Insurance Loss From Hurricanes Cuts Berkshire’s Quarterly Profit

Berkshire Hathaway Inc. reported Friday it had third-quarter net income of $4.1 billion, or $2.71 per Class B share, down 43.5 percent from $7.2 billion, or $3.23 per share, in the same period last year.

Berkshire recorded a $1.4 billion insurance loss stemming from $3 billion in claims from Hurricanes Harvey, Irma and Maria and an earthquake in Mexico.

"They got dinged," said Cathy Seifert, an analyst with CFRA Research in New York. "Everybody (in the insurance industry) got dinged. Relative to how bad it could have been, this is manageable."

The loss from underwriting - the art of charging enough premiums to cover losses - was the biggest for Berkshire in more than a decade, but Berkshire's other businesses were profitable, although Seifert said those businesses' 2.9 percent increase in profits was "very unremarkable."

Operating earnings, which exclude investment results, dropped 29 percent to $3.4 billion, or $1.39 per share in the three months that ended Sept. 30, from $4.85 billion, or $1.97 per Class B share a year ago.

The per-share results fell short of predictions averaging $1.59 per share by Wall Street analysts surveyed by FactSet.

Berkshire said the disaster-related losses would total $1.95 billion after taxes. The company also had a $252 million foreign currency exchange loss during the quarter.

Chief Executive Warren Buffett has said operating earnings are a good measure of the performance of Berkshire's 80-plus operating companies. Investment results can vary widely from quarter to quarter, especially if Berkshire sells shares of stocks purchased years ago.

The Omaha company's insurance operations have made money for the past 14 years by bringing in more premium dollars than its insurance companies have paid out for claims.

That's an unusual result for underwriting, since most insurance companies lose money on claims but make it up by investing the premium funds being held to pay claims.

Through Sept. 30, Berkshire's underwriting loss totaled $1.72 billion. For all of 2016, the company had an underwriting profit of $1.37 billion.

Berkshire has said it reduced the amount of catastrophe risk it is insuring because premiums have been inadequate. Nearly half of the third-quarter claims were for reinsurance contracts, which are agreements by Berkshire to take over some of the insurance risks from other companies.

In addition, Buffett has estimated that Berkshire's Geico auto insurance division may pay $500 million in claims for autos flooded in the hurricane that hit Houston.

Seifert said Berkshire's underwriting loss was less than she had expected. (Experts estimated insured losses at $150 billion for the three hurricanes and $725 million in Mexico for the earthquake.)

Claims from the hurricanes may hurt other insurance companies' financial strength, she said, but not Berkshire. "It wasn't like their coffers were drained paying these claims."

Despite the claims, Berkshire's cash supply gained $10.5 billion during the three months to $96.6 billion, an all-time high.

Berkshire executives are known for having the discipline to avoid insurance contracts if the premiums are too low to justify taking the risk, Seifert said. "I think these numbers show that when losses of this magnitude hit, they are as vulnerable as anyone else."

The Omaha World-Herald is owned by Berkshire Hathaway Inc.

steve.jordon@owh.com, 402-444-1080

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