Seeking Alpha
Long/short equity, dividend investing, ETF investing
Profile| Send Message|
( followers)  
Berkshire Hathaway’s Class A shares (NYSE:BRK.A) have been on a roll in recent months, closing above the historic milestone of $100,000 (U.S.) last week. Once again, the media is paying homage to Warren Buffett.

But much of the uptrend can be attributed to a bet on the weather, i.e. the reinsurance businesses stepping up underwriting of ‘catastrophe risks’ following the heavy hurricane season of last year. Now that this year’s hurricane season is virtually over without major incident, the 75%-higher premiums charged in the wake of the disasters are flowing to the bottom line.

To believers in the efficient markets theorem, Buffett has flipped heads again: if there had been some big hurricanes, the Buffett legend would not likely be enjoying a revival. On the other hand, to believers in inefficient markets, Buffett shows the right way to assume risk.

A weather bet resurrected his fortunes but destroyed those of hedge-fund Amaranth and its energy trader. The latter relied on forecasts from weather centers, but that aligned them with the consensus. The other side of the trade had the value: the downside risk was priced in but not the upside.

Anyway, the next time insurers are hit by a wave of claims don’t flee as the compensation claims mount. Their shares might be worth buying because the ensuing boost to premiums goes mostly to the bottom line whenever risks revert to the norm.

Source: Buffett's Fair Weather Bet Paying Off