22 Mar

Insurance Business: Berkshire Hathaway’s Growth Engine

WRITTEN BY Mohit Oberoi, CFA

Insurance business

In his 2018 annual shareholder letter, Warren Buffett, Berkshire Hathaway’s (BRK-B) chairman, said, “Our property/casualty (“P/C”) insurance business – our fifth grove – has been the engine propelling Berkshire’s growth since 1967, the year we acquired National Indemnity and its sister company, National Fire & Marine, for $8.6 million.”

Insurance Business: Berkshire Hathaway’s Growth Engine

Float

The insurance business offers Berkshire Hathaway what Buffett calls “float.” Basically, the insurance company collects premiums, invests the money, and pays back the insured when claims arise. Buffett said that “this collect-now, pay-later model leaves P/C companies holding large sums.” Looking at Berkshire Hathaway’s float, it increased from $39 million in 1970 to $122.7 billion at the end of 2018.

Buffett said, “We may in time experience a decline in float. If so, the decline will be very gradual – at the outside no more than 3% in any year. The nature of our insurance contracts is such that we can never be subject to immediate or near-term demands for sums that are of significance to our cash resources.”

Buffett’s investment style

The float that Berkshire Hathaway’s insurance operations offer is pretty stable. The float aligns well with Buffett’s long-term investment style. The float allows Berkshire Hathaway to acquire companies and not just invest in a portfolio of publicly traded securities (SPY).

Although Buffett has exited companies like IBM (IBM), Oracle (ORCL), General Electric (GE), and Walmart (WMT) over the last two years, he’s known for holding stocks for a very long period. At the end of the fourth quarter, Apple (AAPL), Coca-Cola (KO), JPMorgan Chase (JPM), Wells Fargo (WFC), and Kraft Heinz (KHC) were some of Berkshire Hathaway’s biggest holdings.

Read Is Warren Buffett Expecting a Market Crash to learn more about Berkshire Hathaway’s latest holdings.

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