“Our Main Business Is Insurance” 31National Indemnity Company and National Fire & Marine Insurance
Company. It was the beginning of a phenomenal success story. Berkshire
Hathaway the textile company would not long survive, but Berkshire
Hathaway the investment company that encompassed it was about to
take off.
To appreciate the phenomenon, we must recognize the true value of
owning an insurance company. Sometimes insurance companies are good
investments, sometimes not. They are, however, always terrif ic invest-
ment vehicles.Policyholders, by paying their premiums, provide a con-
stant stream of cash, known as the f loat. Insurance companies set aside
some of this cash (called the reserve) to pay claims each year, based on
their best estimates, and invest the rest. To give themselves a high degree
of liquidity, since it is seldom possible to know exactly when claim pay-
ments will need to be paid, most opt to invest in marketable securities—
primarily stocks and bonds. Thus Warren Buffett had acquired not only
two modestly healthy companies, but a cast-iron vehicle for managing
investments.
For a seasoned stock picker like Buffett, it was a perfect match. In
just two years, he increased the combined stocks and bonds portfolio of
the two companies from $31.9 million to nearly $42 million. At the
same time, the insurance businesses themselves were doing quite well.
In just one year, the net income of National Indemnity rose from $1.6
million to $2.2 million.
Buffett’s early success in insurance led him to expand aggressively
into this group. Over the next decade, he purchased three additional
insurance companies and organized f ive more. And he has not slowed
down. As of 2004, Berkshire owns 38 insurance companies, including
two giants, the Government Employees Insurance Company (GEICO)
and General Re, each of which has several subsidiaries.
Government Employees Insurance Company
Warren Buffett f irst became acquainted with GEICO while a student
at Columbia because his mentor, Ben Graham, was a chairman of
its board of directors. A favorite part of the Buffett lore is the now-
familiar story of the young student visiting the company’s off ices on a
Saturday morning and pounding on the door until a janitor let him in.