Underwriting Profit
The profit (or loss) from insurance operations after paying claims and expenses, before investment income — the core measure of insurance business quality.
Underwriting Profit
Underwriting profit is the profit (or loss) from insurance operations themselves — the difference between premiums collected and claims plus expenses paid. This is separate from the investment income on float. When underwriting is profitable, float essentially costs nothing to hold.
The Two Sources of Insurance Value
Insurance Economics
| Source | Description |
|---|---|
| Underwriting profit | The actual profit from insuring risk |
| Float income | Investment returns on premiums held |
"Our goal is to earn an underwriting profit — meaning we're paid to hold float rather than paying for it."
Berkshire's Track Record
The Profit Streak
| Years | Underwriting Profit? |
|---|---|
| 2003-2016 | 14 consecutive years |
| Total profits (2003-2016) | ~$28 billion |
This is remarkable in an industry where most insurers lose money on underwriting.
Why Underwriting Profit Matters
Competitive Advantage
Companies that consistently earn underwriting profits have structural advantages:
- Pricing discipline — Won't cut prices to gain market share
- Risk selection — Avoids bad risks
- Expense control — Operates efficiently
The Float Multiplier
When underwriting is profitable:
Underwriting Profit (+) + Float Income (+) = Double Benefit
Example (2008):
- Underwriting profit: $2.8 billion
- Float (~$58.5 billion) invested at market returns
- Essentially free money to invest
The Insurance Trisect
Three Engines
| Company | Specialty | Underwriting Style |
|---|---|---|
| GEICO | Direct auto | Low-cost, high-volume |
| General Re | Reinsurance | Disciplined, long-term |
| Ajit's Division | Large risks | Unique, uncorrelated |
Together they generate consistent underwriting profits.
Famous Quotes
"In 2008, we were paid $2.8 billion to hold our float."
"Our insurance CEOs have not had the wind at their back. Yet these managers have excelled to a degree Charlie and I never dreamed possible."
Related
- insurance-float — The capital float generates
- geico — Largest direct auto insurer
- berkshire-hathaway — Parent company