Why Buffett Loves Insurance
Two profit sources:
1. Underwriting profit – surplus after paying claims and expenses.
2. Investment income on float – premiums held before claims are paid.
• The float is like interest‑free, long‑term capital; as long as underwriting is at least break‑even, it’s effectively free money to invest.
• Unlike most businesses where capital must be raised from equity or debt, insurance “loans” you the float.
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2️⃣ The Compounding Machine
• If float grows and underwriting stays profitable, you get more investable funds each year without issuing shares or taking loans.
• Investing float in high‑quality businesses compounds wealth far faster than relying only on retained earnings.
• Berkshire’s float grew from $39M in 1970 to ~$169B in 2023, all available for investment without interest expense.
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3️⃣ The Conditions for Success
Buffett says insurance is “easy to ruin, hard to master” — to make it work as an investment, you must have:
1. Disciplined underwriting – refuse to underprice risk even in “soft markets.”
2. Financial strength – large capital base so you can handle big losses.
3. Patient, rational management – willing to walk away from bad business.
4. Long‑term investment horizon – float is invested with decades in mind, not quarters.
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4️⃣ The Big Advantage for Berkshire
• Because of its AAA‑like financial strength and cash reserves, Berkshire can take on big, unusual risks (e.g., catastrophe bonds, mega reinsurance deals) that others can’t.
• This allows pricing power and selective deal‑making.
• Led by Ajit Jain, the insurance units have often made huge profits even in years with major catastrophes.
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5️⃣ Risks Buffett Warns About
• Soft market temptation: competing on price during periods of excess capacity destroys profitability.
• Catastrophic events: hurricanes, earthquakes, pandemics, cyber events — one badly mispriced bet can wipe out years of gains.
• Regulatory changes: could impact pricing, reserves, and capital
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