Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) reported operating earnings of $3.89 billion for the second quarter, down 10% from $4.33 billion in the same quarter last year. The company's net income, which includes gains and losses from its investments and derivatives positions, fell to $4.01 billion, down 37% from $6.4 billion last year.
Underlying Berkshire's year-over-year decline in operating earnings was a rare underwriting loss from its insurance companies. The company reported a combined underwriting loss of $38 million, stemming from a decline in the results at GEICO, and a $411 million loss for Berkshire Hathaway Reinsurance Group.
In its quarterly report, the company noted that GEICO saw an increase in "claims frequencies and severities in several of its major coverages," consistent with a decline in results and commentary from other automotive insurers like Allstate (NYSE:ALL) during the second quarter. GEICO's underwriting profit fell sharply to pre-tax profits of $53 million, down from $393 million in the second quarter of 2015.
Berkshire Hathaway Reinsurance Group, which produces very volatile results given the nature of the business -- insuring other insurance companies -- and its customer concentration -- 37% of its property/casualty premiums in this unit come from just three contracts -- posted an underwriting loss of $411 million, down from an underwriting loss of $9 million in the second quarter of 2014.
Berkshire's non-insurance operating companies performed well across the board, with each segment reporting higher pre-tax income. Its noninsurance operating companies saw their pre-tax earnings grow by nearly 8% from the same period last year. One notable improvement included its railroad, BNSF, which generated pre-tax earnings of $1.53 billion, up from $1.47 billion last year.
No help from its investments
Movements in asset prices can have a particularly large impact on Berkshire's investment portfolio and net income, given its beefy size. During the second quarter, its non-insurance investments and derivatives positions offered little help to offset falling operating earnings from its insurance companies. The company reported a net gain on its investments and derivatives of $123 million in the second quarter compared to $2.06 billion a year ago.
As expected, Berkshire's derivative bets generated a pre-tax loss of $174 million resulting from broad declines in global stock market indices and an uptick in volatility, which negatively affects the carrying value of its put options sold on market indexes. Likewise, a relatively flat quarter left its investment portfolio to generate only modest appreciation, and income of $236 million after taxes compared to $1.96 billion last year.
Though the results may appear lackluster, it's important to remember that Berkshire's largest earnings drivers -- insurance and its investment portfolio -- are inherently very volatile. What matters isn't their performance in a single calendar quarter, but over years. Berkshire's underwriting discipline and history as a company with excellent capital allocation make it easy to look past the quarter-to-quarter swings to see that Berkshire remains a growing, cash-rich company with stakes in some of America's best businesses.