By Daniel Shvartsman

Investing.com — Berkshire Hathaway (NYSE:) (NYSE:), the Warren Buffett-led insurance and industrial conglomerate, reported record operating earnings in 2022 even as its net income line showed deep losses due to the bear market on Wall Street last year.

Berkshire Hathaway’s operating earnings, which is Buffett’s preferred figure to measure the company’s growth as it is adjusted to remove net capital gains or losses during the year, was $30.79B, 12.2% above 2021’s figure. GAAP net income came in as a loss of $22.8B. In his annual letter to shareholders that came out Saturday, Buffett reiterated his preference to focus on operating earnings, saying that capital gains’ “quarter-by-quarter gyrations, regularly and mindlessly headlined by media, totally misinform investors.”

Indeed, Berkshire Hathaway’s book value also dropped in 2022, with the drop in Berkshire’s equity securities’ value amounting to more than the book value drop.

Berkshire Hathaway’s annual report, Buffett’s annual letter, and Berkshire’s annual shareholder meeting in May are all hotly followed as indicators of the state of the economy, both given Buffett’s accumulated insight into the state of the economy – with his partner and Berkshire Hathaway vice chairman Charlie Munger – and Berkshire Hathaway’s conglomerate nature, which offers read-throughs to the wider economy.

Here are some highlights from Buffett’s letter and the report:

In defense of capitalism, the U.S., and Berkshire’s corporate citizenship

Buffett’s letter was short on comments about his portfolio, the post-Buffett future of Berkshire Hathaway, or whether the market is more fairly valued after saying ‘little excites us’ a year ago.

Instead, he seemed to make a philosophical and political argument. Buffett made clear the value of share buybacks, noting that Berkshire Hathaway reduced the share count 1.2% from the 2021 annual report to the 2022 annual report (buying back $7.85 billion in shares in 2022) to the benefit of shareholders. But he also stated that, “When you are told that all repurchases are harmful to shareholders or to the country, or particularly beneficial to CEOs, you are listening to either an economic illiterate or a silver-tongued demagogue (characters that are not mutually exclusive),” pushing back on criticism but also perhaps the calls for .

Buffett also spent a section of the letter pointing out that Berkshire paid $32 billion in corporate taxes in the decade ending 2021, amounting to .1% of all federal taxes collected in that period, as a reminder that Berkshire is doing its part. This, combined with his praise of Berkshire Hathaway shareholders who tend to donate their wealth to charity, amounted to defense of Berkshire’s position in the U.S. social fabric.

He coupled that with his continued defense of America, however, saying, “I have yet to see a time when it made sense to make a long-term bet against America. And I doubt very much that any reader of this letter will have a different experience in the future.”

A turning point for GEICO?

Berkshire’s insurance businesses ended up posting a $90 million loss for the year, but Q4 marked a gain of $234 million. GEICO has been the main cause of the loss as compared to past years, struggling with pricing amidst increased claims severity (in part related to used car price inflation).

The auto insurer still lost $440M in Q4, but this was a narrowing compared to Q3. The report cited a reduction in underwriting expenses related to less advertising, an 8.9% drop in policies in force for the year, and an 11.3% increase in average premium pricing for the year. This suggests GEICO is competing less for less-profitable business and adjusting to the increased severity. Throw in any moderation for used car inflation – claims severities were up 14-16% for collision and 21-22% for property damage – and GEICO may have a stronger 2023.

Berkshire at least thinks so, saying it expects an underwriting profit for the year from the unit.

Inflation Vs. Recession

Berkshire’s various businesses struggled with cost inflation and lessening volumes while also benefiting from price inflation. The question is whether those dynamics continue, or whether a recession or conversely a soft landing plays out.

Berkshire’s railroad segment grew revenues 11.9% but operating earnings drop 2.4% and net earnings drop .7% due to this prices up but costs up and volumes down dynamic. The energy and utilities business grew earnings by 9.3%, and the manufacturing segment grew earnings 12.5%. But in regard to the latter, the firm wrote that, “demand began to weaken in the second half of the year at certain of our businesses.”

The importance of long-term investing

While Buffett didn’t comment much on Berkshire Hathaway’s portfolio positions, he talked about the secret sauce to their investment strategy: long-term thinking, and focus.

Buffett cited Berkshire’s positions in Coca-Cola (NYSE:) and American Express (NYSE:), where the buying was mostly done in 1994 and 1995 for $1.3 billion each, and which now return dividends to Berkshire of a combined $1 billion (a 38.5% yield on cost). Pleasing, but “far from spectacular”, Buffett wrote. The key is the capital appreciation, as he noted that each position amounts to 5% of Berkshire’s current net worth, at $25 billion (Coke) and $22 billion (Amex) respectively.

Buffett’s conclusion: “The lesson for investors: The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders. And, yes, it helps to start early and live into your 90s as well.”

This might explain why the firm’s most recent form 13F filing didn’t contain : not everything happens in a given quarter.

Catch up on historic statistics about Berkshire Hathaway.

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