Berkshire Hathaway 1999 Annual Meeting Audience Question # 8

Why Warren would issue a fairly-priced bond if the insurance subsidiaries can generate float

Warren Buffett:

Zone 8.

Audience Member:

I’m Brian Phillips from Chickamauga, Georgia.

And my question is, with regards to an insurance company, if you can use the float for cheap financing, why would you issue a fairly-priced bond?

Warren Buffett:

Why would we do what?

Audience Member:

Issue a fairly-priced bond.

Warren Buffett:

Yeah, well, the best form of financing for us is cheap float. Now, most insurance companies don’t generate cheap float. So, I mean, there are plenty of companies in the insurance business who have a cost of float that makes it unattractive, actually, to expand their businesses.

Our insurance companies have had a terrific experience on cost of float. And we would develop it just as fast as we can.
Right now, we would have no interest in issuing a bond because we have more money around than we know what to do with. And it comes from low-cost float.

But if there came a time when things were very attractive and we had utilized all the money from our float and from retained earnings and all of that to invest, and we still saw opportunities, we might very well borrow moderate amounts of money in the market.

It would cost us more than our float was costing us. But it still, incrementally, would provide earnings.

Now, we would try to gain more float under those circumstances as well. But we would not just quit when we ran out of money from float. We would go ahead and borrow moderate amounts of money. We would never borrow huge amounts of money, though.

Charlie?

Charlie Munger:

Well, I agree.

Warren Buffett:

OK. You can see why we’ve been partners a long time.

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