On The Structure Of Berkshire Hathaway, Part 2: The Harney Investment Trust

| About: Berkshire Hathaway (BRK.A)

Click here for part 1.

In Omaha, there is Farnam Street. Among value investors, it is well-known, because the small main office of Berkshire Hathaway (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'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 BRK'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 BRK'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 BRK'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
Click to enlarge
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
Click to enlarge
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
Click to enlarge

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
Click to enlarge

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 BRK.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.

Full disclosure: Long BRK.B for clients and me.