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Why is this experience
significant - how do the investment processes of Warren Buffett and Water Street fit these practices?
(Excerpt - Water Street Advisers Form ADV Part 2 – Schedule
F – Methods of Investment Analysis 4(a))
An "insurers' line" -- the slope of which marks the prevailing industry standard for minimum total investment performance is drawn of the mean-variance graph below.
For the time period illustrated -- January 1992 to March 31, 2010 -- the slope of the insurers' risk line marks the chance that the quarterly total investment return will drop below the quarterly yield on a 90-day TBIll -- one in every four quarters, or 25%..
The first (3) points on this line -- the points of performance for the 90-day TBill, industry total return and the Lehman Brothers Aggregate Bond Index illustrate that property casualty insurers generally matched to this performance minimum by holding a portfolio whose returns and risk were less than that found in the bond market.
The fourth point on the line -- the point of performance for the Berkshire Hathaway portfolio -- shows how Buffett has been able to conform to the industry minimum standard for total investment performance while generating an investment return 500 basis points above the industry average for this period.
The fifth point of this graph -- WTRSTR -- illustrates that the performance of the Water Street portfolio has also been successful in meeting this industry minimum -- generating an average return on par with Buffett's insurance portfolios while operating at a slightly lower level of quarter returns volatility.
The significance of this is as follows:
The industry-average ratio of admitted assets to surplus for this period was 2.75:1.00 -- the ratio of admitted assets to written premium, 0.60:1.00.
A 500 basis point spread on asset returns means a 1300 basis point pretax advantage in attracting and holding capital and a 300 basis point advantage in pricing risk -- both significant for growing market share and attracting capital.
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