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We recently attended the Berkshire Hathaway annual meeting in Omaha where succession was a key topic given the age of Buffett and the recent passing of Charlie Munger. Ajit Jain, Vice-Chairman of insurance operations, joined Buffett and his appointed successor, Greg Abel, on stage for half of the meeting. Ajit runs the insurance business at Berkshire which is its most important business. The insurance operation not only provides Berkshire with a large float to invest (currently $168 billion), but it has also contributed an average of $1.5 billion in underwriting profit over the last 10 years. As pointed out in the article, Berkshire has produced an underwriting profit in 18 of the last 20 years. This is a remarkable feat for an industry that in aggregate usually loses money in underwriting and makes its return on float. We have been pondering what happens to the crucial insurance operation if Ajit leaves or passes. While still young by Berkshire standards at 72, it is an important question. We believe the key advantages in Berkshire’s insurance division are its risk discipline and its fortress balance sheet. When the insurance market is soft and not providing enough premiums to compensate for risk, Berkshire has tended to significantly cut back underwriting. By contrast, when premiums are adequate as they were for CAT reinsurance in Florida last year, Berkshire will act in a big way (it made a multi-billion profit on its Florida contracts last year). Furthermore, Berkshire tends to favor re-insurance risk more as exposures to risks under these contracts are capped (think about the open-ended liability of being a monoline P&C insurer in Florida when a large hurricane hits for instance). While Ajit will be hard to replace, the culture of risk management is well ingrained at Berkshire, making us more comfortable that results will be good when Ajit (and Warren) are no longer there.

A recent study by The National Association of College and University Business Officers (NACUBO) provides an insightful view of the evolution of university endowment investment policies over the past 50 years. When surveyed initially in 1974, the 136 endowments that participated in the study were categorized into three broad investment approaches: total return, balanced, and income-oriented. Today, nearly every endowment follows what is dubbed the "Swensenian" model, which pays homage to Yale's late endowment chief David Swensen who advocated a heavy emphasis on alternative assets. When Swensen assumed his position at Yale in 1987, US universities allocated on average less than ~2% of their investments to alternatives. Nowadays, over 55% of endowment portfolios are comprised of alternatives, with private equity and hedge funds together accounting for ~23%. Has such a profound change led to better results? Hardly according to Richard Ennis a “doyen of institutional investor performance measurement and analysis” per FT. “Ennis found that the average US university endowment underperformed a blended benchmark in 12 of the past 15 years, for an average annualized relative loss of 0.9%.” It is worth noting that the benchmarks Ennis used are all liquid thus leaving us to ponder about an attending premium for the illiquidity of many of these alternatives. We suspect that the conventional wisdom regarding the new endowment model might be challenged as institutions increasingly look for liquidity to fund obligations in this new interest rate environment.