On the 10th of November 2025, Warren Buffett published his final letter to shareholders. Click the link to access a copy of it.
From here, he will “no longer be writing Berkshire Hathaway’s annual report or talking endlessly at the annual meeting.” It’s a good letter, with lots of lessons in business, life and humility.
Warren Buffett presided over an incredible sixty years at Berkshire Hathaway. The company’s share price has compounded by nearly 20% annually since 1965, enough to turn a $1,000 investment back then into $60 million today. That same $1 investment in the S&P 500 in 1965 would be worth $452,000 today. The question is, how did Warren Buffett (CEO & Chairman of Berkshire Hathaway) do it?
I think there’s three key ingredients. Firstly, there’s the man himself. Buffett has all the attributes of a great investor—brains, curiosity, and humility—and he has them in spades. Secondly, there’s the emphasis on owning high-quality businesses for long periods of time. Owning, and rarely selling, companies with high returns on capital is what lets the power of compounding work its magic. It also allows Berkshire to avoid paying tax on its capital gains until the latest possible moment: Berkshire Hathaway’s deferred tax liability is $87 billion! Thirdly, and the main topic of my article, is Berkshire’s use of leverage. ‘Leverage’ in this case simply means that there are more assets employed in the business than what shareholders have put up in funding.
Let’s break that down. Looking at Berkshire’s balance sheet, there are $1.2 trillion (yes, with a ‘t’) of assets at the end of September 2025. However, Berkshire’s shareholders have only stumped up $698 billion of the capital needed to fund these assets (the original capital raised plus retained earnings since). Why does this matter? Because, in effect, for every $1 that you as a shareholder invest in Berkshire, you get $1.75 of assets earning a return for you. This is leverage, and it magnifies the returns that shareholders earn.
Now, it’s common enough for businesses to not rely entirely on shareholders’ capital. Many businesses, for example, use debt to fund part of their operations. The tricky bit with debt is that you usually have to pay the bank and/or bondholders for the loan or use of their capital (interest), and they will probably want to be paid back at some point. And Berkshire Hathaway does use debt, particularly in its regulated businesses. But its single-greatest source of funding is one that doesn’t need to be paid back, doesn’t cost anything, is low risk, and grows naturally over time. Sounds too fantastic to be true, right?
Not so in the insurance business. At the heart of Berkshire Hathaway sits a group of insurance businesses writing coverage for a vast range of insurable risks. The insurance business in essence is simple: a customer approaches Berkshire looking for coverage, and Berkshire agrees to insure the customer in return for a premium. In effect, Berkshire obtains cash today (the premium) in exchange for a promise to pay that cash out at a later date if the customer experiences an insured loss. In the meantime, this cash can be invested to earn a return for Berkshire Hathaway (usually in government bonds) without shareholders having to put up a penny. This is known as ‘float’ in the insurance industry.
That’s the ‘leverage’ bit—Berkshire has assets earning a return that shareholders didn’t fund. In fact, Berkshire has an estimated $176 billion of this insurance float, compared to shareholders’ equity of $668 billion. But why doesn’t it have to be paid back, why doesn’t it cost anything, and why is it low risk?
Berkshire’s insurance businesses are profitable and successful, so that the group never has to pay its customers back because over time more insurance premium monies are coming in the door than going out. In addition, policy holders can’t ask for their policy monies back even in a crisis. Contrast that with customer deposits which fund banks!
The insurance float doesn’t cost Berkshire anything because of strong insurance underwriting discipline. Over the last twenty years, Berkshire’s insurance businesses have on average incurred $95 of claims and expenses for every $100 of insurance premium. So, the float has not just cost nothing, Berkshire has actually been paid to hold it. That’s the opposite of debt!
The float is also low risk for shareholders because Berkshire’s insurance underwriting discipline means that the odds of a drawdown on the float are very low. Berkshire has only had two years of underwriting losses in the last twenty. And, further, the float is invested in high-quality bonds and cash, providing more than enough capital to fund insurance losses in any given year.
Finally, the float grows naturally over time—consider a pool of money (the float) which consistently has more dollars added to it than taken out over time. That pool will, naturally, grow over time as the insurance businesses grow. Berkshire Hathaway’s float, for example, has grown from $19 million in 1967 to $176 billion today. So, earnings from the insurance float have similarly grown without any need for additional shareholder capital.
Float is, truly, the ultimate form of leverage, and Buffett has used it to great effect to magnify returns for shareholders since 1965. Over time, this insurance float has played a pivotal role in turning Berkshire Hathaway into a compounding machine and earned Buffett himself a well-deserved spot in the pantheon of great investors.
There are a number of companies following the Berkshire Hathaway model and we cover them, too, on the website and in our weekly newsletter for interested investors. If that interests you, consider subscribing to our website/newsletter offering. It is Ireland’s only investment newsletter. A monthly subscription is €20 and an annual subscription is €299. Click the link for more information on this service.
Darren Gillen
13th November 2025
