Warren Buffett’s Berkshire Hathaway insurance and reinsurance businesses lost money or gained less in underwriting in the second quarter and first six months of 2017 compared to last year while his railroad, manufacturing, energy and utilities businesses all reported increased earnings.
Berkshire Hathaway reported an overall 15 percent drop in second quarter profit as improvement in the railroad business fell short of offsetting lower investment income and the insurance underwriting losses.
The insurance and reinsurance businesses combined generated after-tax losses from underwriting in the second quarter ($24 million) and first six months of 2017 ($289 million).
The insurance underwriting results declined as compared to 2016 due in part to decreased earnings from the re-estimation of liabilities for prior years’ loss events, higher losses from current year catastrophe events and increased deferred charge amortization on retroactive reinsurance contracts, according to the firm.
Investment income from all the insurance units was down one percent to $965 million in the quarter.
Private passenger auto insurer GEICO’s premiums written and earned both grew about 16 percent in the second quarter but the underwriting gain ($119 million) declined from last year’s second quarter ($150 million) as claim costs grew. GEICO’s losses and loss adjustment expenses in 2017 increased $935 million (18.1 percent) in the second quarter. GEICO’s underwriting gain for the first six months was $294 million compared to $414 million for the same period in 2016.
The company said auto claims frequencies in the first six months of 2017 were relatively flat for property damage and collision coverages, increased approximately three percent for bodily injury coverage and decreased about two percent for personal injury protection coverage compared to 2016. Average claims severities were higher in the first six months of 2017 for property damage and collision coverages (four to five percent range) and bodily injury coverage (four to six percent range).
Reinsurer General Re’s property/casualty premiums earned increased $153 million (25 percent) in the quarter and $155 million (12 percent) for the six month period, respectively, as compared to 2016. The property/casualty reinsurance operations generated pre-tax underwriting losses of $14 million in the second quarter and $157 million in the first six months of 2017 compared to pre-tax underwriting gains of $23 million and $53 million, respectively, in the comparable 2016 periods. The company said the increases reflected higher written premiums in both direct and broker markets, primarily attributable to new business and increased participations for renewals. Despite the increase in premiums in 2017, price competition in most reinsurance markets persists and the reinsurer said it continues to decline business when prices are inadequate.
In the first six months of 2017, General Re increased its estimates for unpaid losses approximately $140 million with respect to certain United Kingdom liability business written in prior years as a result of the U.K. Ministry of Justice’s decision to reduce the fixed discount rate required in lump sum settlement calculations of U.K. personal injury claims. The discount rate, referred to as the Ogden rate, was reduced from 2.5 percent to negative 0.75 percent and General Re expects this will “significantly increase claim costs associated with currently unsettled cases, as well as for future cases.”
Berkshire Hathaway Reinsurance Group (BHRG) underwrites excess-of-loss reinsurance and quota-share coverages on property/casualty risks, including property catastrophe insurance and reinsurance. BHRG also writes some retroactive reinsurance. In the second quarter and first six months of 2017, property/casualty reinsurance premiums earned increased $116 million (11 percent) and $77 million (4 percent), respectively, compared to 2016. Berkshire noted that about half of the premiums written and earned in the first six months of 2017 derived from two contracts. The premium volume was constrained for most reinsurance coverages, as rates were generally inadequate, according to the reinsurer. “We have the capacity and desire to write more business when prices are appropriate,” the company said.
The property/casualty reinsurance business generated pre-tax underwriting gains of $52 million in the second quarter and pre-tax losses of $217 million in the first six months of 2017, compared to pre-tax gains of $249 million in the second quarter and $375 million in the first six months of 2016. In the first six months of 2017, losses of approximately $250 million related to prior years’ loss events, which included losses from unanticipated reported claims from hurricane and earthquake events in 2016 and increased liability estimates attributable to the Ogden discount rate decrease.
In January 2017, Berkshire’s NICO (National Indemnity Co.) entered into an aggregate excess-of-loss retroactive reinsurance agreement with Amercian International Group (AIG) that became effective on February 2, 2017. In connection with the AIG agreement, NICO received cash premiums of $10.2 billion. As of the effective date, recorded losses and loss adjustment expenses incurred were $10.2 billion, representing the initial estimate of the unpaid losses and loss adjustment expenses assumed of $16.4 billion, partly offset by a deferred charge asset of $6.2 billion. Thus, on the effective date, the AIG agreement had no effect on pre-tax underwriting results.
BHRG’s retroactive contracts produced pre-tax underwriting losses of $229 million and $399 million in the second quarter and first six months of 2017, respectively, and $149 million and $259 million, respectively, in the comparable 2016 periods. The comparative increases in such losses in 2017 were primarily due to deferred charge amortization related to the AIG agreement and another retroactive reinsurance contract written in December 2016, partly offset by a small net gain from a contract commuted in the first quarter of 2017 and comparatively lower deferred charge amortization from other contracts.
Berkshire Hathaway Primary Group consists of independently managed insurance underwriting businesses. The largest of these insurers include the MedPro Group, National Indemnity Co., Berkshire Hathaway Homestate Companies, Berkshire Hathaway Specialty Insurance and Berkshire Hathaway GUARD Insurance Companies. Other BH Primary insurers include U.S. Liability Insurance Co., Applied Underwriters and Central States Indemnity Co.
The BH Primary insurers produced pre-tax underwriting gains of $232 million in the second quarter and $421 million in the first six months of 2017. Primary Group’s premiums written in the second quarter and first six months in 2017 increased 8.9 percent and 13.2 percent, respectively, over the same periods in 2016. All of the BH Primary insurers generated increased premiums written in the first six months of 2017, led by BH Specialty (23 percent), GUARD (28 percent) and BHHC (11 percent). Premiums earned increased $248 million (16.4 percent) in the second quarter and $483 million (16.4 percent) in the first six months as compared to 2016 reflecting the increases in premiums written.
In the third quarter of 2016, NICO agreed to acquire Medical Liability Mutual Insurance Co., a writer of medical professional liability insurance domiciled in New York. The acquisition will involve the conversion of MLMIC from a mutual company to a stock company. The company expects this transaction will be completed in late 2017.