Why Buffett Likes Insurance Stocks - And You Should Too

Dear investor,

I hope this message finds you well.

Buffett’s preference for insurance companies comes down to a brilliant financial mechanism that most investors don't fully appreciate: the float. When you really understand how this works, it becomes clear why he's called it one of the best business models ever created.

Here's the basic setup that makes insurance so attractive: When you buy insurance, you pay your premium upfront - let's say at the beginning of the year. But the insurance company doesn't pay out claims immediately.

There's often months or even years between when they collect your money and when they might have to pay a claim. In short, float is the money that an insurance company gets to hold onto between the time customers pay premiums and the time they make claims on their policies.

This creates essentially free money that the insurance company can invest while they're holding it. As Buffett notes, it's "money we hold and can invest but that does not belong to us." Think about this for a moment: customers are essentially giving the insurance company an interest-free loan, and the company gets to keep all the investment returns.

Now, here's where it gets really interesting for long-term investors:

In this sense, insurance float is like a loan, and the underwriting loss is like the interest rate on that loan (i.e. cost of capital). If an insurance company can break even on their underwriting - meaning they collect enough in premiums to cover claims and expenses - then their float is essentially cost-free capital. Even if they have small underwriting losses, as long as those losses are less than what they can earn investing the float, they're still ahead.

This creates a compounding effect that traditional businesses can't match. While most companies have to either reinvest their own profits or borrow money to grow, insurance companies can use their customers' money to generate additional returns. It's like having a massive, permanent, interest-free credit line that keeps growing as you write more policies.

On top of that the insurance model also provides predictable cash flows. People and businesses need insurance regardless of economic conditions, so there's a steady stream of premium income. Combined with the float mechanism, this creates a business that can generate returns in multiple ways: through underwriting profits, investment income on the float, and capital appreciation of the underlying investments.

From my point of view insurance companies offer something unique: they're essentially conservative asset management companies funded by their customers rather than their shareholders. The best-run insurance companies can generate consistent returns while building an ever-larger pool of float to invest. It's a self-reinforcing cycle that can compound wealth over decades - exactly the kind of long-term advantage that appeals to patient investors.

But not all insurance companies are created equal.

The key is finding insurance companies with disciplined underwriting. Companies that chase growth by underpricing their policies will destroy value, but those that maintain pricing discipline while growing their float create a nearly unbeatable business model for long-term wealth creation.

I've identified an exceptional insurance company that's been perfecting this float strategy for decades - one that maintains the disciplined underwriting standards Buffett demands while consistently growing its investment portfolio.

Ready to see exactly which top‐tier insurance powerhouse I’m recommending and how you can position your portfolio to ride its float‐driven compounding for decades?

👉 Download the full report 👈

Until the next issue.

If you enjoy The Onveston Letter, let me and the algorithm know by clicking the “Like” button ❤️.

And if you aren’t a subscriber yet, then sign up below to not miss out on future articles.

For new readers: Check out all my previous posts here

Disclaimer: This analysis is not advice to buy or sell this or any stock; it is just pointing out an objective observation of unique patterns that developed from my research. Nothing herein should be construed as an offer to buy or sell securities or to give individual investment advice.