Berkshire’s earnings hit speed bump
4.8% drop in first-quarter operating profit to $3.56 billion
seattle — Warren Buffett’s Berkshire Hathaway hit a speed bump in the first quarter as insurance units posted an underwriting loss, overshadowing gains at the company’s railroad and energy business.
The results aren’t likely to damp the festive mood as shareholders gather Saturday for the company’s annual meeting in Omaha, Nebraska. The event doubles as a showcase for Berkshire’s dozens of businesses and a platform for Buffett, 86, to share his investing gospel with thousands of adoring fans.
Over the past five decades, he’s transformed Berkshire from a struggling textile business into a financial powerhouse with insurance, energy, retail, transportation and manufacturing units. With an eye toward value and long-term thinking, his stock picks and acquisitions have helped propel steady increases in the company’s earnings.
Buffett has said there will be blips in that record, in part because insurance results can be volatile. First-quarter operating profit slipped 4.8 per cent to $3.56 billion, the company said Friday in a statement.
The result was driven by underwriting losses at Berkshire’s namesake reinsurance group and General Re unit, which both incurred costs tied to a cyclone in Australia. Pretax profit fell 34 per cent at Geico, which sells auto coverage.
Despite the occasional setback, insurance has been a significant moneymaker for Berkshire, generating annual underwriting profits for more than a decade. The businesses also provide Buffett with billions of dollars of “float” — or premiums held before paying claims — that he can invest.
Berkshire’s largest unit, railroad Burlington Northern Santa Fe, added $838 million to net income, 6.9 per cent more than in the same period of 2016, according to a regulatory filing. BNSF and its competitors have benefited this year from a rebound in coal volumes after a surge in prices for natural gas, a rival energy source.
Still, carriers aren’t counting on a sustained rebound in coal, because power producers have been shifting away from the fossil fuel. BNSF also saw an increase in car shipments over its network after it won business from a new automotive customer.
The manufacturing, service and retail segment added $1.32 billion to earnings, compared with $1.27 billion 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 last year in one of his biggest acquisitions. Profit fell at the industrial products segment, as the Lubrizol chemicals unit had pretax losses of $184 million on the exit from an “underperforming” business, asset impairments and restructuring charges, according to the filing.
The contribution from Berkshire Hathaway Energy rose to $501 million from $441 million 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.
Bill Smead, a Seattle-based money manager who is in Omaha for the meeting, welcomed the gains at the railroad and other operating businesses and wasn’t worried about the insurance results.
“The catastrophic losses, you can’t do anything about,” he said. “Much more important to shareholders is that Buffett is burying himself in cash.”
Berkshire’s war chest totalled $96.5 billion at the end of the first quarter, a record. The climbing cash balance has caused some analysts and investors to speculate that Buffett could do a deal that’s big even by his standards.
While he waits for the right opportunity, Buffett’s been buying lots of stocks. In February, he said that he’d built Berkshire’s holding in Apple to more than $18 billion. His company also amassed stakes in the four largest US airlines — American Airlines Group, Delta Air Lines, Southwest Airlines Co and United Continental Holdings. — Bloomberg