Berkshire Hathaway (BRKA +0.83%) (BRKB +0.95%) has delivered stellar long-term returns, and one major reason why is that it leans heavily on insurance to drive its long-term growth.
In the second quarter, the company saw its float, or the cash generated from premiums collected before claims are actually paid out, jump $1.1 billion to a whopping $177.5 billion. This growing float has been a cornerstone of Berkshire's growing cash pile and ability to make strategic investments across a range of industries.
However, Berkshire's underwriting profit actually dipped during the second quarter. Despite this, the conglomerate saw steady growth across other sectors, showing why Berkshire can continue to deliver for investors.
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Berkshire Hathaway's insurance segment has been crucial for its long-term growth
Berkshire Hathaway is a massive conglomerate with businesses across manufacturing, energy, transportation, utilities, consumer products, and insurance, of course. Within its insurance segment, Berkshire owns automotive insurer GEICO, along with insurers across the industry, covering commercial, specialty, and reinsurance.
Insurance has been crucial for Berkshire's long-term success because it provides the company with a massive cash stockpile through its float. Float represents cash collected before paying out claims, and Berkshire invests it in safe U.S. Treasuries. Claims tend to be predictable over time, and as collected premiums outpace claims, Berkshire's cash stockpile grows steadily over a long time horizon.
NYSE: BRKB
Key Data Points
In the second quarter, Berkshire's float climbed to $177.5 billion. The company invests this specific capital primarily in U.S. Treasuries. Combined with its other investments, Berkshire closed the quarter with $324.9 billion in U.S. Treasuries and another $323.8 billion in equities.
Float grew despite the company's insurance underwriting after-tax earnings falling 13% year over year in the second quarter. The drop came amid higher claims costs in its GEICO auto insurance business. In the quarter, GEICO's loss ratio rose to 76.6%, up from 71.8% in the prior year.
The rising loss ratio reflects higher automotive claims costs. On top of this, GEICO also saw expenses rise as it increased advertising spend in the period.
Despite this, Berkshire saw excellent performance across its other insurance businesses, Berkshire Hathaway Primary Group and Berkshire Hathaway Reinsurance Group, thanks to lower-than-expected losses and solid premium growth.
Berkshire's growth engine keeps chugging along
Investors in Berkshire should keep an eye on its insurance operations, which have driven a large chunk of the company's long-term value. However, despite the drop in insurance earnings, Berkshire Hathaway continued to grow across its businesses, with second-quarter operating earnings rising 16% to nearly $13 billion. Its manufacturing, service, and retail businesses drove growth during the period.
The company also became a net buyer of equities for the first time in three and a half years, increased its Alphabet stake to $40 billion, and still has $365 billion in capital to put to work. For investors seeking a quality stock that has built-in diversification, Berkshire Hathaway remains an excellent stock to own today.
