Berkshire Hathaway 1999 Annual Meeting Audience Question # 49

How much the Unicover affair would cost Cologne Re and Berkshire’s shareholders

Warren Buffett:

The second question about what’s been called… what’s the Unicover affair that Cologne Re set up a 275 million… Cologne Life, I should say… set up a $275 million reserve against.

First of all, I would say for the losses to be incurred on that business, the 275 still represents the best estimate.

In other words, it may be the tip of the iceberg in terms of the loss to the industry, because no one else has acknowledged any losses. This is amazing. I mean, believe me, there are plenty of other losses out there.

We said we were going to lose 275 million. I think that’s a good estimate. But I think a lot of other people are going to lose very… they have to lose significant money. Somebody has to lose some significant money besides us on that.

And so what we have reported may be the tip of the industry iceberg. I don’t think it’s the tip of the General Re or Berkshire Hathaway iceberg.

It’s our best estimate today of what that loss will be. If that estimate changes, I will let you know through the quarterly reports or, if it was really material, we’d have some announcement. But I don’t anticipate that.

But we’ll report to you faithfully, I promise to you, as to how that loss develops over time.

The… what you read makes a great deal of sense about when something’s too good to be true, it usually is and that sort of thing.

The distribution of the losses in the Unicover affair will, probably, not be fully settled 10 years from now.

I mean, I have seen these things before in insurance and in other areas, but particularly in insurance, where there are multitudes of parties, and there are allegations of stupidity, there’s allegations of fraud, there’s allegations of misrepresentation, there’s allegations of everything.

There are so many people involved, there are so many factual matters to be determined. There will be lots of litigation. It will take a long, long time to sort out the litigation. In the end, the losses will get paid by somebody. Our best estimate we’ve put up is 275 million.

But we may find out far more in coming months and years, as to the involvement of other parties or… we can find out a great many things, because there will be lots of litigation, not necessarily involving us, but that we will, as a… even as a viewer of… we will be learning things about what took place.

Unfortunately, there have been some similar things in insurance. We were involved in something that had some similarities to this at National Indemnity, 20-odd years ago. And it was very expensive to us.

It didn’t cost us that many millions of dollars, but it happened at exactly at the time that the stock market was down around the 600 on the Dow, and we did not know how big the losses would be. And therefore, it caused us to have to be more conservative in investing in equities than would have otherwise been the case, if this hadn’t been hanging over our head.

So conventional accounting will never pick up the loss that we suffered in that.

It was called the Omni affair. And like I said, it had some… I’m sure it had many differences, too, but it had some similarities. And, you know, it can… it’s distracting to have something like this that obviously… there was some mix of mistakes, there’s some mix of misinformation. All of that will have to get sorted out.

Our best guess right now is that, when it’s all done… 10 years from now, 15 years from now… the 275 million will be our loss. That most certainly won’t be the exact figure. But like I say, if there’s any reason to revise that number upward, we’ll let you know promptly.

It is the nature of insurance that you get unpleasant surprises from time to time.

Loews Corp. bought CNA in the early 1970s. And just in the last few years, there was a fiberboard settlement on a policy, I believe, that was written in the late ’50s. And there was a, as I remember, a billion and a half dollar loss on something where the premiums were a few thousand dollars.

GEICO has lost, as I remember, $60 million on a book of business that was written in the early 1980s, where the total premium was less than $200,000. You know, how much of that is stupidity, how much of it is fraud, or who knows exactly? But you can get some very unpleasant surprises in insurance.

And unfortunately, this will not be the last one. It won’t occur in the same place, it won’t occur exactly the same way. But the nature of insurance is that the surprises are on the unpleasant side.

It’s not the kind of thing that happens when you’re writing personal auto insurance or anything of the sort. But when you write business where the claims pop up 10 or 20 or 30 years later… I think we’ve got a claim, a small workers’ comp company that we have, that goes back 20-odd years, 25 years or so, and it’s just popped up to life in the last year or so. And it costs real money.
So it’s a business where the surprises can come big and they can come late. And that will happen even with good management.

But with good managements, you’ll have fewer such surprises.

Charlie?

Charlie Munger:

Well, that was a marvelous question. And imagine anybody asking a question of how to get educated… who knows how to educate people? It’s the same way you educate the dog by rubbing his nose in it.

And generally speaking, that was a dumb error. That was an amateur’s mistake.

It doesn’t mean that General Re is suddenly full of amateurs. It was a rare lapse, just as at Berkshire, we think the Omni affair was a rare lapse. I don’t think we’ve repeated it since. Have we, Warren? I can’t think of a single one.

Warren Buffett:

But again, you know, we don’t know that we’ve repeated it.

Charlie Munger:

Well but…

Warren Buffett:

These things pop up later. No. No, the answer is we haven’t repeated it.

Charlie Munger:

So yes, it was a dumb, amateurish error. These things do happen. We don’t think it reflects a sudden lowering of the intellectual standards of General Re, which are probably the best in the world. It’s just one of those things that does happen once in a while.

And there’s one good side to these things, it does make you more careful. It really refreshes your attention to get banged on the nose like that.

Warren Buffett:

Yeah, and it remains to be seen where the costs of that will be born. Because the entire set of facts, in terms of what was committed to and all of that, it has not been resolved yet.

In the Omni situation, we had significant disputes on the facts for some time, and we eventually recovered a fair amount of money that, for a time, it didn’t look like we would recover.

So, you know, the final chapter on this is not going to be written for some time, but it was appropriate to set up $275 million as a reserve, in terms of what we know at this time. And that number could go up. It could also go down, depending on the facts that we discover.

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