Berkshire sharply cuts cat capacity

[dual_bid]

Berkshire Hathaway Inc. has drastically reduced its property catastrophe reinsurance capacity because of concerns that large losses could lead to liquidity problems or put more pressure on its ratings, sources say.

 

http://www.businessinsurance.com/article/20090628/ISSUE01/306289986

[woodstove]

Thanks - nice find.  The "what" seems probable, but perhaps the "why" is just the article author's guess.

Ajit Jain did not comment, it appears.

 

I wonder if pricing is not appealing, vs risk, given lots of liquidity thrown into financial system past 12 months.

 

Wind risk does not seem unusually higher - curious about that.  But I would think municipal and state govts

having problems paying their fire and police and other services, might increase other types of property risk.

And anything long tail is subject to risk of inflation in settlement amounts, lots more claims hitting maxima.

[Parsad]

What are they talking about...that BHRG cut capacity in the 2nd Q?  In the 1st Q, revenues at BHRG were up three fold, so I don't understand exactly what they are referring to.  Cheers!

[WideMoat]

The article doesn't pass the smell test for me; the sensational headline is not confirmed by the (seemingly speculative) testimonies.

 

Quote #1:

"Berkshire Hathaway “effectively pulled out of the property cat market in June and July. They're keeping their powder dry,” said John Daum, New York-based executive director of Lockton Re, a unit of Kansas City, Mo.-based Lockton Cos."

 

Response:

This could be prices and not unusual.

 

Quote #2:

"“Pretty much the sentiment within Berkshire...is not to have any catastrophic claims, particularly for the wind peril. We really saw them withdraw fairly significantly out of the wind-exposed cat business,” he said."

 

Response:

Wind-exposed cat business is likely only a small portion of their whole reinsurance business; thus reducing exposure there would not justify the title and opening sentence.

 

Quote #3:

"Berkshire “doesn't want to have any volatility built into their earnings this year” in the interest of capital and ratings preservation, he said."

 

Response: This runs directly contrary to Buffett's repeated public comments.  Volatility is desired; ratings matter little (they still have two top ratings); they have lots of capital and lots of ways to raise more quickly.

 

Quote #4:"Rod Fox, chief executive officer of intermediary TigerRisk Partners in Greenwich, Conn., said: “My understanding is, with their Swiss Re transaction, and their balance sheet, that they have cut back their cat capacity, but I think they will still write some business for clients.”"

 

Response: I don't buy it.  Berkshire would not pass up profitable insurance business merely because of a preferred stock holding in an insurance company.  Completely separate issues.

 

Quote #5: "Joseph M. Fedor, executive vp of intermediary US Re Group in New York, said the principal reason for the withdrawal is “they supported the cat market mostly because they had a large amount of liquidity in the past, and that has shrunk.”

 

In addition, “they probably feel that the primary rates are under pressure, therefore the reinsurance rates are going to come under pressure,” he said."

 

Response: True--they have less capital, but Buffett would get more if profitable business were out there.  The second half of the quote sounds correct.  If prices are soft, then Berkshire would write less business.

 

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This strikes me as slipshod, sensationalist journalism.  Perhaps Berkshire is conserving capital for ratings, but these quotes are not nearly enough to show it.

[mpauls]

I don't know about this one. While they may have "withdrawn or reduced capacity" all this really says is that they transferred capital from one of many insurance businesses to another of Berkshire's operations.  This could be another insurer, another operating business, or they could be in the process making a new acquisition.  Furthermore, the last time I checked, Berkshire's larger insurers could cut their capacity by between 1/3 to 1/2 and still write the same amount of business as they did last year.     

[kcbar]

Buffett mentioned at the annual meeting that they were writing less Cat insurance due to lower pricing.