And nobody care to read the news. General Re is
not doing a good job at all.
If General Re is
still an independent company, such a big lost will end
up with numerous major downgrades and trade 15-20%
down to $170-180. This implies BRK's value =
170*285.71 =$48570 to $51427. Now we all know Buffett paid
way too much for Gereral Re last year. He can buy
General Re much much cheaper this year at about $175 plus
I guess I'm using "profit commission" a little
too loosely. I think of an override as recognition of
the underlying profitability of the ceded business.
Sort of a prospective fixed profit commission --
doesn't adjust based on actual loss experience after the
fact like a typical profit commission. Perhaps more
like a bounty in some ways. Sorry for the misuse.
Buffett's Holding Company Had Strong
OMAHA, Neb. (Reuters) - Berkshire Hathaway Inc.
(NYSE:BRKa - news), the wildly diverse and successful
holding company of billionaire investor Warren Buffett,
said Tuesday its net earnings rose nearly 50 percent
The company, which owns, among other
things, insurance companies, a restaurant chain and a
jeweler, said its net earnings for the year ended December
31 rose to $2.8 billion from $1.9 billion in
The increase was led by a surge in realized
investment gains, which rose to $1.6 billion from $704
million in 1997. Earnings from operations rose to $1.3
billion from $1.2 billion.
On a per share basis,
earnings from operations rose to $1,021 from $971 and net
earnings rose to $2,262 from $1,542.
Hathaway said GEICO, which sells auto and home insurance
and is the company's largest operation, was a main
contributor to operating profits last year, with an
underwriting profit margin of 6.7 percent, above its
Premium rate cuts were seen in some U.S. states last year
and the company said margins in 1999 ``will almost
Berkshire Hathaway said its
much-anticipated letter to shareholders, penned by Buffett, who is
chairman, is scheduled to be posted on the Internet on
In an annual ritual, shareholders and
investors pore over Buffett's yearly letter for some
insight into the investor's thoughts about the stock
market, other financial markets and possibly hints on his
Buffett, who owns stakes in such blue chips as Gillette
Co. (NYSE:G - news) and Coca Cola Co., typically
declines to discuss his investments and does not make
stock or investment recommendations.
Hathaway's class A shares were down $400 at $73,005 and
class B shares were off $26 at $2,411 in late morning
activity on the New York Stock Exchange.
The Berkshire news release states that General
Re's results were included in 1998's results for only
10 days. GEICO's underwriting profit margin of 6.7%
(well above their target) was the biggest contributor
to operating results. Buffett warns that this margin
will almost certainly decrease in 1999 due to premium
rate reductions taken in certain states during 1998.
GEICO's growth continued to accelerate in all categories
of auto insurance. Voluntary policies in force
increased 20.8% well ahead of the 16% increase in 1997 and
the 10% increase in 1996. Year over year growth is
continuing in 1999.
Actually Martha, you got it almost 100% right.
You describe an override commission correctly, but a
profit commission is not the same thing as an override
Generally, a reinsurance contract will define its net profit
as premiums collected less ceding commissions less
loss and loss adjustment expenses ceded less an
expense factor. A profit commission provision in a
reinsurance contract results in part of the reinsurer's net
profit being returned to the primary company, either
when the reinsurer's liabilities are terminated or
after a certain amount of time has elapsed.
sliding scale commission is mechanically very similar in
that the final net commission paid to the primary
company depends on loss experience, but no definition of
profit enters into the formula.
Portion of reinsurance premium paid back to the
primary company to reimburse them for their original
production expenses. Practically speaking, a bit of an
accounting game. No economic reason why primary companies
don't just cede the net amount to reinsurers. However,
ceding commissions flow through accounting statements as
negative expenses, so the primary company net expense
ratios don't look screwy. When ceding commissions exceed
the primary company's expense level, you get an
"override". Essentially a recognition by the reinsurer of the
profitability of the business being ceded -- profit commission.
Some primary companies cede a very high percent of
writings with very little net risk. They live off the
overrides with next to zero risk taking. Lots of different
ways to play the insurance game.