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Strategies & Market Trends : Buffettology -- Ignore unavailable to you. Want to Upgrade?

To: Jacques Newey who wrote (2754)	1/22/2001 6:57:58 PM
From: Shane M	Read Replies (2) \| Respond to of 4690

Jacques, Wow, long post <g> I understand what you're saying (correct me if I'm wrong). Some insurance companies run at a 92 combined ratio. some run at a 98, and others run at a 104 combined ratio. The cheapest float would be from a company with a 92 combined ratio. And given equal ability to invest the float the company with a 92 combined ratio makes the most money. Pretty straight forward. Probably where I'm missing is here: to me low combined ratios are an operational advantage, nothing specific to float. "Low cost float" sound like it's nothing more than efficient business operations. Where I can see Berkshire having a specific long term advantage operationally is in the supercat insurance. They are big enough to cut deals that nobody else can make, and can jack up the profits considerably because of that. This I guess equates to "low cost float." In auto insurance the Geico brand has incredible word-of-mouth going for it - from numbers I've seen stronger word of mouth than any major carrier (except maybe USAA which doesn't really count). Geico isn't necessarily the best price in insurance, surprisingly often it's not, but the perception is such. It makes sense (no agent, they must be cheaper) but isn't always the case. I don't expect that the advantage here, unlike Supercats, is sustainable in the long run. Others can and will compete effectively in the direct market. The direct market within the past few years has just become large enough to attract the attention of larger players and strategies are being put into place to address it. Again, not saying that Geico won't make money here, but super-normal profits should be much more difficult in the long run. FWIW, Shane

To: Jacques Newey who wrote (2754)	1/28/2001 8:56:29 AM
From: Freedom Fighter	Respond to of 4690

I would like to add my two cents to this float discussion. Generally, it is a good idea to generate as much low cost float as possible. But there are capital, liquidity and risk considerations that are part of the overall strategy for most businesses. If a company takes on a lot of business relative to its capital, it will generally make low risk and very liquid investments. That will generate low returns on investments that somewhat offset the higher profit potential from insurance. If it takes on very little business relative to its capital, it can afford to take some longer term equity stakes. Hopefully, that will lead to higher investment returns that offset lower profits from insurance. BRK is in the unique position of having an extraordinary amount of excess capital. That capital was created prior to it becoming primarily an insurance company. It also has many 100% owned businesses that generate income. That frees the company to pretty much write whatever amount insurance it wants (as long as it is priced properly) and then invest much of the proceeds any way it wants. That's another huge advantage. Wayne