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Unlike some of the other companies, it does not have profitability as an exclusive motivation. Even at break-even, it generates significant float for Bershire t

by blurry 18y ago

Unlike some of the other companies, it does not have profitability as an exclusive motivation. Even at break-even, it generates significant float for Bershire to invest. Can you explain?

JoelSutherland 18y ago
An insurance money makes its money from the premiums people pay and spends money on claims. Once a claim is made, there is a period of time before the company must pay it. Even at break-even, an insurance company must keep a large amount of cash on hand to pay future claims. This is called float. Even though the company does not 'own' the money, it is free to invest it while it holds it. Buffet has used Geico and other insurers primarily as vehicles to invest their float.
- byrneseyeview 18y ago
  On the other hand, it's important to note that Berkshire's insurance companies have been unusually profitable. Their combined ratio (ratio of expenses to premiums collected) is often below 100% -- not especially common for the insurance business. However, that average incorporates more volatility, and more deviations from the norm.
  - tapostrophemo 18y ago
    Well, any insurance company that doesn't have a combined ratio (CR) less than 100 is not making money. Example: a CR of 92 means that for every dollar of premium, the company has to spend 92 cents, leaving 8 cents of profit. A CR of 102 means that the company has to spend $1.02 for every dollar taken in. How much spent depends, in general, on operating expenses and claims paid. Limiting how much you spend can only get you so far; hence the rest of an insurers profit comes from investments. (And where does the money for investing come from? Collected premiums!)
    - byrneseyeview 18y ago
      An insurance company with a combined ratio of 99 has a cost of capital lower than the US treasury. So yes, it is probably making money -- even if it has its assets in T-bills.

by blurry 18y ago

Unlike some of the other companies, it does not have profitability as an exclusive motivation. Even at break-even, it generates significant float for Bershire to invest. Can you explain?

JoelSutherland 18y ago

An insurance money makes its money from the premiums people pay and spends money on claims. Once a claim is made, there is a period of time before the company must pay it. Even at break-even, an insurance company must keep a large amount of cash on hand to pay future claims. This is called float. Even though the company does not 'own' the money, it is free to invest it while it holds it. Buffet has used Geico and other insurers primarily as vehicles to invest their float.

byrneseyeview 18y ago
On the other hand, it's important to note that Berkshire's insurance companies have been unusually profitable. Their combined ratio (ratio of expenses to premiums collected) is often below 100% -- not especially common for the insurance business. However, that average incorporates more volatility, and more deviations from the norm.
- tapostrophemo 18y ago
  Well, any insurance company that doesn't have a combined ratio (CR) less than 100 is not making money. Example: a CR of 92 means that for every dollar of premium, the company has to spend 92 cents, leaving 8 cents of profit. A CR of 102 means that the company has to spend $1.02 for every dollar taken in. How much spent depends, in general, on operating expenses and claims paid. Limiting how much you spend can only get you so far; hence the rest of an insurers profit comes from investments. (And where does the money for investing come from? Collected premiums!)
  - byrneseyeview 18y ago
    An insurance company with a combined ratio of 99 has a cost of capital lower than the US treasury. So yes, it is probably making money -- even if it has its assets in T-bills.