Berkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B) is home to many excellent insurance companies. GEICO and its BH Reinsurance unit come to mind as some of the biggest, and certainly the best in their respective markets. But when it comes to underwriting profits, at least over the last decade or so, few have topped its fastest-growing insurance unit, Berkshire Hathaway Primary Group.
The mashup of insurance companies that are reported on a combined basis as BH Primary Group don't get much press. Collectively, they're relatively small and relatively new. But they're also incredibly profitable, putting up the best underwriting results of any of Berkshire's insurers over the last decade.
Image source: The Motley Fool.
Profits in risk
Last year was a dismal year for insurance, as Warren Buffett estimated that the industry lost $100 billion to catastrophes, primarily due to three major hurricanes (Harvey, Irma, and Maria). That figure would rival the losses experienced in 2005, when Hurricane Katrina tore through the Gulf of Mexico.
But whereas most insurers posted underwriting losses last year, the insurers that make up BH Primary Group put up yet another year of underwriting profits, making them the only Berkshire insurers to do so.
Data source: Berkshire Hathaway's annual reports. Chart by author.
BH Primary Group is a small part of Berkshire's insurance businesses. Combined, this group earned premiums of $7.1 billion in 2017, or 12% of all premiums earned by Berkshire's insurance companies last year. But what these businesses lack in premium volume today, they make up for with growth opportunities
The who's who
Buffett has occasionally used his letters to shareholders to shine a spotlight on BH Primary Group's standout stars. Chief among them is BH Specialty Insurance (BHSI), which Berkshire launched in 2013. The specialty insurance unit is led by Peter Eastwood, who Berkshire controversially poached from AIG.
Buffett recognized pretty quickly that in Eastwood, Berkshire Hathaway had yet another star executive in insurance. He wrote the following in his 2014 letter to shareholders:
BHSI is led by Peter Eastwood, an experienced underwriter who is widely respected in the insurance world. During 2014, Peter expanded his talented group, moving into both international business and new lines of insurance. We repeat last year's prediction that BHSI will be a major asset for Berkshire, one that will generate volume in the billions within a few years.
Later, in the 2016 letter, Buffett had even more praise for his new hire.
Our first decision was to put Peter Eastwood in charge, a move that proved to be a home run: We expected significant losses in the early years while Peter built the personnel and infrastructure needed for a worldwide operation. Instead, he and his crew delivered significant underwriting profits throughout the start-up period. BHSI's volume increased 40% in 2016, reaching $1.3 billion. It's clear to me that the company is destined to become one of the world's leading P/C insurers.
To be clear, this isn't just Buffett being a perennial optimist. In a sign of just how important Eastwood was to AIG, and how important he is to Berkshire, AIG made it very clear that it wasn't happy about having its employees poached by its competitor.
Relations between AIG and Berkshire soured after his hiring. AIG stopped sending Berkshire its reinsurance business, and the two ultimately agreed not to poach employees from one another for one year, but by then it was already too late. Berkshire had the man they really wanted.
A model for the future
Buffett often talks about how Berkshire's hands-off approach attracts capable managers to the company. That model appears to be working in insurance, too. Eastwood described in his 2014 letter to BHSI employees how much latitude the company has in choosing lines in which it will compete for business.
As you all know, when we started the company we were given a very broad and simple mandate... and told that we could build the business anywhere in the world, and enter virtually any product line area, as long as we felt and could demonstrate that we could produce a sustainable profit for Berkshire Hathaway.
BHSI is one of BH Primary Group's fastest-growing insurance companies. It now employs 890 people, up from 82 at the end of 2013. And its underwriting has been spectacular, despite elevated storm losses last year.
In a recent memo to employees, Eastwood said that BHSI has posted a since-inception combined ratio of 77% in its North American property business. Before the storm season, BHSI's property business had a combined ratio as low as 47%.
BH Primary Group doesn't get the attention it deserves. Its performance last year caps a 10-year period in which it earned a pre-tax underwriting margin in excess of 10% in 9 of 10 years, and the sixth consecutive year in which earned premiums grew at a double-digit clip year over year.
GEICO's best growth is in the rearview mirror, and Berkshire's reinsurance mastermind, Ajit Jain, is getting to an age where many worry he may be thinking about his own retirement. BH Primary Group, and its stars, like Peter Eastwood, age 51, may be the future for one of Berkshire's most important earnings drivers.
