Berkshire’s COVID-19 Exposure Potentially Greater but Manageable: Analysts

Analysts at Morgan Stanley have said that although Berkshire Hathaway could be exposed to losses from the impacts of the global COVID-19 pandemic in a number of business lines, losses should be manageable for Warren Buffett’s property and casualty (P&C) reinsurance operation.

Source: Reinsurance News - Luke Gallin | Published on April 3, 2020

Berkshire Hathaway 3Q earnings

As events around the world continue to be either postponed or cancelled, businesses close and millions of workers go remote in an effort to tackle the ongoing pandemic, the financial impact on the re/insurance industry is potentially large but uncertain.

Travel coverages, event cancellation and other specialty lines are expected to see losses, while the potential for increased business interruption losses could be more likely as legal action continues to be pushed in parts of the U.S.

In a recent note concerning Berkshire Hathaway’s potential exposure to the impacts being caused by the COVID-19 coronavirus outbreak, analysts at Morgan Stanley explain that the re/insurer could be more exposed than others in certain lines.

Since the acceleration of lockdowns and social distancing measures, a move which has led to damaging disruption and loss of business for companies from all sectors of all shapes and sizes, business interruption policies have been a hot topic.

As noted by analysts, business interruption coverage typically requires a physical property damage trigger, such as a fire, and, most standard contracts have a virus exclusion element.

It’s been well documented that legislation is being pushed in parts of the U.S. to force insurers to retroactively cover business interruption losses regardless of policy wording or exclusions, although analysts remain unconcerned that this will come to fruition.

“That said, Berkshire could have greater exposure than peers to BI written on non-US policy forms (where exclusions are somewhat less common), as well as specialty lines like event cancellation.

“We have not increased our loss ratio assumptions at this point, as we believe losses should be manageable, but note downside in the event that specialty exposure exceeds our current assumptions,” say analysts.

At the same time, analysts note that Berkshire’s reluctance to participate in alternative investments should protect it from related losses on this side of the balance sheet, when compared with certain peers over the coming months.

Overall, analysts expect the insurance impact to be manageable for Berkshire. However, since the financial crisis the company has acquired some non-insurance operations and, it’s expected that most non-insurance businesses (outside of utilities) will suffer. Ultimately, Morgan Stanley warns that the increasing share of earnings from cyclical businesses, “could elevate earnings risk relative to prior recessions.”