The Snowball_ Warren Buffett and the Business of Life - Alice Schroeder [303]
By the time he shut it down, the textile business had become a flyspeck on the holding company that bore the Berkshire Hathaway name. Buffett’s plan was that insurance would drive that Berkshire Hathaway—the one that swallowed up whole businesses like the Nebraska Furniture Mart. During the 1970s, he had cobbled together a diverse group of insurance companies and loaded them onto the back of National Indemnity to give it an extra kick. It was a brilliant strategy, but for a number of years, they had mostly been going wrong.
First, Jet Jack Ringwalt had retired. Then, the “Omni affair,” when National Indemnity was swindled by a crooked agent, had threatened to explode into losses that could have cost the company $10 million or more. Although the final tab had settled into a couple of miserable millions, this was only the first of a series of problems with the insurance companies. Buffett had bought a small home-and auto-insurance company in the early 1970s that promptly skidded into a ditch, until a new manager towed it out. That was to be the pattern with all the rest of Buffett’s insurance investments—straight into the ditch, then call the tow truck. It would take a mighty winch and a heavy engine to dig some of them out of the muck. Berkshire had gotten involved in California workers’ compensation insurance—coverage that pays for lost wages and health benefits when people are injured on the job. By 1977, one of its two workers’ comp companies was in a full-blown “disaster,” with its manager taking kickbacks from brokers.10 Buffett’s protégé Dan Grossman, sent to L.A. to save it, quickly realized that he did not understand insurance, a complex business that is rougher than it sounds. (Verne McKenzie, for example, had once led a trip to personally repossess an agent’s house and car.11) Turning your controller into a repo man was not the typical CEO’s management style, but in Buffett’s world, after all, a smart person could do anything. Faced with a wrecked company to salvage, Grossman’s solution, therefore, was to call the tow truck and hire an experienced manager, Frank DeNardo, who began to straighten things out. Buffett larded praise on DeNardo in Berkshire’s annual report.
Buffett had also started a reinsurer—a company that insures other insurers—as a sort of experiment. He hired George Young, a gentle, professorial man, to run it. Young seemed to know what he was doing, and money came in the door, but too many losses flowed back out. Buffett tried to work with Young to solve the problem, then Hail-Maryed Grossman to New York on a rescue mission. It was “kind of vague,” says Grossman. “He said, go talk to Lloyd’s of London, go find some reinsurance deals that you can do.” Grossman figured out fast that reinsurance was a business for specialists. Given no instructions, he camped out at Ruane, Cunniff and started to learn investing.
Another of Buffett’s insurance ventures was the creation of the Homestate Companies—a batch of little insurers scattered among a number of different states. The idea here was that somebody wearing the title of president would make customers feel better served than the same person as branch manager of a big national insurance company. In 1978, Buffett wrote that these companies had done a “disappointing” job. The customers liked doing business with a president, but the big national companies had certain other advantages, such as experience. The Homestate Companies needed new management. Buffett had no plans to solve this problem himself. Nor did his standard management technique of taking out all the cash and raising prices release a flood of profits in insurance (although it was a good starting point). His friend Tom Murphy liked to tell him that he “delegated to the point of abdication.”12 Now he