Berkshire May Have First Underwriting Loss in Nine Years After Disasters

Warren Buffett said natural disasters led by the Japan earthquake in March eroded first-quarter profit at Berkshire Hathaway Inc. (BRK/A) and may lead to the company’s first annual insurance underwriting loss in nine years.

Net income dropped to $1.51 billion from $3.63 billion a year earlier, Berkshire said yesterday in a statement. The insurance segment posted an underwriting loss of $821 million. The Japan earthquake cost the firm $1.06 billion, a temblor in Christchurch, New Zealand $412 million, and flooding and a cyclone in Australia $195 million.

Berkshire benefited last year after the U.S. escaped major damage from hurricanes. Insurers had more than $60 billion in catastrophe claims as a result of Hurricanes Katrina, Wilma and Rita in 2005, according to ISO, a unit of actuarial data provider Verisk Analytics Inc.

“We probably had the second-worst quarter for the insurance industry in terms of catastrophes around the globe,” Buffett said yesterday at Berkshire’s annual meeting in Omaha, Nebraska. “Normally the third quarter of the year is the worst because that’s when the hurricanes tend to hit.”

Berkshire made $1.3 billion last year from insurance underwriting, according to a regulatory filing. Its last annual underwriting loss was in 2002, at $284 million.

“It’s unlikely that we would have an underwriting profit for 2011,” said Buffett, the firm’s 80-year-old chairman and chief executive officer. “If it was remarkably catastrophe- free, it’s conceivable we would break even.”

No Dividend

Berkshire’s Class A shares have risen 3.6 percent this year in New York Stock Exchange trading. They declined $55 to $124,750 on April 29.

Buffett, who has shunned payouts to Berkshire investors and buybacks, said declaring a dividend would cause his firm’s shares to fall and be an admission that he can’t fully invest the company’s profits. He prefers to make acquisitions and buy securities instead. With a cash hoard of about $38 billion, it may be harder to effectively invest the proceeds, Buffett said.

“Every dollar that’s been reinvested in Berkshire has created more than a dollar of market value,” said Buffett, who is Berkshire’s largest shareholder. “There will come a time, and who knows how soon because the numbers are getting big,” that the company won’t be able to use profits in a way that serves shareholders, he said.

Derivatives, Investments

Berkshire had a first-quarter loss of $82 million on derivatives and investments compared with a $1.41 billion gain on the holdings a year earlier. Liabilities on the company’s so- called equity-index puts widen when four stock indexes fall further from the levels they were at when Buffett made the deals near the market’s peak in 2006 and 2007.

Japan’s Nikkei 225 (NKY) Stock Average, one of four benchmarks covered by Buffett’s bets, dropped 4.6 percent in the first quarter, led by declines after the earthquake in that country. The stock-price declines in Japan are a “buying opportunity” for equity investors, Buffett said at a news conference in Bangalore in March. The other three benchmarks, including the Standard & Poor’s 500 Index, advanced in the period.

U.S. lenders are less attractive investments than they once were, Buffett said. Berkshire was the largest shareholder in Wells Fargo & Co. (WFC) as of year-end and the third-largest owner of U.S. Bancorp stock.

“U.S. banking profitability will be considerably less in my view in the period ahead than it was in the early part of this century,” Buffett said. “A very important reason is that the leverage will be reduced. That’s probably a good thing for society. That may be a bad thing for banks who can use leverage intelligently.”

‘Bullish’ on Recovery

Profit from regulated businesses, such as the Burlington Northern Santa Fe railroad and utility unit MidAmerican Energy Holdings Co., surged to $908 million from $505 million a year earlier. Matt Rose, CEO of Burlington Northern, said he is confident about economic expansion led by trade with Asia.

“I’m very, very bullish about the recovery,” Rose said yesterday in an interview in Omaha. “It’s really driven by worldwide demand, specifically China.”

Berkshire acquired Burlington Northern last year for $26.5 billion in cash and stock, taking on about $8 billion in debt, in what Buffett has called an “all-in wager” on the U.S. economy. His firm said in March that it would purchase engine- additive maker Lubrizol Corp. for about $9 billion in cash.

Future Deals

“We’re looking at a couple but they’re not more than a gleam in the eye,” Buffett said of deals that would be “something similar” to Lubrizol. “They’re worth doing but we can’t do a really big elephant now and we won’t stretch when we’ve never really taken any risk because we don’t need to.”

Manufacturing, service and retailing profit jumped to $558 million in the first quarter from $477 million a year earlier. That group includes Marmon Holdings Inc., a maker of construction materials; carpet manufacturer Shaw Industries; and Fruit of the Loom, which produces underwear and other clothing, according to the company’s annual report. Berkshire didn’t break down results by unit.

“Pretty much all of our businesses with the exception of those that are related to residential housing are getting better,” Buffett said.

To contact the reporters on this story: Noah Buhayar in New York at nbuhayar@bloomberg.net; Margaret Collins in Omaha at mcollins45@bloomberg.net; Andrew Frye in Omaha at afrye@bloomberg.net

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net

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