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This is really just a follow-up to a previous post a few days ago, thinking about how much profit we should attribute to Berkshire's underwriting operations. Remember that, in his '5 groves approach', Buffett just ignores underwriting; many others assume it will be zero in an average year, or at least leave it at zero to be 'conservative', while some take a stab at what an average level is. Here's my stab.

I personally prefer to put in my best estimate for an average year's underwriting gains, rather than purposefully underestimating the number at zero. The other day, I looked at 15 years of underwriting earnings (pre-tax), just because beyond 15 years back, I got sick of getting the numbers from annual reports every 3 years, but I admit that 15 was pretty arbitrary, and I could reasonably be suspected of cherry-picking. So I decided I would go back to 2001, both because it includes a very bad year (2001) and because any prior data is really a qualitatively different Berkshire, before the huge transformative merger with General Re which closed in 2000.

So I have 22 years of data (2001 to 2022), and here's what I get:

 Earned premiums and pre-tax underwriting earnings:									
          2022	 2021	2020	2019	2018	2017	2016	2015	2014	2013	2012
Premiums 74645  69478  63401   61078   57418   60597   45881   41294   41253   36684   34545
Earnings   -98	  936	 838	 417	2010   -3239	2131	1837	2668	3089	1625
% 	 -0.1%	 1.3%	1.3%	0.7%	3.5%   -5.3%	4.6%	4.4%	6.5%	8.4%	4.7%

          2011	 2010	2009	2008	2007	2006	2005	2004	2003	2002	2001
Premiums 32075  30749  27884   25525   31783   23964   21997   21085   21493   19182   17905	
Earnings   248	 2013	1460	2792	3374	3838	  53	1551	1618   -400   -4067	
%          0.8%	 6.5%	5.2%   10.9%   10.6%   16.0%	0.2%	7.4%    0.0%	0.0%  -22.7%	22-yr average: 3.21%

By the way, the 15-year average was pretty close: 3.6%, going back to 2008. 2007, 2006, and 2004 were pretty good, too, but 2001 was decidedly not.

So there you have it: my best estimate of pre-tax underwriting earnings is 3.2% pre-tax, in the post-Gen Re era. If we get a 9-11 size disaster every 20 years, we might expect to have that average, unless Berkshire's conservatism in underwriting policy-writing has changed (which I doubt.) I actually thought it would be lower.

On a technical note, I think it's better to apply the 3.2% average number to the current earned premiums ($74.6b, although this will jump higher with the Alleghany purchase), rather than calculate the average underwriting earnings, since these have gone up by more than 4 times over the last 22 years. 3.2% of $74.6b is $2.3b. I noticed this morning that Whitney Tilson uses $1.4b in pre-tax underwriting earnings for his estimate of current value; this would correspond to about 1.9% in pre-tax underwriting earnings, quite a bit lower than the 22-year average.

How important is this? Maybe not that important, but not completely insignificant, either. Buffett's estimate of 2022 'operating earnings'* is $30.8b:

The company's operating earnings ' our term for income calculated using Generally Accepted Accounting Principles ('GAAP'), exclusive of capital gains or losses from equity holdings ' set a record at $30.8 billion.

This is after tax; since 2018, Berkshire's average effective corporate tax rate is 20%. $2.3b in underwriting earnings would be $1.9b after tax, which would have added 6.2% to the $30.8b in operating earnings. Ok, so I see that $2b is now almost a rounding error for Berkshire...


Regards, DTB

*By the way, looking at this more carefully than Saturday when I read the letter, I see that Buffett's definition of operating earnings is not what I thought it was: it is not the earnings of the operating companies, it is just something closer to old GAAP, with no unrealized capital gains in the income statement. But it does seem to include things like dividends from the equity portfolio. I just mention it in case anyone else has been making the same error I was making.

Some sharp-eyed reader noticed an error in the table, with 2002 showing 1618 in earnings on 21493 in premiums written, but 0.0% as a percentage when it should have been 7.5%; same problem for 2002, where the correct earnings (-400) and premiums (19182) are in the table but the 0.0% percentage should have been -2.1%. Fortunately the average I posted (3.21%) is the correct number, so nothing else in the post needs to be changed.

Formating columns of data in this website (and in the previous Fool version) is a bit of a hassle, and I seem to have wiped out those 2 percentages while I was inserting the right number of spaces to get all the columnns to line up. Sorry about that, and thanks for the correction to the eagle-eyed reader who pointed it out to me. (Since said board member didn't post to the boards, I won't say who it was, in case he/she prefers to remain anonymois...) And the day some programming genius can find a way of copying excel cells directly into a text format, that would be a very welcome improvement. Now that we've been spoiled to expect miracles, with many thanks to Manlobbi!

dtb

I have a similar table. Slight difference in pretax underwriting profit for 2009 for some reason, but nothing material.

One thing to consider:
Due to a quirk of accounting, premiums earned take a big temporary leap upwards the year that any big retroactive insurance contract signed.
That accounts for $7.1bn in 2007 for Equitas, and $10.2bn in 2017 for AIG.
I deduct those from the "premiums earned" column before trying to estimate the average underwriting profit that way.

With that adjustment, the average underwriting profit since 2001 (your date range) has been 3.329%.
If you go back to 1998, the average has been 2.406%.

FWIW, when trying to estimate cyclically adjusted underwriting profit, I use two methods, and average them.
They are: 2.70% of premiums earned (excluding big retroactive deals), and 1.30% of float.
I aimed for conservatism when I picked those figures, but as recent years haven't been fantastic the sum of my figures is pretty much spot on the sum of the actual figures since 2009, or since 1999.

For 2022, my cyclically adjusted estimate was $2.074 billion.

Jim

I believe that raddish's Export Text macro for excel would work.
I'll give it a try. pasted your data with corrections into Excel and used the macro.

                 2022   2021   2020   2019   2018   2017   2016   2015   2014   2013    2012
Premiums        74645  69478  63401  61078  57418  60597  45881  41294  41253  36684   34545
Earnings          -98    936    838    417   2010  -3239   2131   1837   2668   3089    1625
%               -0.1%   1.3%   1.3%   0.7%   3.5%  -5.3%   4.6%   4.4%   6.5%   8.4%    4.7%
 
                 2011   2010   2009   2008   2007   2006   2005   2004   2003   2002    2001
Premiums        32075  30749  27884  25525  31783  23964  21997  21085  21493  19182   17905
Earnings          248   2013   1460   2792   3374   3838     53   1551   1618   -400   -4067
%                0.8%   6.5%   5.2%  10.9%  10.6%  16.0%   0.2%   7.4%   7.5%  -2.1%  -22.7%
 
22-yr average:   3.2%

RAM

I have a similar table. Slight difference in pretax underwriting profit for 2009 for some reason, but nothing material.


I'm guessing the discrepancy is because earnings figures are sometimes revised, in subsequent years. The differences seem to always be small, but for instance, in 2009, Berkshire reported $1559 in pre-tax underwriting earnings, but in 2010, they reported $1460. For almost all the reports, they give the most recent year plus the two previous years. When there was a discrepancy, I used the most recent report, assuming that the revised figure better reflected the true earnings. However, to save time, I only looked at half the annual reports, using the third most recent year as a check that I was looking at the right number (they also report post-tax underwriting earnings, you have to be careful), and revising the second-most recent earnings figure if it had changed. But since I didn't look at every year's report, I might have sometimes missed an earnings revision that would have made a small difference.

So in the case of the 2009, I have used the number reported in 2011 for 2009; you may have quite naturally used the number reported in 2010 (i.e., in the 2009 annual report.)


One thing to consider:
Due to a quirk of accounting, premiums earned take a big temporary leap upwards the year that any big retroactive insurance contract signed.
That accounts for $7.1bn in 2007 for Equitas, and $10.2bn in 2017 for AIG.
I deduct those from the "premiums earned" column before trying to estimate the average underwriting profit that way.

With that adjustment, the average underwriting profit since 2001 (your date range) has been 3.329%.


I guess that makes sense, but wouldn't that temporary leap upwards be accompanied by a drag on earnings over the next few years? That might explain why your revised numbers end up being very close to mine: 3.2% for me, 3.3% for you; as you say, nothing material.

In any case, 3% is more than enough precision; obviously, one bad 2001-like year (with -23% in pre-tax underwriting earnings) would be enough to shift the 22-year average down by a full point. 3% before tax, 2% after tax is good enough for our purposes, I would think, so I'm glad we come up with numbers that are so close.

Regards, DTB

raddish's Export Text macro for excel would work.

Awesome!

Just out of curiosity, to complete my lesson, how do you paste text into Excel so that each number goes into a different cell? When I try, it all goes into one cell.

Thanks, DTB

Just out of curiosity, to complete my lesson, how do you paste text into Excel so that each number goes into a different cell? When I try, it all goes into one cell.


Presumably you mean all the columns go into one column, but it still separates different rows of the pasted data to different rows of the spreadsheet.

In this case go to the top toolbar of Excel,
1) Click "Data" on the top toolbar
2) Looking along the tab groups, in "data tools"
3) notice "Text to Colunns"
4) press that
5) follow fairly obvious instructions
6) experiment around a bit if you have to

Enjoy,
R:)

In this case go to the top toolbar of Excel,
1) Click "Data" on the top toolbar
2) Looking along the tab groups, in "data tools"
3) notice "Text to Colunns"
4) press that
5) follow fairly obvious instructions
6) experiment around a bit if you have to


Awesome! I didn't even have to go to step 6... Thx

dtb

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