Ajit Jain’s BH Reinsurance Float Contribution
Float makes the insurance world go around. In fact, the reason for Berkshire’s outperformance over the years is the access to cheap float that can be reinvested in companies like Coco Cola, American Express and other companies. We looked at the data of Berkshire Hathaway’s insurance float for the past 16 years. The below chart shows the super growth of Jain’s BH Reinsurance division, the stagnation of General RE and the decent growth of GEICO. Other primary insurance division contributions include acquisitions & other specialty insurance.
When we look specifically at the contribution of the BH Reinsurance group in the below chart, the contribution is staggering.
In 1998, 16 years ago, BH Reinsurance had a float of $4.3BN and contributed to 19% of overall Berkshire’s insurance float. From then on, the BH Reinsurance group’s float increased continuously in 15 of the 16 years. At the end of 2013, the group had a float of $37BN and contributed to 48% of the total float. This was an increase of nearly 9 times on an extremely large base.
Ajit Jain’s BH Reinsurance Underwriting Profit Contribution
Growth in float in the insurance industry can be achieved by underpricing & taking an underwriting loss. Here is Buffett on key insurance principles in his 2013 annual letter:
A sound insurance operation needs to adhere to four disciplines. It must (1) understand all exposures that might cause a policy to incur losses; (2) conservatively assess the likelihood of any exposure actually causing a loss and the probable cost if it does; (3) set a premium that, on average, will deliver a profit after both prospective loss costs and operating expenses are covered; and (4) be willing to walk away if the appropriate premium can’t be obtained. Many insurers pass the first three tests and flunk the fourth.
So, did Ajit Jain achieve this remarkable growth in float by taking underwriting losses? Quite to the contrary, a 12 year examination of the BH Reinsurance division’s underwriting profit & loss shows a combined total profit of $6.6BN
From 2002 to 2013, the BH Reinsurance group had underwriting losses in only 2 of the 12 years. This is not to say that losses will not occur in the future but a 12 year track record shows the temperament and ability of a person to manage risk.
This remarkable performance by BH Reinsurance has pundits and Buffet himself hinting that Jain is likely to be the leading candidate to succeed Buffett. Here is the Wall Street Journal on Ajit Jain’s chances to be the next successor:
Some shareholders said they were now rooting for Jain to be Berkshire’s next chief because of his ability, as a reinsurance expert, to understand complex risks. Separately, on Saturday morning, Mr. Buffett signaled that he had one particular successor in mind. “The guy who’s the leading candidate now, I would lay a lot of money on the fact that he’s straight as an arrow.” That statement alone was unusual: Buffett hasn’t often described the qualities of a single leading candidate, choosing instead to describe the entire roster of potential replacements as capable of stepping into the CEO role.