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Could the Interest Rate Hike Boost Berkshire’s Insurance Income?

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Berkshire Hathaway’s commercial lines

Berkshire Hathaway (BRK-B) became the tenth-largest US commercial lines insurer on direct premium volume in 2014. Its commercial lines business has expanded by 125% over the past five years to $5.6 billion through acquisitions and organic growth. In the December quarter, Berkshire Hathaway is expected to see nominal growth in its commercial lines, partially offset by its re-insurance business. It engages in property, casualty, life, and health insurance and re-insurance. Its major subsidiaries include GEICO, General RE Corporation, the Berkshire Hathaway Reinsurance Group, or BHRG, and the Berkshire Hathaway Primary Group.

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In the third quarter, the total insurance group revenues came in at $11.6 billion, compared with $13.7 billion during the same quarter last year. The fall was mainly due to lower revenues from re-insurance operations. Revenues for re-insurance operations fell to $1.9 billion during the same period, compared with $4.8 billion, partially offset by a rise in revenues at GEICO. The re-insurance business was impacted by costs of $130 million tied to an explosion at the port of Tianjin, China.

Slow rate hikes

The recent increase in the interest rates will likely boost the company’s insurance income. However, further rate hikes are expected to be low and slow due to a global recession. The earnings before taxes for the insurance business fell to $1.7 billion due to lower profits from the re-insurance business, General RE, and GEICO. They were partially offset by the higher investment income of approximately $1.1 billion and higher profits at the Berkshire Hathaway Primary Group.

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Berkshire Hathaway expanded its book value by 3.3% in 2015. In comparison, its competitor American International Group (AIG) expanded its book value by 2.7%, whereas Metlife’s (MET) book value fell by 3%, and Allstate’s (ALL) book value expanded by 13%. Together, these companies form 6.5% of the Financial Select Sector SPDR ETF (XLF).

Re-insurance declines on competition

The re-insurance business has suffered due to increased competition and declining premiums. Berkshire Hathaway maintains a good amount of capital in order to write re-insurance contracts. Berkshire Hathaway’s statutory surplus for its insurance businesses was $129 billion as of December 31, 2014. The higher surplus allows Berkshire Hathaway to write re-insurance contracts that can be had for good premiums based on negotiations with insurance and re-insurance clients. Underwriting decisions are the responsibility of unit managers, and investing decisions are mainly undertaken by Warren Buffett. The company’s underwriting results are mainly impacted by catastrophic losses and currency fluctuations.

Continue to the next part of this series for a look at the expansion of Berkshire Hathaway’s railroad subsidiary, BNSF Railway.

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