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Berkshire Hathaway Increases Finance and Insurance Holdings

Berkshire Hathaway's New Stake in Apple and Key Portfolio Changes

(Continued from Prior Part)

Finance divisions

Berkshire Hathaway (BRK-B) increased its stake in Visa (V) and Bank of New York Mellon (BK) in the first quarter of 2016. The company has one-third of its total portfolio value deployed in financial and insurance companies.

The company is the tenth-largest US commercial lines insurer by direct premium volume. Its commercial lines division has expanded by 125% over the past five years to $5.6 billion through acquisitions and organic growth.

In 1Q16, Berkshire Hathaway saw strong growth in its insurance business from GEICO, which was more than offset by its reinsurance business. Berkshire Hathaway engages in property, casualty, life, and health insurance and reinsurance. Its major subsidiaries include GEICO, General Reinsurance, the Berkshire Hathaway Reinsurance Group, and the Berkshire Hathaway Primary Group.

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In the first quarter of 2016, total insurance group revenues came in at $12.3 billion compared to $10.6 billion during the same quarter last year. The rise was mainly due to higher revenues from GEICO.

Reinsurance pains

The reinsurance business has suffered due to increased competition and falling premiums. Berkshire Hathaway maintains a good amount of capital in order to write reinsurance contracts.

Berkshire Hathaway’s statutory surplus for its insurance businesses was $124 billion as of December 31, 2015. The higher surplus allows Berkshire Hathaway to write reinsurance contracts for good premiums based on negotiations with insurance and reinsurance clients.

Underwriting decisions are the responsibility of unit managers, and investing decisions are mainly undertaken by Warren Buffett. The company’s underwriting results are mainly impacted by catastrophic losses and currency fluctuations.

Investment income

The rise of interest rates will likely boost Berkshire Hathaway’s insurance income. However, further rate hikes by the Federal Reserve are expected to be low and slow due to the current global slowdown. Earnings before taxes for the insurance business declined to $1.5 billion as compared to $1.8 billion in the corresponding quarter last year, mainly due to lost profits from the reinsurance business.

Berkshire Hathaway expanded its book value by 3.3% in 2015. By comparison, its competitor American International Group (AIG) raised its book value by 2.7%, and Allstate (ALL) raised its book value by 13%. MetLife’s (MET) book value fell by 3%. Together, these companies make up 6.5% of the Financial Select Sector SPDR Fund (XLF).

In the next part of this series, we’ll look at Berkshire Hathaway’s industrial and retail holdings.

Continue to Next Part

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