Berkshire Hathaway’s $357 Billion Cash: Geico Pretax Profit Drops 45%

By Daniel Okafor

Berkshire Hathaway held approximately $357 billion in cash at the end of September, down 2% from the previous quarter. The Omaha, Neb.-based conglomerate announced the figures over the weekend. Berkshire’s reported cash position could fund the purchase of all but 28 of the largest companies in the U.S. without borrowing a single dollar or issuing any stock.

Berkshire also disclosed $9.6 billion in stock buybacks during the third quarter. The company identified Warren Buffett’s son Howard Buffett as chairman and Greg Abel as chief executive. Those figures drew attention. They did not explain the main operating problem.

Geico, Berkshire’s insurance operation, reported that pretax earnings tumbled 45% to $982 million. Berkshire’s overall operating earnings fell 6% to $12.7 billion. The quarter’s clearest operating warning came from the insurance unit.

Evercore noted that Geico was increasing advertising expenditure, as rivals Allstate and Progressive had done. The analysts framed the risk this way.

“We wonder if renewal pricing decreases will come next. We have been surprised that there hasn’t been more price competition to date, which could be due to a more concentrated market,” Evercore’s analysts said.

What drove Geico’s earnings decline?

Geico’s premiums written were nearly flat. They fell 0.3% to $11.71 billion. Total losses and loss-adjustment expense rose 8.5%. The ratio of claims and expenses to premiums increased to 91.4% from 84.3%.

The 7.1-percentage-point increase shows how the pressure built. Claims and expenses took a larger share of premium, while premium volume barely changed. Berkshire said Geico suffered from higher claims frequencies and average severities, as well as lower average earned premiums per policy.

The reported figures describe a direct squeeze on underwriting profit. More claims cost more, lower earned premiums provided less revenue per policy, and nearly unchanged premium volume left little room to absorb those changes.

• Premiums written: $11.71 billion, down 0.3%.
• Total losses and loss-adjustment expense: up 8.5%.
• Claims-and-expenses-to-premiums ratio: 91.4%, up from 84.3%.
• Pretax earnings: $982 million, down 45%.

The mismatch carried more weight than the nearly flat premium line. Premium volume barely changed while insurance costs moved higher. A 0.3% decline in written premiums accompanied an 8.5% rise in losses and loss-adjustment expense, capturing how Geico’s pretax profit could fall 45%.

How could advertising affect renewal pricing?

Evercore’s concern was