Retroactive reinsurance contracts, Ogden rate reduction produce underwriting losses for Berkshire Hathaway

Boston-based Berkshire Hathaway Specialty insurance, which announced its entry in 2015 into the Canadian market, had a 23% increase in premiums written for the first half of 2017 versus 2016, while the Berkshire Hathaway Reinsurance Group had liabilities for losses and loss adjustment expenses, associated with its retroactive reinsurance contracts, of more than $40.1 billion as of June 30, parent firm Berkshire Hathaway Inc. reported Friday.

Omaha, Neb.-based Berkshire Hathaway reported  an underwriting loss of $22 million during the three months ending June 30, compared to an underwriting gain of $337 million in Q2 2106.

All figures are in United States dollars.

Berkshire Hathaway Reinsurance Group reported  an underwriting loss of $400 million in Q2 2017,  compared to an underwriting gain of $184 million in the same three months of 2016.  Berkshire Hathaway Reinsurance Group had an underwriting loss of $121 million in life and health, an underwriting gain of $52 million in P&C and an underwriting loss of $331 million in retroactive reinsurance.

The other insurance groups – Government Employees Insurance Company (GEICO), General Re and Berkshire Hathaway Primary Group – reported underwriting gains in the latest quarter.

Part of Berkshire Hathaway Reinsurance Group’s loss this year was due to an agreement – initially announced Jan. 20 – in which Berkshire Hathaway subsidiary National Indemnity Company (NICO) is agreeing to cover 80% of American International Group Inc.’s net losses and net allocated loss adjustment expenses on certain long-tail exposures.

Berkshire Hathaway said earlier it received cash premiums of $10.2 billion in connection with that agreement, in which NICO assumes 80% of the net losses and net allocated loss adjustment expenses certain reserves in excess of the first $25 billion.

AIG said earlier that NICO’s overall limit of liability under the agreement is $20 billion.

“Before foreign currency gains/losses, retroactive reinsurance contracts produced pre-tax underwriting losses of $229 million and $399 million in the second quarter and first six months of 2017, respectively, and $149 million and $259 million, respectively, in the comparable 2016 periods,” Berkshire Hathaway said Aug. 4, 2017 of Berkshire Hathaway Reinsurance Group’s Q2 financial results. “The comparative increases in such losses in 2017 were primarily due to deferred charge amortization related to the AIG Agreement and another retroactive reinsurance contract written in December 2016, partly offset by a small net gain from a contract commuted in the first quarter of 2017 and comparatively lower deferred charge amortization from other contracts.”

Meanwhile the Berkshire Hathaway Primary Group reported $1.8 billion in premiums written in the latest quarter, up 8.9% from $1.654 billion in Q2 2016.For the first six months of the year, Berkshire Hathaway Primary Group’s premiums written increased 13.2%, from $3.233 billion in 2016 to $3.65 billion this year.

“All of the BH Primary insurers generated increased premiums written in the first six months of 2017, led by BH Specialty (23%), GUARD (28%) and BHHC (11%),” Berkshire Hathaway said in a release.

In Canada, BH Specialty’s coverages include marine, builder’s risk and environmental liability, among others.

By segment, Berkshire Hathaway reported revenues, in the latest quarter, of $1.786 billion from Berkshire Hathaway Reinsurance Group, $1.759 billion from Berkshire Hathaway Primary Group, $7.244 billion from GEICO and $1.5789 billion from General Re, which does business through 13 branch offices in the U.S. and Canada.

GEICO, General Re and the Berkshire Hathaway Primary Group reported underwriting gains, in Q2 2017, of $119 million, $25 million and $232 million respectively.

General Re writes both P&C and life and health. It had a pre-tax underwriting gain, in the latest quarter, of $39 million in life and health and a pre-tax underwriting loss of $14 million in P&C. The P&C pre-tax underwriting loss was $157 million for the first six months of 2017 compared to pre-tax underwriting gains of $23 million in Q2 2016 and $53 million in the first half of 2016, Berkshire Hathaway reported. In Britain, Berkshire Hathaway expects the decision to reduce the Ogden rate, from 2.5% to negative 0.75%, “will significantly increase claim costs associated with currently unsettled cases, as well as for future cases.” The Ogden rate is the fixed discount rate required in lump sum settlement calculations of personal injury claims in Britain.

Company-wide, Berkshire Hathaway reported insurance premiums earned of $12.37 billion in the latest quarter, compared to $10.8 billion in Q2 2016.

Total Q2 2017 revenues were $57.5 billion. Berkshire Hathaway reported net earnings of $4.3 billion in the latest quarter, down from $5.1 billion in Q2 2016.