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Macroeconomics, Insurance to Dictate Berkshire Hathaway's 2H17

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Part 3
Macroeconomics, Insurance to Dictate Berkshire Hathaway's 2H17 PART 3 OF 11

Berkshire Hathaway’s Insurance: What to Expect amid Rising Claims

Claims set to rise

Berkshire Hathaway (BRK.B) saw subdued profits in its Insurance segment in 2Q17, mainly due to higher claims. The trend is set to get stronger in the second half of 2017, given that core insurance and reinsurance are set to see higher claims in property and casualty and auto. The division might see higher top-line growth, largely due to growing business in manufacturing and automobile, partially offset by personal insurance. Berkshire raises capital for investments through its Insurance division in the form of premiums. Its profitability thus forms a key to provide enough capital for future deployment.

Berkshire Hathaway&#8217;s Insurance: What to Expect amid Rising Claims

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In 2Q17, the Insurance segment expanded on a YoY (year-over-year) basis, with revenues rising 13.0% to $13.7 billion. However, earnings before taxes fell 27.9% to ~$1.3 billion, mainly due to losses in the reinsurance business on higher claims. The trend is expected to continue in the second half of 2017, thus dragging the company’s overall performance. Berkshire’s reinsurance business garners lower premium amid competition, however. It has seen a rise in claims due to natural calamities. Commercial and individual insurance offerings continue to benefit the Insurance division.

Berkshire’s GEICO division is expected to garner higher revenues in the second half of 2017 since commercial insurance adoption is expected to rise across categories. In 2Q17, GEICO’s premiums increased 16.7%, totaling $7.6 billion, helped by auto policies. In insurance, Berkshire competes with life and P&C (property and casualty) providers (IYF) Prudential Financial (PRU), Allstate (ALL), and American International Group (AIG).

Drag on profitability

Berkshire Hathaway’s reinsurance business is expected to see higher claims in the second half of 2017 apart from the declining reinsurance premiums. The trend has resulted in subdued earnings over the past few quarters. Premiums are expected to stabilize in the second half of 2017, but claims can further put stress on underwriting profits. In 2Q17, the reinsurance business’s premiums rose to $1.8 billion compared with $1.7 billion in the prior year. The growth was due to higher premiums in the life, P&C, and annuity reinsurance businesses. The subdivision saw pre-tax underwriting losses of $400 million on claims, compared with underwriting gains of $184.0 million in 2Q16.

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