At 80, Warren Buffett has more energy than I: Ajit Jain, Berkshire Hathaway

India-born Ajit Jain is seen as one of the candidates who will succeed Warren Buffett as chairman of Berkshire Hathaway Inc. Jain helped set up Berkshire’s reinsurance business in 1986 when it was “raining gold” in the insurance markets due to a sudden hardening of rates and has been the biggest cash generator for the firm. (More articles on Ajit Jain)

He quit Mckinsey & Co to join Berkshire after a call from his former boss who had joined Buffett. Jain, who left the country in 1976, is amazed at how the difference between India and the West in terms of availability of products and services has been narrowed although the income gap within has widened. He narrates an incident of how 10 years ago, when his mother had to undergo a bypass surgery, he took her to Mount Sinai in the US.

But more recently, when she had to undergo the operation again, she chose Apollo Hospital in India and the anaesthetist turned out to be the same who treated her in the US. Jain is in India to launch berkshireinsurance .com — an online distribution of motor insurance and his foray into the retail market here. In an interview, Jain speaks about plans for India, Buffett’s succession plan and the impact of the Japanese earthquake.

It is impossible to find any news article on you without keying in the search words “likely successor” Is this likely to happen?

Warren’s talked about it and there is a process in place. There are four candidates and I have read that I am one of the four. It is fair to say that I work fairly closely with him. But we have got very good people. I know a lot of the names talked about. In fact, the person who is rumoured to be the likely candidate in the press-David Sokol-is somebody who I have the utmost respect for. I think he is a terrific guy to run the company.

If he is chosen , he would have 100% of my support. Not that anyone is asking me. And the key thing is Warren’s going strong. You have got to see from inside the company. He may be 20 years older than I am, but forget about mental energy, he has more physical energy than I do. If you forget about his age and look at his stamina and physical characteristics, 10 years is a given and in 10-years’ time, there will be a different crop of candidates.

How does it feel to be praised effusively by your chairman in every annual letter to shareholders?

I would feel a lot better if I deserved the comments I get. If I look at the 25-26 years I have been doing this, our unit has taken many intelligent but risky bets, especially if you are in the business that we are in, we have had more than our share of good luck.

Also, a lot of people don’t appreciate the reason why my job is as easy as it is and as fun as it is because we have a boss, we have a board and we have a company that can withstand a multi-billion-dollar loss without affecting how we do our business and without blaming any individual for a wrong decision. The other side of the equation that makes my job easier is that despite having all the capital, we have zero pressure to deploy the capital which is a huge tailwind. If I compare my job with CEOs of other reinsurance companies, the difference is that they are under pressure to deploy capital. So I can focus on the insurance business without having to worry about going into the capital issues.

What will be the impact of Japan on world insurance markets?

I spent a lot of time in London last week because of Japan before coming here. There seem to be two distinct points of view. People in the US seem to feel that it is going to be a much bigger loss to the insurance industry than people in the London market or the Lloyds market. As the dust settles, there is no question it is going to be huge economic loss. But in Japan, the sellers are so hypersensitive about earthquake risks that their prices are very high, and because the prices are so high, the take-up rate for earthquake risks is very low.

In the Kobe earthquake of ’95, out of a $100-billion economic loss, there was less than $3 billion insured loss. Earthquake insurance penetration has gone up since, and depending on who you talk to, they tell you it is between 10% and 20%. And then a lot of homeowners’ loss is with the Japanese government pool. The commercial activity is not very high in the affected areas.


So if you talk to people in London, they will tell you that loss to international reinsurance market is below $20 billion , which is a very manageable number given the way the industry is capitalized. If you talk to people in the US, they will tell you that the loss will be around $50 billion. I think one big wild card in this loss will be business interruption. The policy wording is very sloppy and there is no standard wording.

You can be a manufacturer in the US getting parts from Japan and your supply chain might get interrupted and in some cases depending on how broad your policy is, you might be able to pass on the loss to your insurance company. The general feeling is it is not that big a deal and international reinsurers are fairly relaxed about it.

Do you feel that business interruption claims could lead to a lot of disputes on whether the proximate cause of loss is earthquake or not...

The lawyers are going to get rich. I think there will be enough ambiguity in the policy wording that there will be some scope for reasonable people for disagreeing whether there is a valid claim or not.

What about business interruption due to radiation risks?

That’s another can of worms. Most policies do have a nuclear exclusion. But the more interesting question is what the proximate cause of the loss is. Is it earthquake and tsunami or is it nuclear radiation?

Will this lead to hardening?

A week ago, I would have said yes. Now I will say no. It goes back to whether this loss is going to be less than $20 billion or is it going to be $50 billion . If it is going to be less than $20 billion, there would not be a problem.

Is a corporate agency for online insurance distribution not a small business for Berkshire Hathaway’s entry to India? Are you looking for bigger opportunities in insurance?

I am very conscious that what Kara (Berkshire Hathaway Re’s vice-president Kara Raiguel, who is on the board of Berkshire Insurance India ), and I are doing is not going to have a great impact on the two of us. But we are doing it for our successors, so that years from now we are wellpositioned with a great brand and great product using a distribution channel which will only keep gaining ground.

When I started this, I had no illusion that this was not going to be big for us. Given India’s potential and given our commitment to the insurance business and the fact that we have seen something like Geico, which is a story that goes back 40-50 years but today is a crown jewel in the Berkshire Empire, we realize that it will be several years before Berkshire Insurance India becomes a meaningful business for us.

We would like to spread our wings in India. We have no preconceived notions on which direction it takes us. But at some point in the future , along some line of business , we hope to find opportunity where we can deploy meaningful chunks of capital and start taking risk on our own books rather than just distribution.


Do you have plans for investments other than insurance in India?

Rightly or wrongly we do not have an approach where we are looking for investment. It is more often people coming to us looking for capital. We have not come across a situation where it would be a winwin for both the person looking for capital and for us. But we would like to have a bigger presence in this country.

Our approach to India or other emerging markets is no different from the way we look at opportunities in the US. Unlike emerging market funds, which have a defined notion of when they want to exit, we like to buy businesses and hold them forever. Our preference is to buy a business on a 100% basis and run it forever. We aren’t looking at start-ups or turnarounds but at established businesses. Berkshire India is a first as a start-up and as a retail business in our division.

Most reinsurance companies have some presence here. Why has Berkshire stayed away?

We do have one person on the ground, former GIC chairman D Sengupta. In reinsurance unlike Swiss Re and Munich Re, which have a decentralized model, we tend to be very centralized in our decision-making . This gives us the flexibility to take decisions on big risks. There was a time in 2001-03 , when we were doing a lot of business in India. Then pricing came under lot of pressure following detariffing and a lot of competition.

The thing about the Indian market is that it does not aggregate with the developing world. India is hot and everybody wants to jump on to the bandwagon. Second, reinsurers have become hypersensitive about having a diversified portfolio. We tend to be very disciplined when it comes to pricing and hence we have not been able to be successful in competing in the reinsurance market. We would like to have a portfolio that is 10 times the size of our present portfolio but the constraint is pricing.

Your chairman Warren Buffett has said that Berkshire Re has made money by avoiding dumb decisions. But by doing wholesale business with reinsurers and insurers , don’t you merely follow their fortunes?

We do not follow the fortunes by and large. We will slice and dice the portfolio, so that we end up following the fortunes of a defined segment that we are comfortable with. For example, we have a reinsurance agreement with an international reinsurer where we don’t participate in their book across the board. But this reinsurer has expertise in the energy business, which is a volatile and capital intensive business—two factors that play in our favour because although we are publicly listed, we really run as if it is privately traded and we do not bother about quarterly earnings.

This client does not like the volatility, so we have teamed up with them to take the energy segment of their business as opposed to their whole book. There are also transactions, which we do with the expectation of underwriting losses because transactions generate a lot of float for us, which will generate income and which will more than make up for the loss.


You have been credited with raising the float for Berkshire Hathaway. Do you you price the ‘float’ ? Do you have to take a call on what returns you could possibly generate before pricing the transaction? Also , like other reinsurers do you ever return capital to shareholders if you feel prices are low?

(Laughs) Fortunately we have an investment manager who does a decent job. I don’t ever worry about what we can earn on the asset side. I look at the government securities yield curve and compare it with the float. But other than that, I don’t look at the asset side. All I do is take the cash and throw it into the black box in Omaha and hopefully, Uncle Warren keeps doing his magic with it.

Returning capital is a different issue. As a policy, Warren has been very clear, Berkshire has never paid a dividend and never bought back shares. The rationale for that is that he feels that we can do a better job of compounding money than handing money back to shareholders . Besides, there is a friction cost in terms of tax. If someone is looking for cash, they can always sell a fraction of the shares.