What you need to know about Berkshire insurance investing struggles

Berkshire Insurance - Analysis - Woman with glasses

Warren Buffett is known for outstanding outcomes in this industry but current figures are sour.

In the investing world, Berkshire insurance decisions have often been seen as the gold standard in terms of solid and reliable choices. However, the company’s operating earnings fell in Q2 2019, shocking many investors.

Insurers owned by Berkshire saw a substantial plummet in underwriting income in that quarter.

Berkshire insurance underwriting income fell by almost 63 percent during the second quarter. This brought it to $353 million. The firm’s reinsurance unit also drooped to a pre-tax loss in Q2. Moreover, its Geico insurer took on a spike in its average claim severity.

Warren Buffett injected growth back into his business through investments into premiums his insurance units were earning. He stated that the move is more than justified despite the volatility sometimes associated with those businesses, said a recent Bloomberg report. At the same time, such volatility can mean the occasional nosedive or loss. This was the case in 2017, when a series of hurricanes all skyrocketed costs within a single season.

On the whole, Berkshire insurance has been essentially steady and reliable for the company.

Its insurers have brought in an underwriting profit during all but one of the last 16 years, said this year’s shareholder letter.

Despite the challenges among its insurance companies, the firm’s property-casualty reinsurance operation propped up its liabilities linked with events that occurred in past years. At the same time, the health and life insurance business at Berkshire’s own reinsurance group altered a contract with a major American reinsurer in Q1 2019. That also contributed to the decreased premiums it brought in during the first half of the year.

“The results in reinsurance have always been really uneven,” said Edward Jones analyst Jim Shanahan. “It’s not a great business to be in right now. Certainly, there isn’t a lot of opportunity in reinsurance to grow very much, so when you have a business like that where there isn’t strong revenue growth, underwriting weakness is exacerbated.”

Though the Berkshire insurance overall operating earnings fell, its net income still rose by 17 percent as Berkshire Insurance - Analysis - Woman with glassesa result of its $7.9 billion in investment gains. Those were primarily generated from its $200 billion stock portfolio, which includes substantial stakes in Bank of America and Apple, among others.

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