Few insurance agents and brokers have not heard of Berkshire Hathaway, a company whose impact on the insurance business cannot be understated. Berkshire owns a number of insurance companies including General Reinsurance, GEICO (of gecko fame), USLI (one of our key markets) and Medical Protective. Every year Warren Buffett, the investing luminary known as the Oracle of Omaha, and Chairman of the Board of Berkshire Hathaway, writes a letter to shareholders. This annual letter is not the one page summary of corporate performance that others provide to shareholders. It is a mix of detailed analysis, investing wisdom and down home wit, this year running 22 pages.
Buffett's letter is read thoroughly by shareholders, investors and insurance executives every year, and always contains interesting and witty commentary. This year is no different (see here, 22 pages). Some perspectives of interest to insurance practitioners include the following, although a reading of the entire letter is much more worthwhile and entertaining:
217,000 employees and annual revenues approaching $100 billion.
…delivered staggering productivity gains in recent years. Between yearend 2003 and yearend 2006, the number of GEICO policies increased from 5.7 million to 8.1 million, a jump of 42%. Yet during that same period, the company’s employees (measured on a fulltime-equivalent basis) fell 3.5%. So productivity grew 47%. And GEICO didn’t start fat.
The big unknown is super-cat insurance. Were the terrible hurricane seasons of 2004-05 aberrations? Or were they our planet’s first warning that the climate of the 21st Century will differ materially from what we’ve seen in the past? If the answer to the second question is yes, 2006 will soon be perceived as a misleading period of calm preceding a series of devastating storms. These could rock the insurance industry. It’s naïve to think of Katrina as anything close to a worst-case event.
Berkshire’s Appetite for insurance risk:
Rates have recently fallen because a flood of capital has entered the super-cat field. We have therefore sharply reduced our wind exposures. Our behavior here parallels that which we employ in financial markets: Be fearful when others are greedy, and be greedy when others are fearful.
the days of lush profits from our newspaper are over… If cable and satellite broadcasting, as well as the internet, had come along first, newspapers as we know them probably would never have existed.
Board of Director criteria:
Board members [must] be owner-oriented, business-savvy, interested and truly independent
When we use incentives – and these can be large – they are always tied to the operating results for which a given CEO has authority. We issue no lottery tickets that carry payoffs unrelated to business performance. If a CEO bats .300, he gets paid for being a .300 hitter, even if circumstances outside of his control cause Berkshire to perform poorly. And if he bats .150, he doesn’t get a payoff just because the successes of others have enabled Berkshire to prosper mightily.
Since Berkshire bought out the liabilities of Equitas, the letter also includes an excellent history of Lloyds of London as well as background on the deal.