What Berkshire Talks About When It Talks About Insurance

Buffett and Berkshire on Florida exposure, GEICO frustrations and how they were “forced” out of banking and fell into insurance.

What Berkshire Talks About When It Talks About Insurance
Photograph by Stuart Isett/Fortune Most Powerful Women via Flickr

Berkshire Hathaway’s annual shareholder meeting is a well choreographed media production filled holding company brands like Dairy Queen ice cream, Borsheim’s jewelry and Fruit of The Loom clothing.

Even Berkshire co-chairman Vice-Chairman Charlie Munger hypes the portfolio by conspicuously munching on See’s peanut brittle during the Q&A.

Which makes it all the odder that little media time is spent discussing the holding companies core business: insurance.

Make no doubt, some industry analysts and high profile investors sprinkled throughout the audience during the May 6 meeting in Omaha were able to inject some questions regarding Berkshire’s vast risk exposure. And Berkshire’s Vice Chairman of Insurance, Ajit Jain, offered some sobering takes

However, beyond the occasional inside baseball references of a few industry analysts, a discussion of Berkshire’s massive, underlying exposure to insurance risk is not the focus of its shareholder meeting.

Below are a few instances where insurance and reinsurance exposure were discussed.

Florida Creates a “Very Unbalanced” Risk Portfolio: Jain

Jain offered his perspective on Berkshire's current risk portfolio.

Pricing that we were expecting to realize didn't really come and meet our pricing requirements, as a result of which January 1 was a big disappointment. We did not write as much as we were hoping to write.
Now fast forward to April 1, which is another big renewal date. We had a lot of powder dry, and we were lucky that we kept the powder dry because April 1 suddenly prices zoomed up again a lot higher than what they were in January 1 and started to look attractive to us.
So now we have a portfolio that is very heavily exposed to property catastrophe. To put that in perspective, our exposure today is almost 50% more than what it was five, six months ago. So we -- I think we have written as much as our capacity will allow us to write. We are very happy with what we've written. The margins have been healthy. The only thing that I want to mention to you is that while the margins have been healthy, we have a very unbalanced portfolio. What that means is if there's a big hurricane in Florida, we will have a very substantial loss. As opposed to that, if we have a very big loss anywhere other than Florida, relative to our competition, we will have a much smaller loss.
Net-net, I'm very happy with the portfolio. It's been a lot better. It is a lot better than what it's been in the past. I don't know how long it will last. And of course, if the hurricane happens in Florida, we could lose -- across all the units, we could lose as much as $15 billion. And if there isn't a loss, we'll make several billion dollars as profit.

GEICO Tech Need a Lot of Work

Jain said that advancing GEICO’s tech stack remains a “work in progress” and that the challenges for the management team are greater than they anticipated.

And the real culprit of the bottleneck is technology. GEICO's technology needs a lot more work than I thought it did. It has more than 500 -- actually, more than 600 legacy systems that don't really talk to each other. And we are trying to compress them to no more than 15, 16 systems that all talk to each other. That's a monumental challenge. And because of that, even though we have made improvements in telematics, we still have a long way to go because of technology.
Because of that and because of the whole issue more broadly in terms of matching rate to risk, GEICO is still a work in progress. I don't know if any of you had a chance to look at the first quarter results. But GEICO has had a very good first quarter coming in at a combined ratio of 93% and change, which means a margin of 6% and change. Even though that's very good, it's not something we can take to the bank because there are two unusual items that contributed to it.

Why Insurtechs Are Failing

Buffett told the audience that the failure of many insuftechs over the past eighteen months was a foreseeable event since the market was valuing them as technology companies rather than the underlying insurance exposure.

We're a technology company. We're a technology company. We're a technology company. Most of them have failed because they stick in actual underwriting. They're no good at taking risk and figuring out how to price it, which is what insurance is.

Insurance Was Not Berkshire’s First Love

Despite years of waxing about the benefit of the insurance “float” to fund Berkshire’s M&A and operations, the industry was not Warren Buffett’s first love.

If you follow sound banking methods, which means you're not doing some things that other people do, a bank would be a perfectly decent investment. In fact, Charlie and I was, me originally in 1969, we bought a bank at Berkshire. And we had $19 million invested in that bank and we had $17 million, I think, invested in our insurance companies. And if the banking Holding Company Act of 1970 hadn't been passed, we might have ended up owning a lot of banks instead of a lot of insurance companies.
We were looking at more banks and — we were going — around Chicago and there were other things we could do. And then bingo, they passed the 1970 Bank Holding Company Act, and we had to divest ourselves of that bank in 10 years. We were going to buy banks.

And Charlie Munger chimed in:

And we were forced out of it.

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