Recent bank failures raise questions about how Berkshire Hathaway and other insurers account for fixed maturity investments.
Well thought out article, as usual. 1-Keep in mind that life insurers differ from what you described as products are designed for assets and liabilities to interact. This is true for traditional managers but PE firms manage life companies more like a P/C firm. A life insurer would not use the term float. 2-annuities and universal life products could theoretically have a run on the bank but it would be unlikely since distributors are incented to reissue the policy once the surrender charges have graded off. 3-For the insurers you describe future premiums can be viewed as an asset with cash flows that are predictable. If the cost of float is less than 1 premiums are all you need except for conservatism. This is why property insurers are able to invest so broadly. 4 - property insurers do interact with economic variables, eg, when inflation is high cars cost more to fix and cost of float exceeds 1.
Great read thanks. Buffett was asked about the float vs cash ratio in one of the more recent meetings, 2018 maybe 2019. He said it's total coincidence and not what they want at all (meaning ideally he'd have his minimum cash holding of say 30 to 40 now). But certainly it is interesting that he drums into our brains the value of the float every chance he gets but really it hasn't been used for at least a decade. Shows how conservative Berkshire are and makes me comfortable leveraging Berkshire myself as they choose not to within.
Another fine analysis! Since the mid-‘80s, Berkshire has been allowed to hold within its insurance capital a concentrated portfolio of equity securities and a lower percentage of fixed-income securities. And as you confirmed, Ravi, National Indemnity actually owns BNSF. Berkshire is a finacial fortress.
It would be interesting to compare Berkshire’s insurance capital to Markel’s, another well-run insurer that doesn’t have Berkshire’s authorization by its insurance regulator and, therefore, is required to hold substantially more bonds and less equities.
The total mismatch between SVB’s assets and liabilities is breathtaking.
As for Berkshire, they were more busy borrowing long at near zero interest rates, not lending long at near zero interest rates. It looks like brilliance in the current context, but it’s really just solid fundamentals.
Excellent article 👍👍
Great article and answered many of my questions related to the impact on insurers. Thank you!
Excellent write-up. While I own BRKB shares and model my equity investing on many of WB's principles, I have always shared his reticence to buy fixed income securities. The unusual element in the SVB matter, unlike with most banks and insurance companies, is that bank management not only mismanaged durations of assets and liabilities but also the singular nature of its customers in their dependence on one kind of funding.