BRK: Berkshire Hathaway (4)

Intro

We love it that BRK publishes their reports on Saturdays — gives us the weekend to read.

BRK has been and still is our biggest position since the beginning of this fund. This article will go through a sum of parts valuation and commentaries on the economics of the business.

Below is the summary table:

(1&2) Cash & Fixed Income Securities: $387b

The huge pile of cash at BRK is a consequence of selling their equities portfolio, especially the Apple position. BRK stopped purchasing more shares in 2019 when Apple’s exposure was ~$74b. Then in the following years leading up to end of 2023, Apple’s exposure ballooned to ~$174b.

BRK then sold down the position from 905.6 million shares in Q4 2023 to just 300 million shares in Q4 2024. Then 2025, they further reduced the exposure ending 2025 with 227.9 million shares at a valuation of $62b, it’s still the largest position (~20%) in the equities portfolio.

The Apple investment did very well since they purchased it in 2016. Over the 9 years, the cost basis was $35/share and today it’s $264/share, that’s a CAGR of 25%!

Investors who think about Buffett usually point to his “never sell, hold forever” philosophy. If Buffett didn’t sell a single Apple share, at their peak holding of 1,021 million shares (adjusted for 20:1 split), it would be worth $270b now. However, to understand the thinking behind taking profits and why Buffett prefers cash, we have to go back to the 1998 Gen Re acquisition.

Recall that Buffett bought Coca-Cola (“Coke”) shares in 1988 — 1990 and it grew more than 13x from its $1.3b cost basis to $17.3b at Q2 1998. Including dividends, it was something like 18x. Because of this market value appreciation, BRK equities portfolio ended 1998 at $37.3b and was 115% book value and 65% of total assets.

Coke itself was nearly 50% of the equities portfolio, 55% of book value and 30% of total assets!

Fundamentally from 1988 to 1998, Coke grew sales by 9.2% per year and expanded profit margins from 12% to 19%. As a result, earnings per share compounded at 16%. The markets rewarded the stock, boosting the PE ratio from 16x to 59x.

Most people would sell the position, but remember that the tax rate was 35% in 1998. Tax rates only fell to today’s 21% after the Tax Cuts and Jobs Act in 2017. To pay 35% tax on $16b gains would have cost $5.6b, almost 18% of book value as at end 1997.

Buffett had better ideas as BRK shares were trading at a high of 2.9x book value, he used the expensive shares as currency to buy Gen Re, issuing 272,200 of Class A equivalent shares at $80,882/share. The goodwill was $14.5b, a huge premium to Gen Re’s tangible book value.

Although the quoted cost was $22b, the economic reality was that BRK shares were twice as expensive as intrinsic value. Therefore, the economic cost of Gen Re could be thought of as only $11b.

Why did Buffett want to buy Gen Re?

Well, it was because 90% of Gen Re investment portfolio was in fixed income securities! When BRK’s overvalued equities combined with Gen Re’s fixed income, the equities portfolio was valued at $37.3b, while the fixed income was $31.2b. Suddenly, equities as a percentage of book value declined from 115% to 65%, effectively resulting in a derisking reallocation without paying any taxes.

We know what happened to Coke’s share price after that, the PE multiple collapsed from 59x to 24x and EPS grew only 5.2% from 1998 to 2025. The total return was a miserable 4.6%!

Imagine the performance drag on book value if Gen Re wasn’t acquired to lessen the impact. BRK never sold a single share and today the Coke position is only 2.2% of total assets. Their “hold forever” ownership went from glorious to mediocre.

Now, back to their Apple position, the story is quite similar. BRK owned it for 9 years and Apple’s total returns compounded at 29%. Very impressive. But the difference is that BRK shares have not been expensive, and BRK market cap is now too big to absorb any insurance company to materially increase its assets and float.

Therefore, if it’s true that:

• Apple’s valuation cannot be sustained at over 30x earnings.

• Current corporate tax rate of 21% is more likely to be higher in the future.

Taking profits is then a reasonable conclusion. Remember that BRK initially bought Apple at just 10x earnings.

(3) Equities Portfolio: $235b

The equities portfolio is a large amount at market value of $298b, at this size it’s impossible to outperform the S&P500 index anymore. However, the advantage of owning equities is not because it will beat the index. Given the unusually large degree of overcapitalization in BRK insurance operations, it allows BRK to overweight on equities while other insurers have to own mostly bonds.

Since BRK buys good companies and generally does not overpay, the earning yields on equities must be higher than bond yields.

Bonds pay interest while businesses reinvest earnings. As a result, BRK dominance over the insurance industry will only grow.

Do note that BRK controls a few companies that are not disclosed in the 13F filings because they are not listed on the US stock exchange.

1. The 5 Japanese trading companies: Itochu, Mitsubishi, Mitsui, Sumitomo, Marubeni.

2. BRK used to own BYD until they finally sold everything in Q1 2025. The original investment was in 2008 for only $230m (peak valuation was ~$8b).

3. BRK used to own shares in PetroChina, POSCO, Tesco, Sanofi, Swiss Re, Munich Re.

As of 2025, these non-13F holdings are estimated to be $35b (11% of equities portfolio). Overall for last 20 years, BRK total equities portfolio compounded at 10.8% while S&P500 was 10.7%.

We make 2 adjustments, reducing valuation by -$63.2b:

1. Bring Apple’s expensive valuation down to 20x earnings (-$24.2b)

2. Account for deferred tax on unrealized gains at 21% (-$39b).

(4) Equity Method Investments: $19b

There’s 3 entities accounted under equity method:

1. Kraft Heinz (27.5%)

2. Occidental (26.9% + warrants)

3. Berkadia (50%)

Kraft Heinz

Kraft Heinz was indeed a lousy investment. The investment was made in two parts. BRK first teamed with 3G to acquire all of Heinz in 2013 for roughly $28b including debt, taking it private. BRK paid $4.25b for half of the common equity and paid $8b in a 9% preferred.

Heinz then merged with publicly traded Kraft in 2015. BRK and 3G both paid another $10b ($5.2b from BRK) for a one-time $16.5/share cash dividend to Kraft’s shareholders. BRK’s 9% preferred was ultimately redeemed.

BRK total cash investment totaled $9.8b for 325.4 million shares of Kraft Heinz. As the investment has been accounted for using the equity method, BRK cost basis increased to $13.6b reflecting its proportionate share of Kraft Heinz minus dividends received. In Q3 2025, they had a $5b write-down reducing BRK carrying value from $13.6b to $8.6b.

BRK per share cost basis is $30.1, while Kraft Heinz shares are trading at $24.6 now. The price is certainly down accounted for on a cash basis, but Kraft Heinz paid a cumulative $18.15/share ($5.9b) in dividends since the 2015 merger.

It’s really bad in the context that BRK and 3G had the business nearly merged with much larger Unilever in 2017 when Kraft Heinz was trading closer to its high at $96/share!

Berkshire vacated its board position in Kraft Heinz at the time of the write-down. Kraft Heinz more recently proposed splitting back into two companies and Greg Abel registered their willingness to sell all ownership.

Occidental

BRK is Occidental’s largest shareholder with 264.9 million common shares (26.9%) and 8% preferred shares redeemable in 2029 at 105% of liquidation value. The preferreds were initially $10b, Occidental redeemed $1.5b.

BRK also owns warrants to purchase 83.9 million more shares at $59.59/share until 1 year after the preferreds are fully redeemed.

Cost basis is estimated to be $14.5b compared to $10.9b market value as of end 2025. BRK also recorded a pre-tax impairment loss of -$5.7b in Q4 2025.

In 2025, BRK spent $9.7b cash to buy Occidental’s chemical business OxyChem. Read this post for more details.

(5) BNSF: $82b

If there’s anything resembling a 100-year bond, the railways look much like it. Since BNSF was acquired in 2010, almost all free cashflows were distributed back to BRK:

BNSF has been late to adopt logistical efficiencies, all the major Class 1 rails except BNSF adopted PSR (Precision Scheduled Railroading) method of operations. For example, the closest competitor Union Pacific (UNP) has operating ratio ~60%, substantially lower than BNSF ~67%.

To reflect a higher operating ratio, we give a 15x earnings multiple, lower than UNP 5-year average of 21x.

(6) BHE: $71b

BHE is made up of 3 regulated electric utilities and distribution assets spanning across the US, Alberta (Canada) and UK.

These utilities are MidAmerican Energy, Nevada Energy and PacifiCorp. They produce more than 34,000MW of power each year, providing energy substantially below the US national average cost.

BHE investor presentation, pg.8

Distribution pipelines are more than 21,000 miles long, transporting 15% of natural gas consumed in the US. They are investing $18b to modernize and build more electrical grid capacity in Western US and Canada.

Half of BHE generating capacity comes from renewables (wind, solar, hydroelectric, geothermal). These assets are built in locations where electric grids don’t exist.

The main competitive advantage is that BHE retains all earnings to finance growth, while other utilities have to payout a large portion of profits as dividends.

NCI (non controlling interests) refers to a number of natural gas distribution assets like the Cove Point LNG export terminal and storage assets from Dominion. BHE now owns 75% of Cove Point, Brookfield owns the other 25%.

BHE also has 50% interest in Electric Transmission Texas.

BHE is on the path to powering the grid with renewables, and less with coal. Only 5% of BHE net property and equipment was related to coal generation. The three regulated utilities closed 16 coal-fired plants from 2006 to 2021, and plan to close another 16 by 2030 and phase out its final 14 by 2049. BHE further intends to retire all of natural gas-fired production units by 2050.

If we look under the earnings breakdown, there’s one odd “real estate” segment:

The real estate brokerage is called Home Services of America, it earns big revenues of $4.3b but tiny profits at $24m. Volumes and profits are hurt due to higher mortgage rates and weak refinancing activity, interest rates are relatively high now and that hurts affordability.

PacifiCorp Wildfires

Recall in 2024, BRK bought the remaining 8% of Walter Scott’s family stake in BHE. The implied valuation for 100% BHE was $49b. The primary reason for the discount is the unknown future liability associated with litigation of PacifiCorp wildfires in Oregon and Northern California. The fires destroyed more than 2,000 structures and took several lives.

PacifiCorp to date has recorded an estimated $2.85b in pre-tax losses for the wildfire litigation, of which $1.4b has been paid. Thus, unpaid liabilities total $1.45b. Insurance recoveries offset $530m of the losses, but with no more expected.

Amounts sought in complaints in Oregon and Northern California total approximately $55b (Q3 2025), up from $46b prior year.

A large portion of $52b relates to damages in the James case, an unprecedented class action that grouped multiple distinct, independently ignited fires in geographically diverse regions into a single class. Before this case, no court in Oregon has certified a class action that included multiple claimants impacted by distinct fires, let alone thousands of claimants located hundreds of miles apart who were impacted by different events. Therefore, in 2025, PacifiCorp appealed to challenge key legal rulings and we will see the progress in 2026.

We believe that electric utilities exist for the public good as regulated monopolies which are allowed to earn a modest return on equity for providing the investment. If there were no profits, then no private sector company would exist. We don’t think state owned models can provide the lowest cost to consumers.

Therefore, we deem the wildfire expenses to be one-off and add it back to earnings, along with the cash tax savings from tax credits.

(7) MSR

The MSR segment is made up of many companies with even more subsidiaries underneath. Marmon itself is a holding company that has more than 100 manufacturing & service businesses organized into 11 business groups. In total, MSR has 286,363 employees!

Many of these businesses are mature and won’t deliver high growth either through pricing or volumes. In fact, some of them are in decline. Therefore, a focus on operational efficiencies is important.

ROE is estimated ~8%, nothing fantastic here. Don't expect improvements to move this number significantly.

Overall, it’s just a decent large group of matured businesses that are predictable. We think 12x earnings is reasonable.

(8) Insurance Underwriting: $54b

10-year history of underwriting results by segments:

GEICO

Progressive Insurance overtook GEICO in terms of market share in 2022 and is currently #2 at 16.7% share. GEICO is #3 at 11.6%, while the #1 State Farm has 18.9%.

Underwriting profits came in at $6.8b against net earned premiums (NEP) of $44.5b. The combined ratio of 84.7% is unusually good and we don’t expect this to persist. GEICO still operates as the industry’s lowest cost producer at 12.4% expense ratio. For a commoditized product such as car insurance, a low cost operation has durable competitive advantages.

The YOY higher expense ratio was due to higher advertising cost.

It’s worthy to know that GEICO produces the most premiums yet requires the least amount of capital. Because admitted auto insurers can write up to $3 premiums for every $1 capital.

BH Primary

BH Primary writes P&C insurance, including healthcare professional liability, workers’ compensation, automobile, general liability, property and specialty coverages.

Overall premiums were slightly lower YOY although these entities improved:

1. MedPro +9% primarily student health business

2. BHHC +7.4%

3. NICO +13% primarily commercial automobile

4. BH Direct +15.8%

5. USLI +4.9%

These increases were offset by declines:

1. GUARD -32.6% due to volume reductions across numerous product categories. GUARD is a collection of 5 companies writing commercial insurance to more than 200,000 small-medium enterprises. During 2024, due to deteriorating loss experience, management at GUARD performed a comprehensive review of claims and significantly increased estimated ultimate claim liabilities. The reduction of favorable development of prior years’ liability claims estimates was attributable to unfavorable social inflation trends, including the impacts of jury awards and litigation costs.

2. RSUI -8.7% due to reduced volumes.

BHRG

This is the reinsurance (RI) segment.

The global RI industry suffered huge losses from the COVID pandemic and a series of natural disasters between 2020 to 2022. As a result, the industry entered into a hard market, but 2024 and 2025 were years of few catastrophes and the supernormal profits brought back competition.

We can see BRK shying away from premiums when pricing softens:

If conditions remain unchanged, we can expect premiums and underwriting profits to decrease in 2026, however profitability will be maintained.

BRK commands a capital base that is stronger than any company in the RI industry. The statutory surplus is a massive $333b, let’s say BRK assigns $30b to GEICO, then it has $303b of capital supporting ~$26b of premiums. That’s just $0.086 premiums per $1 of capital!

Compare this to the entire RI industry surplus capital of $760b with expected written premiums of ~$438b (+11% growth from $395b in 2024). These stats are incredible: BRK wrote 6% of the entire industry’s premiums, and has 40% of surplus capital!

The industry excluding BRK wrote $412b premiums on $427b capital: $0.96 premiums per $1 of capital — compared to BRK’s $0.086!

In fact, it’s quite scary to know that the entire RI industry excluding BRK is writing premiums at nearly 1:1 capital. If a chain of significant catastrophes occur at the same time, everyone’s sinking and BRK is going to be the one handing out life jackets.

That’s why you hear Buffett claiming that BRK will survive a thousand-year flood:

We will always be prepared for the thousand-year flood: in fact, if it occurs we will be selling life jackets to the unprepared.

Warren Buffett, 2015

Look at the 2 largest reinsurers in the world and their premium-to-equity ratios:

• Swiss Re: $43b premiums, $25b equity.

• Munich Re: €60.4b premiums, €33.4b equity.

Because of this setup, they cannot allocate into equities and have to match their liabilities with low yield bonds.

Put together, we assume a normalized COR 96% on NEP $88.9b, and apply a 15x multiple. This approach is different from prior years where we tried to derive the underwriting engine by PV of float, which requires sensitive assumptions (discount rates).

For this reason we will use numbers directly from the 10K to sense check if 15x multiple is reasonable or not.

Firstly, the insurance capital can be thought of as float + statutory surplus.

Why add float in?

We have mentioned this many times: Although float is a liability in accounting terms, it actually has equity-like characteristics for BRK because of 3 reasons:

1. BRK generates float through consistent underwriting profits.

2. BRK insurance business is growing every year, and so does the float.

3. BRK is overcapitalized. Outgoing claims need not be paid from the float.

Therefore, insurance float is not a liability in economical sense, it allows BRK to own more assets than its own equity capital. The effects are similar to leverage with debt, but float doesn’t have any negative covenants like debt. It is like permanent capital if the above 3 conditions are met.

• Float + statutory surplus = $176b + $333b = $509b.

• Implied return on capital (ROC) = 54/509 = 11%.

We think ~10% ROC is reasonable.

(9) HoldCo debt: -$22.7b

This is debt that has recourse to BRK.

Most of it comprises of JPY denominated debt with only 1.2% fixed interest rate (interest expense $180m). The proceeds funded the 5 Japanese trading companies which gave dividends of $862m in 2025, yielding 5.6% on original cost basis of $15.4b (pg.20, 2025 10K).

These are predictable diversified businesses that distribute dividends significantly exceeding the interest cost of debt.

Is this what free money looks like?

Normalized Look-Through Earnings

The sum of parts suggest that BRK is likely overvalued at $1,089b market cap. Below is an alternative method to derive normalized earnings and check for multiples.

These are the adjustments:

• Add proportionate earnings of equity holdings, less out the dividends received from them.

• Less out fair value movement and underwriting results.

• Add back normalized underwriting profits at COR 96%.

• Add back one-time charges.

It is indeed not cheap at 24.5x implied PE.

Succession Notes

Ajit Jain

The next important succession question is on Ajit Jain.

There are 2 candidates within BRK that can take over:

1. Kara Raiguel (CEO Gen Re, 53 years old). Kara is educated as an actuary and worked initially at CIGNA and then moved to BRK, first spending 15 years working at National Indemnity, with 7 years of close working relationship with Ajit in underwriting large retroactive RI. Ajit appointed her as Gen Re CEO after Tad Montross retired in 2016. Before her move to Gen Re, the entity was doing average 98.5% COR. After she came, average COR improved to 96.6% from 2016 to 2018. Today it’s running at 88% to 92%.

2. Don Wurster (CEO National Indemnity, 73 years old). This fact alone should show why he is instrumental at National Indemnity: From 1986 to 1999, written premiums fell by -77%, but headcount only decreased by -45%, and National Indemnity had underwriting profits every single year:
   

   

No other company and executive will tolerate 13 years of declining sales and higher expense ratios, but Buffett and Wurster are exceptional leaders who would rather chase profits than size. Maybe age will come as a factor, Wurster is just 1 year younger than Ajit.

Marc Hamburg

Marc Hamburg joined BRK in 1992 as CFO and announced his retirement on June 2027. Charles Chang will take over, moving away from his role as BHE CFO. Charles will work with his successor at BHE over this first 5 months of 2026 before moving on.

The CFO role for BRK is very detail oriented. Buffett has commented that Marc knows the business better than anyone else. Alas, he’s 75 and age does catch up.

Todd Combs

Nancy Pierce was appointed CEO at GEICO upon Todd Combs’ resignation to join JP Morgan. Her career spanned 39 years at GEICO, starting in the claims department, going to underwriting, telephone sales, operations and eventually Chief Operating Office in 2024.

Michael O’Sullivan was appointed full-time in-house general counsel, he previously worked at Munger, Tolles & Olson prior to joining Snap as in-house counsel in 2017. BRK for years used Munger, Tolles & Olson as external counsel and Ron Olson recently retired from BRK’s board.

Todd’s resignation is not surprising given his energetic nature. He worked with Amazon & JPM for the failed Haven Healthcare project, and sat on the board of JPM since 2016. After he became CEO of GEICO in 2019, underwriting profits went from $1.5b to $6.8b.

Ted Weschler now managed about 6% of BRK’s investments, including a portion of the portfolio formerly overseen by Todd.