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Berkshire Profit Beats Estimates on Insurance, Railroad

Warren Buffett’s Berkshire Hathaway Inc. posted second-quarter profit that beat analysts’ estimates on gains at insurance units, manufacturing operations, the energy company and railroad Burlington Northern Santa Fe.

Operating earnings, which exclude some investment results, were $2,252 a share, the Omaha, Nebraska-based company said yesterday in a statement. That compares with the $1,777 average estimate of three analysts surveyed by Bloomberg.

Buffett, 81, built Berkshire over four decades from a failing textile maker into a company that produces energy, hauls freight and sells products ranging from ice cream to underwear. The billionaire chairman and chief executive officer has highlighted his firm’s financial strength to investors and as a lure to the managers of potential target companies.

“It’s a great balance sheet at the end of the day,” Tom Lewandowski, an analyst at Edward Jones & Co. who recommends that clients buy the stock, said in an interview before results were announced. “There’s only a few balance sheets out there that can stack up against it.”

Book value, a measure of assets minus liabilities, rose in the quarter to $177.4 billion from $176 billion at the end of March. The cash hoard climbed to $40.7 billion from $37.8 billion three months earlier.

Berkshire’s Class A (BRK/A) shares rose 1.7 percent to $128,479 yesterday. They have advanced 12 percent this year, compared with the 11 percent gain for the Standard & Poor’s 500 Index. Results were released after the close of regular trading.

Insurance Gains

The insurance division posted an underwriting profit of $619 million, compared with a loss of $7 million a year earlier, led by gains at the reinsurance business run by Ajit Jain. Underwriting profit at the Geico auto insurance unit fell 2.5 percent to $155 million as the severity and frequency of claims increased.

Buffett has used insurance premiums Berkshire holds before paying claims to amass the largest equity stakes in companies including Coca-Cola Co. and Wells Fargo & Co. Berkshire’s stock portfolio fell 3.3 percent to at $86.2 billion on June 30 from three months earlier.

Buffett’s biggest takeover, railroad Burlington Northern Santa Fe, was completed in 2010 in a $26.5 billion transaction. The business contributed $802 million to earnings, compared with $690 million a year earlier. Utility unit MidAmerican Energy Holdings Co. added $253 million to Berkshire’s profit compared with $215 million in last year’s second quarter.

Manufacturing Results

Earnings from manufacturing, service and retailing units increased to $1.03 billion in the second quarter from $789 million in the same period in 2011. The group of businesses includes engine-additive maker Lubrizol; Marmon Holdings, a manufacturer of construction materials; and Fruit of the Loom, which produces underwear and other clothing.

Buffett has been positioning his firm for a rebound in housing by adding to holdings of Wells Fargo, the largest U.S. home lender, purchasing residential real-estate brokers and bidding on the mortgage assets of bankrupt Residential Capital LLC. He said last month that housing is starting to rebound, while the rest of the U.S. economy is slowing.

“For the last two years, I’ve seen everything except housing moving forward in the economy,” Buffett said. “In the last few months, the rest of the economy actually has flattened out. Housing is picking up.”

Net income slid 9 percent in the quarter to $3.11 billion as losses on Buffett’s derivatives bets on equity markets widened to $1.17 billion in the three months ended June 30 from $271 million a year earlier.

Equity Derivatives

The contracts are tied to equity indexes in the U.S., Europe and Japan and aren’t scheduled to mature until 2018 or later. Berkshire’s liabilities rise when the benchmarks fall, as they did in the second quarter.

“It was a long-term bet on those markets,” Doug Pawlowski, an analyst at Fitch Ratings, said in an interview before results were announced. “Given the accounting treatment, he’s essentially stopped making that particular bet.”

Buffett wrote in a February letter to shareholders that new rules around collateral have made the wagers less attractive. The derivatives book will probably shrink under the company’s next leaders, he said at the annual meeting in May.

In yesterday's filing, Berkshire said it entered into an agreement with an unidentified counterparty after June 30 that reduces by about half its $16 billion notional exposure on derivative contracts that protect against municipal and state defaults.

Divided Roles

Buffett has said his roles will be divided once he’s no longer running the firm. He has suggested that his son Howard, a company director since 1993, could be non-executive chairman. In February, the billionaire wrote to shareholders that the board has picked the next chief executive officer and has two back-up candidates. None of the individuals has been identified.

Investments will be overseen by Ted Weschler and Todd Combs, former hedge-fund managers hired in the past two years. They will oversee about $4 billion each, compared with $2.75 billion at the beginning of 2012, Buffett told Betty Liu in a July 13 interview on Bloomberg Television. Combs and Weschler have expanded equity holdings, taking stakes in companies including General Motors Co. (GM) and MasterCard Inc.

To contact the reporter on this story: Noah Buhayar in New York at nbuhayar@bloomberg.net.

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

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