Berkshire Hathaway’s Structure, Part 2: The Harney Investment Trust

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by David Merkel, CFA of Aleph Blog

In Omaha, there is Farnam Street.  Among value investors, it is well-known, because the small main office of Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) is located there.  Less well known is Harney Street, but from an insurance standpoint it is important, because Berkshire Hathaway’s largest insurance subsidiary, National Indemnity, is located there.  One of the major assets of National Indemnity is the Harney Investment Trust, of which National Indemnity is the sole beneficiary.

Before I go further, I want to say there is a lot I don’t know about what I am going to write.  Let me tell you what sources I have looked at:

  • SEC filings of companies where the Harney Investment Trust was a greater than 5% shareholder.
  • Legal documents from Bankruptcies and other corporate legal events where Harney Investment Trust was a party.
  • All of the statutory filings for Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B)’s primary insurance companies in 2012.
  • All of National Indemnity’s statutory filings on assets 2002-2013.
  • All of National Indemity’s statutory audits, 2002-2012.

Now, if you read through Berkshire Hathaway’s filings to the SEC, you won’t find many mentions of the Harney Investment Trust.  You have to read the insurance regulatory documents to find it, and even if you do that, you will still be puzzled.  Why?

  • Over the last 12 years, the National Association of Insurance Commissioners does not require “Other Assets” on Schedule BA to provide enough data so that an external user can make the change in book value or market value make sense.  It has gotten better over time, but it is still not enough.  You want to have enough data such that it explains the change in market and book value to the nearest thousand dollars.
  • There are a few errors that are obvious.  Some easy calculations don’t add.  Current year starting values are not the same as last year’s ending values.
  • A few numbers between the statutory filings and audits don’t agree.

Now, some of that is due to bad regulation.  The data reported for schedule BA assets could be streamlined such that it reports the change in the balance sheet for each asset on a book and fair market value basis.

But more of it is due to Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B)’s lack of willingness to discuss/mention the Harney Investment Trust.  I did a lot of digging on this, and found  little that was definitive.  One seemingly intelligent opinion I found here.  I will quote the most relevant portion from “globalfinancepartners”:

Regarding the large surplus at Berkshire – it is largely because many subsidiaries are owned inside the insurance companies – especially within National Indemnity.  100% of the stock of BNSF, for example, valued at Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B)’s cost of $34 Billion – is owned by National Indemnity and counts towards the statutory surplus.  Also, National Indemnity owns 100% of the shares of GEICO.  Then in addition there are the securities, of course.

GEICO, in turn, owns 100% of the shares of Clayton, McLane, TTI, as well the marketable securities.

I’ll attach an NAIC filing if you really want to geek out.  But unfortunately, the mystery stock Buffett has been accumulating and receiving confidential status on through the SEC is hidden like always inside the “Harney Investment Trust” – Buffett’s go-to vehicle for keeping stock trading hidden from regulatory filings.  (Harney Street is in Omaha)

He gets it, mostly, and concludes that Buffett uses the Harney Investment Trust to hide his buying and selling of positions.  Assets inside the Trust do not get reported one-by-one on the insurance Schedule D.

Now, before I close, I want to share the data that I have harvested from the Statutory statements, and make a few more comments.

Year

2001

2002

2003

2004

2005

Cost    8,063,249,239    6,098,184,425     4,345,049,427       7,566,419,887
Addl Investment       4,314,851,219
Fair Value    10,532,124,694
Book    9,814,864,000    9,325,481,908    8,326,636,998     5,326,049,532       9,524,818,329
Change      (220,350,768)        859,931,290   (1,141,017,994)       1,958,398,441
Accretion
OTTI
FX Change
Inv Income           455,078,969
Book Sold    5,405,086,442    4,640,112,416     2,934,268,712       1,121,718,176
Change            (40,084,139)
Consideration    6,156,977,208    5,492,507,843     3,827,449,032       1,561,718,363
Gain        751,890,766        852,395,427          893,180,320           399,916,048
income
% Assets

25.77%

18.33%

10.45%

15.36%

Am Cost    8,355,067,000    8,063,249,000    6,098,184,000     4,345,049,000       7,566,420,000
URGC    1,459,797,000    1,711,427,000    3,810,157,000     2,316,272,000       2,965,705,000
URCL                                   –        144,894,000                                   –                                    –                                      –
Fair Value    9,814,864,000    9,629,782,000    9,908,341,000     6,661,321,000    10,532,125,000
Comments Disagreeing figs

 

Year

2006

2007

2008

2009

Cost       6,964,633,697    20,139,079,483       5,921,482,114       5,786,018,179
Addl Investment           982,768,239    15,783,905,450       9,781,668,840    10,865,269,974
Fair Value    12,117,706,779    21,921,621,265       4,923,093,676       6,769,046,868
Book    11,123,440,646    21,921,621,265       4,801,843,191       5,800,502,260
Change       3,098,256,653       1,751,436,622     (2,840,908,667)       1,108,867,879
Accretion           119,595,243           197,707,597
OTTI           288,188,143       2,590,146,282
FX Change            (57,873,620)              36,966,246
Inv Income       1,261,755,231           663,463,512           987,469,687           826,207,723
Book Sold       1,746,959,239       2,653,395,647    24,830,673,311       8,645,957,509
Change         (100,447,051)               (3,398,147)              37,662,286
Consideration       1,999,993,027       6,522,527,452    24,010,303,351       9,017,341,154
Gain           353,480,839       3,869,131,805           179,640,040           371,383,645
income                 3,658,670              62,505,008
% Assets

16.56%

29.56%

7.78%

7.39%

Am Cost       6,964,634,000    20,139,079,000       5,921,482,000       5,786,018,000
URGC       5,153,073,000       1,782,542,000                                      –           983,029,000
URCL                                      –                                      –           998,388,000                                      –
Fair Value    12,117,707,000    21,921,621,000       4,923,094,000       6,769,047,000
Comments Bought out other trusts Cleaned House
Year

2010

2011

2012

2013

Cost       9,457,498,340       7,464,877,852    7,064,639,865    5,004,510,446
Addl Investment       7,068,414,613    12,784,563,299    4,186,877,510    3,254,233,606
Fair Value    11,700,226,848       7,807,366,099    9,066,610,408    7,675,070,719
Book    10,720,330,531       7,450,894,712    8,417,129,742    7,511,081,043
Change       1,271,863,576     (1,276,652,476)    1,332,026,027    1,163,420,948
Accretion              17,914,824            (25,309,149)              2,759,586              2,810,400
OTTI           476,659,635           190,142,457        115,680,863
FX Change               (5,766,223)                    (911,734)              1,296,067                   659,774
Inv Income           554,369,500           719,996,080        389,469,312        403,093,171
Book Sold       2,944,738,747    14,566,437,847    4,479,185,215    5,214,644,823
Change                 7,728,019                 4,705,665              4,970,996      (102,528,623)
Consideration       3,576,396,272    14,738,706,689    4,833,798,698    5,785,003,373
Gain           631,657,525           141,268,842        354,613,478        570,358,551
income              76,920,680              25,137,655           11,091,687        118,147,838
% Assets

9.60%

6.45%

6.59%

Am Cost       9,457,498,000       7,464,878,000    7,064,640,000
URGC       2,343,171,000           866,984,000    2,083,717,000
URCL           100,442,000           524,226,000           81,747,000
Fair Value    11,700,227,000       7,807,636,000    9,066,610,000

Notes: OTTI: other than temporary impairments.  URCG: Unrealized Capital Gains. URCL: Unrealized Capital Losses.  Other categories are hard to define, though I am sure the NAIC has definitions, though they don’t give complete changes in balance sheets.

Another thing that I could not make to match from the statutory statements was the securities that went in and out of the trust.  Aside from some Treasury bonds  in 2002, here are all of the reported transactions where securities moved from National Indemnity to the Trust, and vice-versa.

Year Action Ticker Shares Value Consideration Capital Gain (loss)

2003

In MTB          927,760               3,655,241

2003

In WFC      6,138,800          127,795,056

2003

In AXP      5,308,500          101,902,002

2003

In MCO    16,140,300          340,631,841

2003

Poof LVLT    32,691,065          100,000,000

2004

In TMK          872,200            20,268,837

2004

In HRB    14,350,600          222,546,836

2004

In CDO      1,195,274                               1

2004

In COST      5,254,000          146,595,428

2004

In GCI      3,447,600            81,873,173

2004

In MLI      1,361,900            30,408,193

2004

In SEE      1,113,300            32,102,292

2004

In USG      6,500,000            37,180,000

2005

Out TMK          872,200            20,268,837          49,826,080                29,557,243

2005

Out HRB    14,350,600          222,546,836        703,179,400              480,632,564

2005

Out CDO      1,195,274                               1          26,666,563                26,666,562

2005

Out COST      5,254,000          146,595,428        254,346,140              107,750,712

2005

Out GCI      3,447,600            81,873,173        281,668,800              199,795,627

2005

Out MLI      1,361,900            30,408,193          43,853,180                13,444,987

2005

Out SEE      1,113,300            32,102,292          59,305,491                27,203,199

2005

Out USG      6,500,000            37,180,000        261,755,000              224,575,000

2008

In USB    20,768,728          657,202,698

2008

In WFC    52,372,788      1,819,017,267

2008

In COP    71,896,273      5,878,643,401

2008

In COST      5,264,000          146,595,428

2008

In KFT    89,222,400      2,957,096,963

2008

In PG    17,200,318      1,026,726,674

2008

In USG    10,102,918          202,419,056

2008

In WMT    18,998,300          901,731,797

2008

Out PG    20,000,000      1,193,846,154    1,468,400,000            (274,553,846)

2009

In COP    29,711,330      1,163,495,683

2009

In MTB              6,300                  447,467

2009

In PG    14,328,093          855,276,936

2009

In TMK      1,656,900            60,572,017

2009

In WMT    14,892,842          746,046,432

2009

In WFC    21,030,680          473,941,080

2009

In GSK      1,510,500            78,918,016

2009

In PKX      1,087,000            44,260,228

2009

In SNY      2,896,133          119,233,280

2009

Out COP    71,896,273      5,690,321,498    3,724,226,941          1,966,094,557

2009

Out MCO    15,000,000          163,880,137        284,850,000            (120,969,863)

2009

Out PG    26,000,000      1,552,000,000    1,607,320,000              (55,320,000)

2010

In JNJ    13,274,736          851,173,066

2010

Out COP    25,227,450          987,906,942    1,288,365,871            (300,458,929)

2010

Out KFT    57,684,645      1,885,271,843    1,567,868,651              317,403,192

2010

Out MTB      4,680,322            36,930,716        216,105,603              179,174,887

2010

Out PG    15,000,000          895,384,615        909,450,000                14,065,385

2011

In COP    21,109,637          826,653,385

2011

In GCI      1,740,231            13,921,848

2011

In IBM    63,905,931    10,856,339,550

2011

In MTB      4,671,245            38,003,193

2011

In PG    12,669,252          756,256,889

2011

In WFC    28,446,437          718,140,133

2011

Out JNJ    12,951,761          829,897,088        801,466,418                28,830,670

2012

In WFC    32,872,641      1,090,916,624

2012

Out PG    29,754,036      1,776,087,072    1,984,891,742              208,804,670

In means assets came into National Indemnity, and out means the reverse.  Poof means something came into National Indemnity, and left in the same calendar year.

Notably, in 2008, Buffett had most of the assets exit the trust into National Indemnity, when they were in a position of unrealized capital loss.  I don’t fully understand the tax and capital effects here, but it seems that Buffett found it to his advantage to move assets out of the trust, and into National Indemnity once the assets were unrealized capital losses.

I think the guy I quoted is correct. Buffett uses the Harney Investment Trust to hide his acquisitions and dispositions of stock.  The NAIC should end this, and make Schedule BA assets that are easily separable appear on Schedule D, where they belong.  Schedule BA should be for assets that are not publicly traded.  Partnerships with assets that would fit on Schedule D should  be on Schedule D.

Summary

Buffett tries to take an ethical stance in investing, and makes many statements about the way investing ought to be done.  Using a trust to avoid disclosure of holdings and transactions is not in the spirit of GAAP or statutory accounting/disclosures.   This practice should be ended.  Warren, step up your game before you have to and end the Harney Investment Trust.  I write this as a fan who owns Berkshire Hathaway B shares.

And, to my dedicated readers, if you have more data, or a better means of analysis of the data I have gathered, by all means offer your help.  Thanks, David

Full disclosure: long BRK/B for clients and me

 

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