Hey, welcome. The plan is the kind of formal shareholder meeting we will do first. We will close the shareholder meeting once we cover the materials. Then we are going to have a Q&A with the team. We have Ryan Israel, CIO of the company, Marc Grandisson, who is executive chair of Vantage.
Yeah, exactly.
And David O'Reilly, CEO of Howard Hughes. And I am Bill Ackman, executive chair of Howard Hughes. Okay. Good morning. Today we are going to vote on three items, election of directors, an advisory vote on executive compensation. By the way, I cannot see our directors. Where are our directors? They are hiding here somewhere. Okay, there we go. And ratification of KPMG as our independent auditor for 2026. As of the record date, August 17th, 2026, there were 59,719,462 shares of common stock. By the way, if we could end the house music. I think there is music. Okay.
Apologies for that. We have been informed that approximately 82% of those shares are represented here in person or by proxy, so a quorum is present, and the meeting has been duly convened. If you would like to ask a question or comment, please raise your hand and wait to be recognized. Questions will be with respect to just the annual meeting. Afterwards, we will have open Q&A on the company or any topics that you have. First proposal is election of directors. Board has nominated 11 directors to serve until next year's annual meeting. Myself, David Eun, Marc Grandisson, Ryan Israel, Thom Lachman. Maybe we can ask directors just to. We got house lights, and if we can introduce our directors to the shareholders. Let us see how we are doing here. House lights, can we.
We have got people virtually.
Okay. Who is virtual, who is in person?
Maryann is here in person.
Okay, who's here? We got Mary. I can barely see you. Please rise, Maryann Tai, and David Eun. Where are the lights? We need house lights, please. House lights. There, they're coming up. Okay. I see Maryann. I say hi to Maryann Tai. Who else do we have? David Eun over here. Which directors are present?
I think that's it.
Just Maryann. Marc, David, Ryan, myself. Okay. We're going to do this again. David Eun, Marc Grandisson, Ryan Israel, Thom Lachman, David O'Reilly, Susan Panuccio, Scot Sellers, Maryann Tai, Jean-Baptiste Wautier, and Anthony Williams. Their backgrounds are included in the proxy statement. We recommend a vote in favor even though some are here virtually. On say on pay, this is our annual advisory vote the board's recommended to vote for, and on KPMG, we've also recommended to vote for. Any questions on the items of the shareholder meeting? Seeing no questions, the polls are now open. If you'd like a ballot, please raise your hand. If you voted already by proxy, you won't need a ballot unless you need to change your vote.
Okay, the polls are now closed, seeing no one who needs a ballot, and based on the preliminary results, all 11 directors have been elected, with each receiving over 96% of the votes. Say on pay has passed with approximately 99% in favor, and the ratification of KPMG passed with 99%. Final results will be filed with the SEC within four business days. A very efficient shareholder meeting. We're going to adjourn, and then we're going to go to Q&A. With respect to Q&A, please note that today's remarks, presentation, and Q&A will include forward-looking statements, including statements about our strategy, Vantage, our plans for our real estate business. These statements reflect our current expectations and are not guarantees of future performance. Actual results may differ materially due to a number of risks and uncertainties.
Those risks are described in the cautionary statements shown on the screen in our annual report on Form 10-K for 2025, our quarterly report on Form 10-Q for the second quarter of 2026, which are available on our website at sec.gov. We undertake no obligation to update these statements except as required by law. We'll also refer to certain non-GAAP financial measures. Definitions and reconciliations to the most directly comparable GAAP measures are included in the appendix to the presentation. Okay. I don't like reading stuff. Okay, we're going to go to presentation. I've got maybe 10 minutes, give you an overview of our plans, and then look forward to your questions. Okay, let's begin on Vantage. I would say the most significant event since we announced the plan to transform Howard Hughes into a diversified holding company was our acquisition of Vantage.
Last year at this meeting, we said, "Here's why we're pursuing insurance. We think it leverages Pershing Square's public markets investment expertise. It's a cash generative business, and we think it's a business that allows for prudent but rapid growth, and it generates significant investment funds." We believe that our holding company structure was ideal for owning an insurance company, and the fact that Pershing Square owns 47% gives us the ability to take a long-term view. We set out to acquire an insurance company that met our goals. We were fortunate in being able to identify a company that actually was a very good platform for our plans going forward, a company called Vantage. It had been launched in 2020 by two well-regarded private equity firms. Business was probably several years away from potential monetization.
A lot of private equity firms are under a fair amount of pressure to return capital to shareholders. We were able to pay a full and fair price, and close the transaction just this June. What was great about Vantage is its scale, the right size. A business of significant scale, but not too large. We could fit in the context of Howard Hughes, both a specialty insurance and reinsurance company, and in that, a business that was created in 2020, a business that did not come with significant concerning legacy reserving issues. We were fortunate in acquiring a company with a very good management team. Our approach at Pershing is always if there's an opportunity to find the best senior team in the world, we're going to pursue it, and we've really been fortunate. Marc is here today.
He is considered by many the best insurance executive of his generation, so to speak. He began early part of his career at Berkshire Hathaway under Ajit Jain. Very good initial training. Then over 25 years, nearly 25 years, I guess, at Arch Capital, the last eight as CEO. We have been cultivating Marc, if you will, seducing, cultivating, for a year and a half. We really got lucky here in the sense that Marc's protege, David Gansberg, became available. Marc was a little reluctant to step into the CEO seat, but we inspired him to become executive chair of Vantage. Once his protege became available, we recruited David Gansberg. David, at some point, bought some Howard Hughes shares, so we allowed him to attend today's meeting. David, if you do not mind standing up, I know you are here somewhere. David Gansberg. Ah, there he is.
David is CEO in waiting. Waiting is till about June 3rd. He has been having a nice relaxing time off. I hope you are not getting too out of shape during this period. You are going to be ready to go come June. But very excited to have David in place. Marc stepped in as executive chair, and he is an icon in the industry. The phone started ringing off the hook and lots of interesting people have kind of put their hat in the ring. Marc is continuing to build out the company with superb talent. We will have some announcements about additional talent coming to the company. One of the first things we did when we acquired Vantage was we sold their entire fixed income portfolio. They had a traditional kind of laddered maturity fixed income portfolio managed by, I guess, BlackRock and Goldman Sachs.
We were able to sell all those investments immediately. People think of fixed income as a low-risk strategy for insurance companies. Had we held that portfolio over the last several months, it would have lost a material amount of value in light of the obviously significant move in interest rates. What do we like about Vantage? A highly diversified business. There has been some softening in the P&C business, but it is a business that Marc will tell you there are hard markets within softening markets, there are soft markets within hard markets, and you want having a platform that is broad enables you to pursue the most profitable opportunities. As I mentioned, we do not have to worry about pre-2020 reserving issues.
We pick up a company that has all the relevant regulatory licenses and a strong credit rating, a very good balance sheet, and at a scale that is large enough to recruit an executive of David's and Marc's quality, but not too big for us not to be able to acquire it. I have already talked a bit about Marc and David. Lucy is here as well. Lucy Fato, if you can just. Where are you? She is. You have to stand. Lucy was formerly, her insurance credentials, she was vice chair and general counsel at AIG. She was actually working, interestingly, at the former Howard Hughes Seaport spinoff business, and she became available to step in here as well. Marc can speak a bit more about obviously progress here, but among his first assignments, we did a large degree of due diligence when we acquired this company.
But we did this with the assistance of excellent insurance consultants. We are not domain experts in insurance reserving and underwriting. So one of the first things Marc is doing is doing a deep dive on the existing book of business, looking for opportunities for growth, looking for pockets of opportunity that have not been pursued by the company, and setting the company up to be able to pursue those opportunities going forward. Marc will speak about how important data is and data analytics, and interesting to hear some thoughts on how AI is going to help insurance companies analyze and do better at underwriting. Maybe there's some risks associated with AI that are worth talking about. I think, Marc, you've been in the chair seat for a few months now?
Yes, since July.
Since July. So a couple of months in, and good news is no surprises to the negative. In fact, actually, one of the things Marc has mentioned, surprises to the positive in terms of the strength of the team, strength of the organization, which is obviously something we identified as part of our due diligence, but Marc's had really a real opportunity to get to know the team and has spoken very highly of the team. As I mentioned, one of the first things we did is reposition the portfolio. At the time of acquisition, it was a $3.1 billion portfolio, about 16% in kind of cash short-term investments, 84% fixed income. We sold the kind of longer-dated fixed income, invested that capital in short-term treasuries, today comprising about 62% of the portfolio. 37% of the portfolio is in common stocks, a portfolio that Pershing Square manages.
Kind of this barbell approach. We take no risk on float, the insurance float, plus a cushion, and the balance in a common stock portfolio. So the theory behind this investment approach, we took a page from Mr. Buffett and Berkshire Hathaway. The way Berkshire has been run historically, Buffett has taken 100% of the float and invested in short-term treasuries. So when you read Berkshire has a several hundred billion dollar treasury portfolio, principally the short-term treasury portfolio that sits in the insurance company, and then he's invested the surplus of the insurer in common stocks, and that's something beginning really in the 1960s. In the early days of Berkshire, Buffett didn't know, I think, much about insurance and had years with very big losses in the insurance company. But the investment side of the portfolio really drove the value of that company over time.
When you compare the approach we are taking that Berkshire has taken over time with that of the typical P&C insurer, if you look at the page, typical insurer has a largely almost entirely fixed income portfolio, some short-term investments, a fixed income portfolio that looks a bit like Vantage, perhaps a small modest 5% of the portfolio in common stocks, generating a consolidated or weighted average return of, let's say, 5% in today's market. Take off taxes, really a 4% return on an investment portfolio. It is really the leverage of the insurer investing a fair amount of assets relative to equity, 2.5 turns of leverage that enables a 10% investment return on the asset side of the balance sheet. Really the focus is on the underwriting part of the business.
Typical insurer, let's say a 95% combined ratio after tax, generating an incremental 4% return on equity. So most of the return comes from the asset side of the balance sheet, leveraging a fixed income portfolio with some profits from the insurance side, getting to a mid-teens return on capital. Now, if you think about risk, 2.5 turns of leverage on an intermediate to longer term fixed income portfolio, that has worked well in a world where rates have come down really since the 1980s. We are now in a world where rates are moving up. It is a very different risk profile. I would say the risk profile is the same, but I think the risk of loss becomes much greater in a world in which rates are rising.
If you look at the approach that we are taking, we take 100% of the assets and put them in short-term treasuries. We take no risk with respect to term structure of interest rates. You can take 100% of the float, and then we invest the common stock portion of the portfolio in a reasonably concentrated 14, 15 name portfolio of large cap, what we call durables, high-quality growth companies, the kind of companies that Pershing Square has invested in historically. We manage this portfolio as part of our arrangement for Howard Hughes, so we charge nothing to the insurer on this part of the business, and we do so with much less leverage than a typical insurer.
Instead of 2.5 turns, the asset side of the balance sheet being 2.5 times the equity, we keep leverage below two turns, something between, let's call it 1.6 - 1.8 times. So lower leverage, much more liquid, in our view, lower risk on a combined basis, but a much higher potential returning portfolio. On the insurance side, we write less premium relative to the typical insurer. The typical insurer is writing typically a ratio of 100% premium to equity. We will be somewhat less than that, generating what we expect will be a meaningfully higher return on equity. If you look at Pershing Square over 23 years, we have had about a third of the time years with returns on a gross basis in excess of 40%. We have generated a gross return over the last 23 years in the 19% range.
I think we're better today than we were in the earlier years. There is the potential for very significant upside in a world in which we generate meaningfully above market returns. We acquired Vantage. Howard Hughes injected $900 million of capital into the company. We took $300 million on the balance sheet, and the balance of the capital was provided by Pershing. Today, Howard Hughes owns slightly more than half of Vantage, and economically, Pershing Square, through this preferred instrument, owns the balance. Howard Hughes has the ability to acquire that preferred instrument and purchase 100% of the business. What we're focused on as we sit here today is we want to get as much of our capital as possible invested in the insurance business. We now have a team in place. We've got the platform.
We have the ability to grow, and the bulk of our capital today is sitting in our real estate operation. A typical real estate investor, the president would talk about real estate being a no money down business. Howard Hughes has operated with a business model of 100% of our money down, where we financed really pretty much every acquisition without the benefit of any third party capital, and that is the pretty significant change that we're about to make. When you look at the stock today, the market values the company at a significant discount to the after-tax value of our real estate portfolio with Vantage valued approximate cost. We believe that discount exists because the market assigns a very high discount rate to real estate development, land ownership, and condominium development.
These are businesses that people normally think of as kind of high risk, and as a result, we've really traded at a significant discount over time. What are we doing? The business naturally generates a lot of cash. About $2.5 billion-$3 billion of cash will be generated by the sale of condominiums, the sale of lots, cash generated by our income-producing assets. That's money that comes over five years, and our goal is to put that capital into the insurance company as quickly as possible. How are we going to do that? We're going to do what most real estate investors do. We're going to become a much more asset capital-light real estate investor by bringing in partners.
We are in the process of engaging advisors to bring in joint venture partners so we can monetize about 80% of the equity we have invested in our income-producing asset portfolio. We also have a number of assets that are non-core to our MPC strategy. Those assets are in the process of being sold. We're going to form joint ventures with our master plan community business. Again, instead of funding this business effectively 100% of the equity coming from Howard Hughes, we're going to bring in partners. If you think of what's been built at Howard Hughes over the last really 15 years, is we've built a machine that has been able to grow the value of our land assets over a long period of time, build out these kind of beautiful communities that rank year- after- year as best places to live in America.
We have a development team that knows how to build projects on time, on budget. We have land holdings with development opportunities out for decades. If you think about other people in the alternative real estate asset management business, they have to find deals. They generally don't have their own operating talent. Here we have a company that has deals as far as the eye can see in markets that we effectively are the dominant and controlling owner, and we have a long-term track record for deploying that capital. We are the ideal partner for a pension fund, for a family office, for investors who want exposure to very high-quality real estate, where we are going to continue to have very significant skin in the game. But we are going to go from being 100% equity owner to being 20% or so skin in the game, but getting paid for our IP.
This has the benefit of taking a real estate company and making it a much higher ROE business, one that we think the market will give much more credit to. It also gives us the ability to take out large amounts of capital from the business. Instead of waiting three to five years, our expectation is by sometime next year, we will have made very material progress in extracting capital from our real estate business. Importantly, this is also a great opportunity for our employees. With public company capital and the high cost that comes with it sort of limited to some extent our ability to pursue certain kinds of real estate opportunities. Real estate developers like to build.
By bringing in third-party capital and increasing the returns in our business, it is going to create more opportunities to deploy capital, which will be great for our real estate team members. So it is strategically great for the company, it is great for the team, and we are going to be able to give Marc a lot more capital a lot more quickly. We believe the after-tax value of our real estate assets is something in order of $5 billion. Expect we keep $1 billion or so of skin in the game. That creates the potential for $4 billion of capital to be extracted from our real estate assets and redeployed into our insurance operations. So today, we basically own effectively all of our real estate. We fund all of our development ourselves, other than obviously bank financing.
Our returns are limited to just the after-tax returns we generate from our real estate. Fast-forward completion of this process, we remain a meaningful equity owner in each of our assets. Think of us as a plus or minus 20% owner, and we fund our growth and the balance of the capital needed in our business with third-party capital. Investors that want exposure to assets in the best markets in the country, managed by a team with an excellent track record with more skin in the game than really any other real estate manager. And we turn this into a business that really generates no third-party fee income to one that generates very significant third-party fee income.
What this does for Howard Hughes business is it takes out a lot of capital we can redeploy elsewhere, and the capital we leave in the business earns a much higher rate of return. We generate more cash, less exposure. Howard Hughes stock seems to trade inversely with rates because of how much perceived exposure we have in the real estate operation to rates. We think the reality of that exposure is much more limited than the market suggests. As you've seen, even with mortgage rates again at 7%, we continue to see enormous demand from people who want to move into our communities. We continue to sell land at higher and higher interest rates. The market, of course, will pay a much higher multiple for a real estate business that's effectively an asset management business as opposed to an asset-heavy real estate operation in a C corporation.
This was not an ingenious idea. There are good examples of other real estate companies that became asset management firms. Brookfield really being the best example. Blackstone, obviously, and these are other examples of real estate operations that operate on an asset-light basis, and the market assigns very nice multiples to their business operations. Pro forma for what we're accomplishing here, Vantage becomes the principal subsidiary of Howard Hughes over the next, let's say, couple of years. Then the Howard Hughes community business will grow its asset base, probably continue to grow its asset base pretty significantly, but by using third-party capital. We've got an asset management business that generates significant fee income, and then we continue to be a minority owner of the assets in our portfolio and the controlling owner, which is important of that portfolio. Graphically, today we're real estate asset equity heavy.
Pro forma for this transaction, we become an insurance-led holding company with a high return real estate operation. Why don't I pause there, and we'd be delighted to take your questions.
Sure.
There are three mics in the audience. We're also going to take questions online. I've turned on the mic in the front. Go ahead.
Hello. You can enter questions online in the chat, and we'll read them out. Bill, would you like to start with one from online?
Sure, let's do that.
Okay, great. Since the success of the Berkshire Hathaway model relies heavily on both risk management, especially saying no to writing some policies, and skillful investment of the flow generated by the insurance business, could you give us a progress report on your efforts to quote, "Clone Ajit Jain?"
Well, I think he's even more handsome than Ajit.
Marc, why don't you speak to maybe what was Arch's approach when you were CEO in cycle management, and how does that carry over to Vantage?
Yeah. You can hear me? That's pretty loud.
It's good to be here, by the way, this morning. I think the playbook has been, this is what I'm used to. I learned about the hard and soft cycle and having the ability and the willingness to write more or write less depending on the market conditions since I was 26, 27 years old. I've learned from tremendously strong and intelligent people, and Ajit Jain certainly was one of them. I've seen this play and the beauty of how Howard Hughes, this is what also attracted me, is that it's not a private company, but it's really well geared towards letting go of top-line volatility and being okay with it. Which I've said to Bill and Brian so many times, top-line volatility leads to bottom-line stability.
This is what it's all about, and it's really easier in a way if you think of a broader organization like Berkshire Hathaway, or in this case, Howard Hughes. When you're a public company doing all the business, and it's the sole thing you do, and you don't have the ability to invest and deploy capital at higher returns when the insurance industry is not giving you the opportunity, it just makes you do things that otherwise you may not want to do. Or you may not wish you could do or you know are not really good to do, just buying one more quarter or buying one more year to see it through, to carry yourself through the soft cycle to get to the hard cycle. We'll deal with it when we get there.
When you see it throughout the cycle, that's something that we won't do here because we don't have to. That's a really wonderful luxury to have. That doesn't mean you walk out of markets. That doesn't mean you just drop your clients. It's far from it. It really means that you're a very sensible and very smart provider of capital through the cycle. At Arch, and certainly at Berkshire, that was the case as well. People understand that. Brokers and clients understand that stance.
I have said more than once to brokers on deals, and David will be my witness, when a deal is too good for the client, and it is a really good transaction, really good price, we would tell them, "Well, maybe you should go with them." That is the willingness to let go of, not a bad transaction, but a transaction that does not meet your personal or your company's hurdle. Having that luxury is what makes for much more stable and valuable growth and book value over time. Is that sort of what you wanted to say?
Yeah. Look, I think what I would add to what Marc said is this is a company that does not have to generate a return by a certain quarter or growth rate by an end of a year. Pershing Square views our stake in the company as effectively a permanent one. Our goal is to compound the value over a very long period of time. The bulk of the profits from a well-run insurance company in this model will come from the asset side of the balance sheet, so there really is not pressure on the insurance team to put capital at risk. So Marc can really pick and choose the risks, and that is really the key. Versus. Now, interesting question would be, Marc, at Arch was a standalone insurance company.
Yeah.
How did Arch manage to follow this philosophy without the pressures normally imposed on a standalone insurance business?
Well, a lot of talking to our investors, making sure they understand the playbook and what we are trying to do, and convince them that over time, that the book value will grow at a better clip and much more stable than the other companies. But it is not without its challenges. I have been in conversations where people did not really believe anymore in the story. You just come out of favor, like the same way Warren was out of favor in 1999 when the NASDAQ was going crazy. So you also have to have the willingness to be contrarian. That was really. The board was strong as well in really being behind this. In the beginning, the private equity-led who understood that playbook, and it carried on well because a couple of times we were pushed, and we were told to do more things. Take more risks in certain areas.
I was saying, "Well, I'm not going to do this because if we do this, we're going to lose." Then it never fails, a year or two after, losses happen, and everybody else has a loss, and we didn't have one, or at least not as high, not as big. So it creates that credibility over time. That was one thing I will say. The second thing I will tell you is, and this is going to be the same here, one of my main missions, and it was the same for Dino's, was to broaden whatever we can do as a company in terms of products and geography. With David, we were instrumental in establishing a reinsurance company in Europe. We didn't have this before, right? We also established a facultative unit.
Along the way, you are able to find new ways and new areas to deploy capital. Mortgage insurance is also a good example. So being on the lookout and being ready to seize the opportunity, and you increase what I talk about all the time is if you have many ponds to fish from, you don't need to rely on one or two of them. If you have multiple of them, it gives you that much more, that better flexibility. I like what you just said, Bill, which is in a hard market, there are soft spots, and vice versa. Soft in soft markets, there are hard parts as well. So the more you have the ability to participate in the market, the breadth of it is what creates that opportunistic, I would say, ability to go through.
Actually, I want to ask you another question.
Sure.
How many ponds do we have to fish from in Vantage? Are there new ponds that you're seeking to bring to the story? Where's your progress in that regard?
Yeah, there are more. On the reinsurance, I don't want to say a whole lot because it's still in development, and we're still talking to people to see maybe joining us to do some of those things. If you look at the things that we've done at Arch, it's a good place to look at, really, to see what we've done because it's worked out very well, and I'm used to it. Something I was also doing prior to Berkshire, evaluating different lines of business. Geographically, we're probably underweight in Europe, in London, for instance, which will be a more natural marketplace for us because of the specialty nature of what we do. We have to figure out how to get there and who's going to do it with us, and also making sure that we have a solid plan of action.
We'll start small and build from this. That's a really first shot, first good example. There are other lines of business that we could actually we're doing as we speak. We had a two-day business review about a month ago and really identified lines of business where we could do a lot more, and that's really better, right? Because it's something you know, you understand already. You have the team in place. So it's really beefing up that team to really seize more of this opportunity. There are other lines that we're not really involved in, like we're not in workers' comp, for instance. That's a huge market. I'm not saying we're going to rush to do it, but it's an example of things we could do.
On the reinsurance side is a few things that I'm thinking on the side that we could do fair amount of, more of building through. So probably more and a lot of it on the reinsurance side. The insurance, we're careful. We have a really good platform. We're really trying to improve and augment what we have in terms of capability within each of those lines of business. With London, that's going to be really expanding that much further, and that's going to take us it's going to be a while for us to digest and really work through it. I think on the reinsurance side, we also have a lot of other things that we can do.
There were some lines of business, liability, for instance, is a good example, that was not part of their initial plan at Vantage, which, and I'm very familiar with it, and so is David, obviously. This is where we started working together at Arch. So that's certainly a line of business, for instance, that we'll do a bit more of, and that fits very nicely with the strategy that Ryan's trying to do on the float base at a lower cost of capital. What I can tell the shareholders that uses at Arch for our shareholders is that I don't know what the company is going to look like exactly in six months, a year, or two years from now.
We're going to have a baseline of what we do on the insurance side and reinsurance, but we might find ourselves being overweight in certain areas compared to what we would expect a company of our size to be because of the opportunities that are there at that point in time. That's something that is very key and very important for us to share with the shareholders of the company.
One thing, if I can, I think is fascinating, having worked closely with Marc now for several months, it's been just a wonderful education for all of us at Pershing Square, is the similarities of what we do on a day-to-day basis on the investment side, where we know there's a large number of opportunities. We talk a lot about how there may be 300 - 400 different stocks that we could buy at any one time that really meet our traditional business principles, and we're sort of waiting for the right setup. So that requires the right facts to be in place. At the same time, it requires the right price to be there, and then we can move quickly. We're constantly scanning the universe. We're really understanding these businesses, and then we're waiting for just the right moment.
Insurance business is actually incredibly similar to what Marc is saying. We couldn't tell you at Pershing Square exactly what our portfolio is going to look like five years from now, although we can talk a lot about what are the high-level characteristics of the businesses that we'll seek to own. But we don't know exactly what the mix will be because we have to see what opportunities the market gives us. It's the exact same thing with the insurance business that Marc's talking about. I think that harmony, both from a high-level business perspective of having a great insurance business where we can generate ongoing profitable float. But not having to constantly be in every market at every time based upon whether it's a hard market or soft market, and doing the same thing on the investment side. But the underlying logic is very similar as well.
Marc, can you speak to you recruiting a bunch of people to the company. Obviously, there's front-loading certain costs associated with that as you build the team and then grow. How should shareholders think about the development of a combined ratio at the company over time? When do we get to kind of you built the team, and you kind of grow into a start deploying capital? When does the company start to stabilize and start generating an appropriate profit?
Yesterday. It's not an or, it's an and, right? You need to develop the business that's going to be profitable. At the same time, investing for the long term. We had a great conversation this week. No. This week, you and I about-
I'm an economically rational guy. It's all about economics. It's all about investing not a dollar now, what it's going to give us in the future. Again, because of our structure, there's a willingness to consider those things and think it through, not having to worry about the next quarter's earning. This is just huge, freeing as management. Our game plan is going to be to do both, is really to invest, hire the people, and then I know I've done this before. We've hired teams, cost us a lot of money in the first year or two, and if we look at the return that's been giving us, five, six, 10 years after we got these people on board, I mean, it's tremendous. We would do that trade, I would do that trade any day of the week. That's what we're trying to do right now.
That's what we're trying to do. I'm asking people for business plan, but I'm not expecting them to live up to it. I just want to make sure that they have a good sense for what they're trying to do once they come on board on our platform. I think we have solid people that really focus on bottom line. I think we have a portfolio, so it's not like we have to rebuild from scratch every year. We have a portfolio. We've been talking to the team, and always for us to massage it or maneuver or navigate through it and realign a few things within each portfolio to improve it. But this is going to be an ongoing conversations, right? It's hiring the right team. Are we doing all the lines of business that we should be doing?
Should we do more or less of that one or this one? At the same time, how do we improve the underwriting? Which leads to one of the things that you mentioned in the presentation about the data and having conviction behind the data, and really having conviction as to what you're trying to do. I think what the shareholders should be expecting is a keen eye on the results always. But if we can find somewhere to invest to really grow the platform over the next five or 10 years, we also want to do this. We're going to do both. I think the best thing for us to do is to explain to our shareholders, "This is what we're doing. This is what's going on. This is what's happening.
This is why the numbers may be a bit perhaps higher than you would've expected in your modeling, but there's a reason for it. If the reason is, again, backed by economic rationality, it should work out. It has worked out in the past.
One of the things I think is really important to what you just said, Marc, is in the insurance business, arguably like the investment business, talent is probably the most precious asset that you can have. In a lot of businesses around corporate America, if you think about the best person you could hire versus the second best, the gap might be maybe the best person does, I don't know, 25%, 40% better, a lot of people would say, than the second best person. Steve Jobs, when he was at Apple, used to use this analogy, though, that in certain businesses, and he was talking about his product designers or his best engineers, the productivity, that gap isn't 25% or 50%. It could be 50 or 100 times.
There are certain businesses where hiring the best people leads you to a result that is orders of magnitude better than what you would get for the second best person. I think the investment business is like that. I think the insurance business is another one. When we talk about hiring people, I think the business attributes are uniquely such that bringing in the best executive chairman, the best future CEO, and then on down the line, you can really get these amazing effects by hiring the best people. I think the investments that we make in our people are even more important in insurance than they might be for the average business in corporate America.
Great. Okay. With that, let's take some questions from the audience. This gentleman right here. If we could bring a mic to him. Where are the microphones? We should stage them. We should have someone in the middle here so that it's easier to pass a mic. We're still working on our meeting logistics. We'll be better next year.
Thank you. Guy Baron, with Springview Capital. Question for Marc, and you addressed some of this already, but when you joined and co-founded Arch, it was a very hard market post 9/11. Clearly, the environment right now is quite different. There are pockets of hardness, but the insurance market has been softening and continues to soften. There is a certain tension there where Howard Hughes is going to give you $3 billion-$4 billion of capital on the one hand. On the other hand, if you were at Arch, you would be potentially shrinking a lot of business. I guess the question is, how do you handle that tension with all that capital coming in? A question for Marc, Bill, and Ryan. Would you then look to inorganic opportunities, M&A, to grow Vantage to the extent that there are insurers trading cheaply because of the market backdrop?
I will start. It is an easy answer. We are such a small company. We do not have to do a whole lot more. There is a lot of opportunities out there, given our size, to grow the platform. You are right, it is not the hard market of 2001 and 2002. We also have higher requirements of capital. I think that even though we have an amazing amount of capital in the industry, all-time high historically, we still have markets hardening. We still have price increases in many markets. I would say that we have been underrepresented in some of these markets, where the returns are really interesting. So when we started Arch, it was nothing. We had to build the whole thing in all lines of business insurance and reinsurance. You probably need a harder market to do that, right? To get it ground running and doing all that stuff.
Now we have a solid book of business already, and we sort of incrementally, we are going to be able to augment and incrementally improve it. There are lines of business that are not as hardening and softening as you might think. There is a lot more stability to them. When we talk about hard and soft and going in or out of market, like I said before, you do not go out altogether. When the market is soft, not every single insurance policy loses money. There is always segmentation that can occur within a certain line of business or area, and that is certainly something that we will be spending a lot of our efforts on. It is already being done, but we are going to do a lot more of that. At Vantage, it is easier, right? It is a smaller footprint. So I am not concerned about this.
If you told me wherever we are right now to go to 10 times this, I think it is a very different animal altogether. I think once you are bigger, I think you have to start shaving a few things because you have such a big presence in the marketplace, but we do not and we are underrepresented, so we have a lot of room to grow.
I think one analogy I would make to the investment management business, the way we think about Marc and team is recruiting a team that is used to managing $50 billion to a fund that is managing $1.5 billion. As Warren Buffett would say, with Berkshire, the scale creates challenges that if he were managing a lot more money, he would be able to be a lot more nimble. We can be incredibly nimble as a small company, but we have a team with the capability of managing a lot more assets, and I think that is a very good combination. With respect to acquisitions, maybe you could make a comment on-
I can, yeah, briefly. I think nothing should be off the table about everything. I think that if you look at the history of my experience, it depends. It all depends on the economics. Could we understand the risk? Is the balance sheet making sense? It may be an asset purchase. I think in terms of priority, if you look at some of the Dino's call and my calls historically, we prefer to hire talent first and then teams second, because it is better because you integrate them into your culture and the way you look at the business. Having said this, we have made some acquisition. David and I worked on one big acquisition we did at Arch, and that worked out pretty well.
I think it depends, I guess, as I would say. But I think we are open-
to grow the platform when and if it makes sense.
The last thing I would add to that is when we put capital into Vantage, we also have, as Marc talked about, organic opportunities, inorganic M&A opportunities. The third opportunity, though, is we, Pershing Square, can help manage the additional capital in terms of investing in stocks. I think what's really nice about that, I think it's one of the reasons Berkshire has been so successful is the more arrows that you have in your quiver, the better you can calibrate looking at the environment. Not just what can we do in terms of expanding the portfolio organically by bringing new people in or writing new business. You could also say, has the market given us an opportunity to acquire an entirely new platform?
Lastly, we can do something that very few insurers historically have the ability to do, which is we can also look and see, should we increase the allocation to equities with that additional capital? I think the blend of all three, because it's not an either/or necessarily, gives us a much wider remit to be able to figure out how we can look at what is the highest return at a given moment in the cycle.
Question. Next. This gentleman right here.
Thank you. I'm David Samra from Artisan Partners. Bill, as you try to reduce the capital intensity of the real estate portfolio, is there an order of priority in terms of the use of that capital between buying in the ownership of Vantage and putting incremental capital into Vantage itself? If you could help us understand that a little bit. In addition to that, in one of your pro forma slides, you showed capital to premiums of less than 100%, and I'm just curious of the buildup of that number, where it comes from. Does it have to do with the way that you're using a lot of the shareholders' equity to invest in the stock market, or is that a reflection of the type of premiums that will be written inside of Vantage? Thank you.
Sure. The company has the option to use the capital. The preferred has a seven-year term, and it effectively represents the economics of Pershing Square owning stock in Vantage, with the company having the option to redeem the preferred at 1.5x book value. This is one instance where the decision on the use of the capital to redeem the preferred versus reinvest in the business, ultimately at the end of the day, while we'll have some points of view on it's going to be one that the board and Marc will decide because of a potential conflict, obviously, as a preferred shareholder. Now, we don't view it as a conflict because we want the company to invest the capital in the manner in which increases the value of Howard Hughes over time.
Think of the world in which some incredible opportunity appeared to, let's say, an acquisition that would advance Vantage in a pretty dramatic way, but it's only available at this moment, and we have a finite amount of capital. That could be an example of let's take $500 million and do that acquisition as opposed to redeem.
The option to redeem the preferred will persist for seven years. The company can make the decision over time, is there a better use of this capital? Now, the good news about buying back the preferred is we're buying something we already know, a business we have perfect information about. And the price, we designed the preferred, and ultimately in negotiation with the company, in a manner that will be very favorable to the company. We believe over time a well-run insurer that earns approaching a 20% or greater than 20% ROE is a business that's worth a lot more than 1.5x book value. And the redemption price of the preferred is fixed at 1.5x. But that will be a decision that we'll make based on the relative opportunity set.
You might envision in a world where, let's say, the market's weaker, perhaps we're just going to spend our capital buying more of Vantage as opposed to deploying more capital in the insurance business.
The pace of capital that we generate. We think the most straightforward thing for the real estate operation, the real estate company to do is bringing in a partner, joint venture partner, capital partner into an income producing real estate portfolio is a very straightforward transaction that happens effectively every day in real estate markets. We are hiring advisors. What is the status of that?
They will be out in the market by the end of the year with the information for potential third parties to evaluate becoming our partners.
We will begin a process with materials. We will go out to a marketplace. We have at least a couple billion of equity in our income producing assets.
At least.
At least. What's a better number?
Well, I think in your presentation you showed a number of total equity of around $5 billion.
But just income. Income producing.
Income producing is about $2 billion.
Yeah.
$2.2 billion?
I would say the first $1.6 billion that we can create from a partner, that could be a pretty straightforward transaction that could happen in the first half of next year. The more open question is the MPC business.
The residential land component, which represents another over $3 billion, depending on how much of Teravalis you include in that. It's a more difficult transaction to bring an institutional partner into land. I think our long-term track record of generating hundreds of millions of dollars of free cash flow, selling dirt at a 65% margin gives us an opportunity to do things that others have not in the past.
What I would say there is it's less certain on the timing, but I would guess I'd be surprised if we haven't generated two-plus billion of capital by sometime comfortably into next year. I would say maybe $3 billion - $4 billion by the end of the year is a reasonable goal for that business. Remind me your second question.
Net premium to equity. I can-
You want to address that?
Yeah. The way we sort of thought about that slide at a very high level is really using Berkshire as the inspiration relative to the traditional insurer. Whereas the traditional insurer tends to write premiums that are roughly equal to its capital, which is effectively as much as it can relative to the capital based upon the regulatory requirements. Berkshire's really gone at about 30% recently relative to capital. So it's been writing very little premium relative to the amount of capital it has and uses that excess capital ultimately to invest primarily in common stocks.
We're actually today primarily in U.S. treasuries.
Yes. They have
Berkshire suffers from scale and both on the investment side and on the premium writing side, which is why they are at the lowest leverage
Yes.
of any insurer in the world.
Yeah. They still have a pretty big equity book relative to treasuries, but they have shifted that a little bit more towards treasuries over the last several years. What I would say at a very high level is that when we acquired Vantage with the team that we had in place, we thought that they were a relatively strong team. There was probably a little bit of an underlying bias as we started working with them to maybe think about having a little bit of extra capital relative to premiums because we know how to do the investing, and we felt very confident in our ability to generate strong returns and therefore maybe having smaller premiums relative to equity was more attractive.
I think while we're still ultimately figuring that out with Marc, and it'll be a decision collectively so that page isn't a commitment to exactly where we'll be. You may have noticed if you compare that to what we had said a year ago, actually we're increasing the amount of premiums that we're writing relative to the equity. I think that just really reflects the superstar team that we've attracted and the people that Marc is already attracting below him. I think the better the team is, the more opportunities there will likely be. I would expect over time you'd actually see that number to be continuing to increase. It's not a commitment. It was really just more of a conceptual understanding.
Said differently, the numbers on the page would be even higher in terms of the returns if we actually decided to calibrate the premiums higher relative to the capital in the business.
Next question. There's one up there. If you could pass the mic.
Thanks so much. Hi, Meyer Shields, KBW. Hi, Marc. Two questions for you. One leading off that, would you have any interest in buying standard commercial operations that would allow for a higher premium surplus or premium to equity ratio? Second, I was hoping you could talk about how your experience in reinsurance would allow you to evaluate MGAs as that business model proliferates.
Okay. Reinsurance is, you're right, Meyer, is a really nice place to know to be able to evaluate MGAs and MGUs. Yes. There's also a cycle, as you know, in the MGA and MGUs. We are partnering with a few of them, many of them, right, Nicole. I've seen Nicole shaking her head. We partner with the ones that we like, the people that do things that we want them to do and are responsive in working with us. It's been working out well, so there's more partnering at this point in time. We also have the same analysis on the underwriting structure, the cash and everything, and the underwriting guidelines to make sure that they're okay. I think it's interesting because Nicole is doing it for us at Vantage, and it really feels like a reinsurance portfolio, very much so.
It's really a nice, I would say renting capital of sort. That's certainly something that's been central that's actually also helped from the leverage perspective, operating leverage perspective. So far, I would underwrite that reinsurance alongside with Nicole so far. So it's been pretty good. What was the first question again, Meyer. Just remind me what the first one is.
Whether you'd be interested in standard commercial lines with a higher premium leverage.
Oh, yes. That one is always a possibility. Right. For everything. It's a large marketplace. But it's a different game, right. It's an agency. It's a lot of connective tissues within all the various distribution network that's kind of hard to dislodge. I think that our focus for now, yes, if it comes to us at a good price, a good structure, we like what they do. They have a nice book for what they do, and we can find a way to house it within Vantage, of course, we'd look at it. But right now, our priority is really focusing on developing and growing. As I mentioned, we're a bit underweight the specialty lines of business, the E&S and whatnot. We have some admitted capability. We'll do some of that.
Right now, most of our focus is to push forward a little bit on the specialty side, which is, as Ryan Israel mentioned, a bit more talent intensive and we could probably do a bit more with it than you would otherwise in the standard commercial marketplace. It's not a no, it's just it would probably have a little bit higher hurdle at this point in our history. In 15 years, 20 years, who knows?
Maybe take an online question.
The Vantage acquisition demonstrated Howard Hughes's intention to build a diversified Berkshire-style portfolio of durable cash flowing businesses. Can you share whether Howard Hughes has identified additional non-real estate opportunities and whether the future expansion is more likely to come through minority equity stakes or full acquisitions?
Our focus for the foreseeable future is building the capital of the insurance company, redeeming the preferred. If we can generate $3 billion of capital from the real estate assets over the course of the next year, figure $1 billion or so will go to redeem the preferred, and the balance will be invested in the insurance company. In the insurance company itself, the assets will be minority stakes in public companies, common stock portfolio. There will come a day, I expect, where the insurance company is very well capitalized and we have excess capital that we can think about deploying in whole company acquisitions. But that day is, I would say, not for the certainly near term to intermediate term. Maybe up front here.
Thanks. Yu Xu, Bessemer. On a related note to David's question over there, can the insurance platform manage third-party capital? If so, is there a pace for that as well? What safeguards would be necessary so that fee generation doesn't take excessive priority over, say, policyholder alignment?
Marc.
Yeah. The platform, again, we haven't filled our boots with everything we would want. For us to get third party, it's interesting in and of itself to get the returns. I also like to underwrite, and I also like to do the underwriting results and really sticking to our balance sheet. I'm always cognizant. Over time, I think we'll develop it as the platform grows. If we have more than we probably want to in certain areas, then we could buy reinsurance, which is sort of third-party capital, right? You get reimbursed some kind of commission. It's already existing as it is. A more broader third-party capital, we have one already at Vantage. We are managing a fair amount of that. We're evaluating what we're going to do and what's going to happen with that over time.
I think our first order will be more developing underwriting income to our balance sheet. Optimizing the reinsurance purchase perhaps as well, to make it as optimal as possible. I think when we get to be much broader, which I've seen that experience through Arch, when you start at the beginning and you move over time, then you come to a point where your size and the market presence is such that you're able to have those kinds of discussions. I would say probably a bit longer term. Certainly something we would evaluate. We also have to demonstrate consistency of returns, right? We need to be able to demonstrate that we're really, really good steward of third-party capital as well. That's something that we'll demonstrate to the market. Once we've demonstrated, I think we'll be able to have good partnerships developing.
In the middle here.
Jim Cohen. 10 years from now, how do you expect the market caps to compare between Howard Hughes, Pershing Square USA, and Pershing Square Asset Management? Do you and Ryan agree on that? How do you compare their risk profiles? Ryan, you should have mentioned before about people that Howard Hughes going after the best chief investment officer too.
Well, I hope they didn't overpay.
Go ahead, Ryan. Why don't you take that one?
I think what's interesting about all of them, maybe you hinted at this a little bit in your question, is if you sort of start at the top, Pershing Square, the management company that Bill and I work for, that effectively is getting fees, which are directly related to the growth of each of the various entities that we manage, of which Howard Hughes and Pershing Square USA are two important parts of that. Ultimately, the returns on those assets are going to very directly relate to the returns that the management company gets.
What I like about our strategy at a very high level is while there could be some differences based upon the starting valuations of those businesses, when you think over a very long period of time, ultimately, the better that Howard Hughes does, the better that Pershing Square USA does, the better the manager is going to do. There is going to be a very direct mathematical relationship between the growth and the value of those businesses. I would say that over time, they should generally be relatively similar. What I think you need to look at is you need to look at the starting valuations of all of them. One of the interesting things about Howard Hughes that we talked about here is that we believe the starting base of assets today is significantly undervalued.
We talked a little bit about the market price, let's say mid 70s as of yesterday, relative to something the base value of the business we believe is at least $100. I would argue that that is, in my view, a relatively conservative valuation because that really assumes that the price that we paid for Vantage is close to what the value is. I think hopefully you have seen already with the team that we have hired, the plans that we have in the future, and just the enormous opportunity we have to create a lot of value, which is why we are really wanting to put as much capital as we can get our hands on into Vantage. I would argue that business is worth a lot more today than what we paid for it.
Therefore, you could argue that just the existing value today is significantly in excess of the share price. We believe the same is true for the other assets that we manage if we do a really good job. I think here there may be even more of a disparity, where we have talked about the share price being significantly above. That is before you think about all the changes that we are going to make, where we are going to take a great real estate platform today, but one that is very capital intensive and has actually, I would argue, hampered our growth to something that is very asset light with a great team that we can use to really now go to capital sources that are multiples the size of what we have internally.
That transforming into an asset-light business should mean that business is a lot more valuable than I think people believe it is today. Then we get to put that capital into Vantage. In rough order of magnitude, every dollar that we take out of Howard Hughes should be worth at least $2 of value because the returns that we can get on that capital in the insurance business are so great that the market should be willing to assign more than book and a half, or something like two. I think the value creation story there is going to be really, really great.
I think Howard Hughes, our expectation and our hope, if we do a good job, is that should accrete at an incredibly rapid rate because of the high rate of return that ultimately Vantage and then the asset-light real estate portfolio will deliver over time. The starting valuation is incredibly low. That said, our expectations are also incredibly high between the other two vehicles. I think all three of them will do really well.
Just to add to what Ryan's saying, one way to think about Howard Hughes today, if you pay $75 a share, think of it as buying a future insurance-dominated holding company at about a 25% discount to book value that has the potential to trade at two turns or greater multiple of book value. If we are successful in deploying capital from real estate into insurance, and Marc is successful at doing what he does best, if we do a good job on the asset side of the balance sheet, we have taken a company trading at a discount to effectively book value, or in this case, the market value, the after-tax market value of a real estate portfolio plus our cost basis in Vantage and turning it to an operating insurance company that deserves a two-turn multiple.
On the Howard Hughes side, real estate asset management companies trade at multiples of book value, right? These are very high return on capital businesses. The market has kind of dinged the company because our ability to generate returns on capital in an equity-heavy real estate operation in a C corporation is limited. The discount rate the market assigns to that business is high. We are moving into businesses where the discount rate is going to come down meaningfully and the returns we can earn on both the insurance and a real estate asset management business are much higher. That should lead to a re-rating of the company from a discount to book value to, we expect over time, a meaningful premium. A good example of how asset managers can trade at a premium to book value is you just look at Pershing Square Inc.
It trades at, I do not even know what book value is, but it is probably a couple of dollars a share. The stock trades in the 50s. It is probably 25 times book value. Asset management businesses can trade at very high values. I will give one little plug for Pershing Square USA. It is trading today at a 24% discount to its net asset value. Net asset value is comprised of the most liquid marketable securities in the world. In each of those cases, those companies, we think, are trading at very deep discounts to what they are worth, so you get kind of a double discount. We like Pershing Square USA as well. Maybe another question online.
Sure. There were a few to this effect. Based on your belief that Howard Hughes stock is significantly undervalued, doesn't it make sense to use some excess capital to repurchase shares along with growing the insurance business?
Actually, in this case, I don't think so. I think the highest return we can generate today is take every marginal dollar of capital and put it into the insurance company. The most effective use of a buyback here would be to buy back the portion of Vantage that's held by Pershing Square as opposed to buying in our outstanding shares at this stage. There may come a day someday where we have so much excess capital that that's a better use of the money. Another question. Yes, right here in the middle.
Thank you. I'm Edmundo Yepez from Armada Capital. We're based in Mexico. I have a question regarding the real estate subsidiaries or the new asset-light model where you keep 20% of whatever you guys are developing, and then the remaining 80%, shall we think it as 100% being that equity, or can it have a portion of debt or et cetera? Just because I want to assess if we have to continuously think of you owning only 20%, or has it the possibility for your ownership to go upwards? Then just this ability of making the model more asset-light, does it accelerate the development that you guys have? So the current pipeline, if you fund it with 100% equity-
it's going to be on a slower pace. Does it accelerate? Because as of my understanding, your thesis is to develop at a very moderate pace so the lot value is maximized.
David, you want to cover that?
Yeah, absolutely. To answer your first question, when we think about selling 80%, it's 80% of the equity in the buildings. Most of the operating assets have property-level debt on them already. When we talk about selling 80% of the residential land, that is an unlevered asset today. It's an asset that really shouldn't have a lot of leverage on it anyway because it's land. It doesn't generate recurring income. To get to your second question,
Our development pipeline has always been sized to meet demand. We sell just enough residential lots to keep up with underlying home sales. I don't know that that business goes faster because third-party capital comes in. On the vertical development side, we're building to meet demand, and today we have opportunities to build on the vertical side, retail centers in Summerlin, more condominiums, that we're not executing on because the risk-adjusted returns of those assets are not as high as redeploying that capital into insurance. I think that if we're able to execute on this asset-light strategy, we'll have plenty of capital. Plenty. There's always need more. Enough capital to redeem the preferred, invest in insurance, and potentially, on one of those slides that Bill went through, eventually raise third-party funds that can do that real estate development pipeline at great risk-adjusted returns for real estate investors.
But maybe not for a diversified holding company when our capital allocation decisions are between insurance and a real estate development. I think this strategy has both the opportunity to increase the capital to insurance as well as increase the vertical development pipeline across the communities business.
Another way to think about what David is saying, when you have real estate in a corporation that has to pay corporate taxes, and is in a public context and has to operate with public company leverage, there's also overhead expenses associated with it's hard to get to a return on equity that's substantially above what the market has historically assigned to this business. When you have a standalone asset where you bring in a partner into that asset, and you finance that asset in the context of a private transaction, you can achieve much higher. The pre-tax returns are what are relevant to the third party investor. It's not embedded in a C corporation. We have, at Howard Hughes, all the ingredients that a real estate investor looks for. What does a pension fund who wants to allocate capital to real estate look for?
One, they want to have a very talented operator. Two, they want someone with very good development capability. Three, they want someone that has institutional credibility and accountability and reporting. Then ideally, they'd like a deal pipeline that for years of ability to put capital to work. It's very hard to find that in the asset management business. You can find some very capable people who are good at deploying capital, but the vast majority of firms, even the Blackstones of the world, rely on third-party developers, third-party managers. We have all of those capabilities in-house that we've used now for 15 years, to build and manage a portfolio, which we have an incredible real estate development track record. We've got a land bank that is basically tees up a series of transactions.
We don't need to compete with all the other real estate asset managers when an acquisition opportunity appears, and we have to bid for an asset, we've got to buy a piece of land. Here we have a land bank, which is just a series of future transactions. So it's a very compelling story to a third party real estate investor. As a result, we expect we should be able to bring in very good partners on very good terms. Okay. Let's go up top there. We're sort of in the middle. Then we'll take this lady here in the third row next. So maybe we get the mic to the next person so that we can avoid a pause. See, we're learning. Okay, go ahead.
Thank you. Daniel Soh from RIT Capital. While this all sounds great and dandy, this is a far cry from that nine years ago at some conference where you presented this tremendous opportunity at the time, sold a lot of people on the grand scheme of the real estate and master planned community operation in South Street Seaport real estate. What would say there is a little bit of disappointment, opportunity cost loss, time value loss, that's immeasurable, especially with what's happened in the past nine years. What can you speak to the investors about renewing that confidence in this new opportunity, new direction, and this huge pivot, to regain their confidence? Thank you.
Great question. I didn't realize it was nine years ago, but it's amazing how time passes. I think we executed on everything we said we would do nine years ago. That is, we were going to refine the portfolio, we were going to focus on building out this, what we think of as a great business. What we were unable to achieve is to garner a low enough cost of capital so that we could earn a return in excess of a cost of capital. While we made, I would say, meaningful progress, if you look at nine years ago, what our land values were nine years ago and what they've become over time. Nine years ago, we were selling acres in Summerlin for what?
$450,000.
And our most recent prices.
$1.8 million over the past two quarters.
Nine years ago, we didn't have much in the way of a development business in Hawaii. Today-
We've had over $10 billion of closed or contracted condominium sales at Ward Village.
Our net operating income was what a decade ago?
A decade ago, we were sub-$100 million, and today our guidance is in the high 200s, $270 million.
So on every measure that you would measure a typical real estate company, the business has made meaningful progress, and actually before the issuance of shares to us in connection with this transaction, the share count has basically been relatively stable over that period. But when you have a cost of capital as high as this business, you can work as hard as you want, you're not going to make much share price progress. So the pivot, as we describe it, addresses the problems that have caused the underperformance of the stock price, which is we go from a much lower return business to a much higher return business. We turn the real estate operation into a much more capital light, higher return business, and we expect to see the benefits of that. And I think you'll be able to judge our progress.
In May of last year, we did the initial transaction. We announced the transformation. We set a goal. At the September meeting, we said, "Look, we're going to buy an insurer." We feel very good about the asset we've acquired, the team that came with that asset. We've enhanced the team with Marc and now with David, with Lucy, with other members. We immediately sold the fixed income assets of the insurer, and we deployed the capital at, we think, very attractive prices and a very high-quality collection of common stocks. We're beginning the process of converting the real estate operation from capital heavy to capital light. Now, should we have done this sooner? Sure.
I would say that could be a reasonable criticism, but I think we thought of Howard Hughes and the board, I think, collectively thought of the company as a pure play real estate development company, and our thesis always was as we simplify the business, we focus the business. We did a better job telling our story. We did a good job recruiting David to become CEO. As we executed, we expected over time we'd garner a value that made sense, and we were ultimately unsuccessful, which is why we're changing the plan. There was a question in the front.
Yes. Hi, my name is Li Jing, and I'm coming from LongRiver Investment. We're very long-term investors. I have two questions. The first one is on the insurance side. Insurance is a business where when you do the business, you don't know the cost of goods sold. What if there is a catastrophic event? It looks like you're still settling the ground, hiring the good team right now. What if there's a catastrophic event happening in the next couple of years? How does that capital movement among your different businesses, real estate insurance, do we see more capital injection into your insurance business in that scenario? That'll be the first question. The second question is on the real estate-
Let's just take one at a time. On the first question, a good question for Marc. How much exposure does Vantage have to catastrophic risk?
It's a very small exposure. Probably underweight versus most other companies, I would expect. It's also the way they calculate, it's somewhat conservative, so I would even say that we could probably put a bit more capital to work if the returns are there. The other thing that we had a similar conversation last week, it's about earnings event versus capital events, right. In the insurance world, one of our mission at the insurance group is to make sure that we don't have a capital event, a significant decrease of capital because of exposure.
You're trying to right-size your exposure within a reasonable one year, maybe two quarters, maybe six quarters earnings so that you can replenish the capital to trade through, because when those kinds of events happen, you're able to re-seize the opportunity and your ticket to the dance is the amount of capital you have, and that's because it's related to the rating agencies giving you the opportunity to participate. We put a lot of risk on balance sheet. We do an insurance carrier right across all lines of business. But we measure 25, 30 different exposure that we could have. We spend all nights thinking about the worst case scenarios, about everything. We don't want to share with you, but what if this happened? What if that happened?
Then we go and report on it on a quarterly basis, to make sure that we're within guidelines and we're not overexposing the capital. That's really what I was talking about.
Marc, with a couple of dozen lines of insurance, how much correlation do you believe there is among the different lines? Is there a way to think about the exposures? We're not a super cat company, for example-
No.
How would you-
Correlation is interesting because it's hard to describe. I know it sounds crazy for most of you here, but what I prefer in terms of PML, this is a term we use in insurance, probable maximum loss, is you don't try to do mathematically. You actually go a bit more simple, and that's probably a bit more conservative. You say, "Hey, if I'm going to be exposed to a Titanic kind of event," let's say. You don't sugarcoat. You don't like granularly go through everything to find out to fine tune and everything. You just assume that limit is exposed, and you just sum across all that exposure across your portfolio. You tend to be a bit more on a conservative side to make sure you're not missing out on what the exposure could be. That's sort of the idea behind risk management.
I think the short answer at the current stage of Vantage-
Sorry. Yeah.
This is not an insurance company to worry about massive catastrophic risk, and Marc's going to do a-
That's not-
very careful job to make sure that doesn't-
Yeah. I think at a very high level, when you think about catastrophic risk, there's sort of two broad level risks I think insurers take. One is any individual event, if it were to happen. People always think about this as a natural event disaster. Earthquake, flood, powerful storm. You are generally riding in certain lines of business, for example, property, where you know that you have property that might be exposed. You could have a house that gets wiped out or something like that, or massive business insurance interruption risk, and that would generally be for an event that could happen that's probably the precise event somebody's trying to protect against. There's a lot of history going back over several hundred years where you could think about how much exposure would you have, the policies are there.
That's kind of one is just in any individual event. That's oftentimes what people talk about when they think about capital events or catastrophic loss. That is something that when we did the diligence was really around or just under 1% of the business what Vantage was writing. It doesn't mean that it can't be more of capital, but we felt like that was a very small risk. That's something we spent a lot of time diligencing on. The second risk is really where no individual event that has happened before, and you get a lot of history on this as well, should be causing a huge loss in any other book of business. Now, you can get the pricing wrong on the business, or there could be things, for example, tort law or court judgments that ultimately cause those things to be worse.
But the nice part about those is that doesn't happen from one individual event, it happens as a series of events over time. Warren Buffett called that social inflation, but that's not actually something that would be causing any particular catastrophic risk at once. It's a decision that you would have as you build a book of business over many, many years that you can see developing, and you could decide to try to price that or not. But I think for what you're asking, that is a very small portion of the portfolio, and I think now with Marc and the team that we're hiring, we have an even better insight as to how to really make sure that we're not accidentally taking risks that we don't think we're getting paid for.
Thank you. Just a-
Go ahead.
quick second question. On the real estate side, I was wondering how much more you're planning to do on the land bank side. Are you in any plan to acquire that very long-term, big parcels of lands for future development?
Yeah. I would say very unlikely. Thank you. Go ahead, in the middle here. We'll take the top middle and then the bottom middle. Go ahead.
All right. John Helmers, Long Focus Capital. First of all, super impressed with the team you've put together and the business plan, and we're investors. We own close to 1.5%. I have two questions. One is, Bill and Ryan, and Bill in particular, with your longitudinal view of the world, how do you, on a scale of one to 10, view today in terms of allocating capital?
It's a highly uncertain world. I would say, the single biggest risk to an investor today is the risk of disruption to the business. It's always a risk we've thought about, I would say, beginning four years ago. The first question we ask is, how will AI impact this business? Will it be a positive by improving productivity or ability to assess risk, let's say, in insurance, or will it cause the business to disappear over some period of time? I think that risk has only escalated in a very meaningful way. I give a much more specific answer to your question. I think it's harder to think about overall markets, if I had to pick a moment in history.
I think this is a very good time where you can differentiate between different kinds of businesses, ones that you think have a high probability of being a beneficiary of AI, and ones that I think are at much greater risk. I do think AI will be a positive for humanity and for businesses and profitability. It will lead to a lot of disruption. It is a moment to be a very careful stock picker, I would say.
That makes sense. My other question is specific to the. Obviously if you generate even the low end of your expected return on the investment side of 15%, it is a compelling investment from here, right? The question would be, just given the lumpy nature of, as I think about it, both sides of the book, and given the evolution of market structure, if something wild happened on the asset side, how are you protecting yourself?
So-
Like I said, a down 40% event occurs because of crazy market structure.
We intend to run Vantage in a low-leverage fashion, both on the asset side of the balance sheet and the way we write insurance business. On the investment side, today we have, call it, 65% of our capital invested in short-term treasuries. We are always going to have a very strong risk-free base of assets to cover our future liabilities. On the common stock side, we invest in what we believe to be the most dominant, durable growth companies in the world. Generally, the average credit rating of our common stock portfolio is in the A+ range. These are generally very low leverage, very high return on capital, very dominant companies with many years of secular growth. Stocks can trade at any price in the very short term, but we are never going to be in a position where we are a forced seller.
We can ride out market volatility. One of the other things that we have done historically at Pershing Square is in addition to spending time obviously developing a portfolio and monitoring and helping assist companies we invest in, we have spent time thinking about what are the black swan risks in the world. It seems like about every seven or so years, we have a pretty interesting event. Over the last 23 years, the history of Pershing Square, we have had three. One, of course, was the financial crisis, and we started to see the seeds of what would become the financial crisis because we are obviously very active market participants.
As we got more and more concerned about what was going on in the credit markets, we developed a hedging strategy, and we bought credit default swaps on AAA-rated companies because we viewed it as the most asymmetric way to hedge against the risk of a failure. We were betting against companies that had AAA ratings but had business models and exposures that we thought would increase their likelihood of insolvency. When that paid off, we had capital to invest in equity markets. Beginning in February 2020, we started thinking about what would be the economic effects of a pandemic, and we hedged that with investment grade CDS. It was not many months later, until December 2020, we said, "Look, we are going to have massive inflation. We have the largest fiscal investment in history. We have 0% Fed policy with a world reopening with a vaccine.
This is going to create a demand shock, and we are going to have a massive spike in inflation. The Fed is going to have to raise rates. Rates are at zero. The two-year Treasury is at 12 basis points. The market is not expecting this." We hedged that by buying interest rate swaptions.
That same collection of that hedging strategy is one we intend to apply to Howard Hughes and ultimately, in part to Vantage. We cannot promise we are going to identify every next risk that is going to cause the market to decline 30%, but it is part of our something we do spend time on every day, something we think about. The beauty of a barbell approach to the way we are managing Vantage's assets, it is a very comforting thing having, today, 60-odd percent of our assets sitting in short-term treasuries earning actually quite a good yield. The balance in the most liquid equities in the world. Large cap, mega cap businesses that today are trading at some of the lowest valuations in their history. So it is a very comforting sleep-at-night approach to investing.
I would feel very differently if I had a 2.5, three times levered insurance company invested in longer-dated fixed income, which is really what the vast majority of insurance companies have today.
Makes sense. Thank you.
Another question here up front. If you raise your hand. There you go.
Hi. Kavish Singhal from New Jersey. My question is related to the markets in general. The S&P's up about 13% this year, but the equal weighted index is up about 8%. It's been an interesting market because you see a lot of divergence. It's only a few industries and sectors that have been contributing to the gain most of the year, the semis and the chip companies. Even from the Magnificent Seven, it's been just Apple and NVIDIA that are actually beating the S&P by a good margin. There's been an interesting divergence where some of the best companies in the world are trading at an extremely attractive price. The business has been doing well, but it's just been a market rerating.
How is Pershing Square looking at that market landscape, where some of the best companies in the world are trading at extremely attractive price because of this interesting concentration of semis and memory companies?
Want to take that?
Sure. I think what you described is exactly what we agree with, and that's really created the opportunity for us this year. What's been very nice is, that market backdrop has really developed, I would say, starting in the earlier part of this year, and then sort of maybe continuing through sort of the March, April, May timeframe. We were able, for example, starting with Vantage in particular, we were able to start putting the capital to work right after we closed the acquisition in late June. So we had the benefit of being able to buy a lot of the securities that you're talking about, what we would classify the great businesses of the world, at some very advantageous prices in our view.
We've been able to fully take advantage of that for Vantage because we got a little lucky with the timing of when we had a bunch of capital be able to put to work. As Bill mentioned, it was also further helped by the fact that we were able to take what was a fixed income portfolio that had maybe around a four-year duration on average, and we were able to sell almost all of that right before interest rates went up maybe 75 or 80 basis points, which saved us a lot of money there. So that swap had kind of advantages on both ends, and now we've taken some of the capital that was in fixed income, put some of it in stocks, and also, in short-term treasuries yielding much higher.
Vantage has actually had the full benefit of the dynamics you've described as we've actually seen, since the period of kind of late June, early July, a nice recovery in a lot of the stocks that you mentioned that we decided to purchase kind of in that 15-ish stock portfolio for Vantage. More broadly, what we have been doing at Pershing Square across our various funds is we have been buying more of the stocks. Earlier in the year, some of those stocks actually were trading at very good prices, so we were able to actually sell some of them and buy some things that traded off very cheaply. We had a very large investment in Microsoft actually kind of around the February lows of the SaaSpocalypse, which has actually done quite well this year.
Up about 25%, depending upon kind of the fund in which we bought it. So had an opportunity to take advantage of that market volatility. We've also, even in the other funds, though, have really rotated out some of the investments that had done well that we felt like had not been hurt for some of this trade-off. And we've used that to be able to buy a lot of the high-quality businesses that Bill mentioned, we think are trading at some of the lowest valuations despite having, I would argue, the same level of certainty that they have in the past when they traded higher valuations. And having, I think, new growth opportunities that may make their future earnings growth even higher levels than what they'd historically been.
I think what's interesting about the market is at a high level, people are focusing on the chip companies because it is very clear in the short term that the earnings of these companies is going to grow at a very rapid rate, and there's very little uncertainty about that. There is uncertainty for a lot of the other markets where AI at a high level could be somewhat disruptive. I think the job as kind of an individual stock picker, like ourselves, a long-term investor, is to go through case-by-case basis and say, "Where does the market have it wrong?
Where do we think the businesses still have a great opportunity for growth?" And some of these businesses, particularly some of the Mag Seven, I would argue, actually have way more growth now than we thought they might over the last couple of years, yet they're even cheaper when judged relative to the multiple earnings they're trading at. So we think it's a very advantageous benefit for a long-term, more concentrated investor who focuses on the world's best businesses.
Hi. Eli Dashef from Brooklyn. Good to be here. Marc, do you have an example of either at Arch or now at Vantage of a business that the price wasn't right and you walked away from?
Yeah. There was a line of business on the insurance side at Arch that I feel bad because we should have gotten it out of it earlier, but it was a bit difficult to get there. There was a line of business that we did that had all the moral issues going that the insureds were, I don't want to say fraudulent, but not necessarily clean, as clean as we would want them to be, and we kept on increasing prices, changing the forms and conditions, but it was doomed to fail. It took us a while.
Somebody talked about cost of goods sold as not being apparent for a little while. That was also one of the situation. We had engaged in that line of business, stayed there for five or six years, and with my colleague at the time, when he took over the insurance, that was on the insurance side, we just sat down and just decided at some point we need to get out. We just need to get out. Because we were opening the lights for that business. We were - 50, one to one, when we opened, turned on the lights, and that's just no way to live.
It took us a while to get there, but we did it, and we just moved on and then walked away from it. That's just what you do. This is a bit more complicated because you have a relationship with the brokers, and you have to do it in a nice way and in a good way, but it turns out that that business was also desirable for other markets around us. So it was absorbed by the broader market and with no problem. It was also not a significant part of what we did on the premium side, but it was a significant loss driver, if you will. Yeah, that's one I can think right off the top of my head.
Bill, I turn 30 in October. I was wondering if you have any advice you'd give your 30-year-old self.
Yes. The advice I would give is no sugar, no alcohol. Go to the gym. Because you get sort of this one body thing, and then I'm twice your age, basically, and there's a big disparity when you get to 60 about your ability to move around and do things. Going to a college reunion is sort of an interesting thing for the people who show. There's a wide disparity in how people look at 60. I would say, if you want to be there and look good, now's the time to start taking those steps. So no more sugar or alcohol for you.
Thank you.
Actually, I had a question for Marc.
Yes.
inspired by your question, which is, how do you balance, particularly Vantage's. We are leveraging one of the benefits of recruiting Marc and David is we're leveraging their reputations over a couple of decades in the insurance industry. But Vantage is sort of a new company. We've got to kind of build our own reputation, and how do we think about our ability to be nimble in terms of stepping in when the pricing's good and stepping away when the price is not so good, but also managing relationships with brokers and so on. How do you do that?
Well, first, we have a really solid team that's been there and done that. Most of our leaders who are business units are 20, 25 years of experience. They've known the marketplace very, very well, and it's really about connectivity with the brokers and relationship with the brokers, right? As long as you're able to explain. They may not agree or like whatever you say at every single time you talk to them or say no to a transaction. But people value, as humans, we value consistency. We value being true to what you say, being credible. I think that's the team at Vantage has definitely created this already. Coming from much bigger organization and having managed much, much broader portfolios. You can see it, you hear it in their comments.
They have specific relationship and very good relationships with key brokers and key clients, and that's how you do it. If you're truthful, honest, and they know what you're looking for and you explain it to them why, people on the other side understand that, too. They know the drill. Like I said before, when you end up in a position where the business is not really giving you the returns you would expect, or it's not really conducive to make good returns, when you decide to take a step back from it, typically it's because the reason you're not able to make as much return is because there's too much capacity. There's too much interest in that line of business.
What you find out is you're able to gracefully not exit, but definitely de-emphasize that line of business, and it gets filled in other areas in the marketplace. Funny enough, when there's nobody else to go to, this is when our underwriters really go in and craft terms and conditions. Are able to create something that's valuable for the client, and this is where we shine a lot. We're able to do this because our people know the terms and conditions. So being true to yourself, be consistent, and be honest, and be transparent and tell them exactly what's going on. That's worked. It's always worked.
Makes sense. Okay. Right here. Up front, fourth row. Why don't we take this guy next? We'll give a microphone right there. We have someone giving this guy a mic and that guy a mic.
Do you want to do an online question and then-
We'll do an online question while we're waiting.
Okay, great.
Perfect.
With the fast pace of changes related to AI, has Vantage leadership considered engaging a firm like Palantir or someone else to take advantage of these opportunities or to protect against disruption? How do you think about that?
We already have a lot of our I've been out for a year and a half of the business, and it feels like it's decades on the AI front. Our team is spending a lot of time and using a lot of the AI tools. Our chief technology is also on top of it. He was at major firms, understands what's at stake and what's going on, and we're investing proportion to who we are as a company, right? I think it's not necessarily our number one point of investment because I think, like Ryan said, I think talent and expanding our footprint is what we're pushing for, but our team is using it every day.
Most of what we're using it for right now is to help, I said that on a call last time, it's about process improvements and making it easier to do our day-to-day life. But there's definitely pressure. I know there are projects going on to really harness more of the data and information through various different sources to really capture it and making hopefully better decisions on the underwriting side. That's going to come. What I like to say is on the Palantir and all the investments, I'm not saying that we wouldn't do this, but I'm cognizant of the image of if you're the first ones in the Wild West, you have arrows on your back, so you probably want to be careful in being over-investing and over-committing to things that are not 100% developed.
I think we're just a great follower of what's happening and evaluating what's going to happen and utilizing whatever is out there to help our decision-making.
Good. Okay. Next from the audience, whoever has the mic.
Yeah. Sulaiman Surani from TriCap Investments in Dubai. I've got three questions. I'll be quick. First one is regarding your investment process. While you're establishing your investment thesis and valuation and even post-investment, how actively do you seek views which are contrary or opposing to the view that you are taking? Specifically, I'm referring to your investments in hyperscalers, where there is a very convincing view in the market that the amount of CapEx that they're doing, both on and off-balance sheet, and all the SPV stuff. And everything that's going on is somewhat close to what was happening at the time of the financial crisis, right? Where companies were going out and opting for very innovative financing structures, debt structures. Meta, for example, has SPVs where they are trying to not show debt on their books, right?
So the question is, in a general way, how actively do you seek out views which are different than what you are taking? And more specifically about the hyperscalers, have you reviewed the research that has been put out by Michael Burry on these companies, where he has, in a very elaborate way, highlighted all the debt and everything that's going on with these three companies?
Yeah, sure. I think one of the great things about the speed at which information is flowing in the capital markets, aside from, I think, creating a lot of opportunities for investment because there's just so much information that you have a lot of people increasingly using quantitative methods in order to trade off of these headlines, you get bombarded with information every day. So I would say we are constantly updating our views. Almost every single day, I'm reading a report, whether it's a research report that comes out or it's a headline, or even if it's kind of in social media, Twitter, the like, where somebody is disagreeing effectively with something that we have done.
I would say clearly the more that you believe there is a market perception out there, whether it is something that you have invested in or something that you are looking to invest in, you really want to understand what is, if you will, the bear case on a stock when you are looking to buy it. We have reviewed everything that has come out there on every investment that we own, the hyperscalers in particular. Very quickly what I would say on the hyperscalers directly related to your question about specific research that has come out, I think one of the things that is important to understand is why are companies like Meta, which have a net cash position and do not actually need to be engaging in issuing a lot of debt, why are they doing structures like this that are off balance sheet?
I think what is nice when you go through the filings, and even when you talk about some of the people who engage on the other side of that transaction, you can very easily go get all the information, the primary research to look at the documents yourself. You can talk to Meta about why they have done it. You can talk to the counterparty who provided that financing, and you can really form a view. What I would just say at a very high level is I think that that particular financing that you are talking about was incredibly beneficial and favorable for Meta.
They basically had, in our view, a right to walk away whenever they wanted while somebody else was effectively putting down 80% of the money, and the implied financing cost for them was very little, and they got exactly what they wanted and able to build out a facility that is going to be really beneficial for their business. I think that is way better than going out and using your own cash flow or going out to the investment grade market and issuing a bond at a higher cost where you have a fixed liability to pay that back maybe in 10 or 30 years. I actually think in this particular example, it was very advantageous for the company in order to do that.
I do not necessarily think so much that Meta was trying to keep off its balance sheet as maybe perhaps as much as the other party who was providing the financing was trying to prove a point to their capital partners about what they could do.
Yeah.
I think it was very attractive, and I don't think the hyperscalers are actually doing anything untoward or that's not necessary to be able to grow their businesses. They can really finance all these investments with their own cash flow and a very modest amount of leverage if they choose to do so over time.
Yeah, I would say it's very different than what was going on during the financial crisis, where here we have the underlying construct is there's a massive amount of demand for compute, and then there are a whole bunch of entrepreneurs that when they see that demand, they're trying to create business models where they can create value for themselves. The data center developers are not dissimilar to real estate developers. They take a piece of land, they build a building, and they fill it with a bunch of GPUs. And they're willing to take certain risks in their business in order to build a business model. And what Meta's doing, as Ryan spoke about, it's a bit like what we're in the process of doing at Howard Hughes. Meta historically has effectively equity financed everything they've done historically.
Now there's a market where third parties are willing to put up capital on pretty attractive returns that are more interesting to Meta than using its own capital. It's something they should take advantage of. Why don't we take the next-
Sorry, one more question.
We're going to give everyone a chance to ask a question. We'll come back to you. Next.
Hi there. Mika Bardin from student at Yale University. Thank you for taking the questions. Usually in the investment space, when there's a strategy that produces outsized returns, that invites a lot of competition, managers starting their own fund following that strategy. This playbook, the Berkshire Hathaway playbook of buying an insurer using the flow to either do other acquisitions or to invest in it has been in the spotlight for a couple of decades now. Why haven't there been other successful managers that have done this, at least at a certain scale?
It's a great question, and I think there's a number of good reasons for it. One, you need a certain construct. What Warren Buffett had is he was the major owner, the majority owner, effectively control of a company. He had very good investment management skills, and also he knew enough about insurance, quote unquote, to be dangerous. He was very patient. He gave up a hedge fund business on which he got a 25% share of the profits. He was managing $100 million in 1969, and he gave that up to take a job managing a public company. The question is, why did he do that? I think the principal reason is he realized that as the investment operation scaled, the fact that the capital base was impermanent really put at risk what he really wanted to achieve over time.
He got control of Berkshire, and he basically used the insurance company as a way to continue his investment strategy in the context of a public company. He's had an incredible track record over 60 years. Today, if you're a really talented investor, you go to work for a hedge fund or an asset management firm. You don't go to work for an insurance company. The ability of insurance companies to attract, I would say, best-in-class equity managers has been very limited. The way insurance companies historically are or have been run to the present day is they're run as pretty much pure play insurance operations, where the asset side of the balance sheet is more of an afterthought. In Vantage's case, they outsource the entire portfolio for whatever, 10 basis points to a third party.
I think because of a bit of the history of Howard Hughes, the fact that we, as part of a transaction, were able to become a major owner of the company and therefore take a very long-term view because we're, I guess, patient. We're not trying to make a fortune next quarter, but build something that can compound over a long period of time. I think because we have the skills we've built over time and relationship, what is Pershing Square? I think we're good at investing, but I would say importantly, we're also good at recruiting talented people and working with really talented people and letting them do what they do best, and getting that done in the context of a public company. It's hard to get those facts lined up.
Generally, the incentive for people are in a much more get rich quickly mode today, I would say. One of the things Warren Buffett clearly had was the vision to see. He understood the power of compounding before you could build it on a spreadsheet. He said, "Okay, well, if I just do what I've been doing, and I live a long time." Now, I didn't agree with his live a long time strategy. I had dinner with Warren Buffett about 20 years ago, and we, of course, ordered Cherry Coke for him on Amazon because he couldn't get it in the supermarket. Of course, he asked for Cherry Coke. Then I asked him whether he wanted sparkling or still water, and he said he wanted neither.
I said, "Don't you drink water?" He said, "Bill, I haven't had water in 48 years." So I think he brushes his teeth with Cherry Coke. I shouldn't even talk about it. I hope the guy lives for another couple of decades, but they got to do an autopsy and figure out someday how he survived on that kind of diet. But maybe I'm wrong. I gave advice not to have sugar. Maybe
Yeah, exactly.
Maybe that's bad advice. Okay. How about in the top there?
Thanks, Bill. Prashik from Eighth Wonder Fund. We are a long-term investor. Going back to the maths of ROE, when you said combined ratios to be in 92%-94% range, if you fundamentally think from first principles about combined ratios and break it into loss ratios and expense ratio. Loss ratio is something depends on how reserve develop over a period of time, but expense ratio is something that is controllable. Warren Buffett had said many times that the true advantage in insurance business is being a low-cost operator.
My question is, what combined ratio looks like today, sorry, expense ratio, how you guys are thinking about it and going forward five to 10 years down the line, what could be the numbers that you guys have in mind and how you're making sure that you have the best talent, pay well, but also manage expenses and that expense ratio part really well?
Great. Obviously, great question for Marc.
Yeah. So high level incentives drive behavior, as we all know. What is in place is to focus on targeting the combined ratio. Not sure if it is public yet, but I know what it is. It is really geared towards a really, really healthy return. That is something that you reward your underwriting team on. That is the basis. That is number 1. It may change over time from a return perspective, bringing some of the stuff that we have done historically, but everything is going to be geared towards rewarding underwriting team for providing good returns. I do not agree with your assessment that expenses or that Warren Buffett says that the way to live and survive in the insurance business is to be the lowest cost provider. That is true in the GEICO world.
Yep.
That is true in personal lines. In the commercial lines and specialty lines that we are in, it is not exactly true. It is not a standardized product at all. It is very disparate in terms of market conditions and what you can encounter. You need a lot of input from the people. The premium is $100. 30%-35% is expense, 60%-70% is losses. Where you make your hay is on the 70%, taking it down to 65, taking it down to 58. Especially in the specialty line, this is where you focus most of your time. You can see GEICO's loss ratios, they are higher. They are 80s, because they have a 15, a 16, maybe it is 78. We can live with 78 because of that purpose. Our focus on expense cutting, the way we look at it, is going to be on the loss ratio side of things.
That is what you should expect us to invest. We are going to be investing. Of course, if their average marketplace at 35% expense, let us say, we cannot be at 40 or 45. But to the extent we can pick a few points here and there on the expense, we will do so. But more of our effort is going to be on shaving and working on the loss ratio piece of the equation. I am not sure it is exactly the question.
No, I think.
Yeah. That is good. Yeah.
All right. Yes. In the blue shirt.
Hi, Girish Bhakoo from TenCore. You both, Marc and Bill, have been active in mortgage insurance historically.
I was short, he was long.
Yeah.
Both of you-
I-
Not interestingly. That-
We were short, and then when things blew up, that's when Marc entered the business.
Yeah. I'm just curious
Timing matters in mortgage insurance.
Very much so.
Yeah, I'm just curious about what your discussions are like with each other about that business and other businesses like it. Thank you.
We've actually had some discussions about mortgage insurance.
Yeah, we have.
I strongly believe, it's a business that occasionally is a great business, and at other times, it's not such a great business. This doesn't strike me as the best time in history to enter the mortgage insurance business. What made it particularly compelling at the time that Arch entered the business is the housing market blew up. Housing values came way down. Underwriting standards improved. A lot of the nonsense that entered the business, and the weakened underwriting standards basically went away for regulatory and capital market reasons. You could enter the business with much better pricing, much more disciplined underwriting, and much less competition. I don't think those same facts are present now, but you'll see the debate between us.
Well, I think to me, timing is the key. What Bill just said is exactly right. I think right now in our existence, there are different focus and different areas to play. We're doing already as it is, some reinsurance on a mortgage space. We understand that space very well. It's a nice little add-on. It diversifies the portfolio further. We are participating in it. But whereas we want to go into and buy, and invest billions of dollars into an MI business, I agree with Bill. We have other things that we need to take care of.
Over time, if there is another crisis, another issue, I would like to agree and I would like to think, and I think David would agree with me, he ran a global mortgage for years, that we'll have a front row seat in terms of being able to take advantage of that. When and if.
We will have the talent.
When and if.
When the time is right.
Exactly
to pursue that opportunity.
Yep.
In the back there. Look.
Yeah. Hey, Marc, it's Harry Fong from Roth Capital.
I know who you are.
AM Best earlier this week issued a report that the specialty E&S market continues to grow, and may have grown about 12% in 2025, much faster than the admitted market. A very different outlook in terms of the current P&C cycle. Number one, how do you see this cycle playing out given that the specialty players now command a much bigger part of the industry business? Separately, for the specialty business to continue to grow faster than the admitted market, their pricing at the margin has to be equal to or below the admitted market pricing levels. I would love to hear your thoughts on that as well.
Yeah, a lot of the specialty business, the E&S business growth, is also geared towards a lot of the MGUs that proliferated over the last two, three years, right? People have seen this Holy Grail. Let's grow, let's go, let's go. So far it's looking okay. We have yet to see how these losses or these results will develop. I think we have to be careful. At Vantage, we do a fair amount of it. We like what we see. We like to grow in that space. Again, we're smaller. That we may, at some point, Harry Fong, get to a point where maybe it's too much of a good thing is not a good thing. That may happen, that people circle back. I think there's also What's been interesting is that the traditional marketplace has lost some money.
There were some issues from 2016 - 2019 where the soft market was. So there seemed to be a lack of confidence in the existing underwriting team, and so you would rather go to a new person to do the business that probably you should be doing otherwise on your book of business. I think it also serves to have. I think the E&S, the brokers, the wholesale brokers are really, really good at promoting that book of business, too. We've had a resurgence of those brokers of late. That's also helped maintain the size of that marketplace. But I think we're going to get to a place where we're going to need some more admitted market. I think the last numbers I saw in 2026, I thought they were going down or stabilizing and going down on the E&S. So Harry Fong, you may have better numbers than I remember.
I think we're probably going to see a decrease. This is really my expectations. If the results don't come through on a lot of the MGAs and MGUs, we may see a little bit more people pulling back. So we may have a, maybe it pulls back a little bit and then goes back in at some point. But we'll see how that goes. It's in flux right now, to be honest. I'll be digging in more into this, Harry Fong.
Thank you.
Yes, here. Actually, why don't we take from online, then this gentleman over here is next.
Sure. We've covered most of them already in the room, but perhaps one last one from online. As the vision is to build a holding company, would Pershing Square ever acquire the remaining stake of Howard Hughes to create one single enterprise?
It's not something on our list of things to do. Okay. Then the question here.
Guido Camaiani from Toronto, Mandeville Private Client. My question is in regards to future growth on the M&A side. It's clear that right now you guys are reinvesting into Vantage. But on the M&A side, when you start looking at buying future insurance companies, will the strategy be to centralize operations under Vantage or to keep those entities decentralized? Thank you.
I think in terms of the spectrum of acquisitions, once Vantage is at appropriate level of capital, Marc feels very good about where the business is. It is certainly possible that an insurance acquisition could come along. But as we've mentioned, the long-term plan is a diversified holding company. We think Vantage becomes stronger if other aspects of the holding company unrelated to insurance, or we have other high-quality businesses. That's a world in which we're going to be weighing the decision to perhaps make an opportunistic investment in insurance or perhaps make an opportunistic investment in a very high quality, durable growth company. That's how we'll look at it.
One thing I would just add is I think when you look at the talent we have between Marc and then when David starts, it would be very difficult, I think, to buy a business and have it be completely decentralized because then you wouldn't be leveraging the skill set that we've really brought into Vantage, which has historically shown to be an incredibly positive thing for the businesses. So I would say to the extent we look at things, I think leveraging the skill set of our team is something that would be really valuable to getting the most out of any platform we might seek to do in the future.
And maybe, Marc, you could speak to this. Insurance is talent, it's capital, it's relationships, or certainly in the specialty business that we're focused on. What does buying the marginal insurance company do for us? What would motivate you to want to acquire a company where we'll know less about the team, we'll know less about the portfolio, the exposures. How do you think about that decision and-
Well, first the company might do something you want to do more of, and for you to buy yourself into a marketplace might be too costly. You may have to cut the pricing, so you may want to maintain the integrity of the pricing. You can accumulate this. In terms of integration of insurance companies, you have to be careful because they don't typically work. Let's be honest here. Most of the people here that have done and followed in the insurance world for a while know that. But there are also strong relations. The way I look at it, we have multiple companies as it is within Vantage. We have an excess GL book. We have a property book of business. So they operate themselves very sufficiently by themselves, self-sufficiently. We don't really have to do a lot of crossover. There's a lot of stuff we could do together.
There's leveraging you could impact. So at a high level, I would say it depends. It really, really depends. For instance, a company could, go back to the question that Meyer asked earlier about a commercial writer. If the commercial writer has a really good mousetrap, I talked to Alex about this. Well, maybe we acquire that company, and we probably wouldn't want to disrupt what they do very, very well. We may want to leave it as is. What we might do is maybe go behind it and provide some of our products and then try to use that distribution perhaps to do more of our products through that distribution line. By and large, if we acquire something, you will do it because it increases what you would want to do more of rather than just buying your way into the marketplace.
That would be a good example.
And we're able to buy it at a price where we think-
Of course.
we can earn an adequate and attractive return.
Yep.
I don't think material acquisitions of insurance assets are likely in the-
No, not in the near term. No.
Okay. Any other questions? Okay. Well, okay. We'll take another one here and then one there. Go ahead.
All right. Thanks, Bill. Yu Xu, Bessemer. Pershing's followed the specialty space for years. Seduction of Marc is case in point. The likes of Kinsale, Markel never really made it into the Pershing PSH portfolio. They've been cheap before, arguably cheap now. What's kept you away from these businesses? What's kept these businesses from clearing your investment bar? How does Howard Hughes exceed them in underwriting valuation and quality? Thanks.
So one of the constraints on Pershing Square is we're described as a very high certainty investor. We want to invest in a business that we can predict with a very high degree of confidence over a long period of time. And we also are a pretty concentrated investor. In the history of Pershing Square, a typical investment for us could be 10% or 15% of capital. When you're an outsider to a financial business, an insurance company, it's much harder to get to a degree of confidence about the quality of the book, and to some degree, the quality of the team. What's nice about the perspective we have, in the Vantage acquisition is we were able to do the due diligence you do when you're buying a private asset.
And then we're able to pick a right team, and that gives us obviously a lot of confidence in the asset and in the way the asset is being managed. And that's why we've really avoided banks, insurance companies for the most part, historically in the Pershing Square portfolio.
Yeah. That said, Kinsale is an amazing business that we follow carefully-
That was a miss.
and would love to own. Arguably, if we'd gotten in earlier, could have been a great return. Mm-hmm. When we have looked at it, what has held us back is clearly it's-
Valuation.
valuation. The valuation is the highest among any insurer, and for good reason. But that does make it a little bit harder to get the economic return that we're looking for from an investment perspective with, to Bill's point, that high degree of certainty. But I think the mousetrap they have is just enviable-
Yes.
in the industry, and the management team there is super high quality. So I'd say that's one we have enormous admiration for.
But by the time the world understood the management team and the strategy, the stock price got to a price that-
Yeah.
made it challenging for us to earn the kind of returns we want to earn. Yes.
Just to follow on one of the questions that was asked earlier, that in case of a major drawdown in markets, and you had mentioned that your risk management is very strong. So on the asset allocation, in such a scenario where the market is down so much, is there a possibility that your asset allocation in terms of your cash and treasuries and equity might change, and you may want to use some of your float to move into equities to take advantage of that extreme situation? Or the allocation that you described earlier is hardcore, maybe legal, maybe regulatory, and that can never change?
I would say the first priority for any insurance company is making sure that we are, in reality and by perception, have incredible financial strength. So we are always going to live by that. Obviously, a world in which stocks are really, really cheap is a world in which we want to be deploying more capital in stocks. So it depends on the book of business at the time. Are we able to inject more capital to the insurance company from, again, the benefit of a diversified holding company? Is there, in that moment, there can be another source of capital outside of the insurer, which allows us to deploy capital in the insurance company and use that capital at a moment like you described.
One of the nice things, and Mr. Warren Buffett's talked a lot about this, is if our insurance business does not have a correlation to the things that are causing the drawdown on the markets, which most market drawdowns have not been associated with things that would've impacted the underlying earnings of the operations or underwriting of the insurance business. That in and of itself is generating capital. The net income, if you will, of the insurer is generating capital and is a source of funding for deployment in stocks. One of the things that's nice about this strategy versus if you think about it just for a typical asset management strategy, is this is not a fixed pool of capital day one, and we have to decide how does our $100 get allocated to bonds and stocks.
The only way that we can increase the allocation to stocks is by decreasing the allocation to bonds, which Bill mentioned in the business, has negative implications that we would like to avoid. But the positive is it's not just that. We start out with $100 and then as we profitably grow through our underwriting, that's an additional source of funds. I think it's one of the reasons why when Mr. Warren Buffett talks about over time he wants businesses to trade at cheap valuations, he wouldn't say that if he bought them day one and could never buy any more of them because he doesn't have a source of funds coming in to constantly feed that investment growth. That's really just because the business underwrites profitably. Our hope and our expectation is that's going to be the same thing at Vantage.
So we're going to constantly be having this stream of cash every year coming in that we'll be able to use to deploy into additional equities, which would really help out in the scenario that you described.
Great. Other questions? Yes.
Just on a trendy topic over this week. What is your view on the loan interest rate for the United States? I think two years ago, I can remember you spent a fair amount of time making the case that there is a 3% long-term inflation rate going forward. Then you made the case for a premium for, I do not know the size of the premium. The question was, do you think the 10 year goes to five? Or what is the fair level given the current geopolitical environment and economic environment at the moment?
I think it is a structurally more expensive world than it was. You think about cost of defense. Every country needs to be spending more on defense. Maybe healthcare generally has been a burden. There are inflationary factors that are structural, that are higher than they have been. I think are in reality higher than. I think it is a different world today. I think getting back to a 2% inflation rate, I think is a challenge. That is certainly a personal view. We could discuss whether it is House view or not. Maybe Ryan, why do not you jump in on what is your view on the third year?
Yeah. I would say.
The tenure it is. Actually, let me add one more thing. I think a lot of what is going on right now is you have a supply problem. You have every, these massive AI build, and huge bond issuance of corporates combined with sovereign issuance. I think it is as much of a supply-demand problem. You have the carry trade kind of unwinding as people financing themselves and, with low-cost, financing themselves in Japan and buying U.S. Treasuries. That is sort of unwinding. There is some combination of technical supply and demand factors, but also I think inflation, relative to the Fed's 2% goal, it is going to be a very difficult goal to get to.
Yeah. So, I would just add to that, the 10-year, really, I think it was earlier this week, hit the highest levels it has been at since 2007. So we are comfortably above 5% on that level, and the 30-year is a little bit of a premium to that. I think to Bill's point, you have to ask the question at a high level, can you get back to 2% if you have not been at 2% since basically 2020? Now, I think that there have been a rolling series of shocks, and the latest one is the massive increase in the price of oil. While some people say, "Well, oil is up, but we strip that out when we measure inflation," that is actually not really how it works.
They do have this core measure, which is supposed to exclude it, but for example, the price of diesel, which is up even more than the price of oil, actually feeds into a huge number of items that are in what is supposed to be the core inflation that excludes the impacts of oil. So the derivative products that you have that are based on oil ultimately make it in very strongly. So I would say, I think the single most important thing that is driving yields today, even versus just a few months ago, that is not new, is the price of oil just dramatically being higher and then all the derivatives off of that.
I do think that it is very likely that if oil comes back down, which is an open question because it is really a geopolitical question, I think you could see a certain resetting of the Treasury rate. On Bill's point, that in and of itself, over the longer term, does not necessarily get us back to a 2% inflationary world. I think there are other factors that are structural, which is, you do have, at least for, it seems like the next several years, a very large increase in a goods build-out that is going to fund what could be a revolutionary technology. Ultimately,
Which in turn could have deflationary effects.
Exactly right. It's a timing issue, to Bill's point, which is, if you build this now, the reason for building it and getting great economic returns is it's going to accelerate GDP growth, and it's going to ultimately do that by increasing productivity, which is historically viewed as disinflationary. I think we may be in a moment where, to Bill's point, I think it will be difficult to get back to 2% quickly without having a real economic problem, which it doesn't seem like we're close to that yet, but it may be a little bit of a time sequence where you have higher inflation now that if we get all the benefits from AI, will result in lower inflation later. Then I think there is this lurking variable. It's no surprise rates aren't just high in the U.S. This is every major country around the world.
I don't necessarily think as much as people talk about there being a problem for U.S. fiscal spending, which there is, I'm not sure that is uniquely driving this because it's happening in every nation that matters around the world. I do think oil is something that's impacting every country around the world, and I think the AI build-out broadly is also. I'd say those are probably the two, in our view, factors that are influencing it. One of those could actually resolve itself sooner, which would help out a lot with where rates are.
Good. Other questions? Okay. Why don't we take? How many more questions do we have? We've got one here, got one there. Is there one there? Okay. And we've got one there. Let's call those the last four, and we'll start here, we'll go across the room. This guy right there.
Hey, Bill. It's Brad Thomas. I want to ask you about the. First of all, somebody mentioned Seaport. I want to give a shout-out to Matt. He's doing a great job there. What is your thought process about monetizing the real estate portfolio, and why wouldn't you sell it all now as a bulk sale versus the five-year period?
Sure. First of all, we don't think of the Howard Hughes real estate portfolio as just a pile of assets. It's not like a real estate investor just has this diversified portfolio. It's actually an operating business, and it's an operating business that we like. The only thing we don't like about the business is that the way we've financed it historically, particularly the way we've equity financed the business, it's hard to earn a return on capital that's high enough to be interesting to a public market investor. That's the problem we want to solve. We solve that problem by bringing in third-party capital to kind of lower cost equity capital that can help us get to an appropriate fees for the opportunity we're affording those investors. That gets us to. It solves a number of problems. One, it meaningfully increases our returns.
You take out 80% of the equity, you get fees on the capital, management fees, performance fees, incentive fees, et cetera. That's actually a very good business. Blackstone built a franchise beginning in that business without the operating talent, or the long-term investment sort of options. We think the best approach is this sort of, if we can do an 80% monetization of that business with 80% third-party capital, we create a very high return real estate company, and we free up a lot of capital for other uses and first use, of course, will be insurance.
Great. Thank you.
Thank you. The next question was in this neighborhood. Go ahead.
Thank you. My name is Eric Pan from Toronto, Canada. My view is that investing is ultimately investing in the people and what they do. My question is, how do you retain lessons learned from major failures? Thank you.
The way to learn from failure is to study it. One of the things we do is, I think you can learn a lot from success, but in many cases, you can learn more from failure. I like to say we treasure our failures, and we talk about them openly, and the press also helps us talk about them
Yeah.
openly. Everything we do is big, relatively speaking, so it is news when we do something that we go wrong, and that actually is helpful. It is helpful because what we are more focused on, obviously we do not want to make mistakes, but we definitively do not want to make mistakes twice. One of the ways to avoid making a mistake twice is to understand what went wrong and to make sure that the circumstances that created that problem do not recur. Another thing that is helpful is actually having a pretty stable team. Pershing Square is unusual in the hedge fund world for a very stable team. The investment team's average tenure on the team is something like 14, 15 years. Ryan and I have worked together for 17 years.
Ben, who is in the room, Bharath, other members of the team, we have worked together for a decade or more. That continuity is helpful. Then the way that you design incentives. Many investment organizations are designed where the individuals have their own individual P&Ls, and they get allocated capital by a portfolio manager, but their incentive is to get an idea in the portfolio. If it works, they get a share of the profits. If it really does not work and it does not work consistently, they go get another job. That is not the ideal incentive structure if you are trying to build value over long periods of time. Everyone at Pershing Square is compensated based on how the overall portfolio does, and that is just a much better approach.
Everyone at Pershing Square today owns a meaningful equity stake in a business that is only valuable if we are successful collectively for our investors. We are also big believers in skin in the game. We are major investors in Howard Hughes. We like management teams to have meaningful investments. To Marc's credit, when he signed up for the job, he bought what you might call a call option struck at book value for an insurance company that maybe he thought he was going to run. That is an asset that can grow meaningfully in value. It is alignment, incentives and then treasuring mistakes. Yes.
Daniel Soh from RIT. This question is for Marc. Before the merger with Howard Hughes, I am curious to know, what was your end game for Vantage? Was it to stay private, grow the business, or was it to possibly go public one day?
Let me help you with that one.
Yeah.
Marc was not with Vantage. Vantage is a company that was launched by Hellman & Friedman and Carlyle, where from a standing start, their goal was to build actually kind of an Arch 2.0 with Dinos, who was a kind of iconic figure, part of the founding of the company. The business was built with having nothing whatsoever really to do with Marc. We acquired it, and then we recruited Marc to serve as executive chair, and David Gansberg. That is really the background. I think there was one more question.
Yeah, just back up there. There's a mic.
Yeah, go ahead.
Hi, my name's Ken Greene, Jericho Capital. Really just very excited about what you're doing here and have-
Actually, I can't see you. Where are you hiding?
Over there.
Okay, there.
Right here.
Okay.
Just very excited about what you guys are doing here, and it's phenomenal to get the opportunity to be part of it and looking back to Berkshire Hathaway in, I guess it was 1995 when I first started following Buffett and read everything about him. I actually got shaken out of it when he bought General Re, and it didn't perform for years, but I'm not going to let it happen here. As I really try to analyze the company, last year's annual meeting, there was a good portion devoted to the real estate. There wasn't much talk of real estate until the other gentleman there started talking about it. I did have one question that-
Please.
Teravalis in Arizona and water rights and potential data centers, is that in the equation? I know there was some talk of that.
Sure. There's a lot embedded in your question. Teravalis, as you probably know, is about 37,000 acres west of the White Tank Mountains. We're in the process of launching that community. We had our grand opening about a year ago. We have over 100 homes sold, residents in there, and there's a massive area of land at Teravalis for commercial development. We have water for the first 5,000 acres, known as Floreo, with our 100-year certificates of supply, and that could absolutely incorporate data centers within that commercial area. I've spent a lot of time, and continue to spend a lot of time traveling the country and even the globe, meeting with companies that are considering relocating. I think that Teravalis and our commercial district there would be a fantastic place for those companies to go. We're going to continue those dialogue.
Yeah. Land has become increasingly valuable as commercial land and in a community that's pro-development and pro-business.
Pro-business, low tax, incredible well-educated, low cost workforce, right adjacent to a major freeway, about a stone's throw from the TSMC campus. We think it's ideally located for the next large scale corporate relocation in Phoenix.
Thank you for joining us. Appreciate it.