The Warren Buffett Way: The World’s Greatest Investor

(Rick Simeone) #1
“Our Main Business Is Insurance” 37

run from National Indemnity’s off ice in Stamford, Connecticut, con-
tributes powerfully to Berkshire’s revenues.
The reinsurance group is headed by Ajit Jain, born in India and ed-
ucated at the Indian Institute of Technology and at Harvard. He re-
cently joked that when he joined Berkshire in 1982, he didn’t even
know how to spell reinsurance, yet Jain has built a tremendously prof-
itable operation that earns Buffett’s highest praise year in and year out.^9
Working on the foundation of Berkshire’s f inancial strength, the
reinsurance group is able to write policies that other companies, even
other reinsurers, would shy away from. Some of them stand out because
they are so unusual: a policy insuring against injury to superstar short-
stop Alex Rodrigez for the Texas Rangers baseball team, or against a $1
billion payout by an Internet lottery. Commenting on the latter, a vice
president in the reinsurance division noted, “As long as the premium is
higher than the odds, we’re comfortable.”^10
The bulk of underwriting at the reinsurance group is not quite so
f lashy. It is, however, extremely prof itable. Signif icant revenue in-
creases occurred in 2002 and 2003. In the aftermath of September 11,
many companies and individuals increased their insurance coverage,
often signif icantly, yet there were no catastrophic losses in the two
following years. In 2003, the Berkshire Hathaway Reinsurance Group
brought in $4.43 billion in premiums, bringing its total f loat to just
under $14 billion.
Perhaps more signif icant, its cost of f loat that year was a negative
3 percent—meaning there was no cost, but rather a prof it. ( In this
case, remember, “negative” is a positive.) That is because the reinsur-
ance group in 2003 had an underwriting gain (more premiums than
payouts) of more than $1 billion. For comparison, that same year the
GEICO underwriting gain was $452 million, and General Re’s was
$145 million.
It is no wonder Buffett says of Jain, “If you see Ajit at our annual
meeting, bow deeply.”^11





Warren Buffett understands the insurance business in a way that few
others do. His success derives in large part from acknowledging the es-
sential commodity nature of the industry and elevating his insurance
companies to the level of a franchise.

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