Warren Buffett: U.S. catastrophe rates too low for Berkshire Hathaway

Warren Buffett, chairman of diversified investment, insurance and reinsurance firm Berkshire Hathaway, said yesterday that his firm has pulled back from U.S. catastrophe reinsurance business as the rates are no longer attractive.

Warren Buffett was being interviewed by CNBC for its Squawkbox programme yesterda, Friday 14th March, when he said that Berkshire Hathaway has pulled back on its U.S. catastrophe re/insurance business as the rates are no longer felt to be commensurate with the risks.

Premiums have now fallen too far for Berkshire Hathaway to continue deploying its capacity into U.S. catastrophe premiums which is a clear sign that the well-capitalised traditional insurance and reinsurance market, combined with continued inflows and interest from capital markets investors, has truly disrupted incumbents.

When Buffett talks about catastrophe insurance at Berkshire Hathaway he is typically also referring to catastrophe reinsurance, as when speaking he generally does not distinguish between the two. Both Berkshire Hathaway and GenRe have been gradually pulling back on insuring and reinsuring U.S. property catastrophe premiums for a number of years, but Buffett said yesterday that U.S. catastrophe exposure has been all but eliminated from the groups underwriting.

Buffett explained to CNBC; “We actually in the United States have almost eliminated our catastrophe insurance business.”

Like other global reinsurance companies Berkshire Hathaway has shifted its property catastrophe focus to other regions where rates are felt to be more commensurate with the levels of risk assumed. Buffett commented; “We’ve written quite a bit over in Asia.”

Of course that shift of focus from Berkshire Hathaway, one of the largest pools of underwriting capital in the world, at the same time as other global reinsurers are looking to expand to compensate for declining rates in mature markets does mean competition in regions like Asia will increase too.

As traditional reinsurance capital looks to regions like Asia, to compensate for lost premium income in markets like the U.S., it increases the likelihood of further drops in renewal rates in the region at the April renewals.

While pricing and premiums on U.S. catastrophe reinsurance business have declined Buffett does not feel that the risk of suffering losses have declined, suggesting he no longer finds the market appealing at current rates.

Buffett said; “The rates came down dramatically and we do not regard the exposures as having come down dramatically. So we’re not writing that business.”

Of course the capital markets are still finding U.S. catastrophe reinsurance premiums still attractive, as are many traditional reinsurers, but for Buffett with his strategy of investing his premium float more actively it is important to maintain a certain level of return.

Buffett’s Berkshire Hathaway placed more focus on specialty insurance and reinsurance business in 2013, with the launch of Berkshire Hathaway Specialty Insurance taking it firmly into the U.S. commercial P&C space. This strategy, of diversifying to avoid declining rates, is one now being attempted by many other insurers and reinsurers.

So has the continued convergence of reinsurance and capital markets, which has seen billions of dollars of new capacity flow into the space from third-party investors, pushed one of its biggest competitors out of a key market entirely? Perhaps for now.

But, while Warren Buffett doesn’t like the return on U.S. property catastrophe insurance and reinsurance business right now, he and his team at Berkshire Hathaway will be watching the market closely and will be ready to come back into the U.S. catastrophe market at the first sign of opportunities to secure better rates.

So if the U.S. hurricane season brings landfalls from severe storms in 2014, it’s likely that Berkshire Hathaway would be one of the first back to replenish lost underwriting capacity in the region. Of course Buffett may not have that all his own way as the capital markets and third-party reinsurance capital will be right alongside him competing for any new opportunities that emerge after a loss event.

That could mean that rates do not climb significantly after the next major U.S. hurricane loss event. In fact with so much capital markets money said to be poised to come into the catastrophe reinsurance space after a loss perhaps Warren Buffett won’t ever find U.S. catastrophe business attractive again. Or perhaps Buffett will be forced to reassess his risk and reward metrics for U.S. catastrophe business.

Read our article on Warren Buffett and Berkshire Hathaway’s thoughts on investing reinsurance float.