For Buffett, Hurricanes Rain on Berkshire's Quarterly Profit

Mother Nature took a toll on Berkshire Hathaway in the third quarter.

Natural disasters including Hurricanes Harvey, Irma and Maria hit Warren Buffett’s insurance-focused conglomerate hard, dragging down earnings by almost $2 billion and overshadowing positive results elsewhere.

A surge in insurance claims led to the third consecutive quarterly underwriting loss, putting Berkshire on track to have an annual loss by that measure for the first time since 2002.

Before this year, Berkshire’s insurance businesses had posted $18bn in underwriting income since 2002. They’d also accumulated more than $90bn in float, the premiums that carriers get to invest while waiting to pay claims. That’s been essential to Berkshire’s success, by giving the company a pile of cash to fuel Buffett’s stock picks and acquisitions.

It was a different story in the third quarter. Operating earnings at the conglomerate plunged 29 per cent to $3.4bn in the period, in large part because of natural disasters, according to a statement on Friday. On a per share basis, the company missed analysts’ estimates.

“I was anticipating a big number,” but this was higher than I thought we’d see, said Jim Shanahan, an analyst at Edward Jones. Still, he said, investors should be focused on the potential for Berkshire and other insurers to raise prices going forward.

The damage at Berkshire’s insurance businesses was widespread. Its namesake reinsurance group absorbed the largest share of the storm costs, as well as expenses related to an earthquake in Mexico. But there were also underwriting losses at Geico and Gen Reinsurance. The primary group, which includes several carriers, posted an underwriting profit.

The insurance industry is expected to shoulder as much as $120bn in claims from one of the worst hurricane seasons on record, according to estimates from catastrophe modeling firm RMS.

Carriers from American International Group to Chubb have also racked up big claims costs. Travelers Companies temporarily suspended its share-buyback program while it assessed storm damage. Munich Reinsurance, the world’s largest reinsurer, said it expected to report a third-quarter loss because of natural disasters.

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AIG expects third-quarter catastrophe losses of about $3 billion

As natural disasters increase, insurance industry feels strain

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The picture at Berkshire wasn’t all negative. The company is more diversified than its competitors in the insurance industry. Earnings at its railroad, BNSF, rose slightly on higher freight volumes. Berkshire said Friday that growth in volume moderated in the third quarter and is expected to moderate further in the last three months of the year.

Berkshire’s collection of electric utilities and other energy businesses also posted gains. Earnings from a group of businesses that includes NetJets, Duracell, Fruit of the Loom and Dairy Queen were almost flat.

“The thing that struck me was how mediocre the rest of the businesses did,” Cathy Seifert, an equity analyst at CFRA Research, who has a hold rating on Berkshire, said in an interview. “That’s a little lame in this environment.”

On a net basis, earnings fell by more than 40 per cent to $4.1bn. The figure includes derivative and investment marks that can jump widely from quarter to quarter. As a result, many investors ignore them when evaluating the business. Berkshire has said the fluctuations are “usually meaningless.”

One figure that shareholders do care about is book value, a measure of assets minus liabilities, that’s often used to evaluate how expensive or cheap the company trades. The figure continued to climb in the quarter and ended September at $187,435 per Class A share.

While Berkshire’s stock is trading near all-time highs, investors are waiting to see what Buffett will do next with his cash. At the end of September, his war chest totaled a record $109bn.

The billionaire has struggled some on the deal front this year. In February, Berkshire was ready to commit billions to help Kraft Heinz in a proposed buyout of Unilever. The Anglo-Dutch consumer goods giant rejected the approach, and the pursuit was quickly abandoned. A few months later, Berkshire Hathaway Energy agreed to buy Texas’s largest power distributor only to be outbid later by Sempra Energy.

Last month, however, Berkshire announced a deal to eventually acquire control of the Pilot Flying J truck stop chain. Deal terms weren’t disclosed at the time or in the quarterly filing.