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Dissecting Berkshire Hathaway's Insurance Results

Berkshire Hathaway Inc.'s (NYSE:BRK.A) (NYSE:BRK.B) second-quarter results were a mixed bag. The company posted slightly lower operating results year over year, mainly thanks to its insurance business.

For the quarter ending in June, it posted $6.14 billion in operating earnings, compared with $6.89 billion in the same quarter last year. The conglomerate also saw volumes of consumer and agricultural products decline at its BNSF railroad.

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Overall, the railroad posted a 4% decrease in unit volume for the quarter, though second-quarter revenue rose 0.3%. Operating income jumped 7% primarily thanks to an increase in its operating ratio to 64.8%, compared to 66.8% a year ago.

Still, as mentioned above, the conglomerate saw the most significant decline in its insurance business. Berkshire saw its total insurance underwriting profit in the second quarter fall 63% to $353 million from $943 million in the year-ago quarter.

Insurance under pressure

Berkshire has three main insurance divisions. There's the property and casualty unit, which is called Berkshire Hathaway Primary Group. There's the Geico and other personal lines business and Berkshire's reinsurance business.

Geico is probably the most recognizable part of this business. It reported an overall increase in the volume of premiums written and premiums earned in the second quarter. These metrics increased by 5.7% and 7.1% respectively, but due to an increase in claims, this did not flow through to the bottom line.

The insurance company's loss ratio in the second quarter increased 3.5 percentage points to 82%; its combined loss and expense ratio came in at 95.6% compared to 91.9% for the same period last year. Nonetheless, it seems as if more consumers are turning to Geico to provide their coverage. The business registered increasing new business sales, up 8.6% year over year during the second quarter of 2019, which should bode well for future growth.

Berkshire's reinsurance business reported a significant loss in the quarter. This division has historically been an excellent generator of float for Buffett to invest. It has signed (through the National Indemnity Business) several notable deals, including a $10 billion deal with AIG (AIG) in 2017, when the financial group agreed to pay Berkshire $10 billion to take on long-term risks on U.S. commercial insurance policies it had already sold (at the time, analysts warned this could be the "The first deal in BHRG large enough to potentially jeopardize an underwriting profit in Berkshire's P&C operations.")

Overall, the group saw premiums written rise by 11.4% and premiums earned were relatively unchanged, though they increased by 7% for the first half of 2019 compared to 2018. Loss creep on prior events, however, forced losses on the division. An increase in estimated claim liabilities attributable to prior-year loss events of $269 million resulted in an overall loss for the division in the second quarter.

The final Berkshire insurance business is the Berkshire Hathaway Primary Group, which provides commercial insurance through Berkshire Hathaway Specialty Insurance, Berkshire Hathaway Homestate Cos., MedPro Group, GUARD Insurance Cos. and National Indemnity Co.

Premiums written in the second quarter rose 12.3% to $2.37 billion and 10.3% for the first six months to $4.71 billion, compared to the same periods in 2018. Overall, Berkshire Primary produced a pre-tax underwriting gain of $167 million in the quarter compared to $234 million for second-quarter 2018.

The bottom line

So overall, it was a pretty mixed quarter for Berkshire's insurance businesses. The overall volume of premiums written increased, and the number of customers using the group's services also increased, but loss creep, as well as rising expenses, weighed on returns.

These are likely to be only temporary factors, so we should see a recovery in probability as they worked through the results. The increase in premiums written is a sign that the business is still growing, and this should start to show through as temporary factors dissipate.

Disclosure: The author owns shares of Berkshire Hathaway.

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This article first appeared on GuruFocus.