Berkshire Hathaway’s (BRK/A, BRK/B) fourth-quarter earnings release also includes the annual letter from Warren Buffett as part of the annual report. Warren Buffett leads Berkshire as CEO and Chairman with Greg Abel, Vice Chairman of Non-insurance, and Ajit Jain, Vice Chairman of Insurance. The yearly letter continued the theme of previous years as a type of owner’s handbook for Berkshire shareholders. Buffett spent a significant portion of the letter focused on how to think about Berkshire’s insurance business. As usual, he noted that shareholders should focus on Berkshire’s operating earnings rather than the volatile GAAP results.

Berkshire Hathaway reported earnings of almost $19.7 billion in the fourth quarter, well below the $37.6 billion in the same quarter of 2023. Operating earnings, which remove the distortion from market changes and better reflect the firm’s earnings power, skyrocketed by 71% for the quarter versus 2023.

Operating earnings for 2024 rose 27% compared to 2023. Per-share operating income increased by 28% for the year, illustrating the value of share repurchases.

Berkshire’s most significant business by annual operating earnings is insurance, followed by the manufacturing, service, and retailing segment.

A more detailed look into the various operating segments for 2024 shows a robust improvement in results over 2023. The insurance business is the primary driver of the growth for the year, growing operating earnings by 51%. Operating income, excluding insurance, grew by 11% compared to last year.

Insurance

For 2024, investment income was 43% higher than in 2023, primarily due to higher short-term investment balances. At last May’s annual meeting, Buffett was correct in predicting that yields and cash levels would lead to higher investment income in 2024. Buffett noted in his annual letter that GEICO continued its improvement and credited Todd Combs with “increasing efficiency and bringing underwriting practices up to date.” Buffett added that the overhaul of GEICO was “not yet complete.” Notably, policies in force grew in the second half of 2024.

The two most essential concepts in insurance investing are “float” and underwriting profit. In simple terms, float is created for insurance companies because insurance premiums are paid before any claims are made by the insured. Insurance companies can invest the float, sometimes for years, before insurance losses are reimbursed. Berkshire’s float at $171 billion is $5 billion higher than its December 31, 2023 level. In general, the value of float increases as yields rise since an insurance company can earn more when investing the cash. Float per share ended 2024 at $118,897, above the level at the end of 2023. Though not a factor for most of this year, share repurchases aid the growth of float per share.

Significant catastrophe losses from Hurricane Helene and Hurricane Milton hit Berkshire. Despite these losses, Berkshire’s insurance segment earned an underwriting profit. Berkshire has a history, unlike many insurance companies, of earning an underwriting profit, meaning that their float costs them nothing and makes them money in addition to allowing them to earn a profit off of investing the float. Berkshire has three main insurance businesses: GEICO, Berkshire Hathaway Primary Group, and Berkshire Hathaway Reinsurance Group. All three insurance segments had a profitable underwriting year. An underwriting profit means the insurance premium exceeds all insurance claims and expenses. For example, GEICO had a combined ratio of 81.5% in 2024, which means that only 81.5 cents of every dollar in insurance premiums were spent on losses and expenses. A combined ratio over 100% indicates the insurance company has an underwriting loss, as seen with the Berkshire Hathaway Primary Group in the third quarter. Despite the poor third quarter, the Primary Group had an underwriting profit for the year.

Railroad

Berkshire owns one of the largest railroads in North America, the Burlington Northern Santa Fe (BNSF) railroad, operating in the U.S. and Canada. Railroad freight volume improved, but a “labor agreement in the fourth quarter of 2024 and litigation charges related to an ongoing legal case” weighed on results for 2024, with operating earnings down 1% versus 2023. On a more positive note, BNSF continued to see better productivity, which bodes well for earnings improvement outside of extraordinary items. BNSF’s operating ratio, operating expenses divided by revenue, improved in 2024.

Utilities and Energy

BHE generally provides steady and growing earnings, as one would expect from what primarily consists of regulated utilities and pipeline companies. In addition, BHE typically produces significant tax credits due to its renewable electricity generation. For this reason, Berkshire focuses on after-tax earnings, which is “how the energy businesses are managed and evaluated.”

BHE had a strong year on the surface, with operating earnings soaring by 60% over 2023. However, lower wildfire loss accruals in 2024 flattered the year-over-year comparisons. Since 2022, BHE has set aside approximately $2.75 billion for possible losses from the wildfires involving PacifiCorp.

Manufacturing, Service and Retailing

Pre-tax earnings fell by 4.2% due primarily to the service and retailing businesses, despite better results at some manufacturing companies. This segment consists of many diverse businesses, so this analysis will focus on the best and worst performers and some themes when looking at this segment.

The service group saw a 23% decline in pre-tax earnings for the quarter, primarily attributable to TTI, the aviation services businesses, and XTRA. TTI is a distributor of electronic components, and management began noting weakness in the group in 2023 due to inventory levels and sagging demand. It is not abnormal for distribution businesses to suffer from these issues after a period of supply chain issues and high demand, as seen surrounding COVID. The aviation services businesses, including NetJets and FlightSafety, saw strong revenue growth, but increased costs hurt results. XTRA, which leases transportation equipment, had fewer units leased and an increase of the expenses.

The retailing group was another significant drag on earnings growth, with a 19.2% decline in pre-tax earnings for 2024. The most critical portion of the retailing segment is Berkshire Hathaway Automotive (BHA), which owns over 80 auto dealerships. BHA had 7.9%% lower earnings for 2024, “primarily due to lower vehicle gross profit margins, partially offset by higher earnings from finance/service contract and parts/service/repair operations, as well as lower selling, general and administrative expenses.” Pre-tax earnings for the remainder of the retailing group fell by 40.2%, due primarily to lower sales and higher costs per unit of sales.

On the positive side, the consumer products group had a 10.9% increase in 2024 pre-tax profits. According to management, the “increase was primarily attributable to higher revenues from Forest River, Brooks Sports, and Duracell, partially offset by lower revenues from Fruit of the Loom, Garan, and Richline.”

Berkshire’s aerospace exposure remains substantial despite selling its publicly traded airline holdings in 2020. Berkshire’s Precision Castparts (PCC) business has been a bright spot within the industrial products segment due to its exposure to the aerospace industry. PCC’s 2024 pre-tax earnings rose by 24.4% relative to 2023, primarily due to “sales increases and generally improved manufacturing and operating efficiencies.”

Pilot Travel Centers (PTC) are the largest operator of travel centers in North America, under the names Pilot and Flying J. On January 16, 2024, Berkshire acquired the final 20% and now owns 100% of the entity. It is shown as a segment within the financials of the operating companies. Still, the January 2023 results are included in the non-controlled business results, so the year-to-date comparison is apples-to-oranges. On an apples-to-apples basis, pre-tax earnings fell by 41.9% for 2024, driven by lower average fuel prices and increased expenses.

Non-Controlled Businesses

This segment includes companies’ profits that must be accounted for under the equity method due to the size of ownership and influence on management. The after-tax equity method earnings have Berkshire’s proportionate share of profits attributable to its investments in Kraft Heinz (KHC), Occidental Petroleum (OXY), and Berkadia. In addition, the January 2023 results from Pilot are included in the 2023 non-controlled business results. According to Bloomberg, Berkshire is Occidental Petroleum’s largest shareholder, with an over 28% stake. More about the reasons for the Occidental investment is here.

Other

The segment had a gain for the year produced primarily by foreign currency exchange rate gains generated from bonds issued by Berkshire Hathaway and denominated in British Pounds, euros, and Japanese Yen. These foreign currency swings are not a concern as Berkshire has significant assets and earnings denominated in these foreign currencies. Investment losses from non-U.S. dollar investments generally offset some of these gains and vice versa, depending on currency exchange rates. Acquisition accounting expenses are also reflected in this segment. These expenses are created by amortizing intangible assets connected to companies purchased by Berkshire. Finally, the gain in other earnings includes “ Berkshire parent company investment income, corporate expenses, intercompany interest income on loans to operating subsidiaries when the related interest expense is included in earnings of the operating subsidiaries and unallocated income taxes.”

Investment Portfolio

Berkshire was a net seller of $6.7 billion in publicly traded stocks in the fourth quarter. This marks the ninth straight quarter of Berkshire Hathaway’s net sales of stocks. Berkshire bought $3.4 billion of stocks while selling $10.1 billion. This brings the total net sales of publicly traded stocks to $134.1 billion for 2024. The 13F filing with the SEC, released on February 14, provided more details of the publicly traded stock portfolio changes, including a new purchase of Constellation Brands (STZ).

After the sales, Berkshire’s insurance company investment portfolio is down to 53% publicly traded stocks from 63% in the first quarter, while cash rose from 28% to 43%.

What To Watch

As a positive, GEICO showed strong profitability and increased policies in force in the second half of the year. Returning GEICO to a growth company was crucial, but Buffett noted there was still work to be done. The BNSF railroad had slipped the five other major railroads, but there looks to have been some improvement in profitability and efficiency in 2024. An update on progress at the annual meeting will be heavily anticipated.

While BHE earnings looked much better for 2024, the threat of further liability for wildfires hasn’t gone away and possibly imperils the attractiveness of future capital spending in the business. Further, significant additional capital investments in liability-impacted utility areas should signal positive progress since Buffett stated, “We will not knowingly throw good money after bad.” Again, an update at May’s annual meeting will be crucial.

The insurance underwriting losses from the California wildfires will be seen in the first quarter, with an estimated loss of approximately $1.3 billion. Berkshire has a history of being a disciplined underwriter with a pristine balance sheet, so the short-term pain should not be an issue.

Summary And Scorecard

Berkshire’s stock price outperformed the S&P 500 in 2024, rising by 25.5% versus a total return of 25.0% from the S&P 500. Year-to-date through February 21, Berkshire’s price was +5.6%, while the S&P 500 had a total return of +2.4%.

Short-term results are generally not meaningful for Berkshire since it is managed with a focus on increasing long-term value and not meeting quarterly hurdles. This ability to take advantage of time arbitrage has served the company and shareholders well over the years. The goal in looking at the results is to see if the segments are generally operating as expected and consider the capital allocation decisions made by Warren Buffett.

Last year, Buffett provided a handy blueprint for the goals of Berkshire’s management. The first goal would be to “increase operating earnings.” Secondly, success in the “decrease shares outstanding” goal would boost operating earnings per share faster. Lastly, “hope for an occasional big opportunity,” allowing for a sizable cash investment at an attractive expected return. This analysis will use Buffett’s blueprint as a lens through which to evaluate how Berkshire is performing.

Increase operating earnings: Fourth-quarter operating earnings were 71% higher than last year’s same quarter, and 2024 was 27% above 2023. Buffett says that operating earnings are the “most descriptive” way to view Berkshire since they remove the short-term volatility of market fluctuations in net earnings. Last year was exceptionally strong by this measure since Buffett said at last year’s annual meeting that “we would expect our earnings should go up modestly from year to year.”

Decrease shares outstanding: Particularly since 2018, a significant capital allocation decision has been made to increase share repurchases. When Berkshire Hathaway actively repurchases shares, it signals Buffett believes its share price is below his intrinsic value estimate. If he is correct, the purchases are a value-creator for the remaining shareholders. Berkshire has stated that there would be no stock repurchases if it would cause cash levels to fall below $30 billion, so the firm’s safety will not be compromised. Operating earnings were 27% above 2023, with operating earnings per share growth of 28%, aided by modest share repurchases. Berkshire repurchased no stock in the third or fourth quarters.

Until an announcement in mid-2018, Berkshire had only made repurchases when the stock traded at less than 1.2 times the price-to-book (P/B) ratio. While that constraint is now relaxed, it is still a good indicator of the general range when aggressive repurchases will likely be seen. Berkshire’s price-to-book ratio remained somewhat elevated during the quarter, so share repurchases were suspended. Berkshire only intends to repurchase shares when the “repurchase price is below Berkshire’s intrinsic value, conservatively determined.” The price-to-book ratio remains a reasonable proxy for gauging Berkshire’s intrinsic value. Still, Warren Buffett’s judgment about its intrinsic value versus other available uses of capital can differ from that simple price-to-book measure.

A longer-term view of the positive impact of Berkshire’s share repurchases is illuminating. Since the start of more aggressive share repurchases in 2018, Berkshire’s operating earnings have grown at an 18.5% compound growth rate, while operating earnings per share have done 2.3 percentage points better at 20.8%.

Hope for an occasional big opportunity: Berkshire has a fortress balance sheet with cash and equivalents of over $334 billion. This cash hoard provides flexibility to take advantage of opportunities, including repurchasing its stock if the price declines to attractive levels.

Buffett spoke directly about the significant cash position: “Despite what some commentators currently view as an extraordinary cash position at Berkshire, the great majority of your money remains in equities. That preference won’t change. While our ownership in marketable equities moved downward last year from $354 billion to $272 billion, the value of our non-quoted controlled equities increased somewhat and remains far greater than the value of the marketable portfolio.”

He also noted: “Often, nothing looks compelling; very infrequently we find ourselves knee-deep in opportunities.” Cash as a percentage of Berkshire Hathaway’s size is the highest since we have data at 29%. At least some of that abnormally large cash stake is likely driven by a lack of “compelling” investment opportunities within Buffett’s circle of competence.

Share repurchases might be off the table for now, removing one lever for Buffett to create value. Despite Berkshire shares being too dear relative to Buffett’s estimate of intrinsic value for share repurchases, shareholders should take comfort in knowing that the firm continues to be managed to survive and emerge stronger from any economic or market downturn by being in a financial position to take advantage of opportunities during a crisis.

The insurance business was the primary driver of the robust positive operating earnings growth in 2024, but even operating income growth excluding insurance hit the double-digits. This was all despite 53% of Berkshire’s 189 operating companies seeing earnings declines in 2024. As a somber note within his annual letter, Buffett stated: “At 94, it won’t be long before Greg Abel replaces me as CEO and will be writing the annual letters.” Buffett showed his faith in Greg Abel’s capabilities to successfully run Berkshire Hathaway when he compared Abel’s ability to act decisively when opportunities presented themselves to Charlie Munger’s.