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