Long before Berkshire Hathaway became the acquisition behemoth it is today, Warren Buffett was primarily involved in the insurance business. That hasn’t changed, and these operations have been some of his biggest and most successful ventures. In an article for CNBC, Validea CEO John Reese describes how the Oracle’s foresight back in the 1970s led to a relatively unknown but impressive investment win.
Insurance companies rely heavily on data for their risk analysis and pricing. Back when Buffett was trying to build strong businesses, he joined a consortium of large insurers to form Verisk Analytics (whose name combines the Latin word for truth—veritas—with “risk”) to source this data. In a textbook case of necessity mothering invention, Verisk operated for years as a proprietary “lab” to support Buffett’s and the other consortium members’ ventures. The business grew nicely and, when the repeal of Glass Steagall in 1999 lifted restrictions between insurance and banking, the growth accelerated.
After the financial crisis, when many insurance companies were cash poor, the group decided to spin off their number-crunching gem in an IPO. Buffett’s deep pockets afforded him the opportunity to hang on to his Verisk stake (he owns 2.1 percent of the company), which has earned a hefty 207 percent return since October 2009.
Today, Berkshire’s piece of the Verisk pie ($128 million) represents a relatively small percentage of Berkshire’s holdings, but has significantly outperformed not only Berkshire but also the S&P 500 and the core holdings in Berkshire’s portfolio (such as American Express, Wells Fargo, Coca Cola and IBM). Validea’s guru analysis gives high marks to Verisk for its competitive prowess as well as its modest capital expenditures, solid return-on-assets and stable, growing earnings.