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By rclosch
July 6, 2006

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There was a story in the Orlando paper last week that indicated that county school boards in central Florida have big problems with buying insurance coverage for this year. The rate increases are startling, and the coverage that the school boards have been able to obtain is totally inadequate.

"It's a major statewide problem," said Ned Julian, risk manager for Seminole County schools. "The most we were able to find was $25 million in coverage."

"Schools are not alone in the pinch for hurricane insurance, which also is worrying cities, counties and other government agencies that have a stock of public structures."

"This year, Seminole had $200 million in insurance coverage and paid $1.3 million for it. The premium for the coming year will be $3.4 million for the $25 million coverage that includes a higher deductible.

(Seminole County is part of the Orlando metro area, all inland, and no coastline)

"At risk are $1.4 billion in Seminole County school buildings. A mild swipe by Hurricane Charley two years ago did $9 million in damage to county schools."

To say that this is a hard market, is an understatement that is off the scale, Seminole County is paying 250% more than last year for a little over 10% of the coverage. We had a hard market after 9/11 but I do not remember seeing anything like this.

Orange County school officials were scurrying Friday to patch together a deal after insurance for school buildings that routinely was renewed must be renegotiated because of changes in costs and coverage.

(Orange includes the city of Orlando, middle of State, no coast)

"Orange, the nation's 12th-largest school district, has $4 billion worth of buildings. It has set aside $6 million for an insurance policy that includes hurricane damage and is considering using a portion to start a self-insurance fund. It paid $2.2 million for insurance this year.

"Insurance costs a lot more for a lot less coverage," said Kipp Minter with J. Rolfe Davis insurance, which is helping the district get a new policy by July 1."

"Volusia schools' hurricane coverage is dropping from $575 million to $25 million, while the cost is climbing from $1.5 million to $4.8 million. Coverage for Lake County schools will be only $25 million, too.

"Osceola managed to round up $50 million of coverage in a comprehensive package that includes hurricane damage, but is paying $5.5 million for it. Like other districts, its deductible is rising from 2 percent to 5 percent.

Before hurricane Charlie, Orlando had not had any significant Hurricane damage in the previous fifty years. So it is probable that insurance companies competing for business had become complacent about risk, but this seems pretty extreme. Volusia County's Premium is up 320% for coverage that is about 4% of what they had the previous year. This is obviously way beyond my limited math skills but isn't this something like an 8000% price increase?

This does not give the appearance of a rational reaction, but smells a bit like simple panic, or perhaps is evidence that the storms of the past two years have inflicted serious damage on the statutory surplus of companies that normally write these policies, and that they simply do not have enough capital to take on much risk. Also, it makes you wonder about the reports we heard a few months ago of new money pouring into the industry to cover hurricane risks.

With rates approaching low earth orbit and risk coverage down dramatically it would seem like this would be a market Buffett would love, it looks to me like a big high floater hung out over the center of the plate. Think, junk bonds in 2001

Further evidence that this is not a normal market was offered in a Bloomberg story that was posted here in early June that said that Berkshire was replacing AIG and Ace as primary insurers for Gulf Casinos

"June 6 (Bloomberg) � Harrah's Entertainment Inc., the world's biggest casino company, is paying 50 percent more for property insurance because Warren Buffett's Berkshire Hathaway Inc. is one of its only options after last year's hurricanes.
Berkshire became the lead insurer for Harrah's in December, replacing American International Group Inc. and Ace Ltd. because they declined to provide enough coverage, said Lance Ewing, risk manager for the Las Vegas-based company. Insured catastrophe losses in 2005 rose to a record $61.2 billion after Hurricanes Katrina and Rita devastated the U.S. Gulf Coast."

Note particularly that Berkshire is "one of its only options ". The story went on to say Berkshire is increasing coverage as other companies cut back, and that, "Buffett's prices are as much as 20 times higher than the rates prevalent a year ago, said Kevin Madden, an insurance broker at Aon Corp. in New York. On some policies, premiums equal half of its maximum potential payout, he said."

It is interesting that Berkshire acting as a primary insurer in these large polices. This is something that do not recall seeing in the past. Is it because they can not write as much reinsurance as they want, or is it just that no one else will write these policies and Berkshire can get whatever they ask?

From these two articles it would seem not only that prices are up sharply, but the insurance companies are taking on a lot less risk than they were a year ago. Under these conditions with premiums up 200 to 300 percent and coverage a small fraction of what it was last year, a series of storms similar to last years record season would produce little discomfort and a substantial underwriting profit at Berkshire.

So a good year would seem likely even if Berkshire doest not raise its level of insurance it writes, but biggest question remains how much insurance and reinsurance will Berkshire write. Last year the Companies insurance revenue was 22 Billion, 10 billion of which was GEICO so something like than 10 billion was for P&C insurance and reinsurance. We have never seen prices like this before so it would not surprise me to see Buffett swing for the fence.

In the first quarter Revenue was up 19% at Berkshire RE but down at GenRe, which given the conditions is disappointing, but Warren has said many times that in the right market they will do a lot more business. It is still possible that the insurance business will pick up dramatically in the 2nd 3rd and 4th quarters. In the Bloomberg article he was quoted as saying he was willing to lose $6 billion on a single event. This figure would be double last year's loss and might be I hint that Berkshire is willing to increase its exposure by $10 billion or so for the right price.

If Berkshire does dramatically increase its insurance exposure one way or the other it will have a dramatic effect on this years earnings (possibly dwarfing things like operating company earnings or investment income). It just depends on how many hurricanes actually show up and how big a swing Buffett decides to take.

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