Friday, February 26, 2010

Berkshire Hathaway's "Buffett Picks Insurer Cooperation Over Competition " (BRK-B; BRK-A)

This is worth keeping an eye on. After a hurricane season with no U.S Atlantic or Gulf landfalls catastrophe bonds scored big and the reinsurers pocketed a bunch of premiums. The state of Florida's decision to self-insure also worked out.

This year may not have as favorable a El Nino/Southern Oscillation, I'll post the latest NOAA advisory after the headline story.
From Bloomberg:
Warren Buffett, who cut back sales of protection to insurers because prices were too low, is betting on a rate increase by investing in the only two firms to write more reinsurance than his Berkshire Hathaway Inc.

Buffett has more than $4.5 billion invested in Munich Re and Swiss Reinsurance Co., choosing to put Berkshire’s cash in two companies that account for more than a third of the global market instead of using the money to compete against them. Had Buffett, as Berkshire’s chairman and chief executive officer, directed a part of that capital to his own underwriters, he could have pushed down the price of coverage, analysts said.

“This is a move to increase that exposure without disrupting the pricing,” said Craig Fehr of Edward Jones & Co., who has a “hold” rating on Omaha, Nebraska-based Berkshire’s stock. “It’s likely a reflection of the fact there aren’t an abundance of opportunities to write new business.”

Buffett’s biggest takeovers in the last decade have boosted Berkshire’s energy and freight businesses, reducing his company’s reliance on insurance. Two years ago, he warned of an industry slump after underwriting results slipped from a record. “That party is over,” Buffett wrote in his 2007 letter to investors, and Berkshire’s underwriting profits have since slipped about 60 percent.

Appetite for Risk

The 2009 letter is scheduled to be released tomorrow with fourth-quarter results. Meyer Shields, an analyst with Stifel Nicolaus & Co., expects Berkshire to post net income of $1,354 a share, compared with $76 in the year-earlier period, according to Bloomberg data. Berkshire stock has risen 23 percent since the end of 2008 as Buffett purchased railroad Burlington Northern Santa Fe for about $27 billion in his largest takeover.

Berkshire, which sells protection through General Re and Berkshire Hathaway Reinsurance Group, scaled back on the coverage of large risks to conserve capital in the first half of last year. The company said in August it had recovered its appetite for new business, while adding it would wait to increase sales until prices improved.

“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 a regulatory filing.

Catastrophe Coverage

The price for catastrophe reinsurance fell for the third time in four years when insurers renegotiated their annual contracts on Jan. 1, according to Guy Carpenter & Co., a unit of brokerage Marsh & McLennan Cos. Prices typically fall when the economy declines, as companies have less to insure. Rates also slide when an increase in industry capital gives carriers the capacity to sell more protection than the market needs.

Reinsurer capital rose in 2009 as stock and bond market rallies boosted investments and the quietest Atlantic storm season in more than a decade reduced claims costs. In 2008, catastrophes including Hurricanes Ike and Gustav cost property insurers $52.5 billion worldwide, according to a Swiss Re study.

“We’ve seen a global easing of rates in the reinsurance market,” said Bryon Ehrhart, CEO of Aon Benfield Analytics, the reinsurance arm of Aon Corp., the world’s largest insurance broker. “There’s never been more capital in the reinsurance business than there is now.">>>MORE

From NOAA's National Center for Environmental Prediction:

issued by
4 February 2010

ENSO Alert System Status: El Niño Advisory

Synopsis: El Niño is expected to continue at least into the Northern Hemisphere spring 2010.

A significant El Niño persisted throughout the equatorial Pacific Ocean during January 2010 (Fig. 1). Although sea surface temperature (SST) departures in the Niño-3.4 region decreased to +1.2oC in late January, SSTs continued to be sufficiently warm to support deep tropical convection (Fig. 2 and Fig. 3). Over the last several months, a series of oceanic Kelvin waves contributed to the build-up of heat content anomalies in the central and eastern Pacific (Fig. 4). The latest Kelvin wave was associated with temperature departures exceeding +2oC down to 150m depth across the eastern half of the equatorial Pacific (Fig. 5). Equatorial convection over the central Pacific remained enhanced during the month, while convection over Indonesia exhibited considerable week-to-week variability. While the low-level winds have been variable, low-level westerly and upper-level easterly wind anomalies generally prevailed during January. Collectively, these oceanic and atmospheric anomalies reflect a strong and mature El Niño episode.

Nearly all models predict decreasing SST anomalies in the Niño-3.4 region through 2010, and model spread increases at longer lead times (Fig. 6). Nearly half of the models indicate the 3-month Niño-3.4 SST anomaly will drop below +0.5oC around April-May-June 2010, indicating a transition to ENSO-neutral conditions during Northern Hemisphere spring. However, predicting the timing of this transition is highly uncertain.

El Niño impacts are expected to last into the Northern Hemisphere spring, even as equatorial SST departures decrease, partly due to the typical warming that occurs between now and April/May (Fig. 3). Expected impacts during February-April 2010 include drier-than-average conditions over Indonesia and enhanced convection over the central equatorial Pacific Ocean, which will likely expand eastward and influence portions of the eastern tropical Pacific, as well as coastal sections of Peru and Ecuador. For the contiguous United States, potential El Niño impacts include above-average precipitation for the southern tier of the country, with below-average precipitation in the Pacific Northwest and Ohio Valley. Below-average snowfall and above-average temperatures are most likely across the northern tier of states (excluding New England), while below-average temperatures are favored for the south-central and southeastern states....