Big Plans for the Corporate Insurance Space Anyone Who Thought Warren Including Commercial Property, Financial Lines, Marine, Energy and Construction,” He Said

Berkshire Hathaway— Warren Buffett big planS for THE corporate insurance space Anyone who thought Warren including commercial property, financial lines, marine, energy and construction,” he said. Buffett’s Berkshire Hathaway was “With the 20 or so talented professionals that just dabbling in the corporate we have been able to hire so far in Asia, we expect to be instantly relevant for clients and brokers in the insurance market when it launched region,” added Mr Breuil. Berkshire Hathaway Specialty “Our intent is to build structural competitive advantages because of the pairing of an unmatched Insurance [BHSI] three years ago balance sheet and long-term financial strength with had better think again. Ad r i a n dedicated and strong insurance professionals at the service of our customers and brokers,” he added. La d b u ry analyses Mr Buffett’s plans Mr Breuil was asked why Berkshire Hathaway had decided to enter the Asian market when it was for the corporate insurance space as so competitive and soft. He responded by saying BHSI awaits regulatory approval that BHSI is not an opportunistic short-term player. “Our Singapore operation carries an A++ AM for its new European operation, Best rating. With that, it is those underwriting and led by Tom Bolt and Gregor Köhler claims people empowered to trade and to handle claims here and now that will make a difference to customers, brokers and distribution partners. That arren Buffett’s l at e s t strength married to that responsiveness is what our letter to shareholders, which he customers and partners want,” he continued. published alongside the group’s “Hence it does not matter where in the insurance annual results, revealed that cycle we enter—we intend to build a multi-line Berkshire Hathaway Specialty general insurance company for the very long term, InsuranceW (BHSI) generated premiums of $1bn last not to come in to ride a market cycle for a short year. The legendary Omaha-based investor clearly period of time,” concluded Mr Breuil. stated that this is only the beginning of his firm’s Last April, BHSI launched in Australia and push into the primary insurance space. quickly also expanded to New Zealand. Some market experts may question the sense “Less than three years ago, we formed Berkshire Mr Breuil’s operation now has offices in behind the launch of another specialty insurance Hathaway Specialty Insurance (BHSI)… Our first Auckland, Brisbane, Hong Kong, Melbourne, operation into an already overcrowded, slow- decision was to put Peter Eastwood in charge. BHSI Singapore and Sydney. growing and soft European market. has already developed $1bn of annual premium One may have expected the next big step for But those same experts will also have likely volume and, under Peter’s direction, is destined to BHSI to be Latin America or perhaps Africa. questioned the sense behind the launch of BHSI in become one of the world’s leading P/C insurers,” But readers of Commercial Risk Europe will be the first place. wrote Mr Buffett. pleased to hear that Mr Eastwood and his team have It made sense for Mr Buffett to seek to balance Mr Eastwood joined BHSI from AIG, along with decided now is the time to expand into the highly the group’s reinsurance and personal motor three colleagues, back in April 2013. competitive and mature UK and mainland European insurance business with corporate and commercial Despite highly competitive market conditions, market. business of course. But was it a good idea to make Mr Buffett said at the time that he wanted to expand The business will be transacted through the move at that time? “big time” into the commercial insurance market Berkshire Hathaway International Insurance Ltd Well, Mr Buffett certainly thought so and the to balance the group’s traditional reinsurance (BH (BHIIL), a UK limited company. figures appear to back him up. reinsurance and General Re) and motor insurance The group revealed last month that BHIIL will In Mr Buffett’s recent letter to shareholders, he (GEICO) businesses. offer specialty insurance solutions to Europe with its explained that apart from reinsurance operations and “It’s official: we are moving into commercial “affiliate” BHSI, subject to regulatory approval. motor insurer GEICO, Berkshire Hathaway has a insurance in a substantial way and we are here to True to form, the group hired two big hitters to group of smaller companies, including BHSI, that stay,” said Mr Buffett when BHSI opened its doors launch the European operation. primarily write commercial coverages. for business in June 2013. Tom Bolt, most recently director of performance “In aggregate, these companies are a large, management at Lloyd’s, is named as president, UK growing and valuable operation that consistently WELCOME SOLUTION and Southern Europe, effective June 1. He will also delivers an underwriting profit, usually much better be CEO of BHIIL. than that reported by their competitors,” noted Mr “With our proven underwriting discipline and Before his time at Lloyd’s, London-based Buffett. financial strength, along with a stellar management Mr Bolt was managing director of Marlborough He explained that during the past 13 years this team, Berkshire Hathaway Specialty Insurance is a Managing Agency and spent 25 years at the group of companies has earned some $4bn from welcome solution for customers seeking large-scale Berkshire Hathaway Group in a variety of senior underwriting, roughly 13% of premium volume property and casualty capacity for the long term,” executive roles. generated. he added. Mr Bolt will join Gregor Köhler, who is already Mr Buffett views the insurance business as one The initial focus was on US excess and surplus installed as president, northern Europe. that generates a float for investment—money that lines. Mr Eastwood set about hiring, rapidly building Mr Köhler will be well known to Commercial Risk does not belong to the group but can be invested the product range and expanding fast. Europe readers as an outspoken and lively committee because it does not need to be paid back straight Based in Boston, BHSI already has offices in member of the German risk management association away. major US cities including Atlanta, Chicago, Fort DVS. Last year, the float generated by Berkshire Lauderdale, Houston, Los Angeles, New York and Düsseldorf-based Mr Köhler has 30 years of Hathaway’s insurance and reinsurance operations San Francisco. insurance and risk management experience. reached $88bn, up from $41bn 13 years earlier. Mr The group used the Pan-Asia Risk and Insurance He was most recently president and CEO of Buffett explained that the float generated by three Management Association’s first annual conference in Pallas Versicherung, the global insurance division of primary companies, of which BHSI is an increasingly November 2014 to announce that it would also start Bayer Group, the German-based chemicals group. important contributor, rose from $943m to $9.9bn operations in Asia. Before that, he served as vice-president at Marsh over the same period. Marc Breuil, former chief executive officer (CEO) and managing director, corporate risk management So what is the Berkshire Hathaway secret recipe of AIG in Hong Kong, Macau and Taiwan, was and insurance at Bertelsmann AG, the media and for continued success and growth in such a tough named as Asian regional president and the company services company. market? has expanded fast in this growing market, from its “Establishing European capabilities is a The answer to this was found in Mr Buffett’s Singapore base. natural next step in the maturation of BHSI, and commentary. Mr Breuil described the Singapore move as “a an important milestone in growing our global “A sound insurance operation needs to adhere to first but critical step of BHSI expansion in Asia”. footprint,” said Mr Eastwood. “We are pleased to four disciplines. It must: (1) understand all exposures “BHSI intends to build a strong and diversified have the top-calibre talents of Tom and Gregor that might cause a policy to incur losses; (2) commercial platform in Asia and is introducing a full [leading] the efforts to build a team in the UK and conservatively assess the likelihood of any exposure range of property and casualty products in Singapore Europe,” he added. actually causing a loss and the probable cost if

12-CRE-Y7-04-BTN.indd 12 5/4/16 18:48:10 BEHIND THE NEWS Berkshire Hathaway 13 Armageddon: not if but when

Adrian Ladbury [email protected]

arren Buffett believes Berkshire Ha t h a w a y is big and strong enough to not only survive, but prosper from a mega catastrophe. He told investors in a recent letter that Berkshire is far more conservative in avoiding risk than most largeW insurers. “For example, if the insurance industry should experience a $250bn loss from some mega-catastrophe—a loss about triple anything it has ever experienced—Berkshire as a whole would likely record a significant profit for the year because of its many streams of earnings,” wrote Mr Buffett. “We would also remain awash in cash and be looking for large opportunities to write business in an insurance market that might well be in disarray. Meanwhile, other major insurers and reinsurers would be swimming in red ink, if not facing insolvency,” he said. Mr Buffett also discussed climate change in his letter because his group had received a proxy proposal on the subject to consider at this year’s annual meeting. He said the sponsor wanted the group to provide a report on the dangers that climate change might present to its insurance operation and explain how it is responding to these threats. Mr Buffett said it seems highly likely to him that climate change poses a major problem for the planet. “I say ‘highly likely’ rather than ‘certain’ because I have no scientific aptitude and remember well the dire predictions of most ‘experts’ about Y2K,” he explained. “It would be foolish, however, for me or anyone to demand 100% proof of huge forthcoming damage to the world if that outcome seemed at all possible and if prompt action had even a small chance of thwarting the danger,” continued Mr Buffett. “This issue bears a similarity to Pascal’s wager on the existence of God. Pascal, it may be recalled, argued that if there were only a tiny probability that God truly existed, it made sense to behave as if he did because the rewards could be infinite whereas the lack of belief risked eternal misery,” he wrote. “Likewise, if there is only a 1% chance the planet is heading toward a truly major disaster and delay means passing a point of no return, inaction now is foolhardy. Call this Noah’s Law: If an ark may be essential it does; (3) set a premium that, on average, will float income all its companies enjoy, will continue for survival, begin building it today, no matter how cloudless the skies deliver a profit after both prospective loss costs and its dismal record of earning subnormal returns on appear,” he added. operating expenses are covered; and (4) be willing tangible net worth as compared to other American Mr Buffett understands why the sponsor of the proxy proposal may to walk away if the appropriate premium can’t be businesses,” continued Mr Buffett. believe Berkshire is threatened by climate change because it is a huge obtained,” wrote Mr Buffett. He predicts the prolonged period of low interest insurer that covers all sorts of risks. “Many insurers pass the first three tests and rates also “virtually guarantees” that earnings on He said the sponsor may worry that property losses will “skyrocket” flunk the fourth. They simply can’t turn their back float will steadily decrease for many years to come because of weather changes. Such worries may be warranted if the group on business that is being eagerly written by their and exacerbate the problems for insurers. wrote 10- or 20-year policies at fixed prices. But Mr Buffett explained that competitors. That old line—‘The other guy is “It’s a good bet that industry results over the insurance policies are usually written for one year and repriced annually doing it, so we must as well’—spells trouble in any next ten years will fall short of those recorded in the to reflect changing exposures. As a result, increased possibilities of loss business, but in none more so than insurance,” he past decade, particularly for those companies that translate promptly into increased premiums. continued. specialise in reinsurance,” added Mr Buffett. But Mr Buffett conceded that he and his long-time business partner Critically, Berkshire Hathaway’s insurance and The only way to succeed in this market is to Charlie Munger would be “powerless” to swallow and prosper from what reinsurance businesses have made an underwriting underwrite for profit, he stressed again. he regards as a huge threat to all businesses and citizens in the US—a profit for 13 years in a row. “Berkshire has now operated at an underwriting major cyber, biological, nuclear or chemical attack from a “foreign profit for 13 consecutive years, our pre-tax gain aggressor”. Old Testament for the period having totalled $26.2bn. That’s no “The probability of such mass destruction in any given year is likely accident: disciplined risk evaluation is the daily focus very small. It’s been more than 70 years since I delivered a Washington style of all of our insurance managers, who know that Post newspaper headlining the fact that the United States had dropped the According to Mr Buffett, those insurers and while float is valuable, its benefits can be drowned first atomic bomb. Subsequently, we’ve had a few close calls but avoided reinsurers that are unable to deliver underwriting by poor underwriting results. All insurers give that catastrophic destruction. We can thank our government—and luck!—for profits and achieve those four disciplines listed above message lip service. At Berkshire it is a religion, Old this result,” said Mr Buffett. will find themselves in trouble over the next decade. Testament-style,” he said. “Nevertheless, what’s a small probability in a short period approaches He said that insurance contracts underwritten If anyone still doubts Mr Buffett’s commitment certainty in the longer run,” he continued, pointing out that if there is only can never be subject to immediate or near-term to the corporate insurance space, he further one chance in 30 of an event occurring in a given year, the likelihood of it demands for sums that are of significance to a underlined the need for diversification in his letter. occurring at least once in a century is 96.6%. group’s cash resources. He also explained why insurance underwriting Mr Buffett said there will forever be people, organisations and perhaps “This structure is by design and is a key income was included as income in Berkshire even nations that would like to inflict maximum damage on the US. component in the strength of Berkshire’s economic Hathaway’s business earnings for the first time this “Their means of doing so have increased exponentially during my fortress. It will never be compromised,” he wrote. year. lifetime. ‘Innovation’ has its dark side. There is no way for American “If our premiums exceed the total of our “We did not do that when we initially corporations or their investors to shed this risk. If an event occurs in the expenses and eventual losses, we register an introduced Berkshire’s two quantitative pillars of US that leads to mass devastation, the value of all equity investments will underwriting profit that adds to the investment valuation because our insurance results were then almost certainly be decimated,” said Mr Buffett. income our float produces. When such a profit is heavily influenced by catastrophe coverages. If the “No one knows what ‘the day after’ will look like. I think, however, earned, we enjoy the use of free money—and, better wind didn’t blow and the earth didn’t shake, we that Einstein’s 1949 appraisal remains apt: ‘I know not with what weapons yet, get paid for holding it,” added Mr Buffett, made large profits. But a mega-catastrophe would World War III will be fought, but World War IV will be fought with sticks again stressing the need for an underwriting profit produce red ink,” he wrote. and stones’,” he concluded. every year. Taking a conservative approach, the group But while the Buffett formula may appear therefore consistently assumed that underwriting simple on paper, in reality it appears to be very would break even over time and ignored any of its difficult for most insurers and reinsurers to achieve gains or losses in its annual calculation of value. “ If there is only a 1% chance the planet on a sustained basis. But diversification of the group’s insurance is heading toward a truly major disaster and delay “Unfortunately, the wish of all insurers to achieve and reinsurance business now enables it to be more this happy result creates intense competition, so confident about its underwriting results, explained means passing a point of no return, inaction now vigorous indeed that it sometimes causes the P/C Mr Buffett. industry as a whole to operate at a significant “Today, our insurance results are likely to be is foolhardy. Call this Noah’s Law: If an ark may underwriting loss,” wrote Mr Buffett. more stable than was the case a decade or two be essential for survival, begin building it today, “This loss, in effect, is what the industry pays ago because we have de-emphasised catastrophe to hold its float. Competitive dynamics almost coverages and greatly expanded our bread-and- no matter how cloudless the skies appear...” guarantee that the insurance industry, despite the butter lines of business,” he wrote.

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