|ANDREW FRYE, Bloomberg News|
After 45 years, insurance engine of growth is set to stall
Berkshire's insurance units, which cover risks from fender benders to asbestos-related hospital bills, can no longer be relied on to provide new investment funds in the form of float, or accumulated premium, Buffett said in a
Float, which rose to
Buffett, 81, entered insurance in 1967 with an
"It's an engine of growth that is running out of gas," said
Berkshire "has now officially become a conglomerate," Matthews said. "It no longer has the culture of an investment vehicle."
Berkshire's success in attracting more insurance business each year than it loses has allowed Buffett to use policyholder funds to buy securities and keep them, in some instances, for decades. "Money we hold but don't own," as Buffett called float in 1997, has advanced in 27 of the last 28 years.
Float funding is similar to "a very low-interest" loan, said
"Float has always been their secret sauce," Shields said. "This is a pretty dramatic change."
Buffett accumulated the biggest holding in
Competition among insurers has made it more difficult for the industry to write profitable business, Buffett said last month in the letter, which accompanied the firm's annual report. If float should eventually decline, "it would almost certainly be very gradual and therefore impose no unusual demand for funds on us," Buffett said.
Float grew by almost
The resources allowed the company to get returns of more than 10 percent on financing for
The only decline in float of the last two decades was a slip of less than 1 percent in 2008, coinciding with claims tied to Hurricanes Gustav and Ike.
Insurance is "Berkshire's core operation and the engine that has propelled our expansion over the years," Buffett said in the letter. "The value of our float is one reason – a huge reason – why we believe Berkshire's intrinsic business value substantially exceeds book value."
The value of Berkshire's float depends on the ability of underwriters to price business above the cost of claims and expenses. The company has posted an underwriting profit in each of the last nine years, yielding float that is "better than cost-free," Buffett said. Berkshire may be scaling back growth in anticipation of greater competition among reinsurers, Lewandowski said.
The curb on float growth may also indicate that Buffett's deals to take on asbestos liabilities in the last five years have reduced Berkshire's capacity for new risks, Shields said. Berkshire was paid about
"It's important to see premiums grow, so that's a negative," Lewandowski said. "I think that will be reflected in shares if you see some consistent decline."
Berkshire has declined 7.6 percent in
Buffett has reduced the firm's reliance on insurance and, consequently, on his ability to pick securities as Berkshire expands manufacturing, energy and transportation operations.
"If the insurance businesses are shrinking then it's a reversal of the whole leverage model," said
(With assistance from
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