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:
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:
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.