Insurance Weighs on Berkshire Hathaway’s 2nd Quarter Profit

August 11, 2008

Omaha, Neb.-based Berkshire Hathaway Inc. reported an 8 percent decline in second-quarter profit as of Friday, Aug. 8 because it collected fewer insurance premiums and recorded $1 billion in unrealized derivative losses.

Billionaire Warren Buffett’s company said it generated $2.9 billion in net income, or $1,859 per share, during the quarter that ended June 30. That’s down from the $3.1 billion net income, or $2,018 per share, it reported in the same period a year ago.

The three analysts surveyed by Thomson Financial were expecting earnings per share of $1,370.33 on average.

Berkshire generated $30.1 billion in revenue during the second quarter, up from $27.3 billion last year.

Officials at Berkshire typically do not comment on quarterly earnings reports. A company spokeswoman did not immediately respond to messages left by the Associated Press on Friday afternoon.

The results impressed Andy Kilpatrick, the stockbroker and author who wrote “Of Permanent Value: The Story of Warren Buffett,” because so many other companies have had to write down the value of assets or reported losses this year.

“I think it looks surprisingly good,” Kilpatrick said.

The unrealized derivative losses Berkshire reported in the second quarter are down from the $1.67 billion the company reported in the first quarter. But Berkshire said in its news release that it doesn’t think investors should pay much attention to the amount of derivative or investment gains or losses in any given quarter.

Buffett has said he believes the long-term derivative contracts Berkshire has written will ultimately be profitable.

Berkshire’s derivatives fit into two major categories. Berkshire will have to pay on some of the contracts if certain U.S. entities default on their credit. Most of the other derivatives will only be paid if certain stock indices are lower in 15 or 20 years than they were when the contract was written.

Glenn Tongue, a managing partner at T2Partners, said he agrees with Buffett’s assessment that the derivatives will prove profitable and wishes the company would seek more of them.

“Evaluating Berkshire on how these contracts have moved is sort of the height of lunacy,” said Tongue, whose investment firm holds a sizable stake in Berkshire.

Berkshire said its operating earnings offer a better measure of how the company is performing in any given period because those figures exclude derivatives and investment gains or losses.

Berkshire reported a $2.3 billion operating profit, or $1,465 per share, during the quarter. That’s down from the $2.5 billion operating profit, or $1,625 per share, it reported in the 2007 second quarter.

Berkshire’s insurance group, which includes Geico, reinsurance giant General Re and several other firms, reported a large drop in underwriting profits during the quarter, with the biggest drop coming in reinsurance.

The company said it expects underwriting profits to be significantly lower in 2008 because of increased price competition and because the string of relatively catastrophe-free quarters is certain to end.

Berkshire Hathaway Reinsurance group reported a drop in pretax underwriting net income, from $356 million in 2007’s second quarter to $79 million this year. General Re reported a $102 million pretax underwriting profit this quarter, down from $230 million a year ago.

Berkshire’s new bond insurance unit formed late last year continued to perform well, but it appeared that business had slowed.

Berkshire said the bond insurance unit brought in $520 million through the first six months of the year. Earlier this year, Buffett told shareholders that Berkshire’s new business insuring municipal bonds generated more than $400 million in premiums during the first quarter.

Berkshire finished the quarter with $31.2 billion cash on hand. That’s down from the $35.6 billion cash the company had at the end of the first quarter.

This is the first quarter that includes Berkshire’s $4.5 billion purchase of a 60 percent stake in industrial conglomerate Marmon Holdings Inc. for the full three months. That deal closed March 18 _ less than two weeks before the end of the first quarter.

Marmon added $261 million in pretax earnings in the quarter, and by the end of the second quarter, Berkshire had increased its stake to nearly 64 percent of the conglomerate.

Marmon includes more than 125 manufacturing and service businesses across the transportation, energy and construction markets. Marmon makes products ranging from railroad tank cars to metal fasteners.

Marmon’s earnings helped bolster Berkshire’s manufacturing, service and retailing division and compensate for companies like Shaw carpeting, which suffered because of the overall housing downturn. The division reported $719 million pretax earnings in the quarter, which was up from $645 million a year ago.

Two major deals that Berkshire agreed to help finance this year _ candymaker Mars Inc.’s purchase of Wm. Wrigley Jr. Co. and Dow Chemical Co.’s purchase of rival chemical maker Row and Haas Co. _ have yet to close, so those deals didn’t affect Berkshire’s quarterly earnings. Berkshire will end up with sizable stakes in both Dow and Wrigley after the deals are complete.

Through the first half of the year, Berkshire reported $3.8 billion net income, or $2,467 per share. That’s down 33 percent from the $5.7 billion, or $3,700 per share, Berkshire made during the first two quarters of 2007, when its insurance division generated exceptional results.

Berkshire owns more than 60 subsidiaries including insurance, clothing, furniture, candy companies, restaurants, natural gas and corporate jet firms. Berkshire also has major investments in such companies as Coca-Cola Co., Anheuser-Busch Cos. and Wells Fargo & Co.

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