Insurance, economy, tariffs weigh on Berkshire Hathaway

August 05, 2019 09:06
Berkshire Hathaway, run by billionaire Warren Buffett, said second-quarter operating profit declined 11 percent to US$6.14 billion. Photo: AFP

Berkshire Hathaway Inc. said its quarterly operating profit fell more than analysts expected, as weakness in insurance underwriting, a slowing economy and trade woes weighed on the conglomerate run by billionaire Warren Buffett, Reuters reports.

Berkshire’s auto insurer Geico suffered a larger number of accident claims, while competition from foreign producers, lower imports and “trade policy” dampened cargo volumes for consumer and agricultural products at its BNSF railroad.

Earnings also barely budged at Berkshire’s manufacturing businesses, where US tariffs hurt sales of gas turbine and pipe products at its Precision Castparts unit, and its service and retailing businesses.

Second-quarter operating profit declined 11 percent to US$6.14 billion, or roughly US$3,757 per Class A share, from US$6.89 billion, or roughly US$4,190 per Class A share, a year earlier.

Analysts on average expected operating profit of US$3,851.28 per share, according to Refinitiv IBES.

Berkshire also said quarterly net income rose 17 percent to US$14.07 billion, or US$8,608 per Class A share, from US$12.01 billion, or US$7,301 per Class A share, a year earlier, reflecting higher unrealized gains on Berkshire’s investments.

A US accounting rule requires Berkshire to report such gains with earnings. That rule adds volatility to Berkshire’s net results, and Buffett says it can mislead investors.

The US economy’s annualized growth rate slowed to 2.1 percent in the second quarter from 3.1 percent in the first quarter, as an acceleration in consumer spending was partially offset by declining exports, manufacturing and business investment, reflecting the trade war between the United States and China.

Buffett told CNBC in May that a US-China trade war would be “bad for the whole world”, and a full-scale trade war would be “bad for everything Berkshire owns”.

More cash

Berkshire ended June with US$122.4 billion of cash and equivalents, reflecting Buffett’s 3-1/2-year drought in finding big acquisitions since buying Precision Castparts.

He has instead invested elsewhere, building a US$50.5 billion stake in iPhone maker Apple Inc. and committing US$10 billion in April to help Occidental Petroleum Corp. buy rival Anardako Petroleum Corp. Berkshire has also bought back US$2.1 billion of its stock this year.

The Omaha, Nebraska-based conglomerate operates more than 90 businesses that also include Dairy Queen ice cream, Fruit of the Loom underwear, and its namesake energy company and real estate brokerage.

It also owns dozens of stocks, including Bank of America Corp., Wells Fargo & Co., and Coca-Cola Co.

Class A shares of Berkshire closed Friday at US$306,000, about 9 percent below their peak last October. Class B shares closed at US$202.67, closer to 10 percent below their peak.

Consumer drag

Insurance underwriting profit dropped 63 percent to US$353 million, with declines in several businesses.

Geico’s pre-tax underwriting gain fell 42 percent, as a higher ratio of loss claims to premiums earned more than offset growth in policies written.

Underwriting at Berkshire’s reinsurance, property/casualty and commercial insurance units also weakened, reflecting higher claims payouts, changes in the expected timing of future payouts, and currency fluctuations, among other factors.

Berkshire was nonetheless able to boost float, or insurance premiums collected before claims are paid and which help fund growth, by another US$1 billion in the quarter, to US$125 billion.

BNSF’s profit rose 2 percent to US$1.34 billion, while revenue was essentially unchanged.

Profit was also flat in Berkshire’s manufacturing, services and retailing businesses, totaling US$2.49 billion.

While Berkshire said more people flew NetJets corporate jets, “soft consumer demand” weighed on sales at home furnishings businesses, which include Nebraska Furniture Mart.

Berkshire Hathaway Energy saw profit rise 4 percent.

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