Burning Questions for Warren Buffett

Coke's compensation package and Berkshire's new specialty insurance business are just some of the topics that will come up at this year's Woodstock for Capitalists.
By Morningstar |  02-05-14 | 

Tomorrow marks Berkshire Hathaway’s Annual Meeting. Morningstar’s Berkshire analyst Gregg Warren will be on a panel asking questions to Warren Buffett and Charlie Munger. Here he shares some some big topics that he thinks are going to be discussed.

On the Coca-Cola compensation plan

Buffett has stated that he wasn't very happy with the plan; he thought it was excessive. But at the same time, Berkshire voted to abstain instead of voting against the plan, which to us doesn't really hold true with a lot of the standards that Berkshire has put in place historically. I'm not really sure that saying that "Voting against Coke is like voting against America," is really the right answer here. So, I think in some sense this issue is going to come up.

In some circles, an abstain is a no vote. But if you really want to send a message, if you're really saying, "I don't like this plan, I think it's excessive, I think it dilutes shareholders," then the obvious vote is against. And it's not saying something negative against management; it's not saying something negative against Coke. It's just saying, "Listen, we want to make sure that we're protecting shareholders' interests," which is ultimately the board's job.

I'd be curious to know what his real rationale is. If you're on the record saying, "I think the plan is excessive and I don't agree with it," and you've got some other activist shareholders basically saying the same thing, then you should throw your vote in with them.

On Burlington Northern

As far as news events and things that have happened, the railcar disaster this past year prompted them to announce that they're looking at safer railcars for the transportation of petroleum and other products. So that's a big positive.

On MidAmerican Energy

They just completed the acquisition of NV Energy this past year; how do they expect to contribute? I think one of the other big issues for MidAmerican is renewable energy. They are now one of the biggest, if not the biggest, generators of renewable energy through wind and solar panels. And basically, they've been out there investing heavily the last couple of years; they've actually been buying some stuff out of bankruptcy.

You've got the tax breaks for those investments sort of running off over the next year or two, and the question in our regard is about whether or not they'll continue to make those investments, continue to build out those operations to sort of diversify away the other pieces of the business. Whether or not it's profitable for them to do that?

On the specialty insurance business started by Berkshire

We've looked at what AIG's done with that business. We've looked at the specialty insurance business, especially on the excess and surplus lines. We think that it is definitely a niche-like business, where if you're going to go into that and you're going to build it from the ground up, it's really a good piece of business to go after.

They have the cash; they have the Berkshire Hathaway name. It's mainly commercial business, so they're really going on a business-to-business basis and going out there and selling the stability and the backing of Berkshire in these insurance contracts. We think from that perspective it's very good. It could be a multi-billion-dollar business in a matter of 4 or 5 years. So, we've got a fairly good outlook for that.

We'd like to get more details from them on how it's being run, on what they're looking at as far as potential earned premiums over the long run, potential profitability for the business over the long run.

It was interesting this year though because as we mentioned previously, they hired in a lot of these guys from AIG to run this business, but looks like Ajit Jain [president of Berkshire's insurance group] is actually going to be overseeing it.

Would there be less reinsurance activity if Jain is going to be focused maybe on building this new business?

Yes, that's sort of the general takeaway that we have.

Reinsurance itself is going through an excess-capacity period right now. You've got a lot of money in the business overall; you've had hedge funds actually moving into the reinsurance business. It's difficult to find risks to undertake at prices that are attractive. And Berkshire's always sort of had that luxury of being able to walk away from this business when things are not priced accordingly. That's a good thing for investors. When you look at some of the other reinsurers, especially the publicly traded ones, they can't really afford to walk away from business because they have to constantly show growth and constantly show investment in the business.

From that perspective, Berkshire does benefit. GenRe and Berkshire Hathaway Reinsurance, if they just don't see the pricing as being appropriate, they can walk away, and it doesn't really hurt them or hurt them overall. And it keeps their profitability looking a lot better than it does for, say, a typical reinsurer.

The above excerpt is from an interview that appeared on Morningstar’s U.S. website where Gregg Warren spoke to Morningstar’s Markets Editor Jeremy Glaser. 

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