Berkshire battles to raise profits
• Insurance business’s falling results have hurt figures, with an underwriting loss of $22m from a gain of $337m a year earlier
Warren Buffett’s Berkshire Hathaway is finding it hard to grind out higher profits, in large part because of slumping results at its insurance businesses.
Warren Buffett’s Berkshire Hathaway is finding it hard to grind out higher profits, in large part because of slumping results at its insurance businesses.
Gains at the conglomerate’s railroad and energy units were not enough to overcome an underwriting loss during the second quarter, the company said on Friday.
Operating profit slid for the third consecutive period.
Buffett is still sitting on a mountain of cash. At the end of the quarter, his company had almost $100bn. The record balance prompted the billionaire to say earlier in 2017 that he had not put his “foot to the floor” on an acquisition for a long time.
It fuelled speculation that he might buy something that’s big even by his standards.
MORTGAGES, ENERGY
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, an embattled Canadian mortgage lender.
In early July, the energy arm of his conglomerate announced a $9bn deal to buy the parent company of the largest electric transmission operator in Texas, although the agreement is being challenged by Paul Singer’s Elliott Management.
Berkshire has also held talks with Sprint 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 $4.12bn of operating profit in the second quarter, an 11% decline from a year earlier. Per share, the figure was $2,505.
The biggest unit, railroad BNSF, reported profit rose 24% to $958m. It has benefited from a surge in coal and other freight shipments in 2017 as it continues to take market share from Union Pacific, its main competitor in the western US.
INSURANCE, CURRENCIES
The insurance segment posted an underwriting loss of $22m, compared with a gain of $337m a year earlier. Some of the decline was at vehicle insurer Geico, which incurred more claims costs than a year earlier.
Buffett has said the business was willing to endure higher expenses as it added new customers, because results would 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 previous years.
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 1%, to $965m.
Profit at the utility unit, Berkshire Hathaway Energy, rose to $516m, from $482m 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 $1.66bn to earnings, compared with $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 in 2016.
In all, Buffett and his deputy investment managers, Todd Combs and Ted Weschler, spent about $3.04bn on equities in the quarter while selling $4.36bn in stock. For fixed-income securities, there were $23.2bn of purchases, compared with a combined $20.3bn of sales, redemptions and maturities.
Berkshire’s stock portfolio was valued at more than $137bn at the end of June. The filing showed a further reduction of Berkshire’s stake in IBM.
Net income slumped 15% to $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 $600m from the redemption of a preferred stake in Kraft Heinz.