Warren Buffett’s Berkshire Hathaway Inc. is willing to sell more insurance for natural disasters after pulling back on catastrophe coverage earlier this year when excess capital became tight.
Berkshire loosened self-imposed curbs after the Omaha, Nebraska-based company said last week it returned to profitability in the second quarter. Buffett and his insurance lieutenant, Ajit Jain, may still be constrained by falling prices for catastrophe coverage, the firm said in a filing.
Buffett said in 2007 he was willing to lose as much as $6 billion in a single “super-catastrophe” as long as Berkshire was paid adequately for the risk. Meeting that threshold became harder as U.S. property rates for businesses declined for 12 straight quarters, according to data from a survey by the Council of Insurance Agents and Brokers.
“Insurance industry pricing right now is just brutal, so Berkshire is exercising some restraint,” said Justin Fuller, a partner at Midway Capital Research & Management who runs the buffettologist.com Web site. “Everybody else is paying lip service to the idea of trying to raise prices, but the economy is so bad that they’re trying to hold on to whatever they can.”
Jain’s insurance unit takes on large and unusual risks, agreeing to back baseball player Alex Rodriguez’s contract, the potential cancellation of a college basketball tournament, and a possible payout of $1 billion in a contest sponsored by PepsiCo Inc. The firm also sells coverage on hurricanes, earthquakes and other disasters, both to individual companies and to insurers looking to reduce their portion of risk.
Earning a Profit
Berkshire swung to a profit in the second quarter after a first-quarter loss, its first since 2001, and reported an 11 percent increase in book value. The benchmark measures assets minus liabilities.
“Due to the restoration of net worth that occurred during the second quarter, management’s willingness to write large catastrophe risks has increased, but to date rates have not warranted such writing,” Berkshire said in the regulatory filing.
Berkshire added customers after the record damage of Hurricane Katrina in 2005 caused insurance rates to jump, and then dialed back its coverage in the U.S. Gulf Coast when the prices came back down.
Berkshire declined to renew an agreement this year with the state of Florida’s disaster fund under the terms that earned the firm $224 million in 2008. Berkshire had agreed to buy $4 billion of 30-year bonds from Florida if a severe storm hit that year to help the state meet its insurance obligations.
Ike, Gustav
Both primary insurers and reinsurance firms lost some of their ability to back new policies last year after Hurricanes Ike and Gustav struck the Gulf Coast, contributing to $25.2 billion in disaster claims, the most since the record storm season of 2005, an industry group said in January.
Berkshire’s move to cut back on disaster coverage earlier this year coincided with a decline in the value of the company’s holdings amid the first-quarter slump in equity markets.
“When it comes to the super-catastrophe insurance that Ajit Jain is so masterful at pricing, I know that they probably have their own sense of how much risk they can take relative to their balance sheet strength,” said Julius Ridgway, a financial adviser at Medley & Brown in Jackson, Mississippi, which owns Berkshire shares. “A decline in book value changes that equation.”
Rate Increases
As investment losses constrained the industry’s capacity, cost-saving moves by customers reduced premium revenue by a record 3.6 percent in the first quarter. More than 20 percent of businesses whose coverage was arranged by broker Marsh Inc., a unit of Marsh & McLennan Cos., altered their policies to reduce costs in the first half of the year, according to a presentation by the company.
Companies with property in disaster-prone regions such as Florida and the Gulf Coast reported increases between 5 percent and 20 percent, depending on how much of their business was located in catastrophe zones, Marsh said.
Aon Benfield, the reinsurance unit of broker Aon Corp., said in a report last month that U.S. catastrophe reinsurance prices at midyear were up 10 percent to 15 percent. The reinsurance increase was less than some reinsurers hoped, said Bijan Moazami, an analyst with FBR Capital Markets, in a research note July 17.
“The market didn’t move the way everyone had expected,” said Richard Kerr, chief executive officer of MarketScout, whose Dallas-based firm tracks commercial insurance rates. “Berkshire isn’t the only one on the sidelines, hoping to force rates up, but anyone who chooses not to play risks losing market share.”
