Author Topic: Berkshire Hathaway - Insurance Operations  (Read 14012 times)

Cigarbutt

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Re: Berkshire Hathaway - Insurance Operations
« Reply #40 on: August 09, 2019, 09:59:15 AM »
https://www.threeinsurance.com/our-story

This product/ business literally launched around the annual meeting this year. One small mention by Buffett during the meeting that this, along with BHSI could be big over time. This had all the trappings of GEICO all over again; targeting comprehensive insurance coverage for small businesses with no brokers. The brand promise appears to hinge on easy-to-apply & understand; single-point-of-contact and 20% savings. And of course “our check will clear”.

Anybody have insights or seen / used this product?
I think gfp and/or Dynamic have commented on this, elsewhere on this Board.

The effort was spearheaded by Mr. Jain, is (and will be) work in progress and it must have been a pain to get this through regulators. From industry publications, many express worries concerning the simplification process which may have gone too far but some of the comments are made by competitors who may lose business because of this new product which will tend to meet an unsatisfied and sometimes frustrating need.
https://www.accenture.com/us-en/insights/insurance/small-commercial-research
You can easily register and get the full report (12 pages) which is interesting.


Okonomen

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Re: Berkshire Hathaway - Insurance Operations
« Reply #41 on: September 08, 2019, 11:31:02 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.

Let's get back to what this thread should really be about: valuing their insurance ops ;)

I pretty much agree with the approach above, but again, it is difficult to put a value on the remaining 5 bio. USD annual investment income from their insurance float as it both consist of various interest income but also (as far as I can read) dividends from their market portfolio. Does anyone have any inputs on how to value this as the incoem stems from cash on hand at the moment but this cash is planned for M&A

Okonomen

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Re: Berkshire Hathaway - Insurance Operations
« Reply #42 on: September 08, 2019, 11:31:38 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.

Let's get back to what this thread should really be about: valuing their insurance ops ;)

I pretty much agree with the approach above, but again, it is difficult to put a value on the remaining 5 bio. USD annual investment income from their insurance float as it both consist of various interest income but also (as far as I can read) dividends from their market portfolio. Does anyone have any inputs on how to value this as the income stems from cash on hand at the moment but this cash is planned for M&A

Dynamic

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Re: Berkshire Hathaway - Insurance Operations
« Reply #43 on: September 08, 2019, 11:32:27 PM »
I think the last post was only quoting the previous one, with no additional words.

I would point out that if some of the investments in equity securities were converted to wholly owned subsidiaries they would be replaced with subsidiaries that still produce a commensurate or better return. If they are taken out of the insurance basket at that point we just decrease the value of the insurance business at that time and increase the value of wholly owned subsidiaries at the same time by a similar amount, possibly increasing net value as Berkshire tends to buy things that have higher IV than what they're giving up although it's not always immediately apparent.

Dynamic

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Re: Berkshire Hathaway - Insurance Operations
« Reply #44 on: September 18, 2019, 07:37:47 AM »
This is somewhat tangential to Berkshire's Insurance as it stands - I found no mention of silicosis in the latest 10-K, for example.

I was listening to an episode of the podcast "Shirtloads of Science" hosted by Australian science communicator Dr Karl Kruszelnicki and featuring Kate Cole, all about silicosis, particularly from workers grinding and cutting concrete, stone and granite etc. This is particularly worrying in construction and demolition which are pretty huge industries employing a lot of young adults, mainly young men. Some evidence even suggests that smoking and silica dust exposure compound the damage of each exposure alone, and anecdotally, I'd say that smokers are over-represented among construction workers. Those working in dust in confined spaces would seem to be especially at risk, while those wetting the surfaces being cut would mitigate the concentration of airborne particles being inhaled but not eliminate the risk.

This seems like another of these long-tail workers compensation exposures that might come to haunt ill-prepared insurers, just like asbestos did, given that its most serious symptoms are often evident decades after exposure.

It also sounds superficially as though there still isn't adequate risk awareness training in training courses or on-the-job Health and Safety.

If other insurers and reinsurers eventually get into trouble over the emergence of this type of compensation exposure, they may need limit their losses and hand off retroactive/long-tail/run-off exposure to insurers with an appetite for large long-tail risks due to their ability and appetite to invest the float at good long-term returns. Just as with the asbestos exposures that various Lloyds syndicates couldn't cope with, Berkshire may have further opportunities to grow long-duration float in future and ensure that these affected workers receive the compensation they're due in the decades to come, while being able to earn an adequate return over the time they expect to wait for the claims to come in and be paid. The rock-solid financial stability of Berkshire should satisfy all stakeholders and regulators that claims will be paid out in due course, more than for practically any other firm, so it should be the case that Berkshire would be able to negotiate a premium that would deliver an adequate discounted return.

Cigarbutt

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Re: Berkshire Hathaway - Insurance Operations
« Reply #45 on: September 19, 2019, 06:32:15 AM »
This is somewhat tangential to Berkshire's Insurance as it stands - I found no mention of silicosis in the latest 10-K, for example.

I was listening to an episode of the podcast "Shirtloads of Science" hosted by Australian science communicator Dr Karl Kruszelnicki and featuring Kate Cole, all about silicosis, particularly from workers grinding and cutting concrete, stone and granite etc. This is particularly worrying in construction and demolition which are pretty huge industries employing a lot of young adults, mainly young men. Some evidence even suggests that smoking and silica dust exposure compound the damage of each exposure alone, and anecdotally, I'd say that smokers are over-represented among construction workers. Those working in dust in confined spaces would seem to be especially at risk, while those wetting the surfaces being cut would mitigate the concentration of airborne particles being inhaled but not eliminate the risk.

This seems like another of these long-tail workers compensation exposures that might come to haunt ill-prepared insurers, just like asbestos did, given that its most serious symptoms are often evident decades after exposure.

It also sounds superficially as though there still isn't adequate risk awareness training in training courses or on-the-job Health and Safety.

If other insurers and reinsurers eventually get into trouble over the emergence of this type of compensation exposure, they may need limit their losses and hand off retroactive/long-tail/run-off exposure to insurers with an appetite for large long-tail risks due to their ability and appetite to invest the float at good long-term returns. Just as with the asbestos exposures that various Lloyds syndicates couldn't cope with, Berkshire may have further opportunities to grow long-duration float in future and ensure that these affected workers receive the compensation they're due in the decades to come, while being able to earn an adequate return over the time they expect to wait for the claims to come in and be paid. The rock-solid financial stability of Berkshire should satisfy all stakeholders and regulators that claims will be paid out in due course, more than for practically any other firm, so it should be the case that Berkshire would be able to negotiate a premium that would deliver an adequate discounted return.
A word about potential silicosis insurance exposure.
It's a real problem and the incidence of claims may eventually rise related to the recent popularity of kitchen countertops and others derived from artificial stone etc.
Anything is possible because of potential legal inflation but silicosis exposure has not resulted in separate disclosure in the latent claims related to environmental exposure category across the industry (as far as I can tell).

Compared to the asbestosis issue, silicosis is much less prevalent, is not associated with a specific tumor such as mesothelioma and potential claim exposure is occurring in a context of significant decreasing mortality rates (contrary to asbestos-related mortality which has been increasing) which points to the possibility that the exposure risks have been better defined and safety standards (that need to be improved) have at least been partly effective. Also, contrary to asbestos, where it is felt that simply breathing air for a sufficient amount of time may be enough to trigger health effects, it is now felt that dangerous silica exposure requires some kind of active involvement (cutting the stone etc).
In the early 2000's, there was a significant rise in silica-related claims, suggesting the possibility of a similar wave of liability damage related to asbestos. The rise in claims was very abrupt but was followed by a comparable abrupt decline because of the realisation that the vast majority of claims had no material basis. A Texas judge was particularly impressive during that episode. A good side effect was that this led to a better and more reliable set of medical criteria in order to define acceptability of claims. A bad side effect was that those really affected by the disease were possibly overlooked by the nonspecific nature of those in charge of claimants. The unintended consequence of inappropriate legal inflation was circumscribed then and it may come back although this remains unlikely under present circumstances.
Conclusion: this issue needs to be followed and may become a significant issue for specific manufacturers, distributors, insurers and others but IMO it's unlikely to be an earth-shattering event for the insurance industry.
It may be the risks that you don't know about that are most likely to kill you. :)
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Dynamic

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Re: Berkshire Hathaway - Insurance Operations
« Reply #46 on: September 19, 2019, 07:44:59 AM »
Thanks for this very useful post, Cigarbutt

Jurgis

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Re: Berkshire Hathaway - Insurance Operations
« Reply #47 on: September 19, 2019, 07:51:58 AM »
OT

It may be the risks that you don't know about that are most likely to kill you. :)

In reality it's the risks that you know about that are most likely to kill you.  8)


But I think you knew that.  8)
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Spekulatius

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Re: Berkshire Hathaway - Insurance Operations
« Reply #48 on: September 19, 2019, 10:21:23 AM »
Thanks for this very useful post, Cigarbutt
Cigarbutt’s posts are almost always very well thought out and useful.
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DooDiligence

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Re: Berkshire Hathaway - Insurance Operations
« Reply #49 on: September 19, 2019, 03:48:13 PM »
Thanks for this very useful post, Cigarbutt
Cigarbutt’s posts are almost always very well thought out and useful.

I second that.
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