Berkshire’s $9.6 Billion Buyback Comes With a 5.8% Earnings Drop

By Olivia Hart

Berkshire Hathaway Inc. spent about $9.6 billion on share buybacks in the third quarter, even as operating earnings fell 5.8% to $12.7 billion.

Berkshire disclosed the results Saturday in a statement. Insurance underwriting profit dropped 43%, while its auto insurer Geico reported higher losses and a surge in underwriting expenses.

The conglomerate spans insurance, railroads, energy and manufacturing, giving investors a read on the US economy. Its results draw close attention because that range of businesses provides a snapshot of economic health.

How did insurance weaken Berkshire’s earnings?

Cathy Seifert, an analyst for CFRA Research, called the underwriting slump “a pretty significant deterioration.” She said investors “should take a look at this because it’s a core profit generator; it’s a core float generator.”

The underwriting decline came without significant catastrophe events for Berkshire during the quarter. That removes one obvious explanation for the drop, but it does not explain why Geico’s losses and expenses rose.

Insurance net investment income fell 14% to $2.7 billion, largely because short-term interest rates declined. Berkshire therefore took pressure in two distinct earnings lines during the quarter.

The result: Berkshire’s core underwriting weakened without a major catastrophe to explain the drop.

Why did Berkshire keep buying shares?

Berkshire began buying back its shares in the first quarter, its first such action in more than a year. Chief Executive Officer Greg Abel found the shares trading below their intrinsic value.

The shares fell roughly 1% during the first nine months of the year, underperforming the S&P 500. Buffett often used that index to highlight Berkshire’s performance. Since then, Berkshire’s stock has reached new highs.

Its A share class has gained nearly 15% since then, against a nearly 4% decline for the S&P 500. The recovery revived questions about whether Berkshire would continue its buybacks, although the rebound alone does not establish that the shares remain undervalued.

Bloomberg Intelligence analyst Matthew Palazola said, “Valuations of equities probably were less attractive to Abel in the third quarter.” His wording offers a possible explanation for Berkshire’s net equity sales, not a disclosed policy on future repurchases.

Cash reached $377.4 billion at the end of September, up from the previous quarter despite the buybacks. After deducting $20.5 billion in unsettled US Treasury bill purchases, Berkshire had about $357 billion in cash.

Berkshire sold a net $426 million of equity holdings during the period. The result: the company bought back stock and still ended September with more cash than in the previous quarter.

What has Abel changed?

Investors praised Abel after his first appearance leading Berkshire’s annual meeting in May. Since then, he has directed capital toward artificial intelligence, housing and technology acquisitions.

Over the past few months, Abel spent $6.8 billion to buy homebuilder Taylor Morrison Home Corp., a typical value bet. He also committed $10 billion to Google parent Alphabet Inc. to support its AI-related investments. Another $930 million went into Bending Spoons SpA, an Italian conglomerate that acquires established businesses and uses technology to transform them.

The disclosures did not specify Berkshire’s ownership terms for the three investments. That leaves the economic exposure unclear beyond the headline outlays, which matters when judging returns against a $377.4 billion cash balance.

Meyer Shields, an analyst at Keefe, Bruyette & Woods, told Bloomberg in an earlier interview that Abel likely views the AI investments as a long-term wager on technology’s potential. The sector faces a growing backlash against data centers and wild swings in stock and bond prices, giving the new CEO an immediate test of that thesis.

The result: Abel has committed substantial capital to new bets without a disclosed timetable for returns.

Where did earnings improve?

At railroad unit BNSF, average revenue per car increased 10.5%, helped by higher fuel surcharge revenue. BNSF profit increased 19.3% during the period, supporting Chief Executive Officer Katie Farmer’s effort to improve profitability and close the gap with Berkshire’s most efficient peers.

Berkshire Hathaway Energy posted an 8.3% earnings increase to $1.6 billion for the period. Higher utility sales volumes and customer rates in certain territories drove the gain.

Railroad and energy earnings improved as insurance earnings fell. The result: their combined offset to insurance’s weakness remains unquantified.

What could tax credits mean?

Roughly one-third of Berkshire Hathaway Energy’s earnings came from tax credits, including some tied to wind-powered electricity generation. Palazola said the unit may benefit from the Democrats’ recent win in the midterm elections.

“Under Republican administrations, it seemed like those might fade away over time, but should we have Democrats staying in power for longer, that’s actually a benefit for this business,” Palazola said.

That makes tax policy a tangible earnings variable for the unit. The result: the election changed a relevant policy assumption, though Berkshire disclosed no incremental earnings benefit.

For investors, the next earnings report will test whether Geico’s underwriting has stabilized and whether Abel’s new investments have begun earning returns. The current disclosures provide outlays and operating results, but no timetable for either improvement.