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David Merkel

Call Me When You Have A Real Insurance Company!

Photo Credit: eflon || The title of the article comes from a comment Greenberg supposedly made to Buffett when AIG was much bigger than Berkshire Hathaway — times change…============================The title of the article comes from a comment Greenberg supposedly made to Buffett when AIG was much bigger than Berkshire Hathaway [BRK] — times change…It’s come to this: AIG has sought out reinsurance from BRK to cap the amount of losses they will pay for prior business written.  It’s quite a statement when you are willing to pay $10 billion in order to have BRK pay 80% of claims over $25 billion, up to $20 billion in total.  At $50 Billion in claims AIG is on its own again.So what business was covered?  A lot.  This is the one of the biggest deals of its type, ever:The agreement covers 80% of substantially all of AIG’s U.S. Commercial long-tail exposures for accident years 2015 and prior, which includes the largest part of AIG’s U.S. casualty exposures during that period. AIG will retain sole authority to handle and resolve claims, and NICO has various access, association and consultation rights.Or as was said in the Wall Street Journal article:The pact covers such product lines as workers’ compensation, directors’ and officers’ liability, professional indemnity, medical malpractice, commercial automobile and some other liability policies.Now, AIG is not among the better P&C insurance companies for reserving out there.  2.5 years ago, they made the Aleph Blog Hall of Shame for P&C reserving.  Now if you would have looked on the last 10-K on page 296 for item 8, note 12, you would note that AIG’s reserving remained weak for 2014 and 2015 as losses and loss adjustment expenses incurred for the business of prior years continued positive.For AIG, this puts a lot of its troubles behind it, after the upcoming writeoff (from the WSJ article):AIG, one of the biggest sellers of insurance by volume to businesses around the globe, also said it expects a material fourth-quarter charge to boost its claims reserves. AIG declined to comment on the possible size. Its fourth-quarter earnings will be released next month.For BRK, this is an opportunity to make money investing the $10 billion as claims on the long-tail business get paid out slowly.  It’s called float, which isn’t magic, but Buffett has done better than most at investing the float, and choosing insurance business to write and reinsure that doesn’t result in large losses for BRK.I expect BRK to make an underwriting profit on this, but let’s assume the worst, that BRK pays out the full $20 billion.  Say the claims come at a rate of $5 billion/year.  The average payout period would be 7.5 years, and BRK would have to earn 9.2% on the float to break even.  At $3.75B/yr, the figures would be 10 years and 6.9%.  At $2.5B/yr, 15 years and 4.6%.This doesn’t seem so bad to me — now I don’t know how bad reserve development will be for AIG, but BRK is usually pretty careful about underwriting this sort of thing. That said BRK has a lot of excess cash sitting around already, and desirable targets for large investments are few.  This had better make an underwriting profit, or a small loss, or maybe Buffett is ready for the market to fall apart, and thus the rate he can earn goes up.All that said, it is an interesting chapter in the relationship between the two companies.  If BRK wasn’t the dominant insurance company of the US after the 2008 financial crisis, it definitely is now.Full disclosure: long BRK/B for myself and clients

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Trump and Conflicts of Interest

Photo Credit: www.GlynLowe.com======================I was driving to a meeting of the Baltimore CFA Society, and listening to Bloomberg Radio, which was carrying President-Elect Trump’s Press Conference. I didn’t think too much about what I heard until Sheri Dillon talk about what was being done to eliminate conflicts of interest. Here is an excerpt:Some have asked questions. Why not divest? Why not just sell everything? Form of blind trust. And I’d like to turn to addressing some of those questions now.Selling, first and foremost, would not eliminate possibilities of conflicts of interest. In fact, it would exacerbate them. The Trump brand is key to the value of the Trump Organization’s assets. If President-elect Trump sold his brand, he would be entitled to royalties for the use of it, and this would result in the trust retaining an interest in the brand without the ability to assure that it does not exploit the office of the presidency.[snip]Some people have suggested that the Trump — that President-elect Trump could bundle the assets and turn the Trump Organization into a public company. Anyone who has ever gone through this extraordinarily cumbersome and complicated process knows that it is a non-starter. It is not realistic and it would be inappropriate for the Trump Organization.It went on from there, but I choked on the last paragraph that I quoted above. (Credit: New York Times, not all accounts carried the remarks of Ms. Dillon, a prominent attorney with the firm Morgan Lewis who structured the agreements for Trump)  As I said before:Trump to Outline Plans for ‘Leaving My Great Business’ Dec. 15 https://t.co/iIwweP2LcN Time to IPO and sell off the Trump Organization $$— David Merkel (@AlephBlog) November 30, 2016An IPO of the Trump Organization was realistic.  I’m not saying it could have been done by the inauguration, but certainly by the end of 2017, and likely a lot earlier.  I’ve seen insurance companies go through IPO processes that took a matter of months, a few because they had to sell the company to raise liquidity quickly for some reason.In an IPO, Trump, all of Trump’s children and anyone else with an equity interest would have gotten their proportionate share of the new public company.  Trump could have provided a lot of shares for the IPO, and instructed the trustee for his assets to sell it off the remainder over the next year or so.While difficult, this would not have been impossible or imprudent.  Trump might lose some value in the process, but hey, that should be part of the cost for a very wealthy man who becomes President of the US.  There would be the countervailing advantage that all capital gains are eliminated, and who knows, that might settle his existing negotiations with the IRS.Ending the counterfactual, though conflict of interest rules don’t apply to the President, Trump had an opportunity to eliminate all conflicts of interest, and did not take it.PS — Many major hotels are in the “name licensing” business — I also don’t buy the argument that Trump could not sell off the organization in entire, with no future payments for the rights of using the name.  A bright businessman could create a new brand easily.  It’s been done before.

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Distrust Forecasts, Part 2

Photo Credit: D.C.Atty || Scrawled in 2008, AFTER the crash started=============================Comments are always appreciated from readers, if they are polite.  Here’s a recent one from the piece Distrust Forecasts.You made one statement that I don’t really understand. “Most forecasters only think about income statements. Most of the limits stem from balance sheets proving insufficient, or cash flows inverting, and staying that way...

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Distrust Forecasts

Photo Credit: New America || Could only drive through the rear-view mirror=======================================================This is the time of year where lots of stray forecasts get given.  I got tired enough of it, that I had to turn off my favorite radio station, Bloomberg Radio, after hearing too many of them.  I recommend that you ignore forecasts, and even the average of them.  I’ll give you some reasons why:Most forecasters don’t have a...

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Who Needs Liquidity Most?

Photo Credit: Timothy Appnel-==-=-=-Here’s the quick summary of what I will say: People and companies need liquidity.  Anything where payments need to be made needs liquidity.  Secondary markets will develop their own liquidity if it is needed.Recently, I was at an annual meeting of a private company that I own shares in.  Toward the end of the meeting, one fellow who was kind of new to the firm asked what ...

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Be wary of surrendering liquidity

Photo Credit: darwin Bell || You ain’t getting out easily…=================================================How would you like a really good model to make money as a money manager? You would? Great!What I am going to describe is a competitive business, so you probably won’t grow like mad, but what money you do bring in the door, you will likely keep for some ...

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The Rules, Part LXII

Ben Graham, who else?================================================================ Well, I didn’t think I would do any more “Rules” posts, but here one is:In markets, “what is true” works in the long run. “What people are growing to believe is true” works in the short run.This is a more general variant of Ben Graham’s dictum:“In the short run, the market is a voting machine but in the long run, it is a weighing machine....

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A Failure of Insurance Regulation

Credit: Bloomberg || Graph of Penn Treaty’s stock price 2002-2009=======================================================I wrote about this last in October 2009 in a piece lovingly entitled: At Last, Death! (speaking of the holding company, not the insurance subsidiaries).  I’m going to quote the whole piece here, because it says most of the things that I wanted to say when I heard the most recent news about Penn Treaty, where the underlying insurance subsidiaries are finally getting liquidated...

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Patience and a Little Courage

Photo Credit: G E M===================================================If I had to suggest two attitudinal adjustments for the average retail investor, I would encourage patience and a little courage.  Why these two?Patience is needed for a wide variety of reasons.  There is almost never a need to act quickly.  If a few days matters to a decision, such that you feel that you have to act NOW, you’re probably playing the wrong game.  Of course ...

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Estimating Future Stock Returns, September 2016 Update Redux

Idea Credit: Philosophical Economics Blog || I get implementation credit, which is less…=================================================================My last post on this generated some good questions.  I’m going to answer them here, because this model deserves a better explanation.  Before I start, I should say that in order to understand the model, you need to read the first two articles in the series, which are here:Estimating Future Stock ReturnsEstimating Future Stock Returns, Follow-upIf you...

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