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Berkshire ability to use cash


WneverLOSE
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Hi, I was wondering if someone can help me figure out how much money can be used for business acquisition / common stocks investments ?

 

by what I can tell most of the money is in the insurance subsidiaries, due to regulation dividends to the parent company are regulated to make sure enough money is left for paying claims and I would guess investments are also regulated for those subsidiaries (or a insurance company can invest 100% of its float at triple leverage bitcoin etf ?)

 

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Berkshire is willing to use all but 20 Billion of the consolidated cash balances towards investments or repurchases, plus whatever prudent borrowing Warren decides is appropriate for the asset being acquired.  It would not be surprising if Berkshire borrowed to fund a portion of a large cash operating business acquisition, as they have in the recent past.

 

Berkshire has a unique ability among insurance companies to invest in common stocks and operating businesses, because so many of Berkshire's wholly owned businesses are actually owned inside of the insurance subsidiaries - and count towards regulatory capital because of that.  So Berkshire's insurance companies are enormously overcapitalized and thus afforded permission to invest in "riskier" securities vs the bond portfolios that most insurers stick to for the lion's share of their portfolios.

 

So, long story short, Berkshire doesn't have to dividend cash out of the insurers to buy a large company or make a large investment.  Many subs are owned by the insurers.

 

Berkshire could make a $150 billion cash acquisition at this time if they felt like it.  A portion would probably be funded with debt guaranteed by the parent, and obviously there are also plenty of liquid securities to sell if something good comes along.

 

Hi, I was wondering if someone can help me figure out how much money can be used for business acquisition / common stocks investments ?

 

by what I can tell most of the money is in the insurance subsidiaries, due to regulation dividends to the parent company are regulated to make sure enough money is left for paying claims and I would guess investments are also regulated for those subsidiaries (or a insurance company can invest 100% of its float at triple leverage bitcoin etf ?)

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Well, BRK had $109B of cash equivalents on its books the last time I checked.  I'm guessing that about $70b of that could easily be used for acquisitions or repurchases without placing the insurance companies at risk during a large cat.

 

It's a shit-tonne of cash, and there's more rolling in every day.

 

SJ

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At some point, the number for the Cash iron Reserve will be higher, because BRK has grown and will be growing so much, that $20B will just be a Bit more than pocket change. $20B was the number that WEB mentioned during or immediately after the Great Recession, but now, BRK is almost 2x larger. So, a $30B number ad mentioned above is probably more realistic at this point.

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globalfinancepartners how does that actually work ? let's say a insurer holds a subsidiary that has 1000% ROE with zero leverage.

It has basically no tangible equity so if regulators count tangible equity towards regulatory capital this will skew the picture a lot since this business is worth much much more than it's tangible equity and if needed can be sold for that amount and it generates a ton of cash each year that can cover any insurance losses.

 

on the other hand a low quality business with high capital needs and large base of long lived specialized assets may look like it has lots of capital that can be used for paying claims but in reality it is far from it.

 

 

 

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... Berkshire has a unique ability among insurance companies to invest in common stocks and operating businesses, because so many of Berkshire's wholly owned businesses are actually owned inside of the insurance subsidiaries - and count towards regulatory capital because of that.  So Berkshire's insurance companies are enormously overcapitalized and thus afforded permission to invest in "riskier" securities vs the bond portfolios that most insurers stick to for the lion's share of their portfolios.

 

So, long story short, Berkshire doesn't have to dividend cash out of the insurers to buy a large company or make a large investment.  Many subs are owned by the insurers. ...

 

WneverLOSE,

 

To shed some light about what globalfinancepartners is talking about, please visit National Indemnity Company Financial Information webpage.

 

The overcapitalization of NICO is built up on the long haul by Berkshire since the acquisition of NICO many years ago, and a major part of the surplus capital compared to required regulatory capital is allocated to other businesses and listed investments.

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The gist of it is that the subsidiaries tend to be valued at Berkshire's historical cost by the regulators unless the valuation is challenged by regulators for some reason.  The zero tangible asset subsidiary in your hypothetical was in reality likely acquired for some price that resulted in goodwill or other intangibles and a book value figure.  BNSF is still "valued" at $34 Billion (Berkshire's cost) in statutory capital (possibly adjusted for earnings and distributions, which have been roughly equal since the BNSF acquisition).

 

It means Berkshire has a much larger statutory surplus than the reported number, but it doesn't really matter for practical purposes because their underwriting is limited by opportunity, not capacity, currently and into the foreseeable future.  What the extreme overcapitalization does for them is that it gets them approval by regulators to invest in "riskier" assets.  Of course, the reality may very well be that long-held, rising dividend paying, equities and wholly owned companies like BNSF are much less "risky" than a huge long duration bond portfolio marked to current prices.

 

There was some discussion a few years ago on this site that I added a (now out of date) NAIC filing to.  I'll try to post the link to the thread ->

 

http://www.cornerofberkshireandfairfax.ca/forum/berkshire-hathaway/insider-quarterly-article-on-ajit/msg138629/#msg138629

 

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edit:

 

Some examples: ("The Company" is NICO in these quotes)

 

"The Company also owns all 1,350.695 outstanding shares of common stock of GEICO Corporation ("GEICO") valued at $20,660,961,730, which is composed of the statutory policyholders' surplus of GEICO's property casualty insurance company's subsidiaries at March 31, 2013 of $12,486,514,157 plus the GAAP equity of all other GEICO subsidiaries at March31, 2013 of $8,144,649,062 and the unamortized intangible goodwill totaling $29,798,511 associated with the shares of GEICO purchased by the Company in 2005 and 2006 from affiliates. Intangible goodwill is amortized under the ten year amortization rule in compliance with SSAP No. 68."

 

"In February, 2010, the Company became the sole member of Burlington Northern Santa Fe, LLC ("BNSF LLC"). The reported cost of BNSF LLC totaled $34,128,543,041, and was equal to the fair value of assets contributed to BNSF LLC in February 2010. SSAP No. 97 requires that dividends or distributions declared in excess of the undistributed accumulated earnings attributable to the investee shall reduce the carrying amount of the investment. As a result, the Company reduced its cost basis in BNSF LLC by $239,000,000 at June 30, 2013. BNSF LLC is reported as an Other Invested Asset and is valued at its June 30, 2013 GAAP equity."

 

 

Another example shows how they are able to shuffle money in and out of the insurance subs through affiliate loans, inter-company loans, etc...

 

"At June 30, 2013, the Company included in admitted Other Invested Assets affiliated loan balances of $4,455,925,619. This balance is primarily composed of $4,157,688,340 due from BHI. Under the terms of a reciprocal revolving loan agreement, the Company may loan amounts to BHI up to $8 billion with an interest rate per annum equal to the 30-day LIBOR rate. The Company loaned an additional $3.7 billion to BHI on June 6, 2013, and reduced the loan balance by $1 billion for the ordinary dividend declared on June 12, 2013. On October 28, 2011, Amendment No. 8 to the revolving loan agreement, which extended the maturity from December 31, 2011 to December 31, 2013 and made the loan agreement reciprocal in nature, was not disapproved by the NE DOI."

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Not exactly Max,

 

Say, some vehicle [, or I don't know what] takes control of Berkshire in future [Let alone, that scenario to commence, in it self need some analysis with regard to probability of feasibility], that acquring entity selling ie. BNSF will just have the sales proceeds of BNSF to add in the statements of regulatory capital for NICO, reduced by historical cost, in that case, increasing dividend room for Berkshire [subject to dividend tax].

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I think what he's saying is that the structure makes it less likely that Berkshire will be broken up through the use of tax-free spin offs, which is how many people envision the 'breakup' going.  The atypical organizational structure probably benefits Berkshire in several ways directly, but Buffett might also like that it makes it harder for an activist to come in a mess up his painting for a quick pop.  A taxable cash sale of BNSF for $100 Billion [uNP's market cap] is a harder sell for the activist folks.  BTW, remember when even Buffett loving professors and commentators were lamenting his overpaying at $34 Billion for BNSF?

 

Happy Lundi Gras!  Berkshire fans will be happy to know that several stuffed animals thrown at parades yesterday were products of the Oriental Trading Company, Omaha NE...  So OTC has successfully entered that lucrative Mardi Gras market.

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Guest longinvestor

Breaking up of Berkshire is currently rendered impossible by the voting rights regime. Based on comments made by Buffett @ the meeting, something is in the works with the settlement of his estate that will keep this intact. I personally would like to live to see the day when a break-up activist does attempt something like that. That will be one hell of a proxy fight worth living to see!

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