Berkshire Hathaways (BRK-B) insurance segment is expected to post marginal growth on GEICO and its reinsurance business. The company is the tenth-largest US commercial lines insurer when evaluated from the direct premium volume.
In 2Q16, Berkshire saw strong growth in its insurance business from GEICO, which was partially offset by General Reinsurance. Total insurance group revenues came in at $12.0 billion compared to $11.7 billion during the prior years quarter. The increase was mainly due to higher revenues from GEICO and the Berkshire Hathaway Primary Group.
Berkshire 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.
Impact of an interest rate hike
The Fed is expected to raise interest rates by the end of 2016. Any rate hike would likely boost insurance income for Berkshire Hathaway. EBT (earnings before taxes) for the insurance business rose to $1.7 billion in 2Q16 compared to $1.3 billion in 2Q15. This was mainly due to improved profits from the reinsurance business.
Berkshire Hathaway expanded its book value 6.4% in 2016. Its competitor American International Group (AIG) increased its book value 2%, whereas MetLifes (MET) book value fell 2.5%. Allstates (ALL) book value rose 13%. Together, these companies make up 6.7% of the Financial Select Sector SPDR ETF (XLF).
Reinsurance business to stabilize
Berkshires reinsurance business has suffered over the past few quarters due to increased competition and falling premiums. The trend continued in the June quarter as revenues for the reinsurance segment fell to $1.7 billion in the June quarter compared to $2.0 billion in 2Q15. The divisions net improved on lower catastrophe losses, resulting in EBT of $184 million. That compares to losses before taxes of $411 million in 2Q15.
Berkshire Hathaway continues to maintain strong liquidity and capital in order to write reinsurance contracts. The surplus allows the company to write reinsurance contracts for good premiums based on negotiations with insurance and reinsurance clients.
In the next part of our series, well take a close look at BNSF Railway.
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