Despite posting solid advances on Friday, stock markets were down last week, and all the same worries investors have had are still largely present. Midterm elections on Tuesday will draw attention, but the focus seems to remain on the Federal Reserve and broader macroeconomic pressures. In premarket trading, futures contracts on the Dow Jones Industrial Average (DJINDICES: ^DJI), S&P 500 (SNPINDEX: ^GSPC), and Nasdaq Composite (NASDAQINDEX: ^IXIC) were slightly higher, as investors seem to hope that things will turn out favorably.
Making news over the weekend was Warren Buffett, whose Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) reported its third-quarter financial results on Saturday morning. As was widely expected, the Oracle of Omaha did prove vulnerable to the bear market. However, its stock was up in premarket trading on Monday, and a closer look at the underlying businesses held within the insurance-focused conglomerate could leave you with a good feeling about Berkshire's prospects.
Losses for Berkshire -- with a caveat
It's easy for those who aren't familiar with Berkshire Hathaway's accounting requirements to draw the wrong conclusion from a quick glance at the insurance giant's headline numbers. Berkshire posted a net loss of $2.69 billion during the third quarter, bringing its year-to-date losses to a staggering $40.98 billion.
Yet Berkshire is required to mark its investments and derivatives to market on a quarterly basis. This has the impact of adding huge gains during bull markets, but when the value of those investments goes down -- as has happened in 2022 -- it results in massive charges against earnings. Indeed, those investments and derivatives cost Berkshire $10.45 billion in the third quarter and a whopping $65.07 billion in the first nine months of the year.
Buffett would probably suggest that looking at realized gains and losses would make more sense. Berkshire didn't have a perfect track record there, with net realized losses of $378 million in the third quarter and $946 million in the first nine months of 2022. However, that at least reflects investment decisions that Buffett and his team made rather than the simple day-to-day fluctuations of share prices.
The rest of the story
To understand Berkshire fully, the best place to start is with the operating earnings of its subsidiaries and major ownership holdings. There, you can get a better picture of the forces affecting the company's overall fundamental performance. Doing that yields some interesting insights:
- Berkshire's insurance units posted a $962 million underwriting loss for the period. That was worse than in the year-earlier quarter, showing the impact of higher catastrophic losses that other insurers have also seen.
- At the same time, though, rising interest rates played a part in boosting the amount of investment income Berkshire's insurance-related assets generated. The 21% year-over-year rise to $1.41 billion was enough to offset higher underwriting losses.
- Berkshire's major cyclical subsidiaries had mixed performance. The BNSF railroad unit saw operating earnings ease lower by roughly 6% to $1.41 billion, but the utility and energy businesses saw a similar-sized rise year over year to $1.59 billion. The performances of the two areas basically canceled each other out.
- The strongest absolute gains came from Berkshire's other controlled businesses, with operating earnings there climbing by more than half a billion dollars to $3.25 billion.
In addition, Berkshire noted that its use of foreign currency-denominated debt yielded gains due to the strong U.S. dollar, adding $679 million to operating earnings for the quarter.
Overall, operating earnings rose 20% in the quarter to $7.76 billion, and year-to-date figures have seen almost exactly the same growth rate. That suggests that Berkshire Hathaway's core businesses are still as healthy as ever and well positioned to deal with the unique challenges of this particular bear market.
