2019: How would Buffett value Berkshire's insurance unit?

JAY GELB: This question is on Berkshire’s intrinsic value. Warren, in your most-recent annual letter, you discussed a methodology to estimate Berkshire’s intrinsic value. However, a major component of Berkshire’s value that many investors find challenging to estimate is that of the company’s vast and unique insurance business.

Could you discuss how you value the company’s insurance unit, based on information Berkshire provides, especially since GAAP book value is not disclosed, of the insurance unit?

WARREN BUFFETT: Well, our insurance business gives us a float that’s other people’s money, which we’re temporarily holding, but which gets regenerated all the time, so as a practical matter, it has a very, very long life. And it’s probably a little more likely to grow than shrink.

So, we have $124 billion that people have given us. And that’s somewhat like having a bank that just consists of one guy. And people come in and deposit $124 billion and promise not to withdraw it forever.

And we’ve got a very good insurance business. It’s taken a very long time to develop it, very long time. In fact, I think we probably have the best property-casualty operation, all things considered, in the world, that I know of, of any size. So, it’s worth a lot of money.

It’s probably — we think it’s worth more to us, and we particularly think it’s worth more while lodged inside Berkshire. We’d have a very, very high value on that. I don’t want to give you an exact number, because I don’t know the exact number. And any number I would have given you in the past would’ve turned out to be wrong, on the low side.

We have managed to earn money on money that was given to us for nothing and have (inaudible) earnings from underwriting and then have these large earnings from investing. And it’s an integral part of Berkshire.

There’s a certain irony to insurance that most people don’t think about. But if you really are prepared, and you have a diversified property-casualty insurance business — a lot of property business in it — if you’re really prepared to pay your claims under any circumstances that come along in the next hundred years, you have to have so much capital in the business that it’s not a very good business.

And if you really think about a worst-case situation, the reinsurance — that’s insurance you buy from other people, as an insurance company, to protect you against the extreme losses, among other things — that reinsurance probably — could likely be — not good at all.

So, even though you’d think you’re laying off part of the risk, if you really take the worst-case examples, you may well not be laying off the risk. And if you keep the capital required to protect against that worst-case example, you’ll have so much capital in the business that it isn’t worthwhile.

Berkshire is really the ideal form for writing the business. Because we have this massive amount of assets that, in many cases, are largely uncorrelated with natural disasters. And we can — we don’t need to buy reinsurance from anybody else. And we can use the money in a more efficient way than most insurance companies.

It’s interesting. The three — In the last 30 years, the three largest reinsurance companies — and I’m counting Lloyd’s as one company — although it isn’t — it’s a group of brokers assembled in — underwriters assembled at a given location. But people think of Lloyd’s as a massive reinsurance market, which it is, not technically one entity. But if you take the three largest companies — and they’re all in fine shape now, they’re first-class operations — but all three of them came close to extinction sometime in the last 30 years, or reasonably close.

And we didn’t really have any truly extraordinary natural catastrophes. The worst we had was Katrina in, whatever it was, 2006 or thereabouts, 2005. But we didn’t have any worst-case situation. And all three of those companies, which everybody looks at as totally good on the asset side, if you show a recoverable from them, two of the three actually made some deals with us to help them in some way. And they’re all in fine shape now.

But it’s really not a good business if you keep your — as a standalone insurer — if you keep enough capital to really be sure you can pay anything that comes along, under any kind of conditions.

And Berkshire can do that. And it can use the money in ways that it likes to use.

So, it’s a very valuable asset. I don’t want to give you a figure on it. But we would not sell it. We certainly wouldn’t want to sell it for its float value. And that float is shown on the balance sheet as a liability. So, it’s extraordinary.

And it’s taken a long time to build. It’d be very, very, very hard for anybody to — I don’t think they could build anything like it. It just takes so long.

And we continue to plow new ground. If you went in the next room, you would’ve seen something called “THREE,” which is our movement toward small and medium business owners for commercial insurance. And there’s an online operation.

And it will take all kind — we’ll do all kinds of mid-course adjusting and that sort of thing — and we’ve only just started up in four states.

But we’ll, you know — ten or 20 years from now, that will be a significant asset of Berkshire, just like Geico has grown from two and a fraction billion of premium to, you know, who knows, but well into the mid-30 billion, just with Tony Nicely. And when I said, in the annual report, that Tony Nicely, who’s here today —

CHARLIE MUNGER: Warren, is there anybody in the world who has a big casualty insurance business that you’d trade our business for theirs?

WARREN BUFFETT: Yeah, oh, no, it’s taken a long time. And it’s taken some tremendous people. And Tony Nicely has created more than 50 billion — with his associates, and he’s got 39,000 of them, probably more now, because he’s growing this year — he’s created more than $50 billion at GEICO — of value — for Berkshire. (Applause)

CHARLIE MUNGER: It’s pretty much what you’d expect. It’s such an easy business, taking in money now in cash and just keeping the books and giving a little of it back.

There’s a lot of stupidity that gets into it. And if you’re not way better than average at it, you’re going to lose money in the end. It’s a mediocre business for most people. And it’s good at Berkshire only because we’re a lot better at it. And if we ever stop being a lot better at it, it wouldn’t be safe for us, either.

WARREN BUFFETT: And Ajit Jain has done a similar thing. He’s done it in a variety of ways within the insurance business. But I would not want to undo — somebody would have to give me more than $50 billion to undo everything he has produced for Berkshire.

And he walked into my office on a Saturday in the mid-1980s. He’d never been in the insurance business before. And I don’t think there’s anybody in the insurance world that doesn’t wish that he’d walked into their office instead of ours, at Berkshire. It’s been extraordinary. It’s truly been extraordinary.

But we have Tom Nerney. We have Tim Kenesey at MedPro. We have Tom Nerney at U.S. Lability.

We have — at GUARD Insurance — we only bought that a few years ago, and that’s a terrific operation. It’s based in Wilkes-Barre, Pennsylvania. Who would expect to find a great insurance operation in Wilkes-Barre?

But we’ve got a great insurance — really great — insurance operation right here in Omaha, about two miles from here. And it was bought by us in 1967. And you know, it changed Berkshire. We built on that base.

We’ve got a — we really got a great insurance business. And I won’t give you a number, but it’s probably a bigger number than you’ve got in your head for — and it’s worth more within Berkshire than it would be worth as an independent operation.

Somebody can say, “Well, this little gem, if it was put out there, would sell at a higher multiple,” or something of the sort. It works much better as being part of a whole, where we have had two tiny operations — two tiny insurance operations — many, many years ago. And they both went broke. The underwriting was bad. But we paid all the claims. We did not walk away. We paid every dime of claims.

And nobody worries about doing any kind of financial transaction with Berkshire. And you know that today — on Saturday — about 9 in the morning, I got a phone call. And we made a deal the next day committing Berkshire to pay out $10 billion, come hell or high water, no outs for, you know, material adverse change or anything like that. And people know we’ll be there with $10 billion.

And they know, in the insurance business, when we write a policy that may come — be payable during the worst catastrophe in history, or may be payable 50 years from now, they know Berkshire will pay. And that’s why we’ve got $124 billion of float.