Three major hurricanes halted Berkshire Hathaway’s streak of annual underwriting profits.Berkshire Hathaway’s insurance operations booked underwriting losses for the first time in over a decade, proving that even the most able of underwriters could not escape the overwhelming financial impact of last year’s three major hurricanes and wildfires. The company’s leader, Warren Buffett, had previously predicted an end to the insurance divisions’ 14-year streak of underwriting profits that reached $28 billion — and last year’s string of natural catastrophes made his prediction come true.
Following two years without any significant natural disasters, Berkshire Hathaway’s insurance and reinsurance entities posted an after-tax underwriting loss of $2.2 billion in 2017. In 2016, those same insurance operations generated $1.4 billion in after-tax profits, a slight improvement on the $1.2-billion gain recorded in 2015.
Hurricanes Harvey, Irma, Maria reversed that trend, however, slamming the company’s insurers and reinsurers with $3.2 billion in losses ($2 billion after taxes). Buffett estimated his company’s share of the industry’s overall $100 billion in losses from the hurricanes at 3%.
A Closer Look
A closer look at two of Berkshire Hathaway’s insurance units highlights the impact of 2017’s devastating natural catastrophes. On the property-casualty reinsurance side, its National Indemnity Co. (NICO) and General Reinsurance Corp. (General Re) suffered approximately $2.4 billion in combined losses due to the hurricanes, an earthquake in Mexico, a cyclone in Australia, and wildfires in California, resulting in a pre-tax underwriting hit of $1.6 billion.
Likewise, the conglomerate’s personal lines insurer Geico attributed its 2017 pre-tax underwriting loss of roughly $450 million to Hurricanes Harvey and Irma as well as higher claims payouts. Yet premiums written by the unit rose 16.1% to $30.5 billion in 2017, as auto premiums per policy increased 6.9%. That hike, according to the company, arose from rate increases, coverage changes, and changes in state and risk mix.
In a Morningstar analyst note, Financial Services Sector Strategist Greggory Warren wrote that he expects Berkshire Hathaway to reduce its reinsurance underwriting volume because of the market’s current excess capacity and unattractive pricing. He added, however, that both General Re and Berkshire Hathaway Reinsurance Group (BHRG) “have a knack for finding profitable business, even when reinsurance pricing is unattractive.”
Warren noted that Geico’s “aggressive underwriting” has led to a spike in the auto insurer’s average loss ratio to 86.6% in 2017, up from the average level charted between 2012 and 2016 of 78.7%. “Geico's relentless pursuit of growth continues to come at the expense of profitability,” he wrote.
Strong Position Entering 2018
Despite the relatively poor performance of its insurance companies last year, Buffett contends that Berkshire Hathaway is better prepared than any other company to weather a “mega-catastrophe,” or a natural disaster that costs $400 billion or more in insured losses. He estimated Berkshire Hathaway’s portion of those potential losses at $12 billion, which falls well under the company’s earnings from non-insurance operations.
In his annual letter to shareholders, Buffett praised his insurance management team for their conservative underwriting practices that produced a steady stream of underwriting profits until the hurricanes and other natural disasters hit.
“I have warned that we have been fortunate in recent years and that the catastrophe-light period the industry was experiencing was not a new norm,” he wrote. “Last September drove home that point, as three significant hurricanes hit Texas, Florida and Puerto Rico.”