How Insurance Companies Turn Their Premiums Into Billions in Profit
There's a timing mismatch in the insurance industry that is very profitable for shareholders.
How Insurance Companies Turn Their Premiums Into Billions in Profit
Overview
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.
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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Originally published at www.fool.com.
