Insurance
Looking more closely at Berkshire's operating businesses, the firm's insurance operations reported a 6.2% increase in earned premiums during the fourth quarter, with stronger sales from Geico (up 9.9%) and Berkshire's specialty insurance operations (up 30.7%) more than making up for weakness at General Re (down 2.0%) and Berkshire Hathaway Reinsurance (down 8.9%), with the latter continuing to be impacted by a sharp decline in premiums from the Swiss Re contract and the property catastrophe business. While Geico posted another quarter of consistent growth on the top line, claim expenses also went up more than expected, which eroded margins by about 40 basis points relative to the 2013 level.
That said, the auto insurer’s 94.3% combined ratio for 2014 remained one of the best in the industry, with pretax underwriting profit increasing 3% year over year, thanks mainly to its low-cost distribution model. Premium growth was exceptionally strong at Berkshire Hathaway Primary, primarily attributable to volume increases from Berkshire Hathaway Specialty, NICO Primary, BHHC, and Guard. While the claims environment for this particular group of insurers has been favorable the past three years, they do write sizable amounts of liability and workers' compensation business, which can have extended claim tails. Premium growth was also fairly strong at Geico, reflecting an increase in in-force policies and pricing actions, both of which were healthy and in line with our expectations.
Berkshire's reinsurance operations continue to struggle with a weak pricing environment, which keeps them from underwriting business (given the unfavorable risk/reward trade-off). As a result, both BHRG and General Re saw a decline in underwriting profits over 2013 levels, with the largest contributor to the decline in the pretax reinsurance earnings coming from BHRG. In particular, earned premiums from BHRG's Swiss Re contract declined $1.3 billion million during 2014. As a result, pretax underwriting gains from the Swiss Re contract declined from $351 million in 2013 to $283 million last year. BHRG's property catastrophe business also saw a decline in premiums, falling 14.0% year over year to $688 million. While the decline in premiums and underwriting profits might, at first glance, reflect poorly on Berkshire reinsurance operations, we view it as a positive for the firm, as it demonstrates its ability to exercise strong underwriting discipline in an unfavorable pricing environment. Looking ahead, we believe soft reinsurance pricing will continue to dampen the demand for new businesses, something that we expect to have an impact on Berkshire's diverse reinsurance businesses in the year ahead.
Berkshire's insurance float increased to $83.9 billion overall from $77.2 billion at the end of the fourth quarter of 2013, reflective of an 8.6% increase year over year. Further gains in float are likely to be much harder to achieve, though, especially with Berkshire likely to limit the amount of reinsurance business it underwrites (given the poor pricing environment for the reinsurers right now). In fact, with floats drifting downward for a number of runoff contracts in the reinsurance business, which offset the gains in float from Geico and the commercial insurance operation,
Berkshire is likely to experience a gradual decline in float in future years. At the end of 2014, Berkshire Hathaway Reinsurance accounted for 51% (up 3% from 2013 level) of the company's total float, with General Re at 23% (down 3% from 2013 level), Geico at 16% (same as 2013 level), and the remaining primary insurance operations at 10% (same as 2013 level). Much of the growth in Berkshire's float over the past decade has come from its reinsurance operations.
Non-insurance business
