Bloomberg says that Warren Buffet-owned Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) is being examined by the U.S. Financial Stability Oversight Council (FSOC) to assess whether the company, which has the world’s fourth largest reinsurance business globally, has the potential to threaten the stability of the country’s financial system were it to fail.
Bloomberg based its report on information from “two people with knowledge of the matter,” and said the study had not been made public since it was still preliminary. It should not also be construed that the FSOC had already made up its mind, said Bloomberg, with any decision being “months away.”
Non-banking financial firms already designated by FSOC
The FSOC is charged with the responsibility to identify any entities that could expose the financial system to systemic risk by virtue of their operations. Any such identified entities would be subjected by the Fed to stress testing for likely risky situations as well as be required to maintain higher levels of capital and liquidity, and maintain leverage within limits.
American International Group Inc (NYSE:AIG), Prudential Financial Inc (NYSE:PRU) and General Electric Company (NYSE:GE)’s finance arm have already been designated as systemically important by the FSOC.
Why Berkshire Hathaway?
Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B)’s massive reinsurance business generated 2012 premiums of $16.1B, says Bloomberg, quoting figures from Standard & Poor. Other metrics that drew Berkshire into the FSOC’s evaluation, according to Bloomberg, include:
- $458.1B of assets as on September 30
- $31.4B of CDS as on January 17
- $5.8B in derivative liabilities
Insurance operations: What are the risks to Berkshire itself?
It is interesting to note Warren Buffet’s views on the business risks Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) faces from its various insurance operations.
“If the insurance industry should experience a $250 billion loss from some mega-catastrophe – a loss about triple anything it has ever experienced – Berkshire as a whole would likely record a significant profit for the year because it has so many streams of earnings. All other major insurers and reinsurers would meanwhile be far in the red, with some facing insolvency” – Warren Buffett, 2012 Shareholder Letter, Berkshire Hathaway.
The above remark is in the context of Berkshire Hathaway Reinsurance Group, run by Buffett’s trusted aide Ajit Jain.
In the same letter, Buffett says that Berkshire’s GEICO insurance unit earned an underwriting profit in 2012 despite suffering its largest single loss in history on account of Hurricane Sandy, which cost GEICO more than three times the loss it sustained from Katrina, the previous record-holder.
Given these business strengths, the $40B cash on its balance sheet, and its AA rating from S&P 500 (INDEXSP:.INX), Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) appears unlikely to be a source of systemic shock to the financial system.