Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A), one of the most successful companies in the U.S., is facing a monumental challenge as its source of new funds dries up. The accumulated premium, or float, from insurance holdings that Berkshire has traditionally counted on to fund stock purchases and acquisitions is unlikely to see growth in the future, Buffett wrote in a letter on February 25, according to a Bloomberg report.
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Berkshire is “an engine of growth that is running out of gas,” according to Jeff Matthews, a Berkshire shareholder and author of Secrets in Plain Sight: Business & Investing Secrets of Warren Buffett. In his book, Matthews describes the company as a “conglomerate” that “no longer has the culture of an investment vehicle.” Berkshire’s float was up to $70.6 billion as of December 31, up from $65.8 billion the previous year and $39 million in 1970.
Edward Jones & Co. analyst Tom Lewandowski describes float funding as being like “a very low-interest” loan. When payouts on claims are greater than the amount of premiums coming in, float shrinks. This shrinkage could put a damper on Buffett’s ability take on new acquisitions while keeping up with current investments.
Berkshire shares are down nearly 8 percent in the last 12 months, compared to a 3 percent increase for the Standard & Poor’s 500 Index. The company grew in the 24 years ended December 31 at a compound annual rate of about 16 percent as float increased 17 percent a year. In the last 10 years, expansion declined to 4.3 percent for the stock and 7.1 percent for the float.
As Buffett reduces Berkshire’s dependence on its insurance businesses, he also decreases his ability to buy securities as the company expands energy, manufacturing, and transportation operations. Lewandowski, who has a “buy” rating on Berkshire, said he thinks a sustained drop in insurance float will be “reflected in shares.”
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