No. of Recommendations: 5
“ headlines and commentary scream about a reported $2.95 billion, 6.2% "collapse" in 2025 operating earnings, largely due to weak insurance results. An erroneous decline in Berkshire’s cash balance is also reported. As usual, most comments and news stories fail to actually consider the financial statements, the MD&A and the footnotes.
Start with GEICO, where pre-tax underwriting earnings “tanked” 12.7%. On further review, GEICO’s underwriting expenses and ratio climbed $1.4 billion from 9.7% to 12.4%. Operating inefficiency? Hardly. Auto insurance pricing remains phenomenal. GEICO massively cranked up advertising expense, growing premiums earned and policies-in-force by more than 5%. Growth was not via price increases but volume. GEICO’s combined ratio climbed to 84.7% from 81.5%, simply meaning pre-tax underwriting margins were 15.3%, lower than a year ago but still extraordinary. The company targets about 4%. Profits remain near record levels. Margins will undoubtedly shrink over time as no insurance commission will grant price increases while industry profits remain historically high. Loss ratios will deteriorate, and price competition will work industry profitability lower. But in the meantime, 2025 was a second banner year at GEICO. More than $1 billion of Berkshire’s overall $2.95 billion decline in operating earnings was from the auto insurer stepping on the advertising gas pedal.
Next, consider the property/casualty reinsurance business where pre-tax underwriting earnings “plunged” 16.6% from $3.80 billion in 2024 to $3.17 billion in 2025. The reinsurance industry has been extremely profitable over the last three years, attracting new capital (too much capital) willing to compete on price. Berkshire is one of the few underwriters willing to shrink volume, even dramatically, when pricing is poor. Written premiums declined 7.9% during the year to $20.17 billion. This is how to do it and why Berkshire’s insurance operation is the best in the world. But why the plunge in underwriting earnings? Losses and loss adjustment expenses were reduced $1.1 billion in 2025 versus a higher $1.7 billion in 2024. In other words, property losses for prior years’ accident claims were lower than originally expected, but by $600 million less in 2025. This is POSITIVE reserve development in both years. Nearly ALL of the plunge in underwriting is simply management was too conservative, but by less. No doubt with too much competition the P/C reinsurance operation will write even less volume in 2026, but this is what you want. It’s how Berkshire got to be Berkshire.
Finally, a big chunk of the $2.95 billion collapse in Berkshire operating earnings is from reported currency translation. Operating earnings include a $642 million 2025 loss on foreign currency exchange versus a $1.1 billion gain in 2024. The $1.74 difference should be properly excluded when assessing operating earnings. The translation gains and losses are on the value of foreign currency debt outstanding. Berkshire has debt denominated in mostly yen and also euros and pound sterling. The debt financed investments. Berkshire’s investments in five Japanese trading companies were finance with yen borrowings at a 1.2% interest rate. During quarterly and annual reporting intervals, when the dollar appreciates against the yen, it harms the value of the stock investments but helps the value of debt outstanding by the same offsetting amount. Foreign currency gains and losses are included in translating the market value of the stocks and GAAP earnings, but gains and losses on the stocks are excluded from reported operating earnings. Thus, while currency movements are real, they are non-operating, and as applied to Berkshire’s foreign debt outstanding should be excluded from any change in operating earnings.
These three considerations for GEICO, P/C reinsurance and currency offsets $3.17 billion of the $2.95 billion after-tax collapse in operating earnings for the year. $3.17 billion happens to be greater than $2.95 billion.
At last, Berkshire’s cash balance is widely reported to have fallen from $381.7 billion at 9/30 to $373.3 billion. No. The widely reported $381.7 billion cash figure at 9/30 neglects a $23.2 billion T-bill payable. Cash totaled $358.4 billion on 9/30, not $381.7 billion. Cash at year-end rose to a record $373.1 billion, which is net of a tiny $167 million payable for T-bills purchased on the last day of the year.
I’ll spare any additional commentary. There’s plenty on Berkshire and plenty of other in the Semper annual letter which we released on Wednesday and posted to the website. Huge thanks for all of the kind words already about the letter. I look forward to seeing everyone who makes it to Omaha this year.“
