Thoughts On The Berkshire Coming Together Too A Comment On Long Term Assist Reinsurnace
I am inward Omaha in addition to take maintain just been to the Warren in addition to Charlie show. It has been on my "to do" listing for my whole adult life in addition to I am strangely disappointed.
It is of kind blasphemous to endure disappointed inward Charlie in addition to Warren. These octogenarians could instruct me enough - they just did not. It was annoying to endure inward the presence of people thence smart in addition to to larn thence little.
I take maintain read diverse notes from the coming together for almost 20 years thence I had a fair persuasion what to expect. I could facial expression - questions on politics in addition to economics, questions from immature people wondering what to attain amongst their life in addition to questions from hedge-fund managers using 25 one m rich people inward a room equally an chance for self promotion.
I got all this - in addition to for the most business office I got the park homily answers. (The same questions were asked final yr in addition to the yr earlier in addition to the yr earlier that. Answers tin forcefulness out endure got from coming together notes.)
This yr nosotros got multiple questions from hedge fund managers who were concerned nigh the stock price. Charlie Munger inward frustration tartly observed that if ane (nameless but good known) hedge fund managing director was that concerned nigh brusque term matters he wasn't actually welcome inward this room. This got full general applause but could (like many of Charlie's answers) endure a piddling to a greater extent than diplomatic.
But amongst the higher upwards exceptions the questions were amend than I expected. Much better. We had serious questions from competent Wall Street analysts who by in addition to large asked nigh insurance, underwriting in addition to regulatory issues - issues that cutting to center of what Berkshire is in addition to Berkshire's powerfulness to road coin to the nurture fellowship (where it tin forcefulness out endure used unencumbered) in addition to to pay insurance claims. The detailed answers to these questions were largely squibbed.
One analyst for event made the obvious observation that the organizational construction is "challenging" in addition to wondered why the railway (BNSF) was owned past times a regulated insurance subsidiary. Charlie in addition to Warren squibbed it - disceptation that BNSF provided more resources for paying claims - noting roughly $5 billion inward pre-tax profits. But throughout the coming together Warren argued that ane wages of BNSF was that it was going to endure allowed to invest vast sums (far inward excess of depreciation) at acceptable regulated returns. In other words BNSF is going to absorb cash. How does this hateful the insurance sub is going to take maintain to a greater extent than cash to pay claims? Can claims endure paid inward steel rails or railway bridges?
This wasn't an atypical squibbed answer. Warren (correctly) argued that General Re was a expert property instantly but that previously it lost its way. Charlie wasn't going to permit Warren acquire away amongst this - it was thoroughly lost when Berkshire purchased it (and paid a huge price). However the details of how General Re was brought dorsum into society were just glossed over. Warren observed that Gen Re had a rattling prissy life reinsurance business. That surprised me. Swiss Re has a sort-of-OK life reinsurance draw of piece of occupation organisation but life reinsurance is a draw of piece of occupation organisation that has produced a few disasters ane of which I followed closely*. I was struggling to sympathise what made the life reinsurance draw of piece of occupation organisation a expert business.
Warren too noted - equally a throwaway - that they had a long term attention reinsurance draw of piece of occupation organisation that he wished they had less of. Again at that spot was no explanation equally to why. But this fourth dimension it is within my plain of competence thence I am going to explicate myself.
The disaster of long term attention insurance
Long term attention insurance has bankrupted almost everyone that always touched it. It is the insurance against the demand to kicking the bucket into a nursing domicile in addition to it has by in addition to large been sold past times insurance agents on commission.
Here is what a commissioned agent does.
They brand friends amongst people who run nursing homes.
When the kids (now optic aged) take in a nursing domicile they mightiness set their (elderly) parents into the insurance broker is notified. The insurance broker thence sells them a policy for their parents.
Of kind the policy is going to endure used. The people who purchase long term attention insurance are exactly the people who are going to claim. It is a disaster.
Eventually the policies acquire thence expensive (to comprehend the losses) that people who won't claim never purchase a policy. Adverse alternative becomes total.
Long term attention insurance is the worst draw of piece of occupation organisation I take maintain always seen.
Warren of kind never told us that - but somehow he injure up re-insuring it.
I approximate he did non desire to explicate his stupidity.
But thence long term attention doesn't demand to endure that awful. Indeed at that spot is (at least) ane fellowship that does it well.
That doesn't brand long term attention a expert draw of piece of occupation organisation - but it mightiness acquire inward an acceptable business.
That fellowship is (and this volition endure a surprise to many of my readers) Genworth. The same Genworth that was a spin-out of crappy long-tailed insurance businesses from GE Capital. It includes a mortgage insurance fellowship (with what is belike a toxic Australian exposure) in addition to a long term attention business.
Here is what they attain to brand the long term attention draw of piece of occupation organisation acceptable.
They employ a sales forcefulness of 60-65 yr quondam people on salary non commission. Because they are on salary non committee they take maintain no incentive to write bad risks. They attain non troll for draw of piece of occupation organisation inward nursing homes.
This sales forcefulness visits the domicile of leads in addition to has a loving cup of tea or java in addition to a social chat. They mightiness pass 20 minutes having a chat.
They volition give away out what the lead's hubby or married adult woman is doing.
They volition give away out whether the Pb is doing the New York Times crossword or reading sophisticated books.
And whether they play golf game or attain some exercise.
They volition facial expression for pictures of the grandchildren in addition to enquire questions nigh them.
They volition notice in addition to enquire nigh the pile of toys in addition to children's games inward the corner.
And solely thence volition they enquire anything that looks similar an underwriting inquiry but they volition take maintain already decided whether to underwrite the business.
Here is what is going on.
People who take maintain stable relationships into quondam historic current tend non to air current upwards inward nursing homes. They facial expression afterward each other. Singles are the biggest take a chance in addition to quest nigh a husband is the critical question.
Doing the New York Times crossword or reading sophisticated books indicates no Alzheimer's disease. That removes closed to other major insurance risk.
Golf suggests closed to physical fitness - in addition to removes to a greater extent than risk.
The children's toys silent are - afterward a corporation matrimony - the adjacent largest take a chance mitigating factor. If the grandparents facial expression afterward the grandchildren that creates a reciprocal obligation. The children are far less probable to set granny inward a nursing domicile if granny is a business office of their ain kid's lives.
Warren knows all this. He knows why closed to insurance businesses are amend than others. He knows why their life reinsurance draw of piece of occupation organisation is expert (I take maintain no idea). He knows why their long-term attention reinsurance draw of piece of occupation organisation is bad (and afterward this postal service thence attain you).
But Warren told us surprisingly little. And for that I am disappointed.
John
*I was in ane lawsuit obsessed past times the collapse of Annuity in addition to Life Re.
Post script: inward all except a rattling bad yr or a rattling high cap-ex yr the depreciation summation profits of BNSF volition belike endure less than cap-ex thence at that spot are probable to endure distributable funds. One exception may endure if a catastrophe removes many of the bridges or damages the rails or closes the draw for an extended period. That silent may good endure a large claims yr for the insurance fellowship thence the province of affairs tin forcefulness out silent endure problematic.
It is of kind blasphemous to endure disappointed inward Charlie in addition to Warren. These octogenarians could instruct me enough - they just did not. It was annoying to endure inward the presence of people thence smart in addition to to larn thence little.
I take maintain read diverse notes from the coming together for almost 20 years thence I had a fair persuasion what to expect. I could facial expression - questions on politics in addition to economics, questions from immature people wondering what to attain amongst their life in addition to questions from hedge-fund managers using 25 one m rich people inward a room equally an chance for self promotion.
I got all this - in addition to for the most business office I got the park homily answers. (The same questions were asked final yr in addition to the yr earlier in addition to the yr earlier that. Answers tin forcefulness out endure got from coming together notes.)
This yr nosotros got multiple questions from hedge fund managers who were concerned nigh the stock price. Charlie Munger inward frustration tartly observed that if ane (nameless but good known) hedge fund managing director was that concerned nigh brusque term matters he wasn't actually welcome inward this room. This got full general applause but could (like many of Charlie's answers) endure a piddling to a greater extent than diplomatic.
But amongst the higher upwards exceptions the questions were amend than I expected. Much better. We had serious questions from competent Wall Street analysts who by in addition to large asked nigh insurance, underwriting in addition to regulatory issues - issues that cutting to center of what Berkshire is in addition to Berkshire's powerfulness to road coin to the nurture fellowship (where it tin forcefulness out endure used unencumbered) in addition to to pay insurance claims. The detailed answers to these questions were largely squibbed.
One analyst for event made the obvious observation that the organizational construction is "challenging" in addition to wondered why the railway (BNSF) was owned past times a regulated insurance subsidiary. Charlie in addition to Warren squibbed it - disceptation that BNSF provided more resources for paying claims - noting roughly $5 billion inward pre-tax profits. But throughout the coming together Warren argued that ane wages of BNSF was that it was going to endure allowed to invest vast sums (far inward excess of depreciation) at acceptable regulated returns. In other words BNSF is going to absorb cash. How does this hateful the insurance sub is going to take maintain to a greater extent than cash to pay claims? Can claims endure paid inward steel rails or railway bridges?
This wasn't an atypical squibbed answer. Warren (correctly) argued that General Re was a expert property instantly but that previously it lost its way. Charlie wasn't going to permit Warren acquire away amongst this - it was thoroughly lost when Berkshire purchased it (and paid a huge price). However the details of how General Re was brought dorsum into society were just glossed over. Warren observed that Gen Re had a rattling prissy life reinsurance business. That surprised me. Swiss Re has a sort-of-OK life reinsurance draw of piece of occupation organisation but life reinsurance is a draw of piece of occupation organisation that has produced a few disasters ane of which I followed closely*. I was struggling to sympathise what made the life reinsurance draw of piece of occupation organisation a expert business.
Warren too noted - equally a throwaway - that they had a long term attention reinsurance draw of piece of occupation organisation that he wished they had less of. Again at that spot was no explanation equally to why. But this fourth dimension it is within my plain of competence thence I am going to explicate myself.
The disaster of long term attention insurance
Long term attention insurance has bankrupted almost everyone that always touched it. It is the insurance against the demand to kicking the bucket into a nursing domicile in addition to it has by in addition to large been sold past times insurance agents on commission.
Here is what a commissioned agent does.
They brand friends amongst people who run nursing homes.
When the kids (now optic aged) take in a nursing domicile they mightiness set their (elderly) parents into the insurance broker is notified. The insurance broker thence sells them a policy for their parents.
Of kind the policy is going to endure used. The people who purchase long term attention insurance are exactly the people who are going to claim. It is a disaster.
Eventually the policies acquire thence expensive (to comprehend the losses) that people who won't claim never purchase a policy. Adverse alternative becomes total.
Long term attention insurance is the worst draw of piece of occupation organisation I take maintain always seen.
Warren of kind never told us that - but somehow he injure up re-insuring it.
I approximate he did non desire to explicate his stupidity.
But thence long term attention doesn't demand to endure that awful. Indeed at that spot is (at least) ane fellowship that does it well.
That doesn't brand long term attention a expert draw of piece of occupation organisation - but it mightiness acquire inward an acceptable business.
That fellowship is (and this volition endure a surprise to many of my readers) Genworth. The same Genworth that was a spin-out of crappy long-tailed insurance businesses from GE Capital. It includes a mortgage insurance fellowship (with what is belike a toxic Australian exposure) in addition to a long term attention business.
Here is what they attain to brand the long term attention draw of piece of occupation organisation acceptable.
They employ a sales forcefulness of 60-65 yr quondam people on salary non commission. Because they are on salary non committee they take maintain no incentive to write bad risks. They attain non troll for draw of piece of occupation organisation inward nursing homes.
This sales forcefulness visits the domicile of leads in addition to has a loving cup of tea or java in addition to a social chat. They mightiness pass 20 minutes having a chat.
They volition give away out what the lead's hubby or married adult woman is doing.
They volition give away out whether the Pb is doing the New York Times crossword or reading sophisticated books.
And whether they play golf game or attain some exercise.
They volition facial expression for pictures of the grandchildren in addition to enquire questions nigh them.
They volition notice in addition to enquire nigh the pile of toys in addition to children's games inward the corner.
And solely thence volition they enquire anything that looks similar an underwriting inquiry but they volition take maintain already decided whether to underwrite the business.
Here is what is going on.
People who take maintain stable relationships into quondam historic current tend non to air current upwards inward nursing homes. They facial expression afterward each other. Singles are the biggest take a chance in addition to quest nigh a husband is the critical question.
Doing the New York Times crossword or reading sophisticated books indicates no Alzheimer's disease. That removes closed to other major insurance risk.
Golf suggests closed to physical fitness - in addition to removes to a greater extent than risk.
The children's toys silent are - afterward a corporation matrimony - the adjacent largest take a chance mitigating factor. If the grandparents facial expression afterward the grandchildren that creates a reciprocal obligation. The children are far less probable to set granny inward a nursing domicile if granny is a business office of their ain kid's lives.
Warren knows all this. He knows why closed to insurance businesses are amend than others. He knows why their life reinsurance draw of piece of occupation organisation is expert (I take maintain no idea). He knows why their long-term attention reinsurance draw of piece of occupation organisation is bad (and afterward this postal service thence attain you).
But Warren told us surprisingly little. And for that I am disappointed.
John
*I was in ane lawsuit obsessed past times the collapse of Annuity in addition to Life Re.
Post script: inward all except a rattling bad yr or a rattling high cap-ex yr the depreciation summation profits of BNSF volition belike endure less than cap-ex thence at that spot are probable to endure distributable funds. One exception may endure if a catastrophe removes many of the bridges or damages the rails or closes the draw for an extended period. That silent may good endure a large claims yr for the insurance fellowship thence the province of affairs tin forcefulness out silent endure problematic.
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