4 ms·

They make a profit on investing the float that offsets their underwriting loss. I never claimed that insurance companies aren't profitable. I said that their in

They make a profit on investing the float that offsets their underwriting loss. I never claimed that insurance companies aren't profitable. I said that their insurance is a money loser. If you look at their financial statements you can see that they have been losing billions on underwriting for years https://www.allstateinvestors.com/static-files/d61a8007-647a-47e4-91cd-0558d1c5a87a https://www.allstateinvestors.com/static-files/d61a8007-647a...

ceejayoz 2y ago
But... they don't have money to invest without the insurance premiums coming in. My family finances look a lot worse if you exclude interest and investment proceeds at random from the analysis, too. $10-20B profit annually is not something I'd describe as "in the hole". The "hole" is overflowing with money.
- dghlsakjg 2y ago
  If you keep selling a product for $95 that costs you $100 to deliver you will be "in the hole" on that product line. For Allstate, that product line is insurance. If you invest that $95, get a $15 dollar return, and then deliver the $100 product, you have made a net profit even though you sold the product for below cost. You are still in the hole for the insurance product no matter how you slice it. Yes, I get that the insurance product is what allows them to invest the float. But any accountant can tell you that they are in the hole on that product. They are still selling the product at a loss, even if their time arbitrage lets them make money elsewhere. Its kind of magic in that its a win/win scenario in what looks like a zero sum game. The point is that people think that insurance companies make money off of them paying a premium higher than what they will recover in claims, and saying that insurance is always a bad deal for the consumer. My point is that isn't true. Insurance companies pay out more in underwriting costs than they collect in premiums. Insurance is very frequently and insanely good deal in aggregate.
  - s1artibartfast 2y ago
    is it really a float? Im not an accountant, but when I think of float, I think of the balance in an account that regularly clears. Is it analogous to interest in household checking account where income = bills, or is it analogous to the same household with a large retirement account that sweeps the checking and pays bills. Maybe another way of asking this is whats the relative size of the interest bearing investments to the annual premium collection. Can you show me where this is listed in the allstate financial results? https://www.allstateinvestors.com/static-files/d61a8007-647a-47e4-91cd-0558d1c5a87a https://www.allstateinvestors.com/static-files/d61a8007-647a...
    - dghlsakjg 2y ago
      The float in the insurance industry is simply the term of art for the pool of money from premiums paid that is available for investment. On that particular statement, I would look at page 8. The assets are, more or less, the float which comes pretty directly from the liabilities of unearned premiums and estimated future claim payments in the liabilities. It is hardly a coincidence that their unearned premiums + claim payment reserve happens to be roughly the amount they have invested ($65b and $66b respectively). Warren Buffets letters to investors explain the insurance industry, and the float, as a whole pretty well (page 7): https://www.berkshirehathaway.com/letters/2013ltr.pdf https://www.berkshirehathaway.com/letters/2013ltr.pdf
      - s1artibartfast 2y ago
        Okay, so if I'm reading this correctly, annual premium income is around $30 billion, annual insurance payouts is also around $30 billion ( cost of administration). Investment assets under management around 66 billion. This is all right, I still don't see how the insurance business unit add value unless there are profitable years on average. I'll have to check out the letters, maybe they will explain this. Edit: Having read that section of the letter, my understanding is the existence of insurance companies relies on the belief that in the long run, the insurance side will not be a loss leader, at least for insurance types without a significant time lag between customer acquisition and insurance payout. For example, operating a "loss leader" could be profitable for something like life insurance where there average claim for a new customer is in the future. It seems like insurance types where there is no intrinsic time delay between customer acquisition and payout (e.g. auto, home) can not operate this way. That is to say, you cant build up a profitable interest bearing float if average policy payouts are >100% in month 1 of the policy. Would you agree with this description?

ceejayoz 2y ago

But... they don't have money to invest without the insurance premiums coming in. My family finances look a lot worse if you exclude interest and investment proceeds at random from the analysis, too. $10-20B profit annually is not something I'd describe as "in the hole". The "hole" is overflowing with money.

dghlsakjg 2y ago
If you keep selling a product for $95 that costs you $100 to deliver you will be "in the hole" on that product line. For Allstate, that product line is insurance. If you invest that $95, get a $15 dollar return, and then deliver the $100 product, you have made a net profit even though you sold the product for below cost. You are still in the hole for the insurance product no matter how you slice it. Yes, I get that the insurance product is what allows them to invest the float. But any accountant can tell you that they are in the hole on that product. They are still selling the product at a loss, even if their time arbitrage lets them make money elsewhere. Its kind of magic in that its a win/win scenario in what looks like a zero sum game. The point is that people think that insurance companies make money off of them paying a premium higher than what they will recover in claims, and saying that insurance is always a bad deal for the consumer. My point is that isn't true. Insurance companies pay out more in underwriting costs than they collect in premiums. Insurance is very frequently and insanely good deal in aggregate.
- s1artibartfast 2y ago
  is it really a float? Im not an accountant, but when I think of float, I think of the balance in an account that regularly clears. Is it analogous to interest in household checking account where income = bills, or is it analogous to the same household with a large retirement account that sweeps the checking and pays bills. Maybe another way of asking this is whats the relative size of the interest bearing investments to the annual premium collection. Can you show me where this is listed in the allstate financial results? https://www.allstateinvestors.com/static-files/d61a8007-647a-47e4-91cd-0558d1c5a87a https://www.allstateinvestors.com/static-files/d61a8007-647a...
  - dghlsakjg 2y ago
    The float in the insurance industry is simply the term of art for the pool of money from premiums paid that is available for investment. On that particular statement, I would look at page 8. The assets are, more or less, the float which comes pretty directly from the liabilities of unearned premiums and estimated future claim payments in the liabilities. It is hardly a coincidence that their unearned premiums + claim payment reserve happens to be roughly the amount they have invested ($65b and $66b respectively). Warren Buffets letters to investors explain the insurance industry, and the float, as a whole pretty well (page 7): https://www.berkshirehathaway.com/letters/2013ltr.pdf https://www.berkshirehathaway.com/letters/2013ltr.pdf
    - s1artibartfast 2y ago
      Okay, so if I'm reading this correctly, annual premium income is around $30 billion, annual insurance payouts is also around $30 billion ( cost of administration). Investment assets under management around 66 billion. This is all right, I still don't see how the insurance business unit add value unless there are profitable years on average. I'll have to check out the letters, maybe they will explain this. Edit: Having read that section of the letter, my understanding is the existence of insurance companies relies on the belief that in the long run, the insurance side will not be a loss leader, at least for insurance types without a significant time lag between customer acquisition and insurance payout. For example, operating a "loss leader" could be profitable for something like life insurance where there average claim for a new customer is in the future. It seems like insurance types where there is no intrinsic time delay between customer acquisition and payout (e.g. auto, home) can not operate this way. That is to say, you cant build up a profitable interest bearing float if average policy payouts are >100% in month 1 of the policy. Would you agree with this description?