Berkshire Hathaway leverages Allegheny buy to offset Geico strain

Berkshire Hathaway cut its 2022 pre-tax underwriting loss on its total insurance operations to $98 million after a $260 million Q4 gain as M&A-driven reinsurance earnings helped offset continuing losses in the automotive sector.

The auto insurer Geico remains the drag on group earnings, still suffering from highly elevated claims severity and unable to retain clients as its moves to hike insurance rates in turn.

But the reinsurance group had its day, claiming a $1.39 billion full-year pre-tax underwriting profit, in part on a major acquisition and after having suffered notably in 2021. Q4, with the inclusion of newly acquired assets, brought $376 million of the total, up 2.2% year on year.

P&C reinsurance bore the fruit of the TransRe acquisition in Q4. Written premiums were up by 72% year on year in Q4 and earned premiums by 52%, all ahead of a 42% rise in pre-tax underwriting profit. The P&C reinsurance segment’s combined ratio in Q4 was up 1.1 percentage points to 84.8%, calculations between the 9M and 12M reports indicate.

Premiums written in the reinsurance wing increased by 20% or $2.8 billion for FY2022, “primarily due to net increases in new property business and higher rates” not to mention the mid-October addition of TransRe, gained in the Allegheny acquisition, all partially offset by FX conversion effects.

Reinsurance loss and loss adjustment expense of $10.6 billion rose a mere 7.4%, helping to cut nearly six percentage points off the segment loss ratio, despite a $2 billion hit from Hurricane Ian. The expense ratio was down a further 2.9 points on FX impacts.

Berkshire’s primary insurance segment suffered a 35% decline in FY2022 pre-tax underwriting profits down to $393 million even after a notable y/y gain in the fourth quarter.

Premiums written in the primary insurance segment in FY2022 rose in excess of 16%, but could not keep pace with loss and OPEX growth in excess of 20%.

Management could call out leading premium gains at Berkshire Hathaway Specialty of 16%, liability unit USLI of 16% and the Homestead Companies BHHC of 15%, but largely padded its top line with $435 million from the inclusion of Alleghany Insurance.

The loss ratio rose 1.9 percentage points to 71.9%, with management reiterating prior word of $554 million in losses from Hurricane Ian, offset in part by $428 million in favourable prior year reserve adjustment.

For the fourth quarter alone, Berkshire primary was performing better, with the loss ratio at 66.5% as the group increased pre-tax underwriting profits by nearly 32% against the year-prior period.

The struggling auto unit Geico ended 2022 with a massive $1.88 billion pre-tax underwriting loss in 2022, adding $456 million in losses in the fourth quarter alone.

The unit's combined ratio ended the year at 104.8%, suggesting virtually no Q4 improvement from the 104.9% recorded for the first nine months.

A modest 2.5% increase in written premiums came as Geico began to take rate an at an accelerating pace, but client departures kept pace. Average rate rose 11.3% for FY2022, up from 5.4% reported after 9M. But the decline in policies in force is up to an 8.9% pace, above the 4.6% annual pace reported for the three quarters of year.

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