On Buffett’s 100 bn “War chest”
One story which is currently making the rounds is that of Warren Buffett’s huuuuuuuuuuge cash pile or “war chest” at Berkshire.
Speculations are rampant what he could do with it for instance:
There are no signs that anything is on the immediate horizon, but they can’t resist fixating on the record amount of cash piling up at Mr. Buffett’s Berkshire Hathaway Inc. — conceivably enough to manage a transaction with a 12-figure price tag. That would put a takeover of, say, Nike Inc. or Costco Wholesale Corp. in range, to cite examples of companies that might appeal to Mr. Buffett’s tastes.
“A $100 billion deal seems possible” given the cash on hand, said Richard Cook, an investment manager in Birmingham, Ala., whose fund holds Berkshire shares.
Personally, I am still surprised how little understanding people seem to have of Berkshire and Insurance in general. This is a snapshot of Berkies Q1 balance sheet:
So it is relatively easy to see that in Q1 79 bn cash was inside the insurance (and other)s operations and “only” 17 bn are outside insurance. Now most commentators assume that you can just use the insurance cash the same way as any other cash and go out and buy a Costco or so.
But unfortunately this is not the case. Although Insurance regulation in the US is quite liberal compared to for instance Europe or Australia, you can’t do everything with insurance money.
Some time ago I have quoted this passage from Berkshire’s 2016 annual report:
Berkshire has a partial offset to the favorable geographical location of its cash, which is that much of it is held in our insurance subsidiaries. Though we have many alternatives for investing this cash, we do not have the unlimited choices that we would enjoy if the cash were held by the parent company, Berkshire. We do have an ability annually to distribute large amounts of cash from our insurers to the parent – though here, too, there are limits. Overall, cash held at our insurers is a very valuable asset, but one slightly less valuable to us than is cash held at the parent level.
Fitting to be called the “Oracle of Omaha” he doesn’t tell us specifics, but clearly he knows what he can do with the cash and what he can’t.
Rule of thumb for insurance assets
In order to get a little bit more transparency into his “war chest”, let’s look at a general “rule of thumb” used in the insurance industry:
As a rule of thumb in Insurance, you should at least cover your (net insurance) insurance liabilities with (high quality) fixed income and cash. With the rest of that money at least in the US you can go out and buy equities. If we look at the liability side of Berkshire in Q1 we can see that they had around 181 bn of gross Insurance liabilities:
Although I do not have the detailed regulatory filings, I would estimate net insurance liabilities at 181 bn minus 14 bn reinsurance assets minus 29 bn insurance receivables resulting in ~138 bn net insurance liabilities.
If we compare this to the asset side of the insurance part again, we only see 22,9 bn fixed maturity assets. If we add cash and cash equivalents to this, we end up with only 102 bn “fixed income” like securities. This means that Buffet most likely is covering already ~36 bn or 25% of his insurance liabilities with equities. Even under US insurance regulation that looks quite aggressive.
As i said, I didn’t look at the regulatory filings and Berkshire’s reporting is very opaque in this respect, but I think it is highly likely that most of the insurance cash is required to cover reserves. [Technical comment: For some strange reasons, US-based Insurance Groups do not need to publish consolidated regulated accounts. That makes it extremely difficult to understand ANY US-based insurance company from a regulatory point of view]
The cash pile within insurance most likely in my opinion is a bet on rising interest rates and Buffett at some point in time will convert them back into longer term and higher yielding fixed income.
Looking at Berkie’s balance sheet, i am not even sure if the 11,5 bn cash in the financial segment are freely available for acquisitions or if cash in regulated utilities or railroads can be used easily.
So at the end of the day it think it is much more realistic that Buffett’s huge “war chest” on a consolidated level is much more an “intra insurance” interest rate bet than a freely available 100 bn USD war chest to buy each and anyone.
Clearly he can raise cash by selling existing equities, but his “organic” cash reserve for acquisition in my opinion is rather limited, maybe something in the area of 10-20 bn USD. But I think it is more realistic that we will again see debt financing liek in the Precision Castparts acquisition.
Oh, and for the Fans of the so-called “Buffett Berkshire buy back put”: You can’t buy own shares with insurance money either……..
P.S.: I am not sure if anyone uses EV based multiples to value Berkshire, but to be on the safe side one should add the insurance liabilities to total debt. And no haircut, unless you also deduct the insurance earnings.
Many comments start with “Buffett said this” or “Buffett said that. I would recommend however to read the actual insurance regulation. For instance this:
Section 26 is the relevant one…..