National Indemnity
Company Overview
National Indemnity is the cornerstone of Berkshire's insurance operations and the foundational acquisition that introduced Buffett to insurance float economics. Founded by Jack Ringwalt in Omaha, Nebraska in 1940, National Indemnity specialized in non-standard and unusual risks — insuring exactly the risks that larger, institutional insurers rejected. This specialty niche created a durable competitive position that has sustained seven decades of profitable underwriting.
Investment Story
1967: The $8.6 million acquisition. Buffett acquired National Indemnity and National Fire & Marine Insurance Company from Jack Ringwalt for $8.6 million — one of the most consequential small acquisitions in business history. Ringwalt was known to periodically regret that he didn't own a larger company; Buffett called his office one day and offered to buy it. The deal closed in 15 minutes.
The float revelation. National Indemnity collected premiums before paying claims — the time gap created "float," investable capital that Berkshire could deploy in equities and acquisitions. If underwriting was profitable, this float cost nothing. If underwriting generated a slight loss, the float still might cost less than conventional debt. This economic characteristic became the financial architecture of all of Berkshire.
1986–1999: The 14-year shrinkage. Under CEO Phil Liesche and then then later managers, National Indemnity's premium volume declined from roughly $280 million in 1986 to less than $100 million by 1999, as the company refused to accept business at inadequate pricing during the insurance industry's prolonged soft market. Competitors grew aggressively; National Indemnity shrank. This proved exactly correct: when hard markets returned, National Indemnity was positioned with pristine underwriting standards and no inherited bad business.
Ajit Jain's reinsurance superseded NICO in scale. While National Indemnity remained the most important Berkshire insurance subsidiary historically, Ajit Jain's reinsurance operation (built from scratch after 1986) eventually exceeded it in both premium volume and float generation.**
Buffett's Own Words
National Indemnity’s direct volume during 1972. Jack Ringwalt and Phil Liesche con- tinue to guide this operation in a manner matched by very few in the business. Our reinsurance business, which has been developed to a substantial operation in just two years by the outstanding efforts of George Young, faces much the same situation. We entered the reinsurance business late in 1969 at a time when rates had risen substantially and capacity was tight. The reinsurance industry was exceptionally profitable in 1971, a
National Indemnity’s direct volume during 1972. Jack Ringwalt and Phil Liesche continue to guide this operation in a manner matched by very few in the business. Our reinsurance business, which has been developed to a substantial operation in just two years by the outstanding efforts of George Young, faces much the same situation. We entered the reinsurance business late in 1969 at a time when rates had risen substantially and capacity was tight. The reinsurance industry was exceptionally profitable in 1971, and we
*National Indemnity present a paradox. They served to swell substantially total corporate profits for 1972, but the factors which produced such profits induced exceptional amounts of new competition at what we believe to be a non-compensatory level of rates. Over- all, we probably would have retained better prospects for the next five years if profits had not risen so dramatically this year. Substantial new competition was forecast in our annual report for last year and we experienced in 1972 the decline in premium *
Insurance Operations During 1973, Jack Ringwalt retired as President of National Indemnity Company after an absolutely brilliant record since founding the business in 1940. He was succeeded by Phil Liesche who, fortunately for us, possesses the same underwriting and managerial philosophy that worked so well for Jack. Our traditional business, specialized auto and general liability lines conducted through National Indemnity Company and National Fire and Marine Insurance Company, had an exceptionally fine underwriti
The direct business of National Indemnity Company, our largest area of insurance activity, produced an underwriting loss of approximately 4% after several years of high profitability. Volume increased somewhat, but we are not encouraging such increases until rates are more adequate. At some point in the cycle, after major insurance companies have had their fill of red ink, history indicates that we will experience an inflow of business at compensatory rates. This operation, headed by Phil Liesche, a most able under
Investment Lessons
The float model is Berkshire's financial foundation. The $8.6 million acquisition of National Indemnity initiated a capital multiplication process that eventually produced hundreds of billions of float. Every subsequent Berkshire insurance acquisition — GEICO, General Re, Ajit's reinsurance — extended and accelerated the same model. The float from this single 1967 acquisition seeded the entire Berkshire capital architecture.
Underwriting discipline creates its own reward. The 14-year shrinkage of National Indemnity's premium volume from 1986 to 1999 looks like failure by conventional metrics. In Berkshire's framework, it was evidence of exceptional discipline: refusing bad-priced business during a competitive cycle. When the cycle turned, National Indemnity had nothing to unwind and was positioned to write quality business immediately.
Small, invisible acquisitions can be transformational. The most consequential acquisition in Berkshire's history cost $8.6 million in 1967 and received no press coverage. This illustrates both the unpredictability of which acquisitions will prove transformational and the importance of evaluating every acquisition on its own merits rather than on its size or profile.