Where Can I Find A Glossary For The “Key Terms” In Insurance?
Rupp's Insurance & Risk Management Glossary
General Re - Glossary of Reinsurance Terms
The Complete Glossary of Insurance Coverage Explanations
Reinsurance: Everything you need . . . Reinsurance basics, links to the top global reinsurance carriers and specialty reinsurance carriers, reinsurance news and statistics, reinsurance services, and reinsurance associations.
What Is Float?
Let's discuss "float" and how to measure its cost. Unless you understand this subject, it will be impossible for you to make an informed judgment about Berkshire's intrinsic value. (1997 Chairman’s Letter [CTRL-F] Key Word: Float)
In the previous section I mentioned "float," the funds of others that insurers, in the conduct of their business, temporarily hold. Because these funds are available to be invested, the typical property-casualty insurer can absorb losses and expenses that exceed premiums by 7% to 11% and still be able to break even on its business. Again, this calculation excludes the earnings the insurer realizes on net worth - that is, on the funds provided by shareholders. (1990 Chairman's Letter [CTRL-F] Key Word: Measuring)
At this point in the report we've customarily provided you with a table showing the annual "combined ratio" of the insurance industry for the preceding decade. This ratio compares total insurance costs (losses incurred plus expenses) to revenue from premiums. (1993 Chairman’s Letter [CTRL-F] Key Word: Provided)
As we've explained in past reports, what counts in our insurance business is, first, the amount of "float" we generate and, second, its cost to us. Float is money we hold but don't own. (1995 Chairman’s Letter [CTRL-F] Key Word: Generate)
Since our float has cost us virtually nothing over the years, it has in effect served as equity. Of course, it differs from true equity in that it doesn't belong to us. Nevertheless, let's assume that instead of our having $3.4 billion of float at the end of 1994, we had replaced it with $3.4 billion of equity. Under this scenario, we would have owned no more assets than we did during 1995. We would, however, have had somewhat lower earnings because the cost of float was negative last year. That is, our float threw off profits. And, of course, to obtain the replacement equity, we would have needed to sell many new shares of Berkshire. The net result - more shares, equal assets and lower earnings - would have materially reduced the value of our stock. So you can understand why float wonderfully benefits a business - if it is obtained at a low cost. (1995 Chairman’s Letter [CTRL-F] Key Word: Differs)
What Is "Combined Ratio"?
The combined ratio represents total insurance costs (losses incurred plus expenses) compared to revenue from premiums: A ratio below 100 indicates an underwriting profit, and one above 100 indicates a loss. The higher the ratio, the worse the year. When the investment income that an insurer earns from holding policyholders' funds ("the float") is taken into account, a combined ratio in the 106 - 110 range typically produces an overall break-even result, exclusive of earnings on the funds provided by shareholders." (1992 Chairman’s Letter [CTRL-F] Key Word: Represents)
Explanation Of The Insurance Business - And Berkshire’s Differentiation
Shown below is an updated version of our usual table presenting key figures for the insurance industry: (Very interesting review concerning the mechanics of the insurance business) (1987 Chairman’s Letter [CTRL-F] Key Word: Best’s)
And, unfortunately, a largely unreported but particularly pernicious problem may well prolong and intensify the coming industry agony. (Insurance Accounting) (1980 Chairman’s Letter [CTRL-F] Key Word: Pernicious)
Errors in Loss Reserving (1984 Chairman’s Letter [CTRL-F] Key Word: Errors)
Any company's level of profitability is determined by three items: (Benefits Of Low Cost Float) (1995 Chairman’s Letter [CTRL-F] Key Word:leverage)
A caution is appropriate here: Because loss costs must be estimated, insurers have enormous latitude in figuring their underwriting results, and that makes it very difficult for investors to calculate a company's true cost of float. Errors of estimation, usually innocent but sometimes not, can be huge. (1999 Chairman’s Letter [CTRL-F] Key Word: Caution)
The Measure Of An Insurer's Profitability
In the previous section I mentioned "float," the funds of others that insurers, in the conduct of their business, temporarily hold. (1990 Chairman's Letter [CTRL-F] Key Word: Measuring)
With the acquisition of General Re -- and with GEICO's business mushrooming -- it becomes more important than ever that you understand how to evaluate an insurance company. (1998 Chairman’s Letter [CTRL-F] Key Word: Mushrooming)
Super-Cat Insurance (An Explanation) And Berkshire’s Competitive Advantage
Our enthusiasm over 1995's insurance results must be tempered once again because we had our third straight year of good fortune in the super-cat business. (1995 Chairman’s Letter [CTRL-F] Key Word: Super-Cat)
As in the past three years, we once again stress that the good results we are reporting for Berkshire stem in part from our super-cat business having a lucky year. (1996 Chairman’s Letter [CTRL-F] Key Word: Lucky)
Occasionally, however, the cost of our float will spike severely. That will occur because of our heavy involvement in the super-cat business, which by its nature is the most volatile of all insurance lines. In this operation, we sell policies that insurance and reinsurance companies purchase in order to limit their losses when mega-catastrophes strike. Berkshire is the preferred market for sophisticated buyers: When the "big one" hits, the financial strength of super-cat writers will be tested, and Berkshire has no peer in this respect. (1997 Chairman’s Letter [CTRL-F] Key Word: Preferred)
What Is “Non-Cat Reinsurance”?
"As with retroactive reinsurance contracts, the premiums established for non-catastrophe reinsurance contracts are based on time-value-of-money concepts because loss payments are expected to occur over lengthy time periods. (1999 Annual Report [CTRL-F] Key Word: As with)
First, a few insurers that are currently experiencing large losses have offloaded a significant portion of these on us in a manner that penalizes our current earnings but gives us float we can use for many years to come. After the loss that we incur in the first year of the policy, there are no further costs attached to this business. (2000 Chairman’s Letter [CTRL-F] Key Word: Penalizes)
What Is “Retroactive Insurance”?
"Generally, retroactive reinsurance contracts indemnify the ceding company, subject to aggregate loss limits, with respect to past loss events that were insured by the counterparty. It is generally expected that losses ultimately paid under these arrangements will exceed the premiums received, possibly by a wide margin. (1999 Annual Report [CTRL-F] Key Word: Ceding)
Under GAAP accounting, this "retroactive" insurance neither benefits nor penalizes our current earnings. Instead, we set up an asset called "deferred charges applicable to assumed reinsurance," in an amount reflecting the difference between the premium we receive and the (higher) losses we expect to pay (for which reserves are immediately established). (2000 Chairman’s Letter [CTRL-F] Key Word: “Retroactive")
Pain-Today, Gain-Tomorrow Policies
There are two factors affecting our cost of float that are very rare at other insurers but that now loom large at Berkshire. First, a few insurers that are currently experiencing large losses have offloaded a significant portion of these on us in a manner that penalizes our current earnings but gives us float we can use for many years to come. After the loss that we incur in the first year of the policy, there are no further costs attached to this business. (2000 Chairman’s Letter [CTRL-F] Key Word: Tomorrow)
Did Warren Buffett Mention The Word "Synergy"In Association With General RE? But the main attraction of the merger is synergy, a word that heretofore has never been used in listing the reasons for a Berkshire acquisition. In this transaction, however, there are at least four areas of powerful synergy, which Charles Munger, Berkshire's Vice Chairman, and I believe justify the premium price that Berkshire is paying.
Berkshire has a special advantage in the super-cat business because of our towering financial strength, which helps us in two ways. (1994 Chairman’s Letter [CTRL-F] Key Word: towering)
