Berkshire Hathaway: how Warren Buffet's money factory works
Booming profits from policies. Higher margins from Treasury investments and capital gains in equities. Recession risk on group's cyclical business
Key points
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On the one hand, the note - particularly for the media focus - cash and cash equivalents. On the other, the fact that the driving force behind profitability is the insurance business. All this with the stock on the stock exchange, which - so far - has withstood the recent Wall Street thud rather well. This is how one can take a snapshot of the state of the art of Berkshire Hathaway, the honding created by one of the biggest US investors: Warren Buffet.
P&L account data
The conglomerate just recently published the figures for the whole of 2024. As is always the case, among the many tables there is one that is more interesting than the others. In this case it is the breakdown - by division - of the so-called Operating earnings. That is to say: the operating profitability after depreciation, amortisation and taxes (not including, therefore, financial investments and interest expenses) recognised to the company's shares. Well: from the graph it emerges that the largest contribution to profits - beyond investment activity (see box below the graphs) - comes from the insurance sector, whose operating earnings settled at USD 9.02 billion (+66.17%). The increase is the consequence - in particular - of the growth in Geico's profitability. The latter reached 7.81 billion in so-called underwriting profit. That is: the difference between insurance premiums collected and costs incurred to pay claims and operating expenses. The result was achieved in what way? The US auto insurance company first took advantage of rate increases that led to a 7.8% rise in the average premium per policy. In addition, business was helped by a reduction in the frequency of claims. Lastly, not forgetting the increase in operational efficiency, which implied a reduction in costs.
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The World of Reinsurance
The reinsurance business itself also helped. Berkshire Hathaway Reinsurance Group recorded - also in 2024 - 2.73 billion in underwriting profits (it had been 1.9 billion two years ago). Here - among other things - the division was buoyed by a decline in liabilities on past claims and an improvement - in non-life business - in the loss ratio. By contrast, the performance of Berkshire Hathaway Primary Group was not positive. The latter - to which a number of independently managed insurance companies active mainly in the US are attributed - posted underwriting profits of € 855m. The figure, which represents a 35.4% drop from the $1.37bn realised in 2023, is the result of a mix of factors. Among others: the rise (+12.8%) in loss and loss adjustment expenses and the impact of catastrophe claims.
Tornadoes
Yes, catastrophic events. The latter, across the holding company's insurance sector, affected the accounts. The total losses, in 2024, were around more than 1 billion. These were losses (not in the technical sense) due - above all - to extreme events such as hurricanes Milton and Helene. Nevertheless, such facts - together with the increase in the average severity of claims in 2024 compared to 2023 - were more than counterbalanced by the overall strength of the business. Above all, at Geico. Hence the expansion of the profitability of the insurance sector in general, which also helped to support the share price on the stock exchange.
Rail transport
But it is not just a matter of policies. Another important part of Berkshire Hathaway's business is rail transport. The holding company owns Bnfs Railway. On this front the trend in profitability has not been positive: operating earnings have fallen by 1.1%. Why? The answer is articulated. The experts point out that - despite the increase in volumes handled - there has been a drop in tariff revenue (price paid for the transport of products) in the wake of a twofold factor. The first is the lower fuel surcharges applied to customers/users. The second is the change in the mix of goods transported: the demand for coal, which - in the rail business - guarantees higher margins, has plummeted in the face of the increased use of gas. Not only that. Profitability was also squeezed by the renewal of the collective labour agreement, which resulted in higher operating costs. In such a scenario Bnfs' profitability slowed down.
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