Berkshire’s Insurance Slump and Key Takeaways From Its Results

(Bloomberg) -- For all its many businesses, Berkshire Hathaway Inc. can still swing on the insurance operations that built it.

The company's operating earnings fell in the second quarter as underwriting income at Berkshire's insurers dropped by almost 63% to $353 million. Berkshire's reinsurance unit swung to a pretax loss in the period while auto insurer Geico saw a jump in the average severity of its claims.

Warren Buffett fueled the growth of his conglomerate by investing the premiums earned by his insurance units, and has said that's more than a fair tradeoff for the occasional volatility those businesses bring. Still, that can mean grappling with a big drop or a loss, as happened in 2017 when a spate of hurricanes caused a spike in costs.

Overall, Berkshire's insurers have been a relatively steady force for the company, generating an annual underwriting profit for 15 of the past 16 years, according to the company's shareholder letter this year.

Berkshire's property-casualty reinsurance operation boosted its liabilities tied to events in prior years while the life and health business at Berkshire's namesake reinsurance group changed a contract with a major U.S. reinsurer in the first quarter, which has reduced the premiums it raked in.

“The results in reinsurance have always been really uneven,” said Jim Shanahan, an analyst at Edward Jones. “It's not a great business to be in right now. Certainly, there isn't a lot of opportunity in reinsurance to grow very much, so when you have a business like that where there isn't strong revenue growth, underwriting weakness is exacerbated.”

While the company's overall operating earnings dropped, net income jumped 17% because of $7.9 billion in investment gains. Those came largely from the company's $200 billion stock portfolio, which includes major stakes in Apple Inc. and Bank of America Corp.

Here are the key takeaways from the results:

Railroad Gains

Buffett's railroad eked out profit gains in the quarter, thanks to growth in shipments of industrial and agricultural products and cost cutting measures. That could help bat down concerns about its ability to weather a slowdown in the sector amid trade battles and comments from rivals about a “puzzling” economic backdrop.

BNSF Railway's profit climbed 2% and topped $1.2 billion for the fifth straight quarter, a level it had never reached before last year.

Consumer Slowdown

Berkshire touches so many parts of U.S. business that it's sometimes used as a measure of the economy. The latest results show some evidence of the American consumer pulling back.

Soft consumer demand hit units from Berkshire's group of home furnishing businesses to its BNSF Railway Co., according to a regulatory filing Saturday. The company's revenue from consumer products -- which includes makers of jewelry, underwear and motor homes -- dropped 8.6% in the quarter. Berkshire Hathaway Automotive, which has over 80 auto dealerships, reported lower sales of new cars, while sales of pre-owned vehicles climbed.

Read more: Berkshire results point to pockets of consumer weakness

The highest-end consumers are still spending: private-plane rental company NetJets saw a jump in leases and flight hours.

Climbing Cash

Buffett isn't seeing much value in stocks right now, and that's causing his cash to pile up to a record level.

Berkshire sold $1 billion more worth of stocks than it bought last quarter, its biggest net selling since the end of 2017. Buffett was an active buyer of equities every quarter last year, including almost $13 billion in the third quarter alone.

Buffett hasn't had a major acquisition in several years and has even pulled back on one of his newer ways to deploy cash, slowing down repurchases of Berkshire's own stock in the second quarter. The result was that the company's cash pile -- a major focus for investors in recent years -- surged to a record $122 billion.

Kraft Heinz

One reason for the drop in operating earnings was Kraft Heinz Co. was missing from the results.

Kraft Heinz, which is set to report results on Aug. 8, hasn't yet delivered first-half results to Berkshire, so Buffett's firm couldn't include its share of the company's earnings, which amounted to $187 million in last year's second quarter.

Kraft Heinz installed a new chief executive officer and finally issued its delayed 10-K filing in June as it worked to clean up from a $15.4 billion writedown. The restatements in June caused a $34 million hit for Berkshire, it said Saturday.

To contact the reporter on this story: Katherine Chiglinsky in New York at kchiglinsky@bloomberg.net

To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, James Ludden

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