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By Jeremy Glaser and Greggory Warren, CFA | 04-19-2016 12:00 AM

Is Berkshire a Good Buy Today?

Despite its runup this year, Berkshire's stock is trading at a reasonable entry point for long-term investors, says Morningstar's Gregg Warren.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Ahead of the Berkshire Hathaway annual meeting, I'm here with Gregg Warren, our senior stock analyst who covers Berkshire for us, to look at Berkshire's shares to see if they are attractive at today's prices.

Gregg, thanks for joining me.

Gregg Warren: Thanks for having me.

Glaser: So, before we do kind of a deep dive into valuation, let's talk a little bit about how the business is actually performing. I know we can slice and dice this in a bunch of different ways. But when you look at kind of the coinsurance operations, what does that look like for Berkshire right now?

Warren: Last year was a more difficult year overall. GEICO struggled through the year with an uptick in loss ratios. This wasn't necessarily emblematic of just GEICO. We saw it within the industry overall. As you know, gas prices have dropped considerably over the last two, three years. And what happens when gas prices go down is there's more drivers on the road, which increases the incidence of accidents, which increases claims. We've also seen an uptick in the amount of distracted drivers getting involved in accidents. So, I think that those two things combined impacted the firm from a perspective on the loss ratio.

And in some part, a little bit of it is GEICO's fault because you go back three, four years ago they were really looking to sort of overtake Allstate as the number-two provider of auto insurance and they were relatively close. And in some ways they did lessen standards a bit when it came down to underwriting and potentially on the pricing front. And they are paying for some of that right now. Now, when I talked to Tony Nicely last year at the meeting, he noted that they are definitely putting in plans to increase pricing where they can, improve sort of the underwriting standards that they have. That hasn't really flowed down through the system yet, but we're expecting by the end of this year to see things looking a lot better.

One of the other trouble areas has been the reinsurance business. It's just a terrible pricing environment right now for reinsurance, and it's been that way for a few years. Buffett has actually been out there saying this is going to be a difficult market for them possibly for the next decade. So, when we look at the reinsurance business, we're not really expecting much in the way of earned premium growth and not much in the way of insurance flow growth. I know a lot of people put a lot of value on the insurance float, but I'm not really necessarily concerned with them sort of slowing down the growth in float because quite honestly, you're not really earning that much on it right now. Interest rates are still at historically low levels and they still need to maintain a fair amount of that in fixed-income investments.

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