If you told me that I had to invest $50 billion every year until we got down to $50 billion in cash, that would be the dumbest thing in the world. Things get extraordinarily attractive very occasionally. – Warren Buffett
Berkshire Hathaway’s (BRK/A, BRK/B) first-quarter earnings release was eclipsed by the annual meeting and the announcement that Warren Buffett would be stepping down as CEO at the end of the year. Warren Buffett leads Berkshire as CEO and Chairman with Greg Abel, Vice Chairman of Non-insurance, and Ajit Jain, Vice Chairman of Insurance.
Berkshire Hathaway reported earnings of almost $4.6 billion in the first quarter, well below the $12.7 billion in the same quarter of 2024, primarily due to a decline in stocks. Operating earnings, which remove the distortion from market changes and better reflect the firm’s earnings power, fell by 14% for the quarter versus 2024. Per-share operating income decreased by 14% for the quarter, with no share repurchases over the past year.
Berkshire’s most significant business by annual operating earnings is insurance, followed by the manufacturing, service, and retailing segment.
Buffett spoke briefly at the annual meeting about first-quarter earnings. He noted that Berkshire’s insurance earnings were as good as they get in 2024, so starting less well this year is unsurprising.
Insurance underwriting was the primary culprit behind the decline in operating earnings, with wildfire losses negatively impacting results. Other income also declined significantly, primarily due to accounting for foreign currency swings. Excluding insurance and the “other” segment, operating earnings were 9% higher.
Insurance
For the first quarter of 2025, investment income was 11% higher than in 2024, primarily due to higher short-term investment balances. There was wonderful news at the annual meeting that GEICO has closed the technology gap with competitors. Jain credited Todd Combs with turning around the business and stated that the company is no longer behind in telematics. GEICO also saw a significant workforce decline, which aided in profitability. Notably, policies in force grew relative to the first quarter 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 $173 billion is $2 billion higher than on December 31, 2024. In general, the value of float increases as yields rise since an insurance company can earn more when investing the cash. Float per share was $120,287, above the level at the end of 2024. Share repurchases were not an aid to the growth of float per share over the past year.
Significant catastrophe losses from the California wildfires hit Berkshire for the quarter. Despite these losses, Berkshire’s insurance segment earned an underwriting profit. The comparison versus the first quarter of 2024 was difficult, since there were no large losses during that period. Berkshire has a history, unlike many insurance companies, of earning an underwriting profit, meaning that their float costs it nothing and makes it money in addition to allowing it 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. Due to the wildfires, only GEICO had a profitable underwriting quarter. An underwriting profit means the insurance premium exceeds all insurance claims and expenses. For example, GEICO had a combined ratio of 79.8% in the first quarter, which means that only 79.8 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 quarter.
Railroad
Berkshire owns one of the largest railroads in North America, the Burlington Northern Santa Fe (BNSF) railroad, which operates in the U.S. and Canada. Railroad freight volume improved, and operating earnings rose about 6% versus the same quarter last year. On a more positive note, BNSF continued to see better productivity, which bodes well for earnings improvement outside of extraordinary items. BNSF’s trailing 12-month operating ratio, operating expenses divided by revenue, improved in the first quarter. Buffett noted at the annual meeting that the “railroad is not earning what it should,” but is ”getting solved.”
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 headline numbers, with operating earnings soaring by 53% over the same quarter in 2024. However, lower losses for the real estate segment (Homeservices) flattered the year-over-year comparisons. In the first quarter of 2024, BHE’s real estate group lost $159 million as it set aside reserves for losses from “real estate industry litigation matters.”
Manufacturing, Service and Retailing
Pre-tax earnings fell by 1.3% due primarily to the manufacturing businesses. This segment consists of many diverse companies, so this analysis will focus on the best and worst performers and some themes when looking at this segment.
Within the manufacturing segment, the building and consumer products groups accounted for the decline in pre-tax income. Within building products, Clayton Homes had better revenues, but lower pretax income due to “lower earnings from financial services.” MiTek and Shaw had falling earnings “due to falling demand and the impact of a divestiture in 2025.” The decline in consumer products earnings was primarily from Forest River, with additional weakness from Garan, Jazwares, and Duracell.
The service group saw a 9.6% increase in pre-tax earnings for the quarter, primarily attributable to the aviation services, leasing businesses, and Charter Brokerage. Lower earnings from TTI partially offset the strength in those businesses. 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 retailing group was a drag on earnings growth, with a 7.6% decline in pre-tax earnings for the quarter. The most critical portion of the retailing segment is Berkshire Hathaway Automotive (BHA), which owns over 80 auto dealerships. BHA had flat earnings compared to the first quarter of 2024. Pre-tax earnings for the remainder of the retailing group fell by 32.8%, due primarily to “lower earnings from our
other retailing businesses, partially offset by increased earnings from the home furnishings businesses.”
Pilot Travel Centers (PTC) is 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. Despite decreased revenues in the quarter, pre-tax earnings increased 140% due to “gains from asset dispositions and lower interest expense, partially offset by higher selling, general and administrative expenses.” McLane’s revenues also declined relative to the same quarter in 2024. Still, pre-tax earnings were 9.7% higher thanks to “an increase in the overall gross sales margin rate, partially offset by the impacts of lower sales and higher selling, general and administrative expenses.”
Non-Controlled Businesses & Other
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. According to Bloomberg, Berkshire is Occidental Petroleum’s largest shareholder, with an almost 27% stake. More about the reasons for the Occidental investment is here.
The segment experienced a 96% decline in operating earnings for the quarter, primarily due to foreign currency exchange rate losses 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 gains from non-U.S. dollar investments generally offset some of these losses 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 $1.5 billion in publicly traded stocks in the first quarter. This marks the tenth straight quarter of Berkshire Hathaway’s net sales of stocks. Berkshire bought $3.2 billion of stocks while selling $4.7 billion. The upcoming 13F filing with the SEC will provide more specific buy and sell details.
After the sales, Berkshire’s insurance company investment portfolio is down to 52% publicly traded stocks from 53% in the fourth quarter, while cash rose from 43% to 44%.
What To Watch
The BNSF railroad had slipped relative to the five other major railroads, but there has been some improvement in profitability and efficiency in 2024. There wasn’t much of an update at the annual meeting other than Buffett saying that the “railroad is not earning what it should,” but is ”getting solved.” In any case, BNSF continues to be on their radar, so progress should be monitored.
While BHE earnings looked much better to start 2025, the threat of further liability for wildfires hasn’t gone away. Buffett and Abel spoke at length about the need for more electric generating capacity, but that the liability threat imperils the attractiveness of Berkshire’s future capital spending in the business. Buffett went so far as to say that “our enthusiasm for buying public utilities is different than it was.”
Summary And Scorecard
Berkshire’s stock price outperformed the S&P 500 in the first quarter, rising by 17.3% versus a total return of -4.3% from the S&P 500. Year-to-date through May 9, Berkshire’s price was +13.2%, while the S&P 500 had a total return of -3.3%.
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 to consider Warren Buffett’s capital allocation decisions05.
Previously, 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: Trailing 12-month operating earnings were 13.1% higher than last year’s same quarter, though underwriting losses caused a 3.3% sequential decline in the measure. 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.
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 when 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. Berkshire has not repurchased stock for the last four 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 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 a 17.3% compound growth rate, while operating earnings per share have done 2.2 percentage points better at 19.5%. Eagle-eyed readers might notice that operating earnings growth oddly exceeded operating earnings per share growth over the last year. Berkshire issues some shares to purchase the remainder of Berkshire Hathaway Energy (BHE) in October 2024.
Hope for an occasional big opportunity: Berkshire has a fortress balance sheet with cash and equivalents of over $342 billion. Cash as a percentage of Berkshire Hathaway’s size is the highest since we have data, at 29.9%. This cash hoard provides flexibility to take advantage of opportunities, including repurchasing its stock if the price declines to attractive levels.
Buffett said Berkshire “holds a lot more cash and Treasury bills than I would like.” He is always looking for investments, but “things don’t come along in an orderly fashion.” He’d like less cash on hand, even as low as $50 billion. “Occasionally, we will be bombarded with opportunities that we will be happy we have the money for,” he said.
Share repurchases are off the table at the current valuation, so one lever for Buffett to create value is removed. 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 tariff shocks, recession, or market downturn by being in a financial position to take advantage of opportunities during a crisis.
Buffett made the most significant announcement at the end of the meeting, stating that he planned to step down from the CEO role at the end of the year. He recommended that Greg Abel assume the CEO role and that Abel should have the “final word on operations or capital deployment.” Following the meeting, the board of directors approved the succession plan, with Buffett remaining Chairman. While it was already clear that Abel was making most of the operational decisions, assuming the final responsibility for all capital allocation decisions will be a significant change. Notably, Buffett will remain Chairman to provide any needed guidance and intends to retain all his shares in the company. The scorecard detailed above, which monitors the progress of Berkshire’s management, should remain unchanged regardless of the upcoming change in leadership.
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