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Author: ORA100 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 212365  
Subject: Two Column/Rationalwalk Date: 10/9/2012 2:10 PM
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In a recent thread-Questions about Berkshire I read the post by Rationalwalk dated 8/6/2012 about the Two Column approach valueing Berkshire.Cash and consolidated investments at 6/30/2012 were $166,891 million (excluding the railroad and Utility and financial products groups). When I am doing my Two Column valuation I include some of the assets in two groups. I include 1)Cash in Railroad and Utility Group $2,598 million 2)Investments in Equity Securities in other section of Rail and Utility Group $424 million 3)Cash in Finance Group $1,251 million 4)Fixed Maturity investments in Finance Group $923 million 5)Other Investments in Finance Group $4,388 million 6) Investments in Equity Securities in Other Section of the Finance Group $522 million.

My total for Cash and consolidated investments at 6/30/2012 was $176,997 million which is $10,106 million more Rationalwalk's total. With 1,651,922 shares outstanding as of 6/30/2012 my calculation increases the cash and consolidated investments by $6,118 per share.

What is the rational for not including the 6 additional assets when valueing the cash and consolidated investments column? I believe that Tilson includes these in his Two Column estimate.

Thanks, Doug
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Author: rationalwalk Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194776 of 212365
Subject: Re: Two Column/Rationalwalk Date: 10/9/2012 3:27 PM
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I don't have the numbers in front of me but the general idea is that you don't want to include cash and investments integral to operating businesses since the value of operating businesses are captured in the second "column". So cash in the rail and utility group, for example, is excluded from the first "column". So the short answer is that it is an attempt to avoid double counting. This is in line with what Buffett has said in the past I believe.

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Author: mungofitch Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194779 of 212365
Subject: Re: Two Column/Rationalwalk Date: 10/9/2012 4:30 PM
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There are quite a few different approaches to the "two column" valuation.

Mr Buffett's is very clean and strict.
There is no provision for underwriting profit or buy-low-sell-high profit on the equity portfolio.

My own approach is to split the firm into those things that are marked
to market regularly and have an obvious value, and everything else.

The "everything else" couldn't exist by itself, but it isn't by itself, so that problem can be ignored.
This includes the facts that float and current assets are needed, and
the fact that the "everything else" part has a whole lot of debt.
Given that view you can value the two sides separately and just add them.

The first one is easy: value all investments per share at market value.
Apply a cyclical adjustment to that if you like, and if you like you can apply a small
discount for an extra level of dividend taxation and the perpetually high cash allocation.

The second can be valued pretty simply based on some plausible multiple
of the on-trend sustainable after-tax income on that, which of course does not
include the dividend and interest income from the marked-to-market half, but could include
a reasonable conservative estimate of cyclically adjusted underwriting profit.

You might use .9 times investments per share plus 9 times pretax EPS on the rest,
or .8 times investments per share plus 10 times pretax EPS on the rest.
I haven't checked recently, but both of those would likely give figures in the $170k-180k range today.
Knock off maybe $15k if you buy my notion that the broad US market is
pretty overvalued these days, and that you conservatively assume that
that issue applies equally to Berkshire's current equity portfolio.

FWIW
For those who want to estimate the long run average pretax underwriting profit,
the average cost of float since and including a horrible 1999-2001 for
Gen Re cleanup has been 0.57% of float, but 2003-2011 it was 3.48%.
It's up to you to decide which is the sustainable level based on
whether you think the Gen Re losses were just rare things that will happen
over the long cycle of reinsurance or truly one-time things resulting
from a badly reserved portfolio of already-written business that was purchased.
0.57% of the current $71.1bn of float is $245/year pretax EPS.
3.48% of the current $71.1bn of float is $1498/year pretax EPS.
1% probably wouldn't be a crazy number to pencil in = $430 pretax EPS.
I think Tilson assumes $1bn/year which would be about 1.4%.

Jim

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Author: DrtThrwingMonkey Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194788 of 212365
Subject: Re: Two Column/Rationalwalk Date: 10/9/2012 11:10 PM
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Jim means negative cost of float, i.e. underwriting profits.

My estimate last year was $1.3 bn, which was $20 bn in the preceding 9 years (even with Katrina and Rita) but -$7 bn 10 years before, i.e. 2001. One year later, the last 10 years are looking good, but to be conservative we should probably keep that bad year in the mix.

Even so, $1.5 bn pre-tax I think is a closer to the truth than zero (Buffett's implicit number). It's good to be conservative, but for an insurer with consistently profitable underwriting to leave that out is overdoing it, in my opinion.

Regards, DTM

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Author: mungofitch Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194797 of 212365
Subject: Re: Two Column/Rationalwalk Date: 10/10/2012 8:04 AM
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Even so, $1.5 bn pre-tax I think is a closer to the truth than zero (Buffett's implicit number)....

For anybody interested in the cost of float trend

        Underwriting
Year pretax P/L Float Cost of float
1999 -1394 25.30 5.5% (gen re cleanup era)
2000 -1585 27.87 5.7% (gen re cleanup era)
2001 -4067 35.51 11.5% (gen re cleanup era and Sept 11 attacks)
2002 -510 41.22 1.2% ("no megacatastrophe...a downward adjustment is appropriate")
2003 1700 44.22 -3.8%
2004 1551 46.09 -3.4%
2005 53 49.29 -0.1% (katrina)
2006 3838 50.88 -7.5%
2007 3374 58.69 -5.7%
2008 2792 58.49 -4.8%
2009 1559 61.91 -2.5%
2010 2013 65.83 -3.1%
2011 248 70.57 -0.4% (tsunami, NZ earthquakes)

Conservative average cost of float 1999-2011 -0.57% (underwriting profit +0.57%)
Optimistic average cost of float 2003-2011 -3.48% (underwriting profit +3.48%)

A rather arbitrary geometric mean of those two figures is -1.41% which gives a nice
round billion a year in pretax underwriting profit based on the current amount of float.
That's what I pencil in when I do cyclical adjustments.

Jim

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Author: rationalwalk Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194798 of 212365
Subject: Re: Two Column/Rationalwalk Date: 10/10/2012 8:32 AM
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Here are my assumptions for Berkshire's future cost of float which I peg at -0.8%. I use this estimate for a float based valuation but (perhaps inconsistently) I assume underwriting break-even for the two-column method due to a desire to be conservative.

http://www.rationalwalk.com/wp-content/uploads/2012/10/BRKFl...

I arrive at the -0.8% cost of float by estimating the cost of float for each of the four reporting groups separately and then coming up with a weighted average. I still penalize General Re for its (now long past) sins and only assume break-even for BH reinsurance. The slight negative cost comes from GEICO and the primary insurers.

It is possible that I'm being way too conservative here but I've been burned with overly bullish float based valuation assumptions in the past.

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Author: Technodweeb Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194799 of 212365
Subject: Re: Two Column/Rationalwalk Date: 10/10/2012 9:13 AM
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Totally awesome nugget of knowledge post on Berkshire to see. The float still seems to grow despite the constant comments by Buffett that is will not grow much.

Thanks Jim.

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Author: mungofitch Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 194801 of 212365
Subject: Re: Two Column/Rationalwalk Date: 10/10/2012 10:07 AM
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Here are my assumptions for Berkshire's future cost of float which I peg at -0.8%...
It is possible that I'm being way too conservative here but I've been burned with overly bullish float based valuation assumptions in the past.


I agree that the goal is to pick the number that's at the most conservative
end of the "probably right" range. Your -.8% sounds fine on that count.
I'm still comfy with my -1.4% since it's only 40% as good as the 9 year average,
but it's not defensible to the 100% confidence level.
There will be a $20 billion loss year some time, so it's just a matter
of trying to estimate how often that will happen.

One bullish note: I'm still amazed they turned an underwriting profit last year given the catastrophes seen.
That's a very big switch from 2002 which was a 1.2% cost of float with no megacats.
You don't have to be glassy-eyed optimist to suspect that Gen Re was a supertanker
that took a few years to turn, but is now definitely headed in the right direction.

Jim

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