Buffett, the incomparable simplifier of arcane financial concepts, explained the reinsurance game with a streetwise candor befitting a Brooklyn bookie: "We receive a modest premium, face the possibility of a huge loss, and get good odds."
Those "modest" premiums add up, providing Buffett with the enormous pool of virtually no-cost liquid capital that lets him make cash offers for whole companies within fifteen minutes (or so he often boasts) of getting an asking price. The losses he risks in exchange for this rare privilege aren't just huge, however; they're monumental. And the good odds are merely that—good odds. It's hard to exaggerate the nerve involved here. Instead of the thousands of short-term fears faced by lesser investors—stock X will fall on disappointing earnings news; stock Y will stagnate owing to flattening sales; the market itself will plummet on rumors of war—Buffett faces a vast and long-term terror: the mega-cat of mega-cats, whatever it might prove to be. Although Gen Re reserves plenty of money for rainy days, its owner has written that "there is nothing symmetrical about surprises in the insurance business."
All of which raises an inevitable question: Who insures the reinsurer? Jehovah?
On September 11, 2001, the question was answered: No one does. Buffett was hosting a golf tournament in Omaha when the mega-cat hit Manhattan. According to someone who was at the tournament, a top officer at a major bank, the magnates and CEOs out on the course first panicked about the act of terrorism and then began fretting about the possibility of insulting Buffett by leaving early and rushing home. The source wouldn't talk about Buffett's own demeanor, but left the impression that he remained composed—at least in comparison with his guests.
In his 2001 letter Buffett was still composed, despite having suffered, through Gen Re, a healthy portion of the largest loss in the history of the insurance industry. He wrote that he had "overlooked" the possibility that the next mega-cat would be man-made, and he scolded himself as an underwriter for "focusing on experience, rather than exposure." Buffett's superbly impersonal formulation describes a universal human weakness—our blockheaded blindness to the unfamiliar—that he needn't have apologized for sharing. Still, it was sporting of him to do so, considering that most people don't earn billions of dollars by estimating the likelihood of mega-cats.
Buffett went on in the letter to analyze the probability of an attack—nuclear, biological, or chemical—large enough to bankrupt the insurance industry and, as a consequence, Berkshire and himself. The risk was low, he asserted, but it was rising, and in any event it would never reach zero. "The best the nation can achieve is a series of stalemates," he concluded. He called on the government to absorb the risk of what might be a trillion-dollar loss, and he warned the public that unless this happened, it was on its own. "Fear may recede with time," he wrote, "but the danger won't." He summed up by telling Berkshire's shareholders that the company was in a better position than most firms to survive another such catastrophe.
He added, in what could be his epitaph: "At Berkshire, we retain our risks and depend on no one."
No wonder he doesn't cower before tornadoes. No wonder his mere presence in a political campaign is enough to inspire voters' confidence. And no wonder he can speak humorously and simply about delusional securities markets, scandalous accounting practices, corrupt corporate management structures, and other troublesome topics that his peers would rather not discuss at all and that the press can only shriek about. No wonder he seems so calm, so cool, so dry, so patient, so fluent, and so darn … reassuring.
It's Warren Buffett versus the apocalypse, and until the apocalypse arrives (he understands the odds; he probably calculates them in his sleep), the charming old gambler can afford to kid around.