Buffett’s Idiot Challenge Seized by Jain in Premium Hunt
Ajit Jain, who helped build Berkshire Hathaway Inc. (BRK/A) into a $200 billion firm by underwriting risks that others shunned, is hunting for insurance-premium growth that his boss Warren Buffett says may be a thing of the past.
The funds that Berkshire holds before paying out claims may decline after swelling to more than $70 billion last year from $39 million in 1970, Buffett said in a February letter to shareholders. The billionaire has used the premiums, called float, for acquisitions and investments to fuel expansion over the past four decades. According to Buffett, Jain took the letter as a challenge.
Jain wants me to “look like an idiot,” the billionaire said May 5, drawing laughter from an audience of thousands of shareholders at the company’s annual meeting in Omaha, Nebraska.
Berkshire’s increasing float has mirrored its climbing stock price during the past quarter century and been used by investors to value the firm. Buffett’s prediction highlights the dilemma facing Jain as he seeks new long-term liabilities.
“How many more big parcels of risk can he buy?” Todd Bault, global risk and insurance analyst at Sector & Sovereign Research LLC, said in a phone interview. “You’d have to find companies that completely want to run off risk.”
Buffett, 81, has praised Jain for his skill in selecting risks at the right prices. The reinsurance chief accumulated $34 billion in float since joining Berkshire in 1985, “a feat that no CEO of any other insurer has come close to matching,” the billionaire wrote in the letter. He didn’t respond to a request for comment sent to an assistant. Jain declined to comment.
‘The Big Hitter’
Much of the growth in float has come from retroactive reinsurance, in which Berkshire assumes responsibility for events that have already occurred. Jain’s Berkshire Hathaway Reinsurance Group has struck some of the largest deals of this kind, including an asbestos-related contract with Equitas Ltd. to assume as much as $13.9 billion of liabilities that once threatened the Lloyd’s of London marketplace.
“Ajit’s the big-hitter,” Cliff Gallant, an analyst at KBW Inc., said in a phone interview. “The big, notable deals come from him.”
Buffett has reduced Berkshire’s reliance on insurance by adding manufacturing operations and railroad Burlington Northern Santa Fe as he prepares the company for his eventual departure. The billionaire plans to have his roles divided after he leaves, with his son Howard Buffett serving as non-executive chairman and former hedge-fund managers Ted Weschler and Todd Combs overseeing investments.
Jain, 60, would win the support of the board if he sought to become chief executive officer, the billionaire said last year at a news conference. Berkshire’s directors have selected a person for the role and have two backups, according to the February letter that didn’t identify the individuals.
The next CEO will be responsible for managing risk and overseeing an insurance business that benefitted from Buffett’s ability to invest premiums before the funds were needed to pay claims. Jain’s reinsurance deals can take years to pay out, giving Buffett time to invest, said Gallant, while other kinds of coverage, such as auto insurance written by Berkshire’s Geico unit, are shorter term.
New sources of float with a longer duration could include taking on risks from life insurers, such as Hartford Financial Services Group Inc., said Meyer Shields, an analyst at Stifel Nicolaus & Co., in a phone interview. Berkshire has taken over life-insurance liabilities from Swiss Re Ltd. and Sun Life Financial Inc. A spokesman for Hartford declined to comment.
‘Lot of Turmoil’
Another option might be to take on risks from companies in Europe that need to strengthen their balance sheets amid the Continent’s debt crisis, said KBW’s Gallant. Greenlight Capital Re Ltd., the reinsurer with a board led by hedge-fund manager David Einhorn, has said regulatory changes and Europe’s financial troubles may create opportunities to sell coverage.
“There’s a lot of turmoil out in the world,” said Gallant. “If any reinsurer has any financial difficulty, problems with liquidity, balance-sheet stress, Berkshire Hathaway Reinsurance Group is out there to help.”
Jain could also increase float through acquisitions. He bid on Transatlantic Holdings Inc. last year, then withdrew his offer before Alleghany Corp. purchased the reinsurer.
Berkshire is unlikely to take on much more asbestos liability because Jain may be looking to diversify risks, said Shields. In addition to the Equitas deal, Buffett’s firm agreed to bear costs that may exceed $8 billion from American International Group Inc., CNA Financial Corp. and Ace Ltd. The contracts cover liabilities tied to asbestos, the building material linked to respiratory illness and cancer.
‘The Big Slugs’
“They’ve gotten most of the big slugs,” said Shields. “I don’t know that they want a monopoly on that.”
Float may decline in part because some of Jain’s contracts are ending. One of the deals, in which Berkshire agreed to assume 20 percent of almost all the property-casualty losses for Swiss Re on contracts providing coverage from the beginning of 2008 to the end of this year, probably won’t be renewed, according to regulatory filings.
If the increase in float stalls, Berkshire will rely more on operating companies, including BNSF, for growth. Buffett’s firm surged in the 24 years ended Dec. 31 at a compound annual rate of about 16 percent as float grew 17 percent a year. Expansion slowed in the past decade to 4.3 percent for the stock and 7.1 percent for the float.
“Float is the rocket fuel behind Berkshire’s long-term, extraordinary track record,” said Whitney Tilson, founder and managing partner of T2 Partners LLC, which holds Berkshire shares. “If float slows down and stagnates, Berkshire will not be able to grow as fast.”
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