Float

An insurer can make money twice from the same premium.

It can collect $100, pay $95 in claims and expenses, and keep $5 through underwriting. Before those claims are paid, the insurer also invests the cash known as float. The return on that float creates a second profit stream.

The interaction between underwriting and investment income is the starting point for analysing an insurance company.

The Dual-Profit Model

Underwriting profit: you collect $100 in premiums, pay $95 in claims, keep $5. That's underwriting profit. It shows up as a "combined ratio" of 95 (claims + expenses divided by premiums). Below 100 means you made money. Above 100 means you lost money on the actual insurance.

Investment income: but you had that $100 in premiums sitting around for six months. You invested it. It returned 3%. That's $3 of pure profit that has nothing to do with your underwriting skill.

Many insurance companies make money on both. Some really good ones, like Berkshire Hathaway's insurance operations, make massive money on investments even when underwriting breaks even or loses money.

That second profit stream makes insurance interesting to analyse.

The Top Players

United States:

• UnitedHealth: $291B (most of this is managed care rather than pure insurance, but the dynamics are similar)
• Centene: $149.5B
• Elevance: $142.9B (formerly Anthem)
• State Farm: $92.6B
• Berkshire Hathaway: $85.4B

International:

• Allianz: $90.2B (German, massive asset management component)

Treat these as reference points rather than buy recommendations. Understand one of them and you understand the category.

What to measure

When analyzing an insurance company, you need:

1. Combined Ratio Trend Are they improving their underwriting? If the combined ratio's been 98 for three years, they're good. If it has been 105 for three years, they are losing on underwriting and need fantastic investment returns.

2. Solvency II Ratios (for European insurers) or RBC Ratios (for U.S. insurers) These measure whether the company has enough capital to absorb catastrophic losses. Below 1.0 is danger. Above 1.5 is typically comfortable. This is your margin of safety.

3. Book Value and ROE What's the actual per-share value? What return are they generating on shareholder equity? Insurance companies with 15%+ ROE are genuinely good at deploying capital.

4. Investment Income as % of Total Income If they're making 40% of profits from investments, the company behaves partly like an asset manager, with a different risk profile.

5. Catastrophe Exposure Does this company have massive exposure to hurricanes (Florida), earthquakes (California), or other tail risks? Some companies are built for catastrophe. Others get wiped out. This shows up in their pricing.

6. Dividend Sustainability European insurers typically yield 4-6% because they generate tons of cash and can return it to shareholders. U.S. insurers are more conservatively capitalized. Check whether dividend coverage is solid, if combined ratio gets worse, can they still pay?

The Valuation Framework

Insurance stocks trade on price-to-book-value. A company with a 1.2 P/B ratio is trading at 20% premium to book value. That's reasonable if they have consistent underwriting profits and good investment returns.

Above 1.5 P/B is expensive unless they have exceptional ROE (15%+) and a track record of compound growth.

Below 1.0 P/B, trading at discount to book, usually means the market is worried about something specific. Sometimes that's an opportunity. Sometimes it's signal.

How the profits compound

The companies that win long-term are the ones that compound through two mechanisms simultaneously:

1. Underwriting discipline. They don't chase premium volume for its own sake. They keep combined ratios clean. They're willing to lose business that doesn't make sense.

2. Investment sophistication. They put the float to work beyond T-bonds. They actively manage duration, credit exposure, and allocation. Berkshire does this better than anyone.

When you get both right, you create a flywheel. Good underwriting generates clean float. Clean float gets invested well. Investment returns fund growth without raising capital. Growth generates more underwriting. Repeat.

This is why Berkshire's insurance operations are so valuable to the conglomerate. The insurance operation generates cheap capital that Berkshire can deploy into better opportunities, even when its direct profit is modest.

The Practical Edge

Most retail investors see insurance as boring and focus on "insurance innovation" or "digital disruption." The better frame is capital allocation.

The edge in insurance comes from treating these as capital-allocation businesses. The result depends on which policies management writes and how it invests the resulting cash, rather than policy volume alone.

The good ones are run by patient capital allocators. The bad ones are run by growth-at-all-costs managers who've optimised for volume.

Look for patient capital allocation rather than growth at any price. Begin with the combined-ratio trend and ROE, then test whether solvency, catastrophe exposure and dividend coverage support the same conclusion.