10:002012-05-07T02:31:46.953+10:00Aha! Now I know the secret to getting LTC insuran...Aha! Now I know the secret to getting LTC insurance with Genworth. It is difficult if not impossible to change the risk factors but now I can rethink the notion that we might need the insurance at all being in a stable marriage, reasonably fit, and mentally strong. No grandchildren yet, but now I can see that Genworth considers us an excellent risk so it would be a poor use of our funds.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-57134116247530246212012-05-07T02:15:33.419+10:002012-05-07T02:15:33.419+10:00As I see it, the main reason for BRK to own busine...As I see it, the main reason for BRK to own businesses like BNSF outright is to avoid the corporate governance / agency issues that arise when owning small blocks of publicly traded stocks. <br /><br />The big risk I see with BRK is that of some rogue manager betting the company on bad insurance. LTC is just a slow leak that is dwarfed by profits elsewhere. But I'm sure there are places where the risks are much more significant. I care mind paying those insurance execs big salaries, but it should be paid in restricted stock--and restricted for as long as the insurance business they are writing.frhttps://www.blogger.com/profile/14980384436598923074noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-29615527472144780602012-05-07T01:11:09.786+10:002012-05-07T01:11:09.786+10:00Sounds to me like your description of the long ter...Sounds to me like your description of the long term health care business is the very reason why (long term) health care should be universal and mandatory.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-64778253611423514272012-05-06T21:04:21.006+10:002012-05-06T21:04:21.006+10:00When I read about Buffet investing in derivatives,...When I read about Buffet investing in derivatives, an insurance company owning a derivative and the ever increasing unrelated businesses owned by Berkshire, I can't help but think that we're seeing a corporate structure that looks more and more like an imbroglio.Conscience of a Conservativenoreply@blogger.com