(Excerpt from University of Berkshire Hathaway by Daniel Pecaut and Corey Wrenn)
Each business will have a couple of unique factors that are essential in evaluating its progress. Often, those unique factors are not immediately reflected in the reported earnings. In our short-attention-span world, analysts and the media so often focus on reported earnings and look no deeper.
With GEICO, one of those essential factors is the policyholder count. Buffett is telling us that. Another is the combined ratio, which reflects the profitability (or lack thereof) of those policies over time. There’s also the generation of float.
With GEICO, these are the things that matter—and they are all growing in a good way. In particular, growth in policyholders has accelerated.
For the Berkshire insurance operation, the growth of no- or low-cost float is primary. Adding $10.5 billion of float (an 11% increase in one fell swoop) is a major addition to intrinsic value. If the float comes with little or no cost, it acts much like equity.