Berkshire’s Q3 operating earnings drop includes a $674 million currency swing

By Nicholas Thomas

Revaluing debt explained most of the fall in operating earnings. GEICO’s rising claims costs show where the business itself came under pressure.

Most of Berkshire Hathaway’s $780 million drop in third-quarter operating earnings came from a $674 million swing in the value of debt denominated in foreign currencies. The company’s November 7 earnings release showed a $343 million loss on that debt, after a $331 million gain a year earlier. Both figures are after tax.

Berkshire (NYSE: BRK.A and BRK.B) periodically recalculates what its non-dollar senior notes are worth in U.S. dollars. Exchange rates can move the reported value of the debt between quarters. In this case, that swing accounted for about 86% of the net decline in operating earnings.

How the quarter compares without the debt swing

Berkshire’s after-tax operating earnings, its non-GAAP measure, fell 5.8% to $12.705 billion for the quarter ended September 30. Adding back this year’s currency loss and subtracting last year’s currency gain puts the two figures at $13.048 billion and $13.154 billion, respectively. That leaves a decline of about 0.8%. The calculation isolates this one debt item and leaves the rest of Berkshire’s reported results in place.

At GEICO, more premium dollars went to claims

The Morning Brief covered the broad slowdown in insurance. Berkshire’s quarterly report shows what changed inside GEICO. Claims and the cost of handling them ate up 76.6 cents of every premium dollar earned, up from 71.5 cents. Another 14.8 cents went to underwriting expenses, up from 12.8 cents. Berkshire attributed the higher claims ratio to more frequent and more costly claims and lower average earned premiums per policy.

GEICO’s pre-tax underwriting earnings fell to $982 million from $1.773 billion. Exchange rates can change the next group earnings comparison on their own. To see whether GEICO is recovering, the more direct measure is how much of each premium dollar it spends on claims and underwriting.