Warren Buffett has made such an impression on value investors and insurance investors, that they think that float is magic. Write insurance, gain float, invest cleverly against the float, and make tons of money.
Now, the insurance industry in general has been a great place to invest, but we need to think about float differently. Float is composed of two things: claim reserves and premium reserves.
Claim reserves can be long, short or in-between. Yesterday's article dealt with long claim reserves - asbestos, environmental, etc. Those reserves can be invested in stocks, real estate, long bonds, etc. But most claim reserves are pretty short, like a year or so for most personal insurance
Editor's note: Originally published on 30 June, 2014
by Simon Lack
Denis Kessler, CEO of Scor, a large reinsurer, is the most recent critic of today's low interest rate environment. It's not only the stereotypical retiree clipping bond coupons that is suffering from current interest rate policy. Insurance companies typically hold substantial amounts of their investment portfolios in bonds, both because of regulatory requirements as well as the need to respond to claims whose timing is often unpredictable. Kessler claimed that central banks were "ruining" the insurance industry, and claimed that insurers were the unwitting victims of the aftermath of the financial crisis even though they didn't create it (AIG and its credit derivatives portfolio presumably notwithstanding).
Warren Buffett has described an insurance company's "float", that is, the premiums they receive in return for making payments in the future, as akin to being paid to borrow money. This is true
The number of products on ETF Deathwatch continues the recent downtrend with the membership rolls for May dropping by two. Ten products were added to the list, but twelve were removed. The highlight of the dozen coming off the list is that only one was due to closure and delisting. The new count stands at 297, of which 202 are ETFs and 95 are ETNs.
The dominant theme for May additions seems to be international funds. Of the ten products added to ETF Deathwatch, six have an international flavor. Of the minority, three are short funds and the fourth an insurance ETF.
Two of the international funds added to the list (db X-Trackers MSCI AC AP ex Japan Hedged (NYSEARCA:DBAP) and db X-Trackers MSCI UK Hedged Equity (NYSEARCA:DBUK)) were designed to provide exposure to foreign market securities without the effects of currency translations. In April, WisdomTree introduced five currency-hedged ETFs