Andrew Bary

Berkshire Hathaway is known for a history of strong underwriting results in its huge insurance operations that have been regularly highlighted by CEO Warren Buffett.

So it was surprising to see two insurance setbacks in Berkshire Hathaway's insurance business that totaled more than $1 billion in the third quarter. The developments were disclosed in the company's 10-Q report Saturday that accompanied Berkshire's earnings release for the third quarter.

The first occurred in Berkshire Hathaway's primary insurance business where the company boosted its estimated liability by $789 million for business incurred before the start of 2024. A significant chunk of the increased liabilities, which resulted in an underwriting loss at the primary insurance unit for the quarter, occurred at Guard, a Berkshire Hathaway insurer that mainly caters to smaller businesses.

The second was a pretax charge of $490 million taken by National Indemnity, a longstanding Berkshire Hathaway insurance unit, related to the bankruptcy of a company, Whittaker, Clark & Daniels, felled by asbestos-related talc liability. Whittaker, Clark is controlled by a Berkshire Hathaway affiliate.

CFRA analyst Cathy Seifert cut her rating on Berkshire Hathaway Class B stock to Hold from Buy Monday, citing insurance premium growth of 3%, which was below peers. She also called out the primary-insurance situation. She cut her target on the Class B shares by $30 to $495. The B shares are down 2.2% Monday to $442.

"We applaud results at Geico, but our view is tempered by the Q3 adverse claim development in the Primary Group and the lack of meaningful commercial lines and reinsurance top-line growth," she wrote.

Berkshire Hathaway operates the largest property and casualty insurer in the world, with enormous total capital of about $300 billion. That means the latest losses barely make a dent in the company's capital base

But they're surprising given Berkshire Hathaway's impressive underwriting record, and highlighted risks as Berkshire Hathaway builds its insurance business, particularly on the primary side, which deals directly with insurance customers.

Berkshire's largest insurance units include Geico, the third-largest auto-insurance carrier in the U.S. behind State Farm and Progressive. It also operates a large reinsurance business including General Re and specialty reinsurance operations headed by Berkshire Hathaway insurance chief Ajit Jain, which have taken on big-ticket catastrophe risks such as Florida hurricanes.

Berkshire has quietly built its primary business in the past decade with insurance premiums likely to hit about $19 billion this year, double the 2019 total.

On the Guard situation, Berkshire Hathaway said it has exited homeowners operations and moved to "tighten underwriting guidelines" in other parts of that unit's businesses.

The Whittaker Clark situation is more complicated. Berkshire Hathaway acquired the equity of the company in 2007 after it had ceased operations in 2004. It appears that the deal was similar to ones in which Berkshire Hathaway acquired asbestos and other liabilities from other insurers.

The idea behind those deals was that Berkshire Hathaway would acquire a fixed amount of liabilities in return for an upfront premium in a bet that the total return on the invested assets would exceed the claims. One such deal occurred in 2014 with CNA Financial when Berkshire Hathaway essentially took on $4 billion of potential claims for a $2 billion premium.

Berkshire Hathaway now is tangling with personal-injury claimants over Whittaker Clark, which sought bankruptcy protection in 2023. Berkshire Hathaway is seeking to resolve the talc-related claims by paying a total of $535 million, according to a recent article in the The Wall Street Journal.

Berkshire Hathaway didn't say much in its 10-Q about the Whittaker Clark situation -- it doesn't even mention the company. Berkshire Hathaway said in the 10-Q that "National Indemnity Company recorded a pretax charge of $490 million in connection with a settlement agreement reached concerning certain non-insurance affiliates that filed voluntary petitions under Chapter 11 of bankruptcy code."

It appears that Berkshire Hathaway's liability in the Whittaker Clark situation isn't capped, which would be unusual for Berkshire Hathaway, which normally seeks to limit its liabilities in these situations.

Since Berkshire Hathaway holds no earnings conference calls, analysts and investors can't ask management about these developments.

Overall, Berkshire Hathaway's insurance underwriting profit fell sharply in the third quarter to $750 million after taxes from $2.4 billion during the same period one year ago. The ongoing underwriting turnaround at Geico was a bright spot.

The overall Berkshire Hathaway insurance business is on track for another good year with over $5 billion in after-tax profits underwriting profits so far in 2024.

Buffett noted in the 2023 annual shareholder letter released earlier this year that "Berkshire has now operated at an underwriting profit for 18 of the last 20 years, the exceptions being 2017 and 2022." This should be the 19th in 21 years despite the third-quarter setbacks.

Write to Andrew Bary at andrew.bary@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

November 04, 2024 16:57 ET (21:57 GMT)

Copyright (c) 2024 Dow Jones & Company, Inc.