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Berkshire Hathaway Inc. Message Board

  • napart napart Jul 24, 1999 3:38 PM Flag

    normhill...re starbucks

    Starbucks tastes like burnt, over-roasted SHIT...

    Seattles Best Coffee is good, Tully's is good, Mukilteo is the BEST...

    Greg

    BTW: Chevy's suck

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    • Insurance companies get beat up by the regulators
      for holding equities. As you point out, huge portion
      of industry asset portfolio is bonds. Regulator risk
      based capital formulas penalize insurers significantly
      if bonds aren't investment grade. Very little junk
      out there. Industry could probably get along pretty
      well with about 30% or $100 billion less capital.
      Don't know the multiple of invested assets vs capital
      (I'll have to look it up), but broad brush, relatively
      short duration, investment grade bond portfolio
      valuations would have to move down by 10-15%. I guess not
      impossible, but seems to me much easier for insurance rates,
      in particular on commericial and reinsurance
      business to drop by significantly higher % and achieve
      same net effect on capital via underwriting
      losses.

      Best of success!

    • What about a good old fashioned bear market in
      stocks and bonds wiping out a lot of the excess capital?


      We've had a little of that already.

      I would say
      that the probability of a bear market in bonds is
      somewhat lower than one in stocks with stocks at all time
      highs by every valuation criteria possible. But even
      with the smaller representation of stocks in most
      investment portfolios, it will have some impact. In
      addition, we could have a bear market in lower quality
      bonds if a stock market crash leads to
      recession.

      Any thoughts?

      Value Investor
      Workshop
      http://member.aol.com/wcrimi/workshop.html

    • Since what we own is more of an insurance
      business than ever, my guess is that the the value of
      float must have decreased as we approach combined ratio
      of 100. With commodity nature and distribution of
      many lines of business over internet, the moat of
      direct writers like GEICO might have also decreased. But
      will others shop for specialty things like executive
      risk over the net? I doubt it. Would it be
      unreasoanble to think that a company like CB (Chubb) who
      writes sepcialty marine insurance, big mercedesa and
      $1,000,000 home insurance could be a target? Pure
      speculation. If pricing does return to "normal" will the
      bigger players have an advantage since they can
      rationalize their costs over a larger base ? Just some
      thoughts....

    • As you pointed out, lots of excess
      capital/capacity in the P&C insurance sector. I think you get rid
      of the excess capacity in a number of ways. On the
      personal lines side, excess capacity has been driven by
      positive auto results over the last few years. Homeowners
      results have been mixed, with margins very negative away
      from the coast -- companies trying aggresively to grow
      share in non-hurricane exposed areas. However, some
      strong margins in some of the heavy hurricane exposed
      areas like Florida and Long Island. Long term however,
      the hurricane exposed homeowner rates aren't enough
      to cover the long term costs of hurricane and the
      load for the volatile impact on future earnings.
      Combined with favorable investment returns has pushed
      capital up. Problem: personal lines market has very
      little growth -- auto rates eroded, or forced to cross
      sell the homeowners, growth of low cost producers like
      GEICO. Can't get decent return on all the excess
      capital. Not too much of a problem for companies like St
      Farm, although they've been paying very large dividends
      so their capital doesn't grow too large. Several
      ways to get capital out: lose it on underpriced
      homeowners book, large loss in a hurricane event, stock
      repurchase, or eat into capital with high expenses as premium
      volume falls. Alternative is low single digit returns at
      best. Eventually, rating agencies (AM Best) will
      downgrade. Tends to drive toward consolidation for expense
      reduction and geographic diversification. In general,
      personal lines will take longer to turn based on excess
      capital in all the large personal lines mutuals that is
      more difficult to get rid of. Then again, poor
      performance on the personal lines side is easier to recognize
      -- poor results aren't hidden in inadequate long
      tail reserves. In general, the turn of the market will
      follow the cash, i.e. when cash flow goes negative, or
      when reserves show short based on actual claim
      payments. I'd like to think that shareholders were smart
      enough to demand their capital back, but I don't think
      that will be the real driver of the reduction in
      excess capacity.

      Commercial lines / reinsurance
      side is much more bloody. Underwriting losses will be
      the real driver here. Expense ratio is important, in
      particular in the transition period as some companies raise
      rates to reasonable levels and lose volume. However,
      really driver of pull back in capacity will be big
      underwriting losses, essentially when management or
      shareholders realize that the underwriters don't know what
      they are doing. Happened after Andrew when reinsurers
      got out of the catastrophe business when they
      realized they didn't know what they were writing,
      regardless of the dramatic increase in cat rates. Workers
      compensation losses will most likely be the initial driver of
      a turn, although long payout may place a turn
      several years away. A large catastrophe would help, but a
      very large portion of the loss would hit the Bermuda
      cat companies and Lloyds, where there is perhaps the
      largest amount of excess capital.

      Overall, I
      would expect a few more years of pain before you really
      see companies falling by the side of the road, and
      sustained firming of rates and profits. Once again, follow
      the cash as an indication of a market
      turn.

      Best of success!

    • ICOS disappointed today. I had to throw in the
      towel on it, along
      with everything else, which to my
      great sadness I see included AOL. Yes, it's franchise
      is mighty and dominance near total. Unfortooniously,
      I fear the market may be about to rejigger it's own
      fabulous formula for 'valueing' your everyday trading
      vehicle. In short, we're about to lose a tire, a wing, or
      the landing gear...prepare the liferafts!!!! Clear
      the runway!

    • No No No! MY pick was berk at yesterday's close.
      I picked AOL FOR Schlomo, just in case he was
      afraid to come out and play today, which it appears he
      was. Maybe when he gets his english teacher to read
      him my post, he'll be able to respond...
      TeeHee

      I just logged on, so I have some more posts to read
      before tallying the results...

      No beers in the
      pool today, I had to go into work for a minor
      emergency (I hate it when that happens)

    • Thanks, I was hoping you would show up to provide
      the answer. In an industry with excess capacity
      (P&C), won't rising prices causes more silly policy to
      be written. Or do the crushing losses of those who
      wrote the silly policies in the past based on
      optimistic inflation forecasts get crushed, thereby reducing
      capacity?

    • Thinking out loud here...
      I think of float as
      the amount of someone elses cash -- in this case,
      cash that will eventually pay an insurance claim --
      that WEB gets to use until time to pay the claim. By
      definition, if inflation, more claim dollars to pay, and more
      float. Secondary question is what is the cost of the
      float, i.e. do we collect enough premium to pay the
      final nominal dollar amount of claims and expenses. If
      over 100% combined ratio, then difference is the cost
      of the float. If less than 100% combined, cost of
      float is zero, and excess premium goes to equity not
      float. If inflation somehow leads to increased rates,
      the net effect could be either good or bad. Float
      increases for WEB to invest at superior returns, but do
      rates increase enough so that the additional
      incremental cost of the float isn't in excess of the addition
      return he can generate on the additional float? At this
      point in the insurance cycle, taking additional rate is
      tough. However, we probably shouldn't focus too closely
      on general inflation figures. First, for auto,
      physical damage rating structure is self correcting for
      inflation. Minimal float anyway. The long tail claims and
      GRN float is driven by the liability coverages, and
      by what I would call social inflation, or in the
      case of workers compensation, medical inflation. How
      liberal are the jury awards, have the insurance companies
      developed effective defenses, do they have a grip on
      medical claim cost escalation? Movements in the interest
      rate are relatively small in relation to these types
      of cost trends. As you would expect, movements in
      these types of trends are much slower, and
      unfortunately, much tougher to project and build into rates. But
      that is what GRN is good at.

      If interest rates
      rise (in this case due to inflation), then WEB can
      invest new cash / float at higher returns. I'm trouble
      by the fact that this statement doesn't distiguish
      between an increase in "real" interest rates and
      "nominal" interest rates. In WEB's case, perhaps its
      because an increase in interest rates will trash the
      equity markets allowing him to pick up bargains for
      superior long run returns?

      Kind of off the track,
      but...
      Best of success!

    • I wonder how much of the immenent increase in
      inflation (bad for insurance companies as the future cost
      of claims rises on money received "yesterday") will
      be offset by the increased value of the float as
      rates rise:

      The inverse from Buffett 1993 surely
      must be true:

      "As interest rates have fallen,
      however, the value of float has
      substantially
      declined. Therefore, the data that we have provided in the
      past are no longer useful for year-to-year comparisons
      of industry profitability. A company writing at the
      same combined ratio now as in the 1980's today has a
      far less attractive business than it did then."

    • ".... Yet, the IPO will help them get the
      necessary strength for their continued successful assault
      on Microsnot...."exactly........plus I expect VA
      Research and Caldera to IPO in the next 12
      months........the RHAT launch should translate into increased Linux
      awareness......Bobo

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