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Warren Buffett calls insurance Berkshire Hathaway's most important sector
- Animats 9y agoThat's how he made his money, with GEICO. And there's so much that can be done with the "float".
- valuearb 9y agoBerkshire Hathaway didn't purchase shares in GEICO until the mid to late 70s (he was already worth hundreds of millions) and didn't buy it outright until 1995 (when he was a multibillionaire). Before purchasing GEICO, Buffett averaged a 40% annualized return in his investment partnerships over 13 years, then averaged a 25% annualized return in Berkshire Hathaway for two and half decades. He was already the greatest investor in history before buying GEICO, and since purchasing it Berkshire Hathaway returns have dropped significantly (though not because of GEICO). GEICO has had only a small part to do with Berkshire's success, in fact it's a small portion of their insurance companies, which include General Re. Float can be negative. In fact, the vast majority of insurers carry negative float, they lose money on the policies they write and squeeze out profits only with the interest they earn on float. Buffett's use of float is only successful because Berkshire is incredibly disciplined and doesn't own any insurance business without demanding it produce an underwriting profit. Lastly, GEICO's float is probably the least useful float of all their insurance companies. Float's value is in proportion to the insurance contract duration, auto insurance is a short term contract and the float has to be returned quickly, greatly restricting the types of investments that can be made with it. Ajit Jain's group writes insurance contracts that have durations up to decades long, and that float can be invested much more aggressively.
- jbdubwub 9y agoEven if Berkshire didn't produce an underwriting profit, it'd still be very successful because of the returns they make on their float. There's a line obviously you can't cross but even if they had a combined ratio of like 1.05 they'd be fine. I like their discipline though. Berkshire has always had a huge insurance component. They bought NICO in the late 60s and built the business to a large part around that.
- kchoudhu 9y agoThere's also his ownership stake in NVEnergy, which exploits Nevada's citizenry using a government sanctioned monopoly. Solar died in Nevada in no small part due to Buffet's lobbying; don't be fooled by the aww-shucks demeanour, the dude is a shark.
- valuearb 9y ago"We do not want our million plus customers that do not have solar to be buying solar at 10.5 cents when we can turn it out for them at 4.5 cents or buy it for them at 4.5 cents,” Buffett told CNBC Monday morning during a wide-ranging interview. “So we do not want the non-solar customers, of whom there are over a million, to be subsidizing the 17,000 solar customers.” The real shark was Musk, who was just mad that he wasn't able to force consumers to buy solar at more than twice the cost of other energy to subsidize his solar business, like he got the poor taxpayers of Nevada to subsidize his factory.
- Jtsummers 9y agoNevada residents don't pay income taxes. They pay sales and property taxes (primarily). The majority of the income in the state, however, comes through sales taxes. Almost certainly not all from residents. Nevada itself is subsidized by outsiders visiting the state. The people of Nevada lose more money in what they choose not to tax the casinos that whatever they may have directly or indirectly put into Musk's factory. Some details on Nevada's revenue: https://ballotpedia.org/Tax_policy_in_Nevada https://ballotpedia.org/Tax_policy_in_Nevada
- trumpisyourdad 9y agohe's an old crotch who needs to go away sooner than later. hopefully the last thing he sees before he dies is a new BTC ATH.
- lordnacho 9y agoWell that's not surprising. He uses the float to generate investment returns, so he needs it to work. There's possibly an extra bonus; if your investment division is good at generating returns, which it is, your insurance division doesn't have to take the same risks that other insurers do. This can mean that you net end up making money on that side as well, since you don't get burned by as many hot potatoes. No idea if this explains their profitable insurance division, I don't have the insight on the insurance side to say.
- dharmon 9y agoOne of many fun parts in reading the BRK letters is seeing this "tweaking" of their underwriting through the 70's until eventually losses were rare.
- valuearb 9y agoIt's actually the reverse. Buffett requires his insurance companies write profitable policies, so that interest earned on the float is gravy. When one suffers through an inevitable bad year (Gen Re a recent example) float interest is a greater margin of safety. Most insurers write unprofitable policies and use float interest to cover those losses and make a profit. When they have a bad year, they often lose horrendous amounts and can be forced to raise more funding at unattractive rates just to stay in business. And the value of float seems to be over-rated on this site. Float almost never can be invested in the stock market or other high yield aggressive investments. Because it represents policyholder's premium dollars it has to be invested very conservatively, usually in safe fixed income investments. The way Buffett uses it adds a nice bump to earnings, but it's far from a key to his success. He never owned any insurance companies when he had his highest return decades.
- yesenadam 9y agomaybe that was a joke and i missed it. deeply interesting? no idea why it's on here.
- tptacek 9y agoSearch for any recent year and "berkshire letter", then, in the PDF, search for "insurance", and you'll see Buffett saying something similar going back as far as you can find Berkshire shareholder letters.
- Nokinside 9y agoThe real genius of Buffet is not the ability to make series of good investments, it's how he has structured his business. Berkshire makes steady amount of money (float and profit) from insurance business. They have always cheap money to invest, even in bad times when money is expensive. When there is downturn and buying opportunities arise, other investors must sell something good, arrange expensive financing, or dilute their stock to buy something new. Buffet just buys.
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- mathattack 9y agoIt's actually both. He's also able to buy whole business cheaper than what they'd go for in an auction. And he gets access to deals that allow him to leverage his brand name. (Example: Goldman Sachs https://qz.com/67052/heres-how-warren-buffett-made-3-1-billion-on-his-crisis-era-bet-on-goldman-sachs/ https://qz.com/67052/heres-how-warren-buffett-made-3-1-billi...)
- Nokinside 9y agoGS investment was prime example of Buffet having money when others don't during crisis. Money was tight, others tried to stay liquid and hoard cash. Only the government and Buffet were there with large amounts of money to spend.
- ggm 9y agoI think whats interesting is the role of insurance in economics going back to the fourteenth century or earlier. Trade demanded ship insurance. Risk capital was locked up behind usury laws (can't lend money and be a good christian, and we killed or expelled all the jews so thats a ... bit of a problem right there..) but insurance for profit at end was legal. The whole UK debt finance from life expectancy, actuarial tables, the long-term rate of insurance as a cost.. Maybe Buffet is just looking into deep economic time and deciding he can live with backing a form of capital investment which pays back over the 100+ year model.
- thirdinline 9y agoThat is interesting, where did you learn about the longer term history of insurance? It sounds like it would make a good book.
- HeyLaughingBoy 9y agoWell, here's the first result for "books on the history of insurance" https://play.google.com/books/reader?id=kkiFKCO5BAgC&printsec=frontcover&output=reader&hl=en_US&pg=GBS.PA44 https://play.google.com/books/reader?id=kkiFKCO5BAgC&printse...
- lefstathiou 9y agoBuffetts reinsurance team is legendary. I have a theory (my gut feel from reading numerous letters) that Buffett makes a point of saying this every year as a way to publicly recognize their contribution as the force behind Berkshire.