In the third quarter, Warren Buffett’s Berkshire Hathaway (BRKB) pleasantly surprised investors with its robust earnings, and a significant contributor to this success was the company’s insurance subsidiary, Geico. However, despite this positive news, Berkshire Hathaway’s stock faced challenges in the market.
For Q3, Berkshire Hathaway reported operating earnings of $4.96 per share, marking an impressive 40.6% year-over-year increase, surpassing the analyst consensus estimate of $4.36, as reported by FactSet. Interestingly, when excluding the insurance segment, Berkshire’s operating earnings experienced a 20% decline.
Geico, often referred to as Warren Buffett’s “favorite child,” encountered difficulties in 2022, but in Q3, the car insurance company made significant progress in its recovery. Cathy Seifert, Vice President at CFRA Research, noted that this progress was driven by an improvement in insurance underwriting profitability, particularly at Geico.
Within the insurance sector, investment income for the quarter surged by 75% compared to the previous year, primarily due to higher interest income. This rebound in yields was supported by Berkshire’s strategic investment in short-term Treasury bills with yields exceeding 5%. Moreover, in the underwriting business, Berkshire Hathaway Primary Group, Berkshire Hathaway Reinsurance Group, and Geico all reported profits in the absence of major catastrophe events.
Geico notably stood out, posting a pre-tax underwriting profit of $1.05 billion, marking its third consecutive profitable quarter following six quarters of losses. Additionally, the insurer recorded its strongest underwriting profit margin since Q1 2021. This success can be attributed to higher average premiums, reduced claims costs, and decreased advertising expenditures.
Progress in restoring Geico to its former status as a growth engine for profits and float has been closely monitored by experts like Bill Stone, Chief Investment Officer of Glenview Trust.
Notably, the insurance sector has been outperforming the market, with companies like Progressive (PGR) and Allstate (ALL) showcasing significant advances among S&P 500 stocks over the past three months.
In 2022, Geico faced market share losses to Progressive, a leader in telematics, which uses data-driven insights to tailor rates and risk. Geico, however, has been diligently working to catch up in the telematics arena.
On the flip side, the railroad and energy segments weighed down Berkshire’s earnings for the quarter. The railroad business, including Burlington Northern Santa Fe, reported a 15% decline in operating earnings due to lower freight volumes and higher nonfuel costs, somewhat offset by lower fuel costs. The energy business, comprising regulated utilities and pipeline companies, saw operating earnings fall by 69%, influenced by wildfire liability and a slowdown in housing activity.
In Q3, Berkshire continued its trend of being a net seller of stocks. It bought $1.7 billion worth of stocks and sold $7 billion, resulting in a net decrease of approximately $5.3 billion. This included sales of approximately $2 billion of its Chevron (CVX) holdings.
While Berkshire did repurchase nearly $1.1 billion of its stock in the quarter, the pace of buybacks increased in September as the stock price declined. However, this was a slowdown compared to the $1.4 billion in buybacks in Q2 and $5 billion in Q1.
Berkshire’s cash reserves swelled to a record $157 billion by the end of September, primarily due to stock sales. This impressive cash pile has consistently grown throughout 2023, amounting to a $29 billion increase year-to-date.
Unfortunately, Berkshire’s B-class shares experienced a 1.4% decline, closing at 347 on the stock market, as they struggled for a second consecutive day to break through resistance at the 50-day moving average.
CFRA’s Seifert showed confidence in Berkshire stock by raising the price target by $10 to $405, emphasizing the strong top-line growth and improved margins that are expected to provide the shares with a catalyst for future success.
