By the early 1980s, NICO’s convictions and superior capital strength enabled it to expand its business into some basic reinsurance transactions in what soon came to be called the Berkshire Hathaway Reinsurance Group. These began with backstopping structured settlements, procedures for settling claims with payment installments over long periods of time. For example, an accident victim, paralyzed with limited mobility, is granted an insured $5,000 monthly for life. For such a settlement to be made, there can be no question about the insurer’s creditworthiness. Backstopping those insurers, NICO carved a niche by offering matchless security and always making good on its promise to pay.
Through what is now called the Berkshire Hathaway Primary Group, NICO added a specialty risk division in 1985. It is devoted to underwriting large and unusual risks for proportional premiums—professional athletes against permanent disability, rock stars against laryngitis, and international sporting events from the Olympics to the World Cup against disruption. NICO launched the division by advertising in a weekly insurance trade journal that it was looking for risks where the premium would be at least $1 million (in today’s dollars, more than twice that).39 The ad yielded six hundred replies, yielding $50 million in premiums—a marketing success that within five years proved to be an equal underwriting success.
NICO writes policies others won’t or can’t, whether multi-billion-dollar satellites or multi-million-dollar reward contests for Grab.com, Pepsi Co., and other corporate customers.40 In 2014, it insured an offer by Quicken Loans to pay a $1 billion dollar prize to anyone picking the exact 2014 men’s NCAA basketball tournament bracket of sixty-four teams—the odds of which being one in 128 billion.41 In the months after the terrorist attacks of September 11, 2001, NICO wrote large terrorism policies, a $1 billion policy for several international airlines, a $500 million policy for an overseas oil platform, and a large portion of the coverage for the Sears Tower in Chicago.
NICO’s growing financial strength—backed by investments in high-quality marketable securities—enabled it to become the market leader in writing catastrophic loss policies. Called “CAT covers” (“CAT” for “catastrophic”) in industry jargon, these are reinsurance contracts that primary insurers (and some reinsurers) buy to protect against a single catastrophe—say a hurricanes or a tornado—that triggers crippling payouts on a large number of policies simultaneously.
NICO has more capacity than other insurers to sell CAT covers. This is partly due to its vast balance-sheet strength and also because Berkshire’s long-term outlook makes it—and its subsidiaries—indifferent to year-to-year swings in results. Competitors, in contrast, care a great deal about steady year-to-year earnings. With such strengths, NICO is able to write policies for amounts that competitors are unable to consider; and NICO remains extremely choosy, rejecting more than 98 percent of business offered to it.42
Berkshire’s CAT cover business was begun from scratch by Ajit Jain,43 who for years also ran all of the Berkshire Hathaway Reinsurance Group. Buffett extols Jain’s virtues repeatedly and emphatically in Berkshire annual reports:
In Ajit, we have an underwriter equipped with the intelligence to properly rate most risks, the realism to forget about those he can’t evaluate, the courage to write huge policies when the premium is appropriate, and the discipline to reject even the smallest risk when the premium is inadequate. It is rare to find a person possessing any one of these talents. For one person to have them all is remarkable.44
National Indemnity has driven Berkshire Hathaway’s growth for several decades. Four decades after acquiring National Indemnity from Ringwalt, Buffett wrote that, but for NICO, Berkshire would have been worth half its value.45 National Indemnity’s promises are sacrosanct. Its financial fortress enables it to sustain its historical commitment to backstop any risk at the right price. Customers willingly pay for such earnestness.
Gen Re’s principal business is reinsurance, backstopping other insurers for portions of policies they write. Buffett noted when discussing the industry in 2008, a year that battered insurers amid a roiling financial crisis: “Reinsurance is a business of long-term promises, sometimes extending for fifty years or more. This past year has retaught clients a crucial principle: A promise is no better than the person or institution making it.”46
Earnestness, in other words, is a vital quality for a reinsurer, an ironclad intention to meet promises made. The essence of earnestness is sincerity, the traditional decree to mean what you say and say what you mean. Gen Re, like NICO, insures large and unusual risks, with policies spanning decades, making promises whose size or duration renders the company’s word a precious asset (a source of business moat). A track record of covering claims increases the value of their promises, translating the intangible trait of earnestness into quantifiable economic gain.