Berkshire Hathaway 2012 Annual Report Download - page 11

Tad has observed all four of the insurance commandments, and it shows in his results. General Re’s huge
float has been better than cost-free under his leadership, and we expect that, on average, it will continue to be. We
are particularly enthusiastic about General Re’s international life reinsurance business, which has achieved
consistent and profitable growth since we acquired the company in 1998.
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Finally, there is GEICO, the insurer on which I cut my teeth 62 years ago. GEICO is run by Tony Nicely,
who joined the company at 18 and completed 51 years of service in 2012.
I rub my eyes when I look at what Tony has accomplished. Last year, it should be noted, his record was
considerably better than is indicated by GEICO’s GAAP underwriting profit of $680 million. Because of a change
in accounting rules at the beginning of the year, we recorded a charge to GEICO’s underwriting earnings of
$410 million. This item had nothing to do with 2012’s operating results, changing neither cash, revenues, expenses
nor taxes. In effect, the writedown simply widened the already huge difference between GEICO’s intrinsic value
and the value at which we carry it on our books.
GEICO earned its underwriting profit, moreover, despite the company suffering its largest single loss in
history. The cause was Hurricane Sandy, which cost GEICO more than three times the loss it sustained from
Katrina, the previous record-holder. We insured 46,906 vehicles that were destroyed or damaged in the storm, a
staggering number reflecting GEICO’s leading market share in the New York metropolitan area.
Last year GEICO enjoyed a meaningful increase in both the renewal rate for existing policyholders
(“persistency”) and in the percentage of rate quotations that resulted in sales (“closures”). Big dollars ride on those
two factors: A sustained gain in persistency of a bare one percentage point increases intrinsic value by more than
$1 billion. GEICO’s gains in 2012 offer dramatic proof that when people check the company’s prices, they usually
find they can save important sums. (Give us a try at 1-800-847-7536 or GEICO.com. Be sure to mention that you are a
shareholder; that fact will usually result in a discount.)
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In addition to our three major insurance operations, we own a group of smaller companies, most of them
plying their trade in odd corners of the insurance world. In aggregate, these companies have consistently delivered
an underwriting profit. Moreover, as the table below shows, they also provide us with substantial float. Charlie and
I treasure these companies and their managers.
Late in 2012, we enlarged this group by acquiring Guard Insurance, a Wilkes-Barre company that writes
workers compensation insurance, primarily for smaller businesses. Guard’s annual premiums total about $300
million. The company has excellent prospects for growth in both its traditional business and new lines it has begun
to offer.
Underwriting Profit Yearend Float
(in millions)
Insurance Operations 2012 2011 2012 2011
BH Reinsurance ......... $ 304 $(714) $34,821 $33,728
General Re ............. 355 144 20,128 19,714
GEICO ................ 680* 576 11,578 11,169
Other Primary .......... 286 242 6,598 5,960
$1,625 $ 248 $73,125 $70,571
*After a $410 million charge against earnings arising from an industry-wide accounting change.
Among large insurance operations, Berkshire’s impresses me as the best in the world. It was our lucky day
when, in March 1967, Jack Ringwalt sold us his two property-casualty insurers for $8.6 million.
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