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Stock Strategist

Berkshire's Diversification Offsets Insurance Losses

Greggory Warren, CFA

Despite a difficult third quarter, in which wide-moat-rated  Berkshire Hathaway’s (BRK.A)/(BRK.B) insurance operations were affected by $2.8 billion in catastrophe-related losses, our fair value estimate is unchanged at $290,000 ($193) per Class A (B) share. The more broadly diversified nature of Berkshire’s portfolio generally allows the company to offset losses in any one segment, which was the case in the third quarter, as strong results from its insurance equity portfolio and railroad operations, as well as solid results from the rest of its businesses, helped offset the insurer’s underwriting losses. From a valuation perspective, it helped that our modeling of Berkshire’s insurance operations had already included the possibility of large natural catastrophe losses, even though the exact timing of these events was unknown.

We use a sum-of-the-parts methodology to derive our fair value estimate for Berkshire. Following our updates to the different models we use to value the company, our valuation of the insurance operations decreased 3% to $94,200 ($63) per Class A (B) share, primarily because of the impact of this year’s large catastrophe losses. Our estimate for Kraft Heinz (KHC), which we value separately from the insurance operations, is $14,900 ($10) per Class A (B) share.

Greggory Warren, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.