Berkshire Hathaway (NYSE: BRKA)(NYSE: BRKB) is among the most acknowledged names on Wall Road. That notoriety is predicated on former CEO Warren Buffett’s lengthy historical past of success as an investor. Nevertheless, what allowed him to take a position is commonly ignored. The important thing ingredient was the so-called “float.” And it is not simply Berkshire Hathaway that has benefited from the float, which is the highly effective instrument that enables insurance coverage corporations to generate billions in earnings for shareholders. Here is what it’s essential to know.
A timing mismatch is the large win for insurance coverage corporations
What, precisely, is the float? An insurance coverage firm like Progressive (NYSE: PGR) collects cash from its prospects as they pay for his or her insurance coverage protection. However Progressive would not really pay out any cash till a declare is filed. Not each buyer recordsdata a declare, so Progressive retains a number of the premiums it collects. Nevertheless, there’ll at all times be some variety of claims, so Progressive, like all insurers, must have cash out there to pay them. The float is the cash an insurance coverage firm like Progressive has collected and is holding to pay claims.
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Insurance companies don’t put that money in a safe and let it sit idle. They make investments it. Some corporations are very conservative with the money, largely investing in bonds to generate revenue. Others, like Berkshire Hathaway, have taken a extra aggressive strategy, investing in shares and, within the case of Berkshire Hathaway, shopping for whole corporations.
Berkshire Hathaway is an uncommon case
Warren Buffett’s perception was that he might use float in methods others did not. His investment approach made him a family title and a Wall Road icon, but it surely was the float that made all of it potential. There are different corporations that mimic the Berkshire Hathaway mannequin, together with Markel Group (NYSE: MKL) and Brookfield Company (NYSE: BN), which is at the moment shifting its enterprise to change into what it describes as an investment-led insurance coverage firm.
That stated, most insurance coverage corporations, like Progressive, take a extra conservative strategy. However even taking a conservative strategy to the float will be extremely worthwhile, as Progressive generated funding revenue of $917 million within the first quarter of 2026 alone. Annualizing that determine places the insurance coverage large on tempo to generate practically $3.7 billion in funding revenue, which might be up from roughly $3.58 billion in 2025.
That stated, there’s a draw back to investing the float. When markets are rising and earnings are flowing, the float is a robust wealth creator. However investing the float places that cash in danger. When a bear market happens and/or rates of interest rise sharply, the worth of an insurance coverage firm’s investments can decline.
Progressive particularly warns that “If the fixed-income or fairness portfolios, or each, have been to undergo a considerable lower in worth, our monetary place, and outcomes of operations may very well be materially adversely affected.” In such conditions, an insurance coverage firm’s monetary place would weaken, and reported earnings may very well be diminished. So the float is a robust instrument, however one which must be wielded properly. That is why most insurance coverage corporations should not as aggressive as Berkshire Hathaway when investing their float.
Be prepared for volatility when you personal an insurance coverage firm
The massive takeaway is that insurance coverage corporations can generate billions in revenue from the float, however these earnings should not risk-free. The truth is, insurance coverage corporations are more likely to be smarting from a bear market on the similar time that you’re and for comparable causes. That may make insurance coverage shares laborious to carry by the trough of a typical bull/bear market cycle.
However, on the similar time, affected person buyers might also discover that bear markets open up engaging funding alternatives within the insurance coverage sector. So, maybe, dig into the sector now and create a wishlist of insurers you’d prefer to personal if solely they have been cheaper. Berkshire Hathaway and Progressive might simply discover their manner onto that checklist for many buyers.
Must you purchase inventory in Progressive proper now?
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Reuben Gregg Brewer has no place in any of the shares talked about. The Motley Idiot has positions in and recommends Berkshire Hathaway, Brookfield Company, Markel Group, and Progressive. The Motley Idiot has a disclosure policy.
