By Nick Fisher, Portfolio Manager
Buffett was on CNBC yesterday (8/30/17) discussing the tragic disaster in Houston. Naturally, he was asked about Berkshire Hathaway's reinsurance exposure and his comments highlight the idea he espouses, "Be fearful when others are greedy."
“We used to write a lot of what we call super cat policies [super catastrophe policies are insurance for insurance companies when there are huge natural disasters], in fact we were the biggest writer of super cat some years ago, and then they didn’t have any hurricanes for a long time. Matter a fact its been 10 or 11 years since a hurricane hit land in the United States and you can go back to 1840 and there really hasn’t been a period that long without a hurricane coming to shore. So the rates kept coming down and down and down…the wind doesn’t know what the rates are…if you get the wrong rates on a policy you are going to lose money over time and so as the rates went down we got out of the super cat business pretty much entirely so it doesn’t hit us big in re-insurance like it would have 10 years ago.”
I'd be willing to bet that very few reinsurance companies will be writing super cat policies next month because they are too busy licking their wounds from underwriting losses from Harvey. Because many smaller insurance companies still need reinsurance, rates on super cat policies will rise and Berkshire Hathaway will be glad to write policies once again at an underwriting profit.