Warren Buffett's Berkshire Hathaway Inc said it plans to limit the amount of business underwritten by its reinsurance operations, as it prepares to spend roughly $26 billion to buy railroad operator Burlington Northern Santa Fe Corp.
The disclosure, made in Berkshire's quarterly report released Friday, suggests that Buffett remains cautious about deploying the company's resources to pursue higher volumes in its insurance operations, even if it means lower near-term profitability.
Berkshire had already been paring insurance risk, as the recession and falling stock markets crimped its book value in 2008 and early 2009.
Though net worth has since significantly recovered, management will continue to constrain the volume of business written in light of the pending BNSF acquisition, Berkshire said. Also, premium rates have not been attractive enough to actually warrant increasing volume thus far in 2009.
Reinsurers provide coverage to other insurers, thereby spreading the risk of loss among several carriers.
Berkshire provides reinsurance on hard-to-cover risks when it can charge enough, and many buyers are willing to pay higher premiums for the security of the Omaha, Nebraska-based company's support.
The pullback by Berkshire could mean more business for rivals, including the world's biggest reinsurers, Munich Re and Swiss Re, and smaller competitors in the United States and Bermuda, including Transatlantic Holdings, Everest Reinsurance and Partner Re.
Berkshire is an investor in Swiss Re.
Berkshire typically generates about half its results from its insurance and reinsurance operations, which also include the car insurer Geico Corp. It also keeps a close eye on its cash stake to ensure it has sufficient capital to cover claims, as well as to satisfy regulatory requirements.
Third-quarter results at Berkshire benefited from a more than quadrupling in insurance underwriting profit, aided by lower claims amid the quietest Atlantic hurricane season in more than a decade.
Berkshire was also also able to release some funds set aside in reserve for potential claims from disasters in prior years. In last year's third quarter, Berkshire had roughly $350 million of losses from hurricanes, including Gustav and Ike.
After a busy storm season, providers of insurance and reinsurance can often charge more to renew coverage. Some price increases that followed last year's hurricane season, the busiest since 2005, may need to be be rolled back after the dearth of major storms this year.
(Reporting by Lilla Zuill and Jonathan Stempel; Editing by Gary Hill)