Last weekend saw the biggest event in the value investor's calendar, the Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) annual meeting. There's been plenty of media coverage of the event over the past few days, but many of the articles have failed to acknowledge the company's underlying performance during the first quarter of 2019.
So, let's look at how Berkshire performed during the first three months of this year and any notable trends in the conglomerate's results.
Berkshire's first-quarter numbers
Warren Buffett (Trades, Portfolio)'s conglomerate performed relatively well during the first quarter of the year. The group reported operating earnings per A-share of $3,388 and $2.26 per B-share. Book value per share increased 6.1% to $225,553 per A-share and $150.37 per B-share including mark-to-market equity investment gains. Even though Buffett recently abandoned book value as a measure of the company's performance, it is still interesting to keep an eye on this measure of shareholder value creation.
The group's most important division is its insurance arm, which registered an impressive performance during the first quarter of 2019, primarily because there were no major catastrophe losses during the period -- the same is true of first-quarter 2018. That being said, income from Berkshire's underwriting activities actually declined 4.4% year-on-year. Overall insurance income increased to $2 billion on a pre-tax basis from $1.7 billion a year ago driven by higher recurring investment income. Investment income at the insurance business grew 23% year-on-year to $1.5 billion, and the insurance business float increased by $1 billion from the prior quarter to $124 billion.
Insurance troubles
Berkshire's insurance business is made up of three main parts. There's the auto insurance business GEICO, Berkshire Hathaway Reinsurance Group, and Berkshire Hathaway Primary Group. The latter is made up of Berkshire Hathaway Specialty Insurance, GUARD Insurance Cos. and National Indemnity Co. Of these three businesses, GEICO was the only one to increase its insurance premiums in the first quarter by 6.6%. The reinsurance business reported an underwriting loss of $253 million and Primary reported a $30 million underwriting loss compared to a $99 million gain in the same quarter last year, although it did report an increase in premiums written.
Robust growth
Away from the insurance business, Burlington Northern Santa Fe achieved fantastic results. Pre-tax earnings increased 10% year-on-year to $1.7 billion off the back of an increase in revenues of 2%. Pre-tax profits received a boost from an improvement in the company's operating margin. It increased from 31.5% a year ago to 33.5% in the most recent quarter. An improvement in the average revenue load per car helped offset lower unit volumes. The average revenue per car increased by 8.5% year-on-year, offsetting a 5.4% decline in overall volumes.
The utilities and energy business also registered an attractive performance with earnings before interest in tax increasing 10% year-on-year to $648 million. Almost every single division in the utilities and energies business reported a substantial increase in earnings before interest and tax. PacifiCorp's earnings before interest and tax increased 28%, MidAmerican doubled its earnings before interest and tax, and Natural Gas Pipelines' earnings rose 9%. The final two primary divisions registered a small decline.
Berkshire's largest division, it's manufacturing, service and retail arm reported a year-on-year increase in pre-tax profit of 3% to $2.9 billion. McLane is the most prominent business here. It reported flat revenues year-on-year. Precision Castparts saw an improvement in revenues and Lubrizol reported declining sales.
The bottom line
So overall, Berkshire's earnings are a mixed bag. BNSF and utilities are registering impressive growth rates, but insurance and manufacturing are struggling. The lack of growth in the insurance business is indicative of the broader environment in the industry. Profits have been under pressure for insurers for the past three or four years as capital has flooded into the sector, depressing rates and increasing losses.
There are some signs that this is beginning to change, and it is worthwhile keeping an eye on Berkshire's insurance numbers throughout the rest of 2019 to see if the changes start to filter through to the conglomerate's bottom line.
Disclosure: The author owns shares in Berkshire Hathaway.
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