Our intent is not to overhype the news like much of the media appears to have done.  Still, it is hard to not notice that this storm system has already developed into a formally named system while it is still located closer to Africa than it is to the Caribbean.  The media will probably play this one up on the “K” angle as it was Katrina that was such a hard lesson for the U.S. before.  Insurers will undoubtedly be watching this system in the days ahead regardless of which letter of the alphabet it has.  What makes this system unique is that the current trajectory is actually heading to what could be some of the same storm-damaged areas as Irene.  That would not be a welcoming event and we would only hope that the trajectory changes to send this up north to just dissipate in the colder waters of the North Atlantic.

Allstate Corporation (NYSE: ALL) and The Travelers Companies, Inc. (NYSE: TRV) have exposure in the areas around North Carolina as well as exposure further up the coast.  The Chubb Corporation (NYSE: CB) has exposure in New York and on north throughout southern New England.  Hartford Financial Services Group Inc. (NYSE: HIG) was on CNBC this week almost talking down some of the damages from the storm, which is a relief to everyone.

Berkshire Hathaway Inc. (NYSE: BRK-B) has insurance and/or reinsurance exposure, and Everest Re Group Ltd. (NYSE: RE) and PartnerRe Ltd. (NYSE: PRE) were also up on Monday after the damages were lower than the reinsurance threshold even while they are all set to raise rates.

The wild card in hurricane season is a small company called Crawford & Company (NYSE: CRD-B).  This outfit provides claims management solutions to insurance companies and self-insured entities.  Think of Crawford, well its associates, as army of individuals as insurance claims adjusters.

Lowe’s Companies Inc. (NYSE: LOW) and The Home Depot, Inc. (NYSE: HD) have slid after a poor confidence number, but they are obvious potential beneficiaries if any real hurricane damage comes.

A new update will be made around 11:00 AM or 2:00 PM EST, but as of now the National Hurricane Center issued advisories on the newly named storm.  This one is still quite a ways out at 535 miles from the Cape Verde islands.  Current maximum sustained winds are 35 knots (40 MPH) and it is moving West-Northwest at 15 knots (17 MPH). If the storm does not peter-out and continues at the same pace, this looks like it would be an issue for the Eastern Seaboard again the weekend after Labor Day.

Again, this is a storm which could change its path or it could just fizzle out all on its own.  We certainly hope it does that or even that it drifts north and just fizzles out in the colder North Atlantic.  We’ll be keeping an eye on Katia in the days ahead.

JON C. OGG

Here is the current NOAA image with a projected path (updated link path here):

What was bad news for insurance and reinsurance stocks last week is suddenly good news this week.  The insurance losses also appear to be low enough that most of the big reinsurance players appear to be escaping Irene’s liabilities either unscathed or only with a small amount.

Allstate Corporation (NYSE: ALL) and The Travelers Companies, Inc. (NYSE: TRV) have exposure in the areas around North Carolina, where the brunt of the hurricane force hit.  They both also had exposure further up the coast. Travelers is now up 3.4% at $49.97 and Allstate is up 4.5% at $25.32.

The Chubb Corporation (NYSE: CB) has exposure in New York and on north throughout southern New England and its shares are up 3.7% at $61.62 on the day.  Hartford Financial Services Group Inc. (NYSE: HIG) is also up over 4% at $18.00 this morning.

Berkshire Hathaway Inc. (NYSE: BRK-B) would have had exposure from insurance and/or reinsurance losses… This is being treated as lower now in liabilities and shares are up 2.5% at $71.72 so far on the news.  Everest Re Group Ltd. (NYSE: RE) is up 3.6% at $79.96 and PartnerRe Ltd. (NYSE: PRE) is up 3.7% at $56.40.

The surprise is actually in Crawford & Company (NYSE: CRD-B).  The company had a near-40% gain last week as it provides claims management solutions to insurance companies and self-insured entities.  Think of this as an employment clearing house for insurance claims adjusters.  This one is up again by more than 2% at $7.08, but after last week’s huge gain it would be one we would view a bit more cautiously.

This is one of those situations where less-bad news is good news.

JON C. OGG

Ace now has a dividend yield based after this hike and with shares up around $69.00 of just over 2.00%.  We would consider this more in the middle of the pack of insurance and reinsurance.  Everest Re Group Ltd. (NYSE: RE) pays about a 2.1% yield today and PartnerRe Ltd. (NYSE: PRE) has a yield of just above 3.00%.  Berkshire Hathaway Inc. (NYSE: BRK-A) recently gave its earnings and showed much larger losses from Japan, as you would expect on its size, due to Japan; Berkshire offers no dividend.

When ACE reported earnings it said that net income for the first quarter was $0.76 per share, versus $2.22 per share for the 2010 first quarter. Net income excluding net realized gains and losses was $0.79 per share versus $1.70 a year earlier. 

Net after-tax catastrophe losses for the first quarter of 2011 were $443 million, including reinstatement premiums, or $1.30 per share, compared with $149 million, or $0.44 per share, for the first quarter of 2010.  The company further noted that total pre-tax catastrophe losses including reinstatement premiums were $489 million, and about $247 million was related to the Japan earthquake.

Book value does matter here because ACE makes money.  That stated book value rose by $402 million, or 2%, during the quarter and that book value per share came in at $69.33 with a tangible book value per share of $55.31.  Tangible book value is of course far more important to investors, but Ace just hit a new all-time high of $69.13 today.

All-time high?  Something is working out just fine… Maybe the financial risks in Japan are not as severe as we have all recently expected.

JON C. OGG

Arch Coal Inc. (NYSE: ACI) Raised to Buy at Brean Murray; Reiterated Buy at Argus.
Dendreon Corporation (NASDAQ: DNDN) Reiterated Buy at Needham.
Everest Re Group, Ltd. (NYSE: RE) Maintained Underperform as Bear of the Day at Zacks.
General Motors Company (NYSE: GM) Raised to Buy at UBS.
Hercules Offshore, Inc. (NASDAQ: HERO) Raised to Outperform at FBR.
JetBlue Airways Corporation (NASDAQ: JBLU) Reiterated Hold at Argus.
LM Ericsson Telephone Co. (NASDAQ: ERIC) Raised to Neutral at JPMorgan.
Pool Corporation (NASDAQ: POOL) Raised to Outperform as Bull of the Day at Zacks.
Rare Element Resources Ltd. (AMEX: REE) Started as Buy at Dahlman Rose.
U.S. Steel Corporation (NYSE: X) Reiterated Buy at Argus.
Viacom Inc. (NYSE: VIA-B) Raised to Buy at BofA/ML.
VIVUS Inc. (NASDAQ: VVUS) Reiterated Buy at Needham.
Wells Fargo & Co. Inc. (NYSE: WFC) Reiterated Sell at Argus.

You can join our free daily email distribution list to hear more about analyst upgrades and downgrades, top day trader and active trader alerts, dividend trends, news on Buffett and other investment gurus, IPOs, secondary offerings, private equity, and more.

JON C. OGG

Arcelor Mittal (NYSE: MT) Raised to Buy at Goldman Sachs.
BMC Software Inc. (NYSE: BMC) Cut to Hold at Citigroup.
Chimera Investment Corporation (NYSE: CIM) Cut to Market Perform at KBW.
Community Health Systems, Inc. (NYSE: CYH) Cut to Perform at Oppenheimer.
Dynegy Inc. (NYSE: DYN) Reiterated Hold at Argus.
Evergreen Solar Inc. (NASDAQ: ESLR) Cut to Sell at Citigroup.
Everest Re Group, Ltd. (NYSE: RE) named as Bear of the Day at Zacks.
Gap Inc. (NYSE: GPS) Cut to Neutral at BofA/ML; Cut to Sell at Goldman Sachs.
Genuine Parts Company (NYSE: GPC) Reiterated Buy at Argus.
Google Inc. (NASDAQ: GOOG) Maintained Buy but cut estimates at Argus.
Infosys Technologies Limited (NASDAQ: INFY) Cut to Neutral at Credit Suisse;target and estimates cut at HSBC.
J.C. Penney Co., Inc. (NYSE: JCP) named Bull of the Day at Zacks.
J.P. Morgan Chase & Co. (NYSE: JPM) Reiterated Hold at Argus.
Iron Mountain Inc. (NYSE: IRM) Cut to Hold at Citigroup.
KB Home (NYSE: KBH) Raised to Neutral at Credit Suisse.
Kraft Foods Inc. (NYSE: KFT) Cut to Equal-Weight at Morgan Stanley.
Marvell Technology Group Ltd. (NASDAQ: MRVL) Cut to Neutral at Susquehanna.
PG & E Corp. (NYSE: PCG) Raised to Outperform at Credit Suisse.

If you are interested in the top research upgrades and downgrades from last week, those include CYH, GOOG, GTXI, MPEL, KWK, RIG, SLW, RGLD, and THC.

You can join our free daily email distribution list to hear more about analyst upgrades and downgrades, top day trader and active trader alerts, dividend trends, news on Buffett and other investment gurus, IPOs, secondary offerings, private equity, and more.

JON C. OGG

Alliance Data Systems Corporation (NYSE: ADS) Cut to Market Perform at KBW.
Accuray, Inc. (NASDAQ: ARAY) Raised to Outperform as Bull of the Day at Zacks.
CenterPoint Energy, Inc. (NYSE: CNP) Raised to Outperform with $20 target at Credit Suisse.
Everest Re Group, Ltd. (NYSE: RE) named as Bear of the Day at Zacks.
Ford Motor Co. (NYSE: F) Raised to Neutral at Credit Suisse.
Freeport McMoRan Copper & Gold Inc. (NYSE: FCX) Reiterated Buy at Argus.
GameStop Corporation (NYSE: GME) Reiterated Outperform and $28 target at Credit Suisse.
General Dynamics Corporation (NYSE: GD) Reiterated Buy with $86 target at Argus.
Optimer Pharmaceuticals, Inc. (NASDAQ: OPTR) Raised to Buy at BofA/ML.
Potash Corp. of Saskatchewan (NYSE: POT) Reiterated Outperform and raised target to $71 at Credit Suisse.
Research-in-Motion Ltd. (NASDAQ: RIMM) removed from Focus List but Maintained Outperform at Credit Suisse.
Verizon Communications Inc. (NYSE: VZ) Reiterated Buy with $44 target at Argus.

Apple Inc. (NASDAQ: AAPL) has a chart that is either wavering or one which is getting sick.  Here is our detailed chart analysis and fundamental explanation regarding why this may be happening. Elsewhere, Canaccord Genuity raised its target to $480 from $460 on Apple this morning and shares are indicated up marginally pre-market.

You can join our free daily email distribution list to hear more about analyst upgrades and downgrades, top day trader and active trader alerts, dividend trends, news on Buffett and other investment gurus, IPOs, secondary offerings, private equity, and more.

JON C. OGG

FULL ARTICLE on Morningstar.com by Bill Bergman

• Everest Re (RE) to Outperform at Wachovia.
• Fortress Investment (FIG) Raised to Hold from Sell at Citigroup.
• PartnerRe (PRE) Raised to Outperform at Wachovia.
• Seattle Genetics (SGEN) Raised to Outperform at Oppenheimer.
• T. Rowe Price (TROW) Raised to Outperform at KBW; raised to Outperform at Wachovia.
• Yamana Gold (AUY) Raised to Outperform at CIBC.
• Nortel (NT) Cut to Neutral at UBS.
• Rick’s Cabaret (RICK) Cut to Neutral at Merriman Curhan Ford.
• Royal Dutch Shell (RDS.A) Cut to Underperform at Credit Suisse.
• US Steel (X) Cut to Sell at UBS.

Jon C. Ogg
October 27, 2008

His annual investor letter is always an important read, although investors should really note that this should be viewed and interpreted as a "macrocosm" of Microcosms.  Warren Buffett will be the first to tell you he cannot predict the stock market, cannot exactly predict the economy, cannot predict the weather, and cannot predict the short-term implications on every stock out there.  But he smooths out all the news and noise from the long-term vision.  That is what a long-term value and income manager is supposed to do, particularly if his holding period is "Forever." If you look over his latest public stock investment holdings, you’ll see he still goes for the simple and easy to understand. We gave a list of candidates that could fall under his ambitions of a "whale of a deal," although this seems more like the past rather than the present or future.

So what are the implications of the Oracle of Omaha panning the insurance sector.  Of his $2.35 Billion in net earnings for the last quarter, $1.44 Billion of the total $2.35 Billion came from insurance underwriting and insurance investment income (61%).  For Q4 2006, the percentage of insurance-tied numbers was 60% of the $2.868 Billion in operating earnings.  For all of 2007, the percentage of insurance-tied numbers was 59% of the $9.634 Billion in operating income.

In his annual letter to shareholders, Mr. Buffett noted specifically that margins in insurance were going to be lower even if we had another disaster free year.  He even noted, “If the winds roar or the earth trembles, results could be far worse.”  In the past two years he has joked about having the foresight to benefit from no disasters.  If that prediction isn’t harsh enough, try this one: “It is a certainty that insurance-industry profit margins, including ours, will fall significantly in 2008. Prices are down, and exposures inexorably rise.”  Or better yet, "That party is over." 

Mr. Buffett has even gone out on a limb to predict the future Berkshire Hathaway as a whole will have breakeven or positive earnings.  He admitted the law of large numbers has caught up with Berkshire Hathaway.  But what happens if you are an executive or bean counter at OTHER insurance companies?

Berkshire Hathaway from best we can tell has not gotten mixed up with all of the leveraged and crazy CDO structures that couldn’t be explained.  That isn’t true elsewhere.  But every portfolio manager talks his or her own book.  There are many things that have yet to be resolved and there are likely to still be at least some failures from all this fallout.  Insurance companies will be in that boat too as their financial bets are frequently much farther out than that of banks. 

• Mr. Buffett has already made a backstop offer for the bond insurers to pick up their municipal assets on the cheap, which were rebuffed faster than the offers were made.  MBIA (NYSE: MBI) and Ambac Financial (NYSE: ABK) are still a "pending situation" as far as ultimate long-term viability, and Berkshire Hathaway decided to open a competing municipal bond insurance operation to compete.
• American International Group (NYSE: AIG) has been hamstrung by leveraged loan and CDO exposure that was first disclosed as immaterial and somehow has grown to a quarterly loss of some $5 Billion.  It also has noted a total of $42.2 Billion of exposure to the troubled bond insurers, and it has written roughly $61 Billion of credit default swaps on CDO’s with some subprime collateral.  They are far from immune, AIG stock fell some 6.5% Friday alone to $46.86, and its 52-week trading range is $44.10 to $72.97.
• Everest Re Group, Ltd. (NYSE: RE) is one of the largest pure-play reinsurers out there, another arena in which Berkshire Hathaway is a giant.  It only fell 1% Friday to $96.88, and its 52-week trading range is $90.27 to $115.86.  They would not at all be immune, particularly after its profits fell some 90%.
• Hartford Financial Services (NYSE: HIG) is another insurance monster that saw shares fall another 3.75% to $69.91, and its 52-week trading range is $65,76 to $106.23.  Chubb (NYSE: CB) is yet another that saw a 3.1% drop Friday to $50.90, while its 52-week trading range is
• $45.65 to $55.99.
• Progressive Corp. (NYSE: PGR) competes head to head with GEICO and it too saw a 3% drop on Friday to $18.33, while its 52-week trading range is $16.98 to $25.16.

Realistically, this list could just go on and on.  There is no reason to.  Most of the reports out there merely just cover his comments in case everyone doesn’t have the time to read through his endless letter.  We have one solid rule when we question anything in the financial markets, and the answer is almost always "FOLLOW THE MONEY."  Mr. Buffett is a great manager, and those who bash him based only upon the "today" really look like clowns.  Regardless, it’s almost like he is trying to prepare his holders for the worst again after two years of no catastrophes.  Maybe he is trying to talk down other insurance operations so he can buy them on the cheap or show how Berkshire Hathaway insurance subsidiaries have better balance sheets.  Either way, he’s talking up his book even if it was meant to sound cautious.

The fact that we noted "Buffett’s Loss Could Be Your Gain" after Barron’s panned this one change nothing about the situation.

Jon C. Ogg
March 1, 2008

Jon C. Ogg
July 18, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.