I’ve been spending a lot of time studying Berkshire Hathaway’s float with the aim of deconstructing its capital structure. As I read and re-read Warren Buffett’s annual letters his true genius continues to fascinate me.
While many readers will know Berkshire is re-known for its insurance float, it will soon be surpassed by its deferred tax float. While one form of this float is unrealised capital gains, the more material source is being generated by depreciation related deferred tax liabilities from the capital intensive businesses such as BNSF (rail-road) and MidAmerican (Utilities). As such, these infrastructure acquisitions were just as much about generating new sources of float as they were about buying ‘great businesses’ – the two ideas go hand in glove.
Float growth is a key driver of intrinsic value for Berkshire, however, now that insurance float is maturing, Buffett needs new and innovative ways to grow it. Railroad assets like BNSF have useful lives of 100 years and will generate deferred tax liabilities for decades after Buffett’s succession – the tax man ‘Uncle Sam’ is a key player of Berkshire’s future…
Read the full article here^
^If you cannot access the link please click here
This research is a complimentary addition to the work on Floats and Moats by The Fundoo Professor
insurance investor 
First off, I want to thank you for the fantastic essay on how to value insurance companies. Your work is much appreciated.
I just have one question about reinsurance recoveries, why is it considered OPM?
LikeLike
Thanks ATB. The reinsurance recoveries are not OPM. They are an asset which is netted off the outstanding claims which are stated on a gross basis on the balance sheet. The same goes for deferred reinsurance costs which are netted off the unearned premium liability.
The net insurance liabilities (rough estimate of float or technical reserves) will then be outstanding claims minus reinsurance recoveries plus unearned premium minus deferred reinsurance costs.
LikeLike
Thanks for the prompt response and my apologies for posting my comments on the wrong article! I meant to comment on your first article on intrinsic value.
By Deferred reinsurance cost from the formula above I assume you mean deferred reinsurance expense. I was also wondering about the other two items you didn’t mention above but mentioned in your essay:
a. premium debtors
b. deferred acquisition cost
How are they treated?
I was about to write you a comment after reading your essay and OPM terminology on deferred tax liability(DTL) as it is also technically OPM but later found out to my pleasant surprise that you had already written an article about it. Pretty complicated stuff and is nothing short of genius. You were able to send out a very complex idea in a very understandable manner. I am still coming to grips with the insurance float essay, I will dig deeper into the other article on DTL once I fully comprehend the former.
LikeLike
Both premium debtors and deferred aquisition costs are not OPM and should be subtracted in the float calc. PD is cash you have not received yet and DAC reflects a previous cash outflow which will be amortised/expensed into the P&L in the future.
LikeLike
Makes sense, I get the concept. As an internal auditor at an insurance Company for 4 years I have to say that your analysis is quite complex, it is not easy to be outside the insurance industry and understand it so well. Looking forward to reading more work by you!
LikeLike