Insurance FloatCopy Anchor Link

Insurance FloatCopy Anchor Link

Float is the money an insurer holds that belongs, temporarily, to its policyholders — and the engine behind berkshire-hathaway's capital base. Buffett defines it in one line: "Float is money we hold but don't own." It exists because premiums are paid before claims are resolved: "float arises because most policies require that premiums be prepaid and, more importantly, because it usually takes time for an insurer to hear about and resolve loss claims."

What makes float valuable is not its size but its cost. If underwriting breaks even, the use of the float is free — and Berkshire's has historically cost less than nothing, a negative cost of funds that Buffett contrasts with insurers "who may generate plenty of float, but at a cost". The discipline is stated identically at Wesco, Munger's insurer: "Float is the term for money we hold temporarily, and as long as our insurance underwriting results are break-even or better, it costs us nothing."

Munger elevates float from an accounting byproduct to a deliberate structural choice. In his account of the Berkshire system, casualty insurers "would be expected to produce, in due course, dependable underwriting gains" while also producing float "from unpaid insurance liabilities" for investment. Float is thus the funding side of Berkshire's capital allocation — the counterpart to the investment decisions covered under capital-allocation.

The dominant component of float is the loss-and-loss-adjustment-expense reserve — the estimated unpaid claims that give float its scale. Against the SEC cache, Berkshire's net loss reserve stood at $70.164B at FY2019, $76.942B at FY2020, and $83.704B at FY2021 (us-gaap:LiabilityForUnpaidClaimsAndClaimsAdjustmentExpenseNet, 10-K), the last figures the cache records for the tag. Net premiums written on the property-casualty book — the inflow that replenishes float — were $25.834B in FY2010 and $29.892B in FY2012 (us-gaap:PremiumsWrittenNetPropertyAndCasualty, 10-K). Wesco's own float was far smaller: Munger reports the Swiss Re retrocession would lift Wes-FIC's float above its year-end 2007 balance of $94 million.

The risk that comes with float is that it is a liability, and its true cost is only known when claims are finally paid — a point howard-marks generalizes under risk-vs-uncertainty. Float is cheap capital only so long as underwriting discipline holds; a mispriced policy turns free money into an expensive loan.

See alsoCopy Anchor Link

• prem-watsa-fairfax
• markel-gayner
• seth-klarman-baupost
• insurance-float-models
• how-does-berkshire-value-insurance

SourcesCopy Anchor Link

• berkshire-hathaway/Letters-Markdown/1995 - Letter to Shareholders.md
• investor-letters/MungerWesco/Letters-Markdown/2007 - Wesco Letter to Shareholders.md
• buffett-partnership/Letters-Markdown/non-buffett-2014_Letter(3)_20150227_Charles T. Munger.md