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Burning Questions for Buffett

Jeremy Glaser
Greggory Warren, CFA

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. At this year's Berkshire Hathaway Annual Meeting, our analyst Gregg Warren will be on a panel asking questions to Warren Buffett and Charlie Munger. I'm here with him today to talk about some big topics that he thinks are going to be discussed.

Gregg, thanks for joining me today.

Gregg Warren: Thanks for having me.

Glaser: Unlike the past couple of years, it doesn't seem to be a one big topic that's dominating the preconference conversation. What do you think will be some of the issues that are going to be discussed. What's one that you think will be on people's minds?

Warren: I think you're absolutely right. I think if we go back the past couple of years, [MidAmerican Energy Holdings chairman David Sokol's resignation] three years ago cropped up and really kind of dominated the meeting overall. We also had some election year stuff going on in 2012.

But when we look at this year, the past year, there really hasn't been much that cropped up that screams out, "This is going to be a big topic of discussion." And I think the one that does stand out more recently has been the issue with 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. There are going to be some questions about it.

The thing is 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.

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Glaser: Why do you think that he did decide to abstain instead of voting now?

Warren: I'm curious to know that myself. If it makes sense, we'll try to roll the question in. I think the hardest part for us as panelists going in is finding questions that actually add value, where you can get Warren engaged and Charlie engaged and have them bring out an answer, bring out something that the people didn't know before about a particular subsidiary, about a particular thing. I think this is one of those issues, kind of like the Sokol thing, where it can lend itself to more defensive posturing.

And we hope that's not the case. I'd be curious to know what his real rationale is. But it just doesn't make sense [to abstain from the vote]. 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.

Glaser: You mentioned that you're trying to get some more information on some of the subsidiaries we might know less about. What are some that you think have had an interesting year that you'd like to tease out some more info on?

Warren: I think Burlington Northern stands out. We'd like some more information. As far as news events and things that have happened, the railcar disaster this past year that 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.

But just getting into sort of more details about Berkshire businesses, about what the thinking is, one is MidAmerican. 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 are 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. And whether or not it's profitable for them to do that.

Glaser: How about on the insurance front? Berkshire started a new insurance business, the specialty insurance business this year. Do you think that's one that's going to be successful for them?

Warren: Yes, I think so. 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 nichelike 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 four or five 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. That to us sends another signal about what they think about reinsurance.

Glaser: What does that mean? If Jain's going to be focused maybe on building this new business, do you expect less reinsurance activity?

Warren: 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.

Glaser: Gregg, thanks for your thoughts. We'll keep catch up with you after the meeting to see what actually got discussed.

Warren: Sounds good.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.