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In this episode, I discuss the following two topics.
1) Basics of insurance business in terms of how insurance companies make money and why Buffett likes them
2) Warren Buffett’s investment on an insurance company called GEIGO
Podcast Website: http://valueinvesting.blubrry.net/
Two key terms for the valuation of insurance companies
“Float”, or available reserve, is policyholder money held, but not owned, by insurers, which comes about because there exist time intervals between received premiums and incurred losses to be paid out, usually more than a year.
Float = Policy holder money held (Liability side) – Policy holder money not held yet (Asset Side)
= [loss and loss adjustment reserves + unearned premium + fund held under reinsurance assumed + other policy holder liabilities] – [premium receivables + loss recoverable + deferred policy acquisition costs + deferred charges on reinsurance + prepaid taxes]
Combined ratio = (Incurred Losses + Expenses) / Earned Premium