This weekend saw the quarterly results and annual shareholders meeting of Berkshire Hathaway and one of the most interesting exchanges during the question & answer session was Warren Buffett and Charlie Munger discussing over just how tough reinsurance can be these days.
Berkshire Hathaway experienced positive underwriting and investment results across its insurance and reinsurance business in Q1 2018, as reported by our sister site Reinsurance News.
But with market conditions in reinsurance remaining challenging, the analysts lined up to quiz Buffett and his deputy Munger were keen to explore just how tough Berkshire Hathaway is finding the state of business these days.
The responses highlight the close relationship developed over almost six decades of friendship that the pair enjoy, having originally met over dinner back in 1959.
Responding to an analyst question about the state of the market and the challenges Berkshire Hathaway faces, Buffett implied that while there are challenges, he expects to continue to achieve growth no matter how difficult the market gets.
“The reinsurance business, I don’t think I’d say that it’s tougher than it was ten years ago,” Buffett explained. “But if you go back to forty or fifty years ago, it was not brutally competitive.”
Discussing reinsurance subsidiary Gen Re, Buffett hailed the work Ajit Jain has done since taking responsibility for the firm, saying it has, “changed somewhat and it probably is more growth oriented than it was before.”
However he insisted that growth is not at any cost, saying that anything Jain has a hand in the development of has underwriting discipline attached.
But he noted that the portfolio at Gen Re has been growing, like so many other major reinsurers, explaining that, “There has been some pick-up and I think you actually will see the property casualty reinsurance business grow a fair amount.”
This despite the much discussed challenges faced by reinsurers.
On the life reinsurance side Gen Re has been growing steadily since Berkshire Hathaway took it over and Buffett noted that overall, “I think we’ll have a somewhat larger operation at Gen Re.”
On the appetite of Berkshire Hathaway to remain in the reinsurance business, despite the challenges faced, Buffett said, “We will be in the reinsurance business five years from now, ten years from now and fifty years from now, and we will have some unusual advantages that stem both from our capital position, our attitude towards the business and the talent that we have.”
Clearly Berkshire Hathaway benefits from efficiencies of scale across the conglomerate, as well as its active investment or total-return type model, which perhaps explains why the company can continue to expand into a still-challenging reinsurance environment.
Of course, these “unusual advantages” that Berkshire has, are not shared by the major global reinsurers of the world, which do not have the multi-pronged conglomerate approach to business, nor the massive pool of investment float, or the appetite to put what float they have to work in such an aggressive investment manner.
Yet still the major reinsurers of the world grow their books into a reinsurance market where rates have not risen to anywhere near the levels hoped for after the major catastrophe events of 2017.
Buffett’s company is leveraging its group wide efficiency and economies of scale to grow into this market, as well as its distinct expertise in large deals and certain lines of business. That edge should see it be able to continue to grow, when perhaps others may find the returns on growth business becoming less attractive.
Buffett seems to have lost no enthusiasm for his insurance and reinsurance enterprise, despite more challenges and lower underwriting returns, saying, “We have a way better than average insurance business generally. We have some real gems that nobody really knows about.
“And we have a very, very good reinsurance business, that will be subject to more ups and downs than something like GEICO which just moves ahead every year, but it will be an important part of Berkshire.”
Of course it is well-publicised that Buffett is less attracted to the catastrophe reinsurance business these days, something business partner Charlie Munger opted to refer to when asked how he felt about the state of the market.
“I would argue the part that any idiot financier can get into has gotten way tougher,” Munger said, adding “And why wouldn’t it.”
As areas of the reinsurance market have become, or are becoming, more commoditised, so it makes sense that they are more open to a wider range of underwriting capital. Perhaps Berkshire has now realised that these peak catastrophe parts of the market are never coming back its way again.
In a clear demonstration of the bond between the pair, Buffett quipped in response, “Charlie is my substitute for my father-in-law.”
It’s clear Berkshire Hathaway’s unusual advantages are the strategic initiatives that add efficiency to its business model and re/insurance capital. In a similar way, the advantages ILS players have are all efficiency related, making their cost of underwriting capital more competitive and allowing them to compete with the biggest players over the largest accounts.
Now who’s going to combine a Berkshire Hathaway-style approach with ILS levels of efficiency? How would that look and how would it fare?