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Berkshire Hathaway’s primary gains offset reinsurance underwriting loss in 2018

23rd February 2019 - Author: Steve Evans

Berkshire Hathaway reported an underwriting loss for its reinsurance businesses in 2018, but this was more than offset by strong gains in the primary insurance and GEICO businesses.

Berkshire Hathaway

Reporting its annual results today, Warren Buffett’s insurance and reinsurance businesses clearly saw mixed fortunes in 2018, with catastrophe losses denting the fourth-quarter and full-year underwriting results across the Berkshire Hathaway business.

For Q4 2018, Berkshire Hathaway has reported an underwriting loss of -$225 million (-$491 million in Q4 2017), but strong insurance investment income of $1.161 billion helped the company to report an overall profit for the insurance and reinsurance businesses in the quarter.

For the full-year, Berkshire Hathaway’s re/insurance units achieved a $1.566 billion underwriting profit, driven by strong performance in the GEICO and primary insurance units. This was much better than the over $2.2 billion underwriting loss of full-year 2017.

Insurance investment income from Warren Buffett’s all-important float reached $4.554 billion for full-year 2018, soundly beating the $3.887 billion investment haul in 2017.

For the full-year GEICO reported a $2.449 billion underwriting profit (well up on a -$310 million loss in 2017) and the Berkshire Hathaway Primary Group profited by $670 million for 2018 (slightly down on 2017’s $719 million).

But the Berkshire Hathaway Reinsurance Group took the brunt of 2018’s catastrophe loss events, falling to a full-year underwriting loss of -$1.109 billion (although much better than 2017’s -$3.648 billion underwriting loss).

Catastrophe losses in 2018 drove a $1.3 billion dent in underwriting results across the business, largely in the reinsurance businesses it seems.

Hurricanes Florence and Michael, Typhoon Jebi in Japan and the wildfires in California were the main catastrophe loss events and Berkshire Hathaway reports $1.1 billion of its catastrophe losses for 2018 occurred in the fourth quarter.

But again, these catastrophe losses were far below the $2.4 billion recorded in 2017 by the firm.

The property and casualty reinsurance businesses at Berkshire Hathaway, which includes P&C business written by General Re, fell to a -$207 million loss for the year on the back of a 77.6% loss ratio and a 102.3% combined ratio.

As we reported on Friday, analysts had expected elevated combined ratios in the Berkshire Hathaway insurance and reinsurance businesses that were most exposed to the catastrophe events of the year.

In addition, asbestos and environmental claims were also expected to be a driver of further losses in the year and Berkshire Hathaway reported an increase in prior year estimates for asbestos, environmental and other latent injury claims.

In the Berkshire Hathaway Reinsurance Group, the firm said that its ultimate liabilities for asbestos, environmental and other latent injury claims were estimated to have increased by around $145 million in 2018, denting pre-tax earnings.

Another area where losses came in higher was from its mega-deal with AIG, the adverse development coverage it provided the insurer in 2017.

Berkshire reported that pre-tax underwriting losses related to the AIG cover were $611 million in 2018, up from $527 million in 2017.

But premiums underwritten rose strongly for the P&C reinsurance units, to $9.413 billion in 2018, up from $7.713 billion in 2017.

Life and health reinsurance business resulted in a pre-tax underwriting gain of $216 million for the year, up considerably from a -$52 million loss in 2017.

At the same time life and health reinsurance premiums written rose strongly to $5.446 billion in 2018, from $4.846 billion in the prior year.

Insurance investment float, the all-important contributor to Berkshire’s long-term earning strength, rose strongly to $123 billion at the end of 2018, up from $114 billion at the end of 2017.

The float is now almost double the roughly $66 billion the firm had only back in 2010, showing just how fast this investment war chest has grown even at a time when reinsurance pricing has softened so much.

So, while a mixed bag, the overall underwriting improvement at GEICO helped to drive a profitable underwriting year across the re/insurance business at Berkshire Hathaway, although catastrophes and other losses dented the reinsurance units in the property and casualty space in particular.

But with Berkshire Hathaway’s premiums underwritten rising strongly and the investment float growing considerably, these businesses appear primed to take advantage of the improved rate environment, while at the same time Buffett’s primary businesses continue to shift towards direct to consumer models (as seen with Three recently) which should also enhance margins over the longer-term.

As the insurance and reinsurance business continues to evolve, it will be interesting to see how else Berkshire Hathaway looks to more directly connect its significant capacity with the insurance consumer.

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