Warren Buffett’s Berkshire Hathaway Inc. said second-quarter profit missed analysts’ estimates because higher claims costs fueled an underwriting loss at the insurance segment.
Net income dropped 37 percent to $4.01 billion, or $2,442 a share, from $6.4 billion, or $3,889, a year earlier, the Omaha, Nebraska-based company said Friday in a statement. Operating earnings, which exclude some investment results, were $2,367 a share, compared with the average $3,038 estimate of three analysts surveyed by Bloomberg.
Buffett, 84, built Berkshire over the past five decades into a sprawling operation that owns manufacturers, retailers, electric utilities and one of the largest U.S. railroads. While those operating businesses provide a steady stream of earnings, the company’s results can still fluctuate widely depending on the performance of investments and insurance underwriting.
“The property-and-casualty insurance industry certainly occasionally takes large hits,” said David Kass, a professor at the University of Maryland’s Robert H. Smith School of Business. “What matters is how you do over time.”
The insurance segment posted an underwriting loss of $38 million, compared with a gain of $411 million a year earlier. The [operating profit] contribution from the GEICO auto insurer plunged to $53 million from $393 million on the increased frequency and cost of claims.
“We are implementing premium rate increases as needed” at GEICO, Berkshire said in a regulatory filing. That echoes the approach at Allstate Corp., the largest publicly traded U.S. auto insurer, where Chief Executive Officer Tom Wilson said a stronger economy led to more auto travel, increasing the number of mishaps on the roads.
The loss at Berkshire Hathaway Reinsurance Group widened to $411 million from $9 million on storm losses in Australia and foreign currency fluctuations.
Berkshire’s net income soared to a record in last year’s second quarter as the company posted profit of more than $2 billion from derivatives and investments. The 2014 figure included a one-time benefit from a share-and-asset swap with Graham Holdings Co., the former publisher of the Washington Post. In this year’s second quarter, the investment and derivative gain was $123 million.
Buffett’s company said that third-quarter results will include a pretax gain of about $7 billion tied to the merger that formed Kraft Heinz Co. in July. Berkshire owns more than a quarter of the combined company after helping to finance the deal.
The gain hasn’t reversed Berkshire’s stock slump this year. Class A shares have slipped 4.7 percent since Dec. 31, trailing the 0.9 percent gain in the Standard & Poor’s 500 Index.
The railroad, BNSF, contributed $963 million to quarterly earnings, compared with $916 million a year earlier. Executive Chairman Matt Rose and CEO Carl Ice plan to spend a record $6 billion this year for upgrades to the network after service delays in 2014.
The investments have helped BNSF weather a slowdown in traffic this year better than its main competitor in the western U.S. Total carloads slipped 0.1 percent at Buffett’s railroad in the quarter, compared with a 5.8 percent drop at Union Pacific Corp.
Berkshire Hathaway Energy Co., the utility business led by Greg Abel, added $502 million to earnings compared with $375 million a year earlier.
Earnings from manufacturing, service and retailing units increased to $1.31 billion in the second quarter from $1.26 billion in the same period in 2014. The group of businesses includes chemical company Lubrizol; McLane, a trucking company; and Fruit of the Loom, which makes underwear and other clothing. Berkshire doesn’t break down results for each business in the segment.
–With assistance from Katherine Chiglinsky in New York.