Berkshire shrinks re/insurance operations in Q1

Berkshire Hathaway has reduced net earned premium in its re/insurance operations by 38.5 percent year on year to $13.37 billion in the first quarter of 2018 driven by the Berkshire Hathaway Reinsurance Group unit, according to KBW research.

The combined ratio of the re/insurance operations improved to 96.1 percent from 101.1 percent over the period.

The largest drop in net earned premium was registered at Berkshire Hathaway Reinsurance Group (BHLN, NICO Group) with a decline of 86.1 percent year on year to $1.65 billion. The decline reflected lower NICO P&C premiums, no retroactive reinsurance deals in the first quarter of 2018 (contrasting with the $10 billion-plus AIG deal in the first quarter of 2017), and modestly lower BHLN Group Life premiums, according to KBW. The combined ratio at BHLN deteriorated during the period to 125.0 percent from 103.8 percent.

GEICO saw net earned premium grow 15.6 percent to $7.92 billion reflecting significant policy growth and higher average premiums per policy, according to KBW. The unit’s combined ratio improved to 91.4 percent from 97.4 percent reflecting lower expense ratios, $407 million of collision and property damage reserve releases, and probably lower-than-expected claim frequency, the analysts noted.

Morgan Stanley analysts said in a May 7 note that GEICO’s underwriting margin of 8 percent in the first quarter was better than expected, adding that the trend continued in April. Berkshire will try to grow the business faster and gain market share, the analysts added.

At the same time, General Re grew net earned premium by 35.9 percent year on year to $1.89 billion, reflecting better-than-expected growth in both P&C (48.6 percent) and life and health (24.7 percent), according to KBW. P&C premium growth reflected both direct and broker market growth (comprising new business and increased renewal participations) along with foreign exchange.

The combined ratio at GenRe improved to 91.9 percent in the first quarter of 2018 from 110.3 percent in the same period a year ago, reflecting the absence of catastrophe losses.

Berkshire Hathaway Primary Group grew net earned premium by 14.4 percent year on year to $1.92 billion in the first quarter of 2018 while the combined ratio deteriorated to 94.8 percent from 88.7 percent.

Berkshire wants to be in the reinsurance business over the long run as it still has competitive advantage in capital and talent and GenRe sees growth opportunities in many areas including life reinsurance, according to Morgan Stanley analysts.

Berkshire has added reserves to the reinsurance contract with AIG. Overall, Berkshire has done well with the retroactive reinsurance deals, according to Morgan Stanley. Insurance float continues to build, adding $2 billion in the first quarter.

Berkshire is experimenting with direct distribution in small business insurance, similar to what GEICO has done in personal auto insurance, Morgan Stanley analysts noted. The disruption in small business insurance will happen but it could take time, they added. Berkshire is cautious on  cyber insurance and doesn’t want to be market leader.