Insurance

Insurance companies collect small payments (premiums) from many people in exchange for a promise: if something bad happens (car accident, house fire, illness, death), they'll pay for it.

Statistically, most policyholders never collect. Those premiums fund payouts to the few who do — plus the company keeps some as profit. And critically, the company invests the float (premiums collected but not yet paid out) for its own profit.

Underwriters analyze who's likely to file a claim. Higher-risk customers pay more. The company collects premiums daily and pays out claims as they come in.

If claims come in lower than expected, profit. If higher (a bad hurricane year, a pandemic), losses. Across many years, the math works out — that's the bet.

Two streams. Underwriting profit — the gap between premiums collected and claims + expenses paid. Investment income — what they earn on the float between collecting premiums and paying claims.

For a property/casualty insurer like GEICO, both matter. For a life insurer like Prudential, investment income usually dominates because the policies pay out decades later.

Insurance float is a unique asset. A bank borrows money and pays interest. An insurer is paid by customers and gets to invest the money — basically negative-cost financing.

Warren Buffett built Berkshire largely by buying insurance companies and using the float to buy stocks and businesses. The strategy turned ~$60B in float into hundreds of billions in value.

Life insurers (Prudential, MetLife) hold premiums for decades before paying out. Long investment horizons, big bond portfolios.

Property/casualty insurers (GEICO, Progressive, Allstate) face shorter claims cycles — car accidents and house fires happen all year. More exposed to catastrophes and inflation but less to interest rates.

Natural catastrophes — hurricanes, wildfires, earthquakes. One bad year can wipe out years of profit.

Underwriting mistakes — pricing policies too cheaply. Interest rates — life insurers earn less when rates fall, since their bond portfolios reset. And inflation — claims cost more than insurers priced for.