Berkshire Hathaway (BRK.A) (BRK.B), the company owned by Warren Buffett (Trades, Portfolio) reported net profit increase by 10% in the first quarter 2015, mainly due to gains in investment income in its insurance division and significantly improved performance in its railroad business. The company reported its Burlington Northern Santa Fe railroad, which functions as one of the largest freight networks in the country, benefitted from the investments to upgrade its system, expansion in lines and hire more employees. Moreover, lower fuel costs and a less severe winter also benefitted the company.
Last year, BNSF struggled with substandard performance mainly due to severe harsh weather and consumer demand. Demand for railroad services was growing faster than the railroad would handle and the public was buying into it.
The company also owns interest in Berkshire Hathaway Energy, another key segment of the company. Net earnings with utilities and renewable power operations declined 7% in the first quarter of 2015 to $421 million. This is due to lower revenue as mild weather in some markets affected the results in the energy segment, which accounted for $4.3 billion in revenue. The outcome of the results suggest the benefits of the company’s diversified business model in which some segments are doing well while other segments offset the other areas, which are not performing in the company.
Besides that, the results of the first quarter 2015 were announced at a time when the investors were preparing to celebrate the company’s 50 year anniversary. Warren Buffett (Trades, Portfolio) pressed the issue saying that 50 years of a profitable partnership, which has transformed the company from a New England small textile mill to a well-diversified investment holding company dealing in stocks and operates different businesses under the umbrella of the company’s platform, is still showing significant performance.
In addition, at the company core business is an insurance business, which includes operations like large reinsurers General Re, Berkshire Hathaway Reinsurance Group and auto insurer Geico. These businesses bring in billions of dollars in float, which they generate as an upfront premium customers pay. Furthermore, that reserve money does not need to pay out soon and it is paid much later so the company is able to invest that money for its own benefit. Over the past five decades, Buffett used the float to fund the company’s expansion into a number of businesses.
In the first quarter 2015, the company held $83.5 billion of float, which is down from $500 million as reported in 2014. Besides this, it has an investment income, which is the amount generated by the assets the company holds by investing its float. The investment income rose to $875 million in the first quarter 2015, which is up 22% from the same period reported last year. Moreover, so did the insurance underwriting profit, which is a measure of premiums earned after expenses and losses. The insurance underwriting profit rose to $480 million in the first quarter 2015 when compared to $461 million reported in the same period last year. In analyzing the performance of Geico, which is the country’s second largest auto insurer, profits were not what were expected because of an increase in the number of claims during the first quarter 2015 and also higher average cost on those claims filed during the period. The Berkshire insurance business accounted for a smaller share in the total operating profits in recent years as the owner Warren Buffett (Trades, Portfolio) has gained outright ownership of businesses compared to investing in securities or stocks.
Berkshire business segment BNSF has accounted for $5.6 billion of the company’s total revenue of $48.6 billion in the first quarter 2015 compared with $5.4 billion out of $45.4 billion last year. The railroad accounted for $1 billion profit in the first quarter 2015, which is one fifth of the company’s total profit of $5.2 billion.
Will Berkshire pick up the pace? Only time will tell as the company jostles to ride the high waves. If the company can grow its profits significantly, staff members and investors will have something to rejoice about.
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