2013: Are Buffett and Munger concerned about new competition in reinsurance?

CLIFF GALLANT: We can follow that up. (Laughter)

Reinsurance pricing is expected to be down at midyear renewals this year, despite the fact that we’ve had a lot catastrophes in recent years.

The finger is being pointed towards alternative capital entering the market, new capacity entering the market.

How concerned are you about this new capacity, and, you know, what is the likelihood that cheap reinsurance pricing soon leads to cheaper primary commercial pricing?

WARREN BUFFETT: Yeah. We hate dumb competition, and hedge fund — managed money, but particularly hedge funds — have entered the insurance, and more particularly, probably, the reinsurance business, quite aggressively in the last few years.

For one thing, it gives them a chance to have a beard, in effect, to operate in Bermuda or someplace where the tax rates are low and where they defer their own income from U.S. income taxes for a long time, and it’s a perfectly respectable beard.

And it can be sold to investors. And people talk about it, you know, being an uncorrelated type of operation and all of that. Anything Wall Street can sell, it will sell. I mean, you can count on that. And —

CHARLIE MUNGER: They like big words, too.

WARREN BUFFETT: Yeah. And it’s very salable now, and the money will flow in and the money will — may — bring down prices, it may do stupid things in reinsurance, but that’s happened before.

And in the end, you know, we know what we’re willing to do, we know what we think the prices should be, and we will do insurance business where we think that the odds favor us earning an underwriting profit. And if we can’t do it, we’ll watch for a while.

You can’t afford, you know, to go along with the crowd in investment, insurance, or a whole lot of other things.

And it can be irritating to have a dumb competitor. I mean, if you’ve got a service station on the corner and you’ve got a guy across the street that is willing to sell gas below cost, you know, you’ve got a terrible problem. That’s why I got out of the gas station business a long time ago.

But insurance, it’s — nice thing about it is— the standby costs are not huge, so it’s not like idling steel plants or something.

So we were perfectly willing in the 1980s to have our expense ratio go up significantly because our volume went down so dramatically.

And, you know, it was a standby cost that was real, but it wasn’t back breaking, and we just waited for better days, and they came along.

Charlie?

CHARLIE MUNGER: With our cranky, wait-it-out methods, we probably have ended up with the best large-scale causality insurance operation in the world.

WARREN BUFFETT: Yeah, I think that’s true, but —

CHARLIE MUNGER: So why would we change?

WARREN BUFFETT: We never really anticipated it would happen, though, when we started in.

CHARLIE MUNGER: That’s true.

WARREN BUFFETT: Yeah. It just sort of evolved.

But the principles were useful, and then we were very lucky in getting some sensational people.

You know, we’ve got Tad Montross at Gen Re, we’ve got Ajit Jain, we’ve got Don Wurster, we’ve got Tony Nicely at GEICO.

I mean, we have just hit the jackpot, in terms of the people. And they like the environment of Berkshire in which to operate, because they do not get pressures to do dumb things, which they would get at many other places.