Each General Re share can be traded in for either 0.0035 BRK Class A shares or 0.105 BRK Class B shares. These exchange ratios are set in stone, even if the price of Class A or Class B shares tanks in the future. Right now, BRK Class B shares are $2,588 per share. 0.105 of $2,588 is $271.74. This is above General Re's current share price of $256. So you could easily make a guaranteed $15-16 per General Re share by buying General Re shares right now and waiting for the merger to be finalized in the fourth quarter. You could make more than $15-16 per share if BRK Class B shares continue to rise for the rest of the year. For instance, if Class B shares hit $3,000 a share in the fourth quarter (and if you bought General Re now at $256 per share), then each General Re share would be valued at $3,000 * 0.105 = $315 per share -- but you'd have only paid $256 for it.
Buffett obviously believes General Re is undervalued, despite reports in the media that he is paying a "premium" for General Re. While it's true that paying 0.105 a BRK B share for a General Re share results in Buffett's paying around $270-275 for each General Re share, which was selling at around $225 before the merger announcement, Buffett is still paying only $20-22 billion for $24 billion in General Re's "float." It's like Buffett is paying out $20-22 billion but getting $24 billion automatically in return -- a profit of $2-4 billion that he can immediately pocket. It's not everyday someone just gives you $2-4 billion for free. To Buffett, being able to use money is as good as the money itself. In no time, Buffett will be able to use that float to generate 24% annual returns as he's been doing for the last 40 years. I personally am buying American Express big-time because Buffett recently petitioned and received permission from the Federal Reserve to increase his AXP stake from 10.6% to an astonishing 17%.
I think I understand float, but some of your math makes me think, maybe not. So help me:
Lets assume you have just two items on the balance sheet - $20 billion in cash (float) and $18 billion in obligations to policyholders. I say the equity is $2 billion and you had better not get excited about buying $20 billion in float for "only" $15 billion. There are simply cheaper ways to get the money to use for investing.
Not that this is what is being done with BRK and General Re, just that you can't take the amount of the float in isolation.
If there is anyone out there with a good accounting background who has crunched the numbers on this merger, I'm sure your analysis would be welcomed on this board.
I think your comments on float are appropriate. There are people, including myself, who add back the float when valuing BRK. Buffett does so also. However, to simply say "float is the same as equity" is to make a mistake. For instance, if the combined ratio of an insurance company is above 100, then the float is being acquired in the presence of an underwiting loss. Meaning that there is a cost to the acquisition of the float and therefore the float is not like equity at all. The insurance business of BRK generates a combined ratio of less than 100 and therefore does not burden the acquisition of the float with a cost. But even that is simplified. I may be more than willing to acquire float while running a combined ratio of 105 if the underlying liability need not be paid for 10 years. I may not be willing at all to acquire float while running a combined ratio of 101 if the underlying liability need be paid a month from next Tuesday. So in your example, to determine if the $15 billion is a good or poor price, one would need to factor in the life of the float and the combined ratio incurred to replinish the $20 billion of float.
It is a small part of the insurance business of Berkshire, but Buffett buys float all the time. Go to the middle of the third paragraph on page 43 of the annual report to the sentence that starts with "Other property and casualty reinsurance contracts..." and read through all of the fourth paragraph. He sells insurance ( buys float ) at underwriting losses while computing the time value of money for the float. If he could give some examples of how they price those contracts, I think we would get a real education in the value of float.
An insurance company's "float" is the premiums from its policyholders that it invests in stocks and bonds for its own profit. Buffett's insurance companies are very selective when it comes to providing coverage and, consequently, Buffett is free to invest the money he hardly ever has to pay out. Gen Re's portfolio of investments, its float, is $24 billion, but Buffett's only paying $20-22 billion for it, and he knows he can basically spend that money any way he wishes without ever having to pay much of it out in claims. This is the reason he was more willing to use BRK stock to buy Gen Re and not cash. He reasoned he was getting $24 billion in intrinsic value, which he can immediately turn around and use to buy more American Express and other companies, but paying out only $20-22 billion of intrinsic value in the form of BRK stock.