Buffett's lessons on insurance, banks and falling prices

In investing, what seems simple on the surface often hides surprising depth. Warren Buffett's 1990 letter to shareholders is a perfect reminder. In this instalment of our ongoing Buffett series , we understand how to really measure an insurance company's performance, why many banks are ticking time bombs and why investors should welcome falling stock prices. Let's break down three big takeaways from that letter in plain language. What is float—and why it matters Most businesses make money by earning more than they spend. But insurance companies are different. They come with a unique feature: float. Float is the money insurers temporarily hold—the premiums collected from customers that haven't yet been paid out in claims. Though this money doesn't belong to the insurer, it can be invested until it's needed. If managed wisely, the float can generate significant investment income. But here's the catch: not all float is equally valuable, and profitability in insurance isn't just about making more in premiums than you pay out in claims. It's about managing something called the combined ratio. The combined ratio is a simple measure: Claims + Operating expenses/Premiums If the ratio is 100 per cent, it means the insurer breaks even from its core operations—it pays out exactly what it earns in premiums. Anything above 100 per cent means the company is losing money from its insurance operations. But if it can earn enough investment income on the float, the overall business can still be profitable. Let's look at two types of insurance: Short-tail insurance (like crop insurance): Claims come in soon after the policy is sold, so there's little time to invest the float. A combined ratio of 100 per cent he

This article was originally published on April 04, 2025.