WALL STREET JOURNAL: Berkshire Tones Down Risky Business

By SCOTT PATTERSON

BUSINESS

JULY 13, 2009

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.

Mr. Buffett and Ajit Jain, his chief reinsurance lieutenant, declined to comment.

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.

Warren Buffett

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.

A factor behind Berkshire's stance could be a game plan to improve its credit rating. In April, Moody's Investors Service lowered Berkshire's long-term issuer rating, a gauge of its ability to meet long-term commitments, to Aa2 from its top Aaa rating, citing the economic downturn and big stock-market decline that pounded Berkshire's investment portfolio.

In its credit opinion, Moody's also cited the potential volatility of Berkshire's "catastrophe-exposed business." Berkshire is a major investor in Moody's Corp., parent of the ratings group.

It is not clear how if at all the pullback will affect Berkshire's earnings. Messrs. Buffett and Jain might be finding better opportunities elsewhere, notes Morningstar analyst Bill Bergman. If so, that could offset the decline in premiums from the property catastrophe side of the ledger.

Another reason Berkshire could be holding back is that prices for this type of insurance are lower than they were in 2006 and 2007, when Berkshire was writing far more policies. While premiums for hurricane coverage are up, prices for other forms of catastrophe coverage, such as earthquake reinsurance, have been relatively flat, says Bryon Ehrhart, chief executive of insurance advisory service Aon Benfield Analytics, who also has noted the pullback by Berkshire. Struggling companies have cut back on insurance, in turn leading to less demand for reinsurance.

Given concerns about its ratings, Berkshire might need to see far more attractive pricing to be enticed.

If Berkshire's finances improve, in part thanks to an improved stock market, that could reenergize its approach to the business.

A higher book value and a rising cash stockpile could eventually lead to a reinstatement of Berkshire's Aaa rating, though Moody's isn't likely to reverse itself soon.

If and when Berkshire wins back a higher rating, that could pave the way for the company to move aggressively back into the property catastrophe market.

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