- REUTERS/Fred Prouser
- Warren Buffett said in his annual letter to shareholders the insurance business is “the engine that for 51 years has powered Berkshire’s growth.”
- The business itself usually makes modest profits, but “the float” enables the company to make massive profits in investments.
- Thanks to the trio of hurricanes last fall, which caused $100 billion in damage by Buffett’s estimates, Berkshire Hathaway’s insurance business took a loss for the first time in 14 years.
Warren Buffett’s bread-and-butter insurance business took a loss for the first time in 14 years in 2017 thanks to the wave of hurricanes last fall.
While he’s famed for his investing prowess, the Berkshire Hathaway chief’s property-and-casualty insurance business is “the engine that for 51 years has powered Berkshire’s growth,” he said in his annual letter to shareholders.
That’s because the “float” from the insurance underwriting business – cash customers pay in premiums that Berkshire holds on to until the customer makes a claim – allows the company to make billions in investments, and it gets to keep the returns from those investments.
Buffett bought the insurer National Indemnity in 1967, and it helped launch Berkshire Hathaway into the juggernaut it is today. The company is the largest property-and-casualty insurer in the country measured by float, with $114.5 billion.
It’s a key to Buffett’s success, but as he writes in his annual letter, float also comes with risk – sometimes “oceans of risk.” Rare catastrophes can cause unexpected and significant losses in the insurance business.
Berkshire manages its insurance business conservatively, so usually it avoids losses and instead turns a decent underwriting profit each year.
But not in 2017. Hurricanes Harvey, Irma, and Maria romped through Texas, Florida, and Puerto Rico, causing by Buffett’s estimates $100 billion in losses. If Irma had taken a slightly different path, that tally could’ve doubled.
Berkshire Hathaway took $3 billion in losses from those three hurricanes, or $2 billion after taxes, Buffett wrote in the letter.
It’s the first time in the last 14 years that his vaunted insurance business took a loss. The business recorded $28.3 billion in pre-tax profits over that span, but in 2017 lost $3.2 billion.
“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,” Buffett said in the letter. “My warning became fact in 2017, as we lost $3.2 billion pre-tax from underwriting.”
It’s worth noting that despite the insurance losses, Berkshire Hathaway made $3.7 billion in dividends from its stock holdings alone last year, with even higher unrealized gains from market appreciation. Those stock holdings were enabled by the company’s float from its insurance business.