How Buffett Turned Around A $23.5 Billion Insurance Bet

Berkshire Hathaway 's insurance companies are worthy of envy. Large, profitable, and responsible for generating billions of dollars for Buffett to invest, the insurance group at Berkshire Hathaway underlies much of its recent and historical success.

Insurance isn't always easy money. Berkshire Hathaway's insurance operations had a less-than-stellar start to the last decade. For four years running, from 1999 to 2002, the insurance operations wildly mispriced risk. Berkshire encountered more in losses than it earned in premiums. Even the extraordinary GEICO unit posted an underwriting loss in the year 2000.

Some of the losses simply couldn't have been predicted. The steepest loss occurred in 2001, when the 9/11 terrorist attacks resulted in outsize losses for Gen Re, Berkshire's reinsurance subsidiary. The reinsurer made up 45% of Berkshire's premium revenue that year.

This result is simply phenomenal. When investment income earned from Berkshire's float is included, the insurance companies have been profitable in 17 out of the last 18 years.

The business of insurance is volatile by its nature. Infrequent but severe catastrophe losses will occasionally rip into its profits, resulting in a negative year. But as Berkshire's stable of insurers has grown more diversified -- it insures cars, homes, health, other insurance companies, and the occasional baseball player -- its profits have become more consistent.

Headline-grabbing acquisitions of utilities, car dealerships, and airplane parts manufacturers will play a part in Berkshire's future. But insurance will always be its bread-and-butter business.

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Jordan Wathen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

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