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Insurance, economy, tariffs weigh on Berkshire Hathaway

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(Reuters) – Berkshire Hathaway Inc (BRKa.N) on Saturday said its quarterly operating profit fell more than analysts expected, as weakness in insurance underwriting, a slowing economy and trade woes weighed on the conglomerate run by billionaire Warren Buffett.

Warren Buffett, chairman and CEO of Berkshire Hathaway, takes his seat to speak at the Fortune’s Most Powerful Women’s Summit in Washington October 13, 2015. REUTERS/Kevin Lamarque/File Photo

Berkshire’s auto insurer Geico suffered a larger number of accident claims, while competition from foreign producers, lower imports and “trade policy” dampened cargo volumes for consumer and agricultural products at its BNSF railroad.

Earnings also barely budged at Berkshire’s manufacturing businesses, where U.S. tariffs hurt sales of gas turbine and pipe products at its Precision Castparts unit, and its service and retailing businesses.

Second-quarter operating profit declined 11% to $6.14 billion, or roughly $3,757 per Class A share, from $6.89 billion, or roughly $4,190 per Class A share, a year earlier.

Analysts on average expected operating profit of $3,851.28 per share, according to Refinitiv IBES.

Berkshire also said quarterly net income rose 17% to $14.07 billion, or $8,608 per Class A share, from $12.01 billion, or $7,301 per Class A share, a year earlier, reflecting higher unrealized gains on Berkshire’s investments.

A U.S. accounting rule requires Berkshire to report such gains with earnings. That rule adds volatility to Berkshire’s net results, and Buffett says it can mislead investors.

The U.S. economy’s annualized growth rate slowed to 2.1% in the second quarter from 3.1% in the first quarter, as an acceleration in consumer spending was partially offset by declining exports, manufacturing and business investment, reflecting the trade war between the United States and China.

Buffett told CNBC in May that a U.S.-China trade war would be “bad for the whole world,” and a full-scale trade war would be “bad for everything Berkshire owns.”

MORE CASH

Berkshire ended June with $122.4 billion of cash and equivalents, reflecting Buffett’s 3-1/2-year drought in finding big acquisitions since buying Precision Castparts.

He has instead invested elsewhere, building a $50.5 billion stake in iPhone maker Apple Inc (AAPL.O) and committing $10 billion in April to help Occidental Petroleum Corp (OXY.N) buy rival Anardako Petroleum Corp (APC.N). Berkshire has also bought back $2.1 billion of its stock this year.

The Omaha, Nebraska-based conglomerate operates more than 90 businesses that also include Dairy Queen ice cream, Fruit of the Loom underwear, and its namesake energy company and real estate brokerage.

It also owns dozens of stocks, including Bank of America Corp (BAC.N), Wells Fargo & Co (WFC.N) and Coca-Cola Co (KO.N).

Class A shares of Berkshire closed Friday at $306,000, about 9% below their peak last October. Class B shares closed at $202.67, closer to 10% below their peak.

CONSUMER DRAG

Insurance underwriting profit dropped 63% to $353 million, with declines in several businesses.

Geico’s pre-tax underwriting gain fell 42%, as a higher ratio of loss claims to premiums earned more than offset growth in policies written.

Underwriting at Berkshire’s reinsurance, property/casualty and commercial insurance units also weakened, reflecting higher claims payouts, changes in the expected timing of future payouts, and currency fluctuations, among other factors.

Berkshire was nonetheless able to boost float, or insurance premiums collected before claims are paid and which help fund growth, by another $1 billion in the quarter, to $125 billion.

BNSF’s profit rose 2% to $1.34 billion, while revenue was essentially unchanged.

Profit was also flat in Berkshire’s manufacturing, services and retailing businesses, totaling $2.49 billion.

While Berkshire said more people flew NetJets corporate jets, “soft consumer demand” weighed on sales at home furnishings businesses, which include Nebraska Furniture Mart.

Berkshire Hathaway Energy saw profit rise 4%.

Reporting by Jonathan Stempel in New York; Editing by Hugh Lawson and Alistair Bell

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Economy

Four in five Albertans pessimistic about economy

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Four out of five Alberta residents expect the provincial economy to deteriorate over the next year, according to a new poll.

The public opinion survey, conducted by the non-profit Angus Reid Institute, said Canadians as a whole appear to be worried about the economy, with 43 per cent expecting a worsening of economic conditions in their province versus 21 per cent expecting an improvement.

However, the survey also highlighted stark regional differences. In Quebec, for example, residents are more likely than not to say that conditions in the province will improve, while in Alberta 79 per cent expect conditions to worsen.

Sixty-four per cent of Albertans — the highest rate of any province — are also concerned about potential household job losses. The number of Albertans who identified potential job loss as a “serious worry” is more than double the national average (34 per cent versus 14 per cent).

The Angus Reid Institute also annually asks respondents if their standard of living is better or worse, and there, regional differences are also striking. In Quebec, the highest number of respondents say their standard of living has improved in a decade of tracking, while the number is lowest in Alberta. Notably, Alberta’s proportion of positive responses dropped by half immediately after Justin Trudeau’s Liberals formed government in 2015 and have remained low since. This year, 56 per cent of Albertans said their standard of living has worsened over the past 12 months.

astephenson@postmedia.com

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German economy grows slightly in 3Q

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BERLIN — Germany’s gross domestic product returned to modest growth in the third quarter, the Federal Statistical Office reported Thursday, staving off a widely-feared recession in Europe’s largest economy.

The Wiesbaden-based agency said the economy grew 0.1% in the July-September period over the previous quarter, largely driven by public and private consumption. Exports rose as well, while imports remained roughly at the second quarter level, the agency reported.

It said, however, that the second quarter contraction was greater than preliminary figures had shown, with the economy shrinking in the April-June period by 0.2% compared to the 0.1% originally reported.

Two straight quarters of declining output is considered a technical recession, which many economists had predicted that Germany had entered in the third quarter.

A week ago, the German government’s independent panel of economic advisers reported that a 0.1% third-quarter contraction was likely.

Though they said there were no signs of a “broad, deep recession,” the panel also said there was no sign of a “strong revival” in the fourth quarter. The five-member panel cut its economic forecast to growth of 0.5% this year and 0.9% in 2020, compared with its forecast in March of 0.8% this year and 1.7% next year.

And even though the recession has been averted, the numbers show Germany is in a de facto stagnation, and its export-driven economy still faces headwinds due to international uncertainty.

Services companies and the jobs market have held up well in Germany, but the industrial sector, led by automobiles and factory machinery, has seen declines amid trade tensions.

Among other things, the dispute between U.S. President Donald Trump and the Chinese leadership over China’s trade surplus with the U.S. has dampened trade and industrial output by raising uncertainty about whether and where more tariffs might be imposed. Another negative is uncertainty about the date and terms of Britain’s departure from the European Union.

In their report, the government economists cautioned that a no-deal Brexit could yet chop 0.3 percentage points off next year’s German growth, reducing it to 0.6%.

Britain is currently scheduled to leave the European Union by the end of January, but whether, how and when it leaves will depend on the outcome of an election next month.

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China economy grinds lower as October indicators miss forecasts

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By Gabriel Crossley and Huizhong Wu

BEIJING (Reuters) – China’s industrial output grew significantly slower than expected in October, as weakness in global and domestic demand and the drawn-out Sino-U.S. trade war weighed on activity in the world‘s second-largest economy.

Industrial production rose 4.7% year-on-year in October, data from the National Bureau of Statistics released on Thursday showed, below the median forecast of 5.4% growth in a Reuters poll.

Indicators showed other sectors also slowing significantly and missing forecasts with retail sales growth back near a 16-year trough and fixed asset investment growth the weakest on record.

The disappointing economic data adds to the case for Beijing to roll out fresh support for the economy after China’s economic growth slowed to its weakest pace in almost three decades in the third quarter as the bruising U.S. trade war hit factory production.

Broad activity in China’s manufacturing sector remains weak with data on the weekend showing factory gate prices falling at their fastest pace in more than three years in October.

China’s official Purchasing Managers’ Index (PMI) also showed activity in the factory sector remained in contraction for a sixth straight month in the month.

“Admittedly, optimism surrounding a phase-one U.S.-China trade deal could provide a boost to corporate investment in the near term,” Capital Economics China Economist Martin Lynge Rasmussen said.

“But even if a minor deal is agreed upon in the coming months, this would merely allow the focus to shift to the more intractable issues that we think will eventually lead the trade talks to break down. The case for further monetary easing remains intact.”

Other data on Thursday showed China’s property investment growth in the first 10 months of the 2019 slowing year-on-year.

The tariff war between China and the United States has hit global demand, disrupted supply chains and upended financial markets.

While some signs of recent progress in trade negotiations between the superpowers have cheered investors, officials from both sides have so far avoided any firm commitments to end their dispute.

That uncertainty has continued to weigh on manufacturers and their order books.

Thursday’s data also showed fixed asset investment, a key driver of economic growth, grew 5.2% from January-October, against expected growth of 5.4%. The January-October growth was the lowest since Reuters record began in 1996.

Private sector fixed-asset investment, which accounts for 60% of the country’s total investment, grew 4.4% in January-October.

On Wednesday, China’s State Council said Beijing would lower the minimum capital ratio requirement for some infrastructure investment projects.

Retail sales rose 7.2% year-on-year in October, missing expected growth of 7.9% and matching the more than 16 year low hit in April.

Consumers have been hit with higher food prices over the past few months, as pork and other meat prices soared.

At the same time, consumers have been reluctant to make big purchases with auto sales falling for the 16th straight month in October, data showed on Monday.

(Writing by Stella Qiu; Editing by Sam Holmes)

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