Author Topic: Berkshire Hathaway - Insurance Operations  (Read 3726 times)

longinvestor

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Berkshire Hathaway - Insurance Operations
« on: August 12, 2017, 05:24:35 AM »
After all Insurance deserves a separate topic here. John Hjorth suggested that also. The general news section has become unwieldy. Besides, what's BRK without Insurance?

There have been some major shifts over the recent past. Ajit Jain now runs all reinsurance, Geico motors on towards the #1 spot, Float generation is growing at a healthy clip, despite our Chairman's guidance that it could flatten, float is at $110 B or so, insurance earnings is steady enough to earn a regular place in the earnings table, lots of idiot capital coming into insurance, it has been a benign claims period for sometime now, and ...

What does the future hold? Insurance is the one segment that I believe runs on it's own, with Buffett playing little more than cheerleader.

Chime in. If you are an insurance industry insider, even more welcome!







longinvestor

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Re: Berkshire Hathaway - Insurance Operations
« Reply #1 on: August 12, 2017, 05:45:18 AM »
So, what is the Insurance business worth? What proportion of BRK's IV is insurance?

John Hjorth

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Re: Berkshire Hathaway - Insurance Operations
« Reply #2 on: August 12, 2017, 11:16:09 AM »
Thank you for doing this split, longinvestor, - it's a great idea & initiative - for future ongoing discussion and information sharing about the insurance parts of Berkshire here on CoBF.

- - - o 0 o - - -

I have attached a screen shot from the latest Berkshire Q-10, p. 24, lower part - please focus on the "Berkshire Hathaway Reinsurance Group" line.

What do you see?, and what do you think about what you see?
« Last Edit: August 12, 2017, 11:18:29 AM by John Hjorth »
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longinvestor

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Re: Berkshire Hathaway - Insurance Operations
« Reply #3 on: August 13, 2017, 03:08:05 PM »
Thank you for doing this split, longinvestor, - it's a great idea & initiative - for future ongoing discussion and information sharing about the insurance parts of Berkshire here on CoBF.

- - - o 0 o - - -

I have attached a screen shot from the latest Berkshire Q-10, p. 24, lower part - please focus on the "Berkshire Hathaway Reinsurance Group" line.

What do you see?, and what do you think about what you see?

Okay, I will do the  financial media headline first. Berkshire Hathaway earnings disappoint analysts due to weakness in Insurance division's  earnings. 'm not making this up. Those were actual headlines.😉

Dynamic

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Re: Berkshire Hathaway - Insurance Operations
« Reply #4 on: August 15, 2017, 02:08:04 AM »
I'm interested in the potential impact of autonomous vehicles and prior to that many collision avoidance systems built into most Teslas and increasing numbers of other cars, working the way down from the premium end of the market to the mainstream.

I welcome this as a way of saving lives, but if self-driving cars were to reach level 3 to level 5 autonomy in the next 5 years and then perhaps the new vehicle fleet (cars, buses and heavy goods transportation) were to be almost all autonomous about 10 years from now, gradually bringing the majority of the US vehicle fleet to full autonomy over it's 15-20 year life cycle we could see insurance premiums and float from GEICO gradually decline to perhaps a third or less of their current levels by about 2040-2050 (inflation adjusted).

Such changes might also reduce car ownership if the cars can perform Transport as an Application so much cheaper than Taxis and human-driven Uber/Lyft cars. I suspect the total miles driven over the fleet would be similar in such a scenario, but with fewer, newer cars having much higher utilization (perhaps up 10-fold or 20-fold from the 4% utilization nowadays).

I'd also imagine that there could be knock-on effects in other industries - e.g. sale of alcohol, if people can get around safely and legally when they're wasted! And as autonomy is likely to coincide with electric vehicle adoption as it becomes cheaper than gasoline/diesel, the oil industry as a fuel source is likely to decline gradually over the next 2-3 decades, and with falling demand, so might the oil price and the use of pipelines. Use of oil in aviation and sea shipping may be more persistent and also the use as chemical feedstock.

But, this is an insurance thread, so I'm thinking we might need to expect that the GEICO portion will continue to grow float for a decade or so, but could be heading for a gradual decline at perhaps 2-5% per year. GEICO's superior cost structure and expense ratios may see it able to thrive and take market share from competitors with higher costs in a market where insured losses and thus premiums are expected to fall as increasing autonomy reduces the accident rate and severity, so expenses in running an insurer could become more significant to the premium. So I don't see float vanishing overnight, and have ground for optimism that GEICO could compensate with market share gains.

Do you agree or disagree with anything I've written?

longinvestor

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Re: Berkshire Hathaway - Insurance Operations
« Reply #5 on: August 15, 2017, 04:12:43 AM »
The hypothesis that needs to be verified,

Null; Myu=0
Alternate; Myu>0

Myu is the average# of accidents experienced by drivers driving autonomous vehicles.

If Null hypothesis is validated, auto insurance as we know it today will be different. Who knows, it's gone. In a sense, automation will have overcome human behavior (finally, whew!). Won't that be the headline?

 If the Null cannot be verified, the alternate hypothesis holds, little will change. Human behavior will continue to be the reason for things like insurance. I suspect that I'll be dead before this. But my kids may, so I look for null to be verified in their lifetime.





Dynamic

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Re: Berkshire Hathaway - Insurance Operations
« Reply #6 on: August 15, 2017, 06:20:42 AM »
The NHTSA in reviewing the headline-grabbing fatal Tesla Model S Autopilot crash, acknowledged that the collective crash rate of drivers when using Autopilot was 40% better than the normal rate for human drivers.
https://techcrunch.com/2017/01/19/nhtsas-full-final-investigation-into-teslas-autopilot-shows-40-crash-rate-reduction/

It seems that we've reached the point that when Tesla Autopilot is able to remain engaged (which doesn't mean in any environmental conditions on any road yet - that would be level 5 autonomy - and we're not quite at level 3), it already has a lower crash rate than humans.

Myu is >0 for sure, but I suspect it's much better than the status quo, so will very gradually lower crash rates as it slowly becomes more widespread and begins to get better, eventually reaching levels 4 and 5, which would mean that I would anticipate a gradually lowering but still real crash rate across the fleet, even if autonomy spreads as rapidly as anti-lock brakes or airbags did. But perhaps somewhere in the decade 2020-2029, insurers and maybe even emergency rooms will begin to see the effects of a declining accident rate, albeit gradually, though the decline might accelerate sharply once the level of human drivers declines below a certain point.

Although not fully relevant to insurance, I could also see autonomous vehicle making a major difference to the trucking industry, where the economic effects of a level 5 fully autonomous vehicle being able to drive 24/7 could be enormous, and likewise to the railroads if the cost of trucking declines dramatically and reduces the railroad's inherent advantages.

DooDiligence

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Re: Berkshire Hathaway - Insurance Operations
« Reply #7 on: August 15, 2017, 06:47:29 AM »
https://www.forbes.com/sites/patricklin/2016/04/25/self-driving-cars-wont-kill-insurance-industry/

*** Quote from article ***

Imagine that you step into a self-driving car of the future. The car’s heads-up monitor issues an alert: “I sense that you’ve been drinking. I probably don’t need your driving assistance, but there’s always a slim chance I may, in the event of an unexpected emergency. If you want to operate this vehicle under the influence of alcohol, your insurance rate for the next 12 hours, or until you arrive at your destination, will increase to $2 per hour. Press here to accept this increase in your insurance.”

You might get a similar alert if you’re driving late on a weekend when other drivers may be drunk, or in heavy traffic, or at high speeds, or if you’re parked in a neighborhood known for break-ins, or at any other time that increases risk.

Thus, one alternative business model in insurance could be to charge for these micro-risks, and even with micro-payments of pennies per hour (or smaller increments of time) or per mile.

Of course, this scenario would be a privacy nightmare. And, as insurers get closer to a state of perfect information, it may force a question about the ethics of their business: is it problematic to offer insurance bets when the outcome is known?

*** End quote ***

Why not, casinos do this every day?
(albeit, with minimal liability re: bodily injury.)

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As an aside, people will want to be entertained while riding.

Game developers could work micro-premiums into your fare?

A rider could actually choose to go into an area known for robbery & vandalism & place bets on their ability to navigate thru with minimal damage.

---

Just throwing crap against a wall here.

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*** Quote from article  ***

To help insurers and policymakers better understand capabilities and risk, we might need to consider inventive proposals, such as creating new positions in government and even a new agency to concentrate technical expertise...

*** End of quote ***

(inventive proposals? uhhh, you lost me there buddy)
abc | abev | aapl | bbh | brk.b | cri | cvs | dva | dis | ew | ffxdf | gpc | mo | nvo | sftby | vde

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DooDiligence

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Re: Berkshire Hathaway - Insurance Operations
« Reply #8 on: August 15, 2017, 06:50:24 AM »
on a more serious note...
abc | abev | aapl | bbh | brk.b | cri | cvs | dva | dis | ew | ffxdf | gpc | mo | nvo | sftby | vde

8 months left in the BRK.B 1st of the month DCA program (hoping 4 a selloff 2 go all in!)

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Dynamic

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Re: Berkshire Hathaway - Insurance Operations
« Reply #9 on: August 15, 2017, 07:33:49 AM »
So, what is the Insurance business worth? What proportion of BRK's IV is insurance?

Hmm, I'll give the autonomous vehicle thing a rest. This is really meaty.

To get a ballpark, we could consider a few things and sanity check them.

Please treat this as thinking aloud by a non expert, not a fully reasoned analysis. I'd like to see how others might go about it and see if there's a better model to valuing the insurance business.

I'll start with just one part of the picture, and see what you think:

The value of the underwriting profit
The 2016 underwriting income was $2.131 bn.

For a sanity check, over the 14 years of consecutive underwriting profit, a time during which float and underwriting have grown, $28 bn has been earned. The average over 14 years is $2.0 bn per year.

And Berkshire tends to underwrite conservatively, with 'loss development' for long-term risks tending slightly to work out in the shareholder's favour, not the norm in the industry. In fact, some of the 'losses' in the insurance division in the last 6 months may be as a result of such conservatism. Berkshire does not need to present the biggest underwriting profit it can, nor to pay taxes now on profits presumed by rosy projections of future insured losses that might not materialise.

Yes, only picking the 14 'up years' is slightly cherry picking to avoid the down year that preceded it, but I think GenRe's problems at purchase are now fixed and the trend is upward.

So if we are to capitalise some sort of underwriting profit, and still anticipate growth in the coming decade and perhaps the odd down year, despite the reduced megacat exposure, I think we should anticipate an average Underwriting Profit of $2.0 bn per year, the lower of the 2016 and the 14 year average is probably neither too conservative nor too optimistic if we capitalise at a reasonable yield.

Perhaps capitalise that at a 10% yield pre-tax or about 7% post-tax (P/E = 14) - what do you think? The underwriting earnings power might be worth $2,000 mn / 0.10 = $20 bn.

If there were to be a mega-cat, I anticipate that Berkshire would make up in the future what it lost in that year through increased business (as a good payer, a company that survives and an opportunist value investor) and in increased premiums during a 'hard market' following major losses, so I'm not too concerned to make allowances for possible down years, especially as I'd anticipate decent growth in underwriting earnings to add to the total return.

The next step would be to value the investments and/or account for float, but that could be another post.