Float is essentially money a company holds that belongs to others but doesn't have to be paid out immediately. Think of it as a temporary, interest-free loan that a business can use for its own purposes, like making investments. The classic and most famous example comes from the insurance industry. When you pay your car insurance premium, the insurance company gets to hold and invest that money. It only has to pay it out later if you have an accident and file a claim. This pool of collected premiums that has not yet been paid out in claims is the float. For a well-run insurance company, this float can be a massive and stable source of capital. It's a concept championed by legendary investor Warren Buffett, who used the float from Berkshire Hathaway's insurance operations as the primary engine for its incredible growth. This “free” money provides a powerful leverage that, when invested wisely, can generate spectacular returns for shareholders over the long term.
The mechanism is simple: a company collects cash from its customers upfront and pays its own expenses or customer claims later. The time lag between receiving the cash and paying it out creates a pool of money—the float. In an insurance company, this plays out perfectly:
This gap creates a substantial, revolving fund. As long as the company keeps writing new policies, the float is continuously replenished. It’s like having a river of cash constantly flowing into your coffers that you can use before it flows out.
For value investors, float is more than just an accounting term; it's a sign of a potentially wonderful business. It's a source of capital that can be cheaper than any loan from a bank.
Warren Buffett is the undisputed master of using float. He acquired insurance companies like National Indemnity Company and GEICO precisely for this reason. He understood that if he could use their float to buy stocks and whole businesses, he could generate investment returns on this “borrowed” money. The best part? If the insurance operations were profitable, he wasn't paying any interest on this “loan.” In fact, he was getting paid to hold the money. This is the financial alchemy that turned Berkshire Hathaway from a struggling textile mill into a global conglomerate. It allowed him to compound capital at rates far beyond what would have been possible using only traditional financing like debt or equity.
Float is not always free. An insurance business can lose money on its core operations. This happens when the claims and operating expenses are greater than the premiums it collected. This is called an underwriting loss. When this occurs, the float has a “cost.” The calculation is straightforward:
For example, if an insurer has an average float of $1 billion and an underwriting loss of $20 million for the year, its cost of float is 2%. This is still likely much cheaper than borrowing $1 billion from a bank! The holy grail, however, is achieving an underwriting profit. This means the premiums collected are more than enough to cover all claims and expenses. In this scenario, the cost of float is negative. The company is literally being paid to hold and invest other people's money. This is the magic Buffett has consistently sought and often achieved.
So, how can you spot a company with great float characteristics?
The best place to start is the balance sheet of an insurance company. The float isn't a single line item, but it's primarily composed of two main liabilities:
Summing these up gives you a good approximation of the company's total float.
The single most important metric for evaluating the quality of an insurance company's float is the combined ratio.
Here’s what it tells you:
As an investor, you should look for companies that consistently maintain a combined ratio below 100%. A long-term track record of underwriting discipline is far more important than a single good year.
While insurance is the quintessential example, other business models also benefit from a float-like characteristic. This often comes from a favorable working capital cycle. Consider these examples:
Float is one of the most powerful, yet often misunderstood, concepts in business and investing. It's a durable competitive advantage that provides a cheap and massive source of long-term capital. For the savvy value investor, identifying a business that generates a large and low-cost (or even better-than-free) float can be the key to unlocking extraordinary investment returns. It’s the secret sauce behind some of the world's most successful enterprises.