Warren Buffett quotes on insurance. Berkshire Hathaway’s insurance operations played a very important role in the company’s success.
Buffett used cash generated by his textile operations to fund entry into the insurance business by purchasing National Indemnity Company in 1967.
Why does Warren Buffett like insurance companies? These companies are attractive because of their float, or cash with a near-zero cost of capital, that comes from the insurance premiums insurance companies collect every month. It is a good source of other people’s money that Warren Buffett can use to make acquisitions and other types of investments interest-free.
There were also tax benefits to doing so, for corporate income tax rates are typically lower than personal income tax rates. Thus, using insurance companies as investment vehicles lowers the tax Buffett has to pay on capital gains.
General Re was the largest reinsurance company in America. It also had a large international presence and earned $1 billion a year in the years before Buffett’s purchase. Buffett argued that the investment was advantageous because of the synergies that it could generate. He notes that after the merger, General Re would be able to focus on its world-class underwriting instead of having to worry about tax considerations and earnings volatility.
However, many analysts believed that Buffett’s acquisition of General Re might be a mistake. General Re lost more than $7 billion in the four years after Buffett’s acquisition, compounded by the effects of the 9/11 terrorist attacks. General Re management was also dissatisfied with the purchase – General Re’s president James Gustafson resigned after the Berkshire merger; a number of other senior executives also openly expressed discontent. Buffett later hypothesized that if General Re had remained independent, it might not have survived the 9/11 attacks.
Dry Powder Cash
Nonetheless, with the merger, Buffett could argue that even if the underwriting operations did not turn a profit, Berkshire would gain free use of float as long as the reinsurer was not loss-making – the dry-powder cash with a zero cost of capital has great value for Berkshire.