Berkshire Hathaway Q3 Earnings

Warren Buffett’s Berkshire Hathaway reported very strong Q3 earnings after the close yesterday (attached are the earnings release and 10Q).  Here are the highlights:

• ·        Operating earnings were up 37% to $3.8 billion, driven by a huge gain in insurance underwriting (from $199 million to $1,089 million, but $855 of this was a one-time gain due to “the reduction in estimated liabilities related to retroactive reinsurance contracts which was primarily attributable to lower than expected loss experience of one ceding company and from reductions in certain reinsurance liabilities that are settled in foreign currencies due to changes in foreign currency exchange rates.”).  Excluding this, insurance underwriting profits were up a healthy 18%.
• ·        Operating earnings of the non-insurance businesses rose 17% to $2.1 billion.  The single biggest noninsurance business, Burlington Northern, saw a 10% year-over-year increase in profits.
• ·        Net income declined 24% due to noncash derivative losses, primarily the equity index puts, reflecting declines in the world’s major stock markets during the quarter.  We believe these quarterly fluctuations can be ignored, as Berkshire doesn’t have to post collateral under any circumstances, the puts can’t be exercised before expiration, and the earliest expiration isn’t until June 2018 (extending as part as January 2026; the weighted average life of all contracts is 9.25 years).
• ·        Operating cash flow was $6.0 billion, offset by $2.2 billion of cap ex, meaning free cash flow was $3.8 billion, or $1.26 billion per MONTH pouring into Omaha for Buffett to allocate).
• ·        Buffett put a long of money to work during the quarter: he bought $6.9 billion of equity securities (and only sold $676 million), for a net of $6.2 billion.  He also completed the purchase of Lubrizol (“Acquisitions of businesses, net of cash acquired” was $7.8 billion in Q3) and invested $5 billion investment in BofA, so Berkshire’s cash (which earns nothing) declined by $12.6 billion to $30.6 billion.  This is great news.
• ·        Float declined 1% to $70 billion and book value, reflecting the derivative losses, declined a bit less than 2% to $96,876.
• ·        Berkshire did buy back some stock, even though the stock price jumped above Buffett’s limit of 1.1x book as soon as he announced the plan and never traded below it.  At today’s price of $115,806, the stock is 9% above the current maximum he’ll pay of $106,564.

Overall, this was a very strong quarter, as Berkshire’s operating businesses grew at a healthy double-digit rate, Buffett made some great investments, and there were no major super cat events that impacted insurance earnings.

Here’s the excerpt from the 10Q:

Disclosure: Long Berkshire Hathaway