Berk­shire profit falls, miss­ing es­ti­mates on in­sur­ance

The Pak Banker - - COMPANIES/BOSS -

War­ren Buf­fett's Berk­shire Hath­away Inc. posted sec­ond-quar­ter profit that missed an­a­lysts' es­ti­mates be­cause of higher claims costs at in­sur­ance units in­clud­ing Ge­ico.

Net in­come dropped 37 per­cent to $4.01 bil­lion, or $2,442 a share, from $6.4 bil­lion, or $3,889, a year ear­lier, the Omaha, Ne­braska-based com­pany said Fri­day in a state­ment. Op­er­at­ing earn­ings, which ex­clude some in­vest­ment re­sults, were $2,367 a share, com­pared with the av­er­age $3,038 es­ti­mate of three an­a­lysts sur­veyed by Bloomberg.

Buf­fett, 84, built Berk­shire over the past five decades into a sprawl­ing op­er­a­tion that owns man­u­fac­tur­ers, re­tail­ers, elec­tric util­i­ties and one of the largest U.S. rail­roads. While those op­er­at­ing busi­nesses pro­vide a steady stream of earn­ings, the com­pany's re­sults can still fluc­tu­ate depend­ing on the per­for­mance of in­vest­ments and its core in­sur­ance oper­a­tions.

"The prop­erty-and-ca­su­alty in­sur­ance in­dus­try cer­tainly oc­ca­sion­ally takes large hits," said David Kass, a pro­fes­sor at the Univer­sity of Mary­land's Robert H. Smith School of Busi­ness. "What mat­ters is how you do over time." Berk­shire's in­sur­ance units posted a net un­der­writ­ing loss of $38 mil­lion, com­pared with a gain of $411 mil­lion a year ear­lier, driven by lower profit at auto in­surer Ge­ico and a wider loss at the com­pany's name­sake rein­sur­ance op­er­a­tion, run by Ajit Jain.

Ge­ico con­trib­uted $53 mil­lion to earn­ings, com­pared with $393 mil­lion a year ear­lier be­cause of an in­crease in the fre­quency and cost of claims. The com­pany re­it­er­ated in a reg­u­la­tory fil­ing that it's rais­ing premi­ums to ac­count for the higher losses. Berk­shire Hath­away Rein­sur­ance Group's loss widened to $411 mil­lion from $9 mil­lion on storm costs in Aus­tralia and for­eign cur­rency fluc­tu­a­tions. The de­cline in net in­come was pri­mar­ily driven by nar­rower in­vest­ment gains. Berk­shire's profit soared to a record in last year's sec­ond quar­ter as the com­pany had a ben­e­fit of more than $2 bil­lion from de­riv­a­tives and in­vest­ments.

The 2014 to­tal in­cluded a one­time con­tri­bu­tion from a share-an­das­set swap with Graham Hold­ings Co., the for­mer pub­lisher of the Washington Post. In this year's sec­ond quar­ter, the in­vest­ment and de­riv­a­tive fig­ure was $123 mil­lion.

Buf­fett's com­pany said that thirdquar­ter re­sults will in­clude a pre­tax gain of about $7 bil­lion tied to the merger that formed Kraft Heinz Co. in July. Berk­shire owns more than a quar­ter of the com­bined com­pany af­ter help­ing to fund the deal. The an­tic­i­pated gain hasn't re­versed Berk­shire's stock slump this year. Class A shares have slipped 4.7 per­cent since Dec. 31, trail­ing the 0.9 per­cent gain in the Stan­dard & Poor's 500 In­dex. Buf­fett's fa­vored yard­stick -book value -- rose 1.9 per­cent to about $149,735 a share dur­ing the sec­ond quar­ter. He has said the met­ric is a good, though un­der­stated, proxy for the com­pany's true worth. In­vestors of­ten use the fig­ure to gauge whether the stock is at­trac­tively priced.

Berk­shire's big­gest non-in­sur­ance unit, rail­road BNSF, con­trib­uted $963 mil­lion to quar­terly earn­ings, com­pared with $916 mil­lion a year ear­lier. To­tal car­loads were rel­a­tively flat, and the rev­enue per car dropped as de­mand for haul­ing oil and coal slumped. Berk­shire Hath­away Energy Co., the util­ity busi­ness led by Greg Abel, added $502 mil­lion to earn­ings com­pared with $375 mil­lion a year ear­lier. The unit ben­e­fited from higher profit at its Iowa power busi­ness, the ad­di­tion of a trans­mis­sion busi­ness in Canada and a lower tax rate. Abel has been in­vest­ing heav­ily in wind gen­er­a­tion, which earns Berk­shire cred­its it can use to off­set its tax li­a­bil­i­ties.

Earn­ings from man­u­fac­tur­ing, ser­vice and re­tail­ing units in­creased to $1.31 bil­lion in the sec­ond quar­ter from $1.26 bil­lion in the same pe­riod in 2014. The group of busi­nesses in­cludes chem­i­cal com­pany Lubri­zol; McLane, a truck­ing op­er­a­tion; and re­cently ac­quired units such as a net­work of car deal­er­ships and a Ger­man mo­tor­cy­cle-ac­ces­sory busi­ness.

Berk­shire breaks down re­sults for only some busi­nesses in the seg­ment. One of them, the NetJets lux­ury avi­a­tion unit, posted a 17 per­cent de­cline in quar­terly profit on costs in­clud­ing fees to can­cel air­craft pur­chases.

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