Dear Mr. Buffett_ What an Investor Learns 1,269 Miles From Wall Street - Janet M. Tavakoli [102]
Simonides is not around anymore, but fortunately for Berkshire Hathaway, it has Ajit Jain to tend to Geico and General Reinsurance, Berkshire Hathaway’s large insurance company holdings. He joined Berkshire Hathaway in 1986, and built its reinsurance business from scratch.The reinsurance business may be even better than primary insurance. Jain tries to price premiums so that no matter who verifies the claims, the insurance business remains profitable.
For the right price, Berkshire Hathaway’s reinsurance companies underwrite the excess risk other insurance companies are eager to shed, reducing their maximum possible loss. Insurance companies sometimes need to expand capacity, exit an insurance business, or protect themselves against rare catastrophic losses, and they are often willing to pay up to meet these needs. For nothing more than a promise, Berkshire Hathaway receives large premium payments in advance. Losses and loss payments are usually delayed far into the future. In the hands of skilled investors like Buffett and Munger, those payments compound to levels that can far exceed any potential future payments.
The super catastrophe or super-cat business may be even better than the reinsurance business, but no one really knows. Berkshire Hathaway is also in this business, and reaps very high upfront premiums. But in a horrific year, the super-cat business will take a huge hit.When it comes, the compounding of the cash has to be great enough to cover the losses.
In December 2007, Ajit Jain set up Berkshire Hathaway Assurance to take advantage of opportunities in municipal bond insurance. In an unprecedented move, New York insurance regulators proposed the idea to Berkshire Hathaway and quickly cut through red tape. In late January 2008, Jonathan Stempel at Reuters asked me if Warren Buffett planned to reinsure the monoline’s structured finance positions. I stopped myself from laughing, and suggested he check his facts directly with Berkshire Hathaway.
Warren has repeatedly said he wants to do “premium business at premium prices,”27 and he insures risks he can understand. Stempel could not reach Ajit Jain or Berkshire for comment, but I had already told this much: “I would be surprised if he were to touch the financial guarantors’ [bond insurers’] structured products, given that the underwriting standards seemed so poor.”28
After the municipal bond market auction failed in the second week of February 2008,2930 Warren Buffett’s Berkshire Hathaway Assurance reinsured $50 million of bonds and was paid a 2 percent premium, double the original 1 percent premium for primary insurance from the bond insurers. Put another way, Berkshire Hathaway Assurance received two times the original premium to back up the existing insurance, in case the insurer cannot pay.31 By the end of February Berkshire Hathaway Assurance did 206 transactions and was paid an average of 3.5 percent on business that the primary insurer originally underwrote at 1.5 percent.32
Warren is happy to do zero business when risk premiums make no sense. Berkshire Hathaway’s triple-A rating is trusted as a genuine rating. Its stated intention of doing premium business at premium prices may leave the largest of the legacy bond insurers scrambling for scraps.
Chapter 12
Money, Money, Money (Warren and Washington)
That’s the problem . . . you can’t regulate it anymore.You can’t get the genie back in the bottle.
—Warren Buffett
(in Reuters), May 24, 2008
In the spring of 2008, both Warren and I said the United States was already in a recession. In May 2008,Warren told CNBC that “it will be deeper and last longer than many think.”1 Yet many economists sound like the Merchants of Death (MOD squad) in Thank You for Smoking : “Although