Berkshire Gains as U.S. Reinsurer Surplus Rebounds (Update1) 
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By Jamie McGee


Aug. 31 (Bloomberg) -- Warren Buffett’sBerkshire Hathaway Inc. and Munich Re are among reinsurers that benefited in the second quarter as the industry’s surplus in the U.S. expanded for the first time in seven periods on investment gains. 

The combined surplus of 19 reinsurers climbed 11 percent in the three months ended June 30 to $66 billion, the Reinsurance Association of America said today in a report. The surplus, a measure of assets minus liabilities, hadn’t increased since the third quarter of 2007. The figure was $72.8 billion on June 30, 2008, before the collapse of Lehman Brothers Holdings Inc. forced down the value of the industry’s investments. 

“You are starting to see a rebound in the financial markets, and therefore you are starting to see a little bit of an uptick in the valuations of the assets,” said Michael Paisan, an analyst at Stifel Nicolaus & Co. 

Reinsurers provide coverage to primary carriers, protecting them from large claims including catastrophes. Munich Re, the world’s largest reinsurer, posted a 14 percent profit gain in the second quarter as investments and sales climbed. Buffett told investors this month that he is more willing to take the risk of covering disasters after Omaha, Nebraska-based Berkshire’s investment portfolio gained. 

“Barring a catastrophe in the third quarter,” the surplus gains are likely to continue, said Dean Evans, an analyst with KBW Inc. “The current outlook is still pretty good for profitability.” 

Hurricane Season 

Catastrophes last year, including Hurricanes Gustav and Ike, cost $25.2 billion, the most since the record storm season of 2005, an industry group said in January.

Forecasters have scaled back predictions for the severity of this year’s storm season because of warming in the eastern Pacific Ocean. 

The Atlantic didn’t produce a named storm in 2009 until Ana on Aug. 15, the latest in more than two decades for the first storm of a calendar year to reach that intensity.

The season runs from June 1 to Nov. 30. 

Reinsurers have been able to pull money from reserves after determining they set aside more than necessary in prior quarters.

The reserve releases contributed to an increase in underwriting profit for the industry, ratings firm A.M. Best said today in a statement, maintaining a “stable” outlook for the industry. 

“Global reinsurers’ performance to date could be counted as an achievement, given the state of the financial services industry and the economy,” A.M. Best said. 

Policy Sales 

Policy sales for the group of 19 reinsurers climbed to $12.8 billion in the first half of the year, up from $12.7 billion the same period in 2008, the Washington-based RAA said. 

Property reinsurance rates have advanced as capital has diminished and insurers seek protection from natural disasters.

Reinsurance prices for U.S. catastrophe zones increased as much as 15 percent in July 1 renewals, Willis Group Holdings Ltd. reported last month.

Reinsurers have been unable to boost prices for casualty coverage, Paisan said. 

“Particularly on the property-catastrophe reinsurance, you are seeing a pretty sizeable uptick in pricing,” Paisan said.

“In the current market where the equity markets are volatile, and debt markets are essentially closed or prohibitively costly, the only additional alternative form of capital is the reinsurance market.” 

Berkshire’s Gain 

Munich Re’s surplus in the U.S. advanced about 6.2 percent in the three months ended June 30 to $3.6 billion. The surplus at Berkshire’s National Indemnity Co. gained 18 percent to $28.4 billion. 

“Due to the restoration of net worth that occurred during the second quarter, management’s willingness to write large catastrophe risks has increased, but to date rates have not warranted such writing,” Berkshire said in an Aug. 7 regulatory filing. 

Capital needs have led reinsurers to pursue acquisitions this year, Paisan said.

Validus Holdings Ltd. announced plans to buy IPC Holdings Ltd., and PartnerRe Ltd. agreed in July to acquire Paris Re Holdings Ltd. 

“The real driver for merger and acquisition activity within the reinsurance area would be more based on trying to build a larger capital base,” Paisan said.

“It’s been increasingly more important to have a larger capital base within the reinsurance industry.”