It's been a year like no other for the U.S., between the coronavirus pandemic and the mass protests that have sprung up following George Floyd's killing at the hands of Minneapolis police. Amid all the tragedy, you may have wondered who's paying for all the damage, whether it's physical or economic.
Each situation is different, and some of it is going to be hard to figure out. But some will be straightforward -- like physical damage from looting or vandalism. In many cases, an insurance company will be on the hook for most of it, if not all of it. If the owner had business interruption insurance, that insurance company may have to cover the lost revenue, too.
Considering that Warren Buffett's Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) sells commercial property and casualty insurance, it's worth asking how much of an impact recent events might have on one of Fooldom's favorite stocks. Let's dig a little deeper to find out.
A modest slice
The total U.S. commercial insurance market is vast -- more than $300 billion. Berkshire is simultaneously a big fish and a little fish in this pond. According to data compiled by the National Association of Insurance Commissioners (NAIC), Berkshire ranks No. 7 on the list of top 10 writers of commercial insurance, as measured by direct premiums written in 2019. However, that only translates to a measly 3.1% of the total U.S. commercial insurance market. Even the largest player, Travelers, only has a 5.5% share of this very fragmented market.
Not all commercial insurance is property and casualty insurance -- the type of policy that would cover damage from looting and vandalism. For instance, commercial property insurance made up less than 15% of Travelers' earned premiums in domestic business insurance last year, with "multi-peril" (essentially, any combination of business insurance lines) making up less than 25% in addition.
Smaller companies may have more exposure to commercial insurance, but if any company thinks its risk is getting too high, it can take out an insurance policy of its own from another insurer in a process called reinsurance. This market fragmentation and the spreading of risk through reinsurance is good news for large commercial insurers like Berkshire, which also sells a substantial amount of reinsurance policies.
In the first quarter alone, Berkshire reported $15.8 billion in earned premiums through its various insurance businesses. Berkshire doesn't break out commercial property and casualty insurance as a separate line in its financial statements, but here's what we do know:
|Insurance Type||Q1 Earned Premiums||Percentage of Total Q1 Earned Premiums|
|GEICO Auto Insurance||$9.1 billion||57.6%|
|Berkshire Hathaway Primary||$2.4 billion||15.2%|
|Property/Casualty Reinsurance||$2.7 billion||17.1%|
|Other Reinsurance||$1.5 billion||9.8%|
Commercial property/casualty insurance is included in the Berkshire Hathaway Primary category, along with non-GEICO auto insurance, medical malpractice insurance, workers' compensation insurance, and specialty coverage. It's unclear what percentage of the property/casualty reinsurance line is commercial as opposed to residential or individual policies. Regardless, though, commercial property/casualty insurance can't be more than one-third of Berkshire's insurance portfolio and is probably closer to 20% or so (although it could be even lower).
That's good news for Berkshire in terms of exposure, but if a significant number of claims come in all at once, Berkshire might still be on the hook for a lot of money -- even if the total number of policies is comparatively small.
So let's try a quick thought experiment. To date, the most expensive civil unrest in U.S. history in terms of property damage was the Los Angeles riots of 1992, costing an estimated $1.4 billion in today's dollars. Imagine a scenario in which every U.S. city of with a population of over 500,000 sustains 10 times that amount of property damage (thankfully, we've come nowhere near that), and all of that damage is to insured commercial property. That would yield a total of $518 billion in claims from 37 cities across the country. If Berkshire were responsible for 3.1% of that total -- roughly equal to its market share -- it would still only cost the company $16.1 billion. That would be just 12% of its current $133.3 billion cash hoard, and less than it earned in total insurance premiums in Q1. Even if reinsurance payouts doubled that cost, the company would still have more than $100 billion in cash left over, and Berkshire may have taken out reinsurance policies of its own.
No business like no business
Even if the risk of actual property damage overwhelming Berkshire is fairly low, businesses that have to shut down due to property damage are sometimes eligible for business interruption insurance, in which their insurer pays them for the revenue they're missing out on while their facility is closed for repairs. You might wonder if this business interruption insurance, which is added to some commercial insurance policies, would cover businesses closed due to the pandemic as well.
While business interruption insurance isn't rare, it's certainly not standard. The NAIC estimates that only about 40% of small businesses carry it. Moreover, most such policies specifically require some sort of property damage to be the cause of the interruption, which means a pandemic wouldn't qualify. Other policies specifically exclude pandemic- or bacteria-and-virus-related interruption from coverage.
Germ of an argument
Regarding pandemic insurance, Buffett implied in a comment at Berkshire Hathaway's annual meeting last month that such policies would have been so costly that Berkshire never wrote any. He said, "We would have written pandemic insurance if people had come to us and offered what we thought was the right price."
That "right price" would likely be prohibitively expensive. Unlike a fire or a tornado, which lasts for a short time and affects a limited amount of properties, a pandemic is by nature universal, so the insurer could be easily overwhelmed by a deluge of claims. Indeed, the NAIC has reacted with alarm to some state legislative proposals that would force business interruption insurance policies to retroactively include COVID-19 coverage regardless of the language in the original policy, saying this would "threaten the solvency of the insurance industry." None of that legislation has yet passed, and if it did, it would almost certainly be challenged in court.
The lack of legislation hasn't stopped some business owners from trying to force their insurers to pay anyway. A coalition of businesses has filed suit against insurance company Chubb, claiming that viruses -- including coronavirus -- damage the surfaces they touch, and that business interruption policies that don't specifically exclude diseases or pandemics should thus cover lost business due to the recent shutdowns.
At Berkshire's annual meeting, Buffett seemed sanguine about the possibility of such suits against Berkshire. "We will have claims," he said. "We will have litigation costs. But proportionally, it's not the same with us as with some other companies, which are heavier in writing business interruption as part of a commercial multi-peril policy."
A low risk
It's very unlikely that the current civil unrest or shutdowns will cause any significant financial headaches for Berkshire Hathaway. Yes, the company may see increased payouts on its commercial property and casualty policies in the current quarter, but Buffett's immense cash hoard is more than enough to cover even a worst-case scenario of nearly half-a-trillion dollars in property damage, and pandemic-related shutdowns probably aren't covered.
Even if legislation is passed requiring insurers to cover shutdown-related losses as part of business interruption insurance, Berkshire doesn't seem to be at much risk due to the low numbers of such policies it offered. And in any case, such legislation would probably result in years of litigation rather than a massive upfront payout.
In the short term, Buffett's conservative approach to investing his cash is more likely to cause Berkshire to underperform than coronavirus-related insurance losses. As a long-term investment, though, the company still looks like solid, particularly after its share-price declines this year.