Kathmandu. Warren Buffett didn’t build his vast fortune simply by selecting winning stocks or buying popular companies like Coca-Cola and Apple. Behind his success lies something that many people can overlook. That’s the insurance business.
For decades, insurance has served as the engine that continues to power Berkshire Hathaway. One conglomerate, Buffett went from a struggling New England textile company to one of the world’s most valuable ones.
Buffett first gained control of Berkshire Hathaway in the mid-1960s. The company was a traditional textile mill business facing stiff competition and declining profits at the time. Many investors may have tried to restart factories or dramatically reduce costs. Still, Buffett saw a major opportunity. He shifted the focus of the company from clothing to investment.
The real turning point came in 1967. That’s when Buffett bought a small but well-run property and casualty insurance company in Omaha, the National Compensation Company, and a sister company for about $86 million.
At first glance, buying an insurance company may seem like an odd move for a stock picker. But Buffett had studied the industry in depth for years. As a young man in 1951, he went to the offices of CEICO (Government Employees Insurance Company) and learned valuable lessons about how insurance companies worked. He was most impressed by the simple yet powerful concept called ‘float’.
Consider this: When you buy car insurance or home insurance, you pay your premiums upfront. The insurance company will take that money immediately but usually pay the claim much later if you have a car accident or a tornado damages your roof. In the meantime, the company keeps the cash. This pool of money is a float.
For a well-managed insurance company, the float can last for months or even years before a claim is paid. Buffett realized that this float would work like interest-bearing money if you carefully managed the insurance side and avoided big losses. Which you can invest elsewhere to earn returns.
It’s not free money in the risky sense; Weak underwriting (taking too many bad risks or charging too little) can cause large losses to wipe out the float and become even greater. But Buffett and his team focused on discipline. They sought out reliable risks, wisely took pricing policies, and sometimes steered clear of meaningless businesses.
National Indemnity specializes in unusual or difficult-to-insure risks. This allowed it to charge higher premiums. The insurance operation owned by Buffett generated profits from underwriting for many years. As a result, the float gave better returns than free ones.
These figures tell an extraordinary story of growth. When Berkshire first ventured seriously into insurance, its float was modest. By the late 1960s, it had a rough float of $19 million or more. That float grew significantly in the following decades as Berkshire added more insurance businesses. In recent years, it has exceeded $150 billion.
This large pool of capital is not owned by Berkshire but can be invested by the company. The company gave Buffett great financial strength by not taking on huge debts or issuing new shares.
Buffett didn’t stop at just national reparations. In 1996, Berkshire bought a large stake in GEICO, the auto insurance company famous for its Geico mascot, and eventually took full ownership. GEICO consistently earned substantial auto insurance premiums.
This was followed by the acquisition of General Rico in 1998. It is a major reinsurance company. Insurance companies reinsure themselves against major losses such as hurricanes or earthquakes. Each acquisition increased Berkshire’s ability to underwrite more business and further grow its float. Today, insurance remains a staple of Berkshire.
With this low-cost capital, Buffett could think and act as a long-term investor for a long time. He invested in stocks he believed to be undervalued and kept them for years or decades as their value rose.
Buffett also used it to buy candy maker C’s candies directly from companies ranging from railroads, utilities and consumer brands. Berkshire was able to move quickly with the cash it already had when opportunities arose during a downturn in the market. This ability to work without terror has been a great advantage.
Of course, there are nuances and risks involved in this strategy. Insurance is not exempt from disasters. Major disasters, whether natural events exacerbated by climate change or unforeseen events, can lead to big claims. Reinsurance in particular can be volatile.
Buffett has acknowledged these challenges and stressed the importance of maintaining a strong balance sheet and conservative methods. Still, in the long run, Berkshire’s insurance business has not only survived but thrived.
Despite the company’s massive growth, Buffett has repeatedly called insurance Berkshire’s most essential business and the engine driving its expansion since 1967. “Without it, Berkshire’s value would be much lower than it is today,” he said. ’
This approach reflects Buffett’s big idea: Seek a sustainable competitive advantage, manage risk wisely, and let time and compounding do the heavy lifting.
In an era of rapid business and high debt, Buffett’s insurance-driven empire is a reminder that stable and disciplined operations can create great wealth in the long run. As Buffett himself nears the end of his illustrious career and heirs like Greg Abel are ready to take over, the foundation he built on the insurance float is rock solid and quietly powering investments, acquisitions and growth for generations to come. –Agency
