Low Interest Rates Cut Value of Berkshire’s Insurance Float

(BRK.A), (BRK.B)

With the advent of unprecedented negative interest rates in Japan and the Eurozone, the value of Berkshire Hathaway’s insurance float is diminished.

Europe’s central banks have slashed interest rates below zero, and at the 2016 Berkshire Hathaway annual meeting, Warren Buffet noted the moves have rewritten Aesop’s ancient adage that a “bird in the hand is worth two in the bush.”

Buffett noted that right now “a bird in the hand is worth 9/10s of a bird in the bush.”

Cheap money has also driven up the costs of Berkshire’s acquisitions, as competitors’ access to capital diminishes one of Berkshire’s key advantages.

Even with Berkshire having just closed on its $32 billion acquisition of aerospace manufacturer Precision Castparts, the company is heading back towards having $40 billion at the ready for acquisitions.

“We have excess cash everywhere at Berkshire,”  Buffett said, as he emphasized that he was ready to put it to work buying more large companies. “We would love to find another three or four types of Precision Castparts.”

With all its cash at the ready for acquisitions, Berkshire still maintains a reserve of $20 billion in case of economic downturns or other needs.

© 2016 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.