Berkshire Faults Wall Street, Private Equity for ‘Disposable Reinsurers’

Berkshire Hathaway Inc. (BRK/A)’s Franklin “Tad” Montross faulted Wall Street and private-equity firms for creating rival sellers of reinsurance that he said may not have the backing of their founders in three to five years.

“The investment term is obviously out of sync with the duration of the liabilities,” Montross, chief executive officer of Berkshire’s General Reinsurance Corp., said in a statement on the unit’s website and dated this month. “This mismatch is unlikely to play out well 10 or 20 years down the road.”

Berkshire, headed by billionaire Warren Buffett, is facing competition from new entrants to the reinsurance market as wind storms, floods and earthquakes weigh on results at established carriers. Stone Point Capital LLC, the private-equity firm overseen by Goldman Sachs Group Inc. director Stephen Friedman, teamed with Alterra Capital Holdings Ltd. (ALTE) in April to back policies through a pool of capital known as a sidecar.

“Sidecars have been the rage to offer catastrophe capacity for just one year, effectively creating a disposable reinsurer,” said Montross, whose General Re is based in Stamford, Connecticut. “Several years ago I quipped, disposable razors and diapers -- why not disposable reinsurers?”

Primary insurers typically turn to sidecars for coverage of short-term risks focused in specific areas, said Mark Dwelle, an analyst at RBC Capital Markets. General liability policies with a potential span of 50 years for claims settlement, which Montross cited in his statement, are not normally the types of contracts that brokers arrange with sidecars, Dwelle said.

Capital Flowing

“Most sidecars are not used in that way,” said Dwelle. “They are a really efficient way for capital to flow into the industry and flow back out of the industry.”

The insurance industry faced about $70 billion of losses from natural disasters and man-made catastrophes in the first half, according to Swiss Re, the world’s second-largest reinsurer. That makes 2011 already the second-most costly year for insurers, surpassed by 2005, when Hurricane Katrina contributed to $120 billion in claims.

General Re’s annual revenue has declined in each of the last three years to $5.69 billion in 2010. Buffett, Berkshire’s chairman and CEO, bought the reinsurer for $18 billion in 1998 in what was then his biggest acquisition.

Peter Hill, a spokesman for Alterra, declined to comment on Montross’s remarks. The Alterra sidecar, New Point IV, was capitalized by the reinsurer, Stone Point and others, Hill said.

Validus’s Sidecar

Validus Holdings Ltd. (VR), the Bermuda-based reinsurer, raised money for a sidecar that it said in June will write business through Dec. 31, 2012, subject to extension. RenaissanceRe Holdings Ltd. (RNR) tapped investors to fund the DaVinciRe underwriter it runs, and CEO Neill Currie said in a June statement that the “ability to access and deploy third-party capital” helps the reinsurer serve clients.

“There is a lot of investor appetite to participate in the reinsurance market, and that has to be a limiting factor” on the ability of established carriers to raise prices, said Ben Cohen, an analyst at Collins Stewart Hawkpoint Plc in London. “One of the reasons why that is happening is you can’t get better returns elsewhere. You get nothing on cash and equity markets are awful.”

Greg Faje, a spokesman for Validus, declined to comment.

The time required to settle claims on property-casualty policies has in some cases grown because of lawsuits and business-interruption requests, Dwelle said. Claims settlement on property catastrophe coverage may require as long as five years after a policy’s inception, Montross said.

“A company making long-term commitments should be run in a conservative manner, and have owners that are committed to the business for the long term,” Montross said. “The private- equity money that has funded the reinsurance start-ups has explicit exit strategies, often in as little as three to five years.”

To contact the reporter on this story: Andrew Frye in New York at afrye@bloomberg.net.

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.