For years, skeptics have labeled the company essentially an index, but Warren Buffett's Berkshire Hathaway (BRK.A) reported fantastic second-quarter results. Revenue jumped 16% year-over-year to $44.7 billion, easily exceeding consensus expectations. Operating earnings were also strong, growing 5% year-over-year to $2,384 per share, also better than consensus estimates. The Oracle's favorite metric, book value per share, is up 7.6% year-to-date to $122,900.
On a segment basis, insurance underwriting profits were a tad weaker than the year prior, down 14% year-over-year to $530 million. Of course, underwriting is a notoriously volatile business because the timing of catastrophic events is inherently unpredictable. The year-to-date trend is positive, as profits have more than doubled. Still, the long-term trend remains the more important metric to observe, in our view. We don't put too much weight into the underwriting earnings of any particular quarter, at least at Berkshire.
Image Source: BRKA 10-Q 2Q FY2013
Berkshire's investment income from its insurance businesses increased 10% year-over-year to $1.1 billion thanks to strong equity performance and increased dividends. The above graphic shows how Berkshire's asset base has changed so far during 2013, as the firm put a bit of cash to work. The 'equity securities' valuations and 'fixed maturity securities' valuations likely represent a change in market values, as opposed to an abrupt shift in asset allocation.
Other insurance competitors posted decent results during their respective quarters. AIG (AIG) saw its book value increase 11% year-over-year to $61.25 per share (down 2% sequentially), while its earnings per share rose 17% year-over-year to $1.12, easily exceeding consensus estimates. The strong results were driven by Property and Casualty insurance, where profits rose 17% year-over-year to $1.1 billion.
Unlike Berkshire, AIG also has an investment products portfolio targeted to a retail audience. Income in the firm's 'Life and Retirement' segment grew 23% year-over-year to $1.2 billion. Not surprisingly, the rise in US equity markets drove significant interest in the firm's retirement product and mutual funds. AIG also feels confident enough in its future performance to authorize a $1.5 billion share buyback and reinstate a dividend of $0.10 per share (its first regular dividend since 2008).
The Hartford (HIG) took its cue from AIG and rode Property and Casualty to higher second quarter earnings. Overall, core earnings per share increased 18% year-over-year to $0.66, driven by a 39% increase at P&C. The quarter was also relatively friendly to the rest of the sector, with earnings up 11% year-over-year at MetLife (MET) and earnings up 17% year-over-year at Lincoln Financial Group (LNC).
Berkshire's Non-Insurance Businesses
Berkshire's railroad business Burlington Northern Santa Fe (BNSF) performed relatively well during the second quarter, as net earnings increased 10% year-over-year to $884 million driven largely by a 3% increase in cars/units handled and a 2% increase in average revenue per car/unit. Revenue in the unit jumped 5% year-over-year to $5.3 billion. Berkshire noted an increase in coal shipments (thanks to higher natural gas prices), which offset a decline in agricultural products. We think increased rail activity is a bullish sign for the broader US economy.
As with BNSF, Berkshire's 'Utilities and Energy' segment experienced a 10% year-over-year increase in net earnings, to $279 million. A decline in unregulated revenue constrained earnings expansion at MidAmerican Energy Company, despite of regulated rate increases. PacifiCorp drove the majority of earnings growth in the segment with higher rates for regulated retail energy.
Revenue expansion in Berkshire's 'Manufacturing, Service, and Retailing' segment was robust, growing 16% year-over-year to $24 billion. A large portion of the revenue increase was driven by McLane's (wholesale grocery distributor) acquisition of Meadowbrook Meat Company, which diversified the business into the restaurant food distribution market. An 18% increase in retailing revenue also helped drive the segment's growth, as Berkshire now includes the recently-acquired Oriental Trading in its results. Overall, segment profits increased 5% year-over-year to $1.07 billion, as lower earnings from Iscar and chemical maker Lubrizol weighed on overall results.
Overall, we were pleased with Berkshire's strong results across its various operating businesses, even though some segments struggled in the second quarter. Unlike many of its peers, Berkshire runs all of its businesses for the long term, so the second quarter results have little impact on our view of the company.
For Berkshire to continue to be successful, its next generation of leaders will have to keep the culture established by Buffett and Charlie Munger alive. Considering the legendary investors' investment track record, we are relatively confident that they will choose the proper people for the job.