Berkshire’s GEICO posts 2021 profit much lower than 2020

Underwriting profit from Berkshire’s core commercial insurance operations is almost back to levels seen from 2014 to 2018, and underwriting losses were lower for Berkshire’s reinsurance operations in 2021 compared to recent years, bringing the ratio overall combined for all Berkshire P&C insurance operations at 97.2, almost in line with last year’s combined ratio. (Editor’s note: For the purposes of this article, CM’s editors have approximated the combined ratio calculation using underwriting earnings and earned premiums presented in the annual report.)

On Saturday morning, Berkshire released its 2021 fourth quarter and 2021 full year, as well as Chairman Warren Buffett’s annual letter to shareholders.

Buffett didn’t say much about insurance in his annual letter, although he listed insurance operations as the first of the “big four” that account for a “large portion” of Berkshire’s value. (The other giants are BNSF Railroad, Berkshire Hathaway Energy and Berkshire’s stake in Apple.)

“The product will never be obsolete and the sales volume will generally increase with economic growth and inflation. Also, integrity and capital will always be important,” he said, referring to insurance.

“There are, of course, other insurers with excellent business models and prospects. However, replicating the Berkshire operation would be nearly impossible,” he wrote.

Like other auto insurers, GEICO had a record year in 2020, and 2021 underwriting results that were worse than 2019 pre-COVID levels. In 2020, despite a six-month program of COVID-related premium refunds totaling $2.9 billion from GEICO to its policyholders, Carrier reported $3.4 billion in pretax underwriting profit. The 2020 profit, driven by lower motor claims frequencies, resulted in a combined ratio of 90.2 for the whole of 2020, lower than it had been in the decade of results that Carrier management followed for Berkshire Hathaway.

In 2021, written premiums increased by $3.5 billion (to $38.4 billion), or 9.9%, compared to 2020, but claims and claims expenses increased by $5.0 billion, or 19.1%, pushing the loss ratio up more than 8 points.

“Claims frequencies in 2021 were higher for all [personal auto] coverage,” said the Management Discussion and Analysis section of the latest annual report, citing jumps in the frequency of personal injury and property damage in the range of 13-14% and increases in collision frequency of more than 20%. Noting that loss severity had also increased, the report also revealed a $1.8 billion reduction in reserves from the prior year impacting GEICO’s loss ratio in the other direction (about 4. 8 points based on $37.7 billion in earned premiums).

Adding underwriting fees to the equation, GEICO’s combined ratio for 2021 was 96.7, more than 6 points higher than 2020’s combined ratio and about one point higher than 2019.

The underwriting earnings story was more positive for Berkshire’s other primary insurance operations, commercial and specialty operations which include Berkshire-Hathaway Specialty, MedPro Group and USLI, among others. Overall written premiums jumped 23.3% for these companies, with Berkshire Hathaway Specialty recording the biggest jump, at 36%.

Although the Berkshire report does not detail underwriting earnings figures by company for this commercial insurance group, Berkshire Hathaway Primary Group’s combined ratio was 94.8 in 2021, around 4.0 points lower than in 2020 and 1 point less than in 2019, producing a pre-tax underwriting profit of $607 million.

The report includes a breakdown of the workforce across all insurance and reinsurance operations, indicating that Berkshire Hathaway Primary Group bucked an industry-wide trend, increasing its workforce by more than 6%. GEICO and the reinsurance activities recorded reductions in the workforce in 2021.

The essential

The pre-tax underwriting results of the property and casualty business are shown in the first graph of this article, including the results of property and casualty reinsurance and retroactive reinsurance operations. While Berkshire recorded $667 million in pre-tax underwriting profits for P/C reinsurance, $782 million in underwriting losses for retroactive reinsurance operations brought the total to $115 million written in ink Red.

Life reinsurance operations suffered larger underwriting losses, bringing total pre-tax underwriting losses for all reinsurance operations to nearly $1 billion ($930 million to be exact).

Combining all results from property and casualty and life insurance and reinsurance operations, after-tax technical profit reached $728 million in 2021, up 10.8% from 2020.

Investment income from the insurance business is, however, the primary driver of overall operating results, and with a 4.6% decline in investment income to $4.8 billion, overall business operating income insurance and reinsurance fell 2.8% to $5.5 billion.

Net income from insurance and non-insurance operations more than doubled to $89.8 billion. Most of the rise, however, was attributable to investment gains, with after-tax operating profit from insurance and non-insurance operations rising 25.2% to $27.5 billion.

Photography: (AP Photo/Nati Harnik)

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