Berkshire Hathaway is well known in our industry as the owner of insurance standouts National Indemnity, General Reinsurance, GEICO and USLI (our favorite). Berkshire's 1Q 2009 earnings were down, but the Chairman was cautiously optimistic about Berkshire's insurance opportunities (see here & here).
After Berkshire's worst year ever, Warren Buffett, well known investor and Chairman of Berkshire Hathaway, published his highly anticipated annual shareholder letter (see here), and it is worth taking a closer look at a number of interesting and valuable observations on the insurance industry contained in the letter. Here are a few:
Our insurance operation, the core business of Berkshire, is an economic powerhouse. Price is what you pay; value is what you get.
GEICO grows because it saves money for motorists......drivers look for the lowest-cost insurance consistent with first-class service. Efficiency is the key to low cost...Americans are focused on saving money as never before
A promise is no better than the person or institution making it. That’s where General Re excels: It is the only reinsurer that is backed by an AAA corporation. Ben Franklin once said, “It’s difficult for an empty sack to stand upright.” That’s no worry for General Re clients.
Investors should be skeptical of history-based models. Constructed by a nerdy-sounding priesthood using esoteric terms such as beta, gamma, sigma and the like, these models tend to look impressive. Too often, though, investors forget to examine the assumptions behind the symbols. Our advice: Beware of geeks bearing formulas.
We commented on the challenges of effectively using modeling in the insurance business in a prior post on The Black Swan (see here). And The D&O Diary points out (see here) that the annual shareholders letter omits any mention of the criminal trial that arose concerning reinsurance arrangements between Berkshire sub General Re and AIG (see here & here).
Brought to you by Tennant Risk Services.