I have owned Berkshire B stock since the 50:1 split and have not regretted it for one moment. It has been the best performing stock in my portfolio. I respect and admire Warren Buffet with whom I share a birthday on August 30. As a Canadian as well, I hightly recommend this terrific stock for anyone's portfolio. Invest and prosper.
Look, Fool, the premiums that Boo-Fay collects represent liabilities on his balance sheet -- either unearned premium that must be returned if the policy is cancelled, or future claims that must be paid.
In order to be an insurance company, the company must have a positive net worth -- capital, if you will. Historically, an insurance company use to be comfortable writing $3 of premium for every dollar of capital that it has on its balance sheet. But times have changed -- today's insurance industry is writing less than a dollar for every dollar of capital. Some say that this represents a wildly over-capitalized insurance industry that can only compete on price, while others say that it simply represents an industry that must become more conservative because of regulatory and market changes that have caused the industry's earnings to become much more volatile and unpredictable.
The point is, that for every additional dollar of premium that Boo-Fay collects to invest, he must find a dollar somewhere else to add to his insurance enterprises' capital base. This has a cost -- the cost of capital that is measured a number of ways including the opportunity cost of lost earnings by not investing that dollar in another business.
You got that, so far?
The "zero cost" that Boo-Fay refers to the idea that premiums are collected today but claims are not paid out for a long time, thus giving him the opportunity to invest this "float." The "cost of float" refers to the expected ultimate underwriting results (premiums less claims and underwriting expenses) that the industry measures by "combined ratio."
If claims and expenses excede premiums, the CR is greater than 100% and the cost of float is the amount over 100%. Boo-Fay points out that when GEICO has an underwriting profit (and the CR is less than 100%), then his "cost of float" is negative.
Boo-Fay does not generate negative cost of float across all lines of insurance and reinsurance -- look at some of Jain's products.
Cost of float has NOTHING TO DO WITH COST OF CAPITAL.
Now dry up and blow away.
What a hoot! The Old Phart mindlessly quotes Boo-Fay without any understanding of what he is quoting, declares the content to be "facts" and then cuts me down for comparing his lack of understanding to a comment made by a president! What a clown!
"The growth of insurance float (premiums paid to Berkshire) allows it to invest billions of dollars at a zero cost. Berkshire makes an underwriting profit most years, in effect getting paid to hold the float, giving a "cost" of these funds of even less than zero."
And on the stock split issie, more facts:
Isn't it cute how Doodie defends his vacuous postings with an irrelevant political quip instead of authentic data?
(I doubt Reagan honored verified stupidity, even when broadcast by a non "liberal.")
In Doodie World being “ignorant” is coming up with facts that don’t fit his prejudiced outlook and in his “league” his colorful debate style - “Idiot,”
“know-nothing dirtbag” and “you old phart” - are but some of his brilliant analyses.
Experience has shown the more one relies on name-calling and invective to support a view, the more false that view is. Doodie supports this reality every day.
You're so ignorant it does no even embarrass you, does it?
The company needs capital to support that "float." If you knew anything about insurance accounting and what reserves are, you would understand this.
If you knew anything about finance other than what Boo-Fay writes in his Annual, you would understand that the capital has a cost, and that it is not "zero."
You are out of your league.
You are obviously an empty gas bag, tossing around a few catch phrases with no substantive knowledge of finance or investing, but just haunt these boards attempting to show off.
The growth of insurance float (premiums paid to Berkshire) allows it to invest billions of dollars at a zero cost. Berkshire makes an underwriting profit most years, in effect getting paid to hold the float, giving a "cost" of these funds of even less than zero. This reality shows your fluffy word spinning is an exercise in vanity and not at all of any value.
In your case, it is the wrong head that is hard. I pretty well explained why I think mgt ought to re-think its capital strategy, but do you only consider as "substantive" those sentiments that echo your own.
There are any number of finance textbooks that will provide an explanation of "cost of capital" and guide thinking on capital strategy and allocation. Go find one.