Hurricane Idalia: Berkshire Hathaway's Reinsurance Challenge

Hurricane Idalia, the recent storm that made landfall in Florida, is posing a significant challenge for Berkshire Hathaway (ticker: BRK.A), as it tests a sizable bet made by the company earlier this year. Fueled by the allure of attractive high premiums, Berkshire has substantially ramped up its reinsurance underwriting in the state. However, now is the time to determine whether the losses incurred during this hurricane season will outweigh the gains.

Ajit Jain, Berkshire's vice chairman of insurance operations, announced in May that the company had underwritten as much property-catastrophe reinsurance as its capacity would allow. This move resulted in a 30% increase in written premiums compared to last year. While the potential revenues may be tempting, the risks involved are substantial. Depending on the severity of the 2023 hurricanes, this reinsurance powerhouse could either reap several billion dollars in profits or suffer losses of up to $15 billion in the Sunshine State.

Thus far, the news seems positive for Warren Buffett's company. Hurricane Idalia initially made landfall on Wednesday as a formidable Category 3 storm but was downgraded to a Category 1 hurricane as it traversed Florida en route to Georgia.

Preliminary estimates from RMS, a catastrophe risk modeling firm under Moody's, indicate that the average insured losses for Hurricane Idalia are projected to be approximately $9.36 billion. UBS analyst Brian Meredith noted this figure in a Tuesday report, emphasizing that it would represent only a fraction of the $50-65 billion insured losses incurred by Hurricane Ian when it struck the state last year (according to SwissRe estimates). However, it's important to recognize that these estimates might change significantly over the next few days.

Sarah Hartley, senior manager of event response at Moody's RMS, highlights the potential for further intensification in the wake of Idalia's path across the eastern Gulf of Mexico. She points to the unusually warm sea surface temperatures—the warmest seen in 40 years—as a factor that could contribute to this intensification.

Despite these developments, Berkshire Hathaway has yet to comment on the situation.

It's worth noting that Berkshire isn't the only insurer lured by the allure of substantial premiums in the hurricane-prone state. RenaissanceRe Holdings (RNR), another prominent reinsurance giant, announced in May that it anticipates underwriting more property catastrophe policies leading up to the hurricane season due to the "reasonably good rates."