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Over the weekend, Warren Buffett and his team hosted some 40,000 people in Omaha for Berkshire Hathaway's annual shareholder meeting. And during the event the 94-year-old announced that he would be retiring at the end of the year. This is after 55 years as CEO, which makes him the longest-serving chief executive of an S&P 500 company.
What a run. Thanks for all the wisdom that you have shared over the years, Warren. In honor of this milestone, I decided to go back and reread his last shareholder letter (which was published back in February). His comments on the insurance industry are particularly interesting, and naturally relevant to real estate.
Over the decades, Warren has talked a lot about the benefits of owning insurance companies, namely the "money-up-front, loss-payments-later" model. It creates a "float" of cash that can be invested in the interim. But the flip side of this benefit is that it can sometimes conceal a shitty business.
As a business, if you have to pay your costs up front before you sell your products or services, then it's pretty easy to determine if you're not making any money. But in insurance, there's a long-tail of liabilities that can be far more insidious and that may not appear for many years, or even decades according to Warren.
There's also climate change bringing more uncertainty:
In general, property-casualty (“P/C”) insurance pricing strengthened during 2024, reflecting a major increase in damage from convective storms. Climate change may have been announcing its arrival. However, no “monster” event occurred during 2024. Someday, any day, a truly staggering insurance loss will occur – and there is no guarantee that there will be only one per annum.
Think back only 135 years when the world had no autos, trucks or airplanes. Now there are 300 million vehicles in the U.S. alone, a massive fleet causing huge damage daily. Property damage arising from hurricanes, tornadoes and wildfires is massive, growing and increasingly unpredictable in their patterns and eventual costs.
In a perverse way, all of this is good for the insurance business. More economic risk means higher premiums and a greater overall need for insurance products. But you have to accurately underwrite this risk:
Properly pricing P/C insurance is part art, part science and is definitely not a business for optimists. Mike Goldberg, the Berkshire executive who recruited Ajit, said it best: “We want our underwriters to daily come to work nervous, but not paralyzed.”
This reminds me. I was speaking with one of our insurance advisors a few years ago and he made a comment that he was going to be "on risk for the project." I responded by half-jokingly saying "it's funny, you see only risk, and I see an opportunity to create something special for the city." Both of us then laughed, but there's obviously some truth to these two perspectives.
I guess I chose the right profession.
Cover photo by Chris Nguyen on Unsplash
Among other things, insurance companies now use aerial photography, combined with AI, to better assess property-level risk. Here's an excerpt from Bloomberg Green:
“Weather and catastrophe losses are running ahead of the ability to manage them, and many insurers are having trouble sustaining their business because they’re not getting the right rates,” said Jay Guin, chief research officer of the extreme event solutions team at Verisk, a catastrophe modeling firm. “AI changes the equation.”
Zurich Insurance Group AG, one of the largest insurers in Europe, uses AI powered risk-modeling software to assess catastrophe risk and often tweaks it for its own purpose.
“If there’s fire hazard like vegetation, overhang or debris in your backyard that shouldn’t be there, we can tell you to lower the risk otherwise we may not be able to underwrite you,” said Ericson Chan, chief information and digital officer of the Swiss company.
What AI allows is a level of granularity that just wasn't possible when humans were the ones who had to do it. Insurers now talk about "continuous remote risk monitoring," meaning they can use AI-powered aerial imagery to constantly check on that risky debris in your backyard.
This feels like quite an improvement for the insurance industry. But when you more accurately price risk, I would imagine that it will lead to more insurers deciding to stay clear of certain risks and certain properties, as has already been the case in places like California.
Building things, as we all know, is a risky endeavor. I think of myself as an optimist, but the reality is that there are countless things that can go wrong. There's approvals risk, political risk, market risk, construction risk, design risk, and many other kinds of risk, some/many of which will be entirely unforeseen. If you asked me two years ago, I wouldn't have listed pandemic risk as being all that high up on the list.
So one way to think about the process of building/developing is that it is an exercise in risk mitigation. This makes it sound a lot less sexy than "city building." Given this, there can be a natural and understandable tendency to want to repeat what worked the last time around. Why make a change and introduce more risk into the system if you don't have to, right? This is arguably one of the reasons why it is often said that the real state industry isn't all that innovative. Too busy managing risk.
To give a specific example, let’s say you’re really focused on managing design risk. In this case, you might make the decision to always work with the same architect. This way you can establish a set of typical approaches and a standard spec. You know how to work together and you know what you're getting when it comes to working drawings. Rinse and repeat as best you can.
There is also something to be said about a kind of product-driven or branded approach to development. In this case you want some consistency to help build a specific brand and experience. And just because you’re using the same firm, doesn’t necessarily mean you can’t innovate and be design forward. This is what great architects do. Think Foster + Partners and Apple. Their stores are powerful brand symbols but also wonderful and highly site specific.
An alternative approach might be to continually use different (design) architects. And maybe partnering with an array of celebrated firms is part of your brand story. You introduce a certain degree of design risk because you’re now trying out and building new relationships, but you could perhaps argue that you’re mitigating other risks. Does using a brand name architect help to reduce market risk, for example? In some markets, it’s almost essential.
I don’t think there’s a right or wrong approach here. Use the same firm, or don’t. Use international starchitects, or don’t. The point is simply that development is fraught with risks that need to be managed. Design is one of many. How you choose to do that depends on what you’re trying to do and what you’re after.
Over the weekend, Warren Buffett and his team hosted some 40,000 people in Omaha for Berkshire Hathaway's annual shareholder meeting. And during the event the 94-year-old announced that he would be retiring at the end of the year. This is after 55 years as CEO, which makes him the longest-serving chief executive of an S&P 500 company.
What a run. Thanks for all the wisdom that you have shared over the years, Warren. In honor of this milestone, I decided to go back and reread his last shareholder letter (which was published back in February). His comments on the insurance industry are particularly interesting, and naturally relevant to real estate.
Over the decades, Warren has talked a lot about the benefits of owning insurance companies, namely the "money-up-front, loss-payments-later" model. It creates a "float" of cash that can be invested in the interim. But the flip side of this benefit is that it can sometimes conceal a shitty business.
As a business, if you have to pay your costs up front before you sell your products or services, then it's pretty easy to determine if you're not making any money. But in insurance, there's a long-tail of liabilities that can be far more insidious and that may not appear for many years, or even decades according to Warren.
There's also climate change bringing more uncertainty:
In general, property-casualty (“P/C”) insurance pricing strengthened during 2024, reflecting a major increase in damage from convective storms. Climate change may have been announcing its arrival. However, no “monster” event occurred during 2024. Someday, any day, a truly staggering insurance loss will occur – and there is no guarantee that there will be only one per annum.
Think back only 135 years when the world had no autos, trucks or airplanes. Now there are 300 million vehicles in the U.S. alone, a massive fleet causing huge damage daily. Property damage arising from hurricanes, tornadoes and wildfires is massive, growing and increasingly unpredictable in their patterns and eventual costs.
In a perverse way, all of this is good for the insurance business. More economic risk means higher premiums and a greater overall need for insurance products. But you have to accurately underwrite this risk:
Properly pricing P/C insurance is part art, part science and is definitely not a business for optimists. Mike Goldberg, the Berkshire executive who recruited Ajit, said it best: “We want our underwriters to daily come to work nervous, but not paralyzed.”
This reminds me. I was speaking with one of our insurance advisors a few years ago and he made a comment that he was going to be "on risk for the project." I responded by half-jokingly saying "it's funny, you see only risk, and I see an opportunity to create something special for the city." Both of us then laughed, but there's obviously some truth to these two perspectives.
I guess I chose the right profession.
Cover photo by Chris Nguyen on Unsplash
Among other things, insurance companies now use aerial photography, combined with AI, to better assess property-level risk. Here's an excerpt from Bloomberg Green:
“Weather and catastrophe losses are running ahead of the ability to manage them, and many insurers are having trouble sustaining their business because they’re not getting the right rates,” said Jay Guin, chief research officer of the extreme event solutions team at Verisk, a catastrophe modeling firm. “AI changes the equation.”
Zurich Insurance Group AG, one of the largest insurers in Europe, uses AI powered risk-modeling software to assess catastrophe risk and often tweaks it for its own purpose.
“If there’s fire hazard like vegetation, overhang or debris in your backyard that shouldn’t be there, we can tell you to lower the risk otherwise we may not be able to underwrite you,” said Ericson Chan, chief information and digital officer of the Swiss company.
What AI allows is a level of granularity that just wasn't possible when humans were the ones who had to do it. Insurers now talk about "continuous remote risk monitoring," meaning they can use AI-powered aerial imagery to constantly check on that risky debris in your backyard.
This feels like quite an improvement for the insurance industry. But when you more accurately price risk, I would imagine that it will lead to more insurers deciding to stay clear of certain risks and certain properties, as has already been the case in places like California.
Building things, as we all know, is a risky endeavor. I think of myself as an optimist, but the reality is that there are countless things that can go wrong. There's approvals risk, political risk, market risk, construction risk, design risk, and many other kinds of risk, some/many of which will be entirely unforeseen. If you asked me two years ago, I wouldn't have listed pandemic risk as being all that high up on the list.
So one way to think about the process of building/developing is that it is an exercise in risk mitigation. This makes it sound a lot less sexy than "city building." Given this, there can be a natural and understandable tendency to want to repeat what worked the last time around. Why make a change and introduce more risk into the system if you don't have to, right? This is arguably one of the reasons why it is often said that the real state industry isn't all that innovative. Too busy managing risk.
To give a specific example, let’s say you’re really focused on managing design risk. In this case, you might make the decision to always work with the same architect. This way you can establish a set of typical approaches and a standard spec. You know how to work together and you know what you're getting when it comes to working drawings. Rinse and repeat as best you can.
There is also something to be said about a kind of product-driven or branded approach to development. In this case you want some consistency to help build a specific brand and experience. And just because you’re using the same firm, doesn’t necessarily mean you can’t innovate and be design forward. This is what great architects do. Think Foster + Partners and Apple. Their stores are powerful brand symbols but also wonderful and highly site specific.
An alternative approach might be to continually use different (design) architects. And maybe partnering with an array of celebrated firms is part of your brand story. You introduce a certain degree of design risk because you’re now trying out and building new relationships, but you could perhaps argue that you’re mitigating other risks. Does using a brand name architect help to reduce market risk, for example? In some markets, it’s almost essential.
I don’t think there’s a right or wrong approach here. Use the same firm, or don’t. Use international starchitects, or don’t. The point is simply that development is fraught with risks that need to be managed. Design is one of many. How you choose to do that depends on what you’re trying to do and what you’re after.
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