Berkshire Hathaway(BRK-B ) may ultimately come out unscathed from the earthquake and nuclear disaster unfolding in Japan despite initial losses of $2.5 billion on stocks and derivatives, and too-early-to-quantify insurance and reinsurance claims.
Buffett also has significant investment stakes in Swiss Re and another reinsurer with large Japanese earthquake exposure, Munich Re.
Berkshire shares gained ground on Friday, the first trading day after the earthquake, but had lost a total of 3.2% this week going into Wednesday’s open. Other factors may be at play in Berkshire’s stock this week, however. On Monday morning, the company announced a $9.7 billion deal to acquire Lubrizol Corp.(LZ_).
Buffett was scheduled to visit Japan on Monday to attend a plant opening ceremony, but canceled his trip, according to the Omaha World-Herald.
“Historically Berkshire has not been heavily exposed to Japan and I think that’s in part because Japan is such a seismically active market,” says Tom Russo, a partner at Gardner Russo & Gardner, which owns Berkshire Hathaway shares.
Russo says many Japanese people and companies go without insurance since the risks are so well-known that premiums have long been high. Still, Russo sees a chance Berkshire will now wade into the market more heavily.
“You’re more apt to see Berkshire Hathaway writing insurance now than you would have been,’ Russo says “Because of the calamities that have occurred the premiums will finally be quite attractive,” Russo says.
One potential obstacle to Berkshire writing more insurance is stock market losses in the first quarter. Berkshire has an extensive equities portfolio, as well as derivatives tied to four major stock market indices, including Tokyo’s Nikkei 225.
A report from Stifel Nicolaus on Tuesday estimates equities and equity-linked derivatives losses implies $1.5 billion in losses to Berkshire’s book value. The report did not include the impact of Tuesday 10.6% drop in Tokyo’s Nikkei 225, which Russo estimates tacked on another $1 billion, for a total of $2.5 billion in losses.
While those are paper losses, they don’t require Berkshire to put up additional collateral before the contract expires in seven years, Russo says.
Still, Stifel analyst Meyer Shields writes in Tuesday’s report that paper losses in those contracts, equity market losses and any possible insurance losses are “worth monitoring.” That’s because in early 2009, paper losses on derivatives “limited Berkshire’s ability to maximise its property-catastrophe writings despite the rate increases following the major 2008 hurricanes.
However, Shields writes, “we’re almost certainly not at the same point today.” Shields did not attempt to quantify the impact to Berkshire’s insurance portfolios from the Japanese quake.
He reiterated his “hold” rating on Berkshire Hathaway, stating “the shares seem fairly valued at current levels and we still see underperformance as more likely than outperformance over the next 12 months.”