Berkshire Hathaway Earnings: Strong Insurance Results Continue to Lift Revenue and Profitability

Key Morningstar Metrics for Berkshire Hathaway

• Fair Value Estimate BRK.A: $640,000.00
• Fair Value Estimate BRK.B: $427.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Low

What We Thought of Berkshire Hathaway’s Earnings

Wide-moat Berkshire Hathaway reported adjusted first-quarter results that were about in line with our expectations. We are leaving our fair value estimates of $640,000 per Class A share and $427 per Class B share in place. First-quarter reported revenue, which includes unrealized and realized gains/losses from Berkshire’s investments and derivatives portfolios, declined 23.6% year over year to $91.7 billion, as the company lapped significant unrealized and realized investment gains during the first quarter of 2023. Excluding the impact of these investment and derivative gains/losses and other adjustments, first-quarter operating revenue increased 5.2% to $89.9 billion.

Operating earnings, exclusive of the impact of investment and derivative gains/losses, increased 39.1% year over year to $11.2 billion during the March quarter. While most of the company’s segments posted solid operating earnings growth, with insurance seeing the largest gain year over year (owing to continued underwriting strength), the railroad unit posted a high-single-digit decline. When including the impact of the investment and derivative gains/losses, reported operating earnings decreased 64.2% to $12.7 billion from $35.5 billion in the prior year’s period.

Book value per share, which still serves as a decent proxy for measuring changes in Berkshire’s intrinsic value, increased 1.2% sequentially and 13.3% year over year to $347,932 (from $389,372 and $347,932 at the end of December 2023 and March 2023, respectively). The company closed out the first quarter with $189.0 billion in cash and cash equivalents, up from $167.6 billion at the end of last year (as free cash flow reached $6.2 billion in the quarter and the company sold on a net basis $17.3 billion of its stock holdings, while repurchasing $2.6 billion of its own shares). Berkshire, by our estimates, had around $147 billion in dry powder at the start of the second quarter of 2024

Berkshire’s Insurance Operations Show Improvement

Looking more closely at Berkshire’s insurance operations, which include Geico (personal auto insurance), Berkshire Hathaway Reinsurance Group (reinsurance), and Berkshire Hathaway Primary Group (specialty insurance). Geico’s top-line growth of 6.3% was slightly better than we expected during the March quarter compared with 2023, especially as it ended up being profitable growth in what has been a difficult environment for the US personal auto insurers. Earned premium growth was also up solidly at Berkshire Hathaway Reinsurance Group and Berkshire Hathaway Primary Group, aided in large part by price hardening in the property-casualty business.

BHRG’s earned premium growth in its property-casualty segment increased 5.6% year over year to $5.4 billion during the March quarter. While lower than our expectations for 8.8% growth, this was likely a reflection of both a hard pricing environment and the firm pulling back some from policies with inadequate levels of profitability. Meanwhile, earned premium growth for BHRG’s life/health segment was 15.9% year over year, which was better than our expectations for 3.8% growth. BHRG lapped results from 2023 that were suppressed because of the commutation of several US life contracts in the first quarter. As for BHPG, the division also reported a strong quarter of top-line growth, with earned premiums increasing 14.6% year over year.

Regarding underwriting profitability, Berkshire reported $3.3 billion in pretax underwriting earnings (reflective of an 84.5% combined ratio). This is compared with $1.2 billion (91.7%) in the year-ago period, exceeding what had been one of its best quarterly showings for profitability in the third quarter of last year, when the insurance operations reported $2.9 billion in pretax underwriting earnings and a combined ratio of 86.4%. Berkshire benefited from both a harder pricing environment in its commercial lines and reinsurance, and from having no meaningful losses from significant catastrophes in the first quarter, neither of which is likely to continue to be the case longer term.

Geico remained solidly in the black during the first quarter, as the company has increased pricing close to 10% during the past year. This decreased its policies in force by around 7% but improved its loss ratio to 72.4% from 83.0% in the year-ago period. The loss ratio decline reflected not only the impact of higher average premiums per auto policy, but also lower claims frequencies. These were partially offset by increases in average claims severities as well as less-favorable development of prior accident years’ claims estimates. The company’s expense ratio declined as well, hitting a record low of 8.7%, attributable to improved operating efficiencies and increased operating leverage, partially offset by increased advertising expenses.

While it looks like Geico has finally hit upon a formula for generating profitable growth on a more consistent basis, we think improved pricing has been a big part of this. Pricing could overshoot in the near term, setting up a period of continued strong underwriting profitability. We expect to see some mean reversion over time. By that, we are referring to mean reversion to Geico’s results before the company started to muddle things by chasing share during periods when most of its peers had pulled back on underwriting in response to rising claims costs. As such, we will be keeping an eye on where Geico goes from here.

As for BHRG, with catastrophe losses being nonexistent during the first quarter, the unit posted an underwriting gain for its property-casualty segment of $1.0 billion (leading to a combined ratio of 81.5%), compared with $390 million (and 92.4%) in the year-ago period. The life/health business also posted decent results, posting underwriting profits of $108 billion (with a combined ratio of 91.2%), compared with $137 million (and 87.1%) in the year-ago period. When including the results from BHRG’s retroactive reinsurance, periodic payment annuity, and variable annuity operations, BHRG reported an underwriting gain of $912 billion (with a combined ratio of 86.4%), compared with $231 million (and 96.3%) in the year-ago period.

BHPG also saw few catastrophe losses during the first quarter, with the insurance unit posting underwriting profits of $486 billion (with a combined ratio of 89.3%), compared with $268 million (and 93.2%) in the year-ago period. While we have seen underwriting margins for a lot of commercial property-casualty insurers plateau over the past year or so, BHPG continues to outperform. As the segment underwrites significant levels of workers’ compensation, commercial and professional liability insurance, with related claim costs that could be subject to high severity and long claim-tails, future liabilities could be greater than what we have seen of late.

Despite overall earned premium growth of 8.5% during the first quarter, Berkshire’s insurance float declined slightly to $168 billion when compared with the fourth quarter of 2023 ($167 billion) but was up from the year-ago period ($165 billion). We continue to believe Geico—despite its more recent issues—and BHPG will be the more consistent generators of insurance float for Berkshire as we move through the next five to 10 years. The growth potential that exists for BHPG’s specialty insurance unit supports our view. We should note, though, that these are more short-tail than long-tail businesses, with the float generated by the two insurance units usually invested in less-risky, liquid investments.

That said, it would not be a stunner if BHRG, which has more long-tail businesses whose float can be invested in riskier longer-term holdings, picked up some additional float in the near term. This is because the hard pricing environment for the reinsurance market seems to be holding. While we are unlikely to see a 30%-plus increase in rates this year like we did during 2023, early indications are that prices will rise low to midsingle digits this year, which is better than price declines, in our view. Much of the price hardening we have seen the past couple of years has been due to “persistent low levels of capital relative to risk.” This is the opposite of what we saw during much of the past decade, when the reinsurance market was flush with capital from the growth of supercatastrophe bonds, as well as private capital entering the market to underwrite risk.

Noninsurance Operations Post Weak Results

Berkshire’s noninsurance operations—BNSF, Berkshire Hathaway Energy, and the manufacturing, service, and retailing operations—usually offer up a more diversified stream of revenue and pretax earnings for the firm, helping to offset any weakness in the insurance business. It was the complete opposite in 2023, as well as the first quarter of 2024, as strong results from the insurance operations more than made up for less-than-stellar results from BNSF Railway and Berkshire Hathaway Energy. We already had a sense of how results were likely to look for BNSF, given that the other Class I railroads reported earnings late last month. Union Pacific Railroad is usually a good proxy for BNSF because both firms focus on the Western US market and have similar shipment profiles, but there were differences in their results during the most recent period.

For starters, BNSF’s preliminary first-quarter operating revenue decline of 4.1% was far worse than the 0.4% top-line decline at Union Pacific during the same period. BNSF’s revenue growth reflected a 9.9% decline in average revenue per car/unit (including fuel surcharges) and a 6.6% increase in volumes. Union Pacific, meanwhile, saw average revenue per car/unit (including fuel surcharges) decline 0.2% on top of a 0.5% decline in total volumes. So, while Union Pacific’s volumes were basically flat when compared with BNSF’s solid volume growth, it looks like BNSF sacrificed more in pricing to secure that business, which can’t be maintained as it had a negative impact on profit margins.

BNSF’s preliminary operating income declined 7.5% to $1.7 billion, with the railroad’s operating ratio declining to 69.5% from 68.4% in the year-ago period. Meanwhile, Union Pacific (which, unlike BNSF, has pursued precision scheduled railroading, or PSR, as a means of improving its profitability) reported an operating ratio of 60.7% for the March quarter.

Berkshire Hathaway Energy Revenue Declines

Normally a pillar of stability, Berkshire Hathaway Energy reported a 2.7% decline in first-quarter revenue on a preliminary basis. Its Berkshire Hathaway Homeservices real estate operations posted a revenue decline of 1.0% for the period, which was an improvement on the prior year’s 27.5% decline, as interest rates have stabilized over the past couple of quarters. Revenue from the energy/utilities operations was down 4.1% year over year, as higher retail customer rates for its regulated utilities in certain territories were offset by lower volumes and wholesale rates. Revenue from the unit’s other operations was stressed during the period.

Even so, BHE reported a 93.7% increase in preliminary pretax earnings to $432 million from $223 million in the year-ago period, as operating expenses declined year over year. That said, much of the decline was due to the unit’s lapping of estimated pretax loss accruals of $359 million (net of expected insurance recoveries) that were recorded in the first quarter of 2023 for wildfires in California in 2020 and Oregon in 2022. We expect this will need to be lifted over the next several quarters as BHE’s end-of-year estimation that its wildfire losses could be as high as $8 billion in the near to medium term (after already booking $2.4 billion of projected wildfire losses at the end of 2023). It will also need to account for a recent lawsuit from a group of 1,000 Oregon fire victims seeking $30 billion from PacifiCorp for actual losses ($5 billion for property damage) and noneconomic losses ($25 billion for emotional distress).

We view this as a blip in BHE’s overall results. We continue to believe that ongoing constructive rate-case outcomes will lead to EBITDA growth in a 4%-6% range on average annually over the next five years for its regulated US utilities, even as the company ramps up growth and operating capital expenditures. Also, we think the residential real estate and brokerage business will eventually recover off its recent lows as rates decline some over the next several years.