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.
Even 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.
"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.
Nevada 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.
This is like saying the thief who stole my car didn’t hurt me cause I’m only working part time and can easily work more hours to buy another.
The money gifted Musk could have gone to schools. Higher taxes on casinos and tourists isn’t free, it means fewer casinos and tourists. And it also can go to schools.
Giving billionaires handouts is terrible public policy.
It’s a regulated public utility, like almost every electric distribution company. Nevada’s electric rates, which are subject to government review and approval, are below the national average. What’s exploitive about it?
Well 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.
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.
Buffett's best years were the Buffett Partnerships, from 1956 to 1969 (iirc), where his returns averaged 40% per year.
Berkshire has benefitted from insurance float for a long time, but it's a minor benefit. Float can't be invested in the stock market, it's extremely restricted in it's usage, and it's only been helpful because of the incredibly disciplined way Berkshire runs it's insurance companies. Proof is it never gave Berkshire Hathaway remotely the returns the Partnerships achieved.
That's an interesting argument because basically any modern Berkshire letter you read is going to say something along the lines of insurance being "the most important" part of BRK, an "all-important" component of their revenue, "the cornerstone of Berkshire", "our core business and the propellant of our growth since we purchased National Indemnity", "our main business", "a huge winner", "exceeds its book value by more than any other Berkshire business", &c.
(Can you tell I just plugged a bunch of random years plus "Berkshire letter" into Google? I didn't find a single one that didn't play up insurance; I'm not leaving any out.)
In 1994, he even laments exiting a position in GEICO in the 1950s as one of his major mistakes!
That's not proof at all. 60 years ago markets were much less efficient than they are today, and Buffett Partnerships was incredibly small compared to the size Berkshire is now.
Buffett has said it ad nauseum- the anchor around his neck is the size. Beating the market with what $200 billion to invest? That's leagues different from beating it with $10 million.
Float can be invested in pretty much anything. You're right that as an industry it tends to go into low risk fixed income investments but that's because it's safe (and easy for companies whose core strength is selling insurance) not because it's required.
Search 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.
The 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.
It'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-billi...)
I 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.
Buffetts 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.
33 comments
[ 2.9 ms ] story [ 62.6 ms ] threadBefore 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.
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.
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.
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.
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
Guys, you realize that that $80MM could have been used to make the CCSD not the butt of national education jokes, right?
The money gifted Musk could have gone to schools. Higher taxes on casinos and tourists isn’t free, it means fewer casinos and tourists. And it also can go to schools.
Giving billionaires handouts is terrible public policy.
"We don't want healthy people to subsidize sick people."
I would like to see that excess returned to customers.
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.
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.
Berkshire has benefitted from insurance float for a long time, but it's a minor benefit. Float can't be invested in the stock market, it's extremely restricted in it's usage, and it's only been helpful because of the incredibly disciplined way Berkshire runs it's insurance companies. Proof is it never gave Berkshire Hathaway remotely the returns the Partnerships achieved.
(Can you tell I just plugged a bunch of random years plus "Berkshire letter" into Google? I didn't find a single one that didn't play up insurance; I'm not leaving any out.)
In 1994, he even laments exiting a position in GEICO in the 1950s as one of his major mistakes!
Buffett has said it ad nauseum- the anchor around his neck is the size. Beating the market with what $200 billion to invest? That's leagues different from beating it with $10 million.
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.
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.
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.
https://play.google.com/books/reader?id=kkiFKCO5BAgC&printse...