Beware: Warren Buffet's reinsuring underwriting profitability philosophy is spreading

By Andrew Barile

Andrew Barile Consulting Corporation


When reinsurance renewal rates stay flat, stocks of reinsurers go down, and we see this with Warren Buffett continuing to increase his stock holdings in Munich Re and Swiss Re, the two world's largest reinsurance companies. The economic crisis has affected the global reinsurance business. Due to the recession, premiums are down for workers' compensation insurance, and buyers buy less property insurance. Reinsurer's bottom lines have been strengthened by the recovery of asset values. This has enabled reinsurers to protect the balance sheets of primary insurance companies, utilizing the existing reinsurance products, quota share, surplus relief, excess of loss, and catastrophe (industry loss warranty covers).

Warren Buffett recognizes that the reinsurance market is facing tighter regulatory supervision and low interest rates, keeping reinsurance stock prices low. Certainly, an opportunity exists to buy Munich Re stock at a low price.

What do buyers of reinsurance want (cedants, i.e., to cede reinsurance) from their reinsurance company markets? None of the buyers' desires have changed in 30 years, except the number of reinsurers has been dramatically reduced. First the factors that the buyer of reinsurance wants:
    No. 1: Impeccable financial strength -- Does the reinsurer pay claims on a timely basis?

    No. 2: Price/cost of reinsurance -- Is it economically feasible to purchase this type of reinsurance? How can we pass the cost of this reinsurance onto the primary insured?

    No. 3: Reinsurance litigation -- What has been the track record of the reinsurer? Are they always in reinsurance arbitration? Are claim settlements an adversarial relationship?

    No. 4: Does the reinsurer provide experience as respects asset investments, underwriting expertise, market knowledge, actuarial services and claims handling?
All of these factors, certainly, are provided by the world's largest reinsurers, Munich Re and Swiss Re. Warren Buffett recognizes this and looks to increasing his influence in the management of each of these reinsurers. Buyers of reinsurance to increase their reinsurance protection options may have to look to London and Bermuda for a competitive insurance quote. Of course, a severe California earthquake, long overdue, a Florida hurricane, or another Gulf Coast hurricane would severely impact the market, and substantially increase the value of Warren Buffett's stock holdings, and confirm his ability to be a great stock investor in the insurance industry.

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