Friday, April 23, 2010

Insurance: Catastrophe! Travelers Reports- '“Weather had a big impact on our results,”' (TRV)

The stock is trading at $53.18, down 61 cents.
Bloomberg brought home the headline quote from TRV's CEO.
When we posted "Berkshire Hathaway's "Buffett Picks Insurer Cooperation Over Competition " (BRK-B; BRK-A)" on Feb 26 I said:
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 an El Nino/Southern Oscillation, I'll post the latest NOAA advisory after the headline story....
The question of course was:
Why is Mr. Buffett buying equity in reinsurers rather than writing the business himself?
The quick and dirty answer is: He likes to get paid for the risk.

As the May 1 BRK annual meeting appraoches I'll be posting snippets of Mr. Buffet's thinking on the insurance/reinsurance business. For right now take my word for the fact that the insurers are not getting paid for the risk they are assuming. That's why I headlined our April 19 post "Hurricane Watch: Thinking of Shorting the Property/Casualty Insurance Companies (AIG; ALL; BRK.B; CB; HIG; TRV)"

I'll leave this introduction with a quote from Berkshire's 2002 annual report. We arrive on the scene just as Warren and Charlie realize they just bought a big 'ol derivatives book and must reduce the risk:
...But closing down a derivatives business is easier said than done. It will be a great many years before we are totally out of this operation (though we reduce our exposure daily).

In fact, the reinsurance and derivatives businesses are similar:
Like Hell, both are easy to enter and almost impossible to exit. In either industry, once you write a contract – which may require a large payment decades later – you are usually stuck with it. True, there are methods by which the risk can be laid off with others. But most strategies of that kind leave you with residual liability.

Another commonality of reinsurance and derivatives is that both generate reported earnings that are often wildly overstated. That’s true because today’s earnings are in a significant way based on estimates whose inaccuracy may not be exposed for many years....

Here's Bloomberg on Travelers travails:

Travelers Profit Declines 2.3% on Catastrophe Costs (Update3)

Travelers Cos., the property insurer added to the Dow Jones Industrial Average last year, said first-quarter profit dropped 2.3 percent as the cost of catastrophe claims increased more than fivefold.

Net income fell to $647 million, or $1.25 a share, from $662 million, or $1.11, in the same period a year earlier, the New York-based insurer said today in a statement. Operating income, which excludes some investment results, was $1.22 a share, missing the $1.38 average estimate of 19 analysts surveyed by Bloomberg.

Travelers, led by Chief Executive Officer Jay Fishman, 57, is competing for business with Chubb Corp. and American International Group Inc. as demand for commercial coverage drops and industry rates decline. At the same time, insurers face claims from first-quarter catastrophe damage including record rainfall in the U.S. Northeast.

“Weather had a big impact on our results,” said Brian MacLean, chief operating officer, in a conference call today. Travelers faced “a very active catastrophe quarter.”...

...‘A Terrific Bite’

Travelers has increased prices for renewing commercial policies to protect revenue as businesses cut jobs and worksites, reducing the need for coverage. Industrywide, U.S. property and casualty insurance sales dropped the most in five decades last year, according to the Property Casualty Insurers Association of America. Policy sales fell 3.7 percent to $419 billion, a third straight annual decline.

“The recession cut into many of the drivers of premium, things like retail sales, payrolls, the number of autos that get sold,” said Michael Murray, an assistant vice president for financial analysis at Verisk Analytics Inc. who collaborated on the study. “The recession took a terrific bite out of the demand for insurance.”...MORE


Insurance: "Chubb Profit Gains 36% to $464 Million on Investments" (CB)

Where are the Catastrophe Bond Issuances? (BRK.B; BRK.B)

"Reinsurance Industry Approaches Record Levels" (BRK-B; BRK-A)

This is just a bookmark for a piece I had promised and not delivered, divining the insurance industry's thinking on global warming.
I put Berkshire in the title because in addition to being the world's third largest reinsurer they recently upped their stake in #1 ranked* Munich Re to 7.99%.

Berkshire Hathaway also owns 3% of Swiss Re and has 3Billion Swiss francs worth of some yummy 12% notes, convertible at 25CHF i.e. 120Mil. shares, current outstanding 354Mil.; last trade 52.35 CHF.

*Munich Re and Swiss Re have swapped the #1 ranking the last few years. We'll have the final 2009 tally by June.
See also:
Jan. 6 "Berkshire Hathaway’s Swiss Re Investment Pays Off (BRK.A; SWCEY)"

Feb. 26 "Berkshire Hathaway's "Buffett Picks Insurer Cooperation Over Competition " (BRK-B; BRK-A)"

Mar. 5 "Insurance: "El Nino dissipating, but may linger through 2010" (BRK-A; BRK-B)":
Place your bets.
Partly because of the ENSO/Southern Oscillation and partly because of the PDO and Arctic Oscillation we had one February tornado this year, an EF0, reported at 445 PM on 27 February. That follows a hurricane season with no U.S. landfalls....
Mar. 9 "Insurance: " Record warmth in Atlantic Main Development Region for hurricanes" (BRK-A; BRK-B)"

Mar. 10 "No Surprise: Chile Leads to Reinsurance Rate Increase Debate" BRK-A; BRK-B"':
No kidding.
A brisk breeze gets the boys in Omaha, Zurich, Munich and London (Lloyds) talking about premium increases.
Not to mention the herverzekering crowd in Amsterdam, they're tough bastards....