For the second quarter, Warren Buffett (Trades, Portfolio)’s insurance conglomerate Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) announced Friday a decline in net earnings on shrinking investment gains, losses on derivatives and insurance underwriting, dropping its share price 1.23% by Monday morning.
Net earnings represented the weak point in Berkshire’s headlining numbers for the second quarter. Buffett’s second-quarter net earnings totaled $4.26 billion, compared to second-quarter 2016 net earnings of $5.0 billion. The earnings were on increased second-quarter revenue of $45.71 billion, compared to second-quarter 2016 revenue of $43.39 billion. Berkshire’s book value increased 6.2% since the end of 2016, and its cash position ballooned to $107 billion.
One of Berkshire’s biggest negative contributors to earnings was its insurance businesses. Insurance underwriting fell to a loss of $22 million from a gain of $337 million in the second quarter the previous year. The losses stemmed from a $122 million negative impact of foreign currency exchange rates on revaluation of its foreign-currency liabilities. A re-estimation of its liabilities for losses in previous years, higher losses for catastrophes in 2017 and increased deferred charge amortization on retroactive reinsurance contracts led to lower profits in underwriting.
At one of his insurance businesses, GEICO, premiums written in the second quarter increased 16.7%. Pre-tax gains at the insurer declined, causing pre-tax underwriting gains to fall to $119 million from $150 million as claim costs grew faster than premiums earned.
Meanwhile, at General RE, property and casualty premiums earned rose 25% to $153 million due to higher written premiums, largely on new business and renewals. The greater reinsurance industry, however, saw increased competition and tighter pricing. “We continue to decline business when we believe prices are inadequate,” Berkshire wrote in a filing.
At Berkshire Hathaway Reinsurance Group, pre-tax underwriting losses grew to $400 million, compared to $184 million in gains a year ago, led by losses in retroactive reinsurance. Berkshire lost $102 million in the segment due to foreign currency exchange rates and $229 million from retroactive reinsurance contracts due in part to an AIG agreement dating from December. The company also said it expects pre-tax deferred charge amortization for full-year 2017 in the area of $975 million.
Buffett reiterated in his earnings release that he considers investment and derivative gains and losses, another substantial drain on second-quarter results, “usually meaningless” for understanding Berkshire’s results in the short term. Investment gains and losses consist of the sale, redemption or exchange of investments, and timing contributes little to Buffett’s investing decisions but can have a sizable impact on a quarter’s earnings.
After-tax investment and derivative gains contracted to $143 million from $394 million in the second quarter the previous year as investment and derivative gains slipped. The favorable results in 2016 included a pre-tax gain of $610 million on redemption of Kraft Heinz preferred stock for $8.32 billion in cash.
Further eroding results were $65 million in derivative losses, compared to $20 million in gains the prior-year quarter.
A section called “other” hit Berkshire with a $292 million loss, compared to $149 million in gains in last year’s second quarter. The category included $342 million in exchange-rate losses in revaluation of debt in euros, following second-quarter 2016 results that included $101 million in foreign currency exchange rate gains.
Berkshire repurchased no stock in the first half of 2017 and maintained its mandate to repurchase Class-A and Class-B common stock at prices less than 20% above book value.