Buffett on Attractive Insurance Economics

Warren Buffett’s annual letter to Berkshire Hathaway shareholders released Saturday notes that Berkshire’s attractive insurance economics exist only because it has “some terrific managers running disciplined operations that possess strong, hard-to-replicate business models.†

As he goes on to extol the virtues of the major units, Buffett comments that Berkshire is far more conservative in avoiding risk than most large insurers.

To put this in perspective, the Oracle of Omaha notes:

For example, if the insurance industry should experience a $250 billion loss from some megacatastrophe – a loss about triple anything it has ever experienced – Berkshire as a whole would likely record a significant profit for the year because of its many streams of earnings. And we would remain awash in cash, looking for large opportunities if the catastrophe caused markets to go into shock. All other major insurers and reinsurers would meanwhile be far in the red, with some facing insolvency.†

As Artemis blog reports, being diversified and cash-rich Berkshire Hathaway’s insurance and reinsurance businesses continue to pay claims and liabilities while the insurance and reinsurance premium float builds and generates significant upside on the investment side of Buffett’s businesses.

Indeed, Berkshire’s attractive insurance economics are due in no small part to  the successful growth of that premium float over the course of years.

Buffett’s  letter  tells us  that Berkshire’s insurance operations again operated at an underwriting profit in 2013 – for the 11th consecutive year – and increased its float.

Buffett writes:

During that 11-year stretch, our float – money that doesn’t belong to us but that we can invest for Berkshire’s benefit – has grown from $41 billion to $77 billion.†

Buffett adds that further gains in float will be tough to achieve, but that if  it does experience a decline in float at some future time, it will be very gradual — at the outside no more than 3 percent in any year.

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