Insurance (cat) carried the day ($3.5bn in 2023 P&C earnings): Warren Buffett
The Berkshire Hathaway insurance and reinsurance businesses delivered as Warren Buffett had anticipated in 2023 and the result drives home investor attraction to the sector right now, with a stunning performance and $3.5 billion in earnings reported by the property and casualty reinsurance arm.
Berkshire Hathaway reported its results on Saturday, read all about them over at our sister publication Reinsurance News.
The Berkshire Hathaway Reinsurance Group underwriting result improved from almost $1.5 billion in 2022 to $1.9 billion in 2023, but the real star of this was the P&C side of the business, where property catastrophe reinsurance returns will have been a significant driver.
As we explained back in November, the bet that Warren Buffett’s Berkshire Hathaway P&C reinsurance businesses had made on underwriting more property catastrophe risks was paying off in 2023.
That bet continued to pay off through the final quarter, with global catastrophe loss activity still insufficient to dent the earnings juggernaut that is the Berkshire P&C reinsurance arm.
By the end of 2023, the pre-tax underwriting profit for the P&C reinsurance division at Berkshire Hathaway had reached more than $3.5 billion, well up on the prior year’s $2.18 billion.
Berkshire Hathaway grew the P&C reinsurance book significantly, with the acquisition of TransRe one driver, helping P&C reinsurance premiums written reach $22.36 billion for the year in 2023, up 32% on the previous year’s $16.96 billion.
Berkshire Hathaway’s P&C reinsurance premiums are now up by 58% since 2021, as Warren Buffett’s underwriting divisions have capitalised on hard reinsurance market conditions.
“The increase in 2023 reflected net increases in new property business and higher rates,” Berkshire reported.
Reiterating that, “We have written considerable levels of property business in recent years and we generally do not retrocede the risks we assume. Our periodic underwriting earnings are subject to considerable volatility from significant catastrophe loss events.”
Property catastrophe reinsurance returns have driven Berkshire Hathaway’s re/insurance segment results in 2023, driving home the attractive state of the market.
The combined ratio on this fell to 84% for 2023 even though underwriting expenses rose by 6%, helping Berkshire’s P&C reinsurance business reach the $3.5 billion of pre-tax earnings mark.
In his letter to shareholders, Warren Buffett explained that his forecast for a profitable insurance year came true saying that P&C in particular “carried the day.”
Back in May he had said that “insurance would likely do well, both because its underwriting earnings are not correlated to earnings elsewhere in the economy and, beyond that, property-casualty insurance prices had strengthened.”
Summing up on how 2023 went, Buffett explained, “Insurance came through as expected.”
Commenting on the subject of negative surprises and how they can come up in business, Buffett said, “We regularly get these in our insurance business, where our basic product is risk assumption, and they will occur elsewhere. Berkshire can sustain financial surprises but we will not knowingly throw good money after bad.”
Buffett is also bullish on Berkshire Hathaway’s ability to continue growing into the insurance and reinsurance market.
He commented, “Our insurance business performed exceptionally well last year, setting records in sales, float and underwriting profits. Property-casualty insurance (“P/C”) provides the core of Berkshire’s well-being and growth. We have been in the business for 57 years and despite our nearly 5,000-fold increase in volume – from $17 million to $83 billion – we have much room to grow.”
He also said on re/insurance, “Beyond that, we have learned – too often, painfully – a good deal about what types of insurance business and what sort of people to avoid. The most important lesson is that our underwriters can be thin, fat, male, female, young, old, foreign or domestic. But they can’t be optimists at the office, however desirable that quality may generally be in life.
“Surprises in the P/C business – which can occur decades after six-month or one-year policies have expired – are almost always negative. The industry’s accounting is designed to recognize this reality, but estimation mistakes can be huge. And when charlatans are involved, detection is often both slow and costly. Berkshire will always attempt to be accurate in its estimates of future loss payments but inflation – both monetary and the “legal” variety – is a wild card.”
Warren Buffett remains as committed to the reinsurance business as ever and the 2023 investment return shows that one side of the business keeps on delivering, with insurance investment income reaching almost $9.6 billion for the year, up by 48% on 2022.
But, the underwriting side is delivering just as well and Warren Buffett’s bet on property catastrophe risk clearly paid dividends in 2023, with the growth of the P&C side largely property focused and the unit reporting record premiums and earnings as well.
