Insurance Float
Central to any attempt to value Berkshire is the ability to understand and value the company's enormous ($61+ billion) insurance float. What follows is a weak attempt to justifying adding some value for insurance float when calculating Berkshires intrinsic value.
Letter Comments on Valuing Berkshire's Float
Hurricane Insurance (Buffett discovers a new source of float) - It should come as no surprise then that Berkshire Hathaway has jumped with both feet into the market for insuring Wall Street and other financial institutions against financial hurricanes.
More on Omaha Cash Flow - This is an attempt to establish the importance of insurance float in any attempt to Value Berkshire Hathaway; we will use Buffett’s two column approach to attempt to understand the company’s current value.
Omaha Cash Flow - In addition to the cash they will receive from investment gains in 2007, Berkshire will see a big cash infusion from a jump in the float of its insurance businesses because of the Equitas transaction. Add the $6.9 billion from Equitas to an after tax profit in the area of $14 billion, and Berkshire’s cash flow in 2007 will be in the black by something like $21 billion.
Equitas - Also helping to push Berkshire’s stock north was the recent announcement of a $15 billion deal with Equitas a trust formed by Lloyds of London to handle their asbestos and environment liabilities. This is a huge deal that will provide $9 billion in new insurance float when the deal closes, and maybe as much as $7 billion more over the life of the contract. This float comes from asbestos claims that will eventually have to be paid.
The Power of Float - If the present trend continues Berkshire’s after tax income this year would equal $6.9 billion up from $407 million in 1992. This means for the last 11 years Berkshire’s after-tax earnings have grown at an average annual rate of 29%.
Omaha Cash Flow - An attempt to rearrange the numbers published in Berkshire Hathaway’s Annual Reports for the last ten years. The numbers are the same but hopefully they are presented here in a fashion that provides some new insight into value of the company.
Owner Earnings, Cash Flow and Berkshire Hathaway - I have no clear idea how to value the float when computing intrinsic value, but I am fairly confident of two things, 1. money is going to keep pouring into Omaha, and 2. I am not sure that any future attempt to value Berkshire based solely on reported earnings will be satisfactory for me.