Berkshire Hathaway annual meeting notes: The Berkshire Hathaway annual meeting was held in Omaha with 35,000 people attending this year. The meeting format is five hours of questions being answered by Chairman and CEO Warren Buffett and Vice Chairman Charlie Munger, who have partnered together for 54 years. Overall, Mr. Buffett is upbeat about the prospects for Berkshire–especially GEICO and the Burlington Northern railroad. Many of the questions posed to Mr. Buffett involved his CEO succession plans. Although he declined to name his successor, Mr. Buffett said both he and the board are solidly in agreement on who his internal replacement will be. Berkshire Hathaway annual meeting notes summarized and put together nicely courtesy of Barclays. We will shortly have a comprehensive set of notes dozens of pages long up later like we did last year.
The Berkshire Hathaway Annual Meeting Notes via Barclays (BCS)
Berkshire Hathaway Annual Meeting Notes on Warren Buffett’s Succession Plans
- Warren Buffett (age 82) and the board of directors clearly spend a great amount of time thinking about his succession plans, and they are solidly in agreement on which internal candidate will be the next CEO of Berkshire Hathaway.
- Mr. Buffett hopes to still be running the company 10 years from now.
- Howard Buffett, who is Warren Buffett’s son, would be non-executive chairman when Warren Buffett is no longer able to serve in his current role. Howard Buffett’s main responsibility would be to preserve Berkshire’s unique culture and, if needed, to remove the new CEO if in the unlikely scenario that he is not performing as hoped.
- The new CEO would likely organize the management reporting structure differently than Mr. Buffett, who currently has several dozen direct reports, although business managers would maintain control over decision making for their own operations.
- Mr. Buffett has already delegated some of his management oversight responsibilities for some units, which makes us think he is preparing for the day he is no longer running the company.
- Warren Buffett anticipates his CEO successor will have significant capital available for deals especially during any future market dislocations, similar to investments made in 2008 by Berkshire on advantageous terms to GE, Goldman Sachs and Swiss Re.
Berkshire Hathaway Annual Meeting Notes Annual Meeting Notes on Acquisitions
- Berkshire Hathaway currently has enough excess cash (after the Heinz deal) for a $15-$20bn acquisition.
- Mr. Buffett feels confident about Berkshire’s largest acquisitions over the past five years (including BNSF, Lubrizol, and Heinz). On a standalone basis, 8 companies currently owned by Berkshire would be large enough to be in the Fortune 500.
- Berkshire is committed to spending $1.5bn to purchase the remaining 10% stake in Marmon it does not already own by 1Q14.
- Berkshire continues to be attracted to bolt-on acquisitions, including companies outside the U.S.
Berkshire Hathaway Annual Meeting Notes on Share Buybacks
- Berkshire would repurchase “a lot” (we think billions of dollars) of stock if its valuation declined to 1.2x book value or less (current implied Class B share prices of $96).
- Mr. Buffett views Berkshire’s current book value as well as its share price as being significantly below its intrinsic value.
Berkshire Hathaway Annual Meeting Notes on GEICO
- GEICO, which is the low price leader in auto insurance, is on track so far in 2013 to add 1 million new policies in force (PIF), which would potentially account for two-thirds of all PIF growth for the entire US auto insurance industry.
- Mr. Buffett estimates that the intrinsic value added from each new auto policy is approximately $1,500 reflecting improved persistency (auto insurance customers staying for longer are typically more profitable). If GEICO adds 1mn new policies in 2013, the implied increase in intrinsic value is $1.5bn.
- GEICO believes it is not disadvantaged by not using telematics (capturing and analyzing individual driver behavior) as part of its underwriting process. Mr. Buffett views GEICO’s current underwriting process as delivering solid results so there is no need to change it.
Berkshire Hathaway Annual Meeting Notes on Entry Into Commercial Insurance
- Berkshire plans to increase its market share in commercial P&C insurance because it views it as an attractive opportunity for profitable growth. This business will focus on large commercial risks and could generate several billion dollars of premium volume over time as well as additional float for investment. We believe insurers such as AIG could be impacted the most.
- The hiring of AIG property-casualty insurance execs to lead this effort will focus on the U.S. first then expand globally. Since this announcement, other P&C insurance underwriters have reached out to join Berkshire.
- Berkshire also entered into an agreement with insurance broker AON to take a 7.5% share of AON-brokered policies through Lloyd’s of London as well as the London insurance market (previously we thought it was just for Lloyd’s). This deal will be structured as a reinsurance transaction on the primary insurance business. Additional premium volume potential for Berkshire from the AON deal could be hundreds of millions of dollars annually, in our view.
- There are only a few select large commercial insurers that Berkshire would be interested in acquiring, but the valuations are currently too expensive. In our view, this statement by M. Buffett is likely referring to CB.
Berkshire Hathaway Annual Meeting Notes on Property Reinsurance Business
- Rates for property catastrophe reinsurance are no longer viewed by Berkshire as being attractive, which we believe means Berkshire will reduce its capacity.
- The entry of alternative capacity into the reinsurance market is one reason why rates are declining.
Berkshire Hathaway Annual Meeting Notes on BNSF Railroad
- BNSF’s rail car loadings in the first 17 weeks of 2013 are up 3.8% compared to the combined rail car loadings of other major US railroads being up only 0.4%.
- BNSF’s results benefit from shipping oil by rail including from the Bakken field. BNSF currently ships 650,000 barrels of oil each day, which could increase to 750,000 barrels by YE13, and could eventually be 1.2-1.4mn. Oil moves faster and with greater flexibility by rail than pipeline.
- Trucking container shipments are one of BNSF’s largest source of customers. If trucking companies switch from oil-based fuel to liquefied natural gas (LNG), then BNSF would likely need to switch more of its locomotives to LNG to remain competitive. The primary manufacturers of BNSF’s locomotives are GE and CAT.
- Shipments of lumber by rail for use in housing construction also are also increasing.
- Coal shipment remains an important business for BNSF. This business is currently stable, although the use of coal for utility power generation appears to be in a secular decline.
Berkshire Hathaway Annual Meeting Notes on Newspaper Business
- Mr. Buffett defended his acquisition of various newspapers. Although revenue is declining, he still anticipates the Berkshire’s newspaper business will generate a 10% after-tax return on equity and $100mn of annual pre-tax annual income.
Berkshire Hathaway Annual Meeting Notes: Musings on Economic and Other Issues
- The US economy is making slow progress toward recovery, although the housing market is recovering faster with some improvement in construction.
- Warren Buffett expects the US dollar to remain the world’s reserve currency for decades to come, and likely beyond. He would not view the loss of this position by the US as a major problem.
- Corporate profits as a percentage of GDP are high at 10% currently. This metric will likely trend downward largely due to faster GDP growth over time. The US could be at somewhat of a disadvantage if its corporate tax rate remains significantly above other global regions.
- Mr. Buffett seemed concerned about how the Fed will unwind its $1bn of annual open market repurchases without causing economic dislocations. He said the Fed is in unchartered territory and it is a huge experiment. Berkshire’s annual earnings would likely be several billion dollars higher if interest rates increased.
- High healthcare costs (17.5% of GDP) are a major problem for US competitiveness and American businesses. Healthcare costs as a % of GDP for many other countries is much lower at 9.5%-11.5%.
- The US banks are stronger than at any time in the past 25 years and much stronger than European banks. But increased capital requirements for the banks will result in lower returns on equity.
- Mr. Buffett has an unfavorable outlook on life insurers due to the impact of sustained low interest rates and robust policy guarantees.
Berkshire Hathaway Annual Meeting Notes on Warren Buffett’s Charitable Contributions
- Mr. Buffett currently donates 4.75% of his Berkshire Hathaway shares annually to charity, which equates to about $2bn annually. This amount is less than 1% of Berkshire’s market cap, which means it is immaterial to the stock price. Roughly $400-$500mn of Berkshire’s market cap trades daily, so the market can clearly absorb his sales.