Insurance Let's look first at insurance,Berkshire's core operation and the engine that has propelled our expansion over the years. as those a now,pay-later model leaves us holding large sums-money we call"float" -that will eventually go to others Meanwhile.we get to invest this float for Berkshire's benefit.Though individual policies and claims come and go. ve grown Year Float (in millions) 190 1.632 2000 27,871 Last year I told you that our float was likely to level off or even decline a bit in the future.Our insurance 13.cheve Oon the pu expect a further increas s will bet s float will alm st certainly grow. downward.If we do experience a decline in float at some future time.it will be very gradualat the outside no more than 2%in any year. of our exp Wh esand we register an ng prof that adds to theca prot aed.we enjoy the use of free money one Unfortunately,the wish of al insurers to ach e this happy resu ates inter to hold its float.Fore State F m.by far the st insurer and npany besides,incurred an the leven years.(Thei 2012 are not yet availabe)There area ot of ways to lose money inurae and the industry never ceases searching for new ones. As noted in the first section of this report.we have now operated at an underwritin rofit for ten consecutive years.our pre-tax gain for the period having totaled 18.6 billion.Looking ahead.I believe we will continue to underwrite profitably in most years.If we do.our float will be better than free money he ealeulations of intrinsie valt?When Rerkehire's book vall calculated,the fidl amount of our float is deducted as a liability.just as if we had to p ay it out tomorrow and were unable to replenish it.But that's an incorrect way to look at float.which should instead be viewed as a revolving und.If foa ring.which I believe Berkshire's will be,the true value of this liability is A partial offset to this overstated liability is $15.5 billion of "goodwill"that is attributable to our insurance companies and included in book value as an asset.In effect,this sents the price we paid for the float The cost of the goodw nng on its true underwniting losses.any goodwi Insurance Let’s look first at insurance, Berkshire’s core operation and the engine that has propelled our expansion over the years. Property-casualty (“P/C”) insurers receive premiums upfront and pay claims later. In extreme cases, such as those arising from certain workers’ compensation accidents, payments can stretch over decades. This collect￾now, pay-later model leaves us holding large sums – money we call “float” – that will eventually go to others. Meanwhile, we get to invest this float for Berkshire’s benefit. Though individual policies and claims come and go, the amount of float we hold remains quite stable in relation to premium volume. Consequently, as our business grows, so does our float. And how we have grown, as the following table shows: Year Float (in $ millions) 1970 $ 39 1980 237 1990 1,632 2000 27,871 2010 65,832 2012 73,125 Last year I told you that our float was likely to level off or even decline a bit in the future. Our insurance CEOs set out to prove me wrong and did, increasing float last year by $2.5 billion. I now expect a further increase in 2013. But further gains will be tough to achieve. On the plus side, GEICO’s float will almost certainly grow. In National Indemnity’s reinsurance division, however, we have a number of run-off contracts whose float drifts downward. If we do experience a decline in float at some future time, it will be very gradual – at the outside no more than 2% in any year. If our premiums exceed the total of our expenses and eventual losses, we register an underwriting profit that adds to the investment income our float produces. When such a profit is earned, we enjoy the use of free money – and, better yet, get paid for holding it. That’s like your taking out a loan and having the bank pay you interest. Unfortunately, the wish of all insurers to achieve this happy result creates intense competition, so vigorous in most years that it causes the P/C industry as a whole to operate at a significant underwriting loss. This loss, in effect, is what the industry pays to hold its float. For example, State Farm, by far the country’s largest insurer and a well-managed company besides, incurred an underwriting loss in eight of the eleven years ending in 2011. (Their financials for 2012 are not yet available.) There are a lot of ways to lose money in insurance, and the industry never ceases searching for new ones. As noted in the first section of this report, we have now operated at an underwriting profit for ten consecutive years, our pre-tax gain for the period having totaled $18.6 billion. Looking ahead, I believe we will continue to underwrite profitably in most years. If we do, our float will be better than free money. So how does our attractive float affect the calculations of intrinsic value? When Berkshire’s book value is calculated, the full amount of our float is deducted as a liability, just as if we had to pay it out tomorrow and were unable to replenish it. But that’s an incorrect way to look at float, which should instead be viewed as a revolving fund. If float is both costless and long-enduring, which I believe Berkshire’s will be, the true value of this liability is dramatically less than the accounting liability. A partial offset to this overstated liability is $15.5 billion of “goodwill” that is attributable to our insurance companies and included in book value as an asset. In effect, this goodwill represents the price we paid for the float￾generating capabilities of our insurance operations. The cost of the goodwill, however, has no bearing on its true value. For example, if an insurance business sustains large and prolonged underwriting losses, any goodwill asset carried on the books should be deemed valueless, whatever its original cost. 7