Insurance

In March 1967 Berkshire Hathaway, then a struggling New England textile company controlled by Warren Buffett, bought National Indemnity and National Fire & Marine, two Omaha insurers, for about $8.6 million. What Buffett wanted was less the insurers' profits than their float: the premiums they had collected and not yet paid out in claims, about $17–20 million at the time (sources differ, verify). Float is money an insurer holds but does not own, and if the underwriting breaks even, it costs nothing to hold. Berkshire invested it. Over the following decades it added GEICO, bought in stages from 1976 and completely in 1996 for about $2.3 billion more, General Re (about $22 billion in stock, 1998) and Alleghany (about $11.6 billion, 2022). Float grew to about $59 billion in 2008, about $114 billion in 2017 and about $176 billion at the end of 2025. For most of those two decades, according to Buffett's letters, its cost was negative: the insurers made underwriting profits, so Berkshire was paid to hold other people's money.

Forty years after Berkshire bought National Indemnity, the largest insurer in the world showed the opposite. AIG's Financial Products unit had sold protection on about $527 billion (notional, end-2007) of corporate loans and mortgage securities, collecting small premiums for risks its models said would almost never be paid. When the mortgage market collapsed in 2008, AIG did not run out of claims-paying money first; it ran out of collateral. This chapter explains how insurers make money, why the timing of their costs makes them both powerful and fragile, and how one of the world's best-rated companies came to need one of the largest government rescues of the crisis.