Warren Buffett. AP Images
Warren Buffett's Berkshire Hathaway suffered a significant financial loss due to the September 11 attacks.
Underwriting losses from the catastrophe cost $2.4 billion to the investor's company.
Berkshire sold some terrorism insurance policies after 9/11 but took care to limit their exposure.
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Warren Buffett's Berkshire Hathaway suffered hefty underwriting losses of $2.4 billion from the terrorist attacks of September 11, 2001. A nuclear attack could have wiped out the entire company, as well as its insurance peers.
Buffett stated in a Washington Post editorial that in November 2001, "Had Osama Bin Laden had a nuclear device, the loss would have bankrupted most industry, Berkshire included." Buffett also stated that total insured losses could have exceeded $1 trillion, more than the combined value of all the property-casualty insurances in the world at the time.
Berkshire has three subsidiaries: Geico, National Indemnity and General Reinsurance. This makes it one of the most important insurers worldwide. The underwriting losses that occurred on 9/11 caused a $1.5 Billion loss to its net earnings. This resulted in a sharp drop from $3.3Billion in 2000 to $800M in 2001. Berkshire absorbed 3% to 5%, according to estimates, of the worldwide insurance industry's losses due the incident.
In 2001, Buffett sacked himself in a letter to Berkshire shareholders. He was well aware that a terrorist attack could happen and was conscious of the potential devastating effects it could have on Berkshire. He failed to adjust the insurance policies that his company was selling, which would have helped to soften the blow to the bottom line.
He said, "I broke the Noah rule: Predicting rainfall doesn't count; building Arks does." Berkshire would be willing to pay upwards of $2Billion for catastrophes, but it wasn't charging enough to assume the loss that caused 9/11.
However, Berkshire was not intimidated by the incident. It was one of few insurance companies that actively covered terrorist losses in the months following 9/11. Buffett revealed in his letter that it had written policies for several international airlines, Chicago's Sears Tower and a North Sea oil platform.
He declared, "No matter what the world's problems are, our checks will be clear." Buffett is well-known for his financial security and making sure Berkshire has enough cash to weather any storms.
Buffett pointed out that Berkshire sold significant amounts of terrorism insurance in 2002 after 9/11 but it did not cover biological, chemical and nuclear attacks.
Berkshire would be under an existential threat if there was a major nuclear explosion, he said. Workers' compensation losses would occur if there were a biological attack on a major factory or office building, which could "make the World Trade Center disaster look like nothing."
Buffett stressed that terrorist attacks have a far greater human cost than the insurance costs. However, he said that Berkshire must consider whether it can pay claims. He stated that if the company went bankrupt, it would not be able pay for the victims of the disaster and those who have suffered long-term injuries but still rely on insurance payments to support them.
Charlie Munger, Buffett’s business partner and Berkshire’s vice-chairman, emphasized the tragedy of 9/11 but presented it as an important lesson to the company.
He stated that "September 11th has made us less weak, foolish and sloppy" at the 2002 meeting.
The effects of 9/11 on Berkshire are nothing compared to the national trauma, deaths and injuries that resulted. It also showed Buffett and Munger that even the most careful of insurers can be caught unaware by disasters.