Warren Buffett’s Berkshire Hathaway posted gains in operating profit as strength in its insurance businesses helped counter inflationary pressures that have weighed on the sprawling conglomerate in the past year.
The firm reported $10.04 billion of operating profit for the second quarter, surpassing the $9.28 billion from the same period last year. The results were largely driven by a 74 per cent increase in insurance underwriting earnings to $1.25 billion, as it trimmed expenses at car insurer Geico and benefited from its acquisition of underwriter Alleghany.
Berkshire posted stronger results despite Mr Buffett cautioning at its annual meeting in Omaha in May that profit at the majority of its operating units could fall this year as an “incredible period” for the US economy draws to the end.
Still, the Federal Reserve’s aggressive pace of rate increases has helped the firm reap greater yield on the cash it stockpiles primarily in short-dated US Treasuries. That cash hoard reached $147.4 billion in the quarter, the second-highest level in data going back to 2014.
On Thursday, Mr Buffett said Fitch Ratings’ downgrade of US government debt would not diminish his appetite for it. Berkshire’s cash pile included $120.4 billion invested in US Treasury bills, according to a company filing on Saturday.
One business that performed worse was its railway unit BNSF, where profit fell 24 per cent as freight volumes dipped and an increase in headcount and wage inflation contributed to higher costs for compensation and benefits.
The company’s Geico insurance unit, which struggled with unprofitability throughout last year, posted positive results for the second quarter in a row. Berkshire cited a benefit from higher premiums over the past year and lower claim frequencies, as well as a reduction in advertising spending.
Still, in the past 12 months policies-in-force decreased by 2.7 million, suggesting the cuts to advertising spending are costing the conglomerate’s car insurer market share.
The conglomerate has struggled with a high-class problem: a surplus of cash and nothing to spend it on as elevated public-market valuations deprive the billionaire investor of acquisition targets. Higher interest rates will have taken some pressure off holding that cash, according to Bloomberg Intelligence.
“Berkshire Hathaway’s diverse businesses contribute to long-term earnings power; a slowing economy and inflation are risks but the company largely has shrugged them off to date," Bloomberg Intelligence's senior industry analyst Matthew Palazola and its associate analyst Eric Bedell said.
"CEO Warren Buffett said operating companies’ earnings could decline this year but a significant rise in interest income would be an offset."
The dearth of opportunity has led Berkshire to pursue share buy-backs at a more aggressive pace, a strategy Mr Buffett once shunned. But the company’s Class B shares are nearing a record high, representing a potential impediment to that strategy. Berkshire spent $1.4 billion in the quarter on share buy-backs.
A value investor such as Mr Buffett “will tend to get a little frustrated with where valuations are”, said Cathy Seifert, an analyst with CFRA Research. “There’s an interesting inflection point here in terms of asset allocation within the investment portfolio, and I think people are going to be watching.”
The company was also a net seller of equities in the quarter.