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Berkshire Hathaway reports $489m Q1 reinsurance loss, $55.5bn investment loss

2nd May 2020 - Author: Steve Evans

Warren Buffett’s conglomerate Berkshire Hathaway reported first-quarter losses to its primary insurance and reinsurance businesses, in part due to the impacts of the Covid-19 coronavirus pandemic.

berkshire-hathaway-reinsurance-logoBut the enormous largely unrealised investment loss of $55.5 billion for the first-quarter of 2020 overshadows all else in the Berkshire Hathaway results today.

Berkshire Hathaway was always assumed to take a significant hit, both across the liabilities held on its insurance and reinsurance balance-sheet, as well as in the massive investment portfolio that Buffett and his colleague Charlie Munger have built and continue to manage.

Today’s results evidence that, with the investment loss of $55.5 billion the main driver of a $49.75 billion net loss attributable to Berkshire Hathaway’s sometimes fanatical shareholder base.

Overall, Warren Buffett’s insurance underwriting businesses managed a profit for the quarter, but this was driven by the Geico auto insurance business as both the Berkshire Hathaway Primary Group and Reinsurance Group underwriting divisions reported losses for the period.

Insurance underwriting as a whole delivered a $363 million profit for the first-quarter of 2020, but GEICO delivered $984 million helped by Covid-19 pandemic lockdown related factors that lowered the auto insurance claim frequency in the period.

On the other side of Berkshire Hathaway’s re/insurance empire, the Primary Group, that includes the Berkshire Specialty insurance underwriting operations, fell to a $33 million loss for Q1, while the Reinsurance Group that includes Gen Re reported a loss of $489 million for the period.

Insurance investment income, from the all-important and still expansive pool of insurance float that Warren Buffett’s re/insurance businesses have accumulated over the years, was positive and actually beat the prior year, at $1.386 billion.

Float from the insurance and reinsurance businesses even grew in the quarter, by $1 billion to reach some $130 billion by the end of the quarter.

While GEICO’s auto business benefited from a reduced claims frequency in the quarter, the Primary Group that incudes units such as Berkshire Hathaway Specialty Insurance and National Indemnity Company’s primary underwriting, saw an elevated loss experience in Q1.

Premiums written by the Primary Group reached $2.455 billion, up slightly on the prior year, but losses were $1.811 billion and the loss ratio 76.4%, some 3.4% higher than the prior year, which despite a lower expense ratio drove the division to a $33 million underwriting loss, slightly worse than the prior years $30 million loss.

Berkshire warns on the potential for this primary unit to experience “significant increases in claims liabilities in the future attributable to higher than expected claim settlements, adverse litigation outcomes or judicial rulings, regulatory actions and other factors not currently anticipated.”

While that isn’t referenced directly to Covid-19, with the BH Primary businesses writing lines such as commercial and professional liability and workers’ compensation, the pandemic could drive elevated claims to some of these longer-tailed lines of underwriting.

The Berkshire Hathaway Reinsurance businesses fared worse in Q1 2020, with premiums rising across the book but all areas, of property and casualty reinsurance, life and health reinsurance, retroactive reinsurance and periodic payment annuities suffering underwriting losses in the first-quarter.

The property and casualty reinsurance business grew its premiums written by 14.5% in the quarter, but elevated losses and expenses both contributed to a $162 million underwriting loss for the P&C reinsurance unit.

The P&C reinsurance unit experienced losses of $2.12 billion in Q1 2020, much higher than the $1.774 billion in the prior year period.

Covid-19 related reinsurance claims from the first-quarter are cited as $230 million.

The life and health reinsurance unit at Berkshire Hathaway had a significantly elevated benefits ratio, with life and health insurance benefits reported as 81.1% of a 116.9% benefits and expense ratio.

It’s much higher than the prior year, when the benefits ratio was just 58.2% and the benefits and expense ratio 72.7%.

The result of higher life and health benefit claims payments in Q1 was an underwriting loss of $229 million for the life and health reinsurance division.

However, the running off of variable annuity guarantee reinsurance contracts was the ultimate cause, driving $234 million of losses to this unit alone. So Covid-19 was not so evident here for Q1, which was perhaps too early to see much in the way of life and health claims impact.

The pandemics impacts are most visible in the Berkshire Hathaway investment loss, some of which will have been recovered by this time as financial markets and asset prices have improved considerably since March 31st.

Aside from that, it is the specific $230 million of Covid-19 related claims within the P&C reinsurance unit that stand-out, especially as these are actually relatively low compared to some other re/insurance competitors that have reported a Q1 2020 pandemic related claims hit.

Berkshire Hathaway does underwrite many longer-tailed lines, so the real impacts of Covid-19 on its business will take time to flow through in the way of claims.

While the overall reinsurance loss of the first-quarter 2002 is higher than the one seen in Q1 2019, it is only really the P&C reinsurance business that has performed significantly worse, one-offs aside, driven largely by these Covid-19 claims.

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