Berkshire Hathaway 2010 Annual Report Download - page 13

Let me emphasize again that cost-free float is not an outcome to be expected for the P/C industry as a
whole: In most years, industry premiums have been inadequate to cover claims plus expenses. Consequently, the
industry’s overall return on tangible equity has for many decades fallen far short of the average return realized by
American industry, a sorry performance almost certain to continue. Berkshire’s outstanding economics exist only
because we have some terrific managers running some unusual businesses. We’ve already told you about GEICO,
but we have two other very large operations, and a bevy of smaller ones as well, each a star in its own way.
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First off is the Berkshire Hathaway Reinsurance Group, run by Ajit Jain. Ajit insures risks that no one
else has the desire or the capital to take on. His operation combines capacity, speed, decisiveness and, most
importantly, brains in a manner that is unique in the insurance business. Yet he never exposes Berkshire to risks
that are inappropriate in relation to our resources. Indeed, we are far more conservative than most large insurers
in that respect. In the past year, Ajit has significantly increased his life reinsurance operation, developing annual
premium volume of about $2 billion that will repeat for decades.
From a standing start in 1985, Ajit has created an insurance business with float of $30 billion and
significant underwriting profits, a feat that no CEO of any other insurer has come close to matching. By his
accomplishments, he has added a great many billions of dollars to the value of Berkshire. Even kryptonite
bounces off Ajit.
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We have another insurance powerhouse in General Re, managed by Tad Montross.
At bottom, a sound insurance operation requires four disciplines: (1) An understanding of all exposures
that might cause a policy to incur losses; (2) A conservative evaluation of the likelihood of any exposure actually
causing a loss and the probable cost if it does; (3) The setting of a premium that will deliver a profit, on average,
after both prospective loss costs and operating expenses are covered; and (4) The willingness to walk away if the
appropriate premium can’t be obtained.
Many insurers pass the first three tests and flunk the fourth. The urgings of Wall Street, pressures from
the agency force and brokers, or simply a refusal by a testosterone-driven CEO to accept shrinking volumes has
led too many insurers to write business at inadequate prices. “The other guy is doing it so we must as well” spells
trouble in any business, but none more so than insurance.
Tad has observed all four of the insurance commandments, and it shows in his results. General Re’s huge
float has been better than cost-free under his leadership, and we expect that, on average, it will continue to be.
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Finally, we own a group of smaller companies, most of them specializing in odd corners of the
insurance world. In aggregate, their results have consistently been profitable and, as the table below shows, the
float they provide us is substantial. Charlie and I treasure these companies and their managers.
Here is the record of all four segments of our property-casualty and life insurance businesses:
Underwriting Profit Yearend Float
(in millions)
Insurance Operations 2010 2009 2010 2009
General Re ...................... $ 452 $ 477 $20,049 $21,014
BH Reinsurance .................. 176 250 30,370 27,753
GEICO ......................... 1,117 649 10,272 9,613
Other Primary ................... 268 84 5,141 5,061
$2,013 $1,460 $65,832 $63,441
Among large insurance operations, Berkshire’s impresses me as the best in the world.
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