Warren Buffett enjoys a $70-b float from insurance

Together, the top five income generating enterprises owned by Berkshire Hathaway brought in a pre-tax profit of $9 billion in 2011. ‘Seven years ago,' Mr Warren Buffett noted in his annual letter to shareholders, ‘we owned only one of the five, whose pre-tax earnings were $393 million.'

Clearly something very important is missing from this story. But it pops into view almost immediately, the story of life and property insurers owned by Berkshire.

The reason for the secondary stature accorded to the profits of Berkshire's insurance companies in Mr Buffett's letter for 2011 was not that these companies did not make very much.

As a group they booked $17 billion in profits between 2003 and 2011. The reason is rather that the primary purpose of the insurance division is to generate money, not profits.

As Mr Buffett puts it, “Our insurance operations deliver costless capital that funds myriad other opportunities. This business produces “float” – money that doesn't belong to us, but that we get to invest for Berkshire's benefit. And if we pay out less in losses and expenses than we receive in premiums, we additionally earn an underwriting profit, meaning the float costs us less than nothing. Though we are sure to have underwriting losses from time to time, we've now had nine consecutive years of underwriting profits. Over the same nine years, our float increased from $41 billion to its current record of $70 billion. Insurance has been good to us.” The float comes into being because insurers get to collect premiums long before claims have to be paid. Mr Buffett acknowledges that it is a liability, a real liability. But ‘it is a liability without covenants or due dates attached to it. In effect, it gives us the benefit of debt — an ability to have more assets working for us — but saddles us with none of its drawbacks.' He could have added that float does not have any of the drawbacks of equity dilution either.

As of December 2011, Berkshire's float, the ‘money that people were paying to hand over to Berkshire to use for its own benefit,' amounts to two thirds of all the money brought into India by all FIIs since the beginning of this century.

Most of Berkshire's money is used to buy stocks, some of it to acquire companies. It would be interesting to see what insurers in India are doing with their money.

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