An in-depth look at Berkshire Hathway's third-quarter earnings; My nearly perfect day yesterday

1) Amid earnings season, you can guess which company I'm particularly interested in...

Berkshire Hathaway (BRK-B) reported its third-quarter earnings on Saturday (you can see the press release here, the full 10-Q here, and the Wall Street Journal's summary in this article: Warren Buffett's Berkshire Hathaway Slashes Apple Stake Again).

One piece of big news is that CEO Warren Buffett continued to sell down his massive stake in Apple (AAPL) during the quarter. At the beginning of the year, Berkshire held approximately 900 million shares, which Buffett cut to about 400 million at mid-year, and he sold around 100 million more shares in the third quarter.

For some perspective, the chart below shows how extraordinarily well Apple has done – nearly a 10-bagger – since Buffett first started buying it in the first quarter of 2016:

I've said previously that think this has been a good sale, for risk management and diversification. In addition, I still believe it will likely be difficult for Apple's stock to outperform going forward for three main reasons:

• The company is so large ($391 billion in revenue) that growth becomes increasingly difficult.
• With a $3.4 trillion market cap (as of Friday's close), share repurchases won't move the needle as much.
• As of Friday's close, the valuation is high. At 36.7 times trailing earnings and 30.2 times next 12 month expected earnings, it's close to the highest level in 16 years.

Many investors are wondering whether Buffett decided to sell so much of his Apple stake because he sees the economy slowing and/or expects the market to fall.

I doubt it... because otherwise, he perhaps would have sold 80% – or even 100% – of his stake.

I think this is nothing more than Buffett continuing to reduce a richly valued, oversized position. Valued at around $67 billion, Apple is still a super-size position for Berkshire, equal to 23.5% of the company's $285 billion equity portfolio according to CNBC's portfolio tracker as of this morning.

So I expect that Buffett still believes Apple is a wonderful company with great economics and a bright future.

Meanwhile, Berkshire's cash hoard now sits at a mind-boggling $325.2 billion, which is now earning respectable short-term interest rates in the 4%-to-5% range.

This chart, courtesy of Creative Planning's Charlie Bilello from a post on X yesterday, shows how much Berkshire's cash pile has grown since 2010:

Turning to Berkshire's wide range of businesses, operating earnings declined 6.2% in the third quarter year over year due to a steep 69% drop in underwriting profits in its massive, diversified insurance segment – as you can see in this table from the third-quarter earnings press release (the dollar figures are in millions):

Other items of note include a surge in investment income due to higher cash levels, Berkshire Hathaway Energy earnings normalizing after big accruals for wildfire losses last year, and healthy 13.3% growth in BNSF Railway earnings – which I hope reflects better operations (a topic I discussed at length in my October 16 e-mail.)

Let's take a closer look at why underwriting profits tumbled...

Here's a chart from page 30 of the 10-Q that breaks down insurance earnings (the dollar figures are in millions, and note that these numbers are pre-tax – so they don't match the after-tax numbers in the table above):

We can see that auto insurer Geico's profits nearly doubled – fabulous performance – driven by an 8.7% increase in premiums earned (mainly due to price increases across the industry – have you looked at your auto insurance bill recently?) while losses declined 3.1%. Here's a breakdown (from page 33 of the 10-Q, and the dollar figures are in millions):

But Berkshire's Primary Group and Reinsurance Group both swung to losses.

The former (from the 10-Q) "consists of several independently managed businesses that provide a variety of primarily commercial insurance solutions, including healthcare professional liability, workers' compensation, automobile, general liability, property and specialty coverages for small, medium and large clients."

Its premiums earned rose 5.3%, but losses soared nearly 49% due to an increase in "estimated ultimate claim liabilities attributable to pre-2024 accident years" and "unfavorable social inflation trends, including the impacts of increased jury awards and litigation costs."

Here's the table (from page 34 of the 10-Q, and the dollar figures are in millions):

Lastly, let's look at Berkshire's Reinsurance Group...

As the 10-Q describes it, this business "offers excess-of-loss and quota-share reinsurance coverages on property and casualty risks to insurers and reinsurers worldwide through several subsidiaries, led by National Indemnity Company ("NICO"), General Reinsurance Corporation, General Reinsurance AG and Transatlantic Reinsurance Company."

It swung to a loss in the third quarter mainly because of an 89% decline in pre-tax profits of its property/casualty segment, as you can see here in this table (also from page 34 of the 10-Q, and the dollar figures are in millions again):

Here's a breakdown of that segment (from page 35 of the 10-Q, and the dollar figures are in millions):

We can see that premiums earned declined by 5.0%, while losses rose 12.5% due to "losses from significant catastrophe events (Hurricane Helene)"... and underwriting expenses rose 50.8% because "NICO recorded a pre-tax charge in underwriting expenses of $490 million in connection with a settlement agreement reached concerning certain non-insurance affiliates that filed voluntary petitions under Chapter 11..."

In summary, there's no single reason why Berkshire's insurance profits declined by 69% in the third quarter. But after taking a deep dive, I'm not worried that this is the start of a long-term trend.

Berkshire's insurance operation is an incredible business that generates a staggering $174 billion in "float" – the money an insurance company has between when it receives premiums from customers and when it pays out claims.

If an insurer is profitable, as Berkshire is, this is an extremely valuable source of funds to invest.

This chart shows the growth of Berkshire's float going back nearly three decades:

Meanwhile, another piece of big news is that Buffett didn't repurchase any of Berkshire's stock in the quarter – the first time that has happened since he began buying back shares in the third quarter of 2018, as you can see in this chart:

I'm not surprised that Buffett has ceased share repurchases given than the stock, even after today's roughly 2% pullback, is still up about 22% this year – roughly double the increase in its intrinsic value.

It's clear that Buffett agrees with my assessment (discussed in my October 1 e-mail) that the stock hasn't been significantly undervalued recently.

Tomorrow, I'll update my estimate of Berkshire's intrinsic value and continue the conversation on what I think of the stock overall... so stay tuned!

2) Yesterday was pretty close to my perfect day...

I got an extra hour of sleep... the weather was spectacular... I ran 15.4 miles of the New York City Marathon with four of my friends (looping back to run miles 18 to 24 twice)... and then in the evening, I played three sets of mixed doubles in tennis for the USTA team I'm on.

Here are pictures from the marathon:

The only time I ran the race officially was nine years ago on my 49th birthday, when my cousin Alex (a 2:21 marathoner at his peak) flew in from San Francisco to run with me.

It was incredibly helpful having him pace me, give me encouragement, and carry every ounce of excess weight (my shirt, water, and phone) in that race.

So every year since then, I've paid it forward by doing the same for my friends who are running the race. (I haven't run the full 26.2 miles since 2015 because the 24-hour World's Toughest Mudder is the following weekend.)

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.