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Berkshire Hathaway Inc. Message Board

  • itmisc2006 itmisc2006 Jun 19, 2013 8:04 PM Flag

    If Rising Interest Rate Is Good For Insurer

    If rising interest rate is good for insurer, then why BRK-B drop today?
    If Fed start tapering, then interest rate should rise.
    So the drop today does not make any sense???

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    • A very good question itmisc...:)

      Areznitskiy is right in that BRK invests much of its float in non-bond securities (such as equities). We can all disagree about whether Berkshire is overvlued at these prices (in evaluating a financial company, as most would value Berkshire because of its insurance, one has to consider book value and their ability to get a good return on assets).

      There are a few reasons why Berkshire would drop despite higher interest rates helping the insurance industry as a whole. Berskshire is more than insurance (their utilities and railroad leverage a lot to buy things), a higher interest rate can cause a slower economy (which can impact everything from their manufacturing, Dairy Queen, Heinz, etc), a higher interest rate can put downward pressure on housing stocks (which can impact Clayton Homes, Shaw Carpets, Ben Moore paint, Acme Bricks, etc), can raise the value of the dollar (which can make American made goods more expensive VS foreign goods... while Berkshire does make a lot overseas, they are disproportionately investing in the US). Roughly 1/3 of the company's value comes from their equity investments... higher interest rates, and pending reductions in the money supply, can bring the value of equities down. Finally, sometimes there is just a down market and brings down everyone with it...:)

      These periods are actually quite good for Berkshire... market volatility means that investments vary widely (big up days and big down days). Putting it in algebra terms... stocks will trade at 1.5 * X (with X being fair value), down to .5X... Your ability to make a lot of money in the market is largely determined by your ability to determine what "X" is... for Berkshire shareholders, we have three guys (Warren, Ted and Todd) working full time on determining X... and they are all quite good at it. So when the market goes down, Berkshire as a company tends to make a lot of money... and Berkshire shareholders can do nothing and get richer.

      Sentiment: Buy

    • Why are higher interest rates good for an insurance company? Because any NEW bond issues that are purchased will have a higher coupon and thus a higher yield to maturity. And the value of the float (premiums held by the insurer which are used to eventually pay policy claims) is a function of what you can SKIM from it, the interest on the bonds, assuming, of course, that you are running a "zero cost" float operation. But what about the OLD bonds that are already in the portfolio? How do you increase their yield to maturity to bring them up to the return you could get from a newly issued bond? You can't increase their coupons, that was fixed/set the day they were issued. You LOWER their market price. The present value (intrinsic value) of most assets decrease in value when interest rates rise because the discount rate that is used to calculate the present value of the future stream of payments (dividends for stocks, interest & principal for bonds) that they are expected to deliver, increases as well. Just my opinion.

      • 2 Replies to jad1148
      • Jad,

        Very well put...:)

        Many insurance companies were trying to focus on short term bonds during the QE-Infinity (as QE 3 became known) knowing that this was coming.

        It is interesting to note that the tamer inflation is actually causing some concern about 'deflation' (which can be macroeconomically a bigger problem than inflation). It could be that the FED will need to keep interest rates low to cause a healthy amount of inflation. That could extend it a bit longer if inflation remains too low.

        Sentiment: Buy

      • you are correct except BRK invest float into companies since Buffet does not belive in bonds
        He might change his mind once yields reach 3% BRK is overpriced here so pull back just brings it back to where it needs to be based on PE

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