Berkshire Hathaway’s Insurance segment
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 June quarter, Berkshire Hathaway saw strong growth in its Insurance business from GEICO, reinsurance business which was partially offset by General Reinsurance. 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, total insurance group revenues came in at $12.0 billion compared to $11.7 billion during the same quarter last year. The rise was mainly due to higher revenues from GEICO and Berkshire Hathaway Primary Group.
The rise in interest rates will likely boost Berkshire’s insurance income. However, further rate hikes by the Federal Reserve are expected to be low and slow due to the current global slowdown. Earnings before taxes for the insurance business rose to $1.7 billion as compared to $1.3 billion in 2Q15, mainly due to improved profits from the reinsurance business.
Berkshire Hathaway expanded its book value by 3.3% in 2015. By comparison, its competitor American International Group (AIG) increased 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).
Over the past few quarters, the company’s Reinsurance business has suffered due to increased competition and falling premiums. The trend continued in the June quarter as Berkshire’s Reinsurance segment revenues declined to $1.7 billion as compared to $2.0 billion in 2Q15.
However, the net improved on lower catastrophe losses, resulting in earnings before taxes of $184 million as compared to losses of $411 million in 2Q15.
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 on 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.