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This was the first annual general meeting that I've attended. My writing hand is cramped from trying to take notes (I counted over 50+ questions asked of WEB and CM). I've got a couple of hours to kill waiting at the airport – so I jotted down some of what I thought were the most interesting Q&A's:

Cost of Float/Growth of Float:

WEB said that the first quarter report that'll be out in a few weeks will show that Berkshire's underwriting losses (cost of float) for Q1 came in at 3% rate annualized. He said that absent some kind of mega-catastrophe, he thinks that they can maintain this for 2001. This is down significantly from the 6% cost of float in 2000 (4.5% when adjusted for reinsurance contracts – “good loss” type). WEB estimated float will grow by $2.5Billion in 2001 to almost $30Billion by the end of the year.

For me this was the most important news at the meeting. If Buffett's forecast proves right – BRK's underwriting losses for the year will be below $1 Billion for the first time since the General Re acquisition in 1998. It's been a long struggle, but it appears the General Re ship is righting itself.

Only $12 million of reinsurance contracts were completed in Q1. These are of the “good loss” type – ie., record loss immediately and use float for many years without further charges to earnings. In 2000, BRK did $400+ million of these type of contracts. In addition, BRK entered into $80million of retroactive insurance contracts in Q1.

Executive Jet Growth/Competition from United:

Warren feels this business won't become a mature business for decades. He feels it has a potential base of 10,000 maybe 100,000 customers versus 2,000-3,000 today. They are buying 700 jets per year, so they can only take on 600 new customers per year. There's nothing they can do to change this fact – so that's is the fastest that they can grow. WEB believes ExecJet can hold 5-10% after-tax margins once it matures because it is more of a service business than an airline business. He does not believe fractional jet ownership is a commodity business. Executive Jet is building a strong reputation for service and safety. Charlie noted that NetJets refused to fly into Aspen the day the other plane crashed.

Warren and Charlie are not sure why UAL is entering. They wonder what will happen when pilots of subsidiary start comparing their wages with pilots at United. They wondered if you were starting a fractional jet business, why you would want to be aligned with a high cost pilots' union.

Long-Term Returns of Stocks:

They still believe that 6.5% - 7% is all you can expect on average. Value of American businesses in aggregate cannot grow faster than GDP in Buffett's opinion.

Pension Fund Accounting:

Warren and Charlie spent a lot of time trashing companies' pension fund accounting. Back in the 1970's, most companies assumed a 6% return on pension assets. Today almost everyone assumes 9% or higher yet stock markets are a lot more overvalued today. They predict over the next few years, many companies pension funds will experience shortfalls.

They are not aware of any cases of companies reducing estimated returns on pension assets. To change would negatively affect reported earnings, so they don't/won't do it. Long-term bond yields are 6% - so where is 9% going to come from, Buffett wondered aloud. If expecting 12% returns from stock market – they will be sorely disappointed.

Freddie Mac/Fannie Mae:

WEB was deliberately vague about the reason for the sale. Charlie referred to reacting to “consequences of what they saw in the two companies practices.” They were emphatic that they did not sell because of concerns about greater government regulation over the two companies.

My sense is that something in Freddie Mac/Fannie Mae risk profile has changed in the view of WEB and CM. Warren and Charlie mentioned that they are more worried about financial institutions than other types of businesses. They talked in general terms about banks that can be economically insolvent but appear OK for a long time before problems become apparent.


BRK bought $1.42Billion of FINOVA bonds because bonds had fallen to attractive price levels that even in a liquidation would do OK. FINOVA ran into refinancing problems and WEB thought that they were going to default. It was at this point that Berkshire combined with Leucadia in order to lead restructuring of company.

WEB feels very good with Leucadia as partner and thinks that the “Berkadia” model will help ensure orderly process . Berkadia can lead or someone else may come in with a plan. Feels that everything is “going well” and there may be more news in the next few weeks although could not elaborate.

Ominously, Buffett predicted more bankruptcies in the next few years.

USG/Asbestos Liability:

Warren was asked a couple of questions about USG position but would not talk about the investment or risk profile. Buffett reiterated that BRK has not put any significant money into companies with potential asbestos liabilities (ex. USG). Hinted that they have walked away from one or two.

Through reinsurance, they have taken over liabilities of companies that have asbestos liabilities but that these contracts are capped.

Lou Simpson:

Lou manages $2 billion autonomously for GEICO. Buffett noted that sometimes investments are reported as being made by Buffett when they are in fact made by Lou. Sometimes, Warren is unaware of what Lou has bought. Also, vehicle is not a tip-off. WEB will sometimes buy for GEICO or Lou for National Idemnity. Lou made the purchase in The GAP. Warren noted that it is helpful to have Lou making $100-$200 Million purchases because WEB doesn't look at this universe of possibilities anymore. WEB focuses on $1billion+ purchases.

Future Acquisitions:
Expect 1-2 per year. WEB would love to make a $15-$20 billion acquisition – unfortunately none in sight.

That's it for now. Sorry for the long post.

Technology companies now vs. Pharmaceutical companies in 1993:

Charlie and Warren would not invest in a basket of tech stocks today as they proposed that they should have done with the pharmaceutical companies in 1993 (when the threat of HillaryCare brought valuations down significantly). While Warren did not which specific pharmaceutical company had the best prospects, he thought that as a group they represented good value.

With technology stocks have dropped significantly since last year, Buffett still feels that the mortality rate of a lot of these companies is still high, whereas not a single pharmaceutical company had going-out-of-business risk. In addition, the pharmaceutical companies as a group earned high returns on equity – this is not the case with technology companies as a group over the long-term.

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