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Comment by fiatmoney | Hacker News Reader

This is partially selected for based on the kinds of businesses Berkshire invests in. They love high free-cash-flow businesses with significant regulatory or operational barriers to entry; the cash flow is then available to finance other acquisitions when opportunities arise, at a very low cost of capital.

In those kinds of businesses, there tend to be easy-to-understand performance metrics that can actually be optimized for on a longer term. The bet on the business model has already happened and there is limited ability to make company-risking bets or engage in empire-building.

One notable thing about Berkshire businesses is that internally they tend to be extremely "thrifty". Their insurance operations have one of the lowest expense ratios (operational expenses as a fraction of premiums) in the business, and are some of the only ones to actually make a profit off of the premiums directly rather than off of investing their float.

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wait, insurance companies don't usually make an actual profit directly from premiums?

what a world we live in, that's an eye-opener for me.

They typically make money from investing the money in between when it's received, and when they pay out claims - imagine a life insurer holding the cash between the start of the policy and the insured's death.

If your insurance provider can make money without investing the premiums, then I'd say you're paying too much for premiums.

They typically pay out more than they take in as premiums. But the time from taking money in to paying it out is in years to decades, so they sit on a mountain of money. Warren made the bulk of his money by using that money wisely.

I think it's just an artifact of inflation/growth. They make a profit directly if you measure in constant dollars, it's just that by the time they pay out they're paying out more nominal dollars than they took in in premiums.

If you want some of those mythical and much coveted "constant dollars", you typically need to sell dollars and buy some sort of appreciating investment.

I think most people have progressed beyond "stuffing cash under the mattress" as an investment model these days.

It's one of the reasons the most instance companies have been mutually owned until recently.

Now they've mostly turned into cash generators for investment banks.

> wait, insurance companies don't usually make an actual profit directly from premiums?

Well, it depends how you measure it.

In a basic model an insurance company's profit is:

Profit = Premiums + Investment Returns - Claims - Expenses

Talking about "profit from premiums" doesn't really make sense, that concept isn't defined. So you can't really say that "insurance companies don't usually make profit directly from premiums".

Fiatmoney is simply claiming that Bekshire's insurance operations have Premiums > Claims + Expenses.

thank you for the breakdown.

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