2001: How much has leverage from insurance float increased Berkshire's returns?
AUDIENCE MEMBER: Hi, my name is Jason Tank from Traverse City, Michigan.
I’ve got one kind of quick question that I’m sure you can answer relatively quickly, if you’re not interested.
I know that Walter Scott’s on the board of directors and he’s also on the board of directors of a company called Level 3 Communications that is in an industry that’s — well, there’s been a lot of change happening and stock prices have been plummeting. I wonder if you’ve ever —
You’ve probably spoken to him at great length about the economics of that business. And have you ever expressed any interest that business, especially at the prices today?
That’s the first question. The second question is — if you look at Berkshire Hathaway as a portfolio, you’ve got wholly owned subsidiaries as operating businesses, marketable securities, common stocks and bonds. If you strip out — and if my premise is wrong, just please tell me.
If you strip out the leverage effect of the cost of the float being, you know, nearly zero or negative throughout the years — if you look at the portfolio minus that leverage piece, how fast do you think your book value would’ve grown over the last 30-plus years? Are we talking about 5 percent or 6 percent due to just the leverage piece on the insurance float?
WARREN BUFFETT: I don’t think it would run as much as 5 or 6 percentage points, but the float has been very useful to us. And actually, I’ve never made the calculation.
So you could well be correct that if it was 5 or 6 points, that would be a quarter of our book value gain over the years being attributable to insurance float.
And I think that’s probably maybe on the high side but — and you can’t make it —
We don’t look at insurance float 100 percent the same as we would look at equity, but we’ve looked at it a good bit, you know. It’s largely tantamount to equity because we’ve had so much equity, we could afford to do it that way. So I — you’ll have to make that calculation yourself.
We think insurance float has been a huge asset to Berkshire. We think it’ll continue to be a huge asset. And we look for every way possible to increase the amount of low-cost float.
On a small scale, we added US Liability last year, an excess surplus lines carrier based in Philadelphia. And so far, that’s working out extremely well. Got a terrific guy running it. And, you know, in a small way, we add float there. I just looked at the first quarter on it, and we had a significant underwriting profit and we had float added. And, you know, that’s the best of all worlds.
So we’ll keep working on it, and it will add — it’s a big asset that Berkshire has that a great many companies — I mean, virtually no other company has it to the degree that we have that also invests in other businesses and uses it as a source of money to invest in other businesses.
The question about Level 3, I obviously can’t answer. I just — I can tell you that you have two enormously smart and high-grade guys in Walter Scott and Jim Crowe in that business. But it’s not a business I know a lot about. And if I did, I wouldn’t talk about it.
Charlie?
CHARLIE MUNGER: I cannot talk just as well as you can. (Laughter)
WARREN BUFFETT: Not always. (Laughter)