NEW YORK, May 9 (Reuters Breakingviews) – It’s easy to see Nebraskan Warren Buffett turning into Florida man – geographically speaking more so than the irrational internet meme version. The Sunshine State’s insurance industry is a mess, and Hurricane Ian only compounded the problems. This imperfect storm suits the Berkshire Hathaway (BRKa.N) CEO’s investing style.
Underwriters in the state have been feverishly trying to offload risk following last year’s Category 5 hurricane that was Florida’s deadliest in nearly 90 years. Swiss Re estimates at least $50 billion of Ian-related insured damage. At the same time, the price of reinsurance – or insurance bought by insurers – has been rising dramatically worldwide.
Captaining the lifeboat is Berkshire’s head of insurance, Ajit Jain. After eschewing property-related catastrophe reinsurance for some 15 years, he said at the company’s annual meeting on Saturday that it now has a “very unbalanced” portfolio that could saddle Berkshire with up to $15 billion of losses if another cataclysmic hurricane hits Florida this year. The upside is several billion dollars, Jain said, if Mother Nature turns out to be more forgiving.
Big insurers largely backed off Florida following Hurricane Andrew in 1992. Smaller ones, many of them undercapitalized, stepped in, as storm bills keep getting bigger. Six property insurers in the state declared insolvency last year. Moreover, Florida’s insurer of last resort, Citizens Property Insurance, is growing rapidly, and expects to expand to 1.7 million policies in force this year, 46% more than in 2022.
The difficulty of backstopping the risk is that reinsurers have recently jacked up rates. Their return on equity surpassed their weighted average cost of capital for the first time in a decade, according to Gallagher Re, thanks to dedicated capital falling 12% last year alongside increasing demand.
Consider one recent catastrophe bond issued by Citizens, which offers $500 million of protection. The type of storm covered should only come along once every half-century or so. The yield is 11%, a healthy projected return for an event with an estimated loss of 1.8% annually, according to Artemis.bm, a catastrophe bond news and data provider. The attraction also grows because the weather is largely uncorrelated with other available investments.
Buffett has said reasonable prices don’t guarantee profit for insurers, but inappropriate prices guarantee losses. The current rates suggest that the upcoming headline will read: “Omaha man lands Florida windfall.”
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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
CONTEXT NEWS
Ajit Jain, Berkshire Hathaway’s vice chairman, said on May 6 that after 15 years of minimal exposure, the company was now heavily exposed to property catastrophe reinsurance, and that the portfolio was “heavily unbalanced” with exposure to Florida.
“If the big hurricane happens in Florida, we could lose – across all the units, we could lose as much as $15 billion. And if there isn’t a loss, we’ll make several billion dollars as profit,” Jain said during Berkshire Hathaway’s annual shareholder meeting in Omaha.
Editing by Jeffrey Goldfarb and Sharon Lam
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Omaha man sails into Florida’s imperfect storm
