
Warren Buffett calls insurance Berkshire Hathaway's most important sector - shubhamjain
https://www.fool.com/investing/2017/03/18/why-warren-buffett-loves-the-insurance-industry.aspx
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tptacek
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.

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Nokinside
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.

~~~
mathattack
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...](https://qz.com/67052/heres-how-warren-
buffett-made-3-1-billion-on-his-crisis-era-bet-on-goldman-sachs/))

~~~
Nokinside
GS investment was prime example of Buffet having money when others don't
during crisis.

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.

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kchoudhu
There'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.

~~~
valuearb
"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.

~~~
Jtsummers
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.

Some details on Nevada's revenue:
[https://ballotpedia.org/Tax_policy_in_Nevada](https://ballotpedia.org/Tax_policy_in_Nevada)

~~~
tptacek
So you're saying the taxpayers fund things through an _even more regressive_
process than income taxes.

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Jtsummers
Well, there is that. But also a large percentage of the sales tax (which
includes hotels and such) comes from tourists, not residents.

~~~
kchoudhu
People trotted that one out a few days ago when trying to justify spending
$80MM on a ball park in Summerlin: we didn't pay for it, the tourists did!

Guys, you realize that that $80MM could have been used to make the CCSD _not_
the butt of national education jokes, right?

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lordnacho
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.

~~~
valuearb
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.

~~~
tptacek
Berkshire entered insurance in 1967; were their best years prior to that?

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valuearb
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.

~~~
jbdubwub
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.

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Animats
That's how he made his money, with GEICO. And there's so much that can be done
with the "float".

~~~
valuearb
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.

~~~
jbdubwub
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.

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ggm
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.

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thirdinline
That is interesting, where did you learn about the longer term history of
insurance? It sounds like it would make a good book.

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HeyLaughingBoy
Well, here's the first result for "books on the history of insurance"

[https://play.google.com/books/reader?id=kkiFKCO5BAgC&printse...](https://play.google.com/books/reader?id=kkiFKCO5BAgC&printsec=frontcover&output=reader&hl=en_US&pg=GBS.PA44)

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lefstathiou
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.

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yesenadam
maybe that was a joke and i missed it. deeply interesting? no idea why it's on
here.

