Despite the headline earnings loss due to stock market weakness, Berkshire’s robust third-quarter operating results illustrated the value of its insurance segment as it added to its cash hoard. Berkshire again reduced its public stock investments, including Chevron, but continued to buy back its own shares.
Berkshire Hathaway (BRK/A, BRK/B) reported a loss of $12.8 billion in the third quarter versus a loss of $2.8 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 decline in the stock market made earnings reported earnings swoon. Operating earnings, which remove the distortion from market changes and better reflect the firm’s earnings power, rose 41% for the quarter versus 2022. Providing an illustration of the value from share repurchases, per-share operating income for the quarter increased by 43% compared to 2022.
Because the 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 third quarter of 2023 are 46% 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 whopping 65% above 2019.
A further look into the different operating segments for the third quarter of 2023 shows weaker results than in 2022, aside from the manufacturing, service, and retailing division and the insurance business, despite overall operating income increasing by 41% year-over-year. In a distinct change from 2022, the insurance segment has been the growth driver year-to-date, as operating income rose 165%, but excluding insurance fell by 12%.
Insurance: Third quarter 2023 investment income was 75% 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 the pandemic, investment income has recovered from depressed levels. Due to easy comparisons, investment income should continue improving for the remainder of 2023, even though the Federal Reserve has paused its rate increases. Underwriting results were poor for the third quarter of 2022, with underwriting losses at all three insurance groups, but the most prominent coming from GEICO. Hurricane Ian contributed to the underwriting losses in the third quarter of last year. Unlike GEICO, Berkshire Hathaway Primary Group and Berkshire Hathaway Reinsurance Group had underwriting gains for 2022. In the third quarter, Berkshire’s insurance underwriting suffered no significant catastrophe events, defined as losses exceeding $150 million, and all three insurance units posted underwriting profits. GEICO had a solid third 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 helped by higher average premiums, policies in force at GEICO have declined. A considerable reduction in advertising expenses bolstered profits. At the annual meeting earlier in the year, Ajit Jain, who oversees 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 progress in returning the company to its former glory should be watched 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 third 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 $167 billion versus the $166 billion level at the end of the second 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 $115,417 from $114,519 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. Third-quarter operating earnings fell 15% 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, partially offset by lower fuel costs.” The railroad was a relative underperformer in 2022, but most of the earnings weakness stems from economic rather than company-specific factors in 2023. Earnings are down year-over-year across the railroad industry.
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. Third-quarter operating earnings fell 69% and declined 46% year-to-date versus 2022. BHE set aside another $1.3 billion for possible losses from the wildfires involving PacifiCorp. Aside from the higher estimated wildfire liability, the U.S. utilities business looks to be operating as expected.
