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Berkshire Hathaway’s full year, 2014 Q4 operating earnings up; another year of underwriting profit


March 2, 2015   by Canadian Underwriter


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Berkshire Hathaway Inc.’s operating earnings grew for both 2014 compared with 2013 and for 2014 Q4 compared with 2013 Q4, and while operating earnings for insurance-underwriting was down, the quickly growing insurance operation posted its twelfth consecutive year of underwriting profit last year.

Berkshire Hathaway's full year, 2014 Q4 operating earnings upThe company’s operating earnings for 2014 were US$16.551 billion compared with US$15.139 billion in 2013, while operating earnings for 2014 Q4 were US$3.963 billion compared with US$3.776 billion in 2013 Q4.

Earnings are stated on an after-tax basis, notes a statement from Berkshire Hathaway Inc., which, along with its subsidiaries, engage in diverse business activities, including property and casualty insurance and reinsurance, utilities and energy, freight rail transportation, finance, manufacturing, retailing and services.

Both full-year and fourth quarter results on the insurance side were down. For Insurance-underwriting, Berkshire Hathaway’s operating earnings were US$1.692 billion in 2014 compared with US$1.995 billion in 2013, and US$191 million in 2014 Q4, down significantly from US$394 million in 2013 Q4.

Insurance-investment income was also down, with Berkshire Hathaway reporting US$3.542 billion in 2014 compared with US$3.708 billion in 2013, and US$880 million for the fourth quarter of 2014 compared with US$904 million for the same period in 2013.

A chart in the 2014 Annual Report notes that, in addition to the company’s three major insurance operations, it owns a group of smaller companies, “most of them plying their trade in odd corners of the insurance world.”

In aggregate, the companies are a growing operation that consistently delivers an underwriting profit.

Specifically, BH Reinsurance had an underwriting profit of US$606 million in 2014 compared with US$1.294 billion in 2013; General Re had US$277 million in 2014 compared with US$283 million in 2013; GEICO had US$1.159 billion in 2014 compared with US$1.127 billion in 2013; and Other Primary had US$626 million in 2014 compared with US$385 million in 2013.

Warren BuffettDespite overall insurance operating earnings being down from their respective periods in 2013, Warren E. Buffett, Berkshire Hathaway’s Chairman of the Board, offers a more optimistic outlook as part of his letter in the 2014 Annual Report.

“Berkshire’s huge and growing insurance operation again operated at an underwriting profit in 2014 – that makes 12 years in a row – and increased its float. During that 12-year stretch, our float – money that doesn’t belong to us but that we can invest for Berkshire’s benefit – has grown from US$41 billion to US$84 billion. Though neither that gain nor the size of our float is reflected in Berkshire’s earnings, float generates significant investment income because of the assets it allows us to hold,” Buffett writes.

The Annual Report provides a historical look at the company’s float:

• 1970 – US$39 million;

• 1980 – US$237 million

• 1990 – US$1.632 billion

• 2000 – US$27.871 billion

• 2010 – US$65.832 billion

• 2014 – US$83.921 billion

“Further gains in float will be tough to achieve,” Buffett reports, pointing out that some insurance operations are expected to grow, while the reinsurance division of National Indemnity “is party to a number of run-off contracts whose float drifts downward. If we do in time experience a decline in float, it will be very gradual – at the outside no more than 3% in any year.”

Competition in insurance is so vigorous, “it frequently causes the P/C industry as a whole to operate at a significant underwriting loss,” Buffett notes.

“This loss, in effect, is what the industry pays to hold its float. Competitive dynamics almost guarantee that the insurance industry, despite the float income all its companies enjoy, will continue its dismal record of earning subnormal returns on tangible net worth as compared to other American businesses. The prolonged period of low interest rates our country is now dealing with causes earnings on float to decrease, thereby exacerbating the profit problems of the industry,” he explains.

“Looking ahead, I believe we will continue to underwrite profitably in most years. Doing so is the daily focus of all of our insurance managers, who know that while float is valuable, its benefits can be drowned by poor underwriting results.”

For non-insurance businesses, Berkshire Hathaway’s operating earnings were US$11.462 billion in 2014 compared with US$10.148 billion for 2013, and US$3.027 for 2014 Q4 compared with US$2.748 billion for 2013 Q4.

As for Other, the company reports the operating loss improved to US$145 million in 2014 compared with US$712 million in 2013, while the operating loss was down to US$135 million in 2014 Q4 compared with US$270 million in 2013 Q4.

Other results noted in the company’s 2014 Annual Report include the following:

• gain in net worth during 2014 was US$18.3 billion, which increased the per-share book value of both our Class A and Class B stock by 8.3%.

• the “Powerhouse Five” – a collection of the company’s largest non-insurance businesses – had a record US$12.4 billion of pre-tax earnings in 2014, up US$1.6 billion from 2013. “If the U.S. economy continues to improve in 2015, we expect earnings of our Powerhouse Five to improve as well. The gain could reach US$1 billion, in part because of bolt-on acquisitions by the group that have already closed or are under contract.”

• the company’s many dozens of smaller non-insurance businesses earned US$5.1 billion last year, up from US$4.7 billion in 2013. “Here, as with our Powerhouse Five, we expect further gains in 2015.”


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