No. of Recommendations: 16
Notes on Q3 2023 v Q2 2023 Earnings Before Tax.
Non-insurance earnings before tax in Q3 v Q2 were flat, if you exclude BHE. Including BHE (with its wildfire provisions) there was a decline of £863 million or 11% from $7,849 million to $6,986.
BNSF held steady at $1.6 billion (*23%).
Manufacturing Industrial Products down 6% to $1,427 million (*20%)
Manufacturing Building Products down 5% to $1,167 million (*17%)
Services down 6% to $772 million (*11%)
Retailing down 5% to $414 million (*6%)
Manufacturing Consumer products up 36% to $483 million (Jazwares acquisition and improved earnings of the apparel and footwear businesses) (*7%)
*EBT as a percentage of non-insurance EBT
Investment income was flat Q on Q at $2,933 million ($2,912 million in Q2).
A decline in non-insurance EBT of $863 million (including non recuring wildfire provisions) was more than offset by insurance underwriting.
GEICO EBT up $539 million
BH Reinsurance up $610 million
BH Primary Group up $238 million
Total EBT of the insurance businesses increased by $1.4 billion.
Total EBT of the insurance businesses were $5.9 billion, compared to $7 billion for the non-insurance group in Q3.
In the 9 months to 30th September 2023, there were net equity sales of $24 billion; no major new acquisitions; no major share buybacks; and the cash pile grew to $157 billion.
My personal impressions
Berkshire is a diversified group of businesses and assets. There is some weakness in the general US economy and that is reflected in the small the Q on Q earnings declines in the non-insurance businesses. Although it is good to see the large profit contributor, BNSF, not declining any further, following issues earlier this year. Insurance had a great Q with the hurricane policies paying of and GEICO doing well. The wildfire legal case and the HomeServices new legal case, are a reminder that things happen and there are always risks and unknows waiting for you, be they political, climate, management etc. and it is a great thing that Berkshire is a good corporate citizen and run extremely prudently. Or is this a sign that Berkshire is a political target with deep pockets and at risk from climate change...maybe investors should limit themselves to e.g. 50% max concentration in Berkshire these days, just in case!
There is certainly some fire power to deploy capital, if the investment landscape changes dramatically over the next 18 months. The share portfolio shrank a little, due to sales and market sentiment, rather than any major change in the prospects for the major portfolio companies.
Critically, Berkshire continues to demonstrate that it is a world class underwriter.
Cut and paste extracts from the 10-Q below, but comments are comparing to prior year, so not so relevant to the above Q on Q numbers.
Relatively low catastrophe losses.
Improved results at GEICO. GEICO's pre-tax underwriting earnings in the first nine months of 2023 reflected higher average premiums per auto policy, lower claims frequencies, reductions in prior accident years' claims estimates and a reduction in advertising costs. However, average claims severities continued to rise in 2023.
Railroad operating revenues declined 12.4% in the third quarter and 7.7% in the first nine months of 2023 compared to 2022, reflecting lower volumes of 4.8% in the third quarter and 8.7% in the first nine months. Average revenue per car/unit decreased 7.1% in the third quarter due to decreased rates per car/unit and lower fuel surcharge revenue, partially offset by favorable changes in business mix. Average revenue per car/unit increased 1.6% in the first nine months of 2023, resulting from higher yield. BNSF's pre-tax earnings were $1.6 billion in the third quarter and $4.9 billion in the first nine months of 2023, declines of 14.6% and 16.6%, respectively, compared to 2022.
Earnings of BNSF declined 15.3% in the third quarter and 16.6% in the first nine months of 2023 compared to 2022. The decreases were primarily attributable to lower overall freight volumes and higher non-fuel operating costs, partially offset by lower fuel costs.
PacifiCorp increased its liability for estimated pre-tax probable Wildfire losses, before expected related insurance recoveries, by $1.4 billion in the third quarter and by $1.9 billion in the first nine months of 2023. After-tax earnings of BHE declined 68.9% in the third quarter and 46.3% in the first nine months of 2023 compared to 2022. The earnings decline in the first nine months reflected lower earnings from the U.S. regulated utilities, reflecting increased wildfire loss estimates, as well as lower earnings from other energy businesses and real estate brokerage businesses.
Business acquisitions, including AP Emissions Technologies and three former Alleghany businesses: Kentucky Trailer, Wilbert Funeral Services, Inc. and Wilbert Plastics Services, accounted for $291 million and $886 million of comparative revenue increases in the third quarter and first nine months of 2023, respectively.
To date, IMC's operations in Israel have not been significantly impacted by the terrorist attack on Israel on October 7, 2023 and the ongoing conflict.
While results of certain industrial products manufacturers and services businesses improved versus 2022, results of several of our building products, consumer products, service and retailing businesses deteriorated.
PCC's pre-tax earnings increased 43.1% in the third quarter and 32.5% in the first nine months of 2023 compared to 2022. The improved results in 2023 reflect the increases in sales and improving manufacturing and operating efficiencies. We continue to strive to improve manufacturing efficiencies, maintain safety and prepare for increasing demand for PCC's products. Continued growth in PCC's revenues and earnings will be predicated on the ability to successfully increase production levels to match the expected growth in aerospace product demand.
Lubrizol's pre-tax earnings declined 41.2% in the third quarter and 19.8% in the first nine months of 2023 compared to 2022. Earnings in 2022 included insurance recoveries of $142 million in the third quarter and $242 million in the first nine months in connection with fires at certain production facilities in 2021 and 2020. Fire insurance recoveries in the first nine months of 2023 were $11 million. Excluding insurance recoveries, earnings in the third quarter of 2023 were higher due to lower raw material costs partially offset by the impact of lower sales volumes, while the first nine months of 2023 were higher due to the favorable impacts of higher selling prices, changes in product mix and lower raw material costs, partially offset by the impact of lower sales volumes, higher operating expenses and unfavorable foreign currency translation effects.
Dividend income declined 4.5% in the third quarter and 12.0% in the first nine months of 2023 compared to 2022. These reductions reflected net dispositions of investments since the end of the third quarter of 2022.
Interest and other investment income increased $1.3 billion in the third quarter and $3.5 billion in the first nine months of 2023 compared to 2022. The increases were primarily due to increases in short-term interest rates.
HomeServices of America, Inc. ('HomeServices'), a wholly owned subsidiary of BHE, is currently defending against four
antitrust cases, all in federal district courts. In each case, plaintiffs claim HomeServices and certain of its subsidiaries conspired with
co-defendants to artificially inflate real estate commissions by following and enforcing multiple listing service ('MLS') rules that
require listing agents to offer a commission split to cooperating agents in order for the property to appear on the MLS ('Cooperative
Compensation Rule'). None of the complaints specify damages sought.
In one of these cases, a jury trial commenced on October 16, 2023, and the jury returned a verdict for the plaintiffs on October
31, 2023, finding that the named defendants participated in a conspiracy to follow and enforce the Cooperative Compensation Rule,
which had the purpose or effect of raising, inflating, or stabilizing broker commission rates paid by home sellers. The jury further found
that the class plaintiffs had proved damages in the amount of $1.8 billion. Federal law authorized trebling of damages and the award of
pre-judgment interest and attorney fees. Joint and several liability applies for the co-defendants. HomeServices intends to vigorously
appeal on multiple grounds the jury's findings and damage award. The appeals process and further actions could take several years.
While it is likely that HomeServices may incur a loss, HomeServices is currently unable to reasonably estimate such loss due to, among
other reasons, the joint and several nature of the liability and the early state of the appeals process.
It is also reasonably possible that HomeServices will incur losses from the three other antitrust cases. However, HomeServices is
unable to reasonably estimate a specific range of possible losses that could be incurred due to, among other reasons, lack of information
about the size of the plaintiff class and potential damages, as well as the joint and several nature of potential liability of the defendants.
