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BNSF

BNSF Grain Shipments Improve from 2014 Levels

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With Bakken crude oil shipments putting carload pressures on BNSF the past few years, grain producers were left griping about shipping delays and premium per car prices.

“We had a lot of grain on the ground about 18 months ago,” Tom Tunnell, the president and CEO of the Kansas Grain and Feed Association, noted in Midwest Producer. “The cost to get rail cars was extremely high, way above normal. The premiums were in the thousands of dollars per car range, but all that’s gone away. We’re back down into a more normal range.”

A Winter of Discontent

Back in the winter of 2014, grain shipments were running weeks late with the shipping time from the Midwest grain belt to the Pacific Northwest running a whopping 22 days. The delays added substantial costs to grain producers, as they paid ocean-going freight ships between $30,000-$50,000 per day to sit in port waiting for the delayed grain.

So far for 2015 BNSF grain shipments are up a solid 10.7% year-to-date over the same period in 2014. Shipments increased from 219,747 carloads in 2014 to 243,268 carloads in 2015.

“We have substantially better Ag shuttle turns per month as compared to last year,” a BNSF official said in May. “Last year we were below 2 turns per month, and now we are over 2.5 turns per month.”

The increase comes despite crude oil shipments only having minor 1.41% decrease in carloads. Despite the collapse in worldwide oil prices, oil train shipping still moved 245,356 tank cars of petroleum, as compared to 248,868 tank cars for the same period in 2014.

Adding Capacity

BNSF is working hard to eliminate grain shipping bottlenecks, including adding 900 new cover-hopper grain cars as part of the 7,800 rail cars it is purchasing in 2015. BNSF’s $6 billion in capital improvements in 2015 is a record for any railroad, and also includes 300 new locomotives.

The most critical time for grain shipments is August through October, and hopefully BNSF will be ready to meet the demand with increased capacity and fewer delays.

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

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Berkshire Hathaway Energy Commentary

Commentary: If You Can’t Beat ‘Em, Join ‘Em?

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Berkshire Hathaway’s Nevada Energy is in a battle for the energy consumer that could be the bellwether for utility industry. With consumers pushing legislators to expand the percentage of “net metering” that Nevada Energy must purchase, Berkshire Hathaway Energy is stuck on the side of trying to hold down consumer demand for rooftop solar so its non-solar consumers don’t see their rates rise as the utility passes on legacy costs from closing outdated coal-fired plants.

Rooftop Solar an Unstoppable Force

In Nevada, 108 companies installed 339 megawatts of solar power in 2014. Even in markets without Las Vegas’s 294 sunny days per year, the cost of rooftop solar is dropping so quickly that Bloomberg News is predicting that there will be “a 17-fold increase in installations.” They note that “By 2040, rooftop solar will be cheaper than electricity from the grid in every major economy.”

While the cost of utility scale solar is also dropping as witnessed by Berkshire’s 1,271 megawatts of solar capacity and growing. (It’s Topaz Solar Farm, a photovoltaic power station in San Luis Obispo County, California, alone is already generating 579 megawatts of power.) The question is whether Berkshire should stand on the sidelines while more and more consumers put solar panels on their roofs.

If You Can’t Beat ‘Em, Join ‘Em

Nevada’s the perfect opportunity for BHE to test adding rooftop solar installation and leasing to its portfolio. The company’s got deeper pockets than the numerous but small players in the market. Other utilities are already testing rooftop solar. Georgia Power rather than fighting rooftop solar companies is joining them in the installation business through a new subsidiary.

Another Key Advantage

Berkshire Hathaway Energy already has a number of unregulated businesses, including its Berkshire Hathaway Home Services real estate empire. Rooftop solar offers another unregulated business opportunity.

So, as the saying goes, “If you can’t beat ‘em, join em.”

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

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Berkshire Hathaway Specialty Insurance Insurance

New Zealand Newest Country for Berkshire Hathaway Specialty Insurance

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New Zealand is the latest country for Berkshire Hathaway Specialty Insurance Company (BHSI). The insurer has received its license from the Reserve Bank of New Zealand and is underwriting property and casualty insurance through its new office in Auckland. BHSI can also offer Marine Cargo coverage in New Zealand, with Australia-based Mark Dixon also having New Zealand responsibility.

“We are pleased to bring the financially strong capacity and customer-centric underwriting and claims handling of BHSI to New Zealand. We open our doors in Auckland with a highly experienced team, a broad appetite for property and casualty risks, and a commitment to providing responsive and enduring solutions to the marketplace,” said Peter Eastwood, Global President and Chief Executive Officer of BHSI.

In April, BHSI received its insurance license to provide all lines of General Business in Australia, and established operations in Sydney. Chris Colahan was named President of BHSI’s Australasia Region. Four executives from AIG were also brought on board. In June, the company added casualty and executive and professional lines for hospitals and medical practices and facilities.

Country Manager for New Zealand Cameron McLisky said “I am delighted to introduce BHSI to the New Zealand marketplace. We have assembled an excellent team and look forward to collaborating with our brokers and insureds to provide stable, flexible solutions along with the quality service that is a hallmark of BHSI operations everywhere.”

Cameron comes to BHSI with two decades of industry experience. He was most recently Regional Financial Lines Manager at AIG Asia Pacific. Before that he was Regional Offices Manager at AIG UK Ltd; Australian Financial Lines Manager at AIG Australia; and Financial Lines Manager at AIG in New Zealand. He was also Casualty Manager at Gen Re in Auckland. He holds a Bachelor of Laws (LLB) degree from the University of Canterbury in Christchurch.

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

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BNSF UTLX

New DOT Standards Push Up Tank Car Prices

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With a backlog of tank car orders at a record 52,000 units through March 31, 2015, prices for tanks that meet the new DOT 117/TC-117 standards could rise over 23-percent.

Tank car prices are expected to increase from $130,000 to $160,000.

Benefiting from the demand will be Berkshire Hathaway’s UTLX, which is a subsidiary of Berkshire’s Marmon Group, as well as other tank car makers, including Trinity Industries Inc. and Greenbrier Co.

UTLX builds tank cars at its Sheldon manufacturing plant in Houston, Texas, and at its UTLX manufacturing plant in Alexandria, Louisiana.

Communities Demand Safety

In July of 2014, in Lynchburg, Virginia, a derailment of 16 oil tanker cars caught America’s attention, as the fiery tank cars spilled into the James River. In the wake of this and several other high profile accidents, communities along oil train routes all over the country are demanding safer oil trains.

The good news is progress is being made, and according to BNSF internal data through December 31, 2014, as crude oil and ethanol shipments have increased, the number of derailments have decreased by 78% from 2011-2014.

As a common carrier, BNSF can’t refuse to carry petroleum, and the new tank cars will reduce the risk of carrying highly flammable cargo.

Petroleum, Ethanol and LPG make up roughly 7-percent of BNSF’s freight hauling. In 2014 BNSF moved enough petroleum to fill the gas tanks of 350 million vehicles.

Replacing the Entire Fleet

Under Enhanced Standards for New and Existing Tank Cars for use in an HHFT—New tank cars constructed after October 1, 2015, are required to meet the new DOT Specification 117 design or performance criteria. The standards will require replacing the entire fleet of DOT-111 tank cars for Packing Group I, which covers most crude shipped by rail, within three years and all non-jacketed CPC-1232s, in the same service, within approximately five years.

William A. Furman, Chairman and CEO, Greenbrier Co. said in a statement in May, “Railroads are the safest way to haul large volumes of freight long distances in America, but when it comes to oil, ethanol and other hazardous liquids, more robust tank cars are needed to ensure the safety of our communities. The health, property and general well-being of our citizens shouldn’t be at risk in the event of an accident and the design for the newly designated DOT-117/TC-117 tank car will help substantially mitigate risk.”

The prescribed car has a 9/16 inch tank shell, 11 gauge jacket, 1/2 inch full-height head shield, thermal protection, and improved pressure relief valves and bottom outlet valves.

A Big Market

While older DOT-111 tank cars, which first debuted in 1964, can be temporarily refurbished to bring them up to the new standards, they must be replaced by 2018. This puts the total market for the new DOT 117/TC-117 tank cars at around 160,000 units.

UTLX will certainly be busy the next few years.

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

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Charlie Munger Insurance

Charlie Munger Cools on Reinsurance Business

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Charlie Munger is less than excited about the reinsurance business these days, as Berkshire Hathaway’s reinsurance business, Gen Re, suffered an aggregate pretax underwriting losses of $14 million in the first quarter of 2015. The loss compares to a $101 million gain during the first quarter of 2014.

The company’s combined ratio deteriorated to 103.0% from 94.6%, and the total underwriting losses included $9 million in workers’ compensation.

Gen Re has $14 billion in capital and $6 billion in premiums.

More Competition Brings Lower Returns

The losses reflect increased competition for reinsurance underwriting.

“It’s a business whose prospects have turned for the worse and there’s not much we can do about it,” Warren Buffett said at the 2015 Berkshire Hathaway annual meeting.

“The reinsurance business not as good as it once was and is unlikely to get better,” Charlie Munger noted. “Money has come in, not because they want to be in reinsurance, but because it’s an uncorrelated asset class. We’re in it for the long haul.”

Uncorrelated (also called non-correlated) asset classes are assets that move in the opposite direction of a particular asset class, thus helping investors reduce risk in exchange for lower upside performance.

Munger’s words were in line with those of Ajit Jain, who is the head of Berkshire Hathaway Reinsurance. “What was a very lucrative business is no longer a very lucrative business going forward” Jain was recently quoted in the Wall Street Journal.

Meyer Shields, managing director at Keefe, Bruyette & Woods Inc., is also pessimistic about Gen Re’s near-term prospects.

“We expect Gen Re and (Berkshire Hathaway Reinsurance Group’s) premium volumes and margins to generally decline in the remainder of 2015 and beyond, reflecting enduring reinsurance price competition and some fallout from Berkshire’s increasing pursuit of primary premium volumes at the likely expense of some former cedents.”

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Categories
Warren Buffett

China’s Stock Market Retreat Proves Buffett Right

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China’s stock market has rocketed upward in 2015, with China’s domestic equity markets having more than doubled, but its recent 20-percent retreat brings to mind Warren Buffett’s recent words on whether traditional value investing has a place in such a market.

“Investment principles do not stop at borders, Buffet noted at the 2015 Berkshire Hathaway annual meeting. “I would apply the principles of the Intelligent Investor—stocks as prices of a business—in evaluating businesses overseas.”

With China’s high-flying stock market increasingly built on borrowed money, with margin debt at a record 8% of the stock market’s free float, Chinese investors may be wise to heed another one of Buffett’s famed aphorisms.

“Only when the tide goes out do you discover who’s been swimming naked.”

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

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Berkshire Hathaway Energy

The Energy Cloud and Berkshire Hathaway Energy’s Future

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Will Berkshire Hathaway Energy be left out in the cold due to disruptive changes in the energy market?

It’s a question that BHE and other utilities are starting to both ask and answer, and is particularly relevant to BHE, which has become in less than a decade one of the major players in solar and wind power generation.

With rooftop solar power changing the relationship between consumers and traditional energy producers and distributors, electric utilities are starting to think seriously about the changing landscape that the energy industry will encounter over the next few decades.

The Energy Cloud

The industry has started to refer to this changing marketplace as the “Energy Cloud,” mirroring the cloud computing world, and emphasizing the dynamic nature of the relationship between all parties.

A white paper by market research and consulting team Navigant Research called the Energy Cloud “…a concept that borrows from cloud computing, represents a range of technical, commercial, environmental, and regulatory changes that challenge the traditional hub-and-spoke grid architecture.”

An anticipated transformation in the energy grid that decentralizes many pieces of the energy production has utilities looking at additional revenue sources from unregulated business units. For example, Georgia Power rather than fighting rooftop solar companies is joining them in the installation business through a new subsidiary.

Unregulated Businesses

Meanwhile, Berkshire Hathaway Energy continues to aggressively expand its unregulated businesses, which includes its energy service solutions company Intelligent Energy Systems, and residential real estate sales company Berkshire Hathaway Home Services. It also owns 225 million shares (10%) of Chinese battery and automaker BYD Company Limited.

In the end, it’s all about transformation in an industry that traditionally talked to customers more than listened to them.

Navigant notes that “the end result of this transformation is a reimagining of how we generate, store, and consume energy in the next 20 years.”

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Categories
Insurance National indemnity

Berkshire’s Commercial Insurance Arm Grabs Market Share

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Berkshire Hathaway’s continued push into commercial insurance lines in the U. S. market is grabbing market share from smaller insurers.

According to a new report by Fitch Ratings, Berkshire Hathaway Homestate Companies (BHHC) was the 10th largest U.S. commercial lines insurer in 2014 based on direct premium volume, with direct premium reaching $5.6 billion through a combination of organic growth and acquisitions.

From Regional to National

Based in Omaha, Nebraska, BHHC was originally incorporated in 1970 as Cornhusker Casualty. In 1981, the company added the Insurance Company of Iowa–an affiliated Iowa-domiciled insurance company. Through further acquisitions it grew into eight separately managed regional insurance companies located across the United States, each with its own local underwriting and management presence in its respective territories–a core value BHHC continues to embody. In the late 1990s, as it gained a national presence, the remaining six companies began operating under the shared brand identity of Berkshire Hathaway Homestate Companies.

Fitch notes that Workers compensation insurance has been a big part of Berkshire’s growth in this area, with the company becoming the seventh largest U.S. writer in 2014.

An Impact on Smaller Insurers

Fitch also reported that Berkshire’s growth could impact smaller insurers.

“Diverse commercial business segments and substantial capital resources position BRK for further market share growth that could marginalize smaller commercial lines underwriters that have less favorable market position.”

Consistently Outperforming the Industry

Berkshire’s track record in commercial lines underwriting has been very positive, and Fitch took note of that fact.

“BRK’s commercial lines’ underwriting results have consistently outperformed the property/casualty industry and most peers and loss reserve experience is historically favorable. Maintaining underwriting profitability with a greatly expanded premium base in a competitive market environment may provide future challenges.”

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

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Insurance Special Report

Special Report: Is the Driverless Car a Threat to Auto Insurers?

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“Self-driving cars are a real threat to auto insurance business,” Warren Buffett said at the 2014 Berkshire Hathaway annual meeting. It was a comment that didn’t get a lot of attention at the time, but suddenly now everyone seems to be talking about self-driving cars and driverless cars.

With Google testing self-driving cars on public roads, some have touted this as a bellwether for a quickly approaching age of automation that has the driver taking the back seat.

Mercedes, BMW, Audi, and Tesla are just some of the companies that are moving ever closer to self-driving cars with a host of collision avoidance features that respond quicker and more precisely than a human operator can.

As for actually being self-driving, Mercedes-Benz wowed consumers at the Consumer Electronics Show in Las Vegas this past January with its self-driving car prototype, the F 015. Mercedes even created a video of its Blade Runner-esque vehicle driving itself to the trade show.

So, if this world is approaching, what does it mean for Berkshire Hathaway’s GEICO, or other auto insurers? Are they really dinosaurs unaware that a mega-asteroid is approaching to wipe them out?

Not So Fast

Bryan Reimer, a research scientist in the MIT AgeLab and the Associate Director of The New England University Transportation Center, doesn’t think the driver is headed for extinction just yet, or even in the near future.

“These technologies show a lot of promise, however, you are not going to get into a black box and say ‘take me somewhere’ at the consumer level,” notes Professor Reimer. “New technologies will reduce fatalities and accidents, but it won’t eliminate them.”

There’s Still a Need for the Human Operator

“Higher levels of automation in the vehicle will still have humans in a supervisory role,” Reimer adds, noting that the sophisticated auto-pilot in planes still has human operators even with planes separated by thousands of feet of airspace. “The more automation, the more skill and training you need,” professor Reimer explains, pointing out the extensive training that pilots undergo. In the case of cars, “we have no equivalent educational structure in place.”

He also adds that with the close spacing of cars, which can be in fractions of a meter, and the variability of road conditions, it make roadways “a much more dynamic environment and harder to predict.” With the enormous number of cars on the road, often coming from different directions, it makes “the speed of decision-making much tougher.”

Accidents Happen

In addition, any self-driving technology will have to coexist with human drivers for a long time to come. “If everything was automated, it would be much easier,” Reimer adds, noting that we have a tendency to both “over-trust and under-trust technology.”

Google has conceded that during its test phase it has had 14 accidents over a span of six years and 1.9 million miles, but that enviable record didn’t come in the real world conditions of New York City rush hour traffic.

As self-driving cars move into the unpredictable world of everyday traffic, accidents happen. One of those accidents happened on July 1, 2015, when one of Google’s Lexus SUV prototypes was rear-ended in Mountain View, California. The crash sent three Google employees to the hospital with symptoms of whiplash.

Eleven of the fourteen accidents Google has had were rear-end collisions brought about by non-self-driving cars, highlighting the same potential danger for self-driving and non-self-driving vehicles.

A Wide Variety of Insurable Risks

Self-driving cars won’t mean the elimination of hazards. For example, there were 250,000 flood damaged cars from Superstorm Sandy in 2012, and in 2013 there were 699,594 cars reported stolen. Add to the mix everything from trees falling on cars, to vandalism, and there are not going to be many people that want to drive their new car without fire, theft and collision insurance. There certainly will be changes in insurance needs, as changes in the ownership structures mean more car-sharing and ride-sharing scenarios. The popularity of Uber and Lyft has already seen GEICO respond with ride-sharing insurance, which launched this past February, and you can expect more policy innovations as insurers meet new consumer demands.

A Safer World that Still Needs Insurance

We live in a lot safer world than we did a hundred years ago. Commercial buildings have automated sprinkler systems and fire alarms, and homes have smoke detectors and burglar alarms, yet they both still have fires and break-ins, and they still need insurance.

It’s likely that cars and trucks will too.

(This article has been updated since it was published.)

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Categories
Richline Group

Berkshire and Wearable Tech, Really? Really!

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Those who think of Warren Buffett as a technophobic investor who has no interest in technology companies, are overlooking the fact that Berkshire Hathaway has its hands in many technology companies. Berkshire is a minority owner of IBM and BYD Co., and its own wholly-owned companies often have areas of leading-edge tech if you look for it. One of those companies is the Richline Group, one of Berkshire’s lesser-known group of companies.

What is the Richline Group?

The Richline Group, Inc., is a wholly-owned subsidiary of Berkshire Hathaway that was formed in 2007, and is both a fine jewelry manufacturer and marketer. The four independent strategic business units in Richline’s portfolio are LeachGarner, Inverness, Rio Grande and Richline Brands.

Embracing Wearable Tech

Early in 2015, Richline signed distribution deals with Omate and Cuff, and Richline will also introduce new products featuring differentiated technology from companies including Say and MightyCast.

Richline is debuting two tiers of product offerings: fine jewelry, which primarily consists of designs made with precious metals, and fashion jewelry, which offers more affordable designs made with bronze and base metals. In addition to fitness tracking, many of Richline’s proprietary designs will offer features centered on personalization, notifications and discrete personal security. Designs look to bring a combination of style and tech to an entirely untapped audience of fashion-forward fine jewelry shoppers.

“We are extremely proud of our initial offering of smart jewelry,” said Ramona Genao-Archibald, Richline Brands’ EVP of Merchandising, “and we feel like we are just getting started. We have an amazing team here at Richline that is dedicated to finding the best emerging technologies and finding new ways to make them look better than ever before.”

In addition to its proprietary innovations, Richline is introducing an assortment of “compatibles” which will offer millions of women stylish and luxury alternatives for use with existing wearable products such as Fitbit and Jawbone.

“Understanding the impact that the emerging wearables space will have on the jewelry industry has been a core focus for Richline over the past two years,” said Richline CEO Dennis Ulrich. “A lot of hard work and collaboration has gone into this project, and we are thrilled to finally be able to show the industry our vision for the future of fine jewelry wearables.”

Promoting Wearable Tech

In addition to its product offerings, Richline is promoting wearable tech through the creation of the WearableStyleNews website. The site is dedicated to sharing the latest in the rapidly-emerging world of luxury wearables. It features a wide-range of news from the mundane to the oddball, including a 3-D printed Bitcoin ring with a QR code in lieu of a stone setting, and L’Oreal’s partnership with Bay Area startup Organovo to achieve 3D printing of human skin for makeup testing.

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.