Derivatives

It’s a long saga that will soon be pretty much over.
Weighted average life at Dec 31 was half a year, so weighted average expiry date around end June.
63% of the contract value existing at Dec 31 was to have expired in the first quarter.

So, we should hope the market doesn’t tank immediately : )
At December 31, none of the options was in the money, just a bit of time value left.

If I’ve added it up correctly, the underwriting profit to date on those puts has been about $4-5bn.
It’s a little tricky since we don’t know precisely when they were entered, nor precisely how much overlap there was in the reporting period on the wind-down of the Gen Re derivatives book.
Counting all derivative gains/losses from 2003 on, it’s a profit of $7.03bn, but that includes some Gen Re stuff.

That’s just underwriting profit, so it doesn’t counting any return on the float the deal raised.

A mostly unrelated note:
For those who might think that extra float thus raised was just sitting around uselessly as cash,
and/or that the extra cash pile should be (should have been) put into some sort of “good enough” equities,
I note that equities as a percentage of book has risen from 37.4% in 2016-Q3 to 69.3% at end 2021.
And that’s not counting the equity-method items like Kraft.

Jim

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A mostly unrelated note:
For those who might think that extra float thus raised was just sitting around uselessly as cash,
and/or that the extra cash pile should be (should have been) put into some sort of “good enough” equities, I note that equities as a percentage of book has risen from 37.4% in 2016-Q3 to 69.3% at end 2021.

Stock prices are marked to market, wholly owned businesses are not.

If Berkshire doesn’t buy more wholly-owned businesses and stock prices rise, equities as a percentage of book will go up.

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For those who might think that extra float thus raised was just sitting around uselessly as cash,
and/or that the extra cash pile should be (should have been) put into some sort of “good enough” equities, I note that equities as a percentage of book has risen from 37.4% in 2016-Q3 to 69.3% at end 2021.

Stock prices are marked to market, wholly owned businesses are not.
If Berkshire doesn’t buy more wholly-owned businesses and stock prices rise, equities as a percentage of book will go up.

True, but that doesn’t really change anything.
Equities are up as a percentage of the investment portfolio, percentage of book, percentage of total assets, percentage of intrinsic value, and percentage of market value.
And it’s not due to market values of those stocks rising faster than intrinsic value—the equity
portfolio is a bigger slice of the pie even if you value the equities based on adjusted earnings.

Nothing like the equity allocation in the mid 1990s before the Gen Re deal, but it seems to be the highest allocation since then.
(I didn’t check every metric all the way back)

As another aside, the operating earnings are hugely important, but still account for less than half the value of the firm as far as I can tell.
Even after I apply a big haircut to the equity values before looking at the total investments per share.
Unless you use an optimistic valuation multiple on the operating earnings, of course.
For my valuation method, I’d have to plug in a multiple over 19 for the operating earnings to match the investments value even after its valuation haircut on equities.

Jim

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As another aside, the operating earnings are hugely important, but still account for less than half the value of the firm as far as I can tell

The value generated by Buffett (a one man hedge fund, if you may), will be gone. The successors of that portfolio will be facing serious challenges in maintaining the value of this half, leave alone creating value on their own on future float generated.

This is what makes me wonder whether the smooth glide path of 8% to 10% value creation per year is reasonable assumption?

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