Berkshire Hathaway’s resilient earnings illustrated the value of its diversified business mix as it added to its cash hoard. Berkshire reduced its public stock investments, including Chevron, but continued to buy back its own shares at a slower rate.
Berkshire Hathaway (BRK/A, BRK/B) reported earnings of $35.9 billion in the second quarter versus a loss of $43.6 billion in the same quarter of 2022. Since results are heavily impacted by gains or losses from the investment portfolio, with unrealized losses from their portfolio included in earnings, the rally in the stock market made earnings soar. Operating earnings, which remove the distortion from market changes and better reflect the firm’s earnings power, rose 7% for the quarter versus 2022. Providing an illustration of the value from share repurchases, per-share operating income for the quarter increased by 8% compared to 2022.
Because the Covid-19 pandemic negatively impacted most businesses, including Berkshire, beginning in early 2020, comparing current results to pre-pandemic 2019 results is helpful. Year-to-date operating earnings for the second quarter of 2023 are 55% above 2019. Operating earnings increased over 2019 across all primary business segments except railroad and energy. Thanks to share repurchases, operating earnings per share for year-to-date 2023 were a massive 75% above 2019.
A further look into the different operating segments for the second quarter of 2023 shows weaker results than in 2022, aside from the insurance business, despite overall operating income increasing by 7% year-over-year. In a distinct change from 2022, the insurance segment has been the growth driver year-to-date, as operating income rose 9% but, excluding insurance fell by 8%.
Insurance: Second quarter 2023 investment income was 24% higher than in 2022, primarily due to higher interest income from short-term investments. As yields have rebounded from the ultra-low interest rates implemented in response to Covid, investment income has jumped from depressed levels. Investment income should continue improving in 2023 even though the Federal Reserve has paused its rate increases. Underwriting results were poor for 2022, with the real culprit being significant underwriting losses at GEICO. Berkshire Hathaway Primary Group and Berkshire Hathaway Reinsurance Group had underwriting gains for 2022 and continued that trend in the most recent quarter. In the second quarter, Berkshire’s insurance underwriting suffered no significant catastrophe events, defined as losses exceeding $150 million. GEICO had a solid second quarter thanks to increased premiums per auto policy and lower claims frequency. Geico continues to suffer from rising claims severity due in part to the higher valuation of used vehicles. Despite the better results, all is not well with GEICO as the policies in force have declined, and a considerable reduction in advertising expenses bolstered profits. At the annual meeting earlier in the year, Ajit Jain, who manages Berkshire’s insurance businesses, stated that GEICO had made “rapid strides” in telematics which should help bolster underwriting profits over time. However, the company was still a ”work in progress.” Previously GEICO was a growth engine for both profits and float, so the possible turnaround here is worth monitoring closely.
The two most essential concepts in insurance investing are “float” and underwriting profit. In simple terms, float is created for insurance companies because insurance premiums are paid before any claims are made by the insured. Insurance companies can invest the float, sometimes for years, before insurance losses are reimbursed. Berkshire has a history, unlike many insurance companies, of earning an underwriting profit, meaning that their float costs them nothing and makes them money in addition to allowing them to earn a profit off of investing the float. As seen in the second quarter of 2023, an underwriting profit means the insurance premium exceeds all insurance claims and expenses. Despite Berkshire’s underwriting loss for 2022, it posted underwriting profits year-to-date in 2023 and for calendar years 2021, 2020, and 2019. Berkshire’s float was higher at approximately $166 billion versus the $165 billion level at the end of the first quarter and above the $164 billion on December 31, 2022. In general, the value of float increases as yields rise. Float per share has increased to $114,519 from $113,290 and $112,066 at the end of the first quarter and 2022, respectively. Share repurchases also aided this growth in float per share.
Railroad: Berkshire owns one of the largest railroads in North America, the Burlington Northern Santa Fe (BNSF) railroad, operating in the U.S. and Canada. Second-quarter operating earnings fell 24% and declined 17% year-to-date versus 2022. According to Berkshire, “the decreases were primarily attributable to lower overall freight volumes and higher non-fuel operating costs, offset by lower fuel costs.” Along with GEICO, the railroad was a relative underperformer in 2022, which merits closer monitoring. Earnings declines were also seen across other railroads, so most of the earnings weakness stems from economic rather than company-specific factors in 2023.
Utilities and Energy: Berkshire owns 92% of Berkshire Hathaway Energy Company (BHE) which generally provides steady and growing earnings, as one would expect from what primarily consists of regulated utilities and pipeline companies. In addition, BHE typically produces significant tax credits due to its wind-powered electricity generation. Second-quarter operating earnings fell 1% and declined 23% year-to-date versus 2022. Year-to-date, the U.S. utilities segment was hampered by a $359 million loss from the 2020 wildfires. In addition, a part of BHE was hit by a new Energy Profits Levy income tax in the U.K., costing the firm $82 million in the first quarter. This group also operates Berkshire Hathaway HomeServices (BHHS), the largest residential real estate brokerage firm in the country.
