How Comprehensive Is Your Income?

By Will Ashworth | September 13, 2009 AAA

How many investors take the time to go through the comprehensive income portion of the profit and loss statement? Probably not many. Most of us are interested in black and white, unambiguous numbers like total revenues and net profits. Mention comprehensive income and our eyes glaze over. So what is it exactly? It's the change in equity in any given period of all transactions from non-owner sources such as foreign currency translations and increases or decreases in unrealized capital gains. Why should you care? It tells you how a company builds shareholder equity beyond retained earnings.

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Insurance companies are classic examples of how comprehensive income changes shareholder equity for the good and the bad. To demonstrate this, here are the second quarter comprehensive incomes of five of the largest publicly traded property and casualty companies.

Top 5 Property & Casualty Companies by Market Cap

Company Comprehensive Income - % of Net Earnings Price/Comprehensive Income Per Share
Berkshire Hathaway (NYSE:BRK.A) 356% 13.1
Travelers (NYSE:TRV) 176% 21.1
ACE (NYSE:ACE) 316% 10.2
Chubb (NYSE:CB) 162% 19.1
Allstate (NYSE:ALL) 677% 6.0

You Can Count On Allstate
On September 11, Goldman Sachs analyst Christopher Neczypor downgraded Allstate from "Neutral" to "Sell" suggesting it was losing market share in the auto insurance business, sustaining significant losses from disaster coverage on its homeowner's policies and not taking decisive enough action with its life insurance business. As part of his downgrade, he set a target price of $28. That all could be true but before you write off Allstate, you might want to look at the figures in the table above.

Two things happened to Allstate in its second quarter. First, it had a huge increase in unrealized gains from its investment portfolio and that translated into a 19.4% increase in shareholder equity for the first six months of the year. In addition, it increased revenues by 14.5% to $8.49 billion from $7.42 billion a year earlier. It even made a net profit of $389 million despite a 17% increase in catastrophe losses. Sure, things aren't perfect at Allstate as Neczypor points out, but if you're one of those people like Warren Buffett who judges a company's success by its growth in book value per share, you have to give Allstate a passing grade.

The Rest Of The Pack
The second highest percentage of comprehensive income to net income in the second quarter was none other than Berkshire Hathaway. Should we be surprised? The quarter was a good one for the markets and Buffet's portfolio was no different.

In Q2, Berkshire Hathaway had a net change in unrealized appreciation of investments of $11.6 billion, which resulted in a $3.44 billion addition to its accumulated comprehensive income. Unfortunately, this wasn't enough to increase shareholder equity, which dropped 2.9% year over year. However, 2009 is shaping up to be a nice bounce-back from 2008 when book value dropped 9.5% from $120.7 billion to $109.3 billion. If the markets can rally once more before the end of the year, who knows, Berkshire Hathaway's book value might even make it back to 2007 levels.

The Bottom Line
Comprehensive income is just one aspect of financial accounting. Taken on its own, it's almost meaningless. However, when combined with the rest of the balance sheet, it gives you a good picture of what a company is doing with its excess capital. Shareholders need to concern themselves with how their money is spent. It's not enough to know your company made a profit and paid a dividend. You need to get under the hood and find out if your share of the pie could be bigger. (To learn more, check out Digging Into Book Value.)

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