Record quarterly operating profit
- 3Q23 operating earnings were up 41% year-on-year, primarily driven by robust insurance income, which more than offset the tepid performance in non-insurance businesses
- The company maintained a prudent approach as (1) cash levels reached a new high, (2) stock positions were reduced during the quarter, and (3) share repurchases slowed down
- We continue to like the company’s resilience in the face of the higher-for-longer interest rate environment; maintain BUY with higher TP of US$405
Strong insurance income offsetting macro weakness. 3Q23 operating earnings rose 41% y-o-y to US$10.8b, which is 33% above pre-pandemic 2019 levels. Underwriting profit was strong at US$2.4b (3Q22: loss of US$1.1b due to Hurricane Ian) due to absence of significant catastrophic events and fewer claims from drivers. Insurance’s investment income also increased 75% y-o-y due to surge in short-term rates. Operating earnings from non-insurance business were down 20% y-o-y, as the Group set aside US$1.3b of possible losses by PacificCorp from the wildfires. Excluding that, the performance is largely in-line with the weaker macro backdrop, as earlier expected by Buffett. Net losses, which included the US$29.8b of mark-to-market investment losses, reached US$12.8b.
Resilient in the face of higher rates.
While the S&P index reached its peak and fell by 3.3% during 3Q23, Berkshire displayed more prudence – it net sold US$5.3b worth of stocks and reduced repurchase to US$1.1b in 3Q23. The cash level reached a new high of US$157.2b (+US$10b q-o-q) as of Sep 2023. The firm can, therefore, continue to take advantage of higher short-term rates when waiting for potential M&A opportunities, which typically arise during deeper market corrections. While higher interest rates may continue to weigh on the US equity market, we believe Berkshire could outperform, considering (1) its strong cash holdings, (2) relatively resilient non-insurance businesses, (3) uncorrelated insurance underwriting income, and (4) equity portfolio that largely comprises of cash-rich companies. Maintain BUY with TP lifted to US$405, after rolling to FY24F at a slightly lower multiple of 1.3x P/B