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Which company is Buffett madly in love with? Again, that would be Geico. But Geico is certainly not the company he most frequently gets involved in. That honor goes to BerkshireRe, said Alice Schroeder, author of the new book, ?The Snowball: Warren Buffett and The Business of Life.?
Berkshire Hathaway Reinsurance Group, the business run by Ajit Jain, is a broker market reinsurer, and includes the financial guaranty business, Lloyd's affiliates, finite reinsurance business, Equitas, and at the heart of it, catastrophe reinsurance.
?That?s the business of handicapping the risk that the Olympics will get cancelled twice in 12 years because of a terrorism attack, and that?s the part of the business that Warren loves because it?s basically odds making, which he enjoys,? said Schroeder, a former Morgan Stanley insurance analyst who left the company to write this first authorized biography of Buffett.
While the book is hardly about insurance -- it focuses more on Buffett?s politics, family, business ideas, marriage and relationships -- Schroeder touches on what makes the individual insurance operations unique, and why no one else has been as successful using insurance premiums or float to build that kind of empire.
?He thinks of the insurance business as the jet fuel that drives the capital allocation of Berkshire. It?s the capital provider in one sense and in another sense he loves the risk underwriting part because he?s a natural handicapper,? Schroeder said.
The ?Float? Maker
Buffett learned underwriting or insurance handicapping from Jack Ringwalt, the majority owner of National Indemnity before Berkshire acquired the company in 1967. He caught on pretty fast, and not long after that, the insurer ?transformed Berkshire from a money-losing textile mill into a diversified holding company,? according to Schroeder. Buffett has said that had it not acquired National Indemnity, Berkshire Hathaway would not be half what its worth today. That?s because, during a period in the 1970s, the float from National Indemnity gave Berkshire the cash float to buy Blue Chip stocks like Coca Cola and Gillette.
His Fair Lady
Long before Ringwalt, Buffett, in his college years, encountered Geico. He invested 75% of his net worth into the company, and sold the stock to family and friends. It brought him customers when he was a stock broker who ended up becoming partners in his partnership. That?s where the fondness for Geico comes from, Schroeder said. ?He?s made huge amounts of money from Geico, and that?s a part of it, but some of it is nostalgia and fondness for his past,? she said.
The Ugly Duckling
Of course, of all his insurance operations, General Reinsurance Corp. has brought Buffett more bad publicity that any other. Four executives of this company were recently convicted of accounting fraud, for helping rival American International Group Inc. cook its books. Schroeder?s book goes briefly into this scandal, but avoids details because she herself is part of the case.
In February, Schroeder testified for the government and against the Gen Re defendants during the trial, and could potentially testify again in a related case filed by the New York state attorney general. Schroeder explained the significance to investors of accurate information about loss, and why investors would have found AIG's financial misstatements to be important (BestWire, May 16, 2008).
Buffett?s support for GenRe hasn?t changed in spite of the recent scandals and some major losses, Schroeder said. ?When he bought General Re, its balance sheet was in excellent condition. General Re did not have any financial problems when he bought it. That?s one of the great misconceptions out there,? Schroeder said.
She admits though, that during that period the culture of General Re had deteriorated internally, and Buffett was not aware of that when he bought it. ?General Re was being managed by a seven-person office of the chairman, and my impression was it was a bit more of a democracy as opposed to the CEO making firm decisions,? Schroeder said.
The Great Delegator
In truth, though, GenRe?s laid-back management in those days wasn?t so different from how Buffett himself runs Berkshire Hathaway today. According to Schroeder, Buffett allows his managers to run their businesses with very little interference. ?It?s been said that he delegates to the point of abdication, and that is true,? she said.
That also was Buffett?s attitude when Schroeder was pouring through his office files and interviewing relatives and close friends. ?For five years, he had no idea of what I was doing. He never asked. He showed remarkable courage because normally when a CEO does a book like this they want control.?
The Executors
Control of Berkshire Hathaway's insurance units also lies firmly in the hands of the company heads. ?They?re understated people. There are no big egos at Berkshire Hathaway. So, you don?t see them a lot in the press. You don?t see them speaking at conference after conference...They?re paid very modestly by industry standards for the companies they run,? said Schroeder.
However, they like working at Berkshire because "Warren leaves them alone and they do what they want, she said. ?They have the autonomy of running a public company, [and yet] they don?t have a bunch of investors and money managers hustling them.?
Schroeder describes them as detailed managers whose goal every day is to "hit closer to the pin, just like golf. They?re not people who think 'I?m bored doing the same job as yesterday, so I think we should do a big acquisition. We need to diversify into a whole new business,'" she said. "The boredom factor that drives a lot of insurance decision making, these are people who just don?t feel that at all. They?re execution people."
To see the interview with Schroeder in its entirety, go to http://www.ambest.com/newsroom.
(By David Dankwa, senior associate editor, BestWeek: David.Dankwa@ambest.com)
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