An insurance company can generate tons of cash. Just ask Warren Buffett; he built Berkshire Hathaway on the shoulders of insurance businesses. If you're unfamiliar with how this works, here's a very simplified version, using car insurance as our example: 1. You buy a car insurance policy and pay monthly premiums to your insurer. 2. The insurance company takes that money -- called the float -- and invests it. 3. If you get in an accident, the insurance company pays your claim. If you don't, it keeps your money and continues to invest it.
The investments that companies make with this money are incredibly important. In some cases, a company may pay out more in claims than it brings in on premiums -- but in the end, it's OK because the company invested the money wisely in the interim. These investments allow cash to build up over the years, which usually makes insurance stocks ripe for dividend payments.
Source: Motley Fool
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