Warren Buffett describing the effect of hurricanes on Berkshire Hathaway's earnings in chairman's letter :
our insurance business in its entirety did well, though Hurricane Katrina inflicted record losses on both Berkshire and the industry. We estimate our
loss from Katrina at $2.5 billion – and her ugly sisters, Rita and Wilma, cost us an additional $.9 billion...
We have major reinsurance operations at General Re and National Indemnity. The former is run
by Joe Brandon and Tad Montross, the latter by Ajit Jain. Both units performed well in 2005 considering
the extraordinary hurricane losses that battered the industry.
It’s an open question whether atmospheric, oceanic or other causal factors have dramatically
changed the frequency or intensity of hurricanes. Recent experience is worrisome. We know, for instance,
that in the 100 years before 2004, about 59 hurricanes of Category 3 strength, or greater, hit the
Southeastern and Gulf Coast states, and that only three of these were Category 5s. We further know that in
2004 there were three Category 3 storms that hammered those areas and that these were followed by four
more in 2005, one of them, Katrina, the most destructive hurricane in industry history. Moreover, there
were three Category 5s near the coast last year that fortunately weakened before landfall.
Was this onslaught of more frequent and more intense storms merely an anomaly? Or was it
caused by changes in climate, water temperature or other variables we don’t fully understand? And could
these factors be developing in a manner that will soon produce disasters dwarfing Katrina?
Joe, Ajit and I don’t know the answer to these all-important questions. What we do know is that
our ignorance means we must follow the course prescribed by Pascal in his famous wager about the
existence of God. As you may recall, he concluded that since he didn’t know the answer, his personal
gain/loss ratio dictated an affirmative conclusion.
So guided, 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. To a lesser degree, we felt
this way after 2004 – and cut back our writings when prices didn’t move. Now our caution has intensified.
If prices seem appropriate, however, we continue to have both the ability and the appetite to be the largest
writer of mega-cat coverage in the world.
online.wsj.com |
