How Warren Buffett Analyzes Insurance Companies: The 5-Step Framework
Warren Buffett owns 26 insurance companies. They make over $300 billion per year.
Most investors think insurance is boring. Buffett thinks it's brilliant. Here's why: Insurance companies collect money today and pay claims later. That gap creates free money to invest.
The average insurance company makes 2-4% profit. Buffett's insurance companies make 15-20% profit. How?
He uses a simple system that most investors miss. I call it the Buffett Framework for Insurance. It works every time.
Why Insurance Companies Are Secret Gold Mines
Think of insurance like this: You run a lemonade stand. Customers pay you $5 today for lemonade you'll deliver next month. You invest that $5 and earn money while you wait.
That's exactly how insurance works. Customers pay premiums today. Claims get paid later. The money sits in between. Smart companies invest it and keep the profits.
GEICO gave Berkshire $47 billion in free money in 2023. Buffett invested it and earned 12% per year. GEICO also made money selling car insurance. Double profits.
Bad insurance companies lose money on both sides. They lose money selling policies AND lose money on investments.
The 5-Step Buffett Framework
Step 1: Check the Combined Ratio (5 minutes)
The combined ratio tells you everything. It's the most important number in insurance.
What it means: Claims plus expenses divided by premiums.
What to look for: Below 100% for the past 5 years.
Why it matters: Under 100% means they make money on every policy sold. Over 100% means they lose money.
Progressive has averaged 96% for 10 years. They make $4 profit on every $100 in premiums. That's before investment gains.
Try this today: Go to any insurance company's website. Find their annual report. Look for "combined ratio" in the financial section.
Step 2: Calculate Float Value (10 minutes)
Float is free money. The bigger the float, the more money to invest.
What to do: Find total float in the annual report. Divide by market cap.
What to look for: Float over 50% of market value.
Why it works: Companies with big float have built-in investment leverage.
Berkshire has $165 billion in float. That's 25% of their market value. They invest this money and keep all the profits.
Try this today: Pick one insurance stock. Find their float number. Compare it to their stock price times shares outstanding.
Step 3: Review Management Track Record (15 minutes)
Bad managers destroy insurance companies fast. Claims pile up. Reserves run short. Stock crashes.
What to check: CEO tenure and past combined ratios.
What to find: Same leadership for 5+ years with steady ratios under 100%.
Why it's crucial: Insurance requires long-term thinking. New CEOs often mess up pricing or reserves.
GEICO has had stable management for decades. Their combined ratio stays predictable. No surprises.
Try this today: Look up the CEO's bio. Check how long they've run the company. Look for any big changes in combined ratios after they started.
Step 4: Check Investment Returns (10 minutes)
Insurance companies are really investment companies. Their investment returns matter more than most people think.
What to compare: Their investment returns vs. the S&P 500 over 5-10 years.
What to find: Returns that beat the market consistently.
Why it's key: Great insurance companies make money two ways: underwriting AND investing float.
Markel earned 10.8% annually on investments over the past decade. The S&P 500 earned 10.5%. Close, but they did it with insurance customers' money, not their own.
Try this today: Find their investment portfolio performance in the annual report. Compare it to what the S&P 500 did in the same years.
Step 5: Find Their Market Position (15 minutes)
Strong market position means pricing power. They can raise rates when costs go up.
What to look for: Top 3 position in at least one insurance category.
Why it matters: Market leaders survive downturns. Small players get crushed.
Where to check: Industry reports or company presentations show market share.
GEICO is #2 in auto insurance. Progressive is #3. Both can raise prices when needed. Smaller companies can't.
Try this today: Google "[company name] market share insurance." Look for official industry rankings or company investor presentations.
Real Results You'll See
Week 1: You'll understand how insurance really works. It's not just collecting premiums. It's about float and investment returns.
Month 1: You'll spot good insurance stocks trading cheap. Many trade below book value despite generating huge float.
Month 3: You'll avoid insurance disasters. Companies with bad combined ratios often crash 50-80% when reality hits.
Progressive followed this framework perfectly. Their stock gained 340% over 10 years while the S&P 500 gained 180%.
Compare that to companies that ignore underwriting discipline. Regional insurers with combined ratios over 105% destroy shareholder money.
Your Next Step
Pick one insurance company you know. Apply these 5 steps. Takes less than an hour total.
Start with boring companies that do basic insurance. Buffett made billions from auto insurance, reinsurance, and specialty coverage. Nothing flashy. Everything profitable.
The best insurance companies focus on steady profits, not fast growth. Just like how Scott Harrison built Charity: Water through disciplined execution, great insurance companies stick to proven methods.
Remember this: Insurance companies that focus on underwriting discipline and smart investing create wealth. Those that chase growth without profits destroy it.
Insurance rewards patient investors. Punishes speculators. Perfect for people who want steady returns that compound over decades.
Start today. Find one insurance stock. Run it through the 5-step framework. Your future self will thank you.
The framework works because it's based on how the business really operates. Insurance isn't complicated. But most people analyze it wrong.
Follow Buffett's method. Focus on the combined ratio, float value, management quality, investment returns, and market position.
Do this correctly and you'll find insurance companies that print money while their competitors struggle to break even.