Berkshire Operating Earnings Jump on Insurance Strength

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(Bloomberg) — Warren Buffett’s Berkshire Hathaway Inc. posted gains in operating profit as strength in its insurance businesses helped counter inflationary pressures that have weighed on the sprawling conglomerate in the last year.

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The firm reported $10.04 billion of operating profit for the second quarter, surpassing its $9.28 billion haul from the same period last year. The results were largely driven by a 74% increase in insurance underwriting earnings to $1.25 billion, as it trimmed expenses at auto insurer Geico and benefited from its acquisition of underwriter Alleghany Corp.

Berkshire posted stronger results despite Buffett cautioning at its annual meeting in Omaha in May that earnings at the majority of its operating units could fall this year as an “incredible period” for the US economy draws to the end. Still, the Federal Reserve’s aggressive pace of rate hikes has helped the firm reap greater yield on the cash it stockpiles primarily in short-dated US Treasuries. That cash hoard reached $147.4 billion in the quarter, the second-highest level in data going back to 2014.

Read More: Berkshire Poised for Gains on Rate Hikes, Countering Slumps

On Thursday, Buffett said that Fitch Ratings’ downgrade of US government debt wouldn’t diminish his appetite for it. Berkshire’s cash pile included $120.4 billion invested in US Treasury bills, according to a company filing on Saturday.

Rail, Road

One business that performed worse was its railroad unit BNSF, where profit fell 24% as freight volumes dipped and an increase in headcount and wage inflation contributed to higher costs for compensation and benefits.

The company’s Geico insurance unit, which struggled with unprofitability throughout 2022, posted positive results for the second quarter in a row. Berkshire cited a benefit from higher premiums over the last year and lower claim frequencies, as well as a reduction in advertising spending.

Still, over the last 12 months, policies-in-force decreased by 2.7 million, suggesting the cuts to advertising spending are costing the conglomerate’s auto insurer market share.

High-class Problem

In recent years, the conglomerate has struggled with a high-class problem: a surplus of cash and nothing to spend it on as elevated public-market valuations deprive the billionaire investor of acquisition targets. Higher interest rates will have taken some pressure off holding that cash, according to Bloomberg Intelligence.

What Bloomberg Intelligence says:

“Berkshire Hathaway’s diverse businesses contribute to long-term earnings power; a slowing economy and inflation are risks but the company largely has shrugged them off to date. CEO Warren Buffett said operating companies’ earnings could decline this year but a significant rise in interest income would be an offset.”

-Matthew Palazola, BI senior industry analyst, and Eric Bedell, BI associate analyst.

The dearth of opportunities has led Berkshire to pursue share buybacks at a more aggressive pace, a strategy Buffett once shunned. But the company’s Class B shares are nearing a record high, representing a potential impediment to that strategy. Berkshire spent $1.4 billion in the quarter on share buybacks.

A value investor like Buffett “will tend to get a little frustrated with where valuations are,” said Cathy Seifert, an analyst with CFRA Research. “There’s an interesting inflection point here in terms of asset allocation within the investment portfolio, and I think people are going to be watching.”

The company was also a net seller of equities in the quarter.

(Updates with details on cash holdings, analyst commentary from fourth paragraph.)

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