Heard on the Street
Buffett Rides High Again Despite Bearish Market
By DEVON SPURGEON
Staff Reporter of THE WALL STREET JOURNAL
In the bullish market of a year ago, Warren E. Buffett was tagged a has-been who just didn't understand New Economy stocks. Now, in the current bearish stock market, guess who's riding high?
Berkshire Hathaway, the manufacturing and insurance conglomerate controlled by Mr. Buffett, looks to be much better positioned than many other companies in the wake of the Sept. 11 terrorist attacks. While it has announced one of the highest loss estimates -- $2.2 billion -- of any insurance company stemming from the attacks, analysts say it easily can make that up with increased market share at steeply increased premium rates.
The possible payout doesn't make Warren Buffett happy, as he says he'd prefer to have the $2.2 billion in hand in coming months to choose for himself how to deploy it. "People forget that, though there is an upside in terms of our competitive position, it may not compensate for the $2.2 billion we lost," he says. "It came at a huge cost."
But so far, the stock market is positive about the state of Berkshire, sending its shares up in recent weeks. The stock is trading near its 52-week high, changing hands Monday at $74,300 in 4 p.m. New York Stock Exchange composite trading. It's up 9.3% since Sept. 10, while the Standard & Poor's 500-stock index has only in the past two weeks clawed its way back to where it stood before the attacks, after being down nearly 12%.
Flash back to the early part of 2000, just before the Internet-stock bubble burst, when Berkshire, at just above $40,000, was trading at less than half its highs of 1998 and early 1999. Repeatedly explaining that he doesn't buy technology stocks because he doesn't invest in what he doesn't understand, Mr. Buffett appeared to have lost his touch. He himself admitted, in his annual letter to shareholders, that he had posted "the worst absolute performance of my tenure" during the bull market of 1999.
Now Berkshire Hathaway is in "the driver's seat," according to Anna Dopkin, portfolio manager of T. Rowe Price Financial Services Fund, of which about 3.3% is in Berkshire shares. "Despite the fact that they will be one of the biggest payers of claims to their customers, their balance sheet following this event is still extremely healthy," she says.
The biggest factor driving the bullishness right now: the steep price increases that are being pushed through by the insurance industry. All told, insurance-related revenue represented more than 60% of Berkshire's total revenue in recent quarters, much of it generated by Berkshire's reinsurance operations. Reinsurers, who assume some of the risk of policies sold by primary insurers, are in some cases boosting prices by more than 100%.
Prices are going up because demand for insurance and reinsurance has increased in the wake of the attacks even as a significant chunk of insurance-industry capital has been wiped out. With "less capital, people will have to pay more to get insurance and reinsurance," says Alice Schroeder, an insurance analyst at Morgan Stanley Dean Witter.
Meanwhile, buyers of reinsurance are pickier about whom they deal with, as analysts are forecasting that the huge losses created by the terrorist attacks are expected to sink some smaller and weakly capitalized reinsurance companies. Berkshire Hathaway's General Re unit is part of an elite group -- foreign behemoths Munich Re and Swiss Re are some of the other prominent members -- best positioned to benefit from this flight-to-quality movement.
"Insurance buyers want to buy from the most secure companies," says Ms. Schroeder. "Berkshire is arguably the most secure insurer on earth."
Indeed, Berkshire is so well capitalized that some insurance-industry executives suggest that Berkshire may have overestimated its terrorist-related losses to make the rest of the industry look bad in comparison. Currently, many insurance-industry analysts and executives put total insured losses at $40 billion, a painful but manageable sum. But if Berkshire is right both in its estimate and another statement it has made -- that it is responsible for 3% to 5% of all industry losses -- then industry losses could hit a maximum of $73 billion, and a large number of insurers could stagger as they attempt to cough up their portion.
Mr. Buffett disputes any such motives, calling the $2.2 billion his "best guess." Still, he asserts, Berkshire's guess "is just as likely to be low as high."
But there is little question that as other companies -- especially insurers -- have been raising capital to shore up their balance sheets, Berkshire is flush with cash and ready to make acquisitions. Berkshire is the "acquirer of first resort," according to Ms. Schroeder. As of June 30, Berkshire had cash reserves of $7.1 billion and $29.1 billion invested in equity securities, according to filings with the Securities and Exchange Commission.
Mr. Buffett doesn't rule out making an acquisition in any sector. "We see interesting things from time to time," he says. "We are always able and eager to do them if the price is right."
His acquisition standards haven't been altered by the events of Sept. 11. He is still looking for companies in industries he understands and ones with solid management in place. While insurance is Berkshire's dominant business interest (and one of Mr. Buffett's favorite businesses), the company owns far more mundane subsidiaries in the boot, brick, paint and fast-food industries. Its most recent acquisition: a trailer-leasing company. "I've been boring for decades," Mr. Buffett said.
Mr. Buffett may be eager to make acquisitions because some of the staples of his equity portfolio haven't been performing well of late. Coca-Cola, Gillette and American Express are all trading near 52-week lows.
Berkshire has been able to offset slightly the loss in the insurance sector with small gains in some other businesses. Executive Jet, Berkshire's airplane-ownership subsidiary, has seen a jump in sales following the attacks.
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