Buffett: Insurance Float as a Super Margin Account

"When Buffett acquired National Indemnity in 1967, he was among the first to recognize the leverage inherent in insurance companies with the ability to generate low-cost float. The acquisition was, in his words, a “watershed” for Berkshire. As he explains, “Float is money we hold but don’t own. In an insurance operation, float arises because premiums are received before losses are paid, an interval that sometimes extends over many years. During that time, the insurer invests the money.”2 This is another example of a powerful iconoclastic metric, one that the rest of the industry largely ignored at the time."

"The company’s primary source of capital has been float from its insurance subsidiaries, although very significant cash has also been provided by wholly owned subsidiaries and by the occasional sale of investments. Buffett has in effect created a capital “flywheel” at Berkshire, with funds from these sources being used to acquire full or partial interests in other cash-generating businesses whose earnings in turn fund other investments, and so on."

"Buffett evolved an idiosyncratic strategy for his insurance operations that emphasized profitable underwriting and float generation over growth in premium revenue. This approach, wildly different from most other insurance companies, relied on a willingness to avoid underwriting insurance when pricing was low, even if short-term profitability might suffer, and, conversely, a propensity to write extraordinarily large amounts of business when prices were attractive."

"Buffett spends his time differently than other Fortune 500 CEOs, managing his schedule to avoid unnecessary distractions and preserving uninterrupted time to read (five newspapers daily and countless annual reports) and think. He prides himself on keeping a blank calendar, devoid of regular meetings. He does not have a computer in his office and has never had a stock ticker."