From small family offices to large public investors, insurance companies have become a cornerstone of long-term investment strategies. Their unique model generates consistent cash flow and resilience, making them an attractive option for diversifying and stabilizing portfolios. Notably, Berkshire Hathaway’s journey with GEICO exemplifies the value in this sector, showcasing the long-term wealth potential within insurance.
Insurance companies generate income in two primary ways: premium revenue and investment returns. When policyholders pay premiums, only a portion is needed to cover claims; the remaining funds are invested, generating returns over time. This process is what Warren Buffett famously calls the “float”—capital held by insurers that can be invested before any claims are paid out.
Through diversification, actuarial precision, and efficient risk management, insurers can maintain profitability and manage risk exposure, allowing them to deliver steady returns regardless of economic swings. The consistency and scale of this cash flow make insurance companies an appealing avenue for deploying capital.
Berkshire Hathaway’s (“Berkshire”) strategic acquisition of GEICO highlights the power of investing in insurance when approached with a long-term strategy. Warren Buffett’s relationship with GEICO began in 1951 when Berkshire made its first purchase, investing $10,282 at a time when the insurer was gaining a reputation for its disciplined underwriting. After exiting the initial stake with a 50% gain, Buffett kept an eye on the company, which continued to excel in its niche of insuring government employees—a statistically lower-risk policyholder group.
GEICO faced severe financial challenges in the 1970s due to high inflation and regulatory caps on premiums. When Jack Byrne took over as CEO in 1976, he implemented an aggressive turnaround strategy, capturing Buffett’s interest. Berkshire soon invested $4.1 million in GEICO stock, acquiring a significant stake to help the insurer recover from near-bankruptcy. Over the following years, Buffet continued to increase Berkshire’s holdings. In 1996 he bought the remaining half of GEICO for $2.3 billion, establishing full ownership. This control allowed Berkshire to leverage GEICO’s profitability, making it a cornerstone of their insurance strategy.
Berkshire Hathaway’s insurance holdings, led by GEICO, have profoundly impacted its earnings. The insurance segment, encompassing GEICO and other holdings, has provided a substantial and reliable income stream for decades. In 2023 alone, Berkshire held $169 billion in insurance float, with premium revenue consistently exceeding claims. This excess has fueled the growth of investments within the float, making the insurance business a steady source of deployable cash for strategic opportunities.
This chart illustrates the impact of Berkshire’s insurance investments on total cash flow and earnings contributions.
For investors who own stock in insurance companies, the cash flow generated by premium income and float provides indirect financial benefits in three main ways: dividends, share buybacks, and stock appreciation. Here’s how each works and why it’s appealing for shareholders:
Although stockholders don’t directly access the float or premium income, these mechanisms allow insurance companies to convert their cash flow into shareholder value over time.
Berkshire Hathaway’s expansion into other insurance sectors highlights the value of commercial property and casualty (P&C) insurance, exemplified by their investment in Chubb. Unlike personal insurers, commercial P&C insurers like Chubb deal with more complex corporate risks, which tend to be less sensitive to consumer cycles and more resilient to economic downturns.
Chubb’s comprehensive risk management approach, diverse underwriting capabilities, and expertise in global commercial insurance align well with Berkshire’s strategy of investing in stable, high-quality companies. Chubb’s robust balance sheet, conservative underwriting, and success in navigating various market cycles have made it a valuable addition to Berkshire’s portfolio by offering both security and growth potential.
While insurance companies offer unique cash flow and growth opportunities, investing in them isn’t without risks. Key risks to consider include:
For all investors, these risks underscore the importance of thorough due diligence. By carefully selecting insurers with strong risk management practices, regulatory compliance, and disciplined underwriting, investors can mitigate potential downsides and align with long-term financial objectives.
The insurance landscape is evolving rapidly with startups innovating across all areas of the industry. For venture capital (VC) funds, opportunities in InsurTech are abundant, as these companies disrupt traditional insurance with technology-driven models.
Some notable trends include:
As these startups mature, they could provide attractive returns and complement traditional insurance investments, creating a balanced approach for family offices and other investors.
As the financial landscape evolves, insurance companies represent a sophisticated approach to wealth management, providing steady income and capital for future investments. By following the example set by companies like Berkshire Hathaway with GEICO and Chubb, investors can leverage the unique benefits of insurance carriers, offering a powerful tool for comprehensive wealth management and growth.