Berkshire Hathaway chooses to walk away from under-priced business
In a set of results that will greatly interest many Bermuda reinsurers, Berkshire Hathaway has admitted that soft rates in the reinsurance market have forced declines in the amount of business it wrote in the second quarter of this year.
While Berkshire Hathaway’s primary insurance businesses grew in the second quarter of 2016 its reinsurance businesses shrank, the company blaming high capacity and intense competition in the sector.
Berkshire Hathaway reported earned insurance premiums of $10.8 billion in the second quarter of 2016, a 4 percent increase from $10.4 billion for the same period in the previous year.
This was mainly driven by its insurance units. Revenues at Berkshire's Hathaway’s motor and home insurance business GEICO reached $6.2 billion for this period, an increase of 10.7 percent compared with the $5.6 billion it made in the same period last year.
Its reinsurance units shrank, however. General Re reported revenues of $1.4 billion for the second quarter, a decrease of 6.6 percent from $1.5 billion for the same period last year.
Berkshire Hathaway Reinsurance Group similarly reported a decrease in revenue for this period to $1.7 billion, down 15 percent from $2 billion, the figure for last year.
In the second quarter and first six months of 2016, property/casualty premiums written overall declined $23 million (5 percent) and $214 million (13 percent), respectively, while premiums earned decreased $82 million (12 percent) and $160 million (11 percent), respectively, as compared to 2015.
The company said the declines were born of pricing discipline and the willingness to walk away from under-priced business but also stressed it was very much open to large deals where the pricing was adequate.
“Our premium volume declined in both the direct and broker markets. Insurance industry capacity remains high and price competition in most property/casualty reinsurance markets persists. We continue to decline business when we believe prices are inadequate. However, we remain prepared to write substantially more business when more appropriate prices can be attained relative to the risks assumed,” the company said.
In terms of Berkshire Hathaway's pre-tax earnings for its insurance and reinsurance businesses, GEICO reported earnings of $150 million for the three-month period ending June 30, compared to $53 million for the same period in 2015.
Berkshire Hathaway Primary Group reported pre-tax earnings of $174 million for this period, compared to $203 million for the same period last year.
General Re reported pre-tax earnings of $2 million, compared to $107 million for the same period in 2015.
Berkshire Hathaway Reinsurance Group reported pre-tax earnings of $184 million, compared to a loss of $411 million for the same period last year.
Overall, the insurance group posted net earnings on underwriting of $337 million compared with a $38 million loss a year earlier.
“Our insurance underwriting operations generated increased net earnings in the second quarter and first six months of 2016 compared to 2015,” Berkshire Hathaway said.
“The increases reflected variations in the foreign currency exchange gains/losses related to claim liabilities denominated in foreign currencies under certain Berkshire Hathaway Reinsurance Group retroactive reinsurance and periodic payment annuity contracts, as well as increased underwriting gains from GEICO, offset by lower gains from General Re and Berkshire Hathaway Primary Group operations.”
