Here's Why I'm Not Too Worried About Berkshire's Operating Earnings Setback

The headlines are jarring, to be sure. Usually resilient Berkshire Hathaway (NYSE: BRKA) (NYSE: BRKB) suffered a 30% ($10.2 billion) year-over-year drop in its fourth-quarter operating earnings, capping off a year when net earnings fell more than 24%, from $89 billion to $67 billion.

Even if these quarterly results were the last ones produced with Warren Buffett still at the helm, it's not exactly an encouraging start for new CEO Greg Abel.

Still, it would be easy to come to the wrong conclusion about Berkshire's recent results. While it is mathematically true that the conglomerate's bottom line contracted last quarter as well as for the entirety of last year, this setback comes with a much-needed footnote.

Image source: Getty Images.

Not exactly a fair comparison

The chart tells the tale. Yes, Berkshire Hathaway's insurance underwriting and insurance investment income contracted last quarter, as well as last year. Just note that this comparison is being made to the oddly strong but ultimately unsustainable growth of its insurance business in 2024. Compared to any other recent year, Berkshire's reportedly beleaguered insurance business is still doing rather well.

Data source: Berkshire Hathaway. Chart by author. Figures are in millions.

The bulk of the conglomerate's reported earnings lull, of course, is the decrease in realized and unrealized (mostly unrealized) investment gains from its individual stock holdings. That's largely a reflection of the fact that the company's been scaling back the size of its stock portfolio since 2023 and growing its cash hoard from just over $100 billion then to more than $370 billion now; less money in the market means less total net gains, even if the market is climbing.

Then there's the nuance that doesn't readily show up on any of this company's quarterly reports: It's been steadily selling off shares of what, at one point not too long ago, were its second-biggest stock holdings as well as some of its biggest sources of dividend income. That's Bank of America. From just over 1 billion shares of BofA as of the middle of 2024 to roughly half that amount now, Berkshire Hathaway has given up more than half a billion dollars' worth of yearly dividend payments.

Buffett added new dividend-paying stocks to the portfolio in the meantime, for the record, like Domino's Pizza or more shares of insurer Chubb. These additions just haven't been enough to offset what it lost by scaling back its stake in Bank of America.

It also merits mentioning that 2025's $8.2 billion worth of impairment charges for its Kraft Heinz, as well as for its purchase of part of Occidental Petroleum, are also unusual one-time expenses, even if not counted as part of operating income.

Temporary turbulence translates into opportunity

Berkshire's all-important insurance business is on the defensive. Greg Abel will want and need to address this headwind as well as he knows how to as soon as he possibly can.

Of all the things about Berkshire that can be addressed, though, this is arguably among the least addressable. Its insurance arm's pricing must remain competitive with the rest of the industry, while payouts remain largely subject to unpredictable weather factors, including hurricanes, wildfires, and more.

The good news is the insurance business is largely self-correcting, with pricing and payouts eventually easing back toward historical long-term averages. That's certainly been the case for Berkshire Hathaway.

More to the point for interested investors, this stock's post-report pullback is arguably more of an opportunity than an omen.

Bank of America is an advertising partner of Motley Fool Money. James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Domino's Pizza. The Motley Fool recommends Kraft Heinz and Occidental Petroleum. The Motley Fool has a disclosure policy.