Last month, 94-year-old Warren Buffett published his annual letter to shareholders. The annual letter of the greatest investor of all time usually offers timely bites of investment and business wisdom, full of domestic humor.
However, this year’s letter had a cold warning on Buffett theme usually does not deal with: climate change.
Remember, doc Buffett is known for investing,, Berksshire Hathawaywith (Nyse: mustache)(Nyse: mustache The basic business is insurance. In fact, the insurance business allows investment business, as it increases the plaw buffett and its team to invest in shares or buy entire companies.
Considering the seemingly inevitable acceleration in the climatic disasters that Buffett points out, insurers are likely to be affected by more and more damage in the future. So, should Buffett’s warning be worried about Berksshire investors?
In a letter published on February 22. Buffett wrote:
Insurance prices were strengthened during 2024, which reflects great increase in damage from convective storms. Climate change may have announced their arrival. However, the “monster” event did not occur during 2024. One day, any day, a really stunning loss of insurance will happen – and there is no guarantee that it will only be one year.
Interestingly, Buffett did not turn to climate change directly in previous letters, despite the property and victims (P&C) insurance to be the core of what Berksshire does. So, does this year mean that there is an increased threat? If so, does that mean that you should sell stock?
According to a study published last year by Potsam Institute for Climate Influence Research (PIK) in Industry Journal NatureClimate disasters can cost the global economy of a whopping $ 38 trillion per year In the middle of this century. This would be a huge increase of 90 times compared to the estimated $ 417 billion estimated economic losses that the world had experienced from natural disasters last year.
More harmful disasters, such as recent Los Angeles fires in the amount of $ 164 billion, is the result of something called “complex time”. Connected time occurs when a combination of two different symptoms of climate change occurs together, which a combined effect leaves two factors independently. So, one plus one is equal to more than two – in this case alone, the larger number is not good.
In the event of a fire in Los Angeles, the city saw during the winter for two years in a row above normal rain, guessing a lot of growing vegetation. However, summer and autumn 2024 were among the hottest on the record, which caused a quick drought. The drought has dried all this additional vegetation, basically creating a lot of inflammation. We all know what happened the following: record winds in January created fires, which had more “fuel”.
Complex time is becoming more and more harmful phenomenon. It is associated with recent fires in South Carolina, Flash Floods in Malaysia and Deep Freeze in Texas 2021. Judging by the PIK study, it seems that these unfortunate events will happen more often.
Image source: Motley Fool.
Despite the ominous forecasts, Buffett still loves Berksshire’s job of insurance. In the letter, it terminates that increased risk is not only part of the insurance, but the risk is actually the only source of industry growth:
P/C Insurance growth depends on increased economic risk. No risk – no need for insurance. Think only 135 years when the world did not have cars, trucks or planes. There are now 300 million vehicles in the US alone, a huge fleet that causes tremendous damage every day.
However, there is a warning: Berksshire and other insurers still need to appreciate their policies profitable. Otherwise, the losses in the industry will escalate together with this superb growth.
In this year’s letter, Buffett suggested some other ways that can be alleviated by escalating risks. For example, P&C insurers can start writing shorter rules to adjust the prices faster. Buffett points out that this has already happened in auto insurance, where insurers have mostly moved to six -month shelves from one -year politics. Although this reduces floating or the amount of cash that insurers get in advance, Buffett notes that he has done so for better insurance.
All in all, I feel pretty comfortable holding my shares in Berksshire. In fact, Berksshire’s insurance is not just not A reason for sale but an increase in climate disaster may actually be a reason for buy more.
After all, Buffett did so recently and Berksshire bought supplies ChubbLeading insurer P&C, last year, making it Berksshire’s ninth biggest share of public shares. So, even Buffett himself adds exposure to insurance industry these days.
This is probably because increased damage to climate change will additionally need to insurance, growing Berksshire franchises along with it. While escalating costs can threaten the solvency of some insurers, Berksshire has several competitive advantages that should allow him to argue profitable. Chubb franchise also has an advantage with its ethos without a problem, a quick request that provides a higher-class client who are willing to pay higher premiums. This price price probably encouraged Berkshire to buy shares of Chubb last year.
If you think about it, insurers competitively favorable can get a double positive financial result from climate change. Not only should insurance premiums grow in the years ahead, together with the risks, but less favorable competition can withdraw to certain business lines or bankrupt, leaving even more profits for the remaining few.
In the letter, Buffett indicates several competitive advantages specific to Berksshire’s insurance, all of which should be aware of. First, Berksshire is so big and well funded that he doesn’t have to buy reinsure for himself. Additional “protection” other insurers must buy to alleviate huge losses increased operating costs. Therefore, since it can withstand higher risks, Berksshire can appreciate certain policies below the competitors.
Second, Buffett instilled in a culture that allows and even encourages Berkshire insurance managers to reduce its business when prices are not appropriate. Many independent insurers, especially public, may feel the need to grow year after year. But this impulse can come to the detriment of insurance, which can become dangerous if the losses later appear greater than expected. But since Berksshire is so large and diverse, there is no same pressure to increase any only insurance line in any year.
Third, Buffett and his insurance chief, Ayit Jain, instilled a caution culture when choosing a manager. “No optimist!” Buffett noted in his letter, and then quoted the executive director who was primarily recruited by Ayita Jain, who said: “We want our insurers to be annoyed daily but not paralyzed.”
Finally, Buffett and his Lieutenants are some of the best investors they could find. Although this speaks to the investment side of the insurance, the two sides of Berkshire are intertwined by themselves, with Buffett investments and operational companies provide further ballast from insurance damage.
The main move from Buffett’s letter is this: although climate change is a risk increase, the insurance industry is likely to grow. As long as Berksshire is held with his pragmatic insurance philosophy and leans into his competitive advantages, it should be fine. In fact, Berksshire can even have the opportunity to have a great great growth in earnings in the time of severe climate change.
Have you ever felt like you missed the ship in buying the most successful stocks? Then you will want to hear it.
On rare occasions, our expert team of analyst issues “Double” supplies Recommendation to companies they think will appear soon. If you are worried that you have already missed the opportunity to invest, now is the best time to buy before it is too late. And numbers speak for themselves:
Nvidia:If you invested $ 1,000 when we doubled in 2009,you would have $ 315,521!*
Apple: If you invested $ 1,000 when we doubled in 2008, You would have $ 40,476!*
Netflix: If you invested $ 1,000 when we doubled in 2004, you would have $ 495,070!*
We are currently releasing “double down” warnings for three incredible companies, and maybe there will be no other chance like this.
Billy Durestein and/or his clients have positions in Berksshire Hathaway. Motley Fool has positions and recommends Berksshire Hathaway. Motley Fool has disclosure rules.
