One of my favorite things to read has been published. No, it's not a magazine or a new book by one of my favorite authors. Instead, it's Warren Buffett's annual letter to Berkshire Hathaway (BRK.A 1.16%) (BRK.B 1.14%) shareholders (of which I'm one).
As always, Buffett shared insight into Berkshire's operations and plenty of wisdom. However, this time he also revealed something that could be concerning to shareholders if you connect the dots. Buffett just identified the biggest threat to Berkshire Hathaway.
NYSE: BRK.B
Key Data Points
It's not related to Buffett
Before I go any further, let me first explain what the biggest threat to Berkshire isn't. It's not related to Buffett.
Many investors (including yours truly) dread the day Buffett will no longer be at the helm of Berkshire Hathaway. Some worry that the company will be in trouble when this eventuality comes. I don't share that concern because I think Berkshire's succession plan is solid. However, Buffett raised the issue in his latest shareholder letter.
The legendary investor wrote, "At 94, it won't be long before Greg Abel replaces me as CEO and will be writing the annual letters." This was one of the most direct allusions he has made to the prospect of him not being around to lead Berkshire in the future.
Buffett also mentioned that he now uses a cane. He said that he and his 91-year-old sister Bertie talk weekly about "the joys of old age and discuss such exciting topics as the relative merits of our canes." He added, "In my case, the utility is limited to the avoidance of falling flat on my face." I'm glad that Buffett is still able to get around even with a cane, but his comments again serve as a reminder that he won't lead Berkshire forever.
Berkshire's biggest threat
So what did Buffett say Berkshire's biggest threat was? As I stated earlier, we must connect the dots.
Buffett noted that property and casualty (P&C) insurance "continues to be Berkshire's core business." And it has become more important to the conglomerate than ever.
In 2024, Berkshire's insurance underwriting generated operating earnings of $9.02 billion. Investment income from the insurance unit contributed nearly $13.7 billion. Combined, insurance-related operating earnings made up 47.8% of Berkshire's total operating earnings last year. In 2023, insurance comprised 40.1% of the total.
Buffett noted the "money-up-front, loss-payments-later" model of Berkshire's P&C business. Premium payments are received upfront. Only later does the business discover what the cost of insuring really is. Buffett said, "We are still making substantial payments on asbestos exposures that occurred 50 or more years ago."
Risky business? That's the name of the game. As Buffett wrote, "No risk -- no need for insurance." He also pointed out, "No private insurer has the willingness to take on the amount of risk that Berkshire can
provide."
Now for the final dot. Buffett mentioned "a major increase in damage from convective storms" in 2024 and that "property damage arising from hurricanes, tornadoes and wildfires is massive, growing and increasingly unpredictable in their patterns and eventual costs."
He somewhat ominously warned, "Climate change may have been announcing its arrival." Buffett added, "Someday, any day, a truly staggering insurance loss will occur -- and there is no guarantee that there will be only one per annum."
Let's put all of this together and connect the dots. P&C is Berkshire's primary business, contributing by far more to its operating earnings than any other unit. Berkshire takes on more risk than any other P&C insurer. There are some early signs that climate change is causing unpredictable weather that increases costs for the P&C industry. Sooner or later, massive losses will be experienced with the possibility that they could be relatively frequent.
I believe Buffett has identified Berkshire Hathaway's biggest threat.
Is Berkshire Hathaway stock still a buy?
With all of this in mind, it might seem that Berkshire Hathaway isn't a great stock to buy. I don't think that's the case, though. For one thing, the company's P&C business is in a better position to withstand threats than most. Buffett noted "its Gibraltar-like financial strength." He said, "Berkshire can financially and psychologically handle extreme losses without blinking."
The P&C business also has flexibility. Buffett wrote that the company currently issues one-year policies, which help control risk. However, he said that this could change if needed.
Perhaps most importantly, Berkshire is heavily diversified beyond insurance. Buffett mentioned the conglomerate's 189 subsidiaries and extensive holdings in other publically traded companies.
The potential impact of climate change likely is Berkshire Hathaway's greatest threat, as Buffett's latest shareholder letter discussed. But its stock remains a good pick for long-term investors because Buffett has built a company built to last -- even after he's no longer at the helm.
