Woodstock for Capitalists

Warren Buffett's annual letter to shareholders affirms Berkshire Hathaway's committment to insurance.  The Oracle of Omaha (aka the Titan at Toontown over at In Lehmann's Terms) pontificates on catastrophes, Geico's presence in New Jersey, Medical Malpractice, CEO compensation, and as always "float", the cost of premium dollars for investment.

"Float is wonderful – if it doesn't come at a high price. Its cost is determined by underwriting results, meaning how the expenses and losses we will ultimately pay compare with the premiums we have received. When an insurer earns an underwriting profit – as has been the case at Berkshire in about half of the 39 years we have been in the insurance business – float is better than free. In such years, we are actually paid for holding other people's money. For most insurers, however, life has been far more difficult: In aggregate, the property-casualty industry almost invariably operates at an underwriting loss. When that loss is large, float becomes expensive, sometimes devastatingly so."

The letter (IJ) is informative and entertaining, containing a hodgepodge of ancedotes like the following one on catastrophes:

"Was this onslaught of more frequent and more intense storms merely an anomaly? ...

"What we do know is that our ignorance means we must follow the course prescribed by Pascal in his famous wager about the existence of God. As you may recall, he concluded that since he didn't know the answer, his personal gain/loss ratio dictated an affirmative conclusion."

"So guided, we've concluded that we should now write mega-cat policies only at prices far higher than prevailed last year – and then only with an aggregate exposure that would not cause us distress if shifts in some important variable produce far more costly storms in the near future. To a lesser degree, we felt this way after 2004 – and cut back our writings when prices didn't move. Now our caution has intensified..."