Berkshire Hathaway 1998 Annual Report Download - page 45

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Management's Discussion (continued)
Insurance Segments - Underwriting (continued)
GEICO Corporation (continued)
GEICO’s underwriting results have been above expectations in recent years and the private passenger auto
insurance industry as a whole had generally good results due to favorable claims experience. However, premium rates
are subject to downward pressure from competition and through the ordinary rate regulation processes of state
insurance departments. The rate reductions taken by GEICO in 1998 were greater than 1997's reductions and will be
fully reflected in earned premiums in 1999. GEICO currently anticipates that there will be some further rate reductions
in 1999. In addition, while the level of claim costs (including catastrophe losses) in recent years have been relatively
low, there is no assurance that these favorable conditions will continue. Accordingly, management expects that
GEICO's underwriting profit margins will return to more normal levels as costs increase faster than premiums.
Notwithstanding, Berkshire's management believes that GEICO's underwriting results will remain better than industry
averages.
Berkshire Hathaway Reinsurance Group
The Berkshire Hathaway Reinsurance Group underwrites principally excess-of-loss reinsurance coverages
for insurers and reinsurers world wide. This Group is believed to be one of the world leaders in providing catastrophe
excess-of-loss reinsurance.
Underwriting results for the past three years are summarized in the following table.
— (dollars are in millions) —
1998 1997 1996
Amount %Amount %Amount %
Premiums written ........................ $ 986 $ 955 $ 715
Premiums earned ......................... $ 939 100.0 $ 967 100.0 $ 758 100.0
Losses and loss expenses ................... 765 81.5 676 69.9 573 75.6
Underwriting expenses .................... 195 20.7 163 16.9 193 25.4
Total losses and expenses .................. 960 102.2 839 86.8 766 101.0
Underwriting gain (loss) — pre-tax ........... $ (21)$ 128 $ (8)
Reinsurance premiums earned from catastrophe excess-of-loss policies totaled $286 million in 1998, $310
million in 1997 and $268 million in 1996. Management believes that increased industry capital devoted to this type
of business and the lack of large catastrophic loss events in recent years continues to promote intensifying price
competition in the catastrophe reinsurance markets. As a result, there are currently fewer opportunities to write
catastrophe reinsurance coverages at acceptable prices. Management anticipates that the level of catastrophe
reinsurance business accepted may decline in 1999.
The catastrophe reinsurance business produced net underwriting gains in 1998 of $155 million as compared
to net underwriting gains of $283 million in 1997 and $167 million in 1996. During the 1996-1998 period, there were
no truly large catastrophic events. Catastrophe losses incurred were $34 million in 1998, nearly zero in 1997 and $46
million in 1996.
Berkshire's management continues to believe that, eventually, a large catastrophe event will occur which will
produce a significant loss. The Berkshire Hathaway Reinsurance Group’s exposure to loss from a single event with
respect to in-force policies at year end 1998 is estimated at approximately $600 million after-tax (excludes losses which
would likely be incurred by General Re). Accordingly, periodic underwriting results remain subject to extreme
volatility. Berkshire's management is willing to accept such volatility provided there is a reasonable prospect of long-
term profitability.