Berkshire Hathaway Has Made Crucial Progress in This Key Business. Here's What Investors Need to Know.

For decades, Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) has captured the attention of investors with its ability to deliver crushing market returns. Under the leadership of CEO Warren Buffett, the company has achieved average annual returns of nearly 20% over the past six decades. To put this into perspective, a $100 investment back then would have ballooned into a staggering $5.5 million today.

Berkshire isn't showing any signs of slowing down. In 2024, the conglomerate posted operating earnings of $47 billion. Its insurance operations are thriving thanks to one of Berkshire's promising investment officers. Here's what investors learned and what the future has in store for Berkshire Hathaway.

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Berkshire's insurance business had a stellar year in 2024

Investors eagerly anticipate Berkshire Hathaway's annual letter to shareholders because it provides insight into what Buffett and his team see in the market and other nuggets of wisdom. In this year's letter, Buffett said property and casualty (P&C) insurance "continues to be Berkshire's core business" as it delivered another stellar earnings performance in 2024.

During the year, Berkshire earned $9 billion in operating earnings from its insurance underwriting operations, a 66% increase from the previous year. Berkshire also benefited greatly from its growing cash pile and elevated interest rates, bringing in $13.7 billion in investment income relating to its insurance operations, a 43% increase year over year. These two items comprised 48% of Berkshire's total operating income for the year.

One key driver of Berkshire's excellent insurance performance is GEICO, its wholly owned auto insurance company. GEICO is the third-largest automotive insurer in the United States, trailing only State Farm and Progressive. However, Berkshire management has openly admitted that its underwriting at GEICO tended to lag competitors, specifically Progressive.

A few years ago, Ajit Jain, Berkshire Hathaway's vice chair of Insurance Operations, noted that Progressive had a significant advantage over GEICO in terms of the loss ratio. This is an important measure in the industry, showing the ratio of claims payouts to total premiums. Jain credited Progressive's use of telematics, or driver data, as one of the key drivers of this success.

How one of Berkshire's future investment officers turned around GEICO

GEICO's performance has been improving under the leadership of Todd Combs, who became CEO in 2020. Since his appointment, the company has implemented telematics and enhanced its models. With Combs at the helm, GEICO has made significant strides and received praise from Warren Buffett in his annual letter.

Buffett noted: "In five years, Todd Combs has reshaped GEICO in a major way, increasing efficiency and bringing underwriting practices up to date. GEICO was a long-held gem that needed major repolishing, and Todd has worked tirelessly in getting the job done."

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Those closely following Berkshire Hathaway may be familiar with Todd Combs, whom Buffett hired in 2010 as one of the company's investing lieutenants. Combs has a background in insurance and investing, two things near and dear to Buffett. He worked for Progressive as a pricing analyst from 1996 to 2000 and at a couple of hedge funds before joining Berkshire Hathaway. With Combs leading GEICO, he has earned the trust of Buffett and his team at Berkshire.

Berkshire Hathaway is built for long-term success

Combs' turnaround at GEICO illustrates how well Buffett understands businesses and also people. Buffett has a long history of putting companies into the hands of those he trusts, which has worked well for the better part of six decades.

Berkshire's insurance operations are a key component of its long-term success, and Todd Combs and Ajit Jain should keep the positive momentum going. With Greg Abel as the eventual CEO and Ted Weschler as another investing lieutenant with a track record of investing success, Berkshire Hathaway is in good hands for the long haul.

Handing off a massive conglomerate like Berkshire Hathaway is no easy feat, but if there is anyone to trust who can do this, it's Warren Buffett himself. Continuing Buffett's long-term success won't be easy, but if the company sticks to its principles, it can continue to thrive and be an excellent stock for long-term investors for decades to come.

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Courtney Carlsen has positions in Progressive. The Motley Fool has positions in and recommends Berkshire Hathaway and Progressive. The Motley Fool has a disclosure policy.