I never had much interest in banking or insurance until reading The
Warren Buffett Way last year and realizing how Buffett made his fortune
by investing the “float” from his insurance companies. Now I think
about this concept all the time and wonder how it might be applied to
my internet companies.
From the 2004 Berkshire Hathaway Annual report:
low-cost, non-perilous sources of leverage that allow us to safely own
far more assets than our equity capital alone would permit: deferred
taxes and “float”, the funds of others that our insurance business
holds because it receives premiums before needing to pay out losses.
Both of these funding sources have grown rapidly and now total about
“Better yet, this funding to date has often been cost-free. Deferred
tax liabilities bear no interest. And as long as we can break even in
our insurance underwriting the cost of the float developed from that
operation is zero. Neither item, of course, is equity; these are real
liabilities. But they are liabilities without covenants or dates
attached to them. In effect, they give us the benefit of debt — an ability to have more assets working for us — but saddle us with none of its drawbacks.”
I have a friend who ranks in the top 5 on major search engines for
insurance related terms. I figure that if I ever establish an online
insurance company, that he’ll be my partner in generating major traffic
to my site. The big question I need to answer before going down this
path is: what regulations govern how insurance funds — the float —
can be invested? I know government regulations would likely not permit
any high-risk investments. But how did Buffett do what he did? I
suppose he bought companies with high book value, so the investments
seemed safe because the companies owned physical assets. I don’t know.
I’m sure you can’t fund high-risk startups with insurance float.
Another options might be industrial banks, which exist in six states,
including Utah. Again, regulations would not permit a high-risk use of
these funds. But I recently read a great article (Wired magazine I
think) about a taxi company that set up an Industrial Bank in Utah
(instead of borrowing money from other banks) and in a couple of years
it was able to greatly increase its net profits because it was able to
finance its own growth.
I’ll keep noodling on this concept. All start up companies need some
cash. And I’m thinking there ought to be a way to fund them using
float, without violating government regulations. (I wonder if
regulations permit say 5% of float to be invested in high risk
investments, as long as the portfolio overall is 95% safe???)
Any ideas from all the brilliant readers out there?