Warren Buffett's Berkshire Hathaway took a $2.4 billion hit from the 9/11 attacks. The investor warned a nuclear assault could have bankrupted his company.
- Warren Buffett's
Berkshire Hathawaytook a major financial hit from the September 11attacks.
- The investor's company stomached $2.4 billion in underwriting losses from the disaster.
- Berkshire sold a bunch of
terrorisminsurance after 9/11, but was careful to limit its exposure.
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Warren Buffett's Berkshire Hathaway recorded a hefty $2.4 billion of underwriting losses from the terrorist attacks on September 11, 2001. However, a nuclear assault could have put the investor's company out of business entirely, along with its
"Had a nuclear device been available to Osama bin Laden, the loss could have bankrupted most of the industry, Berkshire very much included," Buffett wrote in a Washington Post editorial in November 2001. He added that the total insured losses could have surpassed $1 trillion, exceeding the combined value of the world's property-casualty insurers at the time.
Berkshire counts Geico, National Indemnity, and General Reinsurance among its subsidiaries, making it one of the largest insurers in the world. Its underwriting losses from 9/11 dealt a $1.5 billion blow to its net earnings, fueling a sharp decline from $3.3 billion in 2000 to less than $800 million in 2001. Berkshire stomached an estimated 3% to 5% of the global insurance industry's losses from the incident.
Buffett kicked himself in his letter to Berkshire shareholders in 2001. He knew a major terrorist attack could occur, and was aware of the devastating impact it might have on Berkshire. Yet he failed to adjust the insurance policies his company was writing, which would have softened the blow to its bottom line.
"I violated the Noah rule: Predicting rain doesn't count; building arks does," he said. The investor added that Berkshire was perfectly willing to pay out upwards of $2 billion following a catastrophe, but in the case of 9/11, it hadn't charged enough for assuming the risk that led to a loss of that scale.
Berkshire wasn't cowed by the episode, however. In the months after 9/11, it was one of the few insurers to actively cover terrorism losses. For example, it wrote policies for multiple international airlines, Chicago's Sears Tower, and a North Sea oil platform, Buffett disclosed in his letter.
"Whatever the world's problems, our checks will clear," he proclaimed. Buffett is known for prizing financial security and ensuring Berkshire has ample cash to weather difficult periods.
While Berkshire sold a significant amount of terrorism insurance after 9/11, it limited its coverage of nuclear, chemical, and biological attacks, Buffett noted during his company's annual shareholder meeting in 2002.
A major nuclear explosion would pose an existential threat to Berkshire, he explained, while a biological attack in a major factory or office building would result in workers' compensation losses that could "make the World Trade Center loss look like nothing."
Buffett emphasized that the human cost of a terrorist attack far exceeds the insurance costs, but asserted that Berkshire has to consider whether it can cover claims. If the company collapsed into bankruptcy, it wouldn't be able to compensate those involved in the disaster, not to mention others who suffered injuries years ago but rely on insurance payouts to live, he said.
Charlie Munger, Buffett's business partner and Berkshire's vice-chairman, underscored the tragedy of 9/11, but framed it as an important lesson for the company.
"To the extent that September 11th has caused us to be less weak, foolish, and sloppy, as we plainly were in facing some plain reality, it's a plus," he said at the meeting in 2002.
Berkshire's fallout from 9/11 pales in comparison to the deaths, injuries, and national trauma caused by the attack. But it showed that even careful insurers can be caught off-guard by catastrophes, and taught Buffett and Munger some important lessons.
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