In his annual letter to Berkshire Hathaway shareholders, the Sage of Omaha Warren Buffett explains that his insurance and reinsurance companies are ready to take advantage of a market turn or dislocation.
Not only is Berkshire Hathaway ready to take advantage of any turn, due to its enormous cash piles, Buffett also thinks his company will be better positioned than other re/insurers, who he expects to be in “disarray.”
Buffett began by explaining that; “Berkshire is far more conservative in avoiding risk than most large insurers,” which is something he has always maintained and that has been largely shown to be true in its results.
“For example, if the insurance industry should experience a $250 billion loss from some mega-catastrophe – a loss about triple anything it has ever experienced – Berkshire as a whole would likely record a large profit for the year,” he said.
Which he’s maintained for many years, as Berkshire Hathaway by taking the diversified conglomerate approach and leveraging the investment float to take stakes in companies has consistently delivered shareholder value.
While having enough diversity so that major reinsurance losses would not wipe out its total profits, in the same way it would for a traditional reinsurance group.
“Our many streams of non-insurance earnings would see to that,” he explained.
Berkshire Hathaway has the ‘dry powder’ to then come back into the market in an even bigger way, giving it an ability to commit capacity much more quickly than some traditional reinsurance business models would be able to after really large losses hit the industry.
“We would remain awash in cash and be eager to write business in an insurance market that might well be in disarray,” wrote Buffett, adding that, “Meanwhile, other major insurers and reinsurers would be swimming in red ink, if not facing insolvency.”
Buffett and Berkshire Hathaway’s reinsurance chief Ajit Jain have been conservative, in some of the more pressured reinsurance lines of business and markets.
“Our premium volume is generally constrained for most property/casualty reinsurance coverages as rates, in our view, are generally inadequate,” he said.
However, Berkshire Hathaway’s reinsurance unit has the “Capacity and desire to write more business when appropriate pricing can be attained,” the 2016 annual report says.
The other Berkshire reinsurance unit, General Re is also navigating the softness both in commercial insurance and reinsurance markets.
“Insurance industry capacity remains high and price competition in most property/casualty reinsurance markets persists. We continue to decline business when we believe prices are inadequate,” the company insists.
But should there be a market turn GenRe too is primed, “We remain prepared to write substantially more business when appropriate prices can be attained.”
When the market turns, even if not anywhere near as much as it has historically due to the expectation of the reinsurance cycle being much flatter now thanks to the availability of both traditional and alternative capital, Buffett and Berkshire Hathaway are ready to commit to giving their clients consistency, while upsizing their stake in the industry.
Alongside the expectation of more capacity flowing in from capital markets at any sign of a turn, this should concern some traditional reinsurers who may not have dry powder after losses without the not insignificant task of raising it which the traditional model may not support as swiftly.
