Tuesday, May 4, 2010

"Buffett: Berkshire Has Some Exposure to Large Natural Disasters" and "Buffett Says He Has 100,000 Shares of Berkshire Rival Munich Re" (BRK.A; BRK.B)

Continuing the insurance theme.
I am intrigued as all get out by Berkshire's decision to invest in competitors rather than write business with their surplus, as pointed out in the second story below and elsewhere.*
From MarketBeat:

When Warren Buffett talks about insurance, you’d be wise to listen. Insurance lies at the heart of Berkshire Hathaway’s money-generating machine.

In response to a question, Buffett addressed Berkshire Hathaway’s exposure to natural catastrophes, a highly relevant question in a year that has seen several large natural disasters.

Buffett said Berkshire will have some exposure to the February earthquake in Chile, in part through its investment in Swiss Re’s property and casualty business (Berkshire agreed to assume 20% of Swiss Re’s P&C biz for several years). The 8.8 magnitude earthquake as “one of the most powerful quakes in recorded history,” Swiss Re said in a press report.

Swiss Re estimated that insured losses, broadly, could reach $4 billion to $7 billion....

From Bloomberg:

Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc., said he personally owns 100,000 shares of German reinsurer Munich Re, a Berkshire competitor.

Buffett, 79, discussed the investment today at a press conference in Omaha, Nebraska, a day after the annual meeting of Berkshire shareholders.

Berkshire had more than $4.5 billion invested as of February in Munich Re and Swiss Reinsurance Co., the only two firms it trails in the reinsurance market. Buffett chose 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....

*From Feb. 26 and April 23:

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

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....