For the first quarter of fiscal 2007,
Berkshire Hathaway experienced growth in
net income of approximately 12%, fueled by the profitable insurance operations. Buffett warned that in the future, the profits of insurance companies would go down because the pricing environment, coupled with a lack of natural disasters last year, led to a perfect Utopian situation in the property and casualty markets. Competitors had begun to cut prices on policies, resulting in less attractive opportunities. As most insurance contracts are written on an annual or semi-annual basis, it takes time for these modified price levels to reflect in the
financial statements of companies.
As a result, Berkshire cut its exposure to hurricane disasters by more than half. The only thing, insists both Munger and Buffett, that an insurance company should focus on is its profitability as measured by the cost of float, not market share. That’s why Berkshire is perfectly willing to let its employees sit around and do nothing rather than write stupidly priced policies; such an approach is incredibly owner-friendly and will avoid major mistakes.
Long-term, the expectations of the two famous investors is that Berkshire will break even on its float costs, although the ride will assuredly be bumpy as a result of the economics and nature of the super-catastrophe reinsurance industry.
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