Warren Buffett’s Dismal Forecast: Earnings Drop for Majority of Berkshire Units

Warren Buffett, the legendary investor and CEO of Berkshire Hathaway, has offered a cautious assessment of his company’s prospects for the coming year.

Speaking at the conglomerate’s annual general meeting, Buffett predicted that the majority of Berkshire’s businesses would experience a decline in earnings due to a long-predicted economic downturn.

This assessment is significant, given that Berkshire is often seen as a bellwether for the US economy, given the broad range of businesses in which it operates, including railroads, utilities, and retail.

Buffett’s comments come at a time when there are growing concerns about the state of the US economy, with rising inflation and interest rates posing a threat to economic growth.

Warren Buffett's Dismal Forecast: Earnings Drop for Majority of Berkshire Units
source : usnews.com

In addition, regional banking instability has led to a curtailment of lending, which could further exacerbate the economic slowdown. In this context, Buffett’s pessimistic outlook for his own company is a sobering reminder of the challenges facing many businesses across the country.

Despite this bleak assessment, there were some bright spots in Berkshire’s recent earnings report. For example, insurance underwriting showed signs of improvement, with Geico returning to profitability after six quarters of losses.

This success is particularly noteworthy, given that the insurance sector is not typically correlated with broader economic activity.

Buffett’s comments suggest that there are significant headwinds facing businesses across the US, particularly those with exposure to the broader economy.

While there may be pockets of success, such as in the insurance sector, the overall outlook is somewhat gloomy. As always, however, Buffett’s words carry weight, given his long track record of success as an investor and his reputation as a sage commentator on economic matters.

Berkshire Hathaway announced that Geico, its insurance subsidiary, had earned $703 million in profits, boosted by increased premiums and reduced advertising spending, despite falling claim frequencies.

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This strong performance helped to propel the overall insurance underwriting businesses to a profit of $911 million, compared to $167 million in the previous year. Despite this, Geico’s growth rate was less than 1% in the quarter, which was significantly below that of its peers.

Although Berkshire had anticipated a return to profitability for Geico in 2023, due to increased premium rates, its underperformance remains a concern for the company.

The subdued growth rate may reflect policy cancellations as customers push back against higher premiums, which could leave the insurer with fewer policyholders.

Meanwhile, other parts of the conglomerate, such as Berkshire Hathaway Energy, suffered a 46.3% fall in after-tax earnings, due to lower earnings from regulated utilities, energy businesses, and real estate brokerage businesses.

To mitigate the impact of volatile markets and fewer investment opportunities, Berkshire increased its stock buyback program to $4.4 billion, up from the previous year.

while Geico’s strong performance boosted Berkshire’s overall insurance earnings, the subdued growth rate and potential loss of policyholders remain a concern. The company’s decision to increase its stock buyback program may reflect the challenges of finding attractive investment opportunities in current market conditions.

Warren Buffett's Dismal Forecast: Earnings Drop for Majority of Berkshire Units
source : investopedia.com

In the first quarter, Berkshire Hathaway increased its cash reserves to around $130.6 billion, up from $128.6 billion at the end of last year. The company sold more stocks than it purchased, resulting in a net gain of $10.4 billion.

Despite the increase in cash reserves, the company advises investors to not focus on investment gains, as they are based on accounting rules and may be misleading. Berkshire’s investment income is expected to be significantly higher this year, thanks to the Federal Reserve’s interest rate hikes to combat inflation.

The company’s annual general meeting is being held later in the day, during which Warren Buffet and Vice Chairman Charlie Munger will answer questions from thousands of fans. Bloomberg is live-blogging the event.

Berkshire Hathaway’s increase in cash reserves and net gain from selling more stocks than purchasing will likely provide the company with more financial flexibility and opportunities for investment in the future.

However, the company’s advice to not focus on investment gains suggests that it places more value on long-term investments rather than short-term gains.