Buffett: Berkshire can handle extreme P&C losses such as wildfires “without blinking”

By David Bull

Feb 22 - (The Insurer) - Warren Buffett said it is part of Berkshire Hathaway’s job as a P&C (re)insurer to contest drivers of claims inflation including escalating verdicts and litigation but added that it is undeterred by “dramatic and growing” loss payments from events such as wildfires.

In his annual letter to shareholders, the veteran chairman of the investment conglomerate that houses (re)insurance operations such as Geico, Berkshire Hathaway Specialty Insurance, RSUI, TransRe and Gen Re said: “It’s our job to price to absorb these and unemotionally take our lumps when surprises develop.”

But he added: “It’s also our job to contest ‘runaway’ verdicts, spurious litigation and outright fraudulent behavior.”

Buffett was writing after a year in which he said Berkshire Hathaway had done better than he had expected – including a 66 percent increase in its P&C underwriting profits to $9.02 billion.

He highlighted general P&C insurance pricing strengthening in 2024, reflecting a major increase in damage from convective storms.

“Climate change may have been announcing its arrival. However, no ‘monster’ event occurred during 2024. Someday, any day, a truly staggering insurance loss will occur – and there is no guarantee that there will be only one per annum,” Buffett wrote.

The firm also disclosed an estimate for a $1.3 billion pre-tax hit from last month’s Southern California wildfires that will impact its first quarter earnings.

“All things considered, we like the P&C insurance business. Berkshire can financially and psychologically handle extreme losses without blinking. We are also not dependent on reinsurers and that gives us a material and enduring cost advantage,” he commented.

He pointed to the differences between short-tail lines and those that have a long tail such as medical malpractice and product liability.

“In ‘long-tail’ lines, a P/C insurer may report large but fictitious profits to its owners and regulators for many years – even decades. The accounting can be particularly dangerous if the CEO is an optimist or a crook.

“These possibilities are not fanciful: History reveals a large number of each species. In recent decades, this ‘money-up-front, loss-payments-later’ model has allowed Berkshire to invest large sums (‘float’) while generally delivering what we believe to be a small underwriting profit,” he observed.

He said that Berkshire Hathaway makes estimates for “surprises” that have so far proved to be adequate.

“We are not deterred by the dramatic and growing loss payments sustained by our activities. (As I write this, think wildfires),” Buffett added.

NO RISK, NO INSURANCE DEMAND

In his letter, the Berkshire Hathaway chief highlighted the fact that P&C insurance growth relies on increased economic risk to fuel demand.

“No risk – no need for insurance,” he stated.

Buffett noted the escalating risk environment, with 300 million vehicles in the US alone – “a massive fleet causing huge damage daily” – and property damages from hurricanes, tornadoes and wildfires that are “massive, growing and increasingly unpredictable in their patterns and eventual costs”.

“It would be foolish – make that madness – to write ten-year policies for these coverages, but we believe one-year assumption of such risks is generally manageable. If we change our minds, we will change the contracts we offer,” he commented.

He added that during his lifetime auto insurers have generally abandoned one-year policies and switched to those with a six-month term in a move that has reduced float for Berkshire Hathaway but allowed “more intelligent underwriting”.

“No private insurer has the willingness to take on the amount of risk that Berkshire can provide. At times, this advantage can be important. But we also need to shrink when prices are inadequate. We must never write inadequately-priced policies in order to stay in the game.

“That policy is corporate suicide. Properly pricing P/C insurance is part art, part science and is definitely not a business for optimists. Mike Goldberg, the Berkshire executive who recruited Ajit, said it best: “We want our underwriters to daily come to work nervous, but not paralyzed,” he wrote.

Buffett highlighted the $32 billion of after-tax profits generated from Berkshire Hathaway’s underwriting over the past two decades, equivalent to around 3.3 cents per dollar of sales after tax.

At the same time its float has grown from $46 billion to $171 billion.

“The float is likely to grow a bit over time and, with intelligent underwriting (and some luck), has a reasonable prospect of being costless,” he suggested.