The engine of Warren Buffett’s Berkshire Hathaway business stuttered and stalled in the second quarter, as the insurance and reinsurance components which have driven a good deal of the Sage of Omaha’s success, were hit by weather and catastrophe losses.
Catastrophe I hear you question? But doesn’t Warren Buffett hate the catastrophe reinsurance business?
The mainstream press has latched onto a number of comments made by Buffett and his reinsurance business chief Ajit Jain in the last few years, where the pair have bemoaned pricing of catastrophe reinsurance business and said it no longer meets their return targets.
But of course, if you looked even a little closely at his reinsurance business and his primary insurance businesses such as auto insurer Geico, you’d quickly realise that Berkshire Hathaway is significantly exposed to weather and catastrophe risks due to the business underwritten.
So even if Buffett and Berkshire Hathaway don’t like specifically underwriting catastrophe risks on a reinsurance basis as much as they used to, they still do underwrite a lot, and assume and retain significant amounts of it.
As evidenced in the second quarter, when Buffett’s Berkshire Hathaway Reinsurance Group fell to a $411m underwriting loss, with a large proportion due to catastrophe and weather losses, much of which came from the first-half severe weather and catastrophe events in Australia.
Similarly, higher frequency of automotive insurance claims has driven much lower profit at Buffett’s Geico unit, with some of that toll likely due to severe weather losses in the U.S.
A $137m loss in the reinsurance property and casualty unit is largely attributed to a single Australian storm loss of $115.
In the General Re reinsurance unit’s property and casualty activities, the pressure of the changing market environment continues to weigh on Berkshire Hathaway’s results as well, with a pull-back in premiums underwritten evident.
The company explained; “Our premium volume declined in both the direct and broker markets worldwide. Insurance industry capacity remains high and price competition in most property/casualty reinsurance markets persists. We continue to decline business when we believe prices are inadequate. However, we remain prepared to write more business when more appropriate prices can be attained relative to the risks assumed.”
Similarly, the pull-back on premiums underwritten at the Berkshire Hathaway Reinsurance Group continues apace, with $675m of P&C premiums written in Q2 2015, compared to $1.118 billion a year earlier.
The company said; “Our volume remains constrained for most property/casualty coverages, and for property catastrophe coverages in particular, as rates, in our view, are generally inadequate.”
The business mix shift continues at Berkshire, with specialty the new focus it seems, but that doesn’t seem to make the business any less exposed to inclement weather and catastrophes.
Of course the other engine of Berkshire Hathaway is the investment side, with the company following an active and diversified global investment strategy, as it puts to work its continuously growing insurance and reinsurance float.
But here, economic conditions hit Buffett’s empire, with net insurance investment income down a little at $977m, compared to $1.131 billion. The insurance and reinsurance float has grown to $85.1 billion, up from $84 billion at December 31st 2014.
Across the entire Berkshire Hathaway business net earnings attributable to shareholders dropped to $4.013 billion, down from $6.395 billion a year earlier, with investments and derivatives performing much worse than in 2014, due to the economic environment.
So neither of Berkshire Hathaway’s engines performed as well as expected in the second-quarter of 2015, demonstrating that event the Sage can have a few bad months.
Of course factors with the insurance and reinsurance market are hurting the firm and the global macro economic and investment environment weighs on the broader business.
The insurance and reinsurance float growth will also be slowing, due to the pull-back on premiums underwritten. That is almost like swapping the fuel for the engine of Berkshire Hathaway’s growth with something a little lower octane and will affect the firm’s results going forwards as well, we’d expect.
But the catastrophe exposure remains and Berkshire continues to assume it. You only have to look at large deals his reinsurance division enters into, such as the most recent investment and quota share with IAG to see that the appetite to assume catastrophe and weather risk remains.