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, Buff ett Pupil, Boosts Berkshire Cash as Succession Looms - Bloomberg

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/4/12, Buff ett Pupil, Boosts Berkshire Cash as Succession Looms - Bloomberg


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Jain, Buffett Pupil, Boosts Berkshire Cash as

Succession LoomsBy Rob Urban - July 11, 2006 00:00 EDT

July 11 (Bloomberg) -- As Ajit Jain was departing McKinsey & Co. two decades ago, he told a colleague he'd

be helping to oversee insurance at Warren Buffett's Berkshire Hathaway Inc. He said he knew little about the

business, yet was unconcerned.

Jain placed ads in industry publications, offering to take on risk from corporations and insurers for $1 million or
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more in annual premiums. The cash he has amassed -- $1.7 billion a year on average since 1998 -- has helped

make Jain a leading candidate among investors to be Buffett's successor.

``He said, `I think I'll take out some full-page ads that say, we'll consider any risk, send us your proposals,''' says

the colleague, John Parker, now a principal at the Chicago consulting firm Katzenbach Partners LLC. ``It was so

Buffett. Buffett basically built Berkshire by saying, `Send us your deals,' and then just answering the phone.''

Today, Jain, 54, speaks daily to Buffett, 75, Berkshire's chairman and chief executive officer. Buffett, the world's

second-richest man, fueled succession interest by pledging June 25 to donate Berkshire shares valued at about

$37 billion, or 85 percent of his stake in the company, to the Bill & Melinda Gates Foundation and four family

charities over time.

He said in March the board had planned for the possibility he may become incapacitated, choosing a successor

from among three `reasonably young'' top Berkshire executives.

`Very High Up'

He wouldn't identify the board's choice. Speculation among investors this year has focused mainly on Jain,

president of a Berkshire division that provides reinsurance -- insurance for insurance companies -- and DavidSokol, 49, CEO of Berkshire's MidAmerican Energy Holdings Co. Berkshire completed on March 21 a $5.1

billion purchase of Portland, Oregon-based PacifiCorp, a utility serving six Western states, and Buffett at the

time said Berkshire is seeking more utilities.

Investors also mention Joseph Brandon, 47, the chief executive of General Re Corp., another Berkshire

reinsurance unit; Richard Santulli, 61, who runs NetJets Inc., an operator of private jets; and Tony Nicely, 63,

CEO of the company's Geico Corp. car-insurance unit.

Jain, who was born in India and holds a master's in business administration from Harvard University in

Cambridge, Massachusetts, has been on investors' lists of potential successors the longest, says Tom Russo, a

partner at Gardner Russo & Gardner in Lancaster, Pennsylvania.

``He has probably personally overseen a commitment of more capital for Berkshire than anyone else over a very

long period of time,'' says Russo, who oversees about $3 billion, including Berkshire shares. ``For one whose

judgment is known to Warren over years of dialogue, he certainly has to be a person who is very high up in the

running.''

Sears Tower, Olympics

Jain specializes in so-called mega-catastrophe coverage, taking on risks rivals shun. He insured Chicago's SearsTower, North America's tallest building; the 2002 Winter Olympics in Salt Lake City after the terrorist attacks

on Sept. 11, 2001; slugger Alex Rodriguez's health after he signed the biggest contract in Major League Basebal

history in 2000 at $252 million over 10 years; and a sweepstakes by Purchase, New York-based PepsiCo Inc.

in which a contestant had a chance to win $1 billion.

``Berkshire has the ability to deal with sums of money that others are very reluctant to consider, and Ajit is

always involved,'' says Bob Hamman, 67, the chief executive officer of Dallas-based SCA Promotions, which

organized the Pepsi contests in 2002 and 2003.

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Based in Stamford, Connecticut, Jain's group of about 30 employees generated float, the pool of premiums

insurers invest before they need to pay out claims, of $16.23 billion as of 2005. That was more than double the

$6.69 billion from Berkshire's 20,417-employee Geico, the fourth-largest U.S. car insurer, according to

Berkshire's annual report.

Investing Proceeds

In 2005, Jain's businesses were responsible for $3.96 billion of the $22 billion in premium revenue generated by

Berkshire's entire insurance group. The previous year, Jain's businesses took in $3.7 billion of $21.1 billion for

the group, and in 2003, they collected $4.4 billion of $21.5 billion.

Jain's focus on generating revenue after joining Berkshire in 1986 is reflected in an ad he took out in the trade

publication Business Insurance that read:

``We are looking for more -- more casualty risks where the premium exceeds $1,000,000. The Berkshire

Hathaway Insurance Group currently has $2 billion in surplus -- that's right, $2 billion. And, because we retain

the entire risk ourselves, instead of laying it off in the uncertain world of reinsurers, we have the flexibility to

respond to your specific needs.''

Èxtraordinary Manager'

Investing the cash generated from his insurance business helped Buffett become second in wealth only to Bill

Gates, chairman of Microsoft Corp., the world's largest software maker. Buffett transformed a failing textile

manufacturer into a company with a market value of $140 billion by acquiring businesses he found to be

undervalued in industries ranging from insurance and utilities to candy-making and paint.

The shares of Omaha, Nebraska-based Berkshire Hathaway traded at about $15 when he took control in 1965

They closed at $91,000 yesterday.

Buffett's annual letters to shareholders contain praise for Jain. In his 2005 letter, Buffett called him an

`èxtraordinary manager.'' The year before he wrote that `Àjit's value to Berkshire is enormous.'' The year

before that he said, ` It's impossible to overstate his value to Berkshire.''

During a press conference on May 7 at this year's annual meeting in Omaha, Buffett said he would recommend

that his son Howard, 51, become chairman, helping the new CEO by serving as a ``double protector of the

culture.''

Daily Talks

In response to a journalist's question on whether Jain may be the choice for CEO, Buffett said he remains in

close touch with him and declined to comment on succession.

`Ì still do talk to him every day,'' Buffett said. ``That's how I get smarter.''

Jain declined to respond to comments in this article in an e-mail that revealed a self-deprecating sense of humor:

`Ìt is undoubtedly the case that any disappointment I have caused you by declining the interview is far less than

the disappointment I would have caused you by granting it.''

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ww.bloomberg.com/apps/news?pid=newsarchive&sid=aHlQC4xTby.8&ref er=us

Asked by a reporter at a June 6 insurance conference in New York whether he was interested in succeeding

Buffett, Jain paused several seconds before replying: ``I love my job.'' He then turned and strode toward the

escalator.

Jain prefers a low profile, says Parker, his former McKinsey colleague.

May Stay Put

``He's not an ego-driven guy who needs the limelight, he's very self-effacing,'' Parker says. ``We talked aboutthis and he said, `My approach to this is Berkshire is all about Warren and there's really no reason to talk to

somebody like me when they can talk to Warren.'''

While investors speculate on succession, Buffett may stay put for years, forcing the board to revise its list as new

executives emerge and others age. Buffett said in a filing with regulators on June 27 that he had ``no plan or

desire to step down'' as chairman and CEO.

As head of the reinsurance division of Berkshire's National Indemnity Co. unit, Jain has pioneered non-traditiona

insurance coverage such as finite risk that has been at the center of scrutiny by New York Attorney General Eliot

Spitzer and the U.S. Securities and Exchange Commission.

Accounting Treatment

In its simplest forms, finite risk reinsurance is financing for insurers who have known losses they want to

postpone recording. The accounting treatment for the policies helps insurers smooth earnings and boost

policyholders' surplus, which regulators say encourages companies to misclassify low-cost loans as finite even

when there isn't enough risk transferred.

Australia's Prudential Regulation Authority, while investigating the 2001 collapse of Sydney-based HIH

Insurance Ltd., examined a finite risk policy Jain negotiated in 1998, according to Buffett. He said regulators hadcanceled the policy without mentioning Jain or National Indemnity.

Regulators said HIH used improper reinsurance contracts to conceal its liability from claims and wrote side

agreements that limited or eliminated the amount of risk transferred to reinsurers. Jain had refused to take part in

any side agreement, Buffett said at a May 2005 press conference.

``I have 100 percent confidence in what Ajit does,'' Buffett said at the conference during Berkshire Hathaway's

annual shareholders meeting. `There is nobody at Berkshire Hathaway that I would have more confidence in

than Ajit.''

Buffett's Confidence

Regulators have also scrutinized Brandon's General Re in the past year. The SEC notified Brandon in September

that he may be sued in connection with General Re's role in alleged earnings manipulation at American

International Group Inc.

Two reinsurance transactions in 2000 and 2001 between General Re and AIG are at the center of inquiries by

regulators and U.S. prosecutors. Three former executives of General Re, including Brandon's predecessor,

Ronald Ferguson, and a former AIG executive pleaded not guilty in February 2006 to criminal charges stemming

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from the investigation. Last year, two former General Re executives pleaded guilty in the case.

Buffett said after this year's annual shareholder meeting in Omaha that the General Re inquiry hadn't put Brandon

in the ``penalty box'' and declined to comment on whether Brandon may be the board's choice as successor.

Brandon and the other potential internal successors -- Sokol, Nicely and Santulli -- declined to comment.

Watching the Cards

Jain fits into the ``Berkshire family,'' mingling with investors at the company's annual weekend meetings and sittingat bridge tables with attendees, says Frank Betz, who manages $100 million at Warren, New Jersey-based

Carret Zane Capital Management LLC. Jain remembers every card played, even as he chats amiably with other

players.

``He's not going to miss anything going on in a room, never mind the people he's playing bridge with,'' Betz says.

``The first time I met him it was very brief, we chatted a minute or two. And then a year later I saw him and he

gave me a big hello, and even remembered my name.''

Bridge is part of the culture for Berkshire executives, investors and customers. Hamman, whose sweepstakes

program was reinsured by Berkshire, was the No. 1 ranked player by the World Bridge Federation as recentlyas 2003. Buffett plays with Jain as well as Gates, who serves on Berkshire's board.

India to Harvard

Born in 1951, Jain was raised in India's coastal province of Orissa. His family name comes from the religious

sect he follows, known as Jainism. He graduated from the Indian Institute of Technology at Kharagpur in 1972

with an undergraduate degree in engineering.

Even then he showed Buffett-like qualities, says Ronojoy Dutta, a friend and former classmate of Jain's at IIT

who was president of Chicago-based UAL Corp.'s United Airlines from 1999 to 2002.

Dutta says he's not surprised that investors mention Jain, with whom he still speaks every couple of weeks, as a

potential Buffett successor.

`Ìt's natural,'' Dutta says. ``He has an uncanny ability to cut to the core of the matter. People will be throwing

extraneous facts in but he has this uncanny ability of saying, `Wait. The real issue is this.' That's his greatest

strength.''

Jain and Dutta didn't take their studies as seriously as their classmates, Dutta says. They spent hours discussing

economics, sociology and the Vietnam War. Often they would debate through the night, with Jain taking it all in,then staking out his position and quietly shredding competing arguments, Dutta says.

`Class Clowns'

`Àjit and Rono were like class clowns in our mechanical engineering class,'' says classmate Vijay Trehan, 56,

now a senior technical consultant in Nashua, New Hampshire, for Hewlett-Packard Co. `Ì was first in my class.

However, looking at what we have all accomplished, the lesson has to be that `not taking life too seriously' is

definitely the way to go.''

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10/1ww.bloomberg.com/apps/news?pid=newsarchive&sid=aHlQC4xTby.8&ref er=us

Jain worked for International Business Machines Corp. in India from 1973 to 1976 before moving to the U.S.,

where he earned his MBA in 1978 and joined McKinsey, according to ``The Warren Buffett CEO, Secrets

from the Berkshire Hathaway Managers,'' by Robert P. Miles (John Wiley & Sons Inc., 2003, $16.95).

He returned to India three years later and, after a monthlong courtship, married a bride chosen by his parents

who also was a member of the Jain sect. He went back to the U.S. to work for McKinsey.

`Ì probably wouldn't have come back but for the fact when I was in India I'd gotten married, and even though

I'd gotten the Western World out of my system, my wife hadn't,'' Miles quotes Jain in the book, which chronicles

Berkshire managers.

A former McKinsey colleague recruited Jain to Berkshire in 1986. At Berkshire, Jain quickly gained Buffett's

respect.

Àvoiding Dumb Decisions'

`Ì have known the details of almost every policy that Ajit has written since he came with us in 1986,'' Buffett

wrote in March 2002, in his letter accompanying Berkshire's annual report. ``His extraordinary discipline, of

course, does not eliminate losses; it does, however, prevent foolish losses. And that's the key: Just as is the casein investing, insurers produce outstanding long-term results primarily by avoiding dumb decisions, rather than by

making brilliant ones.''

Buffett's admiration of Jain's underwriting discipline places him on any list of potential successors, says David

Winters, who manages $400 million at Wintergreen Advisers LLC in Mountain Lakes, New Jersey.

``He's been an incredible asset to the Berkshire shareholders over the years,'' says Winters, who has held

Berkshire stock for his own account for more than a decade. ``The guy's got a very seriously capable insurance

brain. So he would certainly be on most people's lists.''

To contact the reporter on this story: Rob Urban in New [email protected]

To contact the editor responsible for this story: Helen Stock at [email protected]; Paul Horvitz at

[email protected]

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