Berkshire Profit Doubles on Insurance Results, Derivatives
Net income climbed to $3.25 billion, or $1,966 a share, from $1.51 billion, or $917, a year earlier, when the company faced claims from an earthquake and tsunami in Japan, Berkshire said today in a statement.
Buffett increases the volatility of results by guarding companies against losses from the largest natural disasters, a risk he’s willing to take because insurance units gives him funds to invest, especially when catastrophes are less severe. Omaha, Nebraska-based Berkshire’s profits also fluctuate based on the performance of stock indexes including the Standard & Poor’s 500 after Buffett used derivatives to bet on equities.
There weren’t “any catastrophe losses that were of note, outside of some tornado activity” in the first quarter, Tom Lewandowski, an analyst with Edward Jones & Co. in St. Louis, said in a phone interview before results were announced. Worldwide, claims from natural disasters were “nothing like we had last year with Japan,” he said.
Book value, a measure of assets minus liabilities, rose in the quarter to $176 billion from $164.9 billion at the end of 2011. Berkshire’s Class A shares have risen 6.3 percent this year in New York, trailing the 8.9 percent gain in the S&P 500.
The value of the equity portfolio climbed to $89.1 billion from $77 billion on Dec. 31 as American Express Co., Wells Fargo & Co., International Business Machines Corp. and Munich Re rallied. Berkshire spent $3.4 billion on equities and sold $820 million in the quarter. The company bought fixed-maturity securities for $2.1 billion and sold $1.1 billion of the assets.
The insurance segment posted an underwriting profit of $54 million compared with a loss of $821 million a year earlier, Berkshire said. The company had “no significant losses” from catastrophes in the three months ended March 31, compared with $1.1 billion after tax a year earlier, according to a regulatory filing today.
The gain from equity-index puts rose to $689 million in the three months ended March 31 from $223 million a year earlier. Gains from credit-default contracts, in which Buffett, 81, bets on the ability of borrowers to repay debt, increased to $340 million from $70 million.
Buffett, Berkshire’s chairman, chief executive officer and largest shareholder, sold equity derivatives to undisclosed buyers for $4.9 billion in 2006 and 2007, when markets were near their peaks. Liabilities on the bullish bets narrow when four equity benchmarks rise. The S&P 500 climbed 12 percent in the three months ended March 31 while another benchmark covered by the contracts, the Nikkei 225 Stock Average, surged 19 percent.
First-quarter results include a $337 million impairment related to bonds of Texas Competitive Electric Holdings, a unit of Energy Future Holdings Corp. Berkshire wrote down holdings tied to Energy Future by $390 million last year and $1 billion in 2010 and may record further losses, Buffett said in February.
Operating earnings, which exclude some investment results, were $1,615 a share, missing the average $1,780 estimate of three analysts surveyed by Bloomberg.
Burlington Northern Santa Fe contributed $701 million to quarterly earnings, compared with $607 million a year earlier, as shipments of consumer goods and industrial products rose. The railroad said in a separate filing today that it will pay a $750 million distribution to its parent this month.
Berkshire paid $26.5 billion in 2010 for the 77.5 percent of the railroad it didn’t already own. Buffett is “on the prowl” for large acquisitions after record earnings at Berkshire’s railroad and energy units helped boost the company’s cash hoard to $37.3 billion at the end of 2011, the billionaire investor said in a letter to shareholders in February. The cash pile climbed to $37.8 billion as of March 31.
Utility unit MidAmerican Energy Holdings Co. added $338 million to Berkshire’s earnings compared with $301 million a year earlier. Pretax earnings from Marmon Holdings, a manufacturer of construction materials, increased to $269 million from $222 million.
The Berkshire segment with other manufacturers posted $815 million in profit, compared with $444 million, after Buffett’s purchase last year of Lubrizol, the maker of engine additives. Without Lubrizol, the division’s earnings would have climbed by $72 million, Berkshire said.
Buffett, under pressure to demonstrate Berkshire is prepared for a transition, told investors in the letter that the company’s board had picked his eventual successor as CEO. He didn’t identify who it was or a timeline for the switch. He also said there are “two superb back-up candidates.”
The CEO said April 17 that he has stage 1 prostate cancer that is “not remotely life-threatening or even debilitating in any meaningful way.” Buffett plans to begin a two-month treatment of daily radiation in July. The regimen will restrict his travel during the period and not otherwise change his daily routine, said Buffett. The company’s annual meeting is scheduled for tomorrow in Omaha.
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