Buffett links hurricane insurance to climate
Financial Times March 5, 2006
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Berkshire Hathaway, the investment group run by Warren Buffett, is pushing up the price of hurricane insurance as a precaution against the possible impact of climate change.
Mr Buffett said it remained an open question whether "atmospheric, oceanic or other causal factors have dramatically changed the frequency or intensity of hurricanes" but after the worst quarterly losses in industry history it was prudent to limit exposure.
Berkshire's insurance subsidiaries lost $3.4bn from the 2005 US hurricane season – a significant drag on otherwise-healthy annual results published on Saturday.
"Our ignorance means we must follow the course prescribed by Pascal in his famous wager about the existence of God," Mr Buffett wrote to shareholders. "Since he didn't know the answer, his personal gain/loss ratio dictated an affirmative conclusion."
Berkshire is one of the world's largest providers of cover against very large catastrophes, partly by reinsuring companies offering home and property insurance.
"We've concluded that we should now write mega-cat policies only at prices far higher than prevailed last year – and then only with an aggregate exposure that would not cause us distress if shifts in some important variable produce far more costly storms in the near future," said Mr Buffett.
Some US home insurers have recently said they will not offer further cover in densely-populated coastal cities such as New York as experts put the risk of a major hurricane hitting the US Eastern Seaboard as high as 81 per cent this year.
Nevertheless, the steady rise in premiums since Hurricane Katrina has attracted risk-hungry hedge fund investors to move into the catastrophe reinsurance market – an ironic role reversal given Mr Buffett's scepticism of their activities.
A large part of this year's letter to shareholders was devoted to his continued campaign against excessive fund management and stock broking fees, a frictional cost he estimates now amounts to a fifth of US corporate profits.
"A record portion of earnings that would go in their entirety to owners – if they just stayed in their rocking chairs – is now going to a swelling army of helpers…. bearing sewn-on sexy names like Hedge Fund or Private Equity," wrote Mr Buffett.
The eagerly-awaited letter also revealed more details of Berkshire's succession planning. It said board directors had now chosen which of three shortlisted managers would replace Mr Buffett if he died tomorrow, but declined to identify which of them it was or whether they would remain the preferred succesor.
Much of the letter railed against traditional targets such as Wall Street, the dangers of derivatives and excessive executive pay.
Otherwise, the tone was less self-critical than in recent years. Mr Buffett said Berkshire had a "decent" year in 2005, thanks in part to greater availability of attractive acquisition candidates.
Apart from hurricane costs and isolated problems at Berkshire's Netjets subsidiary, the biggest loss came from Mr Buffett's famous bet against the US dollar. The rising greenback cost Berkshire $995m in 2005, reducing its currency gains to $2bn since he began shorting the dollar in 2002 in response to concerns about the US trade deficit.
Net income rose from $7.3bn to $8.5bn in 2005 on revenue of $82bn. The book value of Berkshire shares – its preferred proxy measurement for underlying value creation - rose 6.4 per cent, beating the S&P 500 index for the first time in three years.
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