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Reinsurance Division Dragged down Berkshire’s Profitability in 1Q16

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Berkshire Hathaway’s commercial lines

Berkshire Hathaway (BRK-B) is the tenth-largest US commercial lines insurer by direct premium volume. Its Commercial Lines division has expanded by 125% over the past five years to $5.6 billion through acquisitions and organic growth.

In the March quarter, Berkshire Hathaway saw strong growth in its insurance business from GEICO, which was more than offset by its reinsurance business. Berkshire engages in property, casualty, life, and health insurance and reinsurance. Its major subsidiaries include GEICO, General Reinsurance, the Berkshire Hathaway Reinsurance Group, and the Berkshire Hathaway Primary Group.

Reinsurance Division Dragged down Berkshire's Profitability in 1Q16

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In the first quarter of 2016, total insurance group revenues came in at $12.3 billion compared to $10.6 billion during the same quarter last year. The rise was mainly due to higher revenues from GEICO. For the full year 2015, reinsurance business revenues fell by $7.2 billion, as compared to $10.1 billion in the prior year’s quarter.

Slow rate hikes

The rise in interest rates will likely boost Berkshire’s insurance income. However, further rate hikes by the US Federal Reserve are expected to be low and slow due to the current global slowdown. Earnings before taxes for the insurance business declined to $1.5 billion as compared to $1.8 billion in the prior year quarter, mainly due to lost profits from the reinsurance business.

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

Reinsurance falls on increased competition

The reinsurance business has suffered due to increased competition and falling premiums. Berkshire Hathaway maintains a good amount of capital in order to write reinsurance contracts.

Berkshire Hathaway’s statutory surplus for its insurance businesses was $124 billion as of December 31, 2015. The higher surplus allows Berkshire Hathaway to write reinsurance contracts for good premiums based on negotiations with insurance and reinsurance 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 for an analysis of BNSF Railway Company.

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