Buf­fett’s in­sur­ers slump, drag­ging down Berk­shire’s earn­ings

Muscat Daily - - BUSINESS -

Seat­tle, US - War­ren Buf­fett’s Berk­shire Hath­away Inc is find­ing it hard to grind out higher prof­its this year, in large part be­cause of slump­ing re­sults at its in­sur­ance busi­nesses.

Gains at the con­glom­er­ate’s rail­road and en­ergy units weren’t enough to over­come an un­der­writ­ing loss dur­ing the sec­ond quar­ter, the com­pany said on Fri­day in a state­ment. Op­er­at­ing profit slid for the third straight pe­riod.

Buf­fett (86), is still sit­ting on a moun­tain of cash. At the end of the quar­ter, his com­pany had al­most US$100bn. The record bal­ance prompted the bil­lion­aire to say ear­lier this year that he hadn’t put his ‘foot to the floor’ on an ac­qui­si­tion for a long time. It also fu­elled spec­u­la­tion that he might buy some­thing that’s big even by his stan­dards.

In the mean­time, Buf­fett has been find­ing other places to in­vest. Berk­shire bought a stake in a real es­tate in­vest­ment trust and agreed in June to prop up Home Cap­i­tal Group Inc, an em­bat­tled Cana­dian mort­gage lender.

In early July, the en­ergy arm of his con­glom­er­ate an­nounced a US$9bn deal to buy the par­ent com­pany of the largest elec­tric­trans­mis­sion op­er­a­tor in Texas, though the agree­ment is be­ing chal­lenged by Paul Singer’s El­liott Man­age­ment Corp. Berk­shire has also held talks with Sprint Corp chair­man Masayoshi Son about mak­ing an in­vest­ment, ac­cord­ing to a per­son fa­mil­iar with the mat­ter.

While those deals could soak up a lot of ex­cess cash at Berk­shire, its dozens of busi­nesses con­tinue to gen­er­ate more. All to­gether, they pro­duced US$4.12bn of op­er­at­ing profit in the sec­ond quar­ter, an 11 per cent de­cline from a year ear­lier. Per share, the fig­ure was US$2,505, miss­ing the US$2,791 av­er­age es­ti­mate of four an­a­lysts sur­veyed by Bloomberg.

The big­gest unit, rail­road BNSF, re­ported profit rose 24 per cent to US$958mn. The busi­ness has ben­e­fited from a surge in coal and other freight ship­ments this year as it con­tin­ues to take mar­ket share from Union Pa­cific Corp, its main com­peti­tor in the western US.

The in­sur­ance seg­ment posted an un­der­writ­ing loss of US$22mn, com­pared with a gain of US$337mn a year ear­lier. Some of the de­cline was at auto in­surer Ge­ico, which in­curred more claims costs than a year ear­lier. Buf­fett has said the busi- ness is will­ing to en­dure higher ex­penses as it adds new cus­tomers, be­cause re­sults will im­prove in the longer term.

Berk­shire’s name­sake rein­surer swung to an un­der­writ­ing loss be­cause of costs tied to nat­u­ral dis­as­ters in ear­lier pe­ri­ods and ac­count­ing charges re­lated to con­tracts that back­stop other in­sur­ers on poli­cies that were sold in prior years. A weaker dol­lar also hurt the unit’s re­sults.

Berk­shire’s other in­sur­ance busi­nesses - Gen­eral Re and its col­lec­tion of pri­mary car­ri­ers - re­ported higher un­der­writ­ing in­come in the quar­ter. Berk­shire’s in­vest­ment in­come from all the in­sur­ance units fell one per cent to US$965mn.

Profit at the util­ity unit, Berk­shire Hath­away En­ergy, rose to US$516mn from US$482mn a year ear­lier. The busi­ness op­er­ates elec­tric grids in the UK, nat­u­ral gas pipe­lines that stretch from the Great Lakes to Texas and power com­pa­nies in states in­clud­ing Iowa and Ne­vada.

The man­u­fac­tur­ing, ser­vice and re­tail seg­ment added US$1.66bn to earn­ings, com­pared with US$1.49bn a year ear­lier. The di­vi­sion in­cludes com­pa­nies like Dairy Queen, NetJets, Fruit of the Loom and Pre­ci­sion Cast­parts, a sup­plier to the aerospace in­dus­try that Buf­fett bought early last year in one of his big­gest ac­qui­si­tions.

In all, Buf­fett and his deputy in­vest­ment man­agers, Todd Combs and Ted Weschler, spent about US$3.04bn on eq­ui­ties in the quar­ter while sell­ing US$4.36bn in stock. For fixed-in­come se­cu­ri­ties, there were US$23.2bn of pur­chases, com­pared with a com­bined US$20.3bn of sales, re­demp­tions and ma­tu­ri­ties. Berk­shire’s stock port­fo­lio was val­ued at more than US$137bn at the end of June. The fil­ing showed a fur­ther re­duc­tion of Berk­shire’s stake in In­ter­na­tional Busi­ness Ma­chines Corp.

Net in­come slumped 15 per cent to US$4.26bn. The fig­ure was hurt by a drop in in­vest­ment gains and a loss on de­riv­a­tives. In last year’s sec­ond quar­ter, Berk­shire recorded a one-time gain of more than US$600mn from the redemp­tion of a pre­ferred stake in Kraft Heinz Co.

War­ren Buf­fett

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