How Monetary Policy and Rate Hikes Could Impact Berkshire
Major insurance players like American International Group (AIG), Prudential (PRU), and Metlife (MET) have witnessed improved investment income in recent quarters mainly due to higher interest income from deployments in debt offerings. The interest income has risen in the recent timeframe, mainly due to rate hikes from the Fed, which has pushed the Fed funds rate to 1.25% in June 2017 from 0.25% in December 2015. The Fed is expected to raise rates further in 4Q17 to 1.5%.
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Berkshire’s (BRK.B) premiums are deployed largely into equity investments by Buffett and Munger. However, the company’s subsidiaries have deployed reasonable leverage for insurance, BNSF, and other businesses, which could result in higher interest costs for the company and thus relatively low net. Its interest, dividend, and investment income for the insurance division stood at $1.32 billion in 2Q17 compared to $1.41 billion in the prior-year period, reflecting lower investment income partially offset by higher interest income. For the finance and financial products, the number stood at $364 million compared to $411 million in the prior year.
Berkshire has been delivering a stable operating performance backed by divisional performances, broad markets (SPY) (SPX-INDEX) growth, and high valuations. However, the company’s investment income could remain subdued for the current quarter due to lower pockets in markets offering attractive returns.
Any further steep rise in rates in 2018 could lead to higher interest costs for asset managers like Berkshire and can impact profitability. The company’s major divisions like Insurance and Energy are posting weaker performances due to underwriting losses, subdued energy margins, and oil prices (USO).