Berkshire Hathaway 1999 Annual Meeting Audience Question # 54

The future of the insurance industry

Warren Buffett:

Zone 3.

Audience Member:

Hi, my name is John Loo from New York City.

First, let me start out by thanking both of you for the incredible education that you’ve provided me through your annual reports and various presentations that you’ve given in public and in publication.

I was about to send you my tuition check last week, but instead I decided to buy more shares of your company. I hope you’ll forgive me.

Warren Buffett:

No, you learned well.

Audience Member:

My question basically centers around the insurance industry at present.

Right now, there’s excess capacity, which comes and goes, typically speaking. But there seems to be a trend towards international consolidation. And also, there seems to be a trend towards demutualization in the life insurance companies in the U.S.

I was wondering if you could give us your thoughts on what the future face of the insurance industry will look like.

Warren Buffett:

Yeah, I… both of those trends do exist, that you talked about.

I don’t think that consolidation usually solves many problems. I mean, if you have two lousy businesses and you put them together, you’ve got a big, lousy business, usually.

And I am not a big fan of consolidation where the theory is that you’re going to… you really have two very mediocre businesses and you’re going to wring the costs out of one. And it doesn’t… it just doesn’t work that way in my experience.

But the consolidation will go on, and the demutualization of life companies will go on.

It’s not inconceivable that we would play some part in one or the other in some way, although it’s not high on our list. But I’ve learned in this business never to say never because things do happen that have caused me to want to retract some earlier statements.

The winners are going to be the people that have some franchise based on specialized talents, on terrific distribution systems, managerial know-how, even the ability to use the float effectively.

And in the case of something like GEICO, on the superior… it’s combined with a franchise… a superior distribution system. We have the low-cost method of distributing personal auto insurance on a… on an all-comers basis.

USAA does a terrific job of delivering low-cost insurance to a specialized group.

GEICO actually came… in a sense… came out of USAA. Leo Goodwin and his wife, Lillian, who founded the company in 1936, were both employed by USAA. And I… Leo, as I remember, was an officer of the company.

So the idea of GEICO came out of a USAA, but they’ve limited it to a given class. We offer it to everybody in the country, except we can’t offer it in New Jersey or Massachusetts because we can’t figure out any way to make any money there.

Twentieth Century has done a terrific job of becoming a low-cost operator in a given urban area, in the greater Los Angeles area.

But in terms of an all-comers, all-geography, all-occupation-type operation, in my view, GEICO is the best operation in the United States. And better yet, consumers around the world are agreeing… around the country… are agreeing with that view.

GEICO gained, last year, 20.8 percent policy holders. This year, in the 12 months ended March 31st, it’s up 22.5 percent policy owners.

These are on big numbers. The base and the growth has accelerated. So that kind of… that sort of advantage will make for a good insurance… a very good insurance business over time.

I think the average insurance company is going to remain very average, and there is a lot of capital in the industry, as you pointed out. There’s more capital in the industry than there is opportunity to use it intelligently.

And nevertheless, it doesn’t go away. You are not seeing consolidation that takes away a lot of the capital of the industry, you’re not seeing massive repurchases or anything of the sort.

So the capital is there. It’s seeking an outlet in premium volume. That actually hurts a General Re to an extent because it means that the primary companies want to retain more of the premium they generate, just so they can show some kind of growth against this capital base.

I think generally, we’re very well positioned in the industry. I think the industry will be tougher in the next few years by a significant margin in the personal auto business. But frankly, I look forward to it because I think we… it may offer us the opportunity to grow even faster.

We… you know, we have the best vehicle in a very, very big industry, the auto insurance business. And we’ve got incredibly good management to take advantage of that. And we’ve got policies available as you leave at the door.


Charlie Munger:

Nothing to add.

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