In other words, insurance companies actually get paid to use other people's money for their own benefit.
You see, in every other business, companies must pay for capital.
They borrow through loans and pay interest…
Or they raise cash through equity offerings, which dilute the value of their share and often come with dividend contributions.
Everywhere else you look, in every other sector, in every other type of business, the cost of capital is one of the primary business considerations.
But a well-run insurance company will routinely not only get all the capital it needs for free… it will actually be paid to accept it.
Let me reiterate this…
Banks, brokers, hedge fund managers, companies, you name it… all of them PAY for the capital they use.
Everyone, that is, except insurance companies who get paid to accept other people’s money.
It’s like taking out a loan and having the bank pay YOU interest.
Here’s how it works:
When you take out an insurance policy, you start paying premiums to the insurer immediately, and you continue to do so month after month…
However, the insurer doesn’t incur any costs yet… (and if you don’t file a claim they never incur any costs on that capital.)
In other words, you’re giving them money they don’t need to pay out until a claim is made – which could be years, decades, or perhaps never.
This money is called the “float.”
And it’s an unfair, unique advantage to insurers…
You see, while the majority of this money will be paid out to claimants eventually…
For years, it’s effectively a “free” pile of cash the insurer can invest into a range of assets…
For example… if an insurer earned 10% each year on their underwriting premiums… and they invested only in the S&P 500…
They don’t only earn 10% in premiums…
It’s 10% plus whatever the S&P 500 returns.
In other words, as long as the insurer has profitable underwriting and continues to issue new policies…
Then they essentially have a permanent and ever-growing interest-free loan they can invest however they like…
And they get to keep ALL the returns earned on that capital.
That’s right, they essentially get paid to invest with other people’s money, keeping all the profits for themselves.
If all this wasn’t enough, insurers also have huge tax advantages.
In fact, it is far and away, the most tax-privileged industry in the world.
That’s because insurance companies don't have to pay taxes on the cash flow they receive through premiums…
Because, on paper, they have technically not earned any of that money.
Sure, it’s in their account and they can use it to invest…
But it’s not until all of the possible claims on the capital have expired that the money is recorded as "earned."
So unlike most companies that have to pay taxes on revenue and profits before investing capital…
Insurance companies get to invest the money first and pay taxes later.
This is an unfair, unique advantage that allows them to compound capital at almost unimaginable rates of return.
Imagine being able to invest all the money in your paycheck – pre-tax – and then pay your tax bill 10 years from now.
There’s no other financial asset that enjoys these advantages… They are unique to the insurance industry.
And by leveraging these advantages, I believe you can grow a small amount of money into a potential fortune in the years ahead.
That’s what Shelby Davis, patriarch of the famed Davis fortune, did…
At 40 years of age, after a long string of career failures, Shelby ended up in a dead-end job.
He was a financial controller for the state of New York – about the darkest hole you can fall into in politics.
With a growing family and virtually no savings or financial prospects, the future looked bleak.
However, as part of his job, he was required to regulate insurance companies.
And it was here he spotted the unique advantages they held.
Seeing the potential, he quit his job… borrowed $50k… and invested in a half-dozen insurance firms in the U.S.
Then he looked around the world for firms governed by similar regulations, and he found another half dozen to buy in Japan.
Then he waited…
Within five years, his investment had multiplied more than 20 times.