Addressing shareholders in his 2017 annual Chairman’s letter, Warren Buffett underlined the financial strength of Berkshire Hathaway, highlighting its ability to respond to a $400 billion mega-catastrophe event.
On the back of 14 consecutive years of underwriting profits, Berkshire Hathaway fell to an underwriting loss in 2017 as a result of the impacts of catastrophe events in the second-half of the year.
However, given the size of the Berkshire Hathaway conglomerate, its income earned from its other businesses and its core investment activities, which includes its huge insurance-float, the catastrophe events didn’t make too much of a mark on the overall performance of the conglomerate.
Berkshire Hathaway estimates losses from Hurricanes Harvey, Irma and Maria of $2 billion after-tax, which reduced its GAAP net worth by under 1% and, Buffett pointed out that some in the reinsurance sector suffered losses in net worth of between 7% to over 15%.
This underlines the financial strength of Berkshire Hathaway when compared to others in the reinsurance industry, and Buffett further highlighted this by noting the firm’s financial preparedness for a mega-catastrophe event striking the U.S.
“We believe that the annual probability of a U.S. mega-catastrophe causing $400 billion or more of insured losses is about 2%. No one, of course, knows the correct probability. We do know, however, that the risk increases over time because of growth in both the number and value of structures located in catastrophe-vulnerable areas.
“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.
“Concurrently, much – indeed, perhaps most – of the p/c world would be out of business. Our unparalleled financial strength explains why other p/c insurers come to Berkshire – and only Berkshire – when they, themselves, need to purchase huge reinsurance coverages for large payments they may have to make in the far future,” said Buffett.
As stated by Buffett, its income from non-insurance activities is substantial, and thus enables the company to potentially better absorb huge, and even mega-catastrophe events when compared to others in the space.
A catastrophe loss of this magnitude has never happened, but with the changing climate, rising asset valuations and increased urbanisation in built-up and coastal regions, both of which are often susceptible to natural catastrophe risks, the potential is certainly there.