Q: What is “float,” in reference to insurance?
A: Warren Buffett, who heads insurance giant Berkshire Hathaway, explained it well in his 1997 letter to shareholders:
“(F) loat is money we hold but don’t own. In an insurance operation, float arises because premiums are received before losses are paid, an interval that sometimes extends over many years. During that time, the insurer invests the money. Typically, this pleasant activity carries with it a downside: The premiums that an insurer takes in usually do not cover the losses and expenses it eventually must pay. That leaves it running an ‘underwriting loss,’ which is the cost of float.
- Mount St. Helens, still steaming, holds the world’s newest glacier
- Seattle sets heat record for July 4
- Whitest big county in the U.S.? It’s us
- For escapee, prison now will mean 23 hours a day in a cell
- Sound Transit planning heats up for light-rail expansion and public vote
Most Read Stories
“An insurance business has value if its cost of float over time is less than the cost the company would otherwise incur to obtain funds. But the business is a lemon if its cost of float is higher than market rates for money.”
Learn more about the fascinating insurance world from the industry itself at iii.org.
Dear Fool: W.R. Grace probably isn’t my dumbest investment, but close to it. Not that it was a bad investment — it’s just that after buying shares at $1.50, when they hit $2.50, I sold, feeling good about it. But the stock has recently topped $95.
The Fool responds: It’s a common mistake. You made a solid 67 percent gain, but it could have been much more had you focused not on the stock’s price alone, but on how much more you thought the company would grow.
If, when the stock was at $2.50, you didn’t have much faith in Grace’s future, selling would have been the right thing to do.
W.R. Grace is an interesting case, in that it voluntarily filed for bankruptcy protection in 2001, after a sharp rise in asbestos claims due to a leak at one of its mines. It has yet to emerge from it, though that’s expected to happen soon.
The maker of specialty chemicals and materials has been performing well recently, and its stock has averaged nearly 15 percent annual growth over the past 20 years.
Not so long ago, American carmakers were gasping for air. Times have changed, though, and Ford Motor, for example, is in the midst of a terrific turnaround.
Credited for much of it is CEO Alan Mulally, who is nearing retirement — and who is reportedly being considered for the top post at Microsoft.
Ford has been redesigning its vehicles to deliver more value and better fuel economy, and it has consolidated its vehicle platforms. It’s all paying off.
Ford’s Fusion could top 300,000 in sales this year and is threatening the Camry’s dominance. And Ford has sold more than 645,000 F-series trucks so far this year.
Another key to Ford’s ultimate success will be its performance abroad.
Its sales in emerging markets are still far smaller than its domestic sales, but those economies and sales numbers are growing far more briskly.
Sales in China recently grew by 55 percent over year-ago levels, and it is investing heavily in India. Even in the U.S., sales popped by 14 percent in October. In Europe, where Ford and others have struggled, losses have been narrowing.
After reinstating its discontinued dividend in 2012, Ford doubled it this year, and it recently yielded 2.4 percent. Consider parking some shares in your portfolio.