uploads///Insurance

Reinsurance Hurts Berkshire Hathaway’s Insurance Business

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Jun. 10 2016, Published 8:04 a.m. ET

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 1Q16, Berkshire Hathaway saw strong growth in its insurance business from GEICO, but this growth 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.

In 2Q16, Berkshire Hathaway is expected to see an improved core insurance business on the back of retail subscriptions. However, reinsurance will continue to be a drag on overall profitability.

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In 1Q16, 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. In 2015, reinsurance business revenues fell by $7.2 billion from $10.1 billion in the prior year’s corresponding quarter.

Slow rate hikes to impact business

The rise in interest rates will likely boost Berkshire Hathaway’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 corresponding quarter last year, mainly due to lost profits from the reinsurance business.

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

Competition weighs on reinsurance pricing

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 investment decisions are mainly made 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 an analysis of BNSF Railway Company.

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