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Investing insurance premiums is different game on Wall Street than in Omaha

Lots of people want to invest insurance money these days. Nobody does it quite like Warren Buffett.

The seed capital Buffett’s Berkshire Hathaway BRK.B 0.17%increase; green up pointing triangle uses to maintain its vast investing empire comes from insurance premiums, dollars that often sit unused for months or years before going to pay claims. That cash—or “float” in Buffettspeak—sounds a lot like the money big private-equity and private-credit firms are increasingly seeking to control. Apollo Global Management APO 0.32%increase; green up pointing triangle Chief Executive Marc Rowan cited “elements of Berkshire Hathaway” when the firm merged with its insurance affiliate, Athene, four years ago.

On the surface, Apollo, KKR and others are following in Buffett’s footsteps in buying up insurance companies. But the firms famous for selling some of Wall Street’s most opaque and illiquid assets don’t really have much in common with the Oracle of Omaha.

Private-market managers like humdrum annuities: long-term insurance policies popular with retirees because they offer a regular stream of payments. That predictability allows insurers to be creative in how they invest insurance reserves, locking up money in private credit. The increasing complexity of their portfolios has kept the regulators who vet those investments busy.

Berkshire deploys its creativity on the insurance policy-writing side. The firm’s insurance chief of 39 years, Ajit Jain, once crafted a policy insuring Pepsi against having to award a $1 billion raffle prize. Buffett’s empire also includes auto insurer Geico and a range of other insurance and reinsurance operations that span the globe.

Jain said at Berkshire’s shareholder meeting in May that the firm has opted to shrink its—already comparatively small—life insurance volume over the past several years rather than compete with private-equity firms willing to assume more leverage and credit risk.

“We do not like the risk reward that these situations offer, and therefore we put up the white flag and said, ‘we can’t compete in this segment right now,’” Jain said.

Insurance isn’t the only turf Berkshire now has to share with private-equity firms: They both also buy up promising companies. Berkshire’s newest acquisition, OxyChem, was once courted by Apollo, and KKR has an internal investment arm one executive described as “a mini Berkshire Hathaway.”

But insurance offers a particular window into the radically different philosophies of a 95-year-old legend and the new crop of float-hungry investor-insurers, at a time when much about Berkshire’s future is up in the air.

Berkshire, a sprawling conglomerate that includes an energy company and BNSF Railway, will get a new CEO for the first time since the 1960s when Greg Abel steps into that role next month. Jain, 74, is nearly a decade past retirement age. Todd Combs, a former hedge-fund manager once groomed to help lead Berkshire’s investment portfolio, just left. And conglomerates, which used to dominate the stock market, have fallen out of favor.

Life insurance is changing, too. Athene is now the world’s top seller of annuities. Private-equity companies control about 20% of annuity reserves—money held to pay future claims—up from 2% in 2011, according to ratings firm A.M. Best. Life and annuity companies— whether they are owned by private-equity managers or by more traditional firms—are investing less in plain-vanilla bonds and more in higher-yielding private credit.

Regulators charged with protecting policyholders in market downturns are working to keep up. The National Association of Insurance Commissioners found some smaller ratings firms rating insurers’ private-credit holdings as many as six notches above what regulators believed was appropriate, according to research cited in a Fitch Ratings report earlier this year.

The American Council of Life Insurers said insurer investments, including private credit, are made in “a highly regulated, state-based system with a long track record of identifying and addressing risks.”

Both Athene and KKR-owned Global Atlantic carry strong investment-grade ratings from A.M. Best. Both have said publicly that the majority of their fixed-income holdings are rated by a major ratings firm—as opposed to the smaller groups the NAIC flagged—and that they carry more than four times the amount of capital regulators require.

Global Atlantic said it “manage(s) the business for extreme downside cases.” Apollo said regarding Athene: “Like Ajit Jain, we have been vocal about our decision in recent years not to reinsure run-off annuity books at prices that don’t make economic sense.”

Having loads of capital on hand is less important for an annuities firm than for an insurer like Berkshire that gets surprise bills for car crashes and natural disasters. But Buffett’s firm, with its $358 billion cash pile, is well capitalized even for a P & C firm, with investments equal to 1.1 times tangible equity compared with an industry average of 2.8, according to UBS research. (For life and annuity insurers, that figure is 8.5.)

Berkshire’s reinsurance group wrote nine to 10 cents of premiums per dollar of statutory capital in 2024, whereas the entire rest of the reinsurance industry wrote 87 cents of premiums per dollar of capital, according to calculations by Christopher Bloomstran, president and chief investment officer of Semper Augustus Investments Group.

“Unlike the rest, you will never hear Berkshire say they wrote the maximum business that capital would allow,” Bloomstran, who has invested in Berkshire since 2000, wrote in February.

That famous hold-your-powder strategy helped Buffett and Jain expand Berkshire’s insurance business in 2023 after a one-two punch of hurricanes and market losses left other property insurers and reinsurers reeling. When reinsurer Swiss Re’s investments in credit-default swaps tanked in the 2008 financial crisis, Berkshire injected $3 billion into the firm—an investment that paid out a steep 12%.

Jain predicted in May that private equity-run life insurers will “make a lot of money” in a good economy. But, he said, “at some point the regulators might get cranky and say, you’re taking too much risk on behalf of your policyholders.

“And that could end in tears.”