What is "float?"

I mentioned in my last post that Mr. Buffett uses float in his businesses, but what does that mean? He calls it "other people's money," and that's actually quite accurate.

In addition to the obvious definitions, float is defined as a : an amount of money represented by checks outstanding and in process of collection b : the time between a transaction (as the writing of a check or a purchase on credit) and the actual withdrawal of funds to cover it c : the volume of a company's shares available for active trading in the auction market. None of these definitions quite paints the picture of what Mr. Buffett does with float.

Float happens when a customer pays their insurance premium and does not have an accident or loss until later, according to a Motley Fool Article. Some of that premium money is used for operating expenses of the insurance company, and the rest of the money can be invested until the funds are needed for a claim. The float is that excess money the insurance company invests.

The length of time between premium payment and claim payouts affects the profitability of float. For instance, car insurance claims are typically resolved very quickly. On the other hand, insurance that involves lengthy lawsuits, such as those relating to asbestos exposure, typically result in claims being paid out many years later. In general, the longer the lawsuit lasts, the longer the float money can be invested and reinvested, and the more profitable the float is.