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Interest rate hikes boost Warren Buffett’s Berkshire Hathaway results

Warren Buffett’s Berkshire Hathaway is fast becoming one of the main beneficiaries of the sharp rise in US interest rates, as its fortress-like balance sheet begins to generate hundreds of millions of dollars in revenue for the sprawling conglomerate.

The interest the company earns on its $109 billion cash pile nearly tripled from a year earlier to $397 million in the third quarter, it disclosed on Saturday, noting that the gain was “primarily due to increases in short-term interest rates.”

Berkshire holds the vast majority of its cash in short-term Treasury bills, bank deposits and in money market accounts, where interest rates have been rising rapidly as the Federal Reserve has tightened monetary policy. Last week, the US central bank raised interest rates to between 3.75 and 4 percent, up from near zero at the start of the year, and traders expect this rate to top 5 percent next year.

Although tightening policy has sent shockwaves through financial markets ̵[ads1]2; even denting the value of Berkshire’s giant stock portfolio — it is finally starting to pay dividends for cash-strapped companies and consumers.

Data from the Investment Company Institute showed that cash parked in money market funds that cater to everyday retail investors has swelled to record highs.

Line chart of cash, cash equivalents and short-term Treasuries ($bn) showing that Berkshire's $109bn cash pile now generates significant interest income

Over the past decade, Buffett and Berkshire Vice Chairman Charlie Munger have presided over a significant expansion of Berkshire’s cash holdings, which they believe is critical given the potential catastrophic payouts the company’s insurance businesses may one day need to make.

It was a point underscored by third-quarter results that showed Berkshire was hit with a $3.4 billion pretax loss from Hurricane Ian, which killed more than 100 people as it tore through parts of Florida. US President Joe Biden has said it will take years, not months, for the region to recover.

Berkshire’s insurance unit suffered an operating loss of $962 million during the quarter, and Geico warned that higher prices for used auto parts and an increase in accidents weighed on results.

Column chart of quarterly interest and other income ($mn) showing Higher interest rates are starting to pay off for Berkshire Hathaway

Buffett and Munger has long been able to withstand large losses in its insurance division because of the large “float” — insurance premiums it collects before it ultimately has to pay claims on liabilities. This flow has helped drive its investments in shares and finance the company’s acquisition of businesses.

The sell-off in financial markets hampered Berkshire’s stock portfolio, which includes large stakes in Apple, American Express, Chevron and Bank of America. The company said its portfolio fell in value to $306.2 billion from $327.7 billion at the end of June.

Those declines led to a net loss of $2.7 billion in the period, or $1,832 per Class A share, from a profit of $10.3 billion the year before, worth $6,882 per share. Buffett has long characterized the fluctuations in the investment portfolio – which it must recognize in the income statement due to accounting rules – as “meaningless”.

Dozens of businesses it owns, widely watched for signs of the health of the U.S. industrial and business complex, revealed the resilience of the U.S. economy while signaling the potential slowdown being engineered by the Fed. Berkshire’s results also showed the effects of inflation and the fight for better wages as real living standards come under pressure from higher prices.

Revenue at the BNSF railroad rose 17 percent to $6.5 billion, but profits fell as freight volumes it sent declined and it paid higher wages to its employees. The railroad became a flashpoint earlier this year when more than 30,000 unionized workers at BNSF threatened to strike, pushing back against conditions and demanding a pay raise.

A preliminary agreement in September made concessions to employees, and BNSF said labor costs rose 27 percent in the third quarter from a year earlier.

The energy companies in Berkshire’s utilities division reported a 17 percent jump in revenue, boosted by higher power costs.

But the company’s real estate unit saw sales fall by almost a fifth, and operating profit at the unit plunged 72 percent from a year earlier as the housing market cooled and it sold fewer homes.

Berkshire said higher mortgage rates were also expected to pressure its handful of businesses in the housing sector. During the quarter, however, these businesses – including brick maker Acme and flooring group Shaw – managed to raise prices and recorded strong demand.

Overall, operating income rose to $7.8 billion from $6.5 billion the year before. The results were helped by higher profits in the manufacturing and service business.

Total return (%) line chart showing that Berkshire has outperformed both stocks and Treasuries in 2022

Berkshire, which this year bought a 21 percent stake in energy company Occidental’s common stock, disclosed that in the fourth quarter it would begin reporting earnings from the oil and gas giant as part of its results.

The company also said it had spent just over $1 billion in the quarter buying back its own shares.

Berkshire’s Class A shares, which are down 4.1 percent this year, have far outperformed the broader market. The benchmark S&P 500 has fallen 20.9 percent while an investor in US government bonds has lost 15.3 percent, according to Ice Data Services.

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