Buffett Admits Insurers Made 'Huge Mistake'
In Not Anticipating Impact of Terror Attacks
11/12/2001
By CALMETTA COLEMAN
Staff Reporter of THE WALL STREET JOURNAL
Reporting a large loss at Berkshire Hathaway Inc., billionaire investor Warren E. Buffett said he and others in the insurance industry made a "huge mistake" by not anticipating the need to collect extra premiums for terrorist acts, and he outlined plans to revamp underwriting practices.
Berkshire Hathaway, the Omaha, Neb., conglomerate run by Mr. Buffett, said it recorded a third-quarter charge of $2.28 billion related to the Sept. 11 attacks. However, in a letter to shareholders, Mr. Buffet said that amount, revised from an earlier estimate of $2.2 billion, "remains a guess." The company said it believes it will take years to accurately determine losses.
With the attack-related losses, the investment-holding company had a third-quarter net loss of $679 million, or $445 a share, compared with net income of $797 million, or $523 a share, a year earlier.
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Revenue, including insurance premiums and realized investment gains, rose 10% to $9.31 billion from $8.43 billion.
In the letter to shareholders -- a rare departure from his annual missive to them -- Mr. Buffett said Berkshire's insurance units were "foolish" for failing to factor in the costs of man-made destruction.
"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," he said.
In breaking out the Sept. 11 impact, Mr. Buffett said the company estimates about $1.7 billion of the losses occurred at its General Re unit and about $575 million were at Berkshire's Reinsurance Group.
Mr. Buffett said General Re is redoing its underwriting practices "with a new urgency." The changes will make sure the unit follows some basic rules of operating an insurance company, including avoiding business that involves moral risks or dealing with dishonorable or unethical clients, Mr. Buffett said.
He also said an insurer should confine its underwriting to businesses that could withstand a significant loss and still report a profit, and it should limit the business it accepts to avoid numerous losses from a single event that could threaten the company's solvency.
While "all those rules were broken at General Re," Mr. Buffett stressed Berkshire is "as strong as any insurer in the world."
Berkshire, which also has investments in retail, manufacturing and services businesses, reported its results after the close of trading Friday. In 4 p.m. New York Stock Exchange composite trading, its Class A common shares were at $69,600, down $1,300.
Write to Calmetta Coleman at calmetta.coleman@wsj.com2
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