Over the last several months, a plethora of articles have been written about Berkshire Hathaway’s (BRKA) upcoming and now-completed purchase of Burlington Northern Santa Fe. Berkshire, the large, diversified holding company, led by legendary investor Warren Buffett and his partner Charlie Munger, recently purchased the railroad giant and as a result, now owns more than 32,000 miles of track in the U.S. The company also owns electric utilities, clothing manufacturers, candy and ice cream makers, building materials companies, and many other firms across a wide array of industries. Mr. Buffett, during his 45-year tenure at the helm of Berkshire has also amassed a huge stock portfolio and owns large chunks of public companies, most notably, blue chips Coca-Cola (KO), Wells Fargo (WFC), and American Express (AXP). However, even with all these businesses, Berkshire’s previous success and future prospects depend on its immense insurance operations.
Berkshire's most visible and well known insurance business is GEICO. It became a wholly-owned subsidiary in 1996, and at that time, was the sixth largest auto insurer in the U.S. Now, it is in third place, and offers its products and services in 44 of the 51 American jurisdictions. GEICO’s market share has increased four-fold over the past 15 years (since Berkshire took full control), and now accounts for more than 8% of the total market. With the backing of Berkshire, it can, in most cases, offer lower rates than its competition, and with an advertising budget of $800 million in 2009 alone (more than twice the amount spent by any other auto insurer), GEICO will likely continue to expand its business at a healthy rate over the next several years.
Mr. Buffett constantly raves about his insurance businesses, particularly GEICO, and not just because of the cute gecko spokesman. When Berkshire sells its vast insurance policies to individuals, businesses, municipalities, and other entities, it receives premiums upfront and pays claims, if necessary, down the road. Thus, this business allows Berkshire, at any one time, to hold huge sums of money, which is referred to as float. Buffett can then invest the float, which has historically led to handsome profits. For comparison purposes, Berkshire’s float amounted to $16 million in 1967. At the end of 2009, Mr. Buffett had $62 billion to invest, and the interest and capital gains he earns, is, for the most part, free. Even better, Berkshire’s float will continue to increase, as GEICO’s, as well as the company’s other insurance businesses, expand.
The recent purchase of Burlington Northern has diversified Berkshire’s operations further. Over the past few years, the company has acquired electric utilities and several industrial firms, as well. However, Berkshire remains an insurance-heavy company, with those operations accounting for about 30% of total annual revenues (not including investment gains, which can vary greatly from one year to the next). Thus, for those investors intrigued by the Burlington addition, it would be a good idea to familiarize yourself with Berkshire’s core insurance operations before making any investment decision. We should also note that Berkshire recently split its B shares (ticker: BRKB) 50-to-1, which makes owning a piece of Mr. Buffett’s company easier for most investors.