Man Without Qualities

Monday, September 12, 2005

Big Loser In New Orleans: Closer To Mr. Big?

Insurance claims from hurricane Katrina may top $60 billion. Those claims, of course, are generally passed on to reinsurance companies, of which the insured party (consumer) has no knowledge or contact. But it is the reinsurance companies who bear the ultimate loss.

Who are the big reinsurance losers from Hurricane Katrina? The American media have been curiously uninformative. Perhaps they don't know. There are some reports, such as this note that Standard & Poor's is putting some insurers on its watch list. But, more interestingly, the British newspaper, the Guardian, has this to report:
Insurance companies with the highest exposure are thought to be Munich Re, Swiss Re, AIG and Berkshire Hathaway, run by legendary US investor Warren Buffett.
There is reason to expect that exposure at General Re from Katrina may be big. In 2004 third quarter Berkshire-Hathaway results included after-tax losses of about $816 million from the much less destructive Florida hurricanes that year. But to my knowledge, Berkshire-Hathaway has not yet made any announcements regarding its Katrina exposure.

Berkshire-Hathaway's big reinsurance subsidiary, General Re, is already being investigated over its role in helping insurer American International Group Inc. (AIG) misstate results, a probe that has just resulted in General Re's chief executive, Joseph Brandon, receiving a formal notice that he could face civil charges. In its quarterly report filed Friday with the Securities and Exchange Commission, Berkshire-Hathaway reported the authorities were looking into the accounting by some of its insurance subsidiaries for finite reinsurance and questioning whether General Re or its subsidiaries "conspired with others" (Berkshire?) to misstate financial statements. And it is worth asking the basic question: Why would Berkshire-Hathaway, eager to aid another public company to misstate its earnings, be presumed to be averse to misstating its own earnings?

Warren Buffett's annual letters to Berkshire-Hathaway's shareholders have for years asserted or implied that Mr. Buffett was intimately involved in the operations of General Re. The web of possible malfeasance and acceptance of possibly imprudent insurance risks at the company now seems to be expanding. How long can it be until Mr. Buffett is personally drawn into the morass? Will the perfect storm of continuing deepening regulatory crisis at Berkshire-Hathaway, big Katrina-driven losses at General RE, and a possibly huge hit in the forex markets, change investors' perceptions of the Sage of Omaha? All of which leads into the fact that despite all of Mr. Buffett's high-profile and hypocritical posturings on "good corporate governance," Berkshire-Hathaway has no successor scheme worthy of the name to replace Mr. Buffett should he leave the company for one reason or another.

Berkshire-Hathaway's stock trades at a premium of about 22 times expected 2005 earnings, which is about twice the price-earnings multiple its insurance peers command. Some analysts are convinced that that premium is not warranted. In other words, those analysts think Berkshire-Hathaway should lose at least 50% of its value.

But there is mounting evidence that the situation at Berkshire-Hathaway may be much worse than that.

UPDATE: White Mountains Insurance Group Ltd., a Bermuda-based property and casualty insurer backed by Warren Buffett, has announced that its Katrina losses may be as much as $300 million ($200 million after tax). White Mountains (once named "Fireman's Fund Corp." - but no longer owns Fireman's Fund Insurance Company) is not owned by Berkshire-Hathaway. It is a public company with common shares listed on the New York Stock Exchange and the Bermuda Stock Exchange with market capitalization at December 31, 2004 approximately $7 billion. White Mountains joined with Berkshire-Hathaway to purchase Safeco's life insurance operations notwithstanding the fact that General Re is considered to be one of White Mountains' main competitors. General Re-New England Asset Management, Inc., a wholly owned subsidiary of General Re, owns 16% of the outstanding shares of "main competitor" White Mountains.

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