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Buffett's Response to September 11

The attacks have damaged Berkshire, but it's still a financial rock.

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Earlier this month, Warren Buffett did something unusual. The chairman of Berkshire Hathaway (BRK.B) addressed a letter to the company’s shareholders, which he usually does only once a year in Berkshire’s annual report. While the letter focuses on the negatives--painting a downright gloomy picture--it also demonstrates why Berkshire shareholders (including myself) feel totally comfortable with our company.

The Negatives
In the letter, Buffett didn’t mince words about how bad things were for Berkshire, for the insurance industry in general, and for the economy. It’s a sobering litany:

  • Buffett’s best guess of the costs of the September 11 attacks to Berkshire: $2.3 billion.
  • The United States has entered a deep recession, "probably a relatively deep and extended one."
  • General Re, one of the big insurance arms of Berkshire, broke all the basic rules of running an insurance company.
  • Insurers hadn’t priced in the risk of man-made mega-catastrophes, and it will take time to remedy that. "In effect, we, and the rest of the industry, included coverage for terrorist acts in policies covering other risks--and received no additional premium for doing so. That was a huge mistake and one that I myself allowed."
  • "Had the attack in New York been nuclear, it is likely that most of the U.S. insurance industry, as well as reinsurers worldwide, would have been destroyed."

Haywood Kelly, CFA has a position in the following securities mentioned above: BRK.B. Find out about Morningstar’s editorial policies.