Monday, May 21, 2007
Berkshire Hathaway Assesses LT Insurance Risk
While much ink is spilled about Warren Buffett and his current investment choices, very little energy is spent on assessing much more important decisions (or absence thereof). The buy/sell of KO one of his largest equity holdings comes to mind. (To whom would he sell said James Grant in 1998. ) Many of these, though virtually absent from public discussion have far greater import to the long-term profitability of his enterprise. Another such decision involves the virtual absence of growth (overall) in the insurance business. As per annual reports; 2006 premiums earned were $24.0 billion compared with 1999 premiums earned were of $19.3 bill. That corrsponds to less than 3% annual top line growth for 7 years. Absent the $7 billion (one time) premium gain in the first quarter, new risk would not have changed long-term growth rates materially. Compare this figure with your average Bermuda company (ACE) that showed a 5 year cumulative growth in premiums in the 13%/14% range. The master himself has suggested that returns will be down in 2007, perhaps sharply. What does his gimlet eye see that myopic investors fail to discern from the inflation/interest rate trends. While I admit to talking my position (short p/c stocks), one would have to give credit to the institutions (buyside, hedge funds) piling into the insurance stocks (life and p/c alike) with the hope that being long US US bonds (through holding US insurance assets) and a winning trade for years will continue to work, absent the foggiest notion about what is coming down the pike in this notorious cyclical industry. The industry is due for a long period of seriously declining margins and ROEs, and investors are likely to be as surprised of the outcome as they are of the impact on their portfolio of insurance stocks.