1994: Why does the intrinsic value of Berkshire's insurance companies exceed book value?

AUDIENCE MEMBER: Maurus Spence from Omaha, Nebraska.

You’ve made comments on several occasions about the intrinsic business value of the insurance operations. And in this year’s report you state that the insurance business possesses an intrinsic value that exceeds book value by a large amount, larger, in fact, than is the case at any Berkshire — other Berkshire business.

I was wondering if you would explain in greater detail why you believe that to be true.

WARREN BUFFETT: Well, I — it’s very hard to quantify, as we’ve said many times in the report. But, I think that it’s clear that even taking fairly pessimistic assumptions, that the excess of intrinsic value over carrying value is higher, by some margin, for the insurance business.

And I think that the table in the report that shows you what our cost to float has been over the years, and also what the trend of float has been over the years, would, unless you thought that table had no validity for the future, I think that that table would tend to the point you in the direction of saying the insurance business does have a very significant excess of intrinsic value over carrying value.

Very hard number to put something on. But — and you don’t want to extrapolate that table out. But I think that table shows that we started with maybe 20 million of float and that we’re up to something close to three billion of float. And that that float has come to us at a cost that’s extremely attractive, on average, over the years.

And just to pick an example, last year, when we actually had an underwriting profit, the value of that float was something over $200 million. And that figure was a lot bigger than it was 10 years ago or 20 years ago.

So that’s — that is a stream — last year was unusually favorable, but that is a — that’s a very significant stream of earnings, and it’s one we feel we have reasonably good prospects in. So we feel very good about the insurance business.