2011: Is Berkshire being overly conservative?

AUDIENCE MEMBER: Hi, I’m Whitney Tilson, a shareholder from New York. Thank you for including in your latest annual letter such complete and clear valuation information regarding Berkshire.

You stated that the operating earnings of the insurance businesses are excluded from your earnings table, and I know you said this morning that 2011 is going to be a break-even year at best.

But in light of the disclosure in the annual report that Berkshire earned $17 billion in profit over the last eight years without a single money-losing year, are you being overly conservative?

Don’t you think the intrinsic value of your insurance businesses is more than just their float, especially GEICO, for the reasons you discussed this morning?

WARREN BUFFETT: Yeah, I’d agree with that, Whitney, but I — it’s very hard to estimate, you know, what the normal underwriting profit might be — might be over the next 20 years or something of the sort.

And so I agree with you. I don’t know whether I’d call it overly conservative. I would say it’s conservative to assume break-even underwriting.

But as you — I mean, if we had another Katrina or something of the sort — and forget about, you know, winter storms in Europe and all that — I mean, we could lose significant money in underwriting this year, and we expect to lose significant money in underwriting, you know, maybe every fifth year, every tenth year, whatever it might be.

But I think you’re right in saying it would not be inappropriate to include some normalized underwriting profit in addition to the calculation that I made in the annual report.

CHARLIE MUNGER: Whitney, let me help you by asking another question of Warren. Is there any other large casualty insurance operation in the world that you know of that you would trade for ours?

WARREN BUFFETT: Not remotely — no, no. Nothing close. I mean, we — however we lucked into it, we’ve got — we have an unbelievable insurance operation.

And, I mean, GEICO, you know, is fabulous. And, you know, if you think about — since 1936, the idea has been out there, but, you know, with all the strength that all the other companies had, and the agency plants and everything else, GEICO has now moved to where it’s the third largest in the United States and gaining ground every day on the two ahead of them, and doing it very profitably.

GEICO’s combined ratio — GEICO had an underwriting profit of close to eight points, as I remember it, in the first quarter. Now that’s going to be, probably, the best quarter of the year, I should add, but it’s a marvelous business.

Ajit [Jain] has built an insurance business from scratch in the reinsurance business, that, in many respects, you know, he operates all alone.

He may not see a lot of transactions in any given period of time, but there are certain things, where if somebody wants huge amounts of insurance and a quick answer, or even a slow answer sometimes — we’ll give them a quick one — there’s really nobody else to call. It’s a little like Charlie mentioned on acquisition opportunities.

So he’s — and he’s done it. I mean, it didn’t exist when he got there.

Tad Montrose has got a magnificent operation at Gen Re. It had to get shaken out to quite a degree, but Tad has got a very, very disciplined business there.

And then we have a group of smaller companies that some of them have some very unusual franchises.

So there really — you know, I didn’t have anything to do with it, so I can brag about these people, but they have really done a job in building an insurance company that I don’t think there’s anything like it.

CHARLIE MUNGER: Some of you people that have been around a long time, you invested with an Omaha boy, and you ended up owning part of the best casualty insurance business in the world.

WARREN BUFFETT: If you go to 30th and Harney, you’ll see a building there, National Indemnities. We paid 7 million for National Indemnity, a million-four for its sister company National Fire & Marine, and that’s the same building that we operated out of in 1967, we’re operating out of today.

The only difference is that today it’s got more net worth than any insurance company in the world.

CHARLIE MUNGER: Yeah, so we — it’s not that great a business as a business, casualty insurance.

It’s a tough game. There are temptations to be stupid in it. It’s like banking. (Laughter)

And — but if you’re in it, I think we’ve got the best one.

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