Berkshire Hathaway 2003 Annual Meeting Audience Question # 16

A triple-A rating doesn’t affect how Berkshire’s insurance businesses writes their policies

Warren Buffett:

Number 4.

Audience Member:

Hi. David Anglin from St. Louis, Missouri. Thanks for the weekend, it’s very nice. It’s always entertaining here.

According to an article in The Economist, the triple-A rating is very important quality for reinsurance to have. Swiss Re, Munich Re have lost their triple-A ratings. Gerling is out of the ballpark.

Will the reinsurance business at Berkshire become unintentionally exposed to higher risk because it is now a major reinsurer still holding a triple-A rating, even though it practices a very severe underwriting discipline?

Warren Buffett:

No, the triple-A can’t increase our risk, because it should not affect what we do.

It may affect what gets offered to us. I mean, logically we should get business offered to us first, and last. I mean, we are the reinsurer that’s going to pay for sure, five years from now, 10 years from now.

So when… I mean, we have contracts, we have structured settlements with paraplegics that are counting on us to make a payment to them 50 years from now.

And those people are in wheelchairs, they may be on… you know, they may be on oxygen, all kinds of things. And they are depending on a little piece of paper that has our name on it, and it says we’re going to pay them for the rest of their life. And it’s very, very important to them whose name is on it.

But that shouldn’t cause us to do… it shouldn’t cause us to do anything at all stupid. It just means that people that care about security of future promises should come to us.

But there’s no reason at all, because Munich or Swiss Re loses their triple-A, that we should underwrite in any way differently than we do now. It just should mean that we have more to choose from.

And I can assure you that, as these companies lose their triple-A… and a number have in the last year or year and a half… we have been tightening our underwriting very materially at Gen Re.

Now, it needed tightening… but we are now, in my view… we have the right… we have a great underwriting culture at Gen Re, and historically it had it most of the years. It drifted away from that, but I think it’s back in spades now. So I don’t think you have to worry about that.


Charlie Munger:

Well, I certainly hope we are better underwriters than Munich Re.

Warren Buffett:

Well, let’s not name names.

No, no, Munich is a fine company.

The rule at Berkshire is we praise by name and we criticize by category.

And I do think Munich is a fine company, but they lost their triple-A, frankly, because they probably had… they were too exposed on the equity side… on the asset side… in equities, relative to net worth, and I think they probably agree with that.

But they have a very strong and important position in insurance. And we do a lot of business with Munich Re, and will continue to do so. But there are others we won’t do business with, incidentally.

I mean, there are some very weak reinsurers in the world and if there were to be a major natural catastrophe, or if there were to be a major financial catastrophe, there are a number of reinsurers, in my view, that would not pay. And we conduct our affairs so we’ll always be able to pay.

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