Berkshire Hathaways 2024 Annual Report
Hopefully, GEICO’s recent investments in technology will help its underwriters price at a level that can achieve market share growth while still delivering underwriting profits. The problem in recent years was that GEICO’s confidence in its risk assessment declined due to six quarters of terrible results. The success we saw in 2024 was welcome news, but it remains to be seen what GEICO’s normalized level of profitability will be and whether market share gains will occur. In the third quarter of 2022, GEICO’s loss ratio was a catastrophically high 97%, indicating that management set rates at woefully inadequate levels. Fortunately, that was the high water mark for the loss ratio which has declined to under 70% in the latest quarter. GEICO has always had a significant cost advantage over its competitors and management applied this lever even more aggressively in recent quarters, with advertising spending and other expenses severely trimmed.
Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO. A year ago, Berkshire’s stock rose after the release of the annual report and I wrote Too Clever by Half! But after a subsequent spike in the stock price in late summer, I failed to take my own advice and sold shares in my retirement accounts, thinking that I would owe no taxes on the sale and shares were getting too expensive. A few weeks later, I reversed my decision and wrote a mea culpa, Just Hold the Goddamn Stock! I was fortunate enough to replace my sold shares at a slightly lower price, but I rediscovered that “trading” is not for me. My overall impression is that Berkshire’s cash balance will grow in the coming year unless there is a major market correction that provides attractive opportunities either in the stock market or acquisitions.
The Rational Walk
- If Berkshire seems “expensive” today at 1.65x book value, that problem will most likely work itself out in short order as value continues to accrete to owners and management retains all earnings.
- This should be no surprise at all given what we have seen develop with Berkshire’s cash balance over the past four quarters.
- But within a year, it is highly likely that Berkshire’s intrinsic value will have “caught up” to today’s “overvaluation” and you could very well never have an opportunity to buy back your position at a lower price.
- Berkshire acquired full ownership of Pilot in early 2024 after a nasty legal dispute with the founding family.
- Of course, if Berkshire deploys cash, the goal will be to earn returns materially higher than the yield on treasury bills.
Repurchase activity has ground to a halt and will likely remain suspended given the reaction of the market to Berkshire’s annual report. I would be surprised to see any repurchases unless the stock declines by at least 15% from current levels and we might need a 20% decline, to about $600,000 on the Class A shares, before Mr. Buffett regains his enthusiasm for large repurchases. Fortunately for shareholders who do not want a taxable event, there was no discussion of Berkshire declaring a dividend.
Berkshire acquired full ownership of Pilot in early 2024 after a nasty legal dispute with the founding family. I wonder whether Pilot was in Warren Buffett’s mind when he wrote about Berkshire’s mistakes at the beginning of his annual letter. Personally, I find trading unappealing even when it works out well, as it did for me last summer.
Drivers of Operating Earnings
Warren Buffett’s letter to shareholders is always the highlight, but I also enjoy slowly going through every word of the report and updating dozens of spreadsheets I have maintained for decades. Last year, I wrote a series of articles covering the 2023 annual report, an effort that took several weeks which was undertaken as part of a paid subscription offering which has since been discontinued. I will not repeat that process this year, but I thought it would be helpful for some readers if I post a shorter article. This post is by no means a comprehensive summary of the report and only includes a few topics that I decided to write about. Readers are encouraged to review Berkshire’s press release and annual report. Would we rather have GEICO post a combined ratio in the low 80s with market share stagnation, or a combined ratio in the high 80s or low 90s with robust growth?
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This resulted in an ultra-low expense ratio of under 10% for the full year, although the expense ratio climbed up to 11.6% in the fourth quarter as management felt confident enough to increase advertising spending. I’ve written about GEICO in detail several times over the past few years, with the most recent article appearing after the 2023 annual report. This gem of a business performed strongly for decades but underinvested in technology which resulted in its main competitor, Progressive, achieving an advantage in underwriting appropriately for risks assumed. As a result, GEICO experienced significant underwriting losses between Q and Q and also lost market share to Progressive. Management took steps to raise premiums and cut costs which restored underwriting profitability starting in 2023.
Berkshire Hathaway 2024 Annual Report
- As I type this article, such conditions seem quite unlikely, but sentiment can change quickly in financial markets and there is a significant amount of macroeconomic uncertainty regarding taxes, trade policy, and spending.
- As an example, let’s say that you believe that Berkshire’s intrinsic value is $690,000 per Class A share when the stock price is $750,000.
- Net earnings for the third quarter and first nine months of 2007 increased significantly compared to the prior year periods.
- It is too mentally taxing to try to jump in and out of a stock simply because its value seems a bit on the high side.
- Management took steps to raise premiums and cut costs which restored underwriting profitability starting in 2023.
It would be highly unrealistic for Berkshire shareholders to regard GEICO’s 2024 underwriting profits to be in any way “normal” given the historically low combined ratio. This document is Berkshire Hathaway’s quarterly report filed with the SEC for the quarter ending September 30, 2007. It includes Berkshire’s consolidated balance sheets as of September 30, 2007 and December 31, 2006 as well as consolidated statements of earnings for the third quarter and first nine months of 2007 and 2006. Berkshire’s businesses are organized into Insurance and Other, Utilities and Energy, and Finance and Financial Products segments.
This should be no surprise at all given what we have seen develop with Berkshire’s cash balance over the past four quarters. Meanwhile, dividend income declined due to reductions in the equity security portfolio which was partially offset by higher dividends on certain holdings. Within the corporate structure, a certain percentage of dividend income is berkshire hathaway annual and interim reports excluded from taxation, so as the proportion of Berkshire’s investment income tilts more toward treasury bill interest, we can expect the effective income tax rate to rise.
View differences made from one year to another to evaluate Berkshire Hathaway Inc’s financial trajectory
In addition, many analysts and reporters neglect to subtract a liability reflecting amounts due for treasury bill purchases that had not settled at yearend. With these adjustments, Berkshire’s cash balance stood at $318 billion at the end of 2024. Pilot was transferred to the MSR group in 2024 from the Railroad, Utility, and Energy group where it first appeared in 2023 after being consolidated on Berkshire’s balance sheet.
It is too mentally taxing to try to jump in and out of a stock simply because its value seems a bit on the high side. The situation would be different if a stock is trading at a level that could plausibly result in no return for five or ten years, but that has never really been the case for Berkshire Hathaway. As a result, it seems better to just hold the stock unless there is a need to raise cash or some clearly superior opportunity comes along that carries reasonable levels of risk.
Historically, Berkshire has been aggressive in terms of seeking growth for GEICO, but with the caveat that inadequate pricing must be rejected. Berkshire does not provide “guidance” to analysts, but what if we wanted to forecast interest income for 2025? As a result, we cannot realistically forecast interest income for 2025, although I would note that the treasury yield curve currently implies that the Fed will cut rates by around a quarter to half of a percent this year. Assuming premium volume of, say, $44 billion in 2025, GEICO would post underwriting profits of about $3 billion if it runs at a combined ratio of 93%. However, 93% might be optimistic given that Ajit Jain, at the 2023 annual meeting, disclosed that GEICO’s target combined ratio is 96%. However, news articles often provide inaccurate figures because they include cash held by the railroad and utility groups that Warren Buffett has typically not included in his discussions of cash in the past.