Election Results: Before getting into today’s topic, I wanted to release the results of the Best CEO vote! Your winner is actually not quite a CEO. His official title is Vice Chairman of Insurance at Berkshire Hathaway.
That’s right your winner is Ajit Jain! Ajit has successfully managed the largest (and most trusted) insurance balance sheet in the world, capable of being the “only one left standing” the day after a nuclear attack. Ajit has successfully used the heft of his balance sheet and his technical acumen to write risks nobody else can write and is willing to write difficult risks when everyone else is too afraid to do so.
He has been responsible for generating so much of the float that Warren Buffett has successfully invested to grow Berkshire. Congratulations to Ajit, though I suspect he is far less interested in this honor than any of the other nominees might be.
I don’t want to reveal who finished where but I will say it was a fairly close three way race. You can see below the distribution of the votes. Note that five individuals received over 3/4 of the total.
Year End Earnings Forecast
OK, on to today’s main topic. As year end earnings results start to get released, I wanted to make a brief prediction.
There will be some meaningful negative surprises due to adverse development or higher accident year loss picks (or both!).
Why do I suggest this? Human nature!
Look, it’s been a light cat year (especially if you didn’t have wildfire losses) with favorable investment returns. Capital levels are robust and earnings are set to top the high end of CEO payout ratios.
What does that mean? It means companies will look to refill the cookie jar. If you can sock away some reserves and still ensure a maximum bonus payout, why wouldn’t you do that?
Sure, your stock may go down for a quarter, but that’s actually kind of good too. Why? New options awards come in a month or two. CEOs want the stock price to be a little lower so they benefit from any recovery rally. The worst time to get new options is after the stock has had a big run!
So all the incentives are to have a weaker quarter at year end. I’m not suggesting large, shocking charges. There may be one or two of those but nobody wants to put their stock in the penalty box if they don’t have to.
But if you can reduce your amount of reserve releases by half? Done! Swing from slight positive development to slight negative? Acceptable. Raise your loss ratio pick a point for the full year? Go for it!
You can think of these moves as the CEO taking out insurance on 2026 earnings. Given they still max out 2025 comp, the cost of the “policy” is effectively zero, and they give themselves more margin for unexpected events in the coming year.
For those in admitted lines, this is even more appealing as it makes it easier to resist any calls for rate reductions. “But Dear Regulator, didn’t you see our loss pick for 25 is worse than 24? We’re already giving back ‘excess profit’.”
Now, some of you will claim I am being unfair and surely companies wouldn’t brazenly manipulate their earnings like this. To which I say, you obviously haven’t met too many insurance CEOs! Maybe they’ll prove me wrong, but I suspect otherwise.