"Re/insurance. The engine of Berkshire Hathaway: Warren Buffett" (BRK) Plus a Special Bonus!
From Artemis:
Warren Buffett’s much-anticipated 50th anniversary letter to
Berkshire Hathaway investors was published on Saturday and the ‘Sage of
Omaha’ explained that insurance and reinsurance has been “the engine”
that propelled the firm’s expansion.
Buffett’s was the first to truly discover the value of insurance premium
float, by building huge pools of capital that he could put to work
across his diversified investment focused business. As such he is the
inspiration of many of the hedge fund strategy reinsurers, and the envy
of many traditional insurers and reinsurers.
Berkshire Hathaway has such a strong capital base, as a result of the
Warren Buffett strategy, that the largest insurers and reinsurers turn
to Berkshire when they need a counterparty who can put down the largest
lines in the industry and who they trust to be there to pay claims in
another 50 years time.
So, it’s always insightful to take a look at some of the sage’s
comments and in the 50th anniversary investor letter Warren Buffett
gives away some of more of his thinking behind the way Berkshire has
leveraged insurance and reinsurance premium float, as well as how
important re/insurance has been to enable Berkshire Hathaway to become a
huge and profitable business empire
Buffett’s letter includes a history lesson on Berkshire Hathaway’s
entry into the insurance and reinsurance world, explaining; “That
industry has been the engine that has propelled our expansion since
1967, when we acquired National Indemnity and its sister company,
National Fire & Marine, for $8.6 million.”
Just think about that for a moment. The largest re/insurance business
empire in the world began from an $8.6 million acquisition. That small
acquisition, which was still a significant sum in 1967, has now morphed
into a re/insurance business that in 2014 generated $2.7 billion of
underwriting profit and over the last twelve years which have all been
profitable, $24 billion.
Buffett said that “insurance was in my sweet spot”, an industry that
he understood and saw as a way to generate both huge profits as well as
huge premium float for investment purposes.
During the twelve successive profitable years of underwriting at
Berkshire Hathaway the firm has generated a massive amount of premium
float. “During that 12-year stretch, our float – money that doesn’t
belong to us but that we can invest for Berkshire’s benefit – has grown
from $41 billion to $84 billion,” Buffett explained.
The float is something Buffett always explains in his letters,
because; “Though neither that gain nor the size of our float is
reflected in Berkshire’s earnings, float generates significant
investment income because of the assets it allows us to hold.”....MORE
Special Bonus: the earliest known video of Mr. Buffett, 1962, from the Nebraska State Historical Society archives:
