Warren Buffett Just Identified the Biggest Threat to Berkshire Hathaway

Key Takeaways:

• Climate change threatens Berkshire’s core insurance business.
• Insurance earnings constituted nearly half of total operating earnings in 2024.
• Buffett addresses his upcoming succession to Greg Abel.
• Berkshire’s financial strength positions it to handle extreme losses.
• Diversification provides a buffer against sector-specific risks.

Buffett’s Latest Letter Highlights Emerging Threats

Warren Buffett’s annual letter to Berkshire Hathaway shareholders has long been a source of wisdom and foresight. This year’s letter, however, carries an implicit warning about the future challenges facing the conglomerate’s core business—insurance.

Climate Change Identified as a Major Threat

In the 2024 letter, Buffett pointed to “a major increase in damage from convective storms.” He noted that “property damage arising from hurricanes, tornadoes and wildfires is massive, growing and increasingly unpredictable in their patterns and eventual costs.” In a stark acknowledgment, he cautioned, “Climate change may have been announcing its arrival.”

These remarks underscore the escalating risks that climate change poses to Berkshire Hathaway’s property and casualty (P&C) insurance business, which relies heavily on assessing and managing risk.

Significance of P&C Insurance to Berkshire

P&C insurance remains the cornerstone of Berkshire Hathaway’s operations. In 2024, insurance underwriting generated operating earnings of $9.02 billion, with investment income from the insurance unit contributing nearly $13.7 billion. Combined, these insurance-related earnings accounted for 47.8% of Berkshire’s total operating earnings last year.

Buffett emphasized the unique challenges of the insurance model. “We are still making substantial payments on asbestos exposures that occurred 50 or more years ago,” he wrote, highlighting the long-term liabilities the company manages.

Potential for Staggering Insurance Losses

Buffett warned shareholders about the inevitability of significant losses. “Someday, any day, a truly staggering insurance loss will occur—and there is no guarantee that there will be only one per annum,” he stated. The increasing unpredictability of natural disasters, fueled by climate change, presents substantial challenges for the insurance industry.

He acknowledged the inherent risks, noting, “No risk—no need for insurance.” Buffett also pointed out, “No private insurer has the willingness to take on the amount of risk that Berkshire can provide.”

Succession Planning Amidst Challenges

At 94, Buffett openly addressed his eventual departure from leadership. “It won’t be long before Greg Abel replaces me as CEO and will be writing the annual letters,” he wrote. By acknowledging the upcoming transition, Buffett aimed to reassure shareholders of the company’s solid succession plan amidst the emerging threats.

He also shared a personal note, mentioning the use of a cane and regular conversations with his 91-year-old sister about “the joys of old age.”

Berkshire’s Financial Resilience and Diversification

Despite looming challenges, Buffett expressed confidence in Berkshire Hathaway’s ability to weather extreme losses. “Berkshire can financially and psychologically handle extreme losses without blinking,” he asserted. The company’s robust financial position and diversified portfolio—spanning 189 subsidiaries and numerous public holdings—provide a substantial buffer against sector-specific risks.

Buffett noted that the P&C business currently issues one-year policies, allowing for flexibility to adjust to changing risk landscapes if necessary.

Conclusion

While climate change emerges as a significant threat to Berkshire Hathaway’s primary business, Buffett’s foresight and the company’s strong foundation suggest resilience in the face of uncertainty. Shareholders can find reassurance in the conglomerate’s preparedness and Buffett’s enduring legacy of prudent management, even as leadership transitions to a new era.