10) On corporate governance, Buffett correctly identifies that many directors, who do not hold a significant amount of stock, and for whom the director's fee is a significant source of income, are often the least independent of all directors. They are dependent on their directorship income; effectively, they have become employees of the firm.
11) On page 22, I found it interesting the Berkshire is in the viatical settlements business, though Buffett doesn't call it that. They buy life insurance policies from sick people, offering them a better deal than the life insurer will offer them for surrendering. They collect the proceeds when the insured dies. (This has always been a part of the insurance industry that has a bad odor, partly because some companies in it have used questionable tactics to get people to sell them their policies. Also, the company buying the policy has no insurable interest in the life of the person's policy, which on public policy grounds is insisted on in taking out an insurance policy. But I digress. ...)
12) Finally, what was not there: a discussion of Berkshire's activities in the retroactive (or retrocessional or finite or financial) reinsurance business. This is notable for two reasons: first, in 2003, he split out the retroactive reinsurance in order to give a clearer presentation of the insurance groups operating results. This year the data is only presented in summary form. Second, Buffett made a big positive out of the retroactive reinsurance results, going so far as to explain the business in both the 2000 (page 8) and 2002 (page 9) shareholder letters.
As a bit of constructive criticism: if you give us the good news, then give us the bad news as well; no one will think the less of you for owning up to a mistake. Expect to hear more about this issue as the reinsurance treaties with AIG (AIG - commentary - Cramer's Take) (and others) get investigated.
P.S. Will you be there when Cramer makes his next move?
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Aaron Pressman Why Buffett Is Smiling 2/1/2005 4:44 PM EST The Oracle of Omaha may be the biggest beneficiary in the M&A-inspired rally.
At time of publication, Merkel or his fund had positions in MRH and PRE, though positions may change at any time.
David J. Merkel, CFA, FSA, is 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. Previously, he managed corporate bonds for Dwight Asset Management. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Merkel cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send your comments to david.merkel@thestreet.com.
Analyst Certification: All of the views expressed in the report accurately reflect the personal views of the research analyst about any and all of the subject securities or issuers. No part of the compensation of the research analyst named herein was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the research analyst in this report.
Merkel is employed by Hovde Capital Advisors LLC (the "firm"), a registered investment advisor with its principal office located in Washington, D.C. The Firm and/or its affiliates have or may have a long or short position or holding in the securities, options on securities, or other related investments of the issuers mentioned herein.
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