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American International Group, Inc. (AIG), Berkshire Hathaway Inc. (BRK.A): One Mind-Blowing Revelation The Buffett Bulls Might’ve Missed

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Editor’s Note: Berkshire Hathaway Inc. (NYSE:BRK.A), Berkshire Hathaway Inc. (NYSE:BRK-B), American International Group, Inc. (NYSE:AIG), The Allstate Corporation (NYSE:ALL), The Allstate Corporation (NYSE:ALL), The Travelers Companies, Inc. (NYSE:TRV), Hartford Financial Services Group Inc (NYSE:HIG)

Warren BuffettBerkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK-B) held its annual meeting a few weekends ago at the Century Link Center in Omaha; see Insider Monkey’s recap from the meeting. An annual spring rite of passage for value investors, the meeting contained thousands of shareholders who flocked to the Midwest to pay homage to the Oracle of Omaha. During the course of the meeting, and in his annual shareholder letter, Warren Buffett discussed future plans for Berkshire Hathaway Inc. (NYSE:BRK.A). One source of potential future growth, which Buffett discussed, is the expansion of the insurance businesses into commercial lines.

Buffett’s plans

Buffett has set in motion plans to expand Berkshire Hathaway Inc. (NYSE:BRK.A)’s insurance businesses into commercial lines by bringing in high-level executives from a major competitor. Early in the meeting, Buffett discussed the recent migration of four insurance executives from American International Group, Inc. (NYSE:AIG), who were brought to Berkshire in order to establish and grow a commercial insurance business. There is no doubt that Berkshire Hathaway Inc. (NYSE:BRK.A) has the funds and industry strength to enter this new arena, which could provide a further growth opportunity for Berkshire.

Likewise, a significant portion of Berkshire Hathaway Inc. (NYSE:BRK.A)’s intrinsic value lies in the float from its insurance businesses.  The insurance businesses take in premiums upfront, and pay claims later. The Company then uses the “float” of the funds it holds to invest. This float has grown from a “measly” $1.632 billion in 1990 to over $73 billion in 2012.

The commercial insurance business could allow Berkshire to grow its float even further.  An increased float with expansion into commercial lines will allow for more investment in the market, and more capital for acquisitions.

Competitors

Berkshire Hathaway Inc. (NYSE:BRK.A) has a number of competitors in the commercial insurance sector.  As mentioned previously, AIG has a large commercial insurance line.  AIG recently reported net revenue income of $2.2 billion, down 31% from the prior year period.  Diluted earnings were $1.43 per share, down 15% from the prior year period.

Another competitor is The Allstate Corporation (NYSE:ALL). Allstate has a market capitalization of $23.34 billion versus a market capitalization of $66.27 billion for AIG, and $278 billion for Berkshire. Unlike AIG or Berkshire, The Allstate Corporation (NYSE:ALL) has a modest dividend yield of 2.02%. At least one hedge fund is betting big on The Allstate Corporation (NYSE:ALL); Mason Hawkins of Southeastern Asset Management reported holding over 16 million shares heading into this year.

The Travelers Companies, Inc. (NYSE:TRV), meanwhile, also has a substantial commercial insurance line.  Travelers reported net income of $896 million for the first quarter, an 11% increase over the prior year’s first quarter. The Travelers Companies, Inc. (NYSE:TRV)’ share price has performed well and is up 19% year-to-date, and a dividend yield of 2.39% is a nice icing on the cake.

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