Liu Jianwei Buffett, the 2013 letter to shareholders (3): insurance business

Buffett's 2013 letter to shareholders (3): insurance business
In twenty-first Century Liu Jianwei 2013-03-22 12:55:59Commentary (0) article whenever and wherever possible to watch the news
Core tip: all insurance companies want to achieve such wonderful results, thus lead to fierce competition, competition in most of years so intense, so that the property and casualty insurance industry as a whole there has been considerable underwriting losses

Buffett released in March 1, 2013 Liu Jian interpreter

Let us have a look the insurance business, this is the core business of Berkshire, but also for promoting our company growing engine.

Property and casualty insurance company pre accept insurance, after the payment claim. In extreme cases, such as some workers accident compensation issues, will lead to claim payment period for decades. This "money after the first payment" model allows us to hold huge amounts of cash, which we call "float", this float does not belong to us, will eventually enter someone's pocket. During the holding period, we can capital investment by the float, earn investment income for berkshire. Although the insured from the individual and claim back and forth, but overall we hold the total float relative premium income of the proportion of the total is very stable. Therefore, with the our insurance business growth, we hold the float is also a corresponding increase. Our past growth, please see the following table:

The annual float (US $million)

197039

1980 237

1990 1632

2000 27871

201065832

201273125

In 2011, I tell you, our float in 2012 may be flat, or even may decrease a little bit. But our affiliate that insurance company CEO are determined to prove that I was wrong, and they did so, they float in 2012 to a $2500000000 increase. I expected 2013 years float will grow more now. But to achieve more growth became very difficult. Favorable factors, GEICO, float almost certainly will continue to grow. But in Nationally Indemnity 's reinsurance division, we have some insurance contract can be lost, these contracts bring float nature also can be lost. If we have a future time did fall float, then it can be very slow -- any one year does not exceed a maximum of 2%.

If our premiums exceed expenses we and the final claim loss and, in the financial statements will be embodied as underwriting profit, also plus our insurance investment investment income generated by. When we get to the underwriting profit, we will be able to enjoy free use of funds cost benefits, better than this situation is, we hold these funds not only don't have to pay any costs can therefore benefit. It is as if you let the bank loan to you, can let the banks pay interest on loans to you.

Unfortunately, all insurance companies are hoping to achieve so wonderful results, thus lead to fierce competition, competition in most of years so intense, so that the property and casualty insurance industry as a whole there has been considerable underwriting losses. For example, State Farm is by far the largest America insurance company, and have good management, but by the end of 2011 in 11 years has 8 years underwriting losses. (the company in 2012 property provided data have not yet been released.) In the insurance industry, there are many ways to cause a loss, but the insurance industry still Everfount to create new loss measures.

As we mentioned in the first part, we have already made an underwriting profit for 10 consecutive years, during these 10 years we earn a pretax profit of 186 billion dollars in total. Looking to the future, I believe we will be able to continue to achieve an underwriting profit in most years. If we do this, that our cost of float will be lower than free money, is negative.

The Mody, these very attractive insurance float and how it will affect the estimation of the intrinsic value? In the calculation of the carrying value of Berkshire, we float all for debt reduction, as we must repay the tomorrow and never be able to borrow as much debt like. However, in this way to look at the float is not correct, instead, to float as a continuous rolling of funds. If the float is not into the can, and can be sustainable in the long run, then the real value of the debt is far lower than the book value of the liability of accounting statements.

A partially offsetting factors that overestimating the debt is belonging to our insurance companies in the $15500000000 "goodwill" asset, as contained in the book value of an asset in the financial statements. In fact, this accounting Goodwill just represent us for our insurance business to create a floating gold deposit superb ability to pay the price. But the historical cost of goodwill and its true value and without any contact. If an insurance enterprise has sustained huge underwriting losses, so no matter related goodwill raw was the cost of these assets, goodwill should be said that there is no value.

Fortunately, Berkshire's insurance company is not so. Charlie and I believe that, after economic value of insurance enterprises of our goodwill, we are willing to create the same quality of float for the purchase price paid, certainly far more than the value of its history recorded. The great value of our float, is why we believe that one of the reasons inner enterprise of Berkshire's value greatly exceeds its book value, and is a major cause of.

I want to emphasize again, don't think, float the whole property casualty insurance industry is not into this: in the insurance industry, only a few companies have similar to Berkshire quality float. In the 45 years to 2011, the premium income which has 37 years of insurance industry throughout the year are not sufficient to cover the losses and expenses . Therefore, the total profit of the insurance industry with respect to tangible equity investment rate of return has been for decades, far lower than the level of the whole America enterprise, this performance make the whole insurance industry was shame, but the future will almost certainly continue to be ashamed.

Another more unpleasant truth let industry already bleak prospect one disaster after another: the insurance company now profits now benefit from "bond portfolio is created by high income left over from the past" rate, but the next few years these bonds mature funds for reinvestment can be obtained when the rate of return will be substantially down -- and perhaps even a future years will be so. Today's bond portfolio is actually constant consumption assets. When these bonds mature and deferred payments, will make the insurance company's earnings by a heavy blow.

Among

And the insurance business of Berkshire to outstanding, the only reason is that we have some extraordinary super star managers with some extraordinary insurance enterprises. Let me give you about our several major insurance companies.

According to the size of the sort of float, ranking first in the Berkshire's reinsurance group (the Berkshire Hathaway Reinsurance Group), by Ajit (Ajit Jain) is responsible for. Ajit to those other people did not have any intention or no capital strength to bear the risk of providing insurance. His insurance business management and the capacity, speed, decisive, and most of the heavy want is the mind, and he and the above factors of the one and only way in the insurance industry. But he never put Berkshire placed with the resources we have do not match the high risk. In fact, in risk avoidance, we are far more conservative than most large insurers. For example, if there is some super catastrophe caused by the insurance industry suffered losses of up to $250000000000 -- the equivalent of the insurance industry on the calendar history the biggest loss of three times, and Berkshire as a whole in this year will not be a loss may also have considerable profit, this is because we have a variety of diverse sources of profit. At the same time, all other major insurance and reinsurance companies will have huge losses, some insurance companies or even facing bankruptcy.

Starting from 1985 to 2011, Ajit created the a large insurance company, with $35000000000 of float, also achieved a cumulative underwriting profit quite high, this is a no any other insurance companies can be comparable to the achievement of CEO. He add billions of dollars in value so that Burke Hills and Company. If you see Ajit shareholders at the general meeting of shareholders, please say thanks to he bowed deeply.

Among

There's also a powerful insurance company is the general re (General Re), by Ted Montrose (Tad Montross) is responsible for the management of.

From the fundamentally, a strong insurance companies need to adhere to the four already in operation: first, learn all may lead to risk claims loss exposure; second, conservative assess any risk exposure probability actual losses and if the result of loss to pay for the cost is how much. (3) establish the premium income level, to ensure that after deducting the expected loss cost and operation cost on average can produce a certain profit lee. (4) if you can't charge a premium income appropriate would rather give up leave.

Many insurance companies can through the first three rule test, but in the fourth pass fail. When the other competitors not often eager to underwrite the wrong policy, they know not to do, but just can't turn away. There is an old saying says: "the other people are doing, so we must do", this sentence to explain the problem of any one industry, but the most appropriate for the insurance industry.

Ted has been strictly abide by all four of the insurance law, which is also reflected in his performance. Under his leadership, the general reinsurance holds the huge cost of float cost lower than. We hope that the future average continue to do so. We especially reinsurance on the common international life reinsurance business enthusiasm look forward to, from 1998 since we bought it company, the business continued to grow and remain profitable.

Among

Finally, to talk about the insurance company is GEICO, 62 years ago at the age of 20 I through investment in the insurance companies began to understand the true way of investment. GEICO is now by Tony Nasley (Tony Nicely) is responsible for the management, at the age of 18 he joined the company in 2012, to have service for the company for 51 years.

See Toni complete performance, I could not believe my eyes. Need explanation is, according to the 2012 GEICO USA acceptable accounting principle accounting statements of the underwriting profit of $680000000, but Toni actually contribute profit substantially more than the report report profits. As an early adjustment of accounting standards, we put $410000000 in meter and a substantial reduction of GEICO companies underwriting profit. but this fee and the 2012 GEICO business operations without any relationship, do not alter the cash, income, cost, also do not change. In fact, write down the carrying value of the assets to further expand the already huge gap between GEICO company's intrinsic value and Book value.

In addition, although the company suffered a history of the largest single loss, GEICO company still real the underwriting profit. Cause huge losses of millions of the hurricane Sandy, which caused the company to GEICO loss is 3 times of Hurricane Katrina, but hurricane Katrina was the original insurance loss record holder. The wind storm destroyed damaged vehicles in 46906 car is insured by GEICO, a large number of surprise, also reflects the company GEICO in the metropolis of New York auto insurance market share how great.

2012 , GEICO in the existing insurance customer renewal proportion ("persistent", persistency) and inquiry into the policy rate ("turnover rate", closures) have high. The two factors: customer interests great renewal proportion sustainable increase of one percentage point, it means that the intrinsic value of more than $1000000000. People a year GEICO insurance company's policy of price, will buy found GEICO's car insurance allows them to save a large sum of money, GEICO2012 annual insurance income growth is a strong proof. (please call 1-800-847-7536 or visit GEICO.com try. Please make sure that you are a shareholder, this can let you enjoy a discount)

Among

In addition to the three major insurance companies above said, we also owns a group of smaller companies, most of them in the insurance world some strange corner doing their own business. Overall, they continue to realization of underwriting profit. In addition, as shown in the table below, they also provide a large float for us. Charlie and I put these insurance companies and their managers if treasures.

2012 years later, our acquisition of Guard insurance company, let us fleet to further expand the scale of insurance. It is located in a Wilkes-Barre insurance company, mainly to serve the small and medium enterprises. The total annual premium income of about $300000000 in Guard. The company has a very good prospect in its traditional business and it has started to provide new services.

The following is our all four pieces of property insurance and life insurance significance of energy performance record:

Underwriting profit year float (US $million)

The insurance company 2012201120122011

Berkshire's reinsurance... $304 $(714) $34821$33728

General re.... 355  144 2012819714

GEICO....... 680* 576 1157811169

Other insurance companies.... 286   242 6598 5960

                      $1625248$73125$70571

* because of the adjustment of the entire insurance industry accounting standards, accrued expenses by $410000000 in underwriting profit.

In all the large insurance companies, I think Berkshire's insurance company is the world's best. In 1967 March, is my lucky day, Jack Ringwalt to 860 million price to sell us he founded two property insurance company.

(the translator Liu Jianwei as the Tianfu Health Fund chief investment division, this paper only personal views, not to persuade or investment advice.)

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