- Berkshire Hathaway (BRK-A) the stock is now trading at over $500,000 per share
- Insurance is, and always has been, the key to Berkshire’s success.
- The autonomy of its units makes succession a non-issue for BRK-A shareholders
Insurance is a bet on catastrophe that helps remove some of the risk from your life. You can insure your home, your car, your business or your life knowing that should the worst happen, you and your loved ones will be taken care of. Usually the worst does not happen and the insurance company wins out, which is why the insurance business is so lucrative.
You just have to ask Berkshire Hathaway (NYSE:BRK-A) shareholders. People think Warren Buffett’s stock picks make him the undisputed king of Wall Street. I guess that’s true, but the real reason to buy BRK-A stock isn’t because of Buffett’s investment acumen, it’s because Berkshire is the largest insurance company in the world.
Berkshire has a leading position in many insurance branches. Based on direct premiums written, it is the second largest P&C insurer in the United States. It is also the 2nd individual automobile insurer and the 6th in commercial automobile insurance. And it ranks sixth in commercial liability insurance and workers’ compensation insurance as well.
Insurance companies owned by Berkshire Hathaway include Geico Auto Insurance and General Re Reinsurance. In March, Berkshire announced it would buy property and casualty insurer and reinsurer Alleghenia (NYSE:Yes) for $11.6 billion. It will be Buffett’s biggest contract since 2016.
Shortly before the news broke, Berkshire’s Class A stock price exceeded $500,000. While most stocks struggled in 2022, with the S&P500 down nearly 10%, BRK-A stock is up 12.3% year-to-date.
The sizzle and the steak
Buffett’s stock picks have always been Berkshire’s sizzle. Investors feel confident to buy Apple (NASDAQ:AAPL) or Bank of America (NYSE:BAC) because they are among Buffett’s favorite stocks. News from his recent Purchase of over $4.2 billion of resume (NYSE:HPQ) action sent shares of the computer maker to a record high earlier this month, even as the rest of the tech sector took it on the chin. And shares of western oil (NYSE:OXY) reached a multi-year high after Buffett revealed that he increased its stake in the oil company nearly a billion dollars.
Buffett can afford multi-billion dollar stock purchases because the rest of Berkshire is throwing away so much money. The company had $146.7 billion in cash and short-term investments at the end of 2021. That’s more than Apple or Alphabet (NASDAQ:GOOGL) has on hand. And for each of the past three years, Berkshire has generated approximately $39 billion in free operating cash flow.
Like Berkshire described in its last annual report, much of the company’s value comes from its “big four” companies, i.e. steak. First and foremost, the company’s insurance business. As the letter states, “the product will never be obsolete and the sales volume will generally increase with economic growth and inflation.”
The company’s stake in Apple, its 100% stake in America’s largest railroad, BNSF, and holding company Berkshire Hathaway Energy round out the Big Four.
BRK-A stock beyond Buffett
While Buffett is widely considered the most successful investor of all time, Father Time is undefeated. Buffett and longtime vice chairman Charlie Munger are both in their 90s, and many investors see succession as the biggest risk for BRK-A stocks.
Some of Berkshire’s major shareholders have proposed the company separate the positions of president and general manager, both now owned by Buffett. Ohama’s Oracle is resistant to the idea and owns 32% of the voting stock.
The speculation continues on who will take the helm. Ajit Jain, previously mentioned as successor, is now 70 years old. Alleghany CEO Joseph Brandon is in his early 60s and described as a “longtime friend” of Buffett.” But the most likely successor is Greg Abel, 59, who has led Berkshire’s non-insurance operations since 2018.
What should matter to investors is that all of Berkshire’s operations are run semi-autonomously. Berkshire operates like a bank and the executives run their businesses. It wouldn’t be difficult to dismantle the company and it would probably bring enormous value.
The basics of BRK-A shares
One of the dumbest things I’ve done in my investing career was not buying Berkshire Hathaway stock. Despite talk of how Buffett lost his edge, the stock’s value has doubled in the past five years.
When stocks go stonks, BRK-A stock has outperformed, and it continues to outperform as the rest of the market crashes. That’s because insurance is a profitable business in good times and bad. Investors can expect Berkshire’s insurance business to continue to generate cash flow even as the economy struggles.
It was money that made Buffett king, providing opportunities for Berkshire when the rest of the investing world had to balk. Cash is king in a crisis, and no one has more than Buffett.
BRK-A shares are selling for less than 2.2x sales and are a good buy in any market. If $500,000 a share is too rich for your blood, you can always buy the B shares (NYSE:BRK-B).
As of the date of publication, Dana Blankenhorn held long positions at AAPL, GOOGL and BAC. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.