Why Cigna Health is one of Burry's largest holdings ⛑️
A lot of beginning investors know that Warren Buffett is one of the greatest investors to ever live. Buffett is a living legend in the value investing community who has turned Berkshire Hathaway from a small textile manufacturer into one of the leading conglomerates to today’s age.
However, what many investors don’t realize is how Buffett used premiums paid by insurers he owned, typically used to purchase bonds, to invest in equities and businesses with predictable free cash flow. This method of using insurance premiums is called “investing the float” and is one of the key strategies the Oracle of Ohama used to become one of the wealthiest investors in the world.
The strategy to invest the float is as follows:
Insurance companies do not pay out the money the collect right away. Instead, they collect money in the form of premiums, invest that capital, and then pay out claims in a future date.
The difference between premiums paid and premiums collected is called “float”
Buffett used this insurance float as leverage when investing in public equities and has had a significant net positive for Berkshire Hathaway investors.
In Berkshire Hathaway’s 2002 shareholder letter, Buffett explains this strategy:
To begin with, the float 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. This pleasant activity typically 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. 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.
The stock we are highlighting today was recently purchased by Micheal Burry. It is an insurance company that generates substantial free cash flow, trading at YTD lows, has an attractive dividend yield and the recent move in interest rates will allow this company to invest their float in high yielding bonds at an extremely attractive yield.
Performance since his filing: +6%
YTD performance: -15%
The company is cheap, and the tailwinds are attractive. Micheal Burry sees this opportunity, so here’s what we think he sees.
Let’s dig in…
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