Insurance - The Engine That Drives Fairfax

[Viking]

Insurance is the foundation upon which Fairfax Financial is built. The company's insurance operations generate underwriting profits and float, which provide the capital that supports Fairfax's investment activities and long-term value creation.

 

I the coming days I will be publishing a series of posts on Fairfax's insurance business: why float is so important, how insurance cycles create opportunity, how Fairfax built its global insurance platform, and why the company appears well positioned for the future.

 

Together, these articles explain how Fairfax built its insurance franchise and why it has been such an important driver of shareholder returns.

 

We will start with two articles on float.

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Float: The Engine that Drove Berkshire Hathaway’s Growth

 

For more than fifty years, Warren Buffett has described insurance as one of the greatest business models ever created. The reason is not underwriting profit. The reason is float.

 

Float is a little like compound interest as an investing concept. It is easy to define but much harder to fully appreciate. Yet understanding float is essential for understanding companies built on the Berkshire Hathaway and Fairfax business models.

 

Back in the 1990s, property and casualty insurance was the primary engine driving Berkshire Hathaway's growth. GEICO was acquired in 1996 and General Re followed in 1998. Given the increasing importance of insurance to Berkshire's future, Buffett used his 1998 annual letter to explain what investors should focus on when evaluating an insurance company.

 

He wrote:

 

 

"With the acquisition of General Re — and with GEICO's business mushrooming — it becomes more important than ever that you understand how to evaluate an insurance company. The key determinants are:

 

1.) the amount of float that the business generates;

2.) its cost; and

3.) most important of all, the long-term outlook for both of these factors."

 

 

Notice what Buffett is saying. 

 

The most important factor in evaluating an insurance company is not earnings, premium growth, or even underwriting results viewed in isolation. It is float—how much the company has, what it costs, and whether both are likely to improve over time.

 

That is a remarkable statement given how little attention float receives today from analysts and investors.

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What Is Float?

 

Buffett's definition is straightforward:

 

 

"To begin with, float is money we hold but don't own. In an insurance operation, float arises because premiums are received before losses are paid, an interval that sometimes extends over many years."

 

 

When an insurer writes a policy, it collects cash immediately. Claims, however, are usually paid later—sometimes months later and sometimes years later. During that period, the insurer holds the money and can invest it.

 

That money is called float.

 

Consider a simple example. An insurer collects $1 billion in premiums today and expects to pay claims gradually over the next several years. Until those claims are paid, the insurer can invest that $1 billion in bonds, stocks, private businesses, or other assets, subject to regulatory and liquidity requirements designed to ensure claims can be paid when due.

 

The money does not belong to shareholders. Eventually it will be used to pay claims. But until then, it is available for investment.

 

This is what makes insurance different from most businesses. Manufacturers must build products before they can sell them. Retailers must purchase inventory before customers walk through the door. Insurance works in reverse. Customers pay first and the service is provided later. The result is a large pool of investable funds.

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Why Float Matters

 

Float creates a second source of earnings.

 

The first source comes from underwriting. If premiums exceed claims and expenses, the insurer earns an underwriting profit.

 

The second source comes from investing float.

 

As a result, a well-run insurer can earn money both from writing insurance policies and from investing the funds generated by those policies. A growing insurance operation can therefore produce an ever-expanding pool of capital that management can deploy into attractive investments.

 

Over long periods of time, this can become a powerful compounding engine.

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The Cost of Float

 

Not all float is valuable.

 

To understand why, investors need to understand what Buffett calls the cost of float.

 

An insurer receives premiums today but eventually must pay claims and operating expenses. If claims and expenses exceed premiums, the insurer records an underwriting loss. Buffett views that underwriting loss as the cost of obtaining float.

 

He explained it this way:

 

 

"Typically, this pleasant activity carries with it a downside: The premiums that an insurer takes in usually do not cover the losses and expenses it eventually must pay. That leaves it running an underwriting loss, which is the cost of float. An insurance business has value if its cost of float over time is less than the cost the company would otherwise incur to obtain funds. But the business is a lemon if its cost of float is higher than market rates for money."

 

 

This point is critical. Float is not automatically valuable.

 

An insurer that consistently loses money underwriting may be paying too much for its float. In that case, the benefits of investing float can be overwhelmed by poor underwriting results. The insurer has effectively borrowed money at an unattractive rate.

 

The best insurers achieve the opposite outcome. They generate underwriting profits while simultaneously investing their float.

 

Better Than Free

 

This is where insurance becomes truly interesting.

 

If an insurer consistently earns underwriting profits, the cost of float becomes negative. Instead of paying for its float, the insurer is actually being paid to hold it.

         

Buffett often described this as one of Berkshire Hathaway's greatest advantages. For decades, Berkshire generated billions of dollars of float while also reporting underwriting profits. The result was a rapidly growing pool of investment capital that cost nothing—and often less than nothing—to hold. 

 

This combination helped fuel Berkshire Hathaway's extraordinary long-term success.

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The Three Questions Every Investor Should Ask

 

Buffett's framework remains remarkably simple.

 

When evaluating an insurance company, investors should ask three questions:

 

1. How much float does the company have?

 

A larger float base provides more capital to invest.

 

2. What does the float cost?

 

Consistent underwriting profits suggest the company is obtaining float on attractive terms.

 

3. What is the long-term trend?

 

Is float growing? Is underwriting disciplined? Has management demonstrated skill over many years and across multiple insurance cycles?

 

The answers to these questions often reveal far more about an insurer's long-term economics than short-term earnings results.

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Why Float Is So Important

 

For Buffett, float became one of the primary engines that powered Berkshire Hathaway's success. 

 

Understanding float is therefore not simply a lesson about insurance. It is the first step toward understanding the model Buffett helped popularize: using insurance float as investment capital. 

 

Berkshire Hathaway perfected this approach, and Fairfax later adapted it. 

 

In both cases, float became much more than an insurance liability. It became a source of low-cost investment capital that could be compounded for the benefit of shareholders over many decades.

 

In the next article, we will apply Buffett's framework to Fairfax and examine the size, cost and growth of its float.

 

[Viking]

Article 2 in our series on Fairfax's insurance business

 

Applying Buffett’s Float Framework to Fairfax

 

In the previous article, Warren Buffett explained that investors should focus on three factors when evaluating an insurance company: 

1. The amount of float the company generates.
2. The cost of that float.
3. The long-term outlook for both.

Let's apply Buffett's framework to Fairfax.

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Size: Fairfax Has Significant Float

 

Warren Buffett's first test is simple: how much float does an insurer have?

 

At December 31, 2025, Fairfax had total float of approximately $40.8 billion. For the purposes of this analysis, two adjustments have been made.

 

First, runoff operations have been excluded. Runoff float has different economic characteristics than float generated by Fairfax's ongoing insurance and reinsurance businesses and is best analyzed separately. Second, Fairfax does not own 100% of certain subsidiaries, including Allied World and Odyssey. As a result, a portion of the float generated by those companies is attributable to minority shareholders rather than Fairfax shareholders. To keep the analysis simple and consistent with Fairfax's reported figures, no adjustment has been made for minority interests.

 

After excluding runoff operations, Fairfax's insurance and reinsurance businesses generated approximately $39.3 billion of float, or about $1,882 per share.

 

Exhibit 1: Insurance & Reinsurance Float Breakdown (2025)

 

 

Fairfax has built a substantial float base. Before considering shareholders' equity, the company controls nearly $40 billion of investment capital generated by its insurance operations.

 

Economic Significance: Float Exceeds Shareholders' Equity

 

The size of float is important, but its significance becomes clearer when compared to shareholders' equity.

At year-end 2025, Fairfax's common shareholders' equity was approximately $26.3 billion. Compared to insurance and reinsurance float of $39.3 billion, Fairfax's float-to-equity ratio was approximately 1.5x.

 

Exhibit 2: Float Relative to Shareholders' Equity (2025)

 

 

This means Fairfax had approximately $1.50 of float supporting every $1.00 of shareholder capital. Put differently, float was 50% larger than the equity supplied by shareholders.

 

This is what makes float so valuable. When managed properly, it allows an insurer to control a substantially larger investment portfolio than shareholders' capital alone would support. Fairfax's investment portfolio is therefore funded not only by shareholders' equity, but also by a large pool of insurance float that has been built over decades of underwriting operations.

 

Buffett's first test is therefore easily met. Fairfax has built a large and economically significant float base.

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Cost: Better Than Free

 

Buffett's second test is the cost of float.

 

Exhibit 3: Fairfax's Cost of Float (2025)

 

 

In 2025, Fairfax reported a combined ratio of 93.0%. The company generated underwriting profits of approximately $1.8 billion while holding $39.3 billion of float.

 

Viewed through Buffett's framework, Fairfax's float was better than free. Instead of paying to access this capital, Fairfax was paid to hold it.

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Trend: Growing Float

 

Buffett believed the long-term trend was the most important factor of all.

 

A large amount of float is valuable. A growing amount of float is even more valuable.

 

Exhibit 4: Fairfax Insurance & Reinsurance Float Growth (2014–2025)

 

 

From 2014 to 2025, Fairfax's float grew from approximately $11.6 billion to $39.3 billion. On a per-share basis, float increased from $547 to $1,886. This represents compound annual growth of approximately 12% over the past eleven years.

 

Growth alone, however, is not enough. Buffett's third test also considers the long-term cost of float.

 

Exhibit 5: Fairfax Combined Ratio (2015–2025)

 

 

 

Fairfax delivered an average combined ratio of 95.4% from 2015 to 2025. The record includes years with elevated catastrophe losses. More importantly, underwriting performance has improved in recent years, with the average combined ratio declining from 97% in 2015–2020 to 94% in 2021–2025.

 

Many insurers can grow float by sacrificing underwriting profitability. Others maintain underwriting discipline but struggle to grow. Fairfax accomplished both. Over the past eleven years, float increased by 245% while underwriting remained consistently profitable. Growing float is valuable. Growing float at a negative cost is even more valuable.

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A Fourth Question

                

Buffett's three questions provide an excellent framework for evaluating an insurance company. I would add a fourth:

How important is float to the business model?

 

The answer depends on the relationship between float and shareholders' equity. The larger the float relative to equity, the greater its potential impact on shareholder returns.

 

At year-end 2025, Fairfax's insurance and reinsurance float was approximately $39.3 billion compared to common shareholders' equity of $26.3 billion. Float was about 1.5 times larger than equity.

 

Exhibit 6: Float Relative to Equity (2014 vs. 2025)

 

 

What makes this particularly noteworthy is that the relationship has remained remarkably consistent over time. In 2014, float represented approximately 1.39 times shareholders' equity. By 2025, the ratio had increased modestly to 1.50 times.

 

This means Fairfax has not only grown its float; it has preserved its importance within the business model. Despite substantial growth over the past decade, float remains larger than shareholders' equity and continues to provide meaningful leverage to shareholder capital.

 

This distinguishes Fairfax from Berkshire Hathaway's evolution. As Berkshire grew into one of the world's largest companies, shareholders' equity expanded much faster than float, reducing float's relative importance over time.

 

Fairfax has followed a different path. Insurance remains the foundation of the business, and float remains one of its most important competitive advantages.

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Buffett's Scorecard

 

Viewed through Buffett's framework—and the additional question regarding the importance of float—Fairfax performs well across every measure.

• Float is large.
• Float has grown consistently over time.
• Float has been obtained at a negative cost.
• Float remains a significant contributor to shareholder returns.

Individually, each characteristic is impressive. Together, they describe a valuable insurance franchise.

 

Over the past eleven years, Fairfax has grown float from $11.6 billion to $39.3 billion, maintained profitable underwriting throughout that growth, and preserved the importance of float to its business model. Few insurers have accomplished all three simultaneously.

 

Buffett's framework was designed to identify insurers with durable economics.

 

By that standard, Fairfax appears to possess one of the strongest float franchises in the property and casualty insurance industry.