Warren Buffett’s annual letter to Berkshire Hathaway shareholders usually contains an interesting section on the insurance business—a crucial ingredient in the Oracle of Omaha’s investing strategy.
Read it here: Warren Buffett’s annual letter to investors
In this year’s bulletin, Buffett talks about the hit Berkshire’s BRK.A, +0.87% BRK.B, +1.01% underwriting business took as a result of the three devastating hurricanes that hit Texas, Florida and Puerto Rico last year. Berkshire’s pretax loss is seen at $3.2 billion he said, which comes to around $2 billion after tax. Overall damages from the hurricanes are seen at around $100 billion, Buffett noted, while cautioning that such estimates are often revised substantially higher.
Buffett noted the loss came after a 14-year string of underwriting profits, which totaled $28.3 billion pretax.
“I have regularly told you that I expect Berkshire to attain an underwriting profit in a majority of years, but also to experience losses from time to time. My warning became fact in 2017, as we lost $3.2 billion pretax from underwriting.”
Buffett said the $2 billion net cost from the hurricanes cut Berkshire’s net worth by less than 1%, while other companies in the reinsurance business suffered net losses of 7% to 15%.
Buffett also discussed the probability of a U.S. “mega-catastrophe”— an event that causes $400 billion or in insured losses. Berkshire puts the probability of any such event in a given year at 2%.
“No company comes close to Berkshire in being financially prepared for a $400 billion mega-cat. Our share of such a loss might be $12 billion or so, an amount far below the annual earnings we expect from our non-insurance activities,” he said.
Frighteningly, he says that such an event would put much, if not most, of the property-and-casualty insurance world out of business.