How Berkshire’s Insurance Can Garner Growth in 1Q18

Insurance segment

The insurance sector (IYF) has seen underwriting losses in 2H17 mainly due to higher claims resulting from hurricanes and other calamities. However, premiums have increased in recent quarters owing to the inevitability of property and casualty insurance as well as higher pricing resulting from higher claims. This has led to higher insurance revenues for many companies, including Berkshire Hathaway (BRK.B). Underwriting losses will largely depend upon claims arising in the upcoming quarters.

In 1Q18, Berkshire’s Insurance segment is expected to see a sequential improvement in its performance, as its claims are expected to fall compared to 4Q17. The segment saw 5% growth in revenue to $14.4 billion in 4Q17 mainly due to growth in GEICO and reinsurance revenue.

How Berkshire’s Insurance Can Garner Growth in 1Q18

For the full year, Berkshire’s Insurance segment managed 30% growth in revenue to $65 billion, reflecting high penetration and increased pricing. However, higher claims led to an underwriting loss of $2.2 billion in 2017 compared to a $1.4 billion gain in 2016. Other insurance players Chubb (CB), Prudential (PRU), and AIG (AIG) also saw weaker performances in 2H17 on the profitability front.

Interest rates

As interest rates are rising, insurance majors have gained from higher investment income as they’ve parked funds largely in debt or liquid funds. However, Berkshire deploys premium income into equities and generates capital gains and dividends as a primary source of investment income.

In the reinsurance business, Berkshire saw underwriting losses of $3.6 billion in 2017, reflecting the pressure of lower pricing as well as higher claims. However, volumes grew, with total premiums rising to $24 billion compared to $14 billion in 2016. The trend of higher premiums is expected to continue in 2018, with relatively low claims driving an improvement in profitability.