Berkshire's $150B Secret: How Insurance Float Just Became a 5% Money Machine

Hey yall,

Happy New Year!

Yesterday was Warren Buffett’s last day as Berkshire CEO.

So, let’s wrap up how Berkshire Hathaway generates $150 billion in insurance float and earns returns on it while you read this. 

That float now yields 5% in short-term Treasury rates as of December 2025. The math is simple: $150B × 5% = $7.5 billion per year in investment income before equity returns.

That's Berkshire's edge. But here's what matters for your portfolio: you can access this same strategy through $KIE (SPDR S&P Insurance ETF) with $590 million in assets at a 0.35% expense ratio. 

The question is whether you understand what you're buying.

Insurance float is the gap between premium collection and claims payout. You pay your auto insurance premium in January. The accident happens in July. The claim gets settled in October. For nine months, the insurer holds your money and invests it.

Multiply that across millions of policies with varying claim timelines, and you get a permanent pool of capital that belongs to policyholders but gets invested by the insurer. The float costs nothing if underwriting breaks even. It generates profit if the insurer collects more in premiums than it pays in claims.

Berkshire figured this out decades ago. Warren Buffett calls float "free money" when combined with disciplined underwriting. The company's insurance operations have generated positive underwriting income in most years while deploying float into Treasuries and equities.

From 2008 to 2022, insurance float earned near-zero returns. 

10-year Treasury yields sat below 2% for most of that period. Short-term rates touched 0.25% during COVID. Float was still valuable as permanent capital, but the compounding power was muted.

That gap closed fast and stayed closed. As of December 2025:

The Fed remained cautious on cuts through 2025, keeping rates elevated longer than many expected. The reset matters. Take Progressive (PGR), which holds roughly $30 billion in float. At current rates, that float generates approximately $1.5 billion annually from fixed income alone, before considering equity exposure. Progressive's combined ratio runs below 90%, meaning the company profits on underwriting and collects investment income on top.

That's two revenue streams from the same dollar. Premiums generate underwriting profit. Float generates investment income. The model works when both engines run.

Not all insurers handle float equally. Property & Casualty (P&C) insurers typically hold shorter-duration float because auto and homeowner claims settle within months. Life insurers manage longer-duration liabilities, sometimes spanning decades.

The pattern holds across the entire P&C industry, which posted a 96.7% combined ratio in 2024, the best underwriting profitability in a decade. Companies with combined ratios below 95% profit from both underwriting and float income. Those above 100% lose money on underwriting and rely entirely on investment returns to cover the gap.

$KIE (SPDR S&P Insurance ETF) holds $590 million AUM and tracks the S&P Insurance Select Industry Index. The fund provides diversified exposure across P&C, Life, and specialty insurers. Expense ratio: 0.35%. Weighting methodology: equal-weighted.

$IAK (iShares U.S. Insurance ETF) offers similar exposure with $500 million AUM and a 0.38% expense ratio. Weighting methodology: cap-weighted via the Dow Jones US Select Insurance Index.

Top holdings across both include Berkshire Hathaway, Progressive, Chubb, Travelers, and MetLife. The allocation skews toward P&C carriers, which benefit more directly from current rate environments.

The key difference: float quality. Not all float is equal. Longer-tail liabilities (workers' comp, professional liability) provide more investment runway than short-tail lines (auto, homeowners). Both ETFs' compositions favor companies with balanced books that benefit from higher rates without excessive duration risk.

Tail length determines float value. A claims payout scheduled five years out provides more compounding time than one due in six months. Insurers with longer tails can take more duration risk and capture higher yields on the yield curve.

Berkshire's GEICO operates in personal auto—short tail. Claims settle fast. Float turns over frequently. But the volume is massive, and the combined ratio historically runs below 95%.

Chubb's specialty lines feature longer tails. Marine, aviation, professional liability—these claims take years to resolve. The float compounds longer, but underwriting complexity increases.

The balance matters. Too much long-tail exposure increases reserve risk. Too much short-tail exposure limits compounding. The best operators mix both and maintain combined ratios below 92%.

Here's where conventional thinking breaks. Rate cuts don't necessarily hurt insurers if the yield curve normalizes. A steepening curve—where long-term rates stay elevated while short-term rates fall—actually benefits insurers with laddered bond portfolios.

The Fed cutting rates from 5% to 3.5% sounds negative. But if the 10-year stays at 4.6%, insurers roll short-term holdings into higher-yielding intermediate bonds. Duration extension at favorable yields improves portfolio returns.

The triple benefit stays intact:

This combination hasn't existed since the mid-2000s. Insurers went through a decade of margin compression (2010-2020) as rates fell and competition intensified. The environment flipped. Hard market pricing returned in 2021. Rates followed in 2022-2023. Both trends persisted through 2025.

Insurance stocks trade at 10-12x P/E ratios on average, below the S&P 500's 20x multiple. The discount reflects perceived commodity risk—insurance is boring, competitive, and cyclical.

But the float premium gets mispriced. Berkshire's insurance operations generate $7.5 billion annually from float income alone at current rates. That's permanent, recurring, and scales with rate levels. The market discounts this stream because it's classified as investment income, not operating earnings.

KIE provides packaged access to this dynamic at 0.35%. You get diversification across 50+ insurers, weighted toward companies with strong underwriting and float quality. The ETF won't match Berkshire's performance—few things do—but it captures the industry's structural advantage without single-stock risk.

The setup works until rates fall below 3% again or combined ratios deteriorate above 100%. Neither looks imminent as we close 2025. Pricing power persists. Rate floors hold despite Fed caution. Float compounds.

That's the playbook. And through December 2025, it's still working.

What's catching investor attention today: $1.28 Trillion Poured Into ETFs in 2025. The Biggest Wealth Shift in a Decade

Disclaimer: This is not financial or investment advice. Do your own research and consult a qualified financial advisor before investing.