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Berkshire Hathaway’s re/insurance underwriting & investment drive strong Q2

6th August 2018 - Author: Steve Evans

The insurance and reinsurance businesses at Warren Buffett’s Berkshire Hathaway recorded strong earnings for the second-quarter of 2018, as both underwriting revenues and investment income beat the prior year.

Berkshire Hathaway logoBerkshire Hathaway reported $943 million of underwriting profit after tax for Q2 2018, up from a loss of -$22 million in the prior year period, while investment income from the insurance and reinsurance businesses delivered $1.142 billion, compared to $965 million in Q2 2017.

The investing side of Berkshire Hathaway’s insurance and reinsurance operations continues to drive results, while this underwriting performance is a significant uplift from recent quarters.

Helping to drive higher investment returns at the hands of Warren Buffett and his colleague Charlie Munger, the Berkshire re/insurance operations have $116 billion of all-important premium float, although this was actually flat with the end of the first-quarter, but still $2 billion up from the beginning of this year.

Berkshire Hathaway’s other business segments also beat the prior year second-quarter, with railroads, utilities and energy delivering $1.89 billion of income, other businesses $2.57 billion and another $348 million from other activities in the group.

Overall operating earnings were $6.893 billion from the second-quarter of 2018, up from $4.119 billion in the prior year.

The float investment and derivatives activities, added to the insurance and other operations earnings, drove net earnings to $12.011 billion for the quarter, significantly higher than the prior years $4.262 billion.

The insurance and reinsurance segments all delivered higher earnings before tax, with Buffett’s auto specialist Geico and the Berkshire Hathaway Reinsurance Group both well up on the prior year.

Geico delivered $673 million of earnings, up from $119 million in the prior year. The Reinsurance Group delivered $297 million of earnings, up from a loss of -$375 million in the prior year. The primary insurance business under Berkshire Hathaway Primary Group delivered $234 million of earnings before tax, just slightly up on the $232 million of the prior year period.

The company explained, “Our insurance businesses generated after-tax earnings from underwriting of $943 million and $1,350 million in the second quarter and first six months of 2018, respectively, compared to losses of $22 million and $289 million, respectively, in 2017. Results in 2018 included reductions of estimated ultimate liabilities for prior years’ property/casualty loss events, the favorable effects of foreign currency exchange rate changes on certain non-U.S. denominated liabilities of U.S subsidiaries and a lower effective income tax rate.”

Geico underwrote $8.237 billion of premiums in Q2 2018, up from $7.27 billion in the prior year. Berkshire has been investing in digital and online delivery platforms in this area, as well as improvements to customer experience, which appear to be driving some of the result improvement for the auto insurer.

Additionally, Berkshire’s Geico has been charging higher prices, with rate increases a response to accelerating losses in recent years, resulting in increased premiums per auto policy of approximately 8.7% over the last year.

The property & casualty reinsurance business wrote significantly more earned premium of $2.296 billion in the quarter (compared to $1.96 billion) and life & health wrote $1.314 billion of earned premium (up from $1.173 billion).

Of this, National Indemnity Company (NICO) reports $1.263 billion, up slightly from $1.183 billion, but General Re reports $1.033 billion of premiums earned in the second-quarter, up significantly from $777 million in the prior year.

“General Re Group’s premiums earned in the second quarter and first six months of 2018 increased $256 million (33%) and $574 million (40%), respectively, compared to 2017. The increases reflected higher direct and broker markets business, derived primarily from new business and increased participations for renewal business. Industry capacity dedicated to property and casualty markets remains high and price competition in most reinsurance markets persists. We continue to decline business when we believe prices are inadequate,” the company said.

The company also benefitted from lower major catastrophe losses in the first-half of this year, helping it to deliver these strong results.

The retroactive reinsurance segment, which includes the large AIG agreement that Berkshire Hathaway has in-force, experienced pre-tax underwriting losses for the first-half of 2018 of $522 million, up from 2017’s $403 million.

This is due to amortization charges related to the AIG deal, factoring in the previously reported increase to Berkshire’s ultimate claim liability estimates of approximately $1.8 billion, as well as an increase in the related deferred charge asset of $1.7 billion in the fourth quarter of 2017.

In life & health reinsurance General Re delivered Q2 premiums earned of $936 million (up from the prior year’s $801 million), while Berkshire Hathaway Life Insurance Company of Nebraska delivered $378 million this year, up from last year’s $372 million.

Berkshire said that for General Re the, “Increases were primarily attributable to growth in Asia and Australia markets and foreign currency translation effects of a comparatively weaker U.S. Dollar. The General Re Group produced pre-tax underwriting gains in the first six months of $114 million in 2018 and $39 million in 2017. Underwriting results in 2018 reflected increased pre-tax gains from international life business, attributable to increased volumes and foreign currency translation effects, and lower claim losses from run-off and life business in North America.”

The Primary Group underwrote $2.11 billion of premiums, up from $1.801 billion in the prior year quarter, ending up with an underwriting gain of $234 million before tax, up from $232 million.

The Berkshire Hathaway insurance and reinsurance businesses have benefitted from a lower major loss environment in the second-quarter and first-half of the year, helping the firm to deliver much better results year-on-year.

The businesses, especially in reinsurance, have underwritten much more in the way of premiums as well, likely to capitalise on a better rate environment, which could bode well for the firm in quarters to come as the premiums earn through.

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