Archive for the ‘Berkshire’ Category

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So Moody’s downgraded Berkshire a while back, which prompted this misunderstanding from Felix Salmon:

Reinsurers used to feel that they needed a triple-A rating because that connoted utter safety: you could reinsure your catastrophe risk with Berkshire safe in the knowledge that the risk of Berkshire being unable to meet its obligations was significantly lower than the risk of, say, a hurricane hitting New York.

Felix went on to add this bit:

Update: My commenters are saying that insurers don’t hedge their counterparty risk to reinsurers. Either you trust a reinsurer or you don’t; if you do, you don’t hedge counterparty risk, and if you don’t, you don’t do any business with them at all. Maybe insurance regulators should be looking into this.

Felix’s commenters are correct in that the rating is a difference of type rather than one of degree. Felix doesn’t like this for some reason, which is beyond me. The issue is twofold: first, policyholder claims are senior to credit claims (this is why insurer ratings are higher than debt ratings) and, two, insurers go into ‘runoff’, not insolvency, and start negotiating with the holders of their liabilities (policyholders, not bondholders). Policyholder obligations are immense compared with bondholder obligations and the consequences of negotiating down bondholders are probably far worse. Why bother when you have a bigger, easier target? Especially for reinsurance companies.

One of Felix’s commenters directs us to the awkwardly named BRAVE Partners, LLP, who have written a paper on protecting reinsurers credit risks with some product they claim gets arond the CDS issue.  They have two key terms in the agreement, it seems: 1. pre-agreed IBNR calculation methods; and, 2. claim triggered only if the name is “unable to pay”.

I’ll leave #1 alone, even though it’s basically a promise to go to arbitration, and skip to #2. How do you define “unable to pay”?  Obviously a company has enough cash in the bank to pay one counterparty’s claims. What about the IBNR on all the other counterparties? Do you apply your magic formula from #1 to all of the company’s liabilities? Will they let you audit their entire portfolio to make sure they can’t pay? Sorry, guys. Nice try, at least.

Back to Berkshire, who has now sold part of its stake in Moody’s. I wonder what the temporal ordering of these events were. Did BRK tell Moody’s they were going to drop their stake and Moody’s responded or is this a retaliation for the downgrade?

All sorts of hat tips to Felix.


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Our Oracle Sucks


Oracle: I’d ask you to sit down, but, you’re not going to anyway. And don’t worry about the vase.
Neo: What vase?
[Neo turns to look for a vase, and as he does, he knocks over a vase of flowers, which shatters on the floor]
Neo: How did you know?
Oracle: What’s really going to bake your noodle later on is, would you still have broken it if I hadn’t said anything?



Everyone hates the rating agencies and I completely with the scepticism. What are we going to do?

Well, don’t bother asking the Oracle of Omaha, even though he knows they’re not going anywhere.

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Reinsurance Guru links to an article at the Motley Fool, concluding, in the quote, with this sentence:

So is it time to conclude that Buffett’s investing legend has been nothing more than extreme luck and excessive risk-taking — the ultimate bubble waiting to pop?

I don’t understand why RG picked out only the really nasty setup of the article and totally missed the knockdown. For instance, the conclusion from Motley Fool:

There is plenty of risk in Berkshire shares, but at current prices, I believe that Berkshire Hathaway is worth the risk.

One thing that the Motley Fool article does alight on is something that I mentioned in an earlier post, namely that the risk in BRK isn’t the stock investments (can only go to zero in the worst case scenario) and it isn’t the prospect of a debt default (see here for an interesting discussion on why CDS spreads can expand). It’s the reinsurance risk.

And reinsurance risk is extremely poorly disclosed to investors, which continues to baffle me. We don’t have an idea for RDS values or what risk management steps Buffett undertakes (which would give us a clue as to what kind of risks really lurk in this smorgasbord).

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