Another Year In Buffett’s House

Last year, when BRK [Berkshire Hathaway] reported their annual earnings with the letter, report, and 10K, I concluded:

From an earnings growth standpoint, there was nothing that amazing about the earnings in 2014.  A few new subsidiaries like NV Energy added earnings, but existing subsidiaries’ earnings were flattish.  Comprehensive income was considerably lower because of the lesser degree of unrealized appreciation on portfolio holdings.

On net, it was a subpar year for Berkshire Hathaway.  The annual letter provided a lot of flash and dazzle, but 2014 was not a lot to write home about, and limits to the BRK business model with respect to float are becoming more visible.

Photo Credit: TEDizen || Buffett’s house is a humble abode — mine is kind of dumpy

What I said one year ago would be a good summary for this year, though Buffett was more upbeat about outcomes this year, with BRK’s book value advancing while the S&P 500 fell on a total return basis.

Overall, BRK had a mediocre year.  Insurance wasn’t that great.  Here are my summary points:

1. BRK is reducing reinsurance — i suspect they aren’t getting the rates that they want.  There are too many reinsurance wannabes attempting to write business to generate float that they can invest against.  Typically, writing insurance in order to invest usually doesn’t work out.  People forget how much money was lost writing marginal insurance business in soft markets thinking they would more than make up the losses with investment income.  BRK is showing some discipline here — good.
2. Aside from new lines of business (specialty insurance), growth is slowing; BRK is trying to remain a conservative underwriter.
3. Reserving conservatism has not changed.
4. Asbestos position has not materially changed.
5. GEICO had a bad year for claims — maybe they grew too much, and maybe picked up a lower class of auto driver.
6. Profit margins falling
7. Float growth slowing
8. Continued problems with workers’ comp and long-term care at Gen Re.  Also problems with payment annuities (blames FX, should blame longevity) and Life Reinsurance.

A few quotes from the 10K on insurance issues:

“We define pre-tax catastrophe losses in excess of $100 million from a single event or series of related events as significant. In 2015, we recorded estimated losses of $136 million in connection with a property loss event in China.”