pdoak

If one values Berkshire as two businesses, the insurance business and the operating units, in order not to double count, I believe that one has to deduct the float i.e. liabilities from the insurance valuation. Therefore, as it 31/12/2011, Berkshire had about $159bn of cash and investments in the insurance business with float of about $73bn giving a net value of about $86bn or $52,000/share. The insurance business also generates underwriting profit so this would need to be added to the valuation. Using a 2% underwriting profit and 5% investment income on the $30bn of premiums could give rise to a valuation of about $20bn, making the insurance business in total worth about $106bn or $64,000/share. (One should note that when Berkshire purchased GEICO, it payed a premium of 1x premiums over book value) Assuming the non insurance business generates about $12bn of pre tax earnings per year, an investor that assumes no growth in earnings and demands a 6% discount rate, would value that earnings stream at about $144bn or $87,000 per share. A no growth valuation of Berkshire equates to about $151,000 per share. The question is how much can Berkshire grow earnings in the future for both the insurance and non insurance businesses. If one assumes a 10% per annum growth rate for the non insurance business for 5 years and then a 2% terminal growth rate, it would add another $100bn plus to the valuation or about $60,000 per share. One should note that over the last 10 years Berkshire has increased its operating earnings for the non insurance units from $3.3bn in 2002 to over $12bn in 2011 implying a growth rate of 13.8% per annum. At 120,000 per share, Berkshire looks cheap with a comfortable margin of safety! I think you are undervaluing the insurance subsiaries with your $85 billion estimate. First, the insurance subsidiaries have a statuary surplus of $95 billion. Second, I don't agree with deducting the float entirely. By this logic, if float were to double to $140 billion it would add no value. The float is a perpetual loan at 0% as long as they can maintain the current level of float while breaking even on underwriting. If you were to discount the float, I don't think it would be by any more than what you would add to the valuation to account for the probability of an underwriting profit. In the 2011 annual report WEB has stated that the insur ance float will most likely remain flat or decline slightly. 2011 Annual Report.... "It’s unlikely that our float will grow much – if at all – from its current level. That’s mainly because we already have an outsized amount relative to our premium volume. Were there to be a decline in float, I will add, it would almost certainly be very gradual and therefore impose no unusual demand for funds on us." This is how I look at the float. What would you pay to have $70 billion interest free and the ability to have Buffett, Combs and Weschler invest the money for you? If Berkshire can make a 8% return on that interest free loan and you use a discount rate of 10% it would be worth $56 billion ($5.6B/.10). Obviously, if you discount the return with current interest rates or are more optimistic about the returns that can be achieved it would be worth a lot more. redskin, in my valuation appraisal I was trying to separate out the insurance business valuation, the operating units and the value one puts on WB growing earnings. In valuing the insurance business, I just looked at two aspects, the cash/investments and the profitability of the insurance operations. These two aspects come to at least $106bn. This valuation does not include anything for WBs ability to generate earnings from retained profits. I tried to give an idea of what this might be worth by showing how the operating units might grow in the future and how much that would be worth. Maybe that was not clear from what I had written. You are right that the float has some value which is why I applied a 5% investment income to the annual premiums in arriving at a combined value of the insurance assets. However, the 5% is a normalised figure and is probably high currently as Berkshire's float is about $70bn with $33bn in cash and $31bn is fixed interest securities. I think that WB has been very cautious investing float which has resulted in the float being invested mainly in cash and fixed interest securities. If one looks back at 2001, float was about $45bn with cash and fixed interest investments at $42bn. On the other hand, Berkshire has invested retained earnings from its insurance business and non insurance businesses extremely well over the years. Estimating how much this is worth is very subjective but it is definitely worth quite a lot. I tried to give a feel for how much this might be worth by stating that a 10% growth rate with a 2% terminal growth could add about $100bn to the valuation. redskin, we probably arrive at a similar valuation but I may be attributing the value slightly differently.

If one values Berkshire as two businesses, the insurance business and the operating units, in order not to double count, I believe that one has to deduct the float i.e. liabilities from the insurance valuation. Therefore, as it 31/12/2011, Berkshire had about $159bn of cash and investments in the insurance business with float of about $73bn giving a net value of about $86bn or $52,000/share. The insurance business also generates underwriting profit so this would need to be added to the valuation. Using a 2% underwriting profit and 5% investment income on the $30bn of premiums could give rise to a valuation of about $20bn, making the insurance business in total worth about $106bn or $64,000/share. (One should note that when Berkshire purchased GEICO, it payed a premium of 1x premiums over book value) Assuming the non insurance business generates about $12bn of pre tax earnings per year, an investor that assumes no growth in earnings and demands a 6% discount rate, would value that earnings stream at about $144bn or $87,000 per share. A no growth valuation of Berkshire equates to about $151,000 per share. The question is how much can Berkshire grow earnings in the future for both the insurance and non insurance businesses. If one assumes a 10% per annum growth rate for the non insurance business for 5 years and then a 2% terminal growth rate, it would add another $100bn plus to the valuation or about $60,000 per share. One should note that over the last 10 years Berkshire has increased its operating earnings for the non insurance units from $3.3bn in 2002 to over $12bn in 2011 implying a growth rate of 13.8% per annum. At 120,000 per share, Berkshire looks cheap with a comfortable margin of safety!