1 More Reason to Be Optimistic About Berkshire Hathaway Inc.

Berkshire Hathaway is a complex company with a variety of core businesses. But one of its principal lines of business had a remarkable run in 2013.

Apr 15, 2014 at 5:15PM

Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) and Warren Buffett grab headlines, but it turns out investors may be missing one critical reality that should provide reason for optimism surrounding the investment.

The business composition
All too often discussion of Warren Buffett's Berkshire Hathaway surrounds the stocks the company invests in, and little information is given to its core business operations. Yet it's vital to remember Berkshire Hathaway has operations across a variety of sectors and industries in addition to the investment income that generates earnings for shareholders.

In fact, a quick glance at the earnings from its various business segments reveals just how diverse it is:

Source: Company Investor Relations

Of course the $4.3 billion seen from the investment and derivative gains and losses is eye-opening. But it's critical to know, as Buffett himself says, "we believe that investment and derivatives gains/losses are often meaningless in terms of understanding our reported results or evaluating our economic performance," because the section is the result of the redemption or sale of various assets. In fact, in 2011 Berkshire reported a loss of $521 million as a result of derivative contacts, showing how wildly the income can swing.  

The key business
With that in mind, one of the fascinating things about Berkshire Hathaway is just how reliant it is on its insurance operations. In fact the combined income from insurance -- both the underwriting and investment income -- represents roughly 30% of total income. And while that may not come as a surprise, it is surprising just how strong of a year it had in 2013.

Pre-tax profit from the insurance group rose from $6.1 billion in 2012 to $7.8 billion in 2013, representing a gain of nearly 30%. But what is even more remarkable than that is the fact its investment income -- which represents more than 60% of total insurance income -- was up by only 6%, or $250 million.

Instead of the gains coming from its investments -- which garner the headline attention -- they arose from its core insurance operations. The underwriting income nearly doubled, moving from $1.6 billion in 2012 to $3.1 billion in 2013, thanks to a remarkable rebound from its Reinsurance group and strong results from GEICO:

Source: Company Investor Relations

Yet it isn't simply earnings that have risen, but also revenues, which rose by 6% in total. However, that gain was driven almost entirely by the 11% revenue growth seen from GEICO.

And this remarkable growth in both revenue and income is also under-girded by the fact that its float -- the difference between insurance premiums collected versus those paid out in claims, which it ultimately invests -- has grown from $28 billion in 2000 to $77 billion in 2013.

All of this is to say that 2013 was a tremendous year for the largest singular line of business at Berkshire Hathaway.

The Foolish bottom line
During a 2012 interview Buffett said:

When insurance is good, it's terrific, and it's been good this year.

When you consider 2013 marked a year in which its core insurance operations saw income nearly double, one has to believe it moved from being terrific and good to perhaps astounding and terrific. This will delight not only Buffett, but the Berkshire Hathaway shareholders as well.

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Patrick Morris owns shares of Berkshire Hathaway. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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