Berkshire Hathaway Insurance Quotes

Munger replied: People are always saying to Berkshire, 'Gee, why don't you write a lot more volume in relation to capital? Everyone else is doing it. The rating agencies say that you can write twice as much in annual volume as you have capital.' And they look at our $10 billion in insurance capital and say, 'That's $20 billion a year. What are you doing writing only $1 billion?' But then . . . somebody else comes in and asks, 'Why did everybody get killed last year but you?' Maybe the questions are related.

For more reading on these fascinating stories, please see: the Berkshire Hathaway 1988 chairman’s letter for a discussion on Rockwood, the December 6, 1951 edition of The Commercial and Financial Chronicle for Buffett’s GEICO write-up, and the April 9, 1953 edition of The Commercial and Financial Chronicle for Buffett’s Western Insurance Securities write-up. A query on your favorite internet search engine should help you find these. If you’re having trouble, e-mail me at Brett@BuffettsEarlyInvestments.com, and I’d be happy to send them to you. The Snowball also offers vivid accounts of each.

In insurance, as elsewhere, the reaction of weak managements to weak operations is often weak accounting. (“It’s difficult for an empty sack to stand upright.”)

Each of these companies will devote its entire efforts to a single state seeking to bring the agents and insureds of its area a combination of large company capability and small company accessibility and sensitivity.

Reliance Insurance and Home Insurance were run into the ground, for example, their promises proved to be worthless.

Over the years, Charlie and I have seen all sorts of bad corporate behavior, both accounting and operational, induced by the desire of management to meet Wall Street expectations. What starts as an “innocent” fudge in order to not disappoint “the Street” — say, trade-loading at quarter-end, turning a blind eye to rising insurance losses, or drawing down a “cookie-jar” reserve — can become the first step toward full-fledged fraud. Playing with the numbers “just this once” may well be the CEO’s intent; it’s seldom the end result. And if it’s okay for the boss to cheat a little, it’s easy for subordinates to rationalize similar behavior.

Insurance companies collect premiums, of which a significant portion goes into reserves to pay future claims. This reserve (the “float”) earns money for Berkshire, leveraging the company’s return on capital.

GEICO’s advertising budget soon exceeded the ad spend of the rest of the auto insurance industry combined.

The Economics of Property-Casualty Insurance With the acquisition of General Re — and with GEICO’s business mushrooming — it becomes more important than ever that you understand how to evaluate an insurance company. The key determinants are: (1) the amount of float that the business generates; (2) its cost; and (3) most important of all, the long-term outlook for both of these factors. To begin with, 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. Typically, this pleasant activity 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. A caution is appropriate here: Because loss costs must be estimated, insurers have enormous latitude in figuring their underwriting results, and that makes it very difficult for investors to calculate a company's true cost of float. Errors of estimation, usually innocent but sometimes not, can be huge. The consequences of these miscalculations flow directly into earnings. An experienced observer can usually detect large-scale errors in reserving, but the general public can typically do no more than accept what's presented, and at times I have been amazed by the numbers that big-name auditors have implicitly blessed. As for Berkshire, Charlie and I attempt to be conservative in presenting its underwriting results to you, because we have found that virtually all surprises in insurance are unpleasant ones. The table that follows shows the float generated by Berkshire’s insurance operations since we entered the business 32 years ago. The data are for every fifth year and also the last, which includes General Re’s huge float. For the table we have calculated our float — which we generate in large amounts relative to our premium volume — by adding net loss reserves, loss adjustment reserves, funds held under reinsurance assumed and unearned premium reserves, and then subtracting agents balances, prepaid acquisition costs, prepaid taxes and deferred charges applicable to assumed reinsurance. (Got that?)

Buffett claimed that the insurance industry has vastly underestimated the full potential of what a super catastrophe could do.

We set no volume goals in our insurance business generally—and certainly not in reinsurance—as virtually any volume can be achieved if profitability standards are ignored.