Tag Archives: Warren Buffett

Warren Buffett On Climate Change Risk

Climate change made a few headlines over the weekend, both in best actor Leo DiCaprio’s Oscars acceptance speech and in Warren Buffett’s annual letter to Berkshire Hathaway shareholders.

Buffett, facing calls from a proxy voter to file a report on the risks that climate change might present to Berkshire Hathaway’s insurance business, said it seems highly likely that climate change poses a major problem for the planet, but made clear that climate change is not a concern for its insurance operation:

As a citizen, you may understandably find climate change keeping you up nights. As a homeowner in a low-lying area, you may wish to consider moving. But when you are thinking only as a shareholder of a major insurer, climate change should not be on your list of worries.”

Buffett said it was understandable that the sponsor of the proxy proposal believes Berkshire is especially threatened by climate change because “we are a huge insurer, covering all sorts of risks”.

Such worries might be valid, he said, if Berkshire wrote 10 or 20-year policies at fixed prices.

But because insurance policies are customarily written for one year and repriced annually to reflect changing exposures, Buffett maintains that climate change is an opportunity for growth. In his words:

Increased possibilities of loss translate promptly into increased premiums.”

According to Buffett, up to now, climate change has not produced more frequent or more costly hurricanes or other weather-related events. As a result, U.S. super-cat rates have fallen steadily in recent years, which is why Berkshire has backed away from that business.

If super-cats become costlier and more frequent, the likely — though far from certain — effect on Berkshire’s insurance business would be to make it larger and more profitable.”

For a broader perspective on how insurers are dealing with climate change risk, check out the Insurance Information Institute’s issues update paper: Climate Change and Insurance Issues.

Buffett on Attractive Insurance Economics

Warren Buffett’s annual letter to Berkshire Hathaway shareholders released Saturday notes that Berkshire’s attractive insurance economics exist only because it has “some terrific managers running disciplined operations that possess strong, hard-to-replicate business models.†

As he goes on to extol the virtues of the major units, Buffett comments that Berkshire is far more conservative in avoiding risk than most large insurers.

To put this in perspective, the Oracle of Omaha notes:

For example, if the insurance industry should experience a $250 billion loss from some megacatastrophe – a loss about triple anything it has ever experienced – Berkshire as a whole would likely record a significant profit for the year because of its many streams of earnings. And we would remain awash in cash, looking for large opportunities if the catastrophe caused markets to go into shock. All other major insurers and reinsurers would meanwhile be far in the red, with some facing insolvency.†

As Artemis blog reports, being diversified and cash-rich Berkshire Hathaway’s insurance and reinsurance businesses continue to pay claims and liabilities while the insurance and reinsurance premium float builds and generates significant upside on the investment side of Buffett’s businesses.

Indeed, Berkshire’s attractive insurance economics are due in no small part to  the successful growth of that premium float over the course of years.

Buffett’s  letter  tells us  that Berkshire’s insurance operations again operated at an underwriting profit in 2013 – for the 11th consecutive year – and increased its float.

Buffett writes:

During that 11-year stretch, our float – money that doesn’t belong to us but that we can invest for Berkshire’s benefit – has grown from $41 billion to $77 billion.†

Buffett adds that further gains in float will be tough to achieve, but that if  it does experience a decline in float at some future time, it will be very gradual — at the outside no more than 3 percent in any year.