Insurance is crucial for Berkshire (NYSE: BRK), and new leadership will be coming
As you’re likely well aware, insurance plays a major role for Berkshire Hathaway (NYSE: BRK), providing a sizable portion of the Warren Buffett-led company’s profit.
Also, Berkshire is able to use the premiums it earns on its insurance offerings to fund stock purchases or takeovers of companies. So the company’s insurance wing is funding its investment wing.
Berkshire’s insurance companies receive premium payments now, but don’t have to pay out on policies until later. Those premiums are known as the float. “An insurance business has value if its cost of float over time is less than the cost the company would otherwise incur to obtain funds,” Buffett has said.
Operating profit for its insurance underwriting and insurance investment income totaled $22.7 billion last year, or 48% of the company’s total operating profit.
Berkshire offers all kinds of insurance and reinsurance. Auto insurer Geico leads the way, with its pre-tax underwriting earnings more than doubling to $7.8 billion in 2024. Geico, which Buffett began buying in 1976, has been one of Berkshire’s most profitable investments.
Other Berkshire insurance companies include commercial insurer Berkshire Hathaway Specialty Insurance, commercial insurer National Indemnity Co. and General Re, a major reinsurer.
Buffett: Insurance is ‘most important business’
“Insurance is the most important business at Berkshire,” Buffett has said. “It’s the engine that has propelled our expansion since 1967.”
The key, of course, is to price your policies high enough to take in more in premiums than you lose in payouts. Of course, you also want to avoid having to make excessive payouts and you want to invest premiums profitably.
The man behind Berkshire insurance is Ajit Jain, who has led the unit for almost 40 years. Buffett is quite pleased with his performance. “Under Ajit, our insurance operation has blossomed from an obscure Omaha-based company into a world leader, renowned for both its taste for risk and its Gibraltar-like financial strength,” he said.
Jain is renowned for his underwriting skills. Among his creative policies, as cited by The Wall Street Journal, were one insuring Chicago’s tallest building (the Willis Tower) against terrorist attacks, one insuring Pepsi (NASDAQ; PEP) against awarding a $1 billion raffle prize, and insuring baseball teams against injuries of star players.
Let Buffett drown
Buffett once quipped that “if Ajit and I are ever in a sinking boat and you could only save one of us, swim to Ajit.”
Now the speculation is who will succeed the 73-year-old Jain. In 2024, he said he gave Berkshire’s board several ideas for successors. The names haven’t been disclosed, but insurance pros offered four ideas to The Wall Street Journal.
• Joe Brandon, CEO of Alleghany, a conglomerate bought by Berkshire in 2022
• Todd Combs, CEO of Geico and an investment manager at Berkshire
• Peter Eastwood, CEO of Berkshire Hathaway Specialty Insurance
• Kara Raiguel, CEO of General Re
Jain has dealt with industry changes such as private-equity firms entering the life insurance and annuities sectors, and his successor will undoubtedly face change too.
How that person deals with it may have a lot to do with Berkshire’s performance in coming years.
