The Best Business in Existence
“I didn’t get rich by buying stocks at a high price-earnings multiple in the midst of crazy speculative booms, and I’m not going to change.”
Warren Buffett has written extensively about insurance in his annual shareholder letters. Notably, in his 2013 letter, he wrote that insurance is "Berkshire's core operation and the engine that has consistently propelled our expansion since that 1967..." after quoting himself from the 1967 shareholder letter where he wrote, "Our investment in the insurance companies reflects a first major step in our efforts to achieve a more diversified base of earning power."
You can (and should) read (almost) all his shareholder letters here.
When he bought National Indemnity in 1967, that wasn't his first time investing in an insurance business, though. He first bought shares in Geico with about $10,000 in 1951. He cashed out a year later for a 50% gain, netting around $15,000 in proceeds. Berkshire now owns 100% of Geico, but Buffett didn't start buying it again until the 1970's, and it was fully acquired in 1996. If he had just held from his initial purchase in 1951, he would have turned his original $10,000 investment into more than $1 million. He later said that the experience "taught me a lesson about the inadvisability of selling a stake in an identifiably wonderful company."
When Berkshire bought the whole business, it was valued at $2.35 billion. While it's hard to say exactly what Geico is worth today, since it is a wholly owned subsidiary of Berkshire, Geico's website says it holds assets of "more than $32 billion."
Insurance makes the world go 'round
Without insurance, the global economy would be much, much smaller. The ability to transfer risk to a third party at a fraction of its potential cost frees up capital for investment in growth initiatives.
Consider your own personal insurance. Imagine that instead of paying your monthly auto insurance premium, you had to keep enough cash on hand to repurchase the latest version of your vehicle if it were totaled in an accident. Now multiply that by everyone who owns a vehicle. That is a lot less money available to invest in the stock or bond markets. Lower demand for stocks would lead to lower prices and, in turn, a vastly smaller economy.
Now scale that up to homes and corporate risks.
In many cases, insurance coverage, such as automobile liability, is mandated by governments. Believe it or not, there are a few states where citizens can obtain a "certificate of self-insurance," but the rules amount to setting aside many times the capital you would spend on a monthly policy to cover potential claims, and probably doesn't make a ton of financial sense for an overwhelming majority of people.
Fascinatingly, the first thing that many people think when their vehicle is mildly damaged is, "Should I just pay for this out of pocket, or should I file a claim with my insurance company?"
Property vs. Casualty
There are many categories of insurance, but the types that Buffett, I, and many others focus on are Property & Casualty (P&C) Insurance.
Property lines of insurance pay for physical damage to the property of the person who owns an insurance policy on their own property.
Casualty lines of insurance pay for physical damage to someone else's property when the policyholder is liable for that damage.
These policies are issued to individuals or commercial entities. Insurance for commercial entities is generally more complex than insurance for individuals. Casualty insurance is far more complex than property insurance because it often takes time and litigation to determine liability. That means the claims can be held up in court for years before payment is due.
At Elevate, we generally don't invest in other lines of insurance, such as Life, Health, Long-term Care, Disability Income, or Surety. However, we do recommend clients purchase coverage in some of these lines to protect their portfolios.
How the P&C business works
Before I go on, there are a few terms I want to define. Don't worry, there will be no quiz at the end, and I am going to do my best to describe the business in terms that anyone can understand. But it is very difficult to do without using a few key industry terms that aren't necessarily part of the common vernacular.
Float: the money that an insurance company holds in its investment accounts from the time policyholders pay premiums until it pays out claims. Example: you pay your auto premium in January, but you haven't filed a claim yet, and you may never. The insurance company invests that money (mostly in bonds, but also some stocks) until you file a claim.
Underwriting: the process of deciding whether to offer an insurance policy and, if so, at what price.
Expense Ratio: measures the amount spent running the business compared to the amount of premiums collected. It is generally expressed as a percent. Example: if a company takes in $1,000 in premiums and spends $250 of that paying employees, leasing property, and paying other expenses, its expense ratio is 25% ($250 / $1000 = 0.25)
Loss Ratio: measures the amount spent paying out claims compared to the amount of premiums collected. If a company collects more in premiums than it pays out in claims, it earns an underwriting profit, but if it pays out more in claims than it collects in premiums, it generates an underwriting loss. Example: if a company takes in $1,000 in premiums and pays out $650 in claims, its loss ratio is 65%. ($650 / $1000 = 0.65)
Combined Ratio: is the Expense Ratio and Loss Ratio added together. It is the key statistic in evaluating insurance companies. A combined ratio under 100% tells you that the insurance company is disciplined and is generating a profit from its underwriting activities. In comparison, a combined ratio above 100% indicates that the company is undisciplined and is incurring underwriting losses. From the definitions above, adding the expense ratio of 25% and the loss ratio of 65% yields a combined ratio of 90%, meaning that for every $1,000 of premium it collects, it pays out $900 on expenses and claims, and keeps the remaining $100.
In case it isn't obvious, each policy doesn't actually have its own combined ratio. The examples above are for illustration purposes only. The company's expense, loss, and combined ratios are analyzed at the enterprise level. Each quarter, the company adds up the total premiums collected, total expenses incurred, and total claims paid, and calculates the enterprise's combined ratio.
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It will probably surprise you to learn that, despite being in the business of pricing insurance risk, the industry as a whole regularly incurs underwriting losses. Only a few of the best companies in the world consistently earn underwriting profits. And those are the ones we focus on.
With a few definitions out of the way, let's move on.
P&C insurance is the only business in existence that enjoys a positive "cost" of capital in its core operations. Other businesses must incur costs before providing a product or service. Consider Apple, the best consumer electronics company. Before they can generate any revenue, let alone profits, they must spend heavily on employees, design, manufacturing, stores, etc., all in hopes of later recouping those expenses through selling iPhones, Macs, and Watches. For insurance companies, this happens in reverse. They collect premiums first, before ever knowing what their costs will be. As the company collects premiums and before it pays claims, it must invest the money, the float, somewhere, usually in highly rated bonds that mature in just a few years. The company keeps all investment gains, and as long as the combined ratio remains under 100%, these gains are essentially "free" money.
On top of that, as mentioned earlier, the product is often mandated by the government to be owned by a wide range of people and companies. Furthermore, when it comes time to file a claim, many policyholders decide to pay out of pocket for fear that filing a claim will raise their premiums. I am in that situation right now, with minor damage to one of my vehicles. Despite having paid for full comprehensive coverage, I will pay out of pocket.
We all have insurance policies, and we all know what happens to premiums over time — they go up! Why? Inflation. As the value of the insured item, or its replacement, increases, the policy premium naturally increases with it. So, with an insurance stock, we have an embedded inflation hedge.
So, I want to make sure you're following along. In the insurance business, we have a positive cost of capital, where the company gets to keep investment profits for investing other people's money, where sales are generated from selling a product that the government often mandates, where the price rises with inflation, which the purchaser actively tries not to use if at all possible.
Tough to beat that setup.
High-quality P&C insurance stocks are mostly defensive investments, but that doesn't mean they can't grow, compound over time, and ultimately generate life-changing wealth.
Just look at the case of Shelby Davis, who turned $50,000 into nearly $1 billion investing almost exclusively in insurance stocks. Now, there are a couple of caveats with the Shelby Davis story. First, he served as a deputy superintendent of the New York State Insurance Department for a few years before becoming a full-time investor; second, he used leverage (or margin loans) to finance some of his purchases.
You don't have to reach too far to believe that while working as an insurance regulator, he discovered how wonderful and safe the highly regulated insurance business was. After learning as much as he could about the companies from the regulators' perspective, which undoubtedly gave him an edge against other investors, he borrowed $50,000 (from his wife) to start investing in the best of them. The rest, as they say, is history. For the full story, check out the book, The Davis Dynasty by John Rothchild.
At any rate, thanks to Shelby Davis, Warren Buffett, and several others who have come before me, I don't think I need to have been an insurance regulator, nor do I think we have to use leverage to generate outstanding long-term results in the insurance business.
I won't get into too many details here because this is already going to be a relatively long write-up, but several aspects of the P&C insurance business make it "defensive." I'll share a few. The first is that it doesn't necessarily ebb and flow with the general economic cycle. During recessions, people don't rush out to cancel their government-mandated home or auto coverage. In fact, those are some of the last things to go. The highest-quality insurers focus on long-term stability, not short-term Wall Street analyst expectations, and they follow conservative investment policies, partly due to regulator requirements.
Insurance is a highly regulated industry. Too often in the past, insurers were attracted to the features already described and, in pursuit of higher revenue, sold policies for too little and invested their float too aggressively, leaving them unable to pay claims when their policyholders needed them most.
In the United States, insurance is primarily regulated at the state level, not by the Federal government. Regulators require insurers to maintain sufficient capital and surplus relative to the risks they have undertaken, using formulas and other rules. If a company falls below certain thresholds, regulators can restrict it from paying dividends, limit new business, or even step in and take control. This is at least partly why all insurance companies invest so much of their float in highly rated bonds, many with maturities of less than 3 or 4 years.
Rising Interest Rates
Investing so much in bonds has its perceived drawbacks. When interest rates rise, bond prices fall, and if 80% of your investment portfolio is invested in bonds, then rising interest rates are going to lead to losses in your portfolio. However, this turns out to be a false dichotomy.
For example, if interest rates are rising and that bond portfolio is equally allocated to bonds that mature in 1 year, 2 years, and 3 years, after the first year, 1/3 of the portfolio is reinvested at the new, higher rates, leading to higher income in year 4 than would have otherwise been possible. Further, most high-quality insurers won't sell their bonds at the lower prices. They always planned to hold the bond to maturity, and at maturity, it pays the same par value regardless of prevailing interest rates. So, rising interest rates amount to a phantom "loss" that is never realized. Additionally, any new premiums received as interest rates rise get invested at those higher rates. So, while it is normal to see insurance companies' stocks fall in the early stages of a rising interest-rate environment, the effect is usually short-lived.
Below is a chart of an equally weighted basket of 5 of the best P&C insurers that we follow (Chubb, Travelers, WR Berkley, Arch Capital Group, and Axis Capital) vs. the effective Federal Funds Rate set by the Federal Reserve. The insurance basket is the blue line, and the Federal Funds Rate is the red line. The time period is 2 years, from January 2022 to December 2023. During this period, the Federal Reserve conducted its most aggressive interest rate-hike cycle since the 1980's, raising the Federal Funds Rate from 0% to over 5% at the fastest pace in history by some measures.
As you can see, after the first hike, the insurance basket began to decline as the market digested the news that we were entering a new rate-hike cycle. Once again, short-term-focused Wall Street analysts sounded the alarm that rates were rising, and bonds would fall. Therefore, since insurance stocks are just giant bond portfolios, the natural conclusion is that you should sell insurance stocks. And so they did.
The high-quality insurance basket fell by 18% in 6 months from March to September 2022. But by the end of the year, the insurance basket was up 25% from the September lows and up 18% for the year 2022, despite the most rapid rise in interest rates in 40+ years. Rates continued to rise into 2023, and while there were pullbacks in the insurance basket, the basket still finished higher.
It is worth noting that both the stock and bond markets ended 2022 deeply in the red. The S&P 500 Index and the Aggregate Bond Index were both down around 19% for the year.
Hard Markets and Soft Markets
The P&C insurance business may not follow the broader economic cycle, but within the industry, there is a distinct cycle of its own. There are two phases: a hard market, in which insurers can easily command higher premiums, and a soft market, in which insurers must either accept lower premiums or back away from the market and sell fewer policies.
Soft markets arise after a period of high and/or increasing premiums with relatively few catastrophic loss events, such as hurricanes. Weak companies start to think they can take market share from larger, stronger companies and drive revenue growth by offering policies with slightly lower premiums.
What we actually want to see during these periods is high-quality insurers refusing to compete on price. We'd rather see them sell fewer policies and sacrifice short-term revenue growth so they don't find out 5-10 years later that they underpriced them and are now incurring underwriting losses.
Wall Street, on the other hand, hates to see slowing revenue growth, and it is typically the catalyst for analysts to cut their price targets and for many fund managers to sell these stocks somewhat blindly.
Once again, this behavior is shortsighted.
Eventually, the weaker insurers who chased short-term revenue growth while sacrificing underwriting discipline begin to realize underwriting losses. Then, a period of relatively more catastrophic events tends to occur, further catalyzing underwriting losses for mispriced policies. The weak insurers are forced to pull back on issuing new policies at low prices and rates once again begin to rise, leading to the next hard market.
You might think it's a good idea to sell the best insurers heading into a soft market like the one we're entering right now. That would be wrong. During the most recent soft market, which lasted 14 years, from 2004 to 2018, according to AM Best and Swiss Re, the high-quality insurance basket I referenced earlier was up 292% vs 225% for the S&P 500. The US Aggregate Bond Index was up only 176%.
The reality is that high-quality insurance stocks tend to outperform in both hard markets and soft markets. In fact, if most self-directed investors focused on identifying and investing only in high-quality insurance stocks, they would meaningfully increase their returns--just like Shelby Davis. And it is no surprise that Warren Buffett built Berkshire around P&C Insurance.
Catastrophes
I wanted to briefly touch on catastrophes as an often-cited reason for wanting to sell or avoid owning P&C Insurance stocks, which is, once again, shortsighted. My comments will be more anecdotal than objective.
A high-quality insurer has reserved more than enough capital to handle catastrophes, whether from hurricanes, wildfires, hailstorms, or otherwise. This is their business. This is what they do.
Paradoxically, one of the best things that can happen to an insurance company is a large but properly priced catastrophe. These catastrophes, as mentioned earlier, tend to catalyze the next hard market. But beyond that, nothing can create a customer for life like showing up and delivering on your promise to cover a policyholder's losses during one of the hardest times of their lives. From that point forward, it will be much more difficult for anyone to take that customer from you, almost regardless of the price.
At the same time, weaker insurance companies that show up and try to dispute every claim in such situations, because they have not properly priced the event, leave behind many new potential customers who have learned the hard lesson that saving a few bucks in premiums isn't worth it if the company isn't really there when needed most.
Tying it together
Warren Buffett's decades-long focus on insurance reflects a simple but powerful truth: high-quality Property & Casualty insurers combine disciplined underwriting with a uniquely advantaged financial model. By collecting premiums upfront and paying claims later, insurers generate "float"—effectively investable capital with a potentially negative cost when underwriting is profitable. This creates a rare business in which companies can earn investment income on other people's money, benefit from inflation-linked pricing, and sell a product that is often mandatory and sometimes intentionally unused by the customer. The key differentiator, however, is underwriting discipline, measured by the combined ratio; only a select group of insurers consistently operate below 100% and create durable value.
For investors, this structure produces a defensive yet compounding asset class that has historically outperformed across cycles. Insurance demand is resilient, regulation enforces conservatism, and industry "hard" and "soft" markets reward long-term discipline over short-term growth chasing. Even headwinds like rising interest rates or catastrophe losses often prove temporary or even beneficial for well-run insurers. The result is a sector where patient ownership of high-quality operators—those that prioritize profitability over volume—can generate exceptional long-term returns, as demonstrated by Buffett, Shelby Davis, and others who recognized insurance as both a cornerstone of economic activity and a uniquely powerful investment engine.
Why write all of this to you today?
Well, in these commentaries, I do like to try to tell you what I would want to know if our roles were reversed, and learning about the P&C Insurance business is perhaps the most valuable thing I have ever learned in my career.
I learned most of what I know about P&C insurance not from the CFA Institute, but from my self-appointed mentor, Porter Stansberry. So, a big thank you to him, and I must credit him for a huge chunk of what I wrote.
For those of you whose portfolios are aligned with our actively managed Elevate Models, we have a significant allocation to P&C Insurance stocks in those models, for all the reasons already mentioned. And for whatever reason, P&C insurance stocks were down slightly for the year as of the end of May. This has led to more than a couple of questions from concerned clients, and I wanted to share, in as much detail as I could, why I don't think a little short-term underperformance is a good reason to make any material changes to our long-term strategy.
We look at P&C as an alternative to investing in bonds because, as mentioned before, it is a defensive sector where the companies are, in many ways, giant bond portfolios with equity upside. Over time, high-quality insurance stocks have not only trounced the returns of the aggregate bond market but also significantly outperformed the S&P 500 Index. And as it relates to the S&P 500, these high-quality P&C stocks have done it with much less volatility.
In this case, I am measuring volatility by the beta statistic. I won't get into a technical explanation, but in broad strokes, the beta tells you how much a stock moves up and down compared to the S&P 500. The S&P 500 has a beta of 1, and a stock with a beta of 0.5 moves around about half as much as the S&P 500, and a stock with a beta of 2 moves around about twice as much as the S&P 500.
The average beta of the 5 high-quality stocks we've been looking at in this commentary is only 0.56!
Here is the performance of the individual names over the past 20 years, 5 years, and 3 years vs. the S&P 500 (the red line) and the Aggregate Bond Index (the black line):
I acknowledge that ACGL hasn't outperformed the S&P 500 Index over the past 3 years. It has taken a breather of sorts after being the best performer, by a wide margin, over the past 5 and 20 years. Over the past three years, its quality has only strengthened. Hence, this breather is a wonderful opportunity to buy one of the highest-quality, best-performing stocks in the best business in existence at a very fair price.
I also acknowledge that AXS hasn’t outperformed the S&P 500 over the past 20 years, but it made a material change in its operations a few years ago that has led to stronger returns more recently.
More importantly, we aren't comparing the P&C positions to the S&P 500 for our purposes. Remember, P&C stocks are the bond alternative in our models. If we didn't own P&C stocks, we'd own some form of the bond market instead. And our returns over time would likely suffer for it. And in all these time frames, its not even a contest between the bond market and the insurance basket.
Every investment strategy goes through periods of underperformance. P&C investing is no different. Neither are high-quality stocks in general. Both have been out of favor in 2026 while the market is chasing profitless technology stocks. We've seen this movie before, and we know how it ends.
One of the keys to long-term results is what you do, or don't do, during the inevitable periods when your long-term strategy is out of favor with the market. I am not saying changes should never be made. Sometimes you find that your long-term strategy doesn't align with your personal investment philosophy, and if that is the case, you should take steps to correct it. If that sounds like you, I will remind you that we have developed several strategies for folks who have become frustrated with owning high-quality stocks that aren't keeping up, in the short run, with the current mania.
There are many more words I could write about various aspects of the P&C business, but I will spare you! If you've stuck with it this long, I hope that you have learned something valuable.
Now, let's briefly wrap things up for this month with a review of some of our standard fare.
The Top 10 Index led the market higher in May, beating the so-called Magnificent Seven (Mag7). Meanwhile, Gold fell another 1.7%.
For the year, Small Caps are still leading the market, up 17.6%, and the market-cap-weighted S&P 500 is ahead of the equal-weight S&P 500 by 2%. Gold remains up 5.1%, and the bond market is flat.
Markets have pulled back so far in June, after a strong run off the lows on March 30th. The S&P 500 is down about 3% from its highs, and I wouldn't be surprised to see further downside to around the 50-day moving average (DMA) at 717. That's only another 2% lower. A move all the way back to the 200-DMA isn't out of the question either. It would barely qualify as a -10% technical correction.
In case you skipped the P&C stock lesson, or missed the chart I shared there, a lot of profitless technology stocks are driving the rally in the market today. But that is unsustainable in the long run. We have seen this movie before, and we know how it ends - we just don't know when.
And lastly, a look at the Top 25 largest stocks in the S&P 500. Eli Lilly (LLY) has reclaimed its place in the Top 10, after a 40% run from its lows. And Micron Technology (MU) has cracked the Top 10 for the first time, pushing Berkshire Hathaway (BRK/B) down to #11. We haven't made any changes to our Top 10 Index yet, but after tomorrow's Space Exploration Technologies (SPCX) IPO, we might be making a shift in the next month or two.
My investment philosophy of buying high-quality stocks and holding them for as close to forever as possible has not changed, but the market is not currently rewarding those companies. For patient and long-term investors, I suggest staying the course. But if you are concerned about short-term performance relative to benchmark indexes and want to make a change, we have excellent options available.
With that, I will call it a month!
I hope you found this commentary both useful and enjoyable. Please tell me what you think - good, bad, or otherwise.
Would you recommend it to people you know? Why or why not? What about our portfolio management and financial planning services?
Click here and let me know!
Until next time, I thank God for each of you, and I thank each of you for reading this commentary.
Clients, I encourage you to click here to access your personalized performance portal and see how your portfolio performed compared to the market's last month.
Shane Fleury, CFA
Chief Investment Officer
Elevate Capital Advisors
Legal Information and Disclosures
This commentary expresses the views of the author as of the date indicated and such views are subject to change without notice. Elevate Capital Advisors, LLC ("Elevate") has no duty or obligation to update the information contained herein. This information is being made available for educational purposes only. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. Elevate believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. This memorandum, including the information contained herein, may not be copied, reproduced, republished, or posted in whole or in part, in any form without the prior written consent of Elevate. Further, wherever there exists the potential for profit there is also the risk of loss.
