Insurance float and intrinsic valuation

Link to PDF document (24 pages)

This is a detailed study of insurance float and its role in the valuation of insurance stocks. Buffett made insurance float famous using it to turn Berkshire into an insurance and investment powerhouse. In doing so he has detailed the importance of float in understanding Berkshires valuation, though much of his teachings around float has been lost outside of Berkshire. However, his process remains highly applicable to mainstream insurance analysis, particularly in the determination of intrinsic value.

The report will explore the application of his principles to Australian insurance companies with a focus on successful valuation and stock-picking. Readers will learn why conventional valuation techniques can be flawed and how float-based valuation can be used within a value investing framework. The key issues I cover include:

• What is float and how analysts should think about it
• How to value an insurance company using float-based valuation
• Why the traditional WACC is incorrect for an insurance company
• Why DCF’s are systemically mispricing insurers
• How to think about the insurance cycle in a float-based context
• Stock Analysis – How it works in practice, Intrinsic value case studies for IAG, SUN, QBE, NHF, GMA + CGF
• Investing – what is the right price to buy an insurance stock, and expected returns

Below are the buy-sell signals for a few of the stocks contained within the report using float-based intrinsic value.


Link to full PDF document (24 pages)

Disclosure: I do not hold any of the securities mentioned above at the time of writing. I may or may not trade these securities in the future. Any recommendations do not constitute investment advice and are purely for learning purposes only. Please do your own research and/or seek professional financial advice.


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