Buffett bearish on reinsurance prospects - FREE

Buffett bearish on reinsurance prospects - FREE

Berkshire Hathaway’s Warren Buffett heaped praise on the heads of his insurance operations as underwriting income contributed $1,118 per share to the $12,304 per share of earnings at the widely diversified conglomerate. Buffett describes the group’s insurance operations as the engine of its expansion.

Across 2015, however, overall underwriting profits were down from $1.69bn to $1.16bn on an after-tax basis, partially offset by a higher contribution from investment income, which rose from $3.54bn to $3.73bn.

The result compares with annual underwriting income averaging $1,434 per share over the past decade. The more stable return was attributed by Buffett to a reduced emphasis on cat coverages and greatly expanded “bread-and-butter lines of business”.

Headed by Ajit Jain for the last 30 years, cat focused Berkshire Hathaway Reinsurance Group posted a $460m underwriting profit in 2015, compared with $606m in the prior year.

Buffett praised Gen Re CEO Tad Montross for maintaining a float that has been “considerably better” than cost free under his leadership and for his willingness to walk away from business if appropriate premium can’t be obtained. Profits dropped from $277m to $132m in 2015 at Gen Re, reflecting Montross’s conservative stance.

At Geico, headed by CEO Tony Nicely, who joined the company 54 years ago, underwriting profits halved to $460mn last year from $1.16bn. “There is no better manager than Tony,” Buffett said of Nicely, who has grown Geico’s share of the US auto market to 11.4% in 2015 from 2.5% in 1995.

Berkshire Hathaway Specialty Insurance, formed less than three years ago and headed by Peter Eastwood, has already developed $1bn of annual premium volume. Buffett says the company is destined to become one of the world’s leading P/C insurers.

In his widely read letter to shareholders, Buffett painted a bleak picture of the US insurance industry’s prospects, saying that “competitive dynamics almost guarantee that the insurance industry will continue its dismal record of earning subnormal returns on tangible net worth, as compared to other American businesses”.

He added that the prolonged period of low interest rates also virtually guarantees that earnings on float will steadily decrease for many years to come, thereby exacerbating the profit problems of insurers around the world.

“It’s a good bet that industry results over the next ten years will fall short of those recorded in the past decade, particularly for those companies that specialize in reinsurance,” Buffett concluded.

Table: underwriting earnings and float by division ($m).

 

Underwriting profit 2015

Underwriting profit 2014

Year end float 2015

Year end float 2014

BH Reinsurance

421

606

44,108

42,454

General Re

132

277

18,560

19,280

Geico

460

1,159

15,148

13,569

Other Primary

824

626

9,906

8,618

 Overall

1,837

2,668

87,722

83,921

Table 2: Berkshire’s group-wide operating earnings by sector ($m).

 

Q4 2015

Q4 2014

FY 2015

FY 2014

Insurance-underwriting

306

191

1,162

1,692

Insurance-investment income

1,033

880

3,725

3,542

Railroad, Utilities and Energy Businesses

1,507

1,552

6,380

5,751

Other businesses and misc income/expense

1,827

1,340

6,091

5,566

Operating earnings

4,673

3,963

17,358

16,551

 


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