2016: Is insurance float valuable when interest rates are zero?

CAROL LOOMIS: This questions relates to something that Warren briefly said earlier today. The question comes from Lynn Palmer, who is just finishing her freshman year at a Houston, Texas high school.

“My question,” she says, “concerns the float generated by Berkshire’s insurance companies. In Mr. Buffett’s 2015 annual letter, he said that the large amount of float that Berkshire possesses allows the company to significantly increase its investment income.

“But what happens when interest rates decline? If the U.S. were to implement negative interest rates in the same way that the eurozone and Japan have done, how would Berkshire be affected?”

WARREN BUFFETT: Yeah, well some of our float actually exists in Europe, where we have the problem of negative interest rates on very high-grade and short-term and medium — even medium-term bonds — and obviously anything that reduces the value of having money is going to affect Berkshire, because we’re always going to have a lot of money.

We — because we have so much capital, and so many sources of earning power, we have the ability, quite properly, to use our float in — to a certain degree — in ways that most insurance companies can’t think about.

So we can find things to do, but sometimes we get, you know we — we’ve got fifty-odd billion of short-term government securities now, and we’re going to get another $8.3 billion, in all likelihood, early in June when our Kraft Heinz preferred is called, so we’ll be back over 60 billion again very soon.

So we’ve got 60 billion out, that’s out at, say, a quarter of 1 percent. Well, the difference between a quarter of 1 percent and minus a quarter of 1 percent, you know, is not that great. I mean, it’s almost as painful to have 60 million out at a quarter of a percent, as to have it out at a negative rate.

Float is not worth as much to insurance companies now as it was 10 years ago or 15 years ago. And that’s true at Berkshire. I think it’s worth considerably more to us than it is to the typical insurance company, because I think we have a broader range of options as to what to do with it.

But there’s no question about it, that having a lot of money around now is not just a problem for insurance companies. It’s a problem for retirees. It’s a problem for anybody that’s stuck with fixed-dollar investments and finds that their income now is a pittance or, you know, in Europe, perhaps a negative rate. And that was not something in their calculation at all 15 years ago.

We love the idea, however, of increasing our float. I mean that money has been very useful to us over time.

It’s useful to us today, even under present conditions, and it’s likely to be very useful to us in the future. It’s shown as a liability, but it’s actually a huge asset.

Charlie?

CHARLIE MUNGER: I’ve got nothing to add.

WARREN BUFFETT: He’s now in full swing. (Laughter)