Buffett explains consequences of BH ‘de-emphasising’ cat risk

Warren Buffett, the chairman of Berkshire Hathaway, explained in the company’s annual report covering 2015 that it is including insurance underwriting income in business earnings for the first time because it de-eemphasised catastrophe coverages, meaning its results should be more stable.

The US holding company saw a reduction in its operating earnings generating by underwriting last year though the amount it generated from insurance investment income increased.

Its operating earnings from insurance underwriting fell to $1.2 billion last year compared with $1.7 billion in 2014. Its insurance investment earnings were slightly up to $3.7 billion, compared with $3.5 billion in 2014.

Warren Buffett was bullish on the strength and reliability of its re/insurance operations stressing the long-term performance they have achieved for the firm.

“Berkshire’s huge and growing insurance operation again operated at an underwriting profit in 2015 – that makes 13 years in a row – and increased its float,” he said in the company’s annual; report.

“During those years, our float – money that doesn’t belong to us but that we can invest for Berkshire’s benefit – grew from $41 billion to $88 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.

“Meanwhile, our underwriting profit totalled $26 billion during the 13-year period, including $1.8 billion earned in 2015. Without a doubt, Berkshire’s largest unrecorded wealth lies in its insurance business. We’ve spent 48 years building this multi-faceted operation, and it can’t be replicated.”

Buffett also highlighted the fact that, for the first time, the company is including insurance underwriting income in business earnings. He said that it did not do that when it initially introduced Berkshire’s two quantitative pillars of valuation because its insurance results were then heavily influenced by catastrophe coverages.

He said: “If the wind didn’t blow and the earth didn’t shake, we made large profits. But a mega-catastrophe would produce red ink. In order to be conservative then in stating our business earnings, we consistently assumed that underwriting would break even over time and ignored any of its gains or losses in our annual calculation of the second factor of value.

“Today, our insurance results are likely to be more stable than was the case a decade or two ago because we have deemphasized catastrophe coverages and greatly expanded our bread-and-butter lines of business.”