Welcome to The Business Buying Academy with Sieva Kozinsky.

🔑 If you’re a business owner looking to improve cash flow, take 60 seconds to read this.

It’s time to control your insurance costs.

That’s why I recommend taking a look at WithCoverage. I know the team and trust their approach.

Most business owners engage an insurance broker to get the “best deal”.

But in my opinion, that’s a mistake.

Traditional insurance brokers are paid on commission. When your premiums go up, so does their paycheck.

It’s a misalignment of incentives. Not great if you're trying to run multiple lean, cash-flowing businesses like me.

Let me tell you why WithCoverage is a better option.

They charge a flat fee (not a commission).

You get a dedicated risk management team of insurance experts and attorneys.

They make 40+ A-rated carriers compete on price. (Versus 2 or 3 like traditional brokers).

Here’s what one of their clients said:

"20%+ cost reduction, better protection, and significant time savings. A total win-win for our portfolio companies and management teams."

- Robbie Patterson, Partner, Asto Consumer Partners

If you’re looking to save on insurance and put that money back into your business, I’d talk to WithCoverage.

​Get a free and confidential risk analysis from WithCoverage​

(Thanks to WithCoverage for sponsoring this newsletter.)

🔑 How to make $20 billion per year in insurance

One of the largest insurance companies started with $100k and a few postcards.

Today, you know that company as GEICO.

Leo Goodwin Sr. and his wife Lillian founded the business in 1936 in San Antonio, Texas at the end of the Great Depression.

Goodwin worked at USAA, which sold life insurance to military personnel.

He saw an opportunity to sell auto insurance to a similar, low-risk group of consumers: Federal government employees and military officers.

To cut down on costs, they only sold insurance directly by mail and phone, with no agents.

And by eliminating the agent commission, GEICO could offer rates 20 to 30% below standard industry prices while still making a profit.

Lillian handled marketing, accounting, rate-setting, and underwriting. In the first year they wrote about 3,700 policies with a staff of 12. The company turned its first underwriting profit in 1940.⁠​

GEICO grew steadily by focusing on good drivers and low costs.

It went public in the late 1940s.

In 1951, a 20-year-old business student visited the company on a Saturday, was let in by a janitor, and spent hours learning the business from executive Lorimer Davidson. He put a large portion of his savings into the stock.

44 years later, that student would buy GEICO.

His name: Warren Buffett.

How Berkshire Entered the Insurance Business

In 1967, Buffett entered the insurance business by purchasing National Indemnity for $8.6 million, which came with $19 million of float.

This became the foundation for a $100 billion+ insurance business.

Berkshire acquired GEICO for $2.35 billion in 1996 and added reinsurance platform General Re in 1998 for $22 billion.

Interestingly, Buffett spent $45 million to buy half of GEICO and $2.3 billion to buy the other half.

Near Collapse and Buffett’s Return

In the mid-1970s GEICO nearly went bust after rapid growth, underwriting problems, and regulatory changes.

Bankruptcy was looming in 1975.

The stock fell from highs around $60 to about $2. In 1976 Buffett (through Berkshire Hathaway) began buying heavily at distressed prices. He invested roughly $45 million between the late 1970s and 1980 to accumulate about a one-third stake.

Here's where GEICO was in the early 70s as a strong business, versus the middle of the 70s when it struggled:

• 1971 (strong, profitable business)
  • Net premiums earned: roughly $377 million
  • Underwriting result: $14 million underwriting profit
  • Combined ratio: 95.4% (underwriting profit).
• 1974 (still profitable, but warning signs)
  • Net premiums earned: $539 million.
  • Underwriting result: roughly $5.9 million underwriting loss.
  • Investment income: $32 million.
• 1975 (the collapse year)
  • Net premiums earned: $603 million
  • Underwriting result: $191 million underwriting loss
  • Combined ratio: ~124%.
  • Investment income: $34 million
• First half of 1976 (near bankruptcy)
  • $40 million net loss in the first six months
  • Policyholder surplus dropped as low as $28 million by mid-year.
  • Regulators in multiple states threatened to stop new business
  • Company raised emergency capital (including a $75 million preferred stock issue) and arranged reinsurance support from other insurers.
• Late 1976 (turnaround begins)
  • Q3 1976: first quarterly profit since late 1974 ($5.8 million net income).
  • Full-year 1976: still a net loss (around $26 million), but much smaller than 1975.
  • Stock recovered from ~$2 to the $5 range by year-end.

To summarize, the company had to stop underwriting unprofitable policies. It sounds simple, but is hard to pull off in practice across millions of customers.

New management took over in 1976 and slowed growth, tightened underwriting policies, and increased reserves.⁠​

Berkshire’s Full Acquisition (1996)

In August 1995 Berkshire announced it would buy the remaining roughly 49% of GEICO it did not already own.

Terms of the deal:⁠​

• Price: $70 per share, or approximately $2.3 billion for the remaining stake.
• Berkshire’s earlier purchases (the initial 51%) had cost only about $45 million.
• The $2.3 billion price implied a total enterprise value of roughly $4.6 billion for 100% of the company.
• At the time, GEICO had about $1.9 billion in tangible net worth; the premium above that reflected the value of its customer base and low-cost direct model.

Why Insurance is the Greatest Business Model in the World

Insurance companies make money through two main engines: underwriting profit and investment income on “float.”⁠​

1. Underwriting profit: Premiums collected minus claims paid and operating expenses (commissions, claims handling, overhead). This is measured by the combined ratio. A ratio below 100% means an underwriting profit; above 100% means an underwriting loss. Success depends on pricing risk accurately, controlling expenses, and avoiding excessive losses (especially catastrophes).⁠​
   ​
2. Investment income on float: The bigger and more reliable profit source for most property-casualty (P&C) insurers. Insurers collect premiums upfront but pay claims later (sometimes years later for liability or workers’ compensation). The money held in between is called float. Insurers invest this float (primarily in bonds, plus some stocks and other assets) and keep the investment returns.

Even a modest underwriting loss can still leave the company highly profitable if the investment income on a large float is strong. Life insurers often have even longer float duration because claims/benefits may be decades away.

Warren Buffett on Float and Why Insurance Is a Great Business

Warren Buffett has repeatedly called insurance Berkshire Hathaway’s most important business and the engine that has driven its growth since the 1960s. His explanation of float:

Today Berkshire's insurance business holds about $176 billion of float, which generates about $16 billion of investment income. In 2025, Berkshire had a down year with "only" $7.3 billion in underwriting profit (down from $9 billion in 2024).

Sieva

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Disclaimer: nothing here is investment advice. Please do your own research. The information above is just for information and learning.

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