Learning from Buffett

In Berkshire Hathaway’s 2004 Annual Report, Warren Buffett talks about how to make money in the highly commoditized insurance business. In short, you underwrite business you think will be profitable, not business that is simply available. You do this by pricing right. (Insurance can be a particularly tempting business to underprice, because you won’t necessarily know it for 5 or more years.)

What we’ve had going for us is a managerial mindset that most insurers find impossible to replicate. Can you imagine any public company embracing a business model that would lead to the decline in revenue that we experienced from 1986 through 1999? That
colossal slide, it should be emphasized, did not occur because business was unobtainable. Many billions of premium dollars were readily available to NICO had we only been willing to cut prices. But we instead consistently priced to make a profit, not to match our most optimistic competitor. We never left customers – but they left us. [emphasis added]

Buffett also notes that employees hate declining volume as much as Wall Street and management, regardless of profitability, because shrinking volume often means shrinking headcount. To combat this, they promised that no one would be let go because of declining volume.

If it’s good enough for Buffett, it’s good enough for me, but how many companies price that way?

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