Berkshire Hathaway 2003 Annual Meeting Audience Question # 2

Warren “loves the idea of growing” but what he really wants is cost-free float

Warren Buffett:

Let’s go to number 2.

Audience Member:

Good morning. I’m Marc Rabinov from Melbourne, Australia.

I had two related questions for you gentlemen, basically both related to float.

Float, as you indicated, has become a very large part of our asset base. Assuming our policy holders continue to renew with us and we keep control of our combined ratio, can we count the float as pseudo equity when calculating the intrinsic value of Berkshire?

And the related question was, can we not expect the float to keep growing at, say, 10 percent per annum for the next five to 10 years given that we’re still really a minority player in this segment? Thank you.

Warren Buffett:

Well, I wish it would grow at 10 percent or so, at least if it were profitable, which I do have a belief that it’s likely to be.

Our float is 42 1/2 billion on March 31st, roughly.

I think the entire float of the American property-casualty industry, you know, could be something in the… roughly… in the area of 500 billion. So we may be some figure like, you know, 8 percent or a little bit more, maybe even 9 percent, somewhere in that range.

Of the total P-C float in the United States… now, it’s true we have a little outside the country, too, but the big part of the world P-C market is in the United States.

When we started out in 1967, I think maybe we had 10 million of float. So to go from 10 million to 42 billion, frankly, surprises me.

But it also… it’s going to be much harder to grow at significant percentage rates in the future.

And our goal… we love the idea of growing… but what we really want is cost-free float. I mean, that is the goal, and growth is not a… not at the top of the list at all. I mean, I hold our managers responsible, not for delivering more float. I hold them responsible for delivering profitable float.

And that is key in our mind at all the time. If it comes along, we love it. But we will find out whether it comes along or not.

The first part of your question, if indeed 42 1/2 billion can be obtained at no cost, or even better yet at a profit, its utility to us is like equity.

Now, you couldn’t realize it upon liquidation, necessarily. Oh you wouldn’t realize it on liquidation. And you couldn’t necessarily realize it on sale, that would depend. So I’m not telling you how to count it as in terms… whether you count it in terms of intrinsic value, you have to make that decision.

But it has the utility to us of 42 1/2 million… 42 1/2 billion… of funds derived from equity without issuing common shares. And that’s one of the reasons we’ve always been so enthused about it now for, what, 35 or 36 years. It’s a great business for us.

And every now and then we got off the track. You know, we got off the track in the early ’80s, we had a problem or two in the mid ’70s, and we had a problem with Gen Re for a few years.

So it… there’s nothing automatic about it, and I will say this: I think, for most companies in the P-C business, that… the P-C business is not a great business. It’s a commodity business to too big a degree.

So I do not think most companies in the P-C business will get float at an attractive cost. We have to be an exception.

But we have some exceptional companies and some exceptional managers, and I truly believe that we will obtain our float at considerably less cost than the industry. And that is the goal.

GEICO, if it would continue to grow at 16 percent, for example, this year, that adds a billion of premium volume. Well that doesn’t generate as much float at GEICO as it generates at Gen Re, but it generates float. So GEICO’s float will grow. I would, you know, I’d bet my life on that.

But certain of our other transactions are more opportunistic in nature, and that float could even shrink.

And if the float shrinks, you know, that is fine with me as long as we produce underwriting profits. We’ll go wherever it goes.

Charlie?

Charlie Munger:

Yeah, with interest rates as low as they are now, this float we have so laboriously built up isn’t worth so much to us on a short-term basis. After all, what… if… what do we have, $16 billion of cash on hand earning a very low rate of return?

So the incremental dollar of float doesn’t look all that advantageous now. But we have a more long-term view than that. We figure that eventually, we’ll do a hell of a lot better than 2 percent.

Warren Buffett:

We’re not getting 2 percent on that 16 billion, Charlie.

We have… we do have, incidentally on March 31st, we have roughly 16 billion in cash, not counting any cash in the finance operation, because that’s a little bit phony in terms of its utility. I mean, it’s offset by borrowed money.

But it… other than the finance operation, we have right at 16 billion in cash and cash equivalents, and we also have a lot of bonds and things of that sort.

On that 16 billion, you know, we are probably getting about 7/10ths of 1 percent, three- quarters of 1 percent, call it, after-tax on $16 billion, which does not make us salivate.

But… we would rather, you know, avoid salivation than to encounter problems. And we will use… Walmart put out the figure yesterday of roughly 1 1/2 billion for a combination of a small trucking company, plus what they sold us.

And we will, you know, we will use money, but money keeps coming in, too. If we earn a billion- seven in the first quarter, that billion-seven is pretty much all cash. And then on top of that we had the billion… billion-three or so float increase.

So float increase plus retained earnings, not counting securities gains, maybe $3 billion. Now we’re not going to keep that up, but there’s a lot of money coming in.

And… but we are getting some chances to deploy it. And if we deploy… if we get it at less than… at zero or less cost, it has…it’s very close to, in our… it has the utility of equity in a very big way.

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