Berkshire after Buffett: The risk ‘genius’ pulling the insurance strings

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In early 2023, Ajit Jain was weighing Berkshire Hathaway Inc.‘s publicity to the danger of a devastating hurricane hitting Florida.

If its insurance coverage enterprise offered extra cowl and the upcoming season proved tame, Berkshire would reap a multibillion-dollar windfall. The draw back? A possible US$15 billion in losses if it changed into an unpleasant 12 months for pure catastrophes. Jain sought permission from his boss, Warren Buffett, to extend the wager.

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“Warren stated sure with out even listening to what the numbers have been,” Jain recounted to shareholders at Berkshire’s annual assembly final 12 months.

With the season ending up a gentle one, the choice helped propel the insurance coverage enterprise to the most effective underwriting income in its historical past.

The 72-year-old Jain heads the insurance coverage operations that underpin Berkshire, offering a budget capital that has allowed Buffett to construct a conglomerate uncommon in American historical past, proprietor of companies from Duracell batteries to BNSF Railway Co. and one of many greatest buyers in the US inventory market.

Buffett takes a firmly hands-off strategy to Berkshire’s companies, however makes an exception for insurance coverage, which spans Authorities Workers Insurance coverage Co. (GEICO), the Nationwide Indemnity Co. and huge reinsurance operations, together with Basic Reinsurance Corp. (Gen Re). For years, Buffett and Jain had a each day name, based on individuals accustomed to the matter.

“They’re each singular geniuses, there are not any ifs or buts about that,” Thomas Gayner, chief government at insurance coverage and funding group Markel Group Inc., itself a Berkshire shareholder, stated of Buffett and Jain.

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Vegetarian, teetotaller

A Berkshire board member since 2018, Jain was as soon as tipped as a attainable chief government of the conglomerate earlier than Buffett in 2021 anointed Greg Abel, one other long-serving lieutenant, as his successor. However Berkshire shareholders and business executives say Jain’s report — and the essential function of the insurance coverage enterprise — arguably make him crucial individual on the firm after Buffett.

Already past the usual retirement age, Jain, a vegetarian and teetotaller, has given no indication of when he would possibly step down. However with Charlie Munger, who helped construct Berkshire, dying final November, and Buffett turning 94 in August, Jain’s future and that of the insurance coverage operations have assumed extra significance.

“He’s an important participant,” stated an individual who has labored with Buffett for years. “Ajit is the individual that is by far essentially the most trusted. He’s made a shit ton of cash for the corporate.”

Buffett’s fascination with the insurance coverage business dates again greater than 70 years. In 1951, he penned a column, “The Safety I Like Greatest,” and picked GEICO, then chaired by his mentor at Columbia College, the famed investor Benjamin Graham.

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Berkshire would purchase GEICO, a motor insurer, in 1996, increasing its operations that started in 1967 with the acquisition of Nationwide Indemnity, an Omaha, Neb.-based property and casualty insurer. Its final vital deal got here in 2022 with the US$12-billion acquisition of Alleghany Corp., an insurance-to-manufacturing group.

Buffett was among the many first to work out that the premiums American customers and companies paid to the likes of GEICO and Nationwide Indemnity, and held to pay claims, have been low-cost capital, monetary firepower that might be profitably invested over a long time.

The float, or the cash Berkshire takes in as premiums, holds to pay claims and invests, has ballooned from US$39 million in 1970 to US$169 billion final 12 months.

In distinction to rival insurers, which mainly make investments their premiums in fixed-income securities corresponding to Treasuries and company bonds, Buffett has for many years plowed cash into shares, a method that has proved a boon for Berkshire shareholders. It’s enabled by the group’s US$1-trillion stability sheet, which permits it to abdomen the upper danger.

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Berkshire’s mannequin additionally sidesteps the perpetual menace hanging over many different buyers: the necessity to increase new funds whereas dealing with redemptions if returns are poor.

“He was in a position to underwrite with self-discipline, make investments the capital as required by regulators … after which have sufficient left to take a position it in shares, and the acquisition of companies, (and) do every of these issues with not simply self-discipline, however a form of brilliance,” stated Lawrence Cunningham, an emeritus professor at George Washington College, who has written books on Berkshire. “It’s that triple execution that was a novel feat. Nobody has ever carried out it at that scale.”

It’s Jain who’s credited with the underwriting expertise which have thus far prevented a blow-up that will have imperilled the mannequin on the coronary heart of the conglomerate.

Most of the contracts Jain, who grew up in India and joined Berkshire from consultancy McKinsey & Co. in 1986, is accountable for are giant and fiendishly difficult, corresponding to a banner US$7-billion reinsurance cope with Lloyd’s of London Ltd. in 2006 over asbestos claims.

They typically go away Berkshire accountable for making a payout years and even a long time after a coverage was initially signed. Given most are very tough to get out of, a misjudgment might be a drag on Berkshire’s underwriting income for years.

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Jain has taken benefit of Berkshire’s stability sheet to show it into the market’s reinsurer of final resort, taking up dangers from different corporations at a good-looking worth. Berkshire’s insurance coverage underwriting divisions have been worthwhile for 18 of the previous 20 years, based on the group’s newest filings with the U.S. Securities and Trade Fee.

Competitors heating up

Each time Jain does retire, his successor will inherit a market that has lately seen buyout teams, together with Apollo International Administration Inc., KKR & Co. Inc. and Blackstone Inc., push into it, creating a brand new breed of insurance-investment empires with experience in areas corresponding to personal credit score.

For now, a lot of the corporations have largely targeted their consideration on the annuities enterprise, however some count on them to increase their footprint past that into areas the place Berkshire has lengthy operated in.

“The private-capital business could be very revolutionary,” stated one former Berkshire government. “If there’s a option to generate profits, they’ll determine it out.”

GEICO, in the meantime, has ceded market share lately, with analysts saying it has been slower than some rivals corresponding to Ohio-based Progressive Corp. to undertake expertise that’s altering how motor insurance coverage is underwritten, together with telematics. Telematic expertise tracks your driving and may reward safer drivers with decrease premiums.

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“Buffett just isn’t bulletproof,” stated one former supervisor on the conglomerate.

Regardless of new threats, business executives say the largest query dealing with Berkshire could be boiled right down to a easy one: Will the group have the ability to substitute Jain’s potential to calibrate dangers and his urge for food to take massive and typically contrarian bets?

Based on individuals accustomed to the matter, the contenders to switch Jain embrace Peter Eastwood, who runs the fast-growing Berkshire Hathaway Specialty Insurance coverage unit, and Charlie Shamieh, chair of Gen Re, a reinsurer Berkshire acquired in 1998. Todd Combs, one in every of Buffett’s two funding deputies and who turned chief government of GEICO in 2019, was additionally within the operating, the individuals stated.

GEICO and Berkshire Hathaway Specialty Insurance coverage declined to remark. Gen Re didn’t reply to requests for remark.

The chief government of a rival insurer who is aware of the trio stated they have been “superb at what they do, they’re good at their verticals,” however operating the complete operations could be a big step up.

Joe Brandon, a former chief government of Gen Re, has additionally been mooted. Brandon returned to the Berkshire fold in 2022 via the acquisition of Alleghany, which he leads. Insiders and former advisers to Berkshire say his path to succeed Jain might be difficult by the style of his exit from Gen Re in 2008 following a fraud scandal that noticed 4 staff charged. Brandon, who co-operated with investigators and was not charged, declined to remark.

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Jain, described by one former worker “as a sweetheart,” however “robust as nails” in the event you’re negotiating towards him, masterminded the deal during which Berkshire took over legacy asbestos and different long-term claims that threatened to damage Lloyd’s.

John Neal, the chief government of Lloyd’s, stated Jain’s report made him one of many “few individuals who have earned the fitting to make these daring selections.”

Jain and his colleagues typically reduce the quantity of canopy they supply after they decide the danger outweighs the worth they will command. Whereas this could result in fallow underwriting years, it means the enterprise can transfer at pace when pricing improves, say business consultants.

It is a bonus not shared by conventional reinsurers, which face better strain from shareholders to constantly increase their underwriting.

“(Jain) has a large stability sheet, with a really low expense ratio, which permits him to leap out and in of {the marketplace} in the best way that others can’t,” stated Stephen Catlin, an insurance coverage business veteran and the chief chair of London-based insurer Convex Group Ltd.

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Whereas GEICO is the better-known model, it’s Nationwide Indemnity that’s on the centre of Berkshire’s insurance coverage operations.

Inside the business, the unit is thought to be opaque. Other than high-profile offers during which the Berkshire title is intentionally publicized, corresponding to a 2017 transaction during which American Worldwide Group Inc. (AIG) paid it US$10 billion to tackle some long-term business dangers it had underwritten, it’s onerous to discern its footprint available in the market.

‘Solely see the offers they see’

“I believe individuals underestimate the offers they do as a result of they solely see the offers they see,” Neal of Lloyd’s stated.

It has additionally lengthy been one in every of Buffett’s most popular acquisition autos. When Berkshire purchased BNSF in 2010, it was Nationwide Indemnity that executed the transaction.

A lot of Berkshire’s US$354-billion inventory portfolio is held by the unit, together with a big a part of its stake in Apple Inc., its holding in oil producer Occidental Petroleum Corp. in addition to the multibillion-dollar investments it made in 2020 in 5 Japanese buying and selling homes, together with Mitsubishi Corp. and Mitsui & Co. Ltd. It was additionally the automobile Berkshire used to purchase Pilot Journey Facilities LLC, a truck-stop operator.

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Based on filings with insurance coverage regulators reviewed by the Monetary Instances, the unit in the end bears a lot of the danger that particular person Berkshire insurance coverage subsidiaries take.

Final 12 months, it struck reinsurance agreements with among the insurance coverage items Berkshire acquired as a part of its takeover of Alleghany, taking up 50 per cent of their attainable claims in alternate for greater than US$5 billion in loss reserves the items had put aside. It additionally struck offers to tackle a quota of the premiums they write sooner or later.

“The big capital base of Nationwide Indemnity and the broader Berkshire permits the group to tackle extra funding danger than is typical for insurance coverage corporations,” Bruce Ballentine, senior credit score officer at score company Moody’s Traders Service Inc., stated.

Berkshire additionally has a US$18-billion credit score line with Nationwide Indemnity, permitting it to borrow billions of {dollars} ought to Buffett want to maneuver rapidly to faucet capital.

The filings additionally confirmed a sequence of dividends between Berkshire’s subsidiaries and Nationwide Indemnity, in addition to the mum or dad firm itself. Late final 12 months, Nationwide Indemnity transferred its possession of BNSF to Berkshire in a deal that valued the railroad at US$82 billion. Nationwide Indemnity declined to remark.

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Nationwide Indemnity was the enterprise Jain ran for years earlier than being promoted to vice-chair of Berkshire in 2018, when he took management of the complete insurance coverage operations.

Buffett has lengthy stated that Berkshire was constructed to outlast him, geared up with leaders throughout its operations able to rising the corporate. Often lavish in his reward of Jain, Buffett used his annual letter to shareholders in February to level out that his high lieutenant doesn’t do it alone.

“Ajit’s achievements since becoming a member of Berkshire have been supported by a big forged of vastly gifted insurance coverage executives in our numerous P/C (property-casualty) operations,” he stated. “Their names and faces are unknown to a lot of the press and the general public. Berkshire’s line-up of managers, nonetheless, is to P/C insurance coverage what Cooperstown’s honourees are to baseball.”

However with Berkshire shareholders heading to Omaha for the group’s annual assembly on Saturday, it’s Jain who, alongside Buffett and Abel, will provide a well-recognized presence on stage within the absence of Munger.

As Buffett wrote to buyers in 2010: “If Charlie, I and Ajit are ever in a sinking boat — and you’ll solely save one in every of us — swim to Ajit.”

© 2024 The Monetary Instances Ltd.

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