Berkshire Hathaway’s annual report celebrates “eye popping performance” fueled by an insurance businesses spared major catastrophes losses in 2023, but Warren Buffett revealed how growing natural disaster risk was still able to drain cash from his operating companies and threaten tens of billions in revenue.
Buffett told investors that one of his biggest “disappointments” for the year was the performance of Berkshire Hathaway Energy (BHE) and its various wholly owned electric utilities spread across the Western US.
Those energy investments built over the past decade have been plagued by hundreds of millions in losses in recent years tied to wildfires and, as a result, declining profits that are making Buffet question his bet on the sector.
Profits from Berkshire’s utilities and energy holdings dropped over 40 percent year over year, from $3.9 billion to $2.3 billion, as BHE scrambled to repair, replace and bring back online electric utilities kicked offline by wildfires.
In addition to the upkeep costs, Berkshire utility PacifiCorp agreed to pay $299 million in December to settle a lawsuit brought by 463 people who say they were harmed by wildfires in southern Oregon in 2020.
“These costs arose from forest fires, whose frequency and intensity have increased – and will likely continue to increase – if convective storms become more frequent,” Buffet said in Berkshire’s annual report released Saturday. “It will be many years until we know the final tally from BHE’s forest-fire losses and can intelligently make decisions about the desirability of future investments in vulnerable western states.”
Buffet said that the increase in wildfire risk, and the resulting regulatory and mitigation steps enforce by states like California and Oregon, make it difficult to project the final cost of the risk.
“It will be many years until we know the final tally from BHE’s forest-fire losses and can intelligently make decisions about the desirability of future investments in vulnerable western states,” Buffett said, adding that while he is used to absorbing “negative surprises” in Berkshire’s insurance business “we will not knowingly throw good money after bad.”
The losses tied to natural disaster risk in its utility business are in stark comparison to the stellar year Berkshire’s insurance business has in managing catastrophe risk. Berkshire declared records in sales, float and underwriting profits, with Buffett paying the it was because the insurance was not filled with “optimists” found in other industries.
“Mistakes in assessing insurance risks can be huge and can take many years – even decades – to surface and ripen,” he said. “Unlike many other insurers, however, handling the loss will not come close to straining our resources, and we will be eager to add to our business the next day.”
