Berkshire Hathaway reported second quarter earnings Friday that were largely mixed. While the headline number showed an improvement, that was largely due to gains in some of Berkshire’s derivative contracts, which are non-cash and tend to create more volatility in the conglomerate’s quarterly earnings. Including these derivative positions, though, Berkshire’s second quarter earnings grew 14%.
In the operating businesses, the story was more mixed. The insurance businesses produced satisfactory results, though underwriting profits were mostly down. While auto-insurer GEICO continues to attract new customers seeking cheaper auto-insurance, its underwriting profits were down thanks primarily to higher losses. General Re improved its profits, while Berkshire Hathaway Reinsurance and the primary insurance group saw declines in profitability.
Berkshire did indicate in its quarterly report that it is more willing to take on large exposures than it was earlier in the year, but that it hasn’t yet as industry wide pricing continues to be very competitive. Berkshire’s total insurance float—premiums collected and not yet paid as claims—increased to $61 billion as of June 30. This additional float—as well as preferred stock dividends from GE and Goldman Sachs--helped boost investment income in Berkshire’s insurance operations by a strong 18%.
The utility business earnings also held up okay, despite large revenue declines attributable to both weak demand and lower prices. The results in the utilities did benefit from gains in the stock of Constellation Energy, which Berkshire received as consideration when Constellation pulled out of a deal to be acquired by Berkshire subsidiary Mid-American. If not for these stock gains, Berkshire’s second quarter earnings in its utility businesses would have been down about 7%.
Results in the operating businesses were down more substantially, which wasn’t entirely unexpected, given the revenue and earnings weakness reported by many other similar businesses over the last few weeks. Across the board revenue was down between 20-30% in most of Berkshire’s operating businesses. NetJets revenue was down even more, at 43%, as that business continues to be flat on its back. In addition, NetJets also had a CEO change in just the last week. The one area that held up, and actually showed some modest growth, was McClane (a foodservice provider), which posted an 8% increase in revenue versus the prior year quarter.
Berkshire’s investments recovered somewhat, which helped push the conglomerate’s book value per share up 11.4% during the second quarter. Berkshire’s cash balance now sits at about $21 billion, after its flurry of investment activity over the past year. Berkshire has indicated in the past that it likes to keep at least $10 billion of cash on hand for insurance regulatory purposes, and given the current economic environment, it would seem that Berkshire would want to keep even more cash on hand. As such, if Berkshire were to make an additional investment or acquisition it would probably raise some additional cash to do so by potentially selling some marketable securities, as the conglomerate has already done over the last six months.
You might also be interested to know that this blog was mentioned in an Associated Press article that I have linked here.
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Also, if you haven’t already done so, please be sure to register for the first “Late Summer Buffett Conclave” (www.buffettconclave.com), which is a social and networking event on August 28th in Chicago for folks interested in Berkshire. Disclaimer: Neither Mr. Buffett nor Berkshire Hathaway nor any of its employees are affiliated with this event.
Justin
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The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business. This content is intended solely for the entertainment of the reader, and the author.
