Warren Buffett is one of the most recognized investors in the world and his track record Berkshire Hathaway (WKN: 854075) (WKN: A0YJQ2) is an incredible proof of the potential of a long-term investment. By making intelligent decisions with his capital, Buffett achieved impressive results, and Berkshire shareholders took advantage of his vision.
There are many things about Buffett, but above all, one is crucial for success. As the Berkshire General Manager explained in his annual letter to shareholders, the biggest asset for the financial giant growth was the property insurance business. The most important asset that allows Buffett to make the most of his lucrative business model is what he calls a "cash balance" – an advantage that exceeds $ 122 billion today.
What is a cash balance?
Insurance business is fundamentally very simple. The buyer goes to an insurance company and buys an insurance policy that transfers a portion of the insurer's risk to the insurer. The policyholder pays advance payment for the policy. If it sustained damage later, the insurance company must pay.
There is always a certain time between the period when the premium is paid and the time when the loss occurs. Meanwhile, the insurance company retains premium money – the cash balance. The insurer is even capable of investing the monetary balance during this period, until it has to pay the damages.
For some insurance specialists, money is not necessarily a big deal. For example, the insurer may charge a monthly premium for the prescription drug insurance, but then immediately pay claims to meet the needs of the insured's recipe. In this case, the insurer will not have a monetary balance for very long, so it will be difficult to invest effectively.
However, Berkshire specializes in types of business, which can take a long time to pass between receiving client's policy and eventual damage. As noted by Buffett, risks such as asbestos liability or accidents occurring can sometimes occur after several decades after the end of the policy. This allows Berkshire to invest in cash in the long term – and therefore Buffett can buy so many interests in the portfolio.
How Berkshire's money position grew
The amount of cash in Berkshire Hathaway is breathtaking, and the pace at which he grows shows his evolution into a giant in the insurance business. In 1970, just a few years after Berkshire purchased the national indemnity and the national fire and marine, Buffett had $ 39 million in cash. Within 30 years, Berkshire extended its insurance to 27.9 billions Dollars of his life, pensions and health insurance.
From there, Buffett continued to grow with his business, but growth slowed down dramatically. However, the money balance in 2010 was 65.8 billion dollars, twice as high as it was 10 years ago. At present, Berkshire has a cash balance of $ 122.7 billion, largely thanks to long hiring and sustained growth in insurance.
Will Berkshire's money continue to grow?
Buffett wants to monitor the continued rise in cash, but competing pressures make it a challenge. It's easy to develop a new insurance business, but it's hard to do and at the same time preserve the excellent track record that Berkshire has recorded in his history. The unfortunate year 2017 is the only one of the last 16 years in which Berkshire has suffered a technical loss. Being disciplined guarantees that Buffett does not pay, so his balance of cash is growing.
Indeed, Buffett's shareholder's letter showed that the money could eventually be reduced. However, the fall will not be as strong as the growth due to the nature of the contracts. Buffett has structured the guidelines in such a way that Berkshire will never face a huge short-term reduction in his cash reserves – and this gives the insurer time to get resources to pay even the most catastrophic losses.
Berkshire Hathaway remains strong and insurance will continue to be a key driver of growth. Buffett knows how important this is to his overall success, and he will ensure that he will continue to function effectively in the years to come.
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The Motley stupid possesses and recommends Berkshire Hathaway (B-shares).
This article was written by Dan Caplinger in English and published on 02/02/2019 at Fool.com. It has been translated so that our German readers can participate in the discussion.
Motley Fool Germany 2019