The Float-First Method: How Buffett and Graham Beat Insurance Investing
Warren Buffett bought his first insurance company in 1967. National Indemnity cost him $8.6 million. Today, those insurance operations are worth over $100 billion.
That's an 11,627% return in 56 years.
Most investors miss the real secret. Buffett didn't just use value investing on insurance. He mixed his mentor Benjamin Graham's safety rules with his own discovery about insurance float.
This created the Float-First Method. It's how Buffett turned boring insurance into his wealth machine.
The Float-First Method Explained
What Benjamin Graham Taught
Graham's main rule: Buy businesses for less than their break-up value. This safety margin protects you when things go wrong.
For insurance companies, Graham studied book value and cash reserves. He wanted companies trading below their net worth. They needed enough cash to pay all claims.
Graham found that insurance companies fail when they price policies too low. They also fail when they guess wrong about future claims. His safety-first approach avoided these disasters.
His student Warren Buffett would add the missing piece. How to profit from insurance float.
What Warren Buffett Added
Buffett saw that insurance companies collect money first. They pay claims later. This timing gap creates "float." It's money you can invest while waiting to pay claims.
GEICO created $28 billion in float for Berkshire in 2022. Buffett invested this money. He earned 12.2% per year over 20 years. Meanwhile, GEICO made money on insurance too.
The big insight: Great insurance companies are really investment funds with leverage. You get paid to invest other people's money.
Your 4-Step Float-First Analysis
Step 1: Calculate Float Quality
- What to do: Divide total float by book value
- Time needed: 5 minutes
- Look for: Ratios above 2.0 (float is twice the equity)
- Why it matters: You find companies with maximum investment power
Progressive has $50 billion float on $25 billion book value. That's a 2.0 ratio. They invest $2 for every $1 of shareholder money.
Step 2: Check Insurance Profits
- What to do: Find 10-year average combined ratio
- Time needed: 10 minutes
- Look for: Below 100% consistently
- Why it matters: You confirm they make money selling insurance
Berkshire's insurance operations averaged 96% combined ratio over 10 years. They profit on insurance while creating float.
Step 3: Track Float Growth
- What to do: Calculate annual float growth for 5 years
- Time needed: 15 minutes
- Look for: Steady 5-15% annual increases
- Why it matters: You find growing investment capital
Markel Corporation grew float from $8 billion to $16 billion between 2015-2022. That's 10% annual growth in money to invest.
Step 4: Apply Graham's Safety Test
- What to do: Compare price to book value and reserve strength
- Time needed: 20 minutes
- Look for: Trading below 1.5x book with strong reserves
- Why it matters: You buy quality companies at discount prices
Real Performance Numbers
Insurance companies using the Float-First Method beat the market:
- Berkshire Hathaway: 20.1% per year over 58 years
- Progressive: 13.8% per year over 20 years
- Markel: 12.4% per year over 25 years
- S&P 500: 10.2% per year over same time
The difference? These companies master both smart insurance and float use.
Compare this to insurance companies that ignore float quality. Many regional insurers show combined ratios above 105%. They create little investable float. Their stock returns barely beat inflation.
Why This Method Works
Insurance creates a unique business model. Customers pay you first. You invest their money. You pay claims later from investment gains.
It's like getting a zero-percent loan to buy stocks and bonds. But only smart underwriters earn this chance.
Companies that write bad policies pay customers instead of profiting from them. Float becomes a cost, not an asset.
The Float-First Method finds companies that earn this float through smart insurance. Then maximize returns through skilled investing.
Your Action Steps Today
Start with three insurance companies: Progressive (PGR), Markel (MKL), and Travelers (TRV). Run each through the 4-step analysis above.
Pick companies that treat insurance as their first job. Float improvement is their accelerator. Just like how Scott Harrison built Charity: Water through smart resource use, successful insurance companies excel at both collecting money well and using it wisely.
Avoid insurance companies that chase growth without smart underwriting. They destroy float value and shareholder money at the same time.
The Float-First Method is simple. You want companies that customers pay to invest their money. Then you buy those companies at fair prices.
Warren Buffett proved this works for six decades. Benjamin Graham's safety rules keep you out of trouble. Their combined approach creates the most powerful system for insurance investing ever built.
Try This Right Now
Open your broker's website. Search for Progressive's latest 10-K filing. Find their combined ratio for the past 3 years. Calculate their float-to-book ratio.
Takes 15 minutes. You'll instantly understand if Progressive deserves your money.
Ready to use more proven investment systems? Get Mentors turns complex strategies from history's greatest investors into simple, doable methods. Our expert-backed content helps you master the exact techniques used by Buffett, Graham, and other legendary investors.
Start using the Float-First Method today. Your portfolio deserves the same advantages that made Berkshire Hathaway investors wealthy.