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Non-Tech : Berkshire Hathaway Class B -- Ignore unavailable to you. Want to Upgrade?

To: The Duke of URL© who wrote (940)	8/16/1999 10:19:00 AM
From: Richard Forsythe	Read Replies (2) \| Respond to of 1652

Typical shallow reporting from the press! Anyway, it was an interesting report, although not terribly good on the face of it. However, it does suggest that Buffet is moving in the "expected" direction with his acquisition. First, we knew that he would scrap the option plan and fund bonuses out of expenses. Page 11 (under General Re in Management Discussion) mentions this as one reason for the underwriting loss for the quarter. Second, I am guessing that he will increase provisions against business to reduce the uncertainty. For example, if General Re accrue money sufficient to be 95% certain of covering expenses, Buffet may shift that to 97%. This would reduce the apparent profit during the life of the contract, and increase the profit at the end (or reduce the loss!). This is also mentioned on page 11. Third, BRK will stop taking less-than-profitable business. Insurance companies are usually faced with the need to take business that is less than optimal in order to meet Wall Street revenue expectations. BRK does not need to do that, but it will squeeze revenue and market share occasionally. He mentions that there was reduced business in various parts of the business--this could be the reason. Overall the above factors presumably contribute to the awful underwriting loss for the quarter of 9-12%. However, presumably this will improve as old business expires and new business (at higher premiums) replaces it. One thing to bare in mind, however, is that Geico is something of an exception in its ability to grow while making an underwriting profit. The insurance business model typically involves writing insurance at an underwriting loss, but making a higher return on investment than the loss. E.g. a policy that is estimated to cost $1000 will be sold for 950 (5% underwriting loss) and the proceeds invested at 8%. The insurance company will make $1026 and thereby an overall profit of $26. Note particularly the comments in the report that in July BRK wrote a contract with a $1.2bn premium -- and each quarter there will be a charge that exceeds the prorated "premium earned" -- an underwriting loss. This will affect future quarters... I think the big question mark is on the investment side. BRK has a good track record in investing the float at much higher than typical returns, but there has been very little evidence of this since the two flight-related acquisitions (Gen Re increased float, but didn't really increase the return on investment). I think part of the poor stock performance is the absence of the appearance of that ROI on the huge pool of float. The reality is, however, that a lot of money could have been invested without it being obvious. We know he built up a large stake in Allied Domecq in the UK, but that is not mentioned. We also see that BRK bought $9bn of bonds in the last 6 months (balance sheet item increased from 21 to 30bn), although it could even be more if the value of the 21bn decreased over the time. Also, equities declined only .5% despite a potentially bigger drop in the actual value of previously owned stock. So he potentially bought additional equity. The cash flow report shows sales of 4.8bn and purchases of $13.5bn. Where did all that money go? We simply have to trust Buffet to invest wisely... Richard