In 2004 four hurricanes struck Florida and the Gulf Coast.  In 2005, Hurricane Katrina devastated New Orleans.  Insurance losses were high as a result of these storms, and capital levels declined.  What’s more, predictions of several years of elevated Hurricane activity were running high—experts called this phenomenon a “multi-decadal oscillation.”  This just means that they believe the probability of more hurricanes making landfall was higher. As a result, rates on catastrophe insurance policies in Florida and the Gulf Coast were very high in 2006 and 2007.

Not surprisingly, Berkshire Hathaway (BRK-B) increased its catastrophe business in each of these years, garnering more premiums for less risk.  And as luck—or mother nature—would have it, both 2006 and 2007 were quiet years for hurricanes, and Berkshire cleaned up, minting profits in its catastrophe reinsurance unit.  In 2008, prices began to fall, and as such, Berkshire pulled back on its “cat” writings.  However, 2008 was again a relatively quiet hurricane season and Berkshire’s insurance units did quite well.

Now, in 2009, with the financial hurricane that hit last year, Berkshire pulled back its capital in some of its traditional “cat” reinsurance businesses, as it had allocated capital more to its investment portfolio where securities prices fell dramatically last year compared to the long-term value of some of them.  Even better than only being able to plant these investment seeds this last year, though, 2009 has been an extremely quiet year for the traditional type of hurricanes too.  As such, despite Berkshire having less “cat” exposure than it has in years past, it will likely see higher profits in its reinsurance businesses when it reports third quarter results.

These additional profits will continue to help build Berkshire’s capital base, potentially making it easier for Chairman Warren Buffett to make either more investments or to have Berkshire’s reinsurance guru, Ajit Jain, possibly increase Berkshire’s insurance exposure if he deems prices to be appropriate.

While I hope this gives you a glimpse into Berkshire’s third quarter earnings due out soon, there is also a lesson to be learned here as well.  Buffett has written over and over again that to be both a good investor and great insurance company one has to “be greedy when others are fearful, and fearful when others are greedy.”  Here is yet another example of Berkshire doing what it says it will do, treading in waters that others fear, and making handsome profits for shareholders because of it.

You might also be interested to know that I recently made an appearance on Fox Business News, which I have linked here.

I welcome dialogue with my readers so please do send me any questions or comments you may have.

Justin

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The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business.  This content is intended solely for the entertainment of the reader, and the author.