What’s So Great About This Business
Whenever I go to Europe, and especially to Switzerland or Italy, I am amazed at the sheer beauty of nature, the quality of the air, the taste of the gourmet food, the magnificent historical sights, and white snow, crystal clear waters of the Mediterranean beaches (Italy has it all). But most of all, I am amazed because of the TOLL ROADS. It is quite a remarkable business model when you can capitalize on traffic. The upfront cost is enormous when building a road. Once that’s done, the upkeep is minimal. You get booths in place, and every car that passes: CACHING. It’s a fantastic model. The owner gets a fee from any person leaving home on his way to work, or exiting the city back to the suburbs.
Europe is built in such a way that freeways connect cities, and the other settlements are mostly rural. Toll roads are essential. Remember that there are many mountain ranges, so toll roads and toll tunnels are very efficient in cutting down driving times. Collecting money from traffic is a winning model, as long as the initial construction didn’t exceed the budget.
One of the greatest companies on the planet is Automatic Data Processing. It processes payrolls. It is a toll road on money. It takes advantage of the time difference between the incoming wires it receives from employers and the wires it makes to the employee accounts, and invests in short-term instruments. It’s a superb business. It earns an interest on OPM (other people’s money) and gets paid to do it (same as the banking system). Visa, MasterCard, and American Express are also wonderful. They make a fee on any transaction we do. It’s essentially a toll road on consumer spending. It is close to perfect. But I have got a better one for you. It is perfect. In fact, it is the backbone of one of the world’s greatest fortunes, Berkshire Hathaway. It is the insurance industry. Specifically, the P&C (Property & Casualty) niche of the insurance business.
What’s so great about it?
Insurance companies make money using two primary methods:
1. Underwriting profits.
2. Investing the float.
Underwriting profits occur when the statisticians of the firm evaluate risks in the right way and charge more in premiums than they pay out in claims.
The second way, and this is a very critical way, is they invest the “float.” When an insurance firm opens its doors in the morning, clients storm in and give the firm money. In return, they are insured. In the meantime, the firm gets to keep this money, invest it for free, and better yet, even earn an underwriting profit on it. It is like taking money from a friend, getting paid to do it, invest it, and keep 100% of the profits, and MAYBE someday pay some of the principal back. It is as close to a perfect business as humanly possible. A supercharged insurance business has a Superinvestor allocating the “float,” like Warren & Charlie, and that allows for enormous returns.
We will be featuring one of the best insurance companies in the world in the upcoming “Niche Monsters” issue.
It will hit your inbox in the coming days. Maybe you will be the next “Oracle of Omaha.”