Berkshire Hathaway Inc.'s insurance operations “shot the lights out last year,” according to Berkshire Hathaway Chairman and CEO Warren Buffett.

In his Friday letter to shareholders, Mr. Buffett noted that Berkshire's insurance operations, which include General Reinsurance Corp., Berkshire Hathaway Reinsurance Group, personal lines insurer Geico and some smaller property/casualty insurers, posted a $1.6 billion underwriting gain in 2012. That was the 10th consecutive year of profitable underwriting, according to Mr. Buffett.

“Late in 2012, we enlarged this group by acquiring Guard Insurance (Group), a Wilkes-Barre (Pa.-based) company that writes workers compensation insurance, primarily for smaller businesses,” said Mr. Buffett in his letter. “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.”

Berkshire Hathaway Reinsurance posted a 2012 underwriting profit of $304 million, compared with a $714 million loss in 2011. Gen Re's underwriting profit more than doubled to $355 million from $144 million a year earlier, while the underwriting profit of Berkshire Hathaway's other primary insurers rose to $286 million from $242 million. Geico accounted for the rest of the underwriting profit.

Mr. Buffett said in the letter that insurers engage in intense competition, “so vigorous in most years that it causes the P/C industry as a whole to operate at a significant underwriting loss.”

“There are a lot of ways to lose money in insurance, and the industry never ceases searching for new ones,” he wrote.

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Mr. Buffett said that in 37 of the 45 years ending in 2011, the property/casualty insurance industry's premiums have been inadequate to cover claims plus expenses. “Consequently, the industry's overall return on tangible equity has for many decades fallen far short of the average return realized by American industry, a sorry performance almost certain to continue.”

He also pointed to the fact that insurer earnings benefit from bond portfolios that provide much higher yields than will be available when they reinvest the funds in the future.

“Today's bond portfolios are, in effect, wasting assets,” wrote Mr. Buffett. “Earnings of insurers will be hurt in a significant way as bonds mature and are rolled over.”