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Berkshire Hathaway Inc. Message Board

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  • Novalis_97 Novalis_97 Jul 30, 1998 11:27 AM Flag

    Why BRK is

    You question how GRN's intrinsic value can be
    calculated merely by dividing its $24 bil. float by its
    number of shares outstanding, 76.5 mil. You think it's
    inevitable that a megadisaster will hit and Buffett/GRN will
    have to pay out some of its floate as underwriting
    loss. But you neither understand Buffett's insurance
    strategy nor reinsurance. If you look at the 1997
    shareholder letter, you will see that for most years Buffett
    has been in business, he's hardly ever had to pay out
    very much of his float to cover claims. For the last
    three years in fact, he'd had to pay "less than %1."
    Buffett even refers to his float as a "cost-free source
    of funds." It is because Buffett is so skillful at
    keeping underwriting losses to a minimum that he could
    build up a multi-billion dollar float over the years
    and invest that float in the stock market at a huge
    returns. One way Buffett bought GRN is because its
    business is reinsurance. Reinsurance is inherently less
    risky than insurance because risks have already been
    vetted once by the primary insurers before ever having
    to be covered by the reinsurer. Reinsurers hardly
    ever have to pay out their float as a result. And
    because Buffett's reinsurance is designed to cover
    megadisasters (which rarely happen if ever) rather than less
    disasters (which happen much more frequently), Buffett
    hardly ever has to pay out his float. California just
    gave him $500 million 2 years ago to insure against
    "the Big One" but Buffett hasn't had to pay a cent of
    that back and he's used that to invest in stocks in
    the meantime. And even if "the Big One" happens, the
    primary insurance companies will take the big hit, while
    Buffett says his "worst case" cost for the "Big One" is
    probably around $1 billion, which Berkshire can easily

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