One of many classes from the 2025 Berkshire Hathaway Annual Assembly was that you just by no means know the place your subsequent funding concept will come from, so it is best to “flip each web page”. For instance, I wish to learn your complete transcript of the Q&A session (due to Regular Compounding) as an alternative of simply studying the WSJ or CNBC articles. Take this query and reply got here up from Ajit Jain, their head of insurance coverage:
Becky Fast: This query is from Peter Shen in New Jersey. It’s for Mr. Buffett and Mr. Jain. In recent times, massive non-public fairness companies like Blackstone, Apollo, and KKR have aggressively expanded into insurance coverage, elevating everlasting capital, managing float, and aiming to copy the mannequin that Berkshire pioneered a long time in the past. On condition that these companies are actually straight competing for insurance coverage property, typically utilizing increased leverage and extra aggressive funding methods, how do you view their affect on Berkshire’s insurance coverage operations and underwriting self-discipline? Do you imagine that the non-public fairness mannequin poses dangers to policyholders within the broad monetary system, and has this competitors made it more difficult for Berkshire to seek out and worth insurance coverage alternatives safely and profitably immediately?
Ajit Jain: A part of the query could be very simple. There’s no query the non-public fairness companies have come into the house, and we’re now not aggressive within the house. We used to do a good quantity on this house, however within the final 3-4 years, I don’t assume we’ve executed a single deal.
You need to separate this entire phase into two elements: the property casualty finish of the enterprise and the life finish of the enterprise. The non-public fairness companies you talked about are all very energetic within the life finish of the enterprise, not the property casualty finish.
You might be proper in figuring out the dangers these non-public fairness companies are taking up each by way of leverage and credit score threat. Whereas the financial system is doing nice and credit score spreads are low, these companies have taken the property from very conservative investments to ones the place they get much more return. So long as the financial system is nice and credit score spreads are low, they are going to earn cash – they’ll make some huge cash due to leverage.
Nonetheless, there may be at all times the hazard that in some unspecified time in the future the regulators would possibly get cranky and say they’re taking an excessive amount of threat on behalf of their policyholders, and that might finish in tears. We don’t just like the risk-reward that these conditions supply, and due to this fact we put up the white flag and mentioned we will’t compete on this phase proper now.
Mainly, Berkshire can’t compete in life insurance coverage proper now as a result of non-public fairness companies are flush with cash and are increasing into insurance coverage and competing very aggressively on charges. The one actual insurance-as-investment product that pursuits me (I do have time period life insurance coverage) are multi-year assured annuity (MYGAs), so I made a decision to verify the present charges.
Certain sufficient, a brand new title referred to as Knighthead Life is on the high of the charts at Blueprint Earnings. Their charges will fluctuate by state and funding quantity, however I noticed 7-year MYGAs at 6.80% and 5-year MYGAs at 6.55% (easy curiosity). Knighthead Life even has a comparatively stable A- score for monetary power from AM Finest. Normally, the highest charge shall be supplied by an insurer with a decrease B++ score.
Digging additional, we discover that personal fairness agency Knighthead Capital Administration/Knighthead Insurance coverage Group just lately accomplished a $550 million capital elevate, acquired Benefit Life Insurance coverage in January 2025, and rapidly rebranded it as Knighthead Life.
One other high MYGA supplier on the record, Revel One, was based in 1980 and purchased by non-public fairness agency Axar Capital in 2022.
I’m nonetheless attempting to maintain my investments easy, however these MYGA charges are a fairly important 2%+ unfold above present financial institution CD charges and Treasuries. They don’t seem to be straight comparable, however they’re comparable. MYGA are way more sophisticated and there are pitfalls to keep away from. Please do your personal analysis earlier than investing.
As well as, maybe this additionally makes it a superb time to buy time period life insurance coverage charges. I haven’t shopped round shortly. We received ours arrange at an affordable value earlier than having children and I’m at all times comfortable to know that it’s there for my household in the event that they want it.
I’m wondering if wanting again, it will have been a chance to benefit from the consumer-friendly charges ensuing from the present rush of cash into non-public fairness, or if the dangers of “increased leverage and extra aggressive funding methods” will ultimately create a disaster occasion if a few of these insurance coverage firms begin to fail. (How lengthy will that shiny A- score final?)