Buffett Beyond Value: Why Warren Buffett Looks to Growth and Management When Investing

Chapter 8. Reinsurance: More of Other People's Money

[We] are a Fort Knox of capital, and that means volatile earnings can't impair our premier credit ratings. Thus we have the perfect structure for writing—and retaining—reinsurance in virtually any amount. In fact, we've used this strength over the past decade to build a powerful super-cat business.^[93]

—Warren Buffett

If a hurricane hits Miami, an insurance company with a large number of policies in the area will be inundated with claims and could go bankrupt. Other natural or man-made disasters such as tornadoes, floods, fires, oil spills, and earthquakes can also result in huge insurance claims in short order. To avoid a financial disaster, many insurance companies transfer their risks to other insurance companies, called reinsurance companies. General Re Corporation is one of the largest reinsurance companies in the world, and it is owned by Berkshire Hathaway.

Size Matters: Berkshire's Acquisition of General Re

A small insurance company—for that matter, any small company—cannot take large risks even when the rewards seem attractive. For this reason, larger insurance companies are likely to be more profitable than smaller ones. For Berkshire as a whole, size is advantageous because more of the insurance and reinsurance premiums and float can be kept in-house. Furthermore, Berkshire may accept more reinsurance business from other insurance companies.

In 1998, Berkshire Hathaway acquired General Re Corporation for $22 billion. This ...