How much is BRK exposed to a giant disaster?

[yadayada]

Excuse me if I am completly wrong here, but doesn't buffet use the insurance float to invest with? What would happen in the case of some giant disaster like in san francisco in 1906? Or some other super disaster? Doesn't that have the potential to wipe out buffets insurance businesses and the large float with it? Since Buffet has said that he doesn't really expect to outperform the S&P 500, wouldn't this make BRK a worse investment option then an index fund?

[gfp]

The float wouldn't be wiped out by a large super cat.  BRK's policies can be very large, but all of them are capped.  BRK holds tens of billions of dollars in cash and much more in liquid securities to pay any large claims event easily.  But because of the way BRK is set up, BRK would have a near break-even year if hit by a super-cat that would wipe out a big portion of the catastrophe insurance industry.  This becomes safer every year, as it is virtually impossible to grow the insurance business inside BRK as fast as the rest of BRK - making Insurance a smaller and smaller part of BRK over time.

[thepupil]

1. There is a reason Berkshire keeps the float's value in cash and short term fixed income. Berkshire's estimated insurance liability is 70B or so. If that all came due tomorrow, Berkshire could handle it.

2. There is a reason Berkshire invests in operating businesses whose stable pretax income can be called upon to buttress the castle should it be assaulted by an insurance loss storm.

3. Anything can happen. I am comfy with 25% in berkshire (got up to 40% but not as cheap anymore), not 100%.

4. Hedging is cheap. Buy way OTM long term puts and sleep well at night if the gloom and doom gigantic catastrophe event scares you. Berkshire makes money selling tail insurance to others; if you are worried about the tail, buy some protection yourself! 

[gfp]

Remember that the $77 Billion in float is not all from super-cat policies, and the fairly small portion that is is not concentrated in any one region.  Most of the float is long-term in nature, such as workers comp, asbestos, life, etc…  It is very stable year to year.

 

It is not possible for the float to come due all at once.  It is a very diversified, long-lived and uniquely attractive pool of float.

[thepupil]

Agreed, I was just saying that Berkshire has a hugely liquid short duration portion of its book and even in the absolutely impossible (would take nuclear war in which case who cares about our PAs) scenario in which it all came due, Berkshire could handle it.

[ERICOPOLY]

4. Hedging is cheap. Buy way OTM long term puts and sleep well at night if the gloom and doom gigantic catastrophe event scares you. Berkshire makes money selling tail insurance to others; if you are worried about the tail, buy some protection yourself!

 

Write puts on blue-chip non-insurance companies (like KO) and use the proceeds to purchase BRK puts.  That way, you have the upside of Berkshire, the tax-deferral of not getting paid a dividend, and the downside profile of a secure, non-insurance company.

 

It keeps the concentrated upside in Berkshire, while shifting the downside to a diversified basket of non-insurance risk.

[boilermaker75]

Berkshire is the reinsurer of choice because of their ability to fulfill all its commitments under conditions of extreme adversity. For this they can charge higher premiums. Also many policies are not activated by the first super-cat that meets the policy terms, but cover a second, third or fourth event. Some policies are triggered by only a specific event, like a hurricane.

 

Berskhire is probably the largest writer of reinsurance in the world.

 

A super-cat policy pays off usually if two things occur, specific losses over a threshold and aggregate losses for the industry above a certain level.

 

Berkshire prices super-cat expecting to pay out 90% of the premiums. If they write $1 billion in premiums the result could be $1 billion in profits in a year with no super-cats to $2 billion in loss in a year where they have to pay out totally on commitments.

 

In the 1994 letter to shareholders’, “All things considered, we believe our worst-case insurance loss from a super-cat is now about $600 million after-tax, an amount that would slightly exceed BRK’s annual earnings from other sources.”

 

[willie2013]

I don't think it is possible to exclude the chance of another "black swan" type of event, such as

the man-made mega-cat that Buffett writes about below:

 

http://berkshirehathaway.com/qtrly/web1101.html

[boilermaker75]

I don't think it is possible to exclude the chance of another "black swan" type of event, such as

the man-made mega-cat that Buffett writes about below:

 

http://berkshirehathaway.com/qtrly/web1101.html

 

That letter was necessary because Berkshire did not know the extent of liabilities at General Re before acquisition in 1998. Berkshire is careful to write policies that limit their super-cat losses to acceptable amounts.  As long as Berkshire doesn't again unknowingly acquire super-cat liabilities they will be ok.