Berkshire Hathaway bought insurers for the float between premium and claim

Berkshire Hathaway in the mid-1960s was a dying New England textile mill; Buffett had taken it over as a value bet, but manufacturing capital was structurally trapped — every dollar reinvested in looms competed against cheaper Southern and overseas mills for a shrinking margin. The obvious moves were to run the mills harder or liquidate; neither turned the company into a compounding machine.

In 1967 Buffett instead used Berkshire's cash to buy National Indemnity, a small Omaha insurer, for $8.6 million. Insurers already sat on float — premiums collected before claims are paid — but most of the industry invested it conservatively in bonds and treated underwriting, not the float itself, as the business. Buffett saw National Indemnity's investment portfolio as something he could redirect toward better returns, and ran the float aggressively rather than conservatively.

Buffett bought insurers explicitly for float — premiums held before claims — describing it as money held but not owned, investable in the meantime.

Buffett bought insurers for the float, treating premiums held before claims as an interest-free loan to invest anywhere, as long as underwriting breaks even.

Premiums arrive before claims are paid, creating a pool of cash that is not yet owed.

If underwriting breaks even, the float costs nothing to hold, making it an interest-free loan.

Investing that float in higher-return assets compounds returns for as long as policies stay open.

Growing the underwriting book grows the float pool, so the investable base expands over time.

Money collected before an obligation is due is investable capital, not just working capital—if you can break even on the obligation, invest the float.

Float grew from tens of millions to well over $100B and financed much of Berkshire's compounding. Berkshire's insurance float grew from $39 million in 1970 to $114.5 billion by the end of 2017, and in his 2004 shareholder letter Buffett wrote that "had we not made this acquisition, Berkshire would be lucky to be worth half of what it is today." Fairfax Financial, Markel and Exor later built similar insurer-as-investment-vehicle structures.