Berkshire Hathaway Investments Beat Expectations

Berkshire Hathaway released its first-quarter earnings, beating analyst expectations on revenue and earnings.

The company posted a 12.6% increase in operating profit, including a 68% increase in insurance investment income. Q/Q net earnings grew from $27.4b to $35.5b. However, most of those net earnings are in the form of unrealized investments and derivative gains.

After six quarters of losses, auto-insurer Geico reported earnings of $703 million, with higher average premiums and lower advertising spending contributing to the gain even as claim frequencies fell. This positive development added to the conglomerate's operating profit of $8.07 billion, up almost 13% from the same period last year.

Geico's turnaround follows a challenging period for the underwriting business due to inflationary pressures on the cost of materials and labor. Geico has also been under pressure from competitors such as Progressive Corp. and Allstate Corp. CFRA analyst Cathy Seifert highlighted that Geico's top-line growth of less than 1% "significantly lags peers," and she suspects that rate hikes to offset claim cost inflation are being met with policy cancellations.

However, Geico's profit helped boost Berkshire's collection of insurance underwriting businesses to deliver $911 million in profit, compared with $167 million a year earlier. The acquisition of Alleghany Corp. for $11.6 billion also added to Berkshire's list of insurers.

Meanwhile, Burlington Northern Santa Fe grew its sales from $5.97 billion to $6.02 billion (despite a 10% drop in freight volume Y/Y), and Berkshire Hathaway Energy rose from $6.02 billion to $6.45 billion.

Yet, it is important to note that recent acquisitions boosted total revenues. Without acquisitions such as Alleghany or Pilot Travel Centers, total Q1 revenue would have declined on a Y/Y basis.

Despite turbulent markets that offered fewer promising deals, Berkshire bought back $4.4 billion of stock, an increase from the same period last year, as valuations in public markets made it more challenging for CEO and Chairman Warren Buffett to identify acquisitions.

At the end of Q1 2023, around 77% of the company's equity holdings were concentrated in 5 companies, growing from 75% in Q4 2022. These companies are Apple ($AAPL), Bank of America ($BAC), American Express ($AXP), Coca-Cola ($KO), and Chevron ($CVX).

Apple's share grew to $151 billion. “It just happens to be a better business than any we own,” Buffet said, justifying the reason for one particular stock attributing to almost half of the equity portfolio.

After adding more than 3.7 million shares of Occidental Petroleum ($OXY) and bringing the stake up to 23.6%, many investors wondered whether Berkshire Hathaway would buy a fully controlling stake.

Buffett dismissed such thoughts.

“We wouldn't know what to do with it,“ Buffett said, adding that he's confident in OXY's management.

“We may or may not own more, “ he added, keeping the options open. Besides a sizable stake, Berkshire also owns warrants to buy $5b of common stock at $59.62, below the recent OXY prices.

As a long-time bank investor, Buffett praised the government’s intervention in the recent Silicon Valley Bank failure.

"It would have been catastrophic," Buffett said of a situation where the government didn't act, according to NBC News. He argued that refusing to guarantee all SVB deposits risked a "run on every bank in the country" and, by extension, a threat to the global financial system.

Besides a 13% stake in Bank of America, Berkshire has a 3.2% stake in Bank of New York Mellon, a 2.8% stake in Citigroup, and a 0.5% stake in U.S Bancorp.

Berkshire Hathaway has never been a technology-oriented company. In fact, outside of Saudi state oil enterprise Aramco, it is the largest non-tech company in the world. Still, Buffett and his partner Charlie Munger had opinions about the latest hot trend, artificial intelligence.

Buffett acknowledged AI “can do amazing things” but asserted it could never replace people like Ajit Jain, head of Berkshire’s insurance operations.

Munger was more reserved about the ongoing hype. “I think old-fashioned intelligence works pretty well,” he added skeptically.

Finally, Buffett reflected on the dollar's status, supporting the world's reserve currency.