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.
|Comments||Bought out other trusts||Cleaned House|
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)|
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.
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.