Berkshire Hathaway 2018 results show P&C growth as Buffett criticises GAAP

Berkshire Hathaway stayed in the black in 2018 helped by its P&C and life and health insurance divisions, but its profits were hit by new accountancy rules that Warren Buffett, its chairman, criticised.

Net earnings attributable to Berkshire Hathaway shareholders were $4 billion in 2018, down from $44.9 billion in 2017. Group results for the fourth quarter of 2018 showed a net loss of $25.3 billion compared with net earnings of $32.5 billion in the same quarter in 2017.

The main reason for the change in the company’s fortunes was a $20.6 billion loss from a reduction in the amount of unrealized capital gains that existed in our investment holdings. Under a new GAAP (generally accepted accounting principles) rule, this must now be included in earnings.

In his letter to shareholders, Buffett said: “As I emphasized in the 2017 annual report, neither Berkshire’s Vice Chairman, Charlie Munger, nor I believe that rule to be sensible. Rather, both of us have consistently thought that at Berkshire this mark-to-market change would produce what I described as ‘wild and capricious swings in our bottom line.’”

Written premiums for the property/casualty division of the Berkshire Hathaway Reinsurance Group increased to $9.4 billion in 2018 from $7.7 billion in 2017.

Retroactive reinsurance written premiums were down to $517 million in 2018 from $10.7 billion the year before. The documents said the 2018 premiums were “derived primarily from one contract”.

The life and health division results showed written premiums were $5.4 billion in 2018 up from $4.8 billion the year before.

In the group’s annual report, it said: “Losses and loss adjustment expenses in 2018 decreased $288 million (4 percent) compared to 2017, and the loss ratio declined 18 percentage points to 77.6 percent.

“Losses incurred from significant catastrophe events in 2018 were approximately $1.3 billion, which derived from Hurricanes Florence and Michael, Typhoon Jebi and the wildfires in California, including $1.1 billion in the fourth quarter.

“Losses from significant catastrophe events in 2017 were approximately $2.4 billion, which derived from Hurricanes Harvey, Irma and Maria, an earthquake in Mexico, a cyclone in Australia and wildfires in California. There were no significant catastrophe loss events in 2016. In addition, losses and loss adjustment expenses reflected net gains of $469 million in 2018, $295 million in 2017 and $874 million in 2016 from reductions of estimated ultimate losses for prior years’ events.

“The net gain in 2018 was primarily due to lower than expected property losses. The net gain from prior years’ loss events in 2017 reflected losses from higher than expected property claims and increases in certain United Kingdom claim liabilities attributable to the UK Ministry of Justice’s decision to reduce the fixed discount rate required in lump sum settlement calculations of personal injury claims from 2.5 percent to negative 0.75 percent.”

It said that: “Premiums earned in 2017 included $10.2 billion from an aggregate excess-of-loss retroactive reinsurance agreement with various subsidiaries of American International Group, Inc. (the “AIG Agreement”). At the inception of our retroactive reinsurance contracts, we record the estimated ultimate claim liabilities, and we also record the excess of such claim liabilities over the premiums received as a deferred charge asset. Thus, as of the inception dates of these contracts, there is no net underwriting gain or loss.”

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