See Jim's new portfolio to help navigate the treacherous interest-rate environment.
Jubak's Journal Recent articles: • Japan's gain could be your loss, 3/14/2006 • Google and AT&T: Is bigger better?, 3/10/2006 • 10 under-the-radar blue chips, 3/8/2006 More... | Jubak's Journal 5 ways to profit from Buffett's forecast Omaha's Oracle can't predict hurricanes, but he does know that his company's premiums for catastrophe coverage are going up. By Jim Jubak I guess you really don't need a weatherman to tell which way the wind blows. At least as long as you have Warren Buffett -- the Oracle of Omaha and one of the best investors of our time -- calling the climate shifts for you. In his most recent annual letter to shareholders, the CEO of Berkshire Hathaway "Its an open question," Buffett continued, "whether atmospheric, oceanic or other causal factors have dramatically changed the frequency or intensity of hurricanes. Recent experience is worrisome. We know, for instance, that in the 100 years before 2004, about 59 hurricanes of Category 3 strength, or greater, hit the Southeastern and Gulf Coast states, and that only three of these were Category 5s. We further know that in 2004 there were three Category 3 storms that hammered those areas and that these were followed by four more in 2005, one of them, Katrina, the most destructive hurricane in industry history. Moreover, there were three Category 5s near the coast last year that fortunately weakened before landfall.
"Was this onslaught of more frequent and more intense storms merely an anomaly? Or was it caused by changes in climate, water temperature or other variables we dont fully understand? And could these factors be developing in a manner that will soon produce disasters dwarfing Katrina?" High risk, high reward Buffett doesn't claim to have the answers to a question that has divided the scientific community between those who see the current upswing in hurricane activity as part of the regular cyclical increase in storm frequency and those who believe the intensity of this season's storm are being fueled by global warming. But he does know what the prudent insurance company should do about the possibility of increased losses: raise premiums. "Weve concluded, Buffett reports, "that we should now write mega-cat [as in catastrophic] policies only at prices far higher than prevailed last year." It's not the increase in premiums that investors should note: insurance companies always raise premiums after a big payout to make up in future profits for the losses they've just suffered. After a disaster like Hurricane Katrina, shares of insurance companies with solid balance sheets -- which enable companies to survive hits to current cash flow -- become solid buys, as premium rates go up and as weaker firms are forced out of business, reducing competition. More from MSN Money
What's new and different here is Buffett calling not just for higher prices but for "far higher" prices. And going on to say that if General Re -- the Berkshire unit that writes the big policies that insurance companies buy for protection against outsize losses -- doesn't get those far higher prices, it simply won't write new business. Higher premiums and less capacity: It sounds like a formula for rising insurance company revenues and profits in 2006. (At least until insurance companies discover by experience if the hurricane season of 2006 continues the pattern of 2005.) In my regular appearance on CNBC's Morning Call on Wednesday, I picked these well-run, financially strong insurance companies that stand to benefit from increases in the premiums for property-and-casualty insurance. Berkshire Hathaway. Let's start at the top of the insurance food chain. Berkshire Hathaway's General Re and National Indemnity units are major reinsurance players. As reinsurers, they buy risk from insurance companies that want to limit their own exposure in case of a catastrophic event. Such as a hurricane. Or, as in 2005, multiple hurricanes. The combination of Katrina, Rita and Wilma cost Berkshire Hathaway's reinsurance businesses $3.4 billion in losses in 2005. But so strong is the company's overall insurance business, which includes the Geico low-cost auto insurance franchise, that Berkshire Hathaway managed a $53 million underwriting profit in 2005. So the company had temporary use of $49 billion in float (money paid in premiums today that will be paid out in claims in the future). And thanks to the slight underwriting profit for 2005, once more Berkshire Hathaway could invest this money at no cost. In 2006, thanks to premium increases, that cash float should be even larger, and barring a hurricane season that's worse than that of 2005, Berkshire Hathaway should again pay nothing for the use of this money. In 2005, the company used part of this float to make five acquisitions: Medical Protective (a medical malpractice insurer), Forest River (a recreational vehicle manufacturer), Business Wire (a distributor of corporate information), Applied Underwriters (a provider of payroll services and workman's compensation insurance), and PacifiCorp (an electric utility serving six Western states.) StockScouter doesn't rate these shares. Philadelphia Consolidated HCC Insurance Holdings And as always I have two "exclusive" picks for readers of CNBC.com on MSN Money. Cincinnati Financial W.R. Berkley Editor's Note: A new Jubaks Journal is posted every Tuesday, Wednesday and Friday. Please note that Jubak's Picks recommendations are for a 12-to-18 month time horizon. See Jubak's CNBC Picks for shorter six month recommendations. For suggestions to help navigate the treacherous interest-rate environment see Jim's new portfolio Dividend stocks for income investors. For picks with a truly long-term perspective see Jubak's 50 best stocks in the world or Future Fantastic 50 Portfolio. E-mail Jim Jubak at jjmail@microsoft.com. At the time of publication, Jim Jubak owned or controlled shares of the following equities mentioned in this column: Berkshire Hathaway. He does not own short positions in any stock mentioned in this column. | ||||||||||||||||||||||||||||
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