Berkshire Hathaway’s Unique Structure Decoded (Sorta) Part I

Berkshire Hathaway B shares Warren BuffettBy Mark Hirschey (Work of Mark Hirschey) [CC BY-SA 2.0], via Wikimedia Commons

Berkshire Hathaway [BRK] is a unique company.  You have a property-casualty insurance giant owning many businesses directly through insurance subsidiaries, including huge businesses like a Class 1 Railroad — BNSF.

Yes, National Indemnity owns BNSF in entire, and many other businesses as well.  I thought the pre-crisis org chart of AIG was complex — because of the many industries that it covers, BRK is far more complex.   In the 2012 statutory statements, it runs for 22 pages.  Let me list the top-level subsidiaries, and any significant lower level subsidiaries they own.

  1. Affordable Housing Partners (common for reducing taxes w/ section 42 housing)
  2. Albecca (Larson-Juhl)
  3. AU Holding Company (Applied Underwriters
  4. Ben Bridge Corporation
  5. Benjamin Moore
  6. Berkshire Hathaway Credit Corp (BH Media — all the little newspapers)
  7. Berkshire Hathaway Finance Corp
  8. BH Columbia Inc (Columbia Insurance, Medical Protective Corp [which owns Lubrizol debt])
  9. BH Housing LLC
  10. BH Shoe Holdings, Inc.
  11. BH-IMC Holdings B.V. (“Iscar”)
  12. BHSF (SF = Scott Fetzer)
  13. Blue Chip Stamps, Inc.  (Really, still around?)
  14. Borsheim Jewelry Company
  15. Brookwood Insurance Company
  16. Business Wire, Inc.
  17. Central States of Omaha Companies, Inc.
  18. CORT Business Services Corp
  19. CTB International Corp.
  20. Cypress Insurance Company
  21. Forest River, Inc.
  22. Fruit of the Loom, Inc.
  23. Garan, Inc.
  24. Gateway Underwriters Agency
  25. General Re Corporation (seems to own much of Fruit of the Loom)
  26. Helzberg’s Diamond Shops
  27. International Dairy Queen
  28. Johns Manville Corp
  29. Jordan’s Furniture
  30. Justin Brands (Acme Brick)
  31. Marmon Holdings
  32. MidAmerican Energy Holdings (CalEnergy, HomeServices of America, Magma Power, NV Energy, Pacificorp)
  33. MiTek Industries
  34. MS Property
  35. National Fire & Marine Insurance Company
  36. National Indemnity (Flightsafety, BNSF, CLAL, GEICO, Clayton Homes, McLane, TTI)
  37. National Liability & Fire Insurance Company
  38. Nebraska Furniture Mart
  39. NetJets, Inc.
  40. Northern States Agency, Inc.
  41. OTC Worldwide Holdings (Oriental Trading Company)
  42. Precision Steel Warehouse, Inc.
  43. R. C. Willey Home Furnishings
  44. Richline Group, Inc.
  45. See’s Candy Shops
  46. Shaw Industries Group
  47. Star Furniture Company
  48. The Buffalo News, Inc.
  49. The Fechheimer Brothers Company
  50. The Lubrizol Corp
  51. The Pampered Chef, Lrd.
  52. US Investment Corporation
  53. Wesco-Financial Insurance Company
  54. XTRA Corp

BRK is huge, and Buffett prefers owning whole companies to portions of companies, because then the entire free cash flow is available to him, not just the dividends.

The first question to answer is why does Buffett have some industrial companies inside his insurers, and some not?  That has to do with risk-based capital.  P&C insurers have to put up capital equal to 22.5% on equity of affiliated insurers, and 15% on non-affiliated common stocks, and 20% on Schedule BA investments that are similar to stocks.  These are more liberal than the standards for life companies, which  have a 30% charge on stocks.   (Which doesn’t make sense, because life insurers have longer balance sheets, and have a better ability to hold equities, but I digress…)

But even if they have to put up capital to own the companies, BRK has a negative cost of capital inside its insurers, because they make underwriting profits.  What a business — make money on insurance, and on businesses owned by the insurance subsidiary.

One more thing about BRK’s insurance subsidiaries — in general, because they have so much asset risk, they don’t write as much insurance as other companies of their size would.

Tomorrow, I will write part 2 on this, regarding the one anomaly I found going through BRK’s statutory books, the Harney Investment Trust.  Till then.

Full disclosure: long BRK/B for clients and me

By David Merkel, CFA of alephblog

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About the Author

David Merkel
David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

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