Berkshire Hathaway ups Q1 insurance take 5.6x on Geico rally & primary gain

Warren Buffett’s insurance empire at  Berkshire Hathaway increased its pre-tax underwriting earnings 5.6x year on year in the first quarter of 2023 as auto insurer Geico swung back to profits after a long struggle and the primary insurance group nearly tripled its Q1 results.

Only reinsurance suffered a decline in Q1 earnings as a moderate decline in P&C reinsurance margins and a major gain in life and health were obscured by one-offs undermining the comparison in the variable annuity business.

The P&C reinsurance business, the largest book in the stable, grew by an underlying 12.4% in the first quarter of 2022 with management claiming net increases in new and renewal property business and higher rates, partially offset by unfavourable foreign currency translation effects.

But add in revenues from TransRe, taken in the late 2022 Allegheny acquisition, and P&C reinsurance earned premiums were up 51.5% year on year.

P&C reinsurance suffered a 4.3 percentage point (pps) increase in its combined ratio to 92.4%, the result of a hefty increase in expenses that more than offset a 2 point decline in the loss ratio.

Reinsurance loss and loss adjustment expense of $3.387 billion included $407 million of catastrophe loss, up 29% on the prior year period. That put 7.9 points into the loss ratio, still some 1.4 pps less than in Q1 2022, accounting for roughly 2/3 of the decline in the loss ratio.

Prior year reserve developments proved more favourable than in the year-prior period, which together with the change in cat loss, still left room for an implied improvement in the attritional loss ratio vs Q1 2022.

For the 6.4 pps jump in its expense ratio, Berkshire Hathaway blamed FX impacts and changes in business mix, including the impact of the acquired TransRe Group.

Beyond P&C, the reinsurance division swung back to a $137 million pre-tax underwriting profit on life and health, where management cited the impact of life insurance contract commutations in 2023. Product losses deepened in run-off retro and periodic payment annuity. Earnings are well down in run-off variable annuity after a prior year accounting change gave a boost.

The primary insurance group nearly tripled its pre-tax underwriting profit to $268 million on a 27% increase in earned premium, of which Allegheny accounted for 3/4. Management also claimed increased volumes from specialty and liability units plus a direct insurer.

The combined ratio for the primary insurance operations came down 3.8 pps to 93.2% on a 5.8 pps reduction in the loss ratio offset by rising expense.

The decline in the loss ratio was said to reflect changes in the business mix, including the impact of the Alleghany acquisition, lower incurred losses from current year catastrophes and increased reductions in loss estimates for prior years’ events. Mark Q1 2023 cat loss at a mere $37 million, down from $75 million in the prior year period.

But the big story came at the Berkshire Hathaway retail automotive unit Geico which swung to a pre-tax underwriting profit of $703 million after having racked up $1.9 billion in losses during four quarters of rising losses in 2022.

The turnaround was sudden. Geico had ended the year with $456 million in losses in the fourth quarter alone with no visible improvement loss ratios despite finally starting to show some acceleration on rates. The unit's combined ratio had ended the year at 104.8%, suggesting virtually no Q4 improvement from the 104.9% recorded for the first nine months.

Newfound profits didn't come through growth: Geico written premiums fell 2% even as management claimed higher average premiums per policy. Premiums earned grew a fractional 0.8%.

Geico did the rest of the work on the cost side. Total loss expense fell 6.5% and total underwriting expense fell 21.6%. That took 6.4 pps off the loss ratio and 2.8 pps off the expense ratio to push the unit back into the green with a 92.7% combined ratio.

Geico claimed a positive impact from higher average premiums per auto policy, favourable reserve development for prior accident years, the reduction in policies-in-force, and lower claims frequencies.

But severity in the age of inflation, the P&L killer of 2022, remains a problem. Average claims severity in the first quarter of 2023 were nearly 21-22% higher for property damage coverage, 7-8% for collision coverage and 8-10% for bodily injury.

Together with operating earnings from Berkshire Hathaway operations in energy, railroads and more, plus the $27.4 billion in total investment income brought by the group’s market wizard and founder Warren Buffett, the Berkshire Hathaway group could lay claim to $33.5 billion in Q1 net earnings. The group now wields $26.75 billion in cash and cash equivalents in addition to the $481 billion securities portfolio plus other assets.

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