Buffett's "Free Float" from Insurance Operations is Deceptive

Buffett in his annual report for 2007 mentions:

``This float (the float collected from insurance premiums until now, $59B) is `free' as long as insurance underwriting breaks even, meaning that the premiums we receive equal the losses and expenses we incur,'' .``If we do that, our investments can be viewed as an unencumbered source of value for Berkshire shareholders.''

This was referenced recently in Bloomberg by comparing how Buffett's strategy is better than Blackstone's :
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a61_4O7o1UdY

Buffett is wrong. Why?

Any insurance business is inherently selling put options. What he is saying is that if future premiums collected from selling these put options are the same as future losses from exercise of some puts--break even scenario-then we get to keep the $50B "for free". Hah!

The premiums collected until now are a part of the capital! You can't arbitrarily set a clock at end of 2007 and call that free money. Any premium earned can possibly go towards insuring future losses---and even saying something like "if future premiums are same as future losses"
is absolutely silly!

A put options seller on SPY can do out of money put sells for 5 years, collect premium, and then say at the end of the 5th year: Hey, if I sell put options in the coming years, and my losses from the occasional exercise of these put options when they fall in the money will be less or equal to the premiums collected in these years, then I get to keep the previous 5 years for free!

As we know from the collapse of Bear Stearns-premiums collected disappear overnight. Finance (banking and insurance) is selling confidence and trust to people-and if they lose that, overnight the business collapses. That can happen to Geico one day, and then Buffett will look not so smart-another outlier due to good luck, until the streak broke.

***
The later (2008) demise of AIG, FNM, FRE etc. showed that they didn't realize this basic stuff.

Insurance is about taking X in premiums, giving out Y in claims, and keeping the X-Y. While you have the money, the only way to ensure that you can pay the Y's is to have it in the lowest risk (generally the lowest rate of interest as well, Government bonds) of the country your company has operations in.

If you try to "invest" the premiums taken in into higher returning ventures, you are not in the Insurance business anymore; you are in the Investing and Speculations business. But the poor people who bought insurance from you thinking that when they are hit by a tough time,  you will help them out, are necessarily duped. You are a high risk investor selling yourself to the world as an insurance provider.

-Sanjay