Warren Buffett — who tends to own a mistake — copped to another one over the weekend while discussing the latest Berkshire Hathaway earnings.
The admission came Saturday in Buffett's annual letter to shareholders and Berkshire's financial report for 2023. Berkshire stock fell Monday after hitting a 52-week high.
Berkshire Hathaway Earnings
The conglomerate reported on Saturday that operating profit rose 28% in the fourth quarter vs. a year ago. It rose 21% for all of 2023, buoyed by insurance underwriting gains and surging investment income.
In fact, excluding the insurance segment, Berkshire's earnings would have fallen vs. 2022.
At the leading edge of pain were Berkshire's two largest non-insurance businesses: the Burlington Northern Santa Fe (BNSF) railroad and Berkshire Hathaway Energy (BHE).
Last May, Buffett had warned of lower earnings in Berkshire's non-insurance businesses in 2023, with BNSF and BHE cushioning the declines. At the same time, he said insurance was likely to do well.
"Insurance came through as expected," Buffett wrote in the letter to shareholders Saturday. "I erred, however, in my expectations for both BNSF and BHE."
Here's a look at each:
Warren Buffett's 'Favorite Child'
Insurance. In 2023, insurance-related investment income jumped 48% to $9.6 billion, mainly due to higher interest income. The rebound in yields helped, with Berkshire investing heavily in short-term Treasury bills with yields above 5%.
In the underwriting business, Berkshire earned $5.4 billion vs. a loss of $30 million a year ago. The main units — Berkshire Hathaway Primary Group, Berkshire Hathaway Reinsurance Group and Geico — all posted gains.
Geico shone. It reversed a big underwriting loss in 2022, thanks to higher premiums on auto policies, lower claims frequency, and reduced advertising.
Buffett, the 93-year-old Berkshire chief and investing legend, first bought Geico stock while he a business student at Columbia University. He has, in the decades since, called Geico a "favorite child."
His letter to shareholders Saturday boasted of "an almost unbelievably wonderful experience with Geico that began early in 1951 and will never end." Geico became a Berkshire Hathaway subsidiary in 1996.
But Bill Stone, chief investment officer of Glenview Trust, said he continues to watch "the progress in returning Geico to its former glory." The car insurer has seen claims severity rise while policies in force have declined, Stone wrote in a note to clients on Sunday.
What Disappointed Investing Legend
BNSF: The BNSF railroad disclosed a 14% fall in operating earnings vs. 2022 to $5.09 billion.
Berkshire tied the earnings decline to "lower volumes and higher non-fuel operating costs, partially offset by lower fuel costs."
In the shareholder letter, Buffett wrote that railroad "wage increases, promulgated in Washington, were far beyond the country's inflation goals."
On top of that, BNSF's "profit margins have slipped" relative to the other five major North American railroads since Berkshire purchased it, Buffett added.
Berkshire Hathaway Energy: Berkshire's collection of pipeline companies and regulated utilities posted a steep 40% plunge in operating earnings in 2023 to $2.3 billion.
"Our second and even more severe earnings disappointment last year occurred at BHE," Buffett wrote.
He added: "The regulatory climate in a few states has raised the specter of zero profitability or even bankruptcy (an actual outcome at California's largest utility and a current threat in Hawaii)."
Pacific Wildfires Crimped Profits
Berkshire's energy unit said it set aside $1.6 billion for possible wildfire losses involving PacifiCorp.
The energy group also operates Berkshire Hathaway HomeServices (BHHS), the largest residential real estate brokerage firm in the country.
Amid the slowdown in housing activity, BHHS posted an 87% decline in earnings vs. 2022. It suffered from an "11% reduction in closed brokerage transaction volumes, as well as lower mortgage services revenues and margins from a 40% decrease in closed transaction volumes." That was "attributable to lower homeowner refinancing activity resulting from rising interest rates," the company said.
In all its other operating businesses, Berkshire Hathaway's earnings climbed 8% to $15.1 billion last year.
On the stock market today, Berkshire stock slid almost 2% to 409.03. BRKB stock reversed lower from a record high of 430, just below a $1 trillion valuation.
