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Insurance float benefit in munger's letter , past present future


scorpioncapital

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I don't quite understand this line

 

"Casualty insurers often invest in common stocks with a value amounting roughly to their shareholders’ equity, as

did Berkshire’s insurance subsidiaries. And the S&P 500 Index produced about 10% per annum, pre-tax, during the

last 50 years, creating a significant tailwind"

 

If an insurer places into stocks merely net equity, where is the benefit of the float leverage , with which one can invest in equities in excess of book value, namely if you put 2x the assets as equity into stocks you have 2 to 1 leverage.

 

Is Charlie saying Berkshire did not use the leverage of float? Or did Berkshire use float exactly as all other insurers (say 20 percent equities and 80 percent bonds) but that they allocated their unleveraged stock portfolio better than others for higher return?

Because if Berkshire did not leverage float into stocks we cannot say insurance float is interest free leverage for stock portfolio right ?

 

 

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You can obviously apportion the equities to where you want in the balance sheet, but given the regulatory oversight, the fixed income and cash holdings should go to the float first. On that basis, according to my calcs their latest ratio is 33% equities and 67% cash/fixed income, whereas say Markel's float is 100% cash/fixed income. Both though would have 100% of their tangible book in equities (which is a type of float which has the advantage of being guaranteed to be free).

 

 

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"Casualty insurers often invest in common stocks with a value amounting roughly to their shareholders’ equity, as

did Berkshire’s insurance subsidiaries. And the S&P 500 Index produced about 10% per annum, pre-tax, during the

last 50 years, creating a significant tailwind"

 

If an insurer places into stocks merely net equity, where is the benefit of the float leverage , with which one can invest in equities in excess of book value, namely if you put 2x the assets as equity into stocks you have 2 to 1 leverage.

 

Berkshire holds a lot of cash.  The composition of assets is malleable and used to meet regulatory requirements (see table below) as well as investing for long term wealth generation.  This article does a reasonable job of extracting the right ideas to think about how the float is managed and employed from an investment perspective.  Berkshire's approach is different from other insurance companies, as you could expect -- they have better and rational thinkers with decision-making power.

https://brooklyninvestor.blogspot.com/2011/12/so-what-is-berkshire-hathaway-really.html

brk1.JPG

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