Warren Buffett calls insurance Berkshire Hathaway's most important sector
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Re: Warren Buffett calls insurance Berkshire Hathaway's most important sector
#2That's how he made his money, with GEICO. And there's so much that can be done with the "float".
Re: Warren Buffett calls insurance Berkshire Hathaway's most important sector
#3There'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.
Re: Warren Buffett calls insurance Berkshire Hathaway's most important sector
#4he'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.
Re: Warren Buffett calls insurance Berkshire Hathaway's most important sector
#5Well 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.
Re: Warren Buffett calls insurance Berkshire Hathaway's most important sector
#6That's how he made his money, with GEICO. And there's so much that can be done with the "float".
Berkshire 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.
Re: Warren Buffett calls insurance Berkshire Hathaway's most important sector
#7Well 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…
One 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.
Re: Warren Buffett calls insurance Berkshire Hathaway's most important sector
#8maybe that was a joke and i missed it. deeply interesting? no idea why it's on here.
Re: Warren Buffett calls insurance Berkshire Hathaway's most important sector
#9Well 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…
It'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.
Re: Warren Buffett calls insurance Berkshire Hathaway's most important sector
#10Search 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.