lealane

Based on the 2nd paragraph Berkshire's 2010 letter (talking about BNSF increasing Berkshire's normal pretax earning power by 40% to about $17 billion) I think you can calculate that BNSF's normal earning power is $4.85 billion. I think Buffett paid an enterprise value of $44 billion ($34 + 10 billion of debt), implying 9x pretax earnings. Critics, including Greenwald, have focused on the fact that maintenance capex is far in excess of depreciation, so looking at the numbers on a GAAP basis doesn't make sense. I think the reason it does make sense (and the reason Buffett looks at it that way) has to do with the way the rails are regulated. The "rate base" used to calculate revenue adequacy is historical cost, rather than replacement cost. Replacement cost is much higher (in some cases 2x) historical cost, which is why depreciation so understates real economic depreciation. If the rails were allowed to earn adequate returns and this was calculated on replacement cost, much higher rates would immediately be justified. The flip side, though, is that any capex spent in excess of accounting depreciation (even if it's called "maintenance") serves to increase a railroad's earning power, because it increases the historical cost of its assets. So in all it looks like Buffett paid 9x pretax...probably not bad at all.

I am looking at FFH closely for the first time and thought this would be a great place to get some thoughts on the main question I have: How good are FFH's various insurance subs in terms of underwriting? OdysseyRe, the single largest piece, seems to be quite good, as does Asia. How about the rest? One trend that I may be making up (but maybe not) is that FFH has shifted more toward buying good operations rather than attempting to turn them around (I'm ignoring run-off operations). Have they ever articulated such a shift? Thanks!

I am new to FFH (and this message board), but I am in a big fan of insurance companies owning non-insurance businesses that throw off cash flow (of which there are only 1.1 examples, to my knowledge, Berkshire and Markel). I think the rationale is more than just diversification and an additional investment opportunity set. Having a recurring stream of earnings at the holding company level should allow an insurance company to utilize its capital more aggressively in terms of asset leverage, and also in terms of flexibility to deploy capital in times of stress, when there may be issues with sending cash up to the holdco. In short, if properly executed, having a stable of good, cash flow producing businesses attached to the insurance operations should make the whole worth more than the sum of the parts. It's amazing to me that only one company has copied Berkshire's playbook in this particular respect. I've wondered why FFH hasn't already started down this path....