Buffett’s Berkshire Hathaway investment float builds despite $3bn cat loss

Despite a catastrophe loss bill of around $3 billion from recent hurricanes Harvey, Irma and Maria, as well as the Mexico earthquakes, Warren Buffett’s insurance and reinsurance businesses at Berkshire Hathaway continued to contribute to a growing pot of investment float, leaving the firm with even more excess capital.

In fact, Berkshire Hathaway now has a stunning $113 billion of investment float, a figure that has jumped by 24% since the end of 2016 when the firm’s investment float sat at just $91 billion.

The insurance and reinsurance businesses are responsible for significant growth in investment float at Berkshire Hathaway, money that Warren Buffett puts to work in his investment strategies and acquisitions.

But it’s also cash that could be diverted back to help with underwriting, if Buffett saw opportunities, a threat to anyone’s hopes for significantly higher pricing in the wake of third-quarter 2017 catastrophe losses.

Analysts at Morgan Stanley have estimated that Berkshire Hathaway has excess capital of around $60 billion, a figure that has likely grown in the last few months given the continued increase in investment float.

At the moment, deploying that excess capital into its insurance and reinsurance capacity pools may not be the most attractive thing that Buffett can do with the cash, but it’s a constant threat to re/insurers that hope for a return to the steep price increases of the past, as Berkshire could dampen these very quickly on its own.

The threat of Berkshire Hathaway deciding that now is the time to upsize on its underwriting has always been real for re/insurers, especially as the investment-oriented approach of the firm means that its capacity can be considered more efficient than many traditional players, which could help it to undercut the competition.

In the past Warren Buffett’s view that catastrophe business is underpriced has always been cited as evidence that the firm wouldn’t push more deeply into that market. But suffering $3 billion of catastrophe losses across its insurance and reinsurance book shows that the firm holds plenty of cat risk in its business anyway and is already therefore influencing the market’s supply of capacity.

The more deeply you look into insurance and reinsurance markets, the more excess capacity you observe.

At this time, the world’s largest insurers and reinsurers, Berkshire Hathaway included, will all be looking for higher rates to compensate them for recent catastrophe losses. But these same companies continue to accumulate capital, some of which they return to shareholders (as Swiss Re is doing), or in the case of Buffett they invest it for greater profit.

Should ceding companies be paying higher prices when the re/insurance business continues to generate large sums of capital for the major players? Despite many companies stating that reinsurance pricing is too low, the fact they remain profitable and can continue to return capital suggests that pricing may be nearer to “right” than they think.

Market forces, the fungibility of available capital or capacity, and risk-related factors should dictate pricing. The fact we continue to see an excess of capital in the sector suggests price rises may disappoint some at the upcoming January renewals.