Slabbed Daily July 13: Presidential Daily Briefing Edition

There is a good and topical insurance news story today that caught my attention, especially since it relates to a post I did on the recently released National Association of Insurance Commissioners whitepaper on their recommendations for a national response to the problems related to availability and affordability of catastrophic property and casualty insurance. In that white paper the Commishes reported there was plenty of private market capital available to back the risks. Of course I think the Commishes are all wet on their conclusions and for some backing on that assertion I offer one of our favorite insurance people here on slabbed in support of my conclusions, Mr Warren Buffet himself. The Wall Street Journal (subscription required) has the story:

Berkshire Hathaway’s reinsurance business, a big profit center for the diversified company, has pulled back from one of the more volatile corners of the reinsurance market: catastrophic property damage.

In recent years, Berkshire Hathaway Reinsurance Group made a push into the profitable business, in essence writing insurance for other insurers that wished to offload some exposure to big losses like hurricane damage. Just a few years ago, Berkshire pulled in $2.2 billion in premiums on a year that saw no major storms.

But recently, Berkshire has become more cash-constrained. Its retreat in “cat” reinsurance suggests it has become more risk averse amid a recent downgrade to its credit rating, a series of hits to Berkshire’s bottom line and ongoing turmoil in the economy.

In May, at the company’s annual meeting in Omaha, Neb., Berkshire Chairman Warren Buffett said the company is “doing less natural risk in terms of hurricanes because…we don’t have as much excess capital as we had a couple years ago.” At the end of the first quarter, Berkshire had slightly less than $20 billion in cash, its lowest level in years.

The crucial midyear renewals period for catastrophe insurance policies in June and early July demonstrated Berkshire’s curtailed presence, market participants say.

“It’s apparent that they’ve reduced their property-cat exposure,” said James Kent, executive vice president at Willis Re, the reinsurance unit of Willis Group Holdings Ltd………

Cat policies are risky for insurers, which can be on the hook for billions if a catastrophe like Hurricane Katrina hits. And these events are impossible to predict. But Mr. Buffett has said he believes Berkshire gets well paid for taking that risk.

Earlier in this decade, Messrs. Buffett and Jain leveraged the conglomerate’s top-shelf credit ratings and vast cash hoard to become a major player in the market.

“If prices seem appropriate…we continue to have both the ability and the appetite to be the largest writer of mega-cat coverage in the world,” Mr. Buffett wrote in his annual letter to shareholders in 2006.

Over the last two years, Berkshire continued to be a player, but the market for reinsurance softened, contributing to a decline in the premiums the company took in.

In 2008, Berkshire Hathaway Reinsurance pulled in $955 million in premiums in catastrophe and individual risk reinsurance, down from $1.6 billion in 2007 and $2.2 billion in 2006. That year, the amount Berkshire could command for reinsurance surged following Hurricanes Katrina and Rita in 2005.

This year, due to Berkshire’s changing risk posture, the decline is expected to be the biggest yet, analysts say.


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