The Aleph Blog » Blog Archive » On the Structure of Berkshire Hathaway, Part 2, the Harney Investment Trust

On the Structure of Berkshire Hathaway, Part 2, the Harney Investment Trust

In Omaha, there is Farnam Street.  Among value investors, it is well-known, because the small main office of Berkshire Hathaway [BRK] 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
CommentsDisagreeing figs

 

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
CommentsBought out other trustsCleaned House
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

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.

YearActionTickerSharesValueConsiderationCapital Gain (loss)

2003

InMTB         927,760              3,655,241

2003

InWFC     6,138,800         127,795,056

2003

InAXP     5,308,500         101,902,002

2003

InMCO   16,140,300         340,631,841

2003

PoofLVLT   32,691,065         100,000,000

2004

InTMK         872,200           20,268,837

2004

InHRB   14,350,600         222,546,836

2004

InCDO     1,195,274                              1

2004

InCOST     5,254,000         146,595,428

2004

InGCI     3,447,600           81,873,173

2004

InMLI     1,361,900           30,408,193

2004

InSEE     1,113,300           32,102,292

2004

InUSG     6,500,000           37,180,000

2005

OutTMK         872,200           20,268,837         49,826,080               29,557,243

2005

OutHRB   14,350,600         222,546,836       703,179,400             480,632,564

2005

OutCDO     1,195,274                              1         26,666,563               26,666,562

2005

OutCOST     5,254,000         146,595,428       254,346,140             107,750,712

2005

OutGCI     3,447,600           81,873,173       281,668,800             199,795,627

2005

OutMLI     1,361,900           30,408,193         43,853,180               13,444,987

2005

OutSEE     1,113,300           32,102,292         59,305,491               27,203,199

2005

OutUSG     6,500,000           37,180,000       261,755,000             224,575,000

2008

InUSB   20,768,728         657,202,698

2008

InWFC   52,372,788     1,819,017,267

2008

InCOP   71,896,273     5,878,643,401

2008

InCOST     5,264,000         146,595,428

2008

InKFT   89,222,400     2,957,096,963

2008

InPG   17,200,318     1,026,726,674

2008

InUSG   10,102,918         202,419,056

2008

InWMT   18,998,300         901,731,797

2008

OutPG   20,000,000     1,193,846,154   1,468,400,000           (274,553,846)

2009

InCOP   29,711,330     1,163,495,683

2009

InMTB             6,300                 447,467

2009

InPG   14,328,093         855,276,936

2009

InTMK     1,656,900           60,572,017

2009

InWMT   14,892,842         746,046,432

2009

InWFC   21,030,680         473,941,080

2009

InGSK     1,510,500           78,918,016

2009

InPKX     1,087,000           44,260,228

2009

InSNY     2,896,133         119,233,280

2009

OutCOP   71,896,273     5,690,321,498   3,724,226,941         1,966,094,557

2009

OutMCO   15,000,000         163,880,137       284,850,000           (120,969,863)

2009

OutPG   26,000,000     1,552,000,000   1,607,320,000             (55,320,000)

2010

InJNJ   13,274,736         851,173,066

2010

OutCOP   25,227,450         987,906,942   1,288,365,871           (300,458,929)

2010

OutKFT   57,684,645     1,885,271,843   1,567,868,651             317,403,192

2010

OutMTB     4,680,322           36,930,716       216,105,603             179,174,887

2010

OutPG   15,000,000         895,384,615       909,450,000               14,065,385

2011

InCOP   21,109,637         826,653,385

2011

InGCI     1,740,231           13,921,848

2011

InIBM   63,905,931   10,856,339,550

2011

InMTB     4,671,245           38,003,193

2011

InPG   12,669,252         756,256,889

2011

InWFC   28,446,437         718,140,133

2011

OutJNJ   12,951,761         829,897,088       801,466,418               28,830,670

2012

InWFC   32,872,641     1,090,916,624

2012

OutPG   29,754,036     1,776,087,072   1,984,891,742             208,804,670

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.  Thanks, David

Full disclosure: long BRK/B for clients and me






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2 Responses to On the Structure of Berkshire Hathaway, Part 2, the Harney Investment Trust

  1. […] Aleph blog has a great series on how Berkshire Hathaway is actually structured. Part 2 with the somehow dodgy trust structure has been extremely […]

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David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.


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