Berkshire Hathaway - Insurance Operations

[John Hjorth]

What are my fellow CoBF board members' opinion / stance on Mr. Buffett giving a "go" to Mr. Jain for taking further USD 15 B in CAT risk related to Florida, as mentioned at the AGM,  in what is perceived an El Niño year?

 

-Thank you in advance for your response.

Edited May 20, 2023 by John Hjorth
Rephrased the question

[cubsfan]

31 minutes ago, John Hjorth said:

What are my fellow CoBF board members' opinion / stance on Mr. Buffett giving a "go" to Mr. Jain for taking further USD 15 B in CAT risk related to Florida, as mentioned at the AGM,  in what is perceived an El Niño year?

 

-Thank you in advance for your response.

Trust in Ajit. Wasn’t the deal we could have a max loss at $15B, but make $7B?

 

Talk about high stakes betting. Pretty cool if you ask me…

 

I wonder where Berkshire falls in the line of liabilities?  After who pays out, etc?

[Charlie]

Look at/think about the track record of Ajit Jain. That's probably all you need to consider. 

(Buffett or Munger said that Track record is everything)

[John Hjorth]

Thank you, @cubsfan & @Charlie,

 

To me, just pretty amazing to be presented by the lines of decision making in the Berkshire Insurance sphere like this, involving economic risks of friggin' [estimated] USD 15 B. [Berkshire will be hit by a dent, and will eventually get over it, if the bet goes wrong.] Thinking about that whole process from proposal to accept is just mind boggling.

 

Where the hell do you place the balls of these gents, when they are no longer among the people alive on Earth? Tjernobyl [J/K]?

Edited May 20, 2023 by John Hjorth

[nwoodman]

13 hours ago, John Hjorth said:

What are my fellow CoBF board members' opinion / stance on Mr. Buffett giving a "go" to Mr. Jain for taking further USD 15 B in CAT risk related to Florida, as mentioned at the AGM,  in what is perceived an El Niño year?

 

-Thank you in advance for your response.

Interesting question I was thinking about this over the last couple of days too.  It does appear that we are moving into an El Niño cycle

 

https://www.jpl.nasa.gov/news/international-sea-level-satellite-spots-early-signs-of-el-nino

 

An El Niño cycle typically reduces Hurricane formation due to an increase in wind shear.  

 

https://www.weather.gov/jan/el_nino_and_la_nina#:~:text=El Niño events generally suppress,high in the atmosphere weaken.

 

So my humble take is that it improves the probability that it could work out well.  

 

Edit:  Some impressive graphics in this article https://www.usatoday.com/in-depth/graphics/2023/05/20/graphics-el-nino-is-building-what-this-means-for-the-worlds-weather/70211954007/

 

Transcript

https://www.artemis.bm/news/berkshire-hathaway-property-cat-book-unbalanced-towards-florida-ajit-jain/

Edited May 21, 2023 by nwoodman

[Dynamic]

When I first bought Berkshire 20 years ago, lumpy but honest results from insurance were part of the deal, and to me far preferable long term to the artificially smoothed Jack Welch era GE results and the high multiple they generated.

 

Catastrophe losses are still there but are usually proportionately smaller for Berkshire now it has grown so much.

 

I tend to think that a bad year tends to weaken competitors and strengthen Berkshire's future position as well as industry pricing hardness when they demonstrate that Berkshire is always prudent and ready with the cash to pay up promptly when insured mega-cats happen.

 

They also prudently cap their correlated reinsurance losses to something affordable, which $15bn is, and when you consider the other streams of income from non insurance operations, dividends received and interest & T-bill coupons, Berkshire is not going to be financially hampered in covering its short term liabilities even if they bag an elephant acquisition at the same time as a major loss event. The cash will still be on hand to act swiftly and decisively for actions that make sound financial sense.

[longterminvestor]

Here is some more chatter on what Berkshire is doing in Florida marketplace.  

Berkshire - Florida Citizens program.pdf

[longterminvestor]

Interview with Kara Raiguel - CEO of GenRe

 

 

[wescobrk]

Random question, but could Berkshire buy Progressive or would the government try and block it?

seems a logical acquisition as Buffett has long admired progressive and it has been outperforming Geico for a long time.

[gfp]

2 hours ago, wescobrk said:

Random question, but could Berkshire buy Progressive or would the government try and block it?

seems a logical acquisition as Buffett has long admired progressive and it has been outperforming Geico for a long time.

 

I would have loved if that had happened a long time ago.  Today I don't think the government would allow it, regardless of combined market share.  Maybe a different government in the future would allow it but PGR isn't getting any cheaper.

[wescobrk]

At 122 billion Buffett could still afford it, but I doubt the government would allow it, guess this one falls under the errors of omission column if Buffett were to be asked this question.

[wescobrk]

Maybe if we get another 50 percent draw down like in 73-74 Berkshire could get it for under 100 bill, but at that point it would be up to Greg if he wanted to test a future government as Buffett has only a few years left, unfortunately.

[sholland]

On 5/20/2023 at 1:45 PM, cubsfan said:

Trust in Ajit. Wasn’t the deal we could have a max loss at $15B, but make $7B?

 

Talk about high stakes betting. Pretty cool if you ask me…

 

I wonder where Berkshire falls in the line of liabilities?  After who pays out, etc?

I know this is over a year old, but I assume a similar situation happens every year that pricing is favorable (I don’t know about this year). I believe that were only 4 hurricanes in the last 100 years that would have caused BRK to be on the hook for the entire $15B:

 

Historical examples (source August 2012 Karen Clark report

Repeat of 1926 Miami Hurricane is estimated to cost $125B in insured losses

Repeat of 1928 Great Okeechobie Hurricane is estimated to cost insurers $65B

Repeat of 1947 Fort Lauderdale Hurricane is estimated to cost insurers $50B

Repeat of 1992 Hurricane Andrew estimated to cost insurers $50B

 

Pretty good bet to make $7B in the good years and be on the hook for up to $15B in the rare bad years. 
 

Total cost to insurers would be spread out to other reinsurers so a $50B industry event probably wouldn’t cost BRK $15B.

Edited June 23 by sholland

[longterminvestor]

The name Karen Clark reminded me of a Michael Lewis article (attached) about hurricane risk pertinent to conversation.  Mentioned in article is Nephila, ISL market for Cat Bonds, which was purchased by Markel.  Forgive me if I posted article before, its a favorite - I do like Mr. Lewis' writing.  

In Natures Casino - M LEWIS - The New York Times.pdf

[oscarazocar]

On 6/21/2024 at 7:04 PM, wescobrk said:

Random question, but could Berkshire buy Progressive or would the government try and block it?

seems a logical acquisition as Buffett has long admired progressive and it has been outperforming Geico for a long time.

 

This is a quote from a 2007 student visit to Omaha:

 

Question 2: GEICO is one of Berkshire’s crown jewels. You know the auto insurance industry cold, and you have been extolling the virtues of the GEICO and Progressive business models for decades. Why haven’t you ever taken a stake in Progressive?

Essentially, "thumb-sucking". That is what his partner Charlie Munger calls it when they identify opportunities in their circle of competence and fail to pull the trigger. Buying one didn’t preclude buying the other. He immensely admires Peter Lewis, the longtime CEO of Progressive. He asks the question of CEO’s – if you had a silver bullet and could kill one of your competitors, who would it be? For GEICO, Buffett would his silver bullet, and all the rest of his ammo, shooting Progressive. Years ago [presumably in the early 1980’s], they were briefly looking at putting the two companies together. He joked that each CEO, Jack Byrne of GEICO and Peter Lewis, would each come to him and report that negotiations were moving along, only that each was under the impression that he was gong to be the CEO of the combined company.

Buffett told the story of his initial involvement with GEICO as a Columbia student. It was obvious to him in 1951 that GEICO would do very well for a very long time. Everyone hates buying car insurance, but they are forced to, and a good chunk of them will go with the low-cost provider.

Buffett mentioned that GEICO now has a slightly better position than Progressive [due to a lower cost structure, I believe], but that the two of them will be duking it out and both will gain share for a long time. When the internet hit, Progressive actually had an edge for awhile. Because they had no direct distribution up to that point, they were quicker to seize on the internet as their direct distribution channel. GEICO had been so successful with its direct mail and phone strategy that those institutional forces vested in the old systems prevented it from shifting to the internet nearly as quickly as it should have. Buffett eventually had to lock them in a room and tell them they couldn’t come out until they had a viable internet strategy.

[wescobrk]

23 minutes ago, oscarazocar said:

 

This is a quote from a 2007 student visit to Omaha:

 

Question 2: GEICO is one of Berkshire’s crown jewels. You know the auto insurance industry cold, and you have been extolling the virtues of the GEICO and Progressive business models for decades. Why haven’t you ever taken a stake in Progressive?

Essentially, "thumb-sucking". That is what his partner Charlie Munger calls it when they identify opportunities in their circle of competence and fail to pull the trigger. Buying one didn’t preclude buying the other. He immensely admires Peter Lewis, the longtime CEO of Progressive. He asks the question of CEO’s – if you had a silver bullet and could kill one of your competitors, who would it be? For GEICO, Buffett would his silver bullet, and all the rest of his ammo, shooting Progressive. Years ago [presumably in the early 1980’s], they were briefly looking at putting the two companies together. He joked that each CEO, Jack Byrne of GEICO and Peter Lewis, would each come to him and report that negotiations were moving along, only that each was under the impression that he was gong to be the CEO of the combined company.

Buffett told the story of his initial involvement with GEICO as a Columbia student. It was obvious to him in 1951 that GEICO would do very well for a very long time. Everyone hates buying car insurance, but they are forced to, and a good chunk of them will go with the low-cost provider.

Buffett mentioned that GEICO now has a slightly better position than Progressive [due to a lower cost structure, I believe], but that the two of them will be duking it out and both will gain share for a long time. When the internet hit, Progressive actually had an edge for awhile. Because they had no direct distribution up to that point, they were quicker to seize on the internet as their direct distribution channel. GEICO had been so successful with its direct mail and phone strategy that those institutional forces vested in the old systems prevented it from shifting to the internet nearly as quickly as it should have. Buffett eventually had to lock them in a room and tell them they couldn’t come out until they had a viable internet strategy.

Thanks for posting that sheds light why he didn’t buy them but still not sure why he never bought the stock (or maybe he did and I’m not aware).

I know his comments about Walmart and google that he just missed them due to price wasn’t low enough for the former and missed it on the latter but he has to know progressive better than anyone else in the world so really odd he missed buying the common for decades especially after 2008 and in 2020 during large corrections.

oh well, can’t win them all.

[DooDiligence]

Just got my renewal notice rom Progressive and the premium went down by $6.

[Intelligent_Investor]

Atlantic hurricane season starts off with a bang, Beryl breaking all the early season records. Looking like a re-2005 or re-2017

[Spekulatius]

On 6/23/2024 at 9:10 AM, wescobrk said:

Maybe if we get another 50 percent draw down like in 73-74 Berkshire could get it for under 100 bill, but at that point it would be up to Greg if he wanted to test a future government as Buffett has only a few years left, unfortunately.

They are pretty much the #1 and the #2 with almost 14% market share each. State Farm market share is only 15%, they are number one but would be much smaller than Geico and Progressive combined.

 

Drawdowns don’t matter and it does not matter what government we have either because this would truly be anticompetitive especially since both have the same direct sales operating model.

Edited August 25 by Spekulatius

[longterminvestor]

Dont need to buy PGR, just need to "clone" PGR.  GEICO is starting to use independent agents to sell their products.  HUGE sea change for GEICO.  PGR has proven a direct channel and a brokerage channel works becoming #1 or #2 in every market.  Mr. Buffett has championed GEICO's no broker commission moat since before I was born however GEICO is now investing in a new model and excited to see how this play out.  Prediction is it works fine and GEICO gets back on track.  GEICO using agents is slowly starting to hit the news, product has not rolled out in my market.  Our agency is getting contract with them so will now be able to offer PGR and GEICO - may the best price win - consumer wins.  

[gfp]

1 hour ago, longterminvestor said:

Dont need to buy PGR, just need to "clone" PGR.  GEICO is starting to use independent agents to sell their products.  HUGE sea change for GEICO.  PGR has proven a direct channel and a brokerage channel works becoming #1 or #2 in every market.  Mr. Buffett has championed GEICO's no broker commission moat since before I was born however GEICO is now investing in a new model and excited to see how this play out.  Prediction is it works fine and GEICO gets back on track.  GEICO using agents is slowly starting to hit the news, product has not rolled out in my market.  Our agency is getting contract with them so will now be able to offer PGR and GEICO - may the best price win - consumer wins.  

 

Wow I had no idea.  Thanks for posting

[DooDiligence]

Will this help them identify and retain low risk policies that they’ve been running off with higher renewal rates?

[longterminvestor]

It will commoditize the product even more so.  Independent agents throw the insured, client, prospect information into a rater (its like a website for agents that provide quotes for every market with a couple clicks) and then chose to present which options are "competitive".  Competitive is relative because sometimes broker may chose to only present the highest commission option to client or in turn the lowest premium - you have to trust the broker.  

 

Years ago when PGR set up the direct channel it scared alot of agents - big brother is gonna steal "our clients".  Yes that did happen however the true "shoppers" will always want to go direct - they enjoy shopping.  Its like a game.  So agents were able to cull the heard for the clients that were wasting their time anyway.  However clients who want advisory services from a broker will take the brokers advice and no need to shop the market now that a broker can bring GEICO to the table.  Before, agents would look at a new client who was with State Farm lets say, and quote with Progressive, Travelers, Liberty, and a host of others.  If the client wants to ensure absolute best pricing, they would have to, in addition to getting their renewal from State Farm, call All State, Farmers, Erie, and GEICO, take all those quotes retrieved individually and compare with what the independent agent channel provided and make a decision.  THATS A TON OF WORK to do every 6 months to ensure best price.  Now, its one less call because GEICO will be apart of the independent channel - IF THEIR agent has a contract with GEICO.  

 

The actual coverage is really not an issue with personal auto - the policies are so highly regulated by individual state insurance commissioners that they basically read the same.  Talking actual contractual language, sure, you can include rental reimbursement, med pay, lower/higher limits - that's not the contract - those are just limits/coverages available - and all carriers have those options.   So an independent agent is not have to explain the mechanics of the policy triggers for personal auto - its really just price (and commish...heheh).