Berkshire Profit Falls, Missing Estimates on Insurance Slump

Updated on

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.

Australia Storm

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 one-time contribution from a share-and-asset 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.

Kraft Heinz

Buffett’s company said that third-quarter 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.

Railroad, Utilities

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.

Trucking, Chemicals

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.

Cash continued to pile up faster than Buffett could spend it, climbing to a record $66.6 billion on June 30 from $63.7 billion three months earlier.

Buffett and his deputy investment managers, Todd Combs and Ted Weschler, spent $3.09 billion on equities and $837 million on fixed-maturity securities in the quarter. They sold $1.05 billion in stock and $395 million of bonds during the period.

The equity portfolio was valued at $117.7 billion on June 30, up from $115.5 billion at the end of March. Berkshire is the biggest shareholder in companies including Coca-Cola Co. and Wells Fargo & Co.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE