1996: Is capital flowing into reinsurance?

Walter Kaye: Mr. Buffett, Mr. Munger, I’m Walter Kaye from New York City.

Warren Buffett: We’re glad to have you here, Walter.

Walter Kaye: Thank you very, very much. You just make me more of an egomaniac, a humble egomaniac, by saying that. I don’t know if Mr. Munger’s wife or Mrs. Buffett is here, but back East, where I come from in New York, they say, “When men are successful, it’s their wife’s doing. But if they’re a failure, it’s because they’re lazy.” (Laughter) I just wanted to thank you again; you’ve done such great things for our family. It’s absolutely incredible.

For those who don’t know these two gentlemen, besides being financial geniuses, they’re the finest human beings you’ll ever meet. The way they explained this downsizing is the most intelligent thing I’ve ever heard. Eventually, people find work; they have to be reeducated and everything.

But one point of business I’d like to ask you, if you don’t mind: I’ve noticed a tremendous amount of new capital going into reinsurance carriers. I was wondering if you could comment on whether you think this influx will affect the reinsurance business and the insurance business in general. As you know, we’re still in a very soft market, and I hear about new reinsurance carriers almost every month, whether in Bermuda, London, or elsewhere. Thank you.

Warren Buffett: OK. Walter knows more about insurance than I do, but I’ll comment on that.

There has been a fair amount of capital entering the reinsurance business. There was a rush of it about three years ago. This influx of capital is negative for our business. Any capital that comes in will get employed.

At Berkshire, we are willing to sit on the sidelines in the reinsurance business. We’ll offer quotes, but others will cut those prices substantially if they have a lot of capital and want to stay busy. When companies have significant capital, they will do something. They might like to think it’s smart, but often they will rationalize their decisions, even if they’re not wise. People don’t like to sit around doing nothing, so that means prices will be cut under certain circumstances, and that’s happening now.

We have a policy at Berkshire regarding downsizing. We’ve promised everyone in our insurance operations that we will never have layoffs due to a drop in volume. We don’t want our people to feel compelled to write a specific amount of business just to keep their jobs. We can handle some overhead that might not be fully utilized because it isn’t a large expense relative to our overall insurance operation.

What we can’t afford is for our team to feel they must keep writing business to secure their jobs. If prices drop significantly, we won’t do business. But we’ll be ready to enter the market again when conditions change.

The reinsurance business has cyclical swings. It reversed in the casualty business around 1985, and we did a tremendous amount of business then. It reversed in catastrophe reinsurance four or five years ago, and we became very active in that.

In insurance, it’s similar to investments. If you feel you must invest every day, you’re likely to make mistakes. You need to wait for the right opportunity. In our insurance operations, having a budget for premium volume would be a poor strategy because our teams could easily meet any budget I set. If I told a unit that wrote $100 million last year to write $500 million this year, they would meet that budget, and I’d end up paying for it for years to come.

GEICO is different. As a low-cost operator, it can attract business at a solid growth rate simply by letting people know what’s available. That’s a business that can grow under almost any circumstances.

Our reinsurance business will fluctuate significantly based on competitors’ actions, which largely depend on how much capital they have available. Right now, it’s moving in one direction, but it will change. I’ve experienced at least half a dozen periods where people thought they’d never find intelligent prices to invest in, and it always changes.

In insurance, companies that misprice their policies will eventually pay the price. The world will still need insurance, and we will be there.