Rising interest rates boost Warren Buffett’s Berkshire Hathaway earnings

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Warren Buffett’s Berkshire Hathaway is quickly 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 revenue for the sprawling conglomerate.

The interest the company earns on its $109 billion cash nearly tripled from a year earlier to $397 million in the third quarter, it disclosed on Saturday, noting that the gain was “primarily due to rising short-term interest rates.

Berkshire holds the vast majority of its cash in the form of short-term Treasury bills, deposits with banks, and money market accounts, where interest rates have risen rapidly as the Federal Reserve has tightened monetary policy. Last week the american central bank raised rates to between 3.75 and 4%, from near zero at the start of the year, and traders expect the rate to rise above 5% next year.

While tighter policy has sent shockwaves through financial markets — even bludgeoning the value of Berkshire’s mammoth stock portfolio — it is finally starting to pay dividends to cash-holding businesses and consumers.

Data from the Investment Company Institute showed cash placed in money market funds for daily retail investors hit an all-time high.

Buffett and Berkshire Vice Chairman Charlie Munger have presided over a significant expansion of Berkshire’s cash holdings over the past decade, which they say is critical given the potential catastrophic payouts that the businesses of company insurance may one day have to perform.

It was a point underscored by third-quarter results which showed Berkshire had been 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. US President Joe Biden has said it will take years, not months, for the region to recover.

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

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

Buffett and Munger have long been able to sustain significant losses in its insurance division due to the large “float” – the insurance premiums it collects before it ultimately has to pay bond claims. This float helped fuel its equity investments and fund the company’s business acquisitions.

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

Those declines pushed it to a net loss of $2.7 billion in the period, or $1,832 per Class A share, from a profit of $10.3 billion a year earlier. worth $6,882 per share. Buffett has long called fluctuations in his investment portfolio — which he has to account for in his profit and loss accounts due to accounting rules — “meaningless.”

The dozens of companies it owns, which are widely watched for signs of the health of the US industrial and commercial complex, have laid bare the resilience of the US economy while signaling the potential downturn orchestrated by the Fed. Berkshire’s results also showed the effects of inflation and struggles for better wages as real living standards come under pressure from rising prices.

Revenue at its BNSF railroad jumped 17% to $6.5 billion, but profits fell as the volumes of freight it shipped fell and it paid higher wages to its employees . The railroad became a flashpoint earlier this year as more than 30,000 unionized workers at the BNSF threatened to strikepushing back on conditions and demanding an increase in wages.

A tentative agreement in September gave employees concessions and BNSF said payroll costs rose 27% in the third quarter from a year earlier.

Energy companies in Berkshire’s utilities division saw a 17% increase in revenue, boosted by higher electricity costs.

But the company’s real estate brokerage unit saw sales fall by almost a fifth and operating profits fell 72% from a year earlier as the housing market cooled and sold fewer than houses.

Berkshire said rising mortgage rates should also put pressure on its handful of companies in the housing sector. During the quarter, however, those companies – including brick maker Acme and flooring group Shaw – were able to raise prices and saw strong demand.

Overall operating profit reached $7.8 billion, up from $6.5 billion a year earlier. The results were helped by stronger profits in its manufacturing and services businesses.

Line chart of total return (%) showing Berkshire outperforming both stocks and Treasuries in 2022

Berkshire, which this year bought a 21% stake in an energy company Occidental common stockrevealed that in the fourth quarter, it would begin reporting the oil and gas giant’s revenue as part of its results.

The company also said it spent just over $1 billion in the quarter to buy back its own shares.

Berkshire’s Class A shares, which have fallen 4.1% this year, have largely outperformed the broader market. The benchmark S&P 500 index fell 20.9% while an investor in US Treasuries lost 15.3%, according to Ice Data Services.

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