Insurance operations contributed $5.7 billion to total operating income of $15.1 billion for Berkshire Hathaway in 2013—with an underwriting profit of $2.0 billion (after taxes) representing the 11th in a row for the Nebraska-based conglomerate.
In his annual letter to shareholders, Berkshire’s Chairman Warren Buffett touted the contributions of GEICO, Berkshire Hathaway Reinsurance and even General Re, which he once described as a mistake to have purchased. Buffett also devoted a few sentences to the newest insurance operation—Berkshire Hathaway Specialty Insurance (BHSI).
Although financial information contained in the report suggests that the specialty unit headed by Peter Eastwood, the former president of AIG’s U.S. property/casualty operations, contributed less than $1 billion to total earned premiums in 2013, Buffett wrote that “BHSI will be a major asset for Berkshire, one that will generate volume in the billions within a few years.”
BHSI is included in the Berkshire Hathaway Primary Group. The Primary Group, which saw earned premiums rise by $1.1 billion to $3.3 billion in 2013, also includes medical malpractice writers Medical Protective Insurance Company and Princeton Insurance Company, Berkshire Hathaway Homestate Companies, writing commercial multiline insurance and workers compensation, and GUARD Insurance Group, another comp writer, among others. According to the annual report, Homestate’s earned premium alone grew $301 million. GUARD was acquired in late 2012, a year when it wrote $400 million in premiums.
The report does not indicate which, if any, of the Primary Group carriers saw premium declines.
In total, earned premiums for all of Berkshire’s P/C operations grew 5.7 percent to $30 billion. GEICO, with its $18.6 billion in earned premiums representing more than 60 percent of the total grew nearly 11 percent.
Earned premiums at Berkshire Hathaway Reinsurance Group declined 19.9 percent to $5.5 billion.
For GenRe, written premiums were flat, and earned premiums grew slightly to about $3.0 billion.
Earned premiums and pretax earnings for the P/C insurance units are summarized in the accompanying table.
Underwriting Profits, Float and Ajit Jain’s Brains
Buffett’s letter makes one significant mention of growth in premiums at an insurance operation—pointing out that GEICO has grown to become the second-largest U.S. auto insurer by leapfrogging Allstate. But the subjects of underwriting profit and increased “float” from holding and investing policyholders’ money are the insurance topics that capture most of Buffett’s attention in his commentary.
During the 11-year stretch of underwriting profits, float grew from $41 billion to $77 billion, he wrote.
Ranked first among the insurance entities in both “float” and underwriting profit ($1.3 billion from P/C and life operations; $915 million for P/C alone) is Berkshire Hathaway Reinsurance Group, led by Ajit Jain.
“Ajit has created an insurance business with float of $37 billion and a large cumulative underwriting profit, a feat that no other insurance CEO has come close to matching,” Buffett’s letter says.
“Ajit’s mind is an idea factory that is always looking for more lines of business he can add to his current assortment,” Buffett wrote, noting that Jain formed BHSI last year.
“His operation combines capacity, speed, decisiveness and, most important, brains in a manner unique in the insurance business,” the letter says, noting that risk-taking Jain never exposes Berkshire to inappropriate levels of risk.
“For example, if the insurance industry should experience a $250 billion loss from some mega-catastrophe—a loss about triple anything it has ever experienced—Berkshire as a whole would likely record a significant profit for the year because of its many streams of earnings. And we would remain awash in cash, looking for large opportunities if the catastrophe caused markets to go into shock. All other major insurers and reinsurers would meanwhile be far in the red, with some facing insolvency,” Buffett wrote.
For 2013, total underwriting profit for Jain’s reinsurance group for P/C and life business was $1.3 billion, with P/C business contributing $915 million (before taxes).
GEICO posted a higher P/C underwriting profit report—$1.1 billion.
“Unfortunately, the wish of all insurers to achieve this happy result [an underwriting profit] creates intense competition, so vigorous in most years that it causes the P/C industry as a whole to operate at a significant underwriting loss. This loss, in effect, is what the industry pays to hold its float,” Buffett wrote in the annual letter, calling out State Farm, “by far the country’s largest insurer and a well-managed company besides” for having posted an underwriting loss in nine of the 12 years ending in 2012.
“Competitive dynamics almost guarantee that the insurance industry…will continue its dismal record of earning subnormal returns as compared to other businesses,” Buffett’s letter says.
Gen Re ‘Now a Gem’
General Re, ranked second in float among the Berkshire insurance divisions with $20 billion, turned in the smallest underwriting profit of the group at $385 million. But the unit still managed to draw accolades from Buffett who referred to General Re as “another reinsurance powerhouse,” and noted that “Gen Re’s huge float has been better than cost-free” under the leadership of Tad Montross.
According to Buffett, Montross has observed four commandments that produce a sound insurance operation: understanding all the possible loss-producing exposures under a policy; conservatively assessing probable loss costs; setting premiums that deliver profits, on average; and walking away when appropriate premium isn’t obtainable.
“It can be remembered that soon after we purchased General Re, the company was beset by problems that caused commentators—and me as well, briefly—to believe I had made a huge mistake. That day is long gone.
“General Re is now a gem,” Buffett wrote in the letter.
Overall, the five insurance and reinsurance divisions produced $2.6 billion of pretax P/C underwriting profit and roughly $3.1 billion, including life business.
After-tax underwriting profit was just shy of $2.0 billion after taxes and investment income added $3.7 billion more to after-tax operating income.
Operating earnings for insurance and non-insurance businesses totaled $15.1 billion.
Adding investment and derivative gains to operating earnings, total bottom-line net earnings were $19.5 billion in 2013, compared to $14.8 billion in 2012.
Other highlights of Buffett’s letter include his discussion of failing to outperform the S&P, the continued search for “elephants” and bolt-on acquisitions, and a discussion of the nation’s pension woes.
See related Associated Press article, “Highlights from Warren Buffett’s Annual Letter,” and Reuters article: “Buffett Seeks More Elephants,” for more insights from Buffett’s letter beyond the insurance segment.
Buffett’s entire letter is embedded below: