jawn619 Posted February 29, 2016 Share Posted February 29, 2016 Now that I have your attention from the eye catching title, I wanted to talk about something in Berkshire's Annual report that I found really interesting. On page 10/11 of the 2015 annual report, Warren talks about the all important insurance float that brings much value to Berkshire. "So how does our float affect intrinsic value? When Berkshire’s book value is calculated, the full amount of our float is deducted as a liability, just as if we had to pay it out tomorrow and could not replenish it. But to think of float as strictly a liability is incorrect. It should instead be viewed as a revolving fund. Daily, we pay old claims and related expenses – a huge $24.5 billion to more than six million claimants in 2015 – and that reduces float. Just as surely, we each day write new business that will soon generate its own claims, adding to float. If our revolving float is both costless and long-enduring, which I believe it will be, the true value of this liability is dramatically less than the accounting liability. Owing $1 that in effect will never leave the premises –because new business is almost certain to deliver a substitute – is worlds different from owing $1 that will go out the door tomorrow and not be replaced. The two types of liabilities, however, are treated as equals under GAAP." Summarized: Cash premiums are collected now, which uncle Warren and Charlie get to invest for the benefit of shareholders. They owe claims, which show up on the balance sheet as a liability. Warren is saying that this liability isn't like debt that comes due and as long as new customers premiums are used to pay off old claims, the cycle continues and the true value of that liability is less than its stated GAAP value. Please discuss or feel free to flame me for mentioning WB in the same sentence as Ponzi Schemes! Link to comment Share on other sites More sharing options...
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