Berkshire Hathaway or the S&P 500 over the Next Decade?

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Part 2
Berkshire Hathaway or the S&P 500 over the Next Decade? PART 2 OF 11

Berkshire Insurance for Funds and Growth

Fund raising

Berkshire Hathaway (BRK.B) raises capital through its insurance businesses in the form of premiums. This has helped the company raise requisite capital for future expansion over the past few decades, and the trend is expected to continue in the forthcoming decade.

Its reinsurance business, which has seen a subdued performance in recent quarters, is expected to stabilize over the next few years as businesses consolidate. However, commercial and individual insurance offerings continue to benefit Berkshire due to macroeconomic growth and the recent boost in manufacturing.

Berkshire Insurance for Funds and Growth

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In 2Q17, Berkshire saw its insurance business expand on a YoY (year-over-year) basis, with revenues rising 13% to $13.7 billion. However, EBT (earnings before taxes) fell 27.9% to ~$1.3 billion, largely due to underwriting losses in the reinsurance business.

Berkshire’s GEICO division has had a healthy run and is expected to garner higher revenues as commercial insurance penetration is expected to rise across categories. In 2Q17, GEICO’s premiums grew 16.7%, totaling $7.6 billion, helped by auto policies. Its insurance division competes with life and P&C providers (XLF) like Prudential (PRU), Allstate (ALL), and AIG (AIG).

Reinsurance to stabilize over period

Berkshire Hathaway’s reinsurance business has witnessed weaker profitability and is now putting more stress on the performance of the overall division. Initially, the weakness was due to declining percentages of premiums due to competition and lately due to underwriting losses. The trend could stabilize over the next one to two years, depending upon consolidation in the industry.

In 2Q17, the reinsurance business’s premiums earned grew to $1.79 billion, compared with $1.65 billion in 2Q16. This growth was fueled by higher premiums in the P&C, life, and annuity reinsurance businesses. However, the company posted underwriting losses on higher claims, and the subdivision saw pre-tax underwriting losses of $400 million, compared with underwriting gains of $184 million in 2Q16.


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