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Coronavirus impact on Berkshire


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Sorry if this has been discussed to death elsewhere but didn't see a specific thread for it, and it's a concern that keeps bubbling up in the back of my mind.


Coronavirus costs would hit Berkshire in many ways, some obvious (lower spending at DQ, lower travel spending for airlines, etc, etc) and some not super obvious.


The concern I have is around Ajit Jain's insurance portfolio, and the shutdown of almost all professional and amateur sports leagues. Given how quickly and easily they've acquiesced to shutdowns* it seems clear they have significant levels of insurance coverage, and that makes me wonder how big Berkshire's exposure is there. Obviously in Ajit and Warren I trust, but still makes me nervous.


Anyone have any thoughts, information on this or any other coronavirus exposure that could be significant to Berkshire?


*excepting the UFC, perhaps proving Warren's point that you only find out who's been swimming naked when the tide goes out.

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I wouldn't worry too much.


I'm sure that this will be a bad loss year for the insurance industry - all that business interruption insurance out there. Berkshire surely has its fair share of exposure to that. But it is a very smart underwriter and risk manager. They'll probably fare better than others. It'll benefit in some ways as well - GEICO will probably have a banner year as losses will decline.


The bottom line is this though. If an event comes to pass that even remotely threatens Berkshire, the streets are lined with the corpses of insurance companies. At that point Berkshire will rip the eyes out of the insurance market on the other side. At the very least you'll see a very hard market in insurance. Guess who's gonna have an appetite for underwriting?


In a worst case scenario exposure to corona risk may be toxic to keep on the books and you could see a Lloyds type deal. This is unlikely though because it's not long period risk. Epidemics tend to end. But who really knows how this thing shakes out? There were losses from 9/11 for years and years after the actual event transpired.

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Insurance is more tail risk, but a lot of their wholly owned business are highly sensitive to the economy : Iskar (Tools, Peer would be KMT), PCP (aircraft, energy are main markets), Burlington (moves still a lot of coal and recently crude), retailers and then a portfolio chuck full with bank stocks thet were done 30-40%.


I frankly don’t think they it is that great of a bargain here real-time to many other securities available right now. One can sleep well at night knowing that they do have a great balance sheet, stable utility and insurance earnings (Geico probably has a great year because people are driving less) and he might be able to snap up and elephant  for a good price. There is a lot of value in that.

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Regarding Business Income Insurance, or what brokers call BI, is written with a trigger for "Direct Physical Loss".  Meaning the business needs to sustain physical damage.  To be clear, a business losing revenue because their clients are not buying because of fear of disease - IS NOT "direct physical loss".  There are policies written for Continent Business Income (Continent BI) to insure supply chain or reliance on other business to produce profit of insured business.  Continent BI is also written on Direct Physical Loss basis.  Meaning, BI or Contigent BI does not cover Pandemics.  Standard policies exclude this exposure.  Any large losses from Pandemic would come from Ajit's book who has capacity for large "un-insurable events" like a pandemic but it would have to be specifically endorsed and guidence on Ajit's book is not gonna be disclosed so we won't know.  Only product I am aware of in the market for Pandemic cover is written by Munich Re/Metabiota brokered by Marsh.  (I bet their phones are ringing off the hook!)


Workers Compensation exposure is also limited due to exclusions.  Some insureds will have draw down in payrolls and thus premium collected will be down however there is STRONG data over time that shows in economy down cycles less claims are reported due to employee wanting to keep their job. 


GEICO should perform well - less cars on road = less accidents. 


From an insurance perspective, this type of panic is when Berkshire will outperform the market and with an already hardening market - these are great tailwinds for a great business to continue to operate from a position of strength. 


In other parts of business, Mr. Buffett's Equity index put option contracts with expiration in Feb 2023 will need adjustment.  As per 10-K, a 30% move to downside would result in a change of $1.8B in value.  Annual report does cite conditions could fair worse considering concentration of puts.  Good news a large portion of the outstanding puts were retired in Feb 2019.  Some impairment will be applied in coming quarters. 


The cash pile is a HUGE option for Berk and hopefully being deployed wisely.  I also believe the value of Tedd/Todd as capital allocators will be tested here and hope they show significant strength during this opportunity.   

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This are the times for which Berkshire is built.


To me more importantly, about right after the Daily Journal Annual meeting, I was getting very nervous about Charlie and Warren in a wash of all those people who could potentially infect them. I was very relieved that BH's annual is now online. (There are also a fair number of elderly shareholders who would also have been at risk.)

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  • 2 weeks later...

So.. just doing some calculations. Seems like the BRK market pf has lost around 30 bn USD value as of late... So my dnamic BV still gets me to around 1,2x bv at 180/share. Any thoughts? However, BRK has lost close to 100 bn USD in market value. Some ofi t seems fair geiven that 2020 and maybe 2021 will significantly impact the earning power

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  • 1 month later...

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