Canadian Underwriter

Q1 insurance premiums up 95% at Berkshire Hathaway after adverse development reinsurance agreement with AIG

May 8, 2017   by Canadian Underwriter

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Berkshire Hathaway Inc. announced Friday it recorded insurance premiums earned of $21.7 billion during the three months ending March 31 – up 95% from $11.1 billion in Q1 2016 -while Cyclone Debbie affected the Omaha, Neb.-based firm’s underwriting result by more than $100 million in the most recent quarter. All figures are in United States dollars.

Berkshire Hathaway’s National Indemnity Company (NICO) subsidiary agreed to cover 80% of the net losses and net allocated loss adjustment expenses on certain long-tail exposures for American International Group Inc., AIG announced Jan. 20.

In connection with the AIG reinsurance agreement, Berkshire Hathaway received cash premiums of $10.2 billion in the most recent quarter, Berkshire Hathaway said May 5. Berkshire Hathaway has essentially been controlled by Warren Buffett – currently chairman and chief executive officer – since 1965.

New York City-based AIG announced Jan. 20, 2017 that it agreed to pay NICO $9.8 billion payable by June 30, 2017, with interest at 4% per annum from January 1, 2016. The reinsurance agreement “covers 80% of substantially all of AIG’s U.S. commercial long-tail exposures for accident years 2015 and prior,” AIG said at the time.

“NICO is assuming 80% of the net losses and net allocated loss adjustment expenses on the subject reserves in excess of the first $25 billion and NICO’s overall limit of liability under the agreement is $20 billion,” AIG added.

For the first three months of 2017, Berkshire Hathaway reported retroactive reinsurance premiums written of $10.185 billion, compared to $580 million during the same period in 2016.

The reinsurance agreement with AIG took effect Feb. 2, Berkshire Hathaway stated, adding the agreement had “no effect” on Berkshire Hathaway’s pre-tax underwriting results for Q1 2017, because Berkshire Hathaway also recorded losses and loss adjustment expenses of $10.2 billion in Q2 2017. That charge represents Berkshire Hathaway’s “initial estimate of the unpaid losses and loss adjustment expenses assumed of $16.4 billion, partly offset by a deferred charge asset of $6.2 billion.”

In its annual report for 2015, AIG said a “significant portion” of its non-life reserves was for “the U.S. commercial casualty class, including excess casualty, asbestos and environmental.”

National Indemnity is a subsidiary of Stamford, Conn.-based Berkshire Hathaway Reinsurance Group, which “underwrites traditional non-catastrophe property and casualty insurance and reinsurance, catastrophe excess-of-loss treaty and facultative reinsurance, and individual primary insurance policies on an excess-of-loss basis for primarily large or otherwise unusual discrete risks,” Berkshire Hathaway reported in February in its annual report for 2016.

Berkshire Hathaway’s other major reinsurance operation is General Re, which does business through 13 branch offices in the U.S. and Canada.

Its primary insurance operations include commercial insurer Berkshire Hathaway Specialty Insurance and direct private passenger auto writer Government Employees Insurance Company (GEICO).

Berkshire Hathaway reported $22.9 billion in insurance revenue in Q1 2017, of which $1.13 billion was from Berkshire Hathaway Primary, $1.39 billion was from General Re, $11.8 billion was from the Berkshire Hathaway Reinsurance Group (up from $2.2 billion in Q1 2016) and $6.8 billion was from GEICO.

Berkshire Hathaway reported an underwriting loss of $267 million in the most recent quarter, compared to an underwriting gain of $213 million in the same period in 2016.

In the latest quarter, Berkshire Hathaway reported an underwriting gain of $175 million from GEICO, an underwriting loss of $143 million from General Re, and underwriting loss of $600 million from Berkshire Hathaway Reinsurance Group and an underwriting gain of $189 million from the primary group.

About $270 million of Berkshire Hathaway Reinsurance Group’s Q1 2017 underwriting loss was “related to prior years’ loss events,” the company said, adding that $52 million was from a Cyclone in Australia.

Berkshire Hathaway was alluding to Cyclone Debbie, which Impact Forecasting said earlier made landfall March 28 in Queensland. Cyclone Debbie caused torrential rainfall and widespread severe flooding, affecting Australia’s agricultural sector, Impact Forecasting said in its global catastrophe recap released by Aon plc in April.

In addition to the $52 million in losses to Berkshire Hathaway Reinsurance Group, Berkshire Hathaway also said May 5 that General Re’s Q1 2017 losses “included $50 million in estimated losses from a cyclone in Australia in March 2017.” Also in the most recent quarter, General Re increased its “estimated for unpaid losses by $142 million” for certain liability business written in previous years in Britain. That resulted from a reduction in the Ogden Rate from plus 2.5% to negative 0.7%. Markel Corp. reported earlier that the Ogden rate – unchanged from 2001 through March 20, 2017 – is used to calculate lump sum awards in bodily injury cases in Britain.

Company wide, Berkshire Hathaway reported total revenues of $65.2 billion the latest quarter, up from $52.16 billion in Q1 2016.

Company-wide net earnings were $4.14 billion in Q1 2017, down from $5.66 billion in Q1 2016.

Of Berkshire Hathaway’s revenues in the latest quarter, $21.75 billion was from insurance, $30.23 billion was from sales and service, $1.16 billion was from investment income, $312 million was from investment gains, $9.4 billion was from railroads and $1.5 billion was from finance and financial products.

In addition to Burlington Northern Santa Fe railroad, Berkshire Hathaway’s other holdings include interests in Calgary-based electrical utility AltaLink LP, the Duracell Company, press release service Business Wire, insulation maker Johns Mansville, paint manufacturer Benjamin Moore & Co., clothing maker Fruit of the Loom and the Dairy Queen and Orange Julius snack chains, among others.

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