OK, Bash Buffett -- but Buy His Stock

The best of all worlds is when a company is so experienced at pricing that it can earn a profit on the premiums it collects on the policies it writes, and so deft at investing that it earns a high rate of return on the float. Oh, and so financially strong that even if it gets something really wrong or if chance goes against it the company will be able to pay out claims without destroying its profitability.

Stormy Weather for Reinsurers

From that point of view, 2005 was something of a test for Berkshire Hathaway. The company's General Re and National Indemnity reinsurance units took a huge hit from the combination of hurricanes Katrina, Rita and Wilma, losing $3.4 billion from the storms. Reinsurers buy risk by, in effect, insuring the ability of other insurance companies to pay claims in case of a catastrophic event.

But thanks to Berkshire Hathaway's low-cost auto-insurance business, Geico, the company's insurance business as a whole showed a slim underwriting profit for the year of $53 million.

That underwriting profit meant that in 2005, again, Berkshire Hathaway didn't pay a cent to use the capital that makes up its float. And since Berkshire Hathaway's float amounts to some $49 billion, that's a huge cost advantage in the investment business. While banks have to pay interest to depositors, and hedge funds have to share profits with their investors, Berkshire Hathaway can invest a no-cost $49 billion.

Battening Down, Raising Premiums

Neither Warren Buffett nor anyone else can predict how the 2006 hurricane season will shape up, though some readers have written me noting that water temperatures in the Gulf of Mexico are already higher than normal for this time of year, which is often a sign of a strong hurricane season to come.

But after a disaster, a prudent insurance company always raises premiums and may indeed cut back on the risks it takes. And that, Buffett says, is exactly how General Re is approaching 2006.