BERKSHIRE HATHAWAY INC. (10-Q)

Berkshire Hathaway’s Diverse Businesses Deliver Strong Results

Berkshire Hathaway, the conglomerate led by legendary investor Warren Buffett, has reported impressive financial results for the first half of 2024. The company’s diverse array of subsidiaries, ranging from insurance to railroads to manufacturing, have collectively generated substantial earnings and cash flow, underscoring the strength and resilience of Berkshire’s business model.

Insurance Segment Shines

Berkshire’s insurance operations, which include GEICO, Berkshire Hathaway Primary Group, and Berkshire Hathaway Reinsurance Group, were a standout performer in the first six months of 2024. The insurance underwriting segment reported a 118% increase in pre-tax earnings compared to the same period in 2023, driven by improved results at GEICO and the absence of significant catastrophe losses.

GEICO, Berkshire’s auto insurance subsidiary, saw its pre-tax underwriting earnings more than triple in the first half of 2024, as higher average premiums, lower claims frequencies, and improved operating efficiencies more than offset increases in average claims severities. The Berkshire Hathaway Primary Group, which offers a variety of commercial insurance solutions, also reported strong results, with pre-tax underwriting earnings up 42% year-over-year.

The Berkshire Hathaway Reinsurance Group, which provides property, casualty, life, and health reinsurance coverage globally, experienced a 60% increase in pre-tax underwriting earnings in the first six months of 2024. This was primarily due to lower catastrophe losses and favorable development of prior accident year claims estimates.

Railroad and Utility Businesses Remain Steady

Berkshire’s railroad subsidiary, BNSF, and its energy subsidiary, Berkshire Hathaway Energy (BHE), continued to contribute solid earnings to the conglomerate’s bottom line.

BNSF’s pre-tax earnings declined 3.8% in the first half of 2024 compared to the same period in 2023, as the railroad faced higher litigation-related costs, which were partially offset by improved employee productivity and lower operating expenses. BNSF’s freight volumes increased 5.4% year-over-year, driven by strong growth in consumer products and agricultural shipments, though coal volumes declined.

BHE’s net earnings attributable to Berkshire Hathaway shareholders increased 12.3% in the first six months of 2024. The utility’s U.S. operations saw higher earnings, reflecting increased retail customer rates, higher retail volumes, and greater income tax benefits from wind production tax credits. BHE’s natural gas pipeline business also reported stronger results, while the real estate brokerage operations experienced a decline in earnings due to litigation-related costs.

Manufacturing, Service, and Retailing Segments Face Headwinds

Berkshire’s manufacturing, service, and retailing businesses, which include a diverse array of industrial, consumer, and retail operations, faced some challenges in the first half of 2024.

The manufacturing segment reported a 5.8% increase in pre-tax earnings, with strong performance from the industrial products and consumer products groups offsetting declines in the building products group. The industrial products businesses, such as Precision Castparts and Lubrizol, benefited from higher demand and improved operating efficiencies, while the consumer products group, including Forest River and Brooks Sports, saw increased revenues and earnings.

However, the building products businesses, including Clayton Homes and the company’s other building materials operations, experienced a 1.7% decline in pre-tax earnings, as higher costs and lower gross margins offset the impact of increased revenues.

The service and retailing segments reported a 19.9% decline in pre-tax earnings. The service businesses, such as NetJets and TTI, saw a 26.3% drop in pre-tax earnings, primarily due to lower sales and increased costs. The retailing businesses, including Berkshire Hathaway Automotive and the home furnishings retailers, also faced challenges, with a 20.6% decline in pre-tax earnings, as they grappled with lower sales, increased competition, and higher operating expenses.

Investment Gains Contribute to Volatile Earnings

As is typical for Berkshire, the company’s investment portfolio played a significant role in its overall financial performance. Investment gains, which include both realized and unrealized gains and losses on the company’s equity securities, contributed $20.2 billion to Berkshire’s net earnings in the first half of 2024, compared to $53.3 billion in the same period of 2023.

These investment gains and losses can be highly volatile from period to period, as they are largely driven by changes in the market prices of Berkshire’s equity holdings. Buffett has long cautioned that these investment gains and losses are often “meaningless” in terms of understanding the company’s underlying operating performance and should not be the primary focus for investors.

Strong Balance Sheet and Ample Liquidity

Berkshire’s financial position remains exceptionally strong, with shareholders’ equity reaching $601.7 billion as of June 30, 2024, an increase of $40.4 billion since the end of 2023. The company’s insurance and other businesses held $271.5 billion in cash, cash equivalents, and U.S. Treasury Bills, providing ample liquidity to support the company’s operations and investment activities.

Berkshire’s total consolidated borrowings stood at $123.6 billion as of June 30, 2024, with the majority of the debt issued by the parent company, BNSF, and BHE. The company continues to maintain a conservative financial profile, with a focus on preserving financial strength and flexibility.

Outlook and Risks

Berkshire’s diverse business model and strong financial position have enabled the company to navigate various economic and market conditions over the years. However, the conglomerate is not immune to the broader macroeconomic and industry-specific challenges that can impact its subsidiaries.

The company’s insurance operations, for example, remain susceptible to the timing and magnitude of catastrophic events, which can significantly affect their underwriting results. The manufacturing, service, and retailing businesses may continue to face headwinds from factors such as supply chain disruptions, labor shortages, and changing consumer preferences.

Additionally, Berkshire’s investment portfolio, while a significant contributor to the company’s overall performance, can also be a source of volatility due to the inherent unpredictability of equity markets. Buffett has cautioned that investment gains and losses are often “meaningless” in terms of understanding the company’s underlying operating performance.

Despite these potential risks, Berkshire’s management remains confident in the company’s ability to navigate the challenges and capitalize on new opportunities. The conglomerate’s decentralized structure, strong balance sheet, and disciplined capital allocation approach have served it well over the years, and investors can likely expect Berkshire to continue its track record of solid long-term performance.