Buffett has written extensively about the importance of staying within your "circle of competence," warning investors: "You don't have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however is vital."
Without question, reinsurance is well within Buffett's circle, and that of Ajit Jain, who is so important to Berkshire's reinsurance business that Buffett has suggested he would choose to save Jain over Charlie Munger or himself if the three were in a sinking boat and only one could be saved.
Buffett has long been a fan of the "float" created by the premiums paid upfront by insurance policy holders. That float has given him the capital to buy stakes in blue-chip companies like Coca-Cola
In addition to its stake in Munich Re, Berkshire owns a stake in Swiss Re.
Including its own reinsurance business, Berkshire Hathaway has ownership in three of the four largest reinsurers in the world. Buffett has indicated that he would not attempt to exert influence over the company's strategy, but it's hard to imagine that the company's executives won't be mindful of his presence, even as a passive shareholder. And no doubt Buffett wouldn't be disappointed if that mindfulness led to better risk pricing in the industry.
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Fool contributor April Taylor owns shares of Berkshire Hathaway. American Express, Berkshire Hathaway, and Coca-Cola are Motley Fool Inside Value choices. Berkshire Hathaway is a Motley Fool Stock Advisor selection. Coca-Cola is a Motley Fool Income Investor selection. The Fool owns shares of Berkshire Hathaway and Coca-Cola. Try any of our Foolish newsletter services free for 30 days.
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