A Closer Look at Berkshire Hathaway’s Insurance Operations

By | March 4, 2015

Carrier Management Special Report

Warren Buffett’s insurance beginnings and predictions; breaking out the insurance and reinsurance results; the growth and expectations for Berkshire Hathaway Specialty Insurance; singling out CEOs; repeating past remarks; the $3 billion premium and more.

This is an edited version of the full special report on Berkshire Hathaway’s results with charts on results by division, underwriting results and float, and workforce changes that was published by CarrierManagement.com.

Insurance operations contributed $5.2 billion to total operating income of $16.6 billion for Berkshire Hathaway in 2014—with the underwriting component of $1.7 billion (after taxes) representing the 12th straight insurance underwriting profit for the Nebraska-based conglomerate.

“Our underwriting profit totaled $24 billion during the twelve-year period, including $2.7 billion earned in 2014,” wrote Berkshire’s Chair Warren Buffett in the company’s annual report released last Saturday, referring to the pretax underwriting profit for all insurance operations.

“And all of this began with our 1967 purchase of National Indemnity for $8.6 million,” Buffett wrote in his annual letter, which features narratives describing the purchase of National Indemnity and other highlights of the last 50 years.

The letter also contains predictions about the next 50 from Buffett and Vice Chair Charlie Munger, including some much-anticipated discussion about succession planning and how Ajit Jain, the leader of Berkshire Hathaway Reinsurance Group, might fit in those plans.

While the overall pretax underwriting profit $2.7 billion figure actually represents a 13.6 percent dip from $3.1 billion in 2013, the life and annuities side of the insurance business accounted for the decline. Taken together, pretax underwriting profit for the property/casualty businesses jumped 6.2 percent to $2.7 billion, while life insurance and reinsurance businesses posted a $66 million loss.

Much of Buffett’s discussion of the P/C results repeats his analysis last year, nearly word-for-word, with shout-outs to individual unit leaders such as Jain, General Re’s Tad Montross, GEICO’s Tony Nicely, and even GEICO’s gecko.

Buffett also repeats some remarks about Jain’s formation of Berkshire Hathaway Specialty Insurance last year: “This initiative took us into commercial insurance, where we were instantly welcomed by both major insurance brokers and corporate risk managers throughout America. Previously, we had written only a few specialized lines of commercial insurance.” Buffett noted that that BHSI’s leader, Peter Eastwood “expanded his talented group” in 2014, moving into both international business and new lines of insurance.

“We repeat last year’s prediction that BHSI will be a major asset for Berkshire, one that will generate volume in the billions within a few years,” Buffett added this year.

One interesting revelation from the final pages of the report is that Eastwood’s unit now employs 521 professionals, up from just 82 listed in the previous report.

In fact, nearly all of Berkshire’s primary P/C insurance businesses saw their workforces increase in 2014, with an overall increase in headcount of nearly 21 percent. The reinsurance businesses, in contrast, experienced slight declines in employee numbers.

It remains difficult to gauge the validity of Buffett’s prediction that BHSI will write “billions” of premiums in the next few years from 2014 and 2013 premium figures presented in the report, which lump BHSI together with Berkshire’s other primary insurers. As a group, however, the primary insurers did in fact write $1 billion more in 2014 than 2013.

That increase—of 31 percent bringing BH Primary Group earned premiums up to $4.4 billion—was primarily attributable to volume increases from BHSI, NICO Primary, Berkshire Hathaway Homestate Companies (providers of commercial multiline insurance, including workers compensation) and Guard Insurance (providers of workers’ compensation and commercial P/C insurance to small and mid-sized businesses), according to the text of the annual report.

The primary group also recorded the biggest jump in underwriting profit—a 63 percent leap to $626 million.

Berkshire Hathaway Reinsurance Group reported the biggest percentage increase in P/C earned premiums of the four P/C divisions summarized in the report—35.7 percent to $7.4 billion. But much of that is attributable to a retroactive reinsurance deal with Liberty Mutual Insurance Co. announced in July.

“Last year, our premier position in reinsurance was reaffirmed by our writing a policy carrying a $3 billion single premium,” Buffett said in his annual letter, referring to the Liberty deal. “I believe that the policy’s size has only been exceeded by our 2007 transaction with Lloyd’s, in which the premium was $7.1 billion. In fact, I know of only eight P/C policies in history that had a single premium exceeding $1 billion. And, yes, all eight were written by Berkshire.”

“Certain of these contracts will require us to make substantial payments 50 years or more from now. When major insurers have needed an unquestionable promise that payments of this type will be made, Berkshire has been the party—the only party—to call,” he boasted.

Retroactive reinsurance deals aside, P/C reinsurance premiums earned fell 21 percent—or $1.1 billion for Berkshire Hathaway Reinsurance Group in 2014—a decline largely attributable to the wind-down of a quota-share contract with Swiss Re, now in runoff. The annual report also notes that property-catastrophe reinsurance premiums earned fell 14 percent in 2014.

“Our volume with respect to these coverages continues to be constrained, as rates, in our view, are inadequate. However, we have the capacity and desire to write substantially more business when appropriate pricing can be obtained,” the annual report notes.

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