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Buffett praises Berkshire insurance execs, muses on past mistakes

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Buffett praises Berkshire insurance execs, muses on past mistakes

Berkshire Hathaway Inc. Chairman Warren Buffett’s annual letter to shareholders, as ever, is packed with his analysis of the conglomerate’s operations, including its extensive commercial insurance and reinsurance businesses.

The much-anticipated letter often covers the same ground he’s covered in previous letters — most notably his belief in the power of the insurance “float,” where insurers achieve investment gains on premiums before paying claims.

The 2016 letter details growth in the company’s relatively new excess and surplus lines unit, again argues that its reinsurance operations are well-positioned even if a major catastrophe were to strike, but also expresses some regret over the dilution in Berkshire Hathaway stock following its purchase of General Reinsurance Corp. nearly 20 years ago.

The letter, which accompanies the company’s annual results and is known for its chatty style and humorous asides, provides an overview of Berkshire Hathaway’s businesses and picks out various executives for special praise. 

Among other comments on Berkshire Hathaway’s insurance operations, Mr. Buffett said Berkshire Hathaway Specialty Insurance Co., which was launched in 2013 and is headed by Peter Eastwood, has beaten expectations.

“We expected significant losses in the early years while Peter built the personnel and infrastructure needed for a worldwide operation. Instead, he and his crew delivered significant underwriting profits throughout the start-up period. BHSI’s volume increased 40% in 2016, reaching $1.3 billion. It’s clear to me that the company is destined to become one of the world’s leading P/C insurers,” Mr. Buffett said.

Looking at Berkshire Hathaway Reinsurance Group, which provides huge amounts of capacity in the reinsurance market and is headed by Ajit Jain, Mr. Buffett again noted that the diversity of Berkshire Hathaway provides its reinsurance operations with advantages over other firms in the market, as the company’s other earnings streams would allow it to survive a catastrophic insurance market loss and benefit from future price increases.

The unit’s success is in large part due to Mr. Jain, Mr. Buffett said.

“If there were ever to be another Ajit and you could swap me for him, don’t hesitate. Make the trade!” he said. 

Mr. Jain has frequently been seen a possible successor to the 86-year-old Mr. Buffett.

In his general comments about Berkshire Hathaway’s business, however, Mr. Buffett did relate how the purchase of General Reinsurance Corp., which followed his earlier purchase of personal lines insurer Geico, could have been handled better.

“Unfortunately, I followed the Geico purchase by foolishly using Berkshire stock — a boatload of stock — to buy General Reinsurance in late 1998,” he said. 

The reinsurer had financial problems, which were addressed after the purchase. “It was, nevertheless, a terrible mistake on my part to issue 272,200 shares of Berkshire in buying General Re, an act that increased our outstanding shares by a whopping 21.8%. My error caused Berkshire shareholders to give far more than they received (a practice that — despite the Biblical endorsement — is far from blessed when you are buying businesses),” he said.

 

 

 

 

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