Image source: The Motley Fool
Berkshire Hathaway (NYSE:BRK.B) literally has more cash than it knows what to do with. And investors are looking at what Warren Buffett – or any of the other managers – are going to do with it.
But investing in the stock market isn’t the only thing that Berkshire does well. A big part of the firm is its insurance division, which has yet again been making impressive moves.
Wildfires
California is currently suffering its worst wildfires in over 40 years. As I write this, 25 lives have been lost and 23 people are still missing – and to some extent, that’s the only thing that really matters.
On top of that, over 12,000 homes and businesses have been damaged. And it might be some time until the full extent of the damage is known.
While this is significant, it’s relatively minor compared to the loss of life. One reason for this is that insurance companies exist to put right at least some of the damage that has been caused.
Berkshire’s balance sheet protects it from a lot of potential problems. That means the possibility of a huge insurance loss is the biggest risk with the stock – and this has been the case for some time.
Insurance
In the context of the latest wildfires, Berkshire Hathaway has done a good job of protecting itself. Since 2023, the company has stopped writing home insurance policies in California.
While the causes of the fires aren’t yet clear, climate change is being cited as a key reason and Buffett has been aware of this for some time. The Berkshire CEO has cited this in the firm’s annual meetings.
This highlights the strength of the company’s insurance operations. With policies that are renewed – and repriced – each year, Berkshire has the chance to back away from risks if they become too great.
The decision to stop writing policies in California has proved to be a smart one. While it might have reduced insurance premiums in the short term, it has also avoided some big losses for the firm.
Buffett’s first rule
According to Buffett, the first rule of investing is not to lose money and the second rule is to never forget rule number one. In the insurance industry – where risk is inevitable – this can be hard to do.
Being able to walk away from business when it isn’t priced attractively is crucial. However, it’s much easier for a company like Berkshire that already has $325bn in cash.
That’s the unique advantage Buffett’s operation has over other insurers. It isn’t under any pressure to write contracts to grow its premium volume, unless it expects to make a decent return in doing so.
I doubt it’s Buffett personally looking after Berkshire’s decisions around California underwriting. But I have no doubt that the culture of the organisation comes from the top.
Investing like Warren Buffett
Every three months, investors pay attention to what Berkshire Hathaway is doing with its cash. But job number one is – and always will be – looking after it.
This is key to how Buffett thinks about investments. It runs through Berkshire’s subsidiaries and is one of the key reasons I expect the stock to continue working out well for shareholders.
This story originally appeared on Motley Fool
