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