Berkshire Hathaway(NYSE: BRKA)(NYSE: BRKB) is one of the most recognized names on Wall Street. That notoriety is based on former CEO Warren Buffett’s long history of success as an investor. However, what allowed him to invest is often overlooked. The key ingredient was the so-called “float.” And it isn’t just Berkshire Hathaway that has benefited from the float, which is the powerful tool that allows insurance companies to generate billions in profits for shareholders. Here’s what you need to know.
A timing mismatch is the big win for insurance companies
What, exactly, is the float? An insurance company like Progressive(NYSE:PGR) collects money from its customers as they pay for their insurance coverage. But Progressive doesn’t actually pay out any money until a claim is filed. Not every customer files a claim, so Progressive keeps some of the premiums it collects. However, there will always be some number of claims, so Progressive, like all insurers, needs to have money available to pay them. The float is the money an insurance company 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 invest it. Some companies are very conservative with the cash, largely investing in bonds to generate income. Others, like Berkshire Hathaway, have taken a more aggressive approach, investing in stocks and, in the case of Berkshire Hathaway, buying entire companies.
Berkshire Hathaway is an unusual case
Warren Buffett’s insight was that he could use float in ways others didn’t. His investment approach made him a household name and a Wall Street icon, but it was the float that made it all possible. There are other companies that mimic the Berkshire Hathaway model, including Markel Group(NYSE: MKL) and Brookfield Corporation(NYSE: BN)which is currently shifting its business to become what it describes as an investment-led insurance company.
That said, most insurance companies, like Progressive, take a more conservative approach. But even taking a conservative approach to the float can be highly profitable, as Progressive generated investment income of $917 million in the first quarter of 2026 alone. Annualizing that figure puts the insurance giant on pace to generate nearly $3.7 billion in investment income, which would be up from roughly $3.58 billion in 2025.
That said, there is a downside to investing the float. When markets are rising and profits are flowing, the float is a powerful wealth creator. But investing the float puts that money at risk. When a bear market occurs and/or interest rates rise sharply, the value of an insurance company’s investments can decline.
Progressive specifically warns that “If the fixed-income or equity portfolios, or both, were to suffer a substantial decrease in value, our financial position, and results of operations could be materially adversely affected.” In such situations, an insurance company’s financial position would weaken, and reported earnings could be reduced. So the float is a powerful tool, but one that has to be wielded wisely. This is why most insurance companies are not as aggressive as Berkshire Hathaway when investing their float.
Be ready for volatility if you own an insurance company
The big takeaway is that insurance companies can generate billions in profit from the float, but those profits are not risk-free. In fact, insurance companies are likely to be smarting from a bear market at the same time that you are and for similar reasons. That can make insurance stocks hard to hold through the trough of a typical bull/bear market cycle.
But, at the same time, patient investors may also find that bear markets open up attractive investment opportunities in the insurance sector. So, perhaps, dig into the sector now and create a wishlist of insurers you’d like to own if only they were cheaper. Berkshire Hathaway and Progressive could easily find their way onto that list for most investors.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, Brookfield Corporation, Markel Group, and Progressive. The Motley Fool has a disclosure policy.
How Insurance Companies Turn Their Premiums Into Billions in Profit was originally published by The Motley Fool
