Thread by @joinditto

Warren Buffett's Berkshire Hathway earns almost 30% of its total revenues (that's $70B) from its insurance business.

How did insurance come to be a money-minting machine for the conglomerate?

A thread👇 (1/10)

First, we need some context on how insurers operate.

Insurance companies generally earn money through two routes. Perhaps the most obvious one is to charge premiums to customers in exchange for the provision of insurance. (2/10)

But insurers also make a large chunk of revenues from investments made through their 'insurance float'. (2/8)

What’s this 'float' you ask? (3/10)

Insurance floats are basically large stacks of money kept, to pay up insurer claims as and when the need arises.

Keeping this money as is makes no sense so every insurer hedges their bets and invests their float elsewhere. (4/10)

Sometimes this may be the sole profit maker so they may buy low-risk government bonds or invest in listed shares or commercial properties.

Now Warren Buffet was a seasoned investor, so he knew how to make money, well, make money. (5/10)

But for that, he needed deep pockets and insurance companies were perfect.

Warren understood the opportunity and used the float from these companies to make strategic investments that led to Berkshire becoming the conglomerate it is today. (6/10)

But Warren’s insurance companies not only made money from the float, but also by underwriting its customers, which actually is pretty rare in the insurance market. (7/10)

One of Berkshire's biggest insurers- GEICO, has been profitable since 2000 from an underwriting perspective. In contrast, its largest competitor, State Farm, has consistently generated billion-dollar underwriting losses.(8/10)

Thus, Berkshire Hathaway’s crown jewels are its insurance businesses, giving Warren and his team of investors money they can invest as they see fit. (9/10)

Now, we couldn't possibly match Warren Buffett's investment advice, but we sure can help you select the most suitable health & term insurance policies.

Drop us your insurance queries on WhatsApp- bit.ly/3eIrQy6 (10/10)