2012: Do Berkshire's insurance businesses make different assumptions about mortality rates?

WARREN BUFFETT: OK. Now we go to our new panel.

Cliff Gallant of KBW, we’re getting the first question here from an analyst.

I don’t think that is on.

CLIFF GALLANT: Oh, can you hear me?

BUFFETT: Yeah.

CLIFF GALLANT: OK, sorry. Thank you again for the opportunity. The subject, generally, still is mortality.

In your 2011 annual report, Berkshire disclosed that Berkshire Hathaway Reinsurance Group made changes in its assumptions for mortality risk, which resulted in a charge, specifically saying that mortality rates had exceeded assumptions in the Swiss Re contract.

Conversely in Gen Re’s Life/Health segment, they reported lower than expected mortality, and I believe these trends continued into the first quarter that we saw in the report last night.

What was the surprise in the Swiss Re contract? And is there a difference in basic assumptions and trends for things like mortality rates among Berkshire’s different businesses?

In the property-casualty businesses, for example, are the same assumptions and reserving philosophies applied companywide?

WARREN BUFFETT: Starting off with the Swiss Re example, we wrote a very, very large contract of reinsurance with Swiss Re — I would say, I don’t know, a year-and-a-half ago now, or thereabouts — and it applied to their business written, I think, in 2004 and earlier. And they had a lot of business. It was American business.

And we started seeing — we got reports quarterly — and we started seeing mortality figures coming in quarterly that were considerably above our expectations and what looked like should be the case — should have been the case — looking at their earlier figures.

So at the end of last year — we have a stop-loss arrangement on this — so we set up a reserve that really reserves it to the worst case, except we present-value that.

But until we get — until we figure out what can be done about that contract — and we have some possibilities in that respect — we will keep that reserved at this worst case. And so we took a charge for that amount.

We do — we are reinsuring Swiss Re, and then they are reinsuring a bunch of American life insurers, and there is ability to reprice that business as we go along, but the degree to which we and Swiss Re might want to reprice that may be a subject of controversy, we’ll see, so we just decided to put it up on a worst-case basis.

Getting to the question of how GEICO reserves, how Gen Re reserves, I would say that — it’s described to some extent in our annual report — but I would say that the one overriding principle is that we hope, and our plan is, to reserve conservatively.

I mean, it’s a lot different reserving in the auto business, where on short-tail lines and physical damage and property damage, you know, you find out very quickly how you’re doing.

And if you look at GEICO’s figures, you know, we’ve had redundancies year after year after year.

Gen Re was under reserved at the time we bought it, and back in those 1999/1998 years, those developed very badly. Now they’ve been developing very favorably for some time. I think with Tad Montross, we’ve got a fellow that — where I feel very good about the way he reserves.

But he is not — there’s no coordination between him and Tony [Nicely] at GEICO, nor with Ajit [Jain] at Berkshire Hathaway Reinsurance. They all have, I think, the same mindset, but they don’t — they’re three very different, different businesses.

Charlie?

CHARLIE MUNGER: There’s always going to be some contract where the results are worse than we expected. Why would anybody buy our insurance if that weren’t the case? (Scattered laughter)

WARREN BUFFETT: It’s interesting how — I mean, just take 9/11. You know, it’s very hard to reserve after something like 9/11, because to what extent is business interruption insurance — when you close the stock exchange for a few days, are you going to be able to collect on insurance?

And, you know, when you close restaurants at airports, you know, 2,000 miles away, because the airport is closed for a few days, is that business interruption insurance? There’s — a lot of questions come up.

We turned out to be somewhat over-reserved for 9/11, as it turned out.

You’ve got the same situation going on in both Thailand and Japan because, as you know, the supply chain for many American companies was interrupted by the tsunami in Japan and the floods in Thailand.

And if you’re a car manufacturer in the United States and you aren’t getting the parts, you know, does your business interruption insurance cover the fact that there were floods for your supplier in Thailand or the tsunami hit in Japan? Sometimes that stuff takes years and years to work out.

On balance, I think you will find that our reserves generally develop favorably.