Warren Buffett's retreat from "volatile" catastrophic property damage reinsurance gets a spotlight in today's (Monday) Wall Street Journal.
Under the 5-column headline "Berkshire Tones Down Risky Business" (subscribers only) above the fold of the Money & Investing section, Scott Patterson notes that Berkshire Hathaway Reinsurance brought in premiums of $955 million last year for catastrophic and individual risk reinsurance.
That's down from $2.2 billion in 2006 and $1.6 billion in 2007.
The Journal points out that Berkshire's cash level is down to about $20 billion and the company may not want to risk being on the hook if this year's hurricane season is particularly nasty. "Its retreat ... 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."
And, in what looks to me like the most important factor, the WSJ points out that "prices for this type of insurance are lower than they were in 2006 and 2007, when Berkshire was writing far more policies." Companies are cutting back on insurance as they try to reduce costs in a difficult economic climate. Less demand for insurance translates into less demand for reinsurance, which means lower prices.
Buffett has often said that Berkshire is willing to take on big risks, but it won't write policies just to stay in the game. The price has to be right, and right now, it appears that isn't the case.
Current Berkshire stock prices:
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