Berkshire Hathaway 1999 Annual Meeting Audience Question # 23

The competitive advantage and reputation of Berkshire’s insurance subsidiaries is stronger now than a few years ago

Warren Buffett:

Zone 10.

Audience Member:

Good morning, Mr. Buffett and Mr. Munger. My name is Robert McClure, and my wife and I live in Singapore. My question concerns insurance.

In the 1994 annual report, you made the following remarks. And I quote, “A prudent insurer will want its protection against true mega-catastrophes… such as a $50 billion windstorm loss on Long Island or an earthquake of similar cost in California… to be absolutely certain.

“That same insurer knows that the disaster making it dependent on a large super-cat recovery is also the disaster that could cause many reinsurers to default. There’s not much sense in paying premiums for coverages that will evaporate precisely when they are needed.

“So the certainty that Berkshire will be both solvent and liquid after a catastrophe of unthinkable proportions is a major competitive advantage for us.” End quote. As I said, that was in the 1994 annual report. Please give us an update on those remarks.

Would you say that that competitive advantage you described is intact? Or would you go so far to say that it has been enhanced over the past five years with the merger of General Re and with what’s happened in the super-cat insurance industry?

Warren Buffett:

Yeah, I would say that that reputation… certainly the reputation is a stronger… oh, it’s stronger than ever.

I mean, Berkshire’s preeminent position as the reinsurer most certain to pay after any conceivable natural disaster… that reputation is stronger today than it’s ever been, and General Re’s reputation right along with it.

I would say the commercial advantage inherent in that reputation is very important. I can’t tell you exactly how it rates compared to 1994. But I can tell you that it’s important.

It tends to be more important when we’re reinsuring other very large entities, either primary insurers or large reinsurers, than it is with the smaller company. The smaller company probably focuses on that less.

But we are writing, probably this week, a very large cover for a very important reinsurer. I don’t think they’d want to buy that from almost anyone else. I mean, a couple of people, maybe, but…

They may… they could decide not to buy it from us because they might not feel they wanted to buy it. I think in this case, they will.

But I don’t think they would have a list of 10 people from whom they’d buy it. They’re too smart for that. Because it’s a very high-level cover. And if that is called upon, there will be a number of people whose checks will not clear. And Berkshire’s check, undoubtedly, will clear.

So, it is a big… the reputation has never been better. The commercial advantage is significant. How much it translates into… you know, it… that can vary from year to year. But I think it’s a permanent advantage that Berkshire will have.

I mean, I think five years from now and 10 years from now and particularly after there has been a huge super-cat, it will be a great asset to Berkshire to be thought of as, essentially, as I’ve described it, as Fort Knox.

And we will pay under any circumstances. And there aren’t many people in the insurance or reinsurance business that can truly say that. And when the very big cover comes along, we should have very few competitors.


Charlie Munger:

Well, I think that’s exactly right.

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