Warren Buffett's 1998 purchase of insurer General Re Corp has resulted in more than US$3 billion in underwriting losses and depressed earnings at Buffett's Berkshire Hathaway Inc.
Now comes the payoff.
With industry claims from the Sept. 11 terrorist attacks estimated at as much as US$70 billion, insurers are raising prices and tightening coverage terms. That will allow Berkshire to recoup its US$2.28 billion in losses from the attack and more, analysts say.
For years Berkshire and General Re have written only a fraction of the policies they could because prices were too low.
Today, with insurers raising rates as much as 60 percent across many lines of business, Berkshire may boost its premium income well above the US$19.34 billion it collected last year.
"General Re is really going to produce in this market," said Donald Watson, a director at Standard & Poor's. "It's going to be payback time for Warren."
The 72-year-old chairman and chief executive officer of Omaha, Nebraska-based Berkshire, who didn't return a call seeking comment for this article, is the biggest outside investor in companies such as Coca-Cola Co and American Express Co. Buffett is also a buyer of businesses ranging from Benjamin Moore Paints to Dairy Queen.
Insurance accounts for almost 60 percent of Berkshire's revenue. Thus, investors watch results at General Re, which provides coverage to insurers, and Geico Corp, which writes auto policies, as closely as they follow the value of Berkshire's investments. Berkshire purchased General Re for US$16.9 billion.
Berkshire Friday said it had a third-quarter net loss of US$679 million, or US$445 a share, reflecting US$2.28 billion of claims from the September attacks. The company's loss estimate was revised up from an original US$2.2 billion.
In releasing earnings, Buffett broke from his usual practice of providing barebones quarterly figures with a note to shareholders in which he called himself and the company "foolish" for not adequately setting rates to reflect the risk of a major, manmade catastrophe such as the Sept. 11 attacks.
While Berkshire and other insurers are raising rates, Buffett said claims may rise further, and take years to sort out; he vowed to overhaul General Re's underwriting practices.
"We, and the rest of the industry, included coverage for terrorist acts in policies covering other risks -- and received no additional premium for doing so," Buffett wrote.
"That was a huge mistake and one that I myself allowed." Even as it raises rates, Berkshire is exposed to the risk of claims from future attacks on policies that aren't yet up for renewal, Buffett said.
Reinsurance demand is surging because the terrorist attacks demonstrated the need for coverage from companies with a proven ability to pay claims at a time when some companies' finances have been shaken, investors say.
"General Re will be the place most people run to, to try to get their reinsurance renewed," said Peter Russ, co-manager of Fairholme Capital Management, which owns about 2,200 Berkshire shares. "They are the best-capitalized reinsurer and specialty catastrophe insurer in the world."
The price of Berkshire's Class A stock reflects that. The shares have fallen about 2 percent this year, versus a 10 percent loss for the S&P Property-Casualty Insurance Index and a 14 percent decline in the Standard & Poor's 500 Index. The shares Friday fell US$1,300 to US$69,600.
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