Berkshire Hathaway (BRK.A) has been Warren Buffett's signature effort for the past 50 years. It is a multinational conglomerate holding company that includes a wide range of industries. Recently, the company's involvement in asbestos claim re-insurance has come under fire for actions that may enrich the company at the expense of those filing claims for injuries from asbestos exposure. These actions and related payments could have a negative impact on the stock price of Berkshire Hathaway.
Warren Buffett's Berkshire Hathaway
Berkshire Hathaway (BRK.B) has its roots in the textile industries that go back to the 1800s. However, the textile industry continued to wane, and by the 1960s, the company was expanding into other areas for its profits, including building materials, utilities, energy, media, financial services and insurance. Berkshire Hathaway is known as one of the most expensive stocks on the market, mainly because it never allows a stock split. Warren Buffet's leadership has made it one of the trusted companies in the world. He has vocally stated his desire to maintain superior ethics in the conduct and management of Berkshire's businesses.
As Berkshire Hathaway expanded its insurance holdings, many companies took advantage of the company's reputation to shift its liability for asbestos claims to its re-insurance subsidiaries. Such names as American International Group (AIG), Chartis and Continental/CN paid massive sums for the peace of mind of having Berkshire insurance companies take over the risk for asbestos injury claims. These companies were happy to let these Berkshire subsidiaries deal with the growing number of claims from asbestos that were beginning to surface as people developed mesothelioma, an asbestos-related disease, in their later years. Berkshire Hathaway benefited greatly from this strategy, but the financial chickens came home to roost when they encountered aggressive plaintiff attorneys taking on asbestos-related injury cases. These plaintiff lawyers began winning court cases at an alarming rate.
Problems With Asbestos Claims
The asbestos injury claims came from a variety of quarters, not only from people involved in construction trades and military functions. Even office workers who had been exposed to asbestos during remodeling operations filed claims. Because the cause of mesothelioma is known to be asbestos exposure, these court actions often resulted in a victory for the plaintiffs. Money began to drain out of the Berkshire subsidiaries, and management might have decided it was time to worry more about profits than ethics. Plaintiff lawyers have been arguing that the company has ordered claims processors to slow down approvals to a crawl, allowing the company to continues to invest and make money off the original premiums for coverage of the claims. Meanwhile, claimants with mesothelioma succumb to their illness and the payment is never made to them while they are alive and need the proceeds to deal with their illness.
Warren Buffet's Stellar Image
Warren Buffet's image as the "Oracle of Omaha" could take a beating with this recent developing story and end up hurting Berkshire Hathaway shareholders. The denial and delay of claims conflicts directly with the high level of ethics and Midwestern values that Buffett has always claimed to be an integral part of his investment strategy. Once it becomes widely known that his subsidiaries may have been actively engaged in denying money to the sick and dying, Buffett will have to do major public relations efforts to remove the tarnish from his name. Hopefully, he will quickly repair the damage done to both claimants and his reputation.
Additional disclosure: This article is neither a recommendation to buy or sell shares, and investors should always do their own research.