Written by: Bu Shuqing
Berkshire Hathaway's net profit in the third quarter has significantly declined, with pressure on the insurance business and a decrease in investment income being the main burdens. However, the company has significantly increased its stock buyback efforts this quarter, achieving a quarterly buyback scale that is a new high for the year, and cash reserves have further climbed to $377.4 billion.
On November 7 local time, Berkshire announced its third-quarter performance. The company reported an operating profit of $12.705 billion, a year-on-year decrease of 5.8%; net profit was $22.112 billion, a year-on-year decrease of 28.2%. Of this, total investment income was approximately $9.407 billion, down about 45.7% from $17.311 billion in the same period last year, shrinking by nearly half.
The performance of the insurance business was weak. Insurance underwriting profit decreased by 43% year-on-year, with the automobile insurance subsidiary Geico experiencing an increase in loss payments and underwriting expenses of 8.5% and 17%, respectively. Net investment income from insurance also decreased by 14% year-on-year to $2.7 billion, mainly affected by the decline in short-term interest rates.
In terms of capital allocation, Berkshire spent approximately $9.6 billion to repurchase its own shares in the third quarter, marking the highest level for a single quarter so far this year. Meanwhile, as of the end of September, the company's cash reserves rose to $377.4 billion, continuing to increase compared to the previous quarter. In the third quarter, Berkshire also net sold approximately $426 million in stock holdings.
Insurance business under pressure, operating profit down 5.8% year-on-year
Berkshire's operating profit in the third quarter was $12.705 billion, down 5.8% year-on-year, with the weak performance of the insurance business being one important reason.
In the third quarter, insurance underwriting profit decreased by 43% year-on-year. Specifically, Geico's loss payments increased by 8.5% year-on-year, and underwriting expenses grew by 17%, indicating an increase in cost pressure for the insurance business.
At the same time, Berkshire's net investment income from insurance fell by 14% year-on-year to $2.7 billion. Bloomberg noted that this was mainly caused by the decline in short-term interest rates. The simultaneous decline in both underwriting profit and investment income puts pressure on the overall profitability of the insurance business.
Investment income shrinks by nearly half, net profit down 28% year-on-year
Compared to the 5.8% decrease in operating profit, Berkshire's net profit decline in the third quarter is more pronounced.
Net profit for the third quarter was $22.112 billion, a year-on-year decrease of 28.2%. Total investment income was approximately $9.407 billion, a decrease of about $7.9 billion from $17.311 billion in the same period last year, a decline of about 45.7%.
It is important to note that investment income includes both unrealized and realized gains and losses from equity investments and is not equivalent to cash income generated from stock trading. The reduction in investment income is an important factor contributing to the year-on-year decline in Berkshire's net profit.
From the perspective of portfolio structure, Berkshire's stock investment portfolio remains highly concentrated.
As of September 30, Alphabet, American Express, Apple, Bank of America, and Coca-Cola collectively accounted for 65% of the total fair value of its equity investments.
Meanwhile, since Abel took office, he has also started to increase investments in AI-related assets, including investing over $10 billion in Alphabet and $930 million in the Italian tech group Bending Spoons.
However, Alphabet's stock price has fallen by over 24% since June, currently dropping below Berkshire's entry cost; Bending Spoons' stock price briefly surged after Berkshire increased its stake, but has since continuously declined over the past three weeks. The timing of this series of investments in the AI field is being questioned by the market.
Buybacks reach a new high for the year in a single quarter, cash reserves rise to $377.4 billion
Despite pressure on profitability, Berkshire significantly increased its stock buyback in the third quarter.
The company repurchased approximately $9.6 billion of its own shares during the quarter, achieving the highest level for a single quarter this year. Bloomberg reported that Berkshire restarted stock buybacks in the first quarter of this year, marking the first buyback in over a year.
Abel believes that Berkshire's stock price is below its intrinsic value, which is why the company started repurchasing its own shares.
Meanwhile, as of the end of September, Berkshire's cash (cash and short-term U.S. Treasury bills) reserves reached $377.4 billion, further increasing compared to the previous quarter. In the third quarter, the company also net sold approximately $426 million in stock holdings.
This indicates that while Berkshire is ramping up its own stock buyback, it is still maintaining a massive cash reserve. For Abel, how to allocate capital among external investments, stock buybacks, and cash management will be a continuous focus for the market.
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