Interest rate rises boost Warren Buffett’s Berkshire Hathaway results

Warren Buffett’s Berkshire Hathaway is fast becoming one of the main beneficiaries of the sharp rise in US interest rates, as its fortress-like balance sheet begins to generate hundreds of millions of dollars in income for the sprawling conglomerate.

The interest the company earns on its $109bn cash pile nearly tripled from a year earlier to $397mn in the third quarter, it disclosed on Saturday, noting that earnings were “primarily due to increases in short-term interest rates”.

Berkshire holds the vast majority of its cash in short-term Treasury bills, bank deposits and money market accounts, where interest rates are rising rapidly as the Federal Reserve tightened monetary policy. Last week the US central bank raised rates to between 3.75 and 4 percent, up from near zero at the start of the year, and traders expect that rate to rise 5 in -hundred next year.

While tighter policy has sent shockwaves through financial markets — even eroding the value of Berkshire’s massive stock portfolio — it’s finally starting to pay dividends for cash-strapped companies and consumers.

Data from the Investment Company Institute showed that money parked in money market funds that cater to everyday retail investors rose to a record.

Line chart of cash, cash equivalents and short-term Treasuries held ($bn) showing Berkshire's $109bn cash pile now generating sizable interest income

Buffett and Berkshire’s vice chairman, Charlie Munger, have over the past decade presided over a significant expansion in Berkshire’s cash holdings, which they believe is critical given the potential catastrophic payouts that businesses of -company insurance one day they may need to do.

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It was a point underscored by third-quarter results that showed Berkshire was hit by a $3.4 billion pre-tax loss from Hurricane Ian, which killed more than 100 people as it tore through parts of Florida. American President Joe Biden said that it will take years, not months, for the region to recover.

Berkshire’s insurance unit suffered an operating loss of $962mn during the quarter, with Geico warning that higher used car parts prices and an increase in accidents were weighing on its results.

Column chart of quarterly interest and other income ($mn) showing higher interest rates starting to pay off for Berkshire Hathaway

Buffett and Munger have long been estimating large losses in its insurance division due to the sizeable “float” – insurance premiums that collect before finally having to pay claims on obligations. That float helped boost its stock investments and fund the company’s business acquisitions.

The sell-off in financial markets has weighed on Berkshire’s equity portfolio, which includes large stakes in Apple, American Express, Chevron and Bank of America. The company said its portfolio fell in value to $306.2bn from $327.7bn at the end of June.

That decline pushed it to a net loss of $2.7bn in the period, or $1,832 per class A share, from a profit of $10.3bn a year earlier, worth $6,882 a share. Buffett has long characterized the changes to his investment portfolio – which he must recognize in his profit and loss statements due to accounting rules – as “nonsense”.

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The dozens of businesses she owns, which are closely watched for signs of the health of the American business and industrial complex, have revealed the resilience of the US economy while also signaling the potential slowdown mapped out by -Fed. Berkshire’s results also showed the effects of inflation and the fight for better wages as real living standards come under pressure from higher prices.

Revenue at his BNSF railroads rose 17 percent to $6.5 billion, but profits fell as freight volumes fell and it paid higher wages to its employees. The railroad was hit hard earlier this year as more than 30,000 unionized workers at BNSF threatened to strike, pushing back against conditions and demanding a pay boost.

A tentative deal in September gave concessions to employees and BNSF said wage costs rose 27 percent in the third quarter from a year earlier.

Energy businesses within Berkshire’s utility division reported a 17 percent jump in revenue, boosted by higher energy costs.

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But the company’s real estate brokerage unit saw sales fall by nearly a fifth, and operating profits at the unit fell 72 percent from a year earlier as the stock market houses cooled and sold fewer houses.

Berkshire said higher mortgage rates were also expected to put pressure on its small number of businesses in the housing sector. During the quarter, however, those businesses – including brick maker Acme and flooring group Shaw – were able to raise prices and recorded strong demand.

Overall, operating profit rose to $7.8bn from $6.5bn a year earlier. The results were helped by higher profits in its manufacturing and services business lines.

Total return (%) line graph showing that Berkshire outperformed both stocks and Treasuries in 2022

Berkshire, which this year bought a 21 percent stake in the common shares of energy company Occidental, revealed that in the fourth quarter it will begin reporting earnings from the oil and gas giant. as part of its results.

The company also said it had spent just over $1 billion in the quarter buying back its own stock.

Berkshire’s class A shares, which are down 4.1 percent this year, have far outperformed the broader market. The benchmark S&P 500 fell 20.9 percent while an investor in US Treasuries lost 15.3 percent, according to Ice Data Services.

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