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Berkshire sharply cuts cat capacity

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STAMFORD, Conn.—Berkshire Hathaway Inc. has drastically reduced its property catastrophe reinsurance capacity because of concerns that large losses could lead to liquidity problems or put more pressure on its ratings, sources say.

In April, New York-based Moody's Investors Service cut its credit ratings on Berkshire Hathaway from Aaa—its top rating—to Aa2. In March, New York-based Standard & Poor's Corp. revised its rating outlook to negative from stable while leaving the company's AAA rating unchanged.

Omaha, Neb.-based Berkshire Hathaway reported a $1.53 billion loss for the first quarter of 2009, due mainly to losses related to its investment in ConocoPhillips Co.

The Berkshire Hathaway Reinsurance Group reported $3.09 billion in revenues for 2009's first quarter, compared with $984 million for the comparable period a year ago.

Berkshire Hathaway “effectively pulled out of the property cat market in June and July. They're keeping their powder dry,” said John Daum, New York-based executive director of Lockton Re, a unit of Kansas City, Mo.-based Lockton Cos. L.L.C.

“Pretty much the sentiment within Berkshire...is not to have any catastrophic claims, particularly for the wind peril. We really saw them withdraw fairly significantly out of the wind-exposed cat business,” he said.

Berkshire “doesn't want to have any volatility built into their earnings this year” in the interest of capital and ratings preservation, he said.

Rod Fox, chief executive officer of intermediary TigerRisk Partners in Greenwich, Conn., said: “My understanding is, with their Swiss Re transaction, and their balance sheet, that they have cut back their cat capacity, but I think they will still write some business for clients.”

Swiss Re announced in February that Berkshire would invest 3 billion Swiss francs ($2.78 billion) in the reinsurer in the form of convertible notes with a 12% interest rate. The Zurich-based reinsurer said it was also purchasing from Berkshire adverse development loss coverage for its property/casualty claims reserves for 2008 and prior years.

Ajit Jain, the Stamford, Conn.-based president of Berkshire's Reinsurance Group, declined to comment on whether Berkshire had reduced its property cat capacity.

Joseph M. Fedor, executive vp of intermediary US Re Group in New York, said the principal reason for the withdrawal is “they supported the cat market mostly because they had a large amount of liquidity in the past, and that has shrunk.”

In addition, “they probably feel that the primary rates are under pressure, therefore the reinsurance rates are going to come under pressure,” he said.

Berkshire's withdrawal from property cat reinsurance is expected to be only temporary, said Steve McElhiney, president of Dallas-based intermediary EWI Inc.

Berkshire has been a longtime supplier of property cat capacity to insurers worldwide. It has a reputation of providing large amounts of capacity, backed by top ratings, that comes with an expensive price tag.

For the first quarter, Berkshire reported $2.01 billion in other-than-temporary impairments of investments, which related primarily to its investment in ConocoPhillips. It also reported $986 million in derivative losses, which it said primarily relates to an increase in its potential loss under its high yield credit default contracts.