Berkshire Hathaway makes a huge slice of its profits from utilities and insurance. While GEICO is one of the company’s most recognizable insurance brands, National Indemnity was actually purchased first. This reinsurance company helps other insurance companies absorb risks and protects them against losses. But, while being a reinsurance company can be extremely lucrative, it is also a rather risky endeavor.
Naturally, Warren Buffett’s reinsurance company is extremely profitable in part due to his leadership and the following three traits which National Indemnity sticks to with a passion:
1. Focus on large, unusual risks
Buffett loves companies that have a ‘moat’ or something which sets them apart. In the reinsurance business, Berkshire Hathaway specalizes in the huge, unusual risks that most companies won’t touch. These risks, should they come to pass, would have a huge payout. However, Buffett knows that corporations are willing to pay quite a bit for that peace of mind, and that’s where a tidy amount of profit comes in. The best example of this actually happened recently when Berkshire make an agreement with Hartford Financial Services Group for asbestos insurance which landed Berkshire with a $650 million premium.
2. Maintain unmatched financial strength
Berkshire Hathaway operates on the cautious side and, at the behest of chairman Warren Buffett, always keeps money on hand just in case an emergency arises. While a minimum of $20 billion is what Buffett prefers, it is often higher. At the time of writing, Berkshire has around $70 billion just sitting around waiting for a good deal or a rainy day. This cash cushion allows the company to maintain its operability and makes those high-risks not as risky as the company could absorb a surprise loss without too much harm to the bottom line.
3. Keep risks on your books
Due to its financial strength, and the stick-to-it attitude of its chairman, Berkshire’s reinsurance companies aren’t bothered with the huge losses that can sometimes come from the risks the company takes. Many times, reinsurance companies will lay off risks to retrocessionaires, but Berkshire would rather absorb them. With every risk they insure, Berkshire stays with the company through the life of the exposure which builds better reputation and strength as that wherewithal brings more business. It, of course, also helps that Berkshire has other companies to fall back on, and that its shareholders are very confident in Buffett.