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Berkshire's Profit Surges on Big Investment Gain

Warren Buffett speaks at the Fortune's Most Powerful Women's Summit in Washington.
ENLARGE

Warren Buffett speaks at the Fortune’s Most Powerful Women’s Summit in Washington.


Photo:

Reuters

By

Anupreeta Das

Updated Nov. 6, 2015 6:29 p.m. ET

Berkshire Hathaway Inc.
BRK.A


-0.78
%




more than doubled its third-quarter profit on an investment gain tied to its ownership stake in Kraft Heinz Co., overshadowing weakness in its core insurance underwriting business where profit dropped.

The Warren Buffett-led company’s operating profit fell 3.7%, driven partly by lower income at its insurance underwriting business, which includes Geico Corp., the country’s second-largest auto insurer. Operating profit excludes the impact of investment results such as the Kraft Heinz gain.

Underwriting profit at its insurance division fell 34% to $414 million from a year ago. Geico reported a lower underwriting gain as it paid out more in claims. This year, Geico has seen the frequency of customer claims go up in all of its major coverage areas, including property damage and collision coverage. The severity of claims also rose, Berkshire said.

The results mirrored those at Geico rival Allstate Corp.
ALL


0.82
%




, which said earlier this week that its auto underwriting income fell during the third quarter because claims continued to increase. Allstate and Geico are among insurers that have raised prices in response.

Underwriting results at Berkshire’s two reinsurance units, General Re and Berkshire Hathaway Reinsurance Group, were also hurt by an explosion in Tianjin, China, with the two businesses incurring losses of about $130 million collectively.

Meanwhile, dividend and interest income from investments made by its insurance companies rose during the quarter, helping offset the underwriting results. Berkshire owns dividend-paying preferred stock in companies such as Bank of America Corp.
BAC


3.70
%




and Burger King owner Restaurant Brands International Inc.
QSR


-2.43
%




. In addition, it has a stock portfolio of more than $110 billion, and its common-stock holdings include International Business Machines Corp.
IBM


-0.25
%




, Wells Fargo
WFC


1.80
%




& Co. and others.

Berkshire suffered big paper losses during the third quarter on its IBM position. Last month, the software and services giant said its revenue fell 14% during the quarter and gave a weaker earnings outlook. In its third-quarter report, Berkshire said it incurred a $2 billion book loss tied to its IBM stake, which was valued at $11.7 billion as of Sept. 30. It said it has no plans to sell its IBM shares and expects that the investment will eventually recover. Of Berkshire’s 10 top stock holdings, according to regulatory filings, only two have increased in value over the past 12 months, Wells Fargo and General Motors Co.
GM


0.87
%




The company’s book value, a measure of net worth, rose 3.3% to $151,083 a Class A share for the first nine months of the year, compared with a 7.1% increase in the year-ago period.

Mr. Buffett has said he prefers to drive Berkshire’s growth by acquiring new businesses rather than investing in stocks or relying on its insurance operations. It already pulls in income from a railroad, utilities, industrial and apparel manufacturers, home builders and even an auto dealership. Operating profit from these non-insurance businesses rose 5.2% to $3.4 billion.

In August, Berkshire struck its biggest-ever deal—the $32 billion takeover of aerospace parts supplier Precision Castparts Corp.
PCP


-0.11
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That deal is expected to close next year.

The big investment gain from Kraft Heinz is tied to the merger of the two food companies, which closed in July. Berkshire had said last quarter it expected to record a noncash pretax gain of about $7 billion in the third quarter because of the way it has to record its holding on its books under accounting rules. The after-tax gain is $4.4 billion.

Thanks to Kraft Heinz, Berkshire’s net income surged to $9.43 billion, or $5,737 a Class A share, compared with $4.62 billion, or $2,811 a share, a year earlier. Revenue rose 15% to nearly $59 billion.

Its operating profit was $4.55 billion or $2,769 a Class A share, compared with $4.72 billion or $2,876 a share, in the year-ago period. Analysts surveyed by Thomson Reuters projected operating earnings of $2,720.60 a share and revenue of $61.19 billion.

Class A shares, down about 10% this year, edged down 0.1% in after-hours trading.

Write to Anupreeta Das at [email protected]

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