Warren Buffett Highlights Berkshire Hathaway's Major Risk in Annual Letter

One of the most anticipated pieces of writing for shareholders is out: Warren Buffett's annual letter to Berkshire Hathaway (BRK.A, BRK.B). As a shareholder myself, I always look forward to the insights and wisdom that Buffett shares.

This year, however, Buffett brought up a matter that may raise concerns among shareholders. He identified what he considers the biggest threat to Berkshire Hathaway.

Not About Buffett's Departure

First, let’s clarify what Buffett’s biggest risk is not related to. It is not about his eventual retirement or passing. Many investors, myself included, worry about what will happen when Buffett is no longer leading Berkshire. Although I do believe that the company’s succession plan is sound, Buffett touched on the topic in his recent letter.

Buffett, now at 94, stated, “At 94, it won’t be long before Greg Abel replaces me as CEO and will be writing the annual letters.” This comment is one of the clearest hints he has given about his future absence from leading the company.

He also shared that he uses a cane, joking about discussing “the joys of old age” with his 91-year-old sister, Bertie. Even though it’s reassuring to know he remains mobile, these comments serve as a reminder that his time at the helm is limited.

Berkshire's Main Threat

So, what did Buffett consider to be Berkshire's greatest threat? Connecting the dots is essential here.

Buffett emphasized that property and casualty (P&C) insurance is Berkshire's core business and has grown more crucial than ever. In 2024, the company recorded operating earnings of $9.02 billion from insurance underwriting, with investment income from this unit nearing $13.7 billion. Together, earnings from the insurance sector accounted for 47.8% of the total operating earnings last year, up from 40.1% in 2023.

Buffett explained the P&C business model, which is based on receiving premium payments upfront while later incurring the actual cost of insurance. He noted that they are still handling significant payments related to asbestos exposures from decades ago.

This approach carries risk, as Buffett stated, “No risk — no need for insurance.” He added that no private insurer can assume the level of risk that Berkshire does.

To connect the final dots, Buffett mentioned a "major increase in damage from convective storms" in 2024 and remarked on the growing and unpredictable nature of damages caused by hurricanes, tornadoes, and wildfires. His warning about climate change hinted that it could lead to massive and unexpected insurance losses, urging that a staggering loss may happen any day now and could become a frequent occurrence.

In summary, Berkshire's primary business is the P&C insurance field. They take on more risk than other insurers, and climate change is emerging as a significant factor contributing to unpredictable weather patterns that escalate costs. The implication is clear: large losses are likely imminent.

Should Investors Still Buy Berkshire Hathaway Stock?

In light of this risk, it could seem like Berkshire Hathaway stock may not be a good investment. However, I believe that is not the case. The company's P&C business is well-equipped to handle such threats. Buffett referred to its "Gibraltar-like financial strength," suggesting that Berkshire can manage extreme losses with confidence.

The P&C division also enjoys flexibility, as they currently issue one-year policies, allowing them to control risk effectively, with the option to modify this strategy as necessary.

Moreover, Berkshire is heavily diversified beyond just insurance, with 189 subsidiaries and extensive investments in publicly traded companies.

While climate change may pose the most significant threat to Berkshire Hathaway, as noted in Buffett's latest shareholder letter, it remains a solid choice for long-term investors. Buffett has structured the company to endure, even after he steps back from leading it.

Warren, Buffett, Berkshire