Now that the shock of Katrina has passed into the second phase and things have stabilized a bit on the rescue and recovery the economic and financial impacts come naturally to the forefront. As this is a board with a heavy interest in insurance it stands to reason that now is a time to see how this all impacts our investment. As I've said previously, I did not want a scenario where Berkshire gains when human suffering is involved - it may make all of what I'm about to say seem callous and cold though it is not meant to be. Insurance is a business that by definition deals with events that cause human suffering - any "gain" in such circumstances can seem hollow. That said, from a pure business perspective I have seen some refer to this event as "bad news" for Berkshire so having lain that out, I'd like to challenge that premise. Become a Complete Fool
Some years ago I attended a parent-teacher conference at my daughter's school. The teacher proudly exclaimed, "They're all winners here! Every one of them - bless their hearts. Relax. Everyone here who tries gets an A, so long as they try."....hold that thought... last week my six year old son began his first soccer practice. They don't "compete" to win and lose but they play "for the fun of it." It comes down to a core philosophy and for the record I can't put into strong enough terms how much I despise that philosophy - I hate everything about it. We now live in a world that goes out of its way to avoid a scenario of ultimate victory and the sting of defeat. To have a winner means someone has to lose and losing brings misery and feelings of despair and in their world we can't have that. It defiles nature. The above is an attempt to remove something at the very core of our humanity - the will to COMPETE and the will to win - the strong human desire for triumph and decisiveness. Some will object but I firmly believe that these things give MEANING to life. I enjoy watching Wal Mart destroy Sears or Netscape strangle Blockbuster - it's not unlike a good football game. Which leads me naturally to the insurance industry... the insurance industry has the beauty of consequences and in the right circumstances an environment where good securities analysis can "win."
In terms of my very significant investment in Berkshire I need to analyze this event or future Katrinas from the aspect of how it impacts my investment. In short, this storm is THE REASON why I chose Berkshire some seven years ago and in pure economic terms it's what I've been waiting for since that first day in 1998. To me the real story is NOT about how Katrina will impact BRK's earnings or how big of a financial hit the company will take - my analytical nexus has always revolved around a blunt comparison of BRK vs. its competition in a search for competitive dominance. That said, for BRK to "win" and achieve the beauty of decisiveness we needed a playing field for the competitive factors to be exposed. I think we may have the beginnings of that in Katrina.
The game as I've always seen it is one of competing "survival genes" who each swim in the primordial goo which is well represented by the water in New Orleans. No company can swim away - there is no escape. It therefore devolves into what I've always wanted - a gladiator fight for survival of the fittest. In order to get this desired scenario we needed an external shock such as a gigantic event or series of events to place maximum pressure on everyone. In this respect it is very similar to a combat scenario - us vs. them and the loser dies - a very brutal outcome. It pits my gene vs. someone else's gene and in the insurance environment I want the circumstances to be as dire and costly as possible because if I've done my analysis correctly then I'll not only win but I'll own a far stronger company in the aftermath - something that can last the rest of my lifetime.
I will argue that what the owner of the superior insurance business should want is an environment which best exposes competitive strengths and weaknesses. In that light I WANT competitive destruction of the most brutal kind. Competitive destruction means consequences and it means winners and losers with natural symptoms of these outcomes. I want to see insurance failures. I want to see poor reserving exposed for what it is. I want to hear the wails and screams of those who took the risk and lacked the discipline to price their policies high enough. I want to see maximum pressure applied to the industry at large. I want to see executives who wrote those policies suffer the wrath. I want to see weak reinsurers quibble over payment and try to back out. I want to see primary insurers who didn't choose Berkshire as their reinsurer not get paid (punishment for not properly choosing someone with ballast). I don't want to see some external force (such as government) come running in for a belated rescue attempt and a stay of execution. I want to take my silver bullet and shoot Swiss Re or Munich Re and then I want to shoot them a second and a third time. No mercy. The fly-by-night operations which sprung up after 9/11, I want to see crushed and exposed for what they are. After it's over I want the competition removed from the playing field in a final result of decisiveness - Berkshire dominating a scattered, fractured, weak competitive landscape that remains.
Lest I be accused of Schadenfreude it's not that as much as it is a quest for consequences that results in a clearly defined winner and loser(s). It's the acknowledgement of an environment which at long last allows the superior economics and strength of Berkshire to show their power. Yes - unfortunately innocent people who worked for the competition will be hurt. Perhaps in a larger Berkshire entity they will find a place - the fruit of competitive destruction is that change happens and it's not the end of the world - just a different world with newly defined opportunity. What happens if Buffett's warnings of a $100 billion insured event come to fruition (perhaps Katrina perhaps something else)? No one can say that the competition wasn't warned. Let the consequences come.
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Now that the shock of Katrina has passed into the second phase and things have stabilized a bit on the rescue and recovery the economic and financial impacts come naturally to the forefront. As this is a board with a heavy interest in insurance it stands to reason that now is a time to see how this all impacts our investment. As I've said previously, I did not want a scenario where Berkshire gains when human suffering is involved - it may make all of what I'm about to say seem callous and cold though it is not meant to be. Insurance is a business that by definition deals with events that cause human suffering - any "gain" in such circumstances can seem hollow. That said, from a pure business perspective I have seen some refer to this event as "bad news" for Berkshire so having lain that out, I'd like to challenge that premise.
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