Berkshire Move Alters Succession Debate

While we were surprised to see wide-moat

While we've long noted that General Re and BHRG have the luxury of walking away from business when pricing is bad (without making cuts to their operations), we've also noted that there are limits to how long that might be the case. With the company seeing reinsurance as probably unattractive for another decade, it makes sense to have Jain oversee Berkshire's entire operation, especially if there are duplicate efforts that can be streamlined. That's not to say that we expect to see major cuts in these operations, but with Jain overseeing both General Re and BHRG, the firm should be able to continue focusing on profitability over growth, which is what an insurer should be doing in a poor pricing environment.

With Jain's responsibilities expanding beyond BHRG to include General Re and Berkshire's foray into specialty insurance, we're not sure what to think about his availability as Berkshire's next CEO. As insurance is still such a complex and integral part of Berkshire's operations, we think it makes more sense for Jain to stay put and for Greg Abel, who has had more experience with mergers and acquisitions and operations during his time running Berkshire Hathaway Energy, to fill the CEO role once Warren Buffett leaves the scene.

Montross has been chairman and CEO of General Re since April 2008. He took over from Joseph Brandon, who resigned under a cloud of suspicion following the prosecution of one former AIG executive and four former General Re executives, including Ronald Ferguson, whom Brandon had succeeded. The prosecuted executives had participated in a transaction that allowed AIG to fraudulently boost its reserve coverage in 2000-01. Much like David Sokol, who also resigned under a cloud of suspicion in 2011 (after it was discovered that he had purchased shares of Lubrizol prior to recommending the specialty chemical company to Buffett as a potential acquisition target for Berkshire), Brandon had been viewed as a potential successor to Buffett before General Re was caught up in the fraud and conspiracy charges leveled by federal prosecutors. While his ascension to the top job may be viewed by some as a battlefield promotion, Montross has been with General Re since the late 1970s, starting as a casualty facultative underwriter. He went on to hold numerous positions in the United States and internationally before being promoted to chief underwriter for General Re's treaty reinsurance business in 1992. By 2001, he had become a member of the company's executive committee and was elevated to the job of president and chief underwriting officer, working closely with Brandon to rapidly correct the serious underwriting issues that cost Berkshire operating income and raised the cost associated with its float. Montross' knowledge of the business, as well as his success at getting General Re back to its roots of conservative and disciplined underwriting, made him the natural candidate to step in when Brandon was asked to leave in 2008. Although Montross is only 60, we hadn't considered him to be a frontrunner to replace Buffett as the head of Berkshire Hathaway. That's not to say that he doesn't have the qualifications; it's just that we believe the whole affair with AIG left a bad taste in Buffett's mouth, and naming Montross as his successor would dredge up all of the old headlines and suspicion tied to that transition in leadership at General Re. By the time the AIG scandal reached its pinnacle, with the jury returning convictions in February 2008, Buffett had already earned a reputation as being tough when it came to manager integrity, noting the following before a House subcommittee that was looking into the wrongdoing at Salomon Brothers in 1991: "Lose money for the firm and I will be understanding. Lose a shred of reputation for the firm and I will be ruthless." Unfortunately, he went out of his way to publicly praise both Brandon and Montross in Berkshire's 2007 annual letter to shareholders, which was released at the end of February 2008, noting that "thanks to Joe Brandon, General Re's CEO, and his partner, Tad Montross, the luster of the company has been restored." Less than two months later, with Berkshire under pressure from federal prosecutors, who could have pursued General Re for corporate criminal liability (which would have damaged the reinsurer's reputation even further), Brandon resigned as chairman and CEO. While the convictions were ultimately overturned on appeal, it was too late for Brandon. Despite being a great manager who returned Berkshire to its roots of conservative and disciplined underwriting, he had to fall on his own sword. While we believe Montross is a great manager in his own regard, we think everything that has gone on at General Re during the past 15 years potentially relegated him to second-tier status. It also didn't help that one of his main competitors for the top job was Jain, who has headed BHRG since it was first formed under the umbrella of National Indemnity Company in the mid-1980s and received bountiful praise from both Buffett and Charlie Munger over the years. We often wonder if Buffett and Munger don't do this intentionally, just to see how each of the managers they highlight performs under the microscope that is put on them after being publicly praised by the duo. Jain is an old hand at this, having been trotted out for accolades for much of the past two decades, and for good reason. From a standing start in 1985, he has created an insurance business with $42.5 billion in float that has generated $79.4 billion in earned premiums and a combined ratio of 93.6% on average during the past decade. This is fairly impressive for any insurance business, let alone a reinsurer. As Buffett so eloquently put it, Jain has succeeded where others may not have because he has "the intelligence to properly rate most risks, the realism to forget about those he can't evaluate, the courage to write huge policies when the premium is appropriate, and the discipline to reject even the smallest risk when the premium is inadequate." If Berkshire's next CEO is expected to do nothing more than act as a caretaker for the business, tending to the needs of the managers who run all of the different subsidiaries, overseeing the actions of the investment managers who handle the company's investment portfolio, and dealing with the capital-allocation decisions and critical risk assessments that need to be made in any given year, then we could not think of a better candidate within Berkshire than Jain. Not only does he understand risk (across a wide range of industries) better than just about anyone else at Berkshire, but Buffett has admitted on countless occasions that Jain has "probably made a lot more money" for the firm than Buffett has over the nearly three decades that he has been with Berkshire. While Jain's experience has primarily been on the underwriting side of the business, his success there has been built on his ability to avoid making "dumb decisions" rather than making "brilliant" ones--attributes that have kept him in good stead with Buffett over the years. The only problem with Jain is that he has been on the record several times saying that he does not want the top job, one of the main reasons there continues to be speculation about other potential candidates for the CEO role at Berkshire. Another is his involvement with Berkshire Hathaway Specialty Insurance, which he spearheaded and is now overseeing (given the lack of more lucrative opportunities on the reinsurance side of the business). While we firmly believe that Jain's name is the first name on the list of candidates that Berkshire's board of directors has in front of them to replace Buffett (once that becomes a necessity), we think the odds of him taking the top job are 50/50. The case against Jain is that he is a very private person who would feel uncomfortable under the spotlight that would come not just with running Berkshire but in following in the footsteps of the Oracle of Omaha. While he is generally regarded to be "smart, good-natured, and quick at cutting to the essence of complicated business matters," he has forgone the "usual raft of consultants, modelers and lawyers that are involved in insurance transactions" and has not been involved in any merger and acquisition activity outside of the bolt-on deals done to build up Berkshire's insurance operations. At 64, Jain is also older than either BHE's Abel (53) and BNSF's Matt Rose (57), which some believe may be an impediment to his getting the top job, especially given Buffett's more recent comments that the company's next "CEO should be relatively young, so that he or she can have a long run in the job." We're not all that convinced by the latter arguments, but do agree that the spotlight that will come with the top job at Berkshire may be enough to keep Jain from taking it.