Berkshire Hathaway 2008 Q3 Results

Today, Berkshire Hathaway (BRK.A / BRK.B) reported 2008 3rd quarter earning:

– Profit decreased 77%, due to weaker results from insurance underwriting, and declining investments.
– Insurance underwriting profit decreased 83% to $81M, compared to $486M a year earlier. The reinsurance group posted $166M pre-tax loss for the quarter.
– Insurance investment income declined 12% to $809M, from $922M a year earlier.
– Non-insurance businesses declined to $1.08B, from $1.172B a year earlier.
– Net income decreased 77% to $1.06B, or $682 a share (class A share, 1/30th for class B share), from $4.55B, or $2942, a year earlier.
– Operating earnings fell to $2.069B, from $2.561B a year earlier.

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Again, as Warren Buffet likes to reminds us, we should not be overly critical of quarterly results for many businesses. We should really focus on year end results. The reason is that timing of many business operations result in non-uniform results across quarters, especially in the insurance industry. However, in some industries & businesses we do need to look at specific and meaningful numbers such as sales figures, inventory levels, etc during each quarter. Examples are in industries such as retail, manufacturing, etc. The Berkshire quarterly report explains in a bit more detail, as to why quarterly results are not that meaningful for insurance companies in particular:

“Although the investment of insurance and reinsurance premiums to generate investment income and investment gains or losses is an integral part of Berkshire’s operations, the generation of investment gains or losses is independent of the insurance underwriting process. Moreover, under applicable GAAP accounting requirements, losses can be created as the result of other-than-temporary declines in value without actual realization or when certain types of investments and derivative contracts are marked-to-market through earnings. In sum, investment and derivative gains/losses for any particular period are not indicative of quarterly business performance.”

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– During the 3rd quarter the value of some holdings and derivatives declined which lowered earnings by $1.01B, from a gain of $1.99B in the year earlier (when Berkshire booked profits from the sale of investments in PetroChina). Declines in debt & equity markets also contributed to the decline in the value of investments and derivative contracts.

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– According to Bloomberg profits across all business units declined: In the insurance business profit at Geico Corp declined 27% to $246M due to claims costs from storms & hurricanes this summer, but written 119000 new policies. Berkshire’s building and materials related business, such as Benjamin Moore, Shaw Industries, and Acme Brick were affected by the economic downturn and significant decline in real estate development. Profits at consumer divisions such as furniture, jewelry, and candy also declined. Energy and utility units, MidAmerican Energy Holdings Co. and PacifiCorp, also declined.

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– On the investment front Warren Buffet spent $5B for a 9% stake in Goldman Sachs Group Inc. Another $3B was spent on a stake in General Electric Co. In both investments Berkshire gained preferred shares with a 10% dividend with warrants. Berkshire’s subsidiaries were also busy this quarter acquiring other companies and expanding their business. See Warren Buffet’s Recent Investments. During the week Berkshire’s CORT, a provider of rental furniture acquired Aaron Rents Corporate Furnishings Division for $72M. This deal is inline with Warren Buffet’s strategy of expanding and investing during maximum pessimism, and also at a time when competitors have little capital to do so. Warren Buffet has also been investing heavily in various stocks, adding to the Berkshire stock portfolio since the beginning of the economic crisis. And although most of his holdings have probably declined since he purchased them, as always Berkshire Hathaway shareholders will definitely appreciate his investment decisions in the years to come.

The Berkshire Hathaway 3rd quarter report can be found at the following link:
http://www.berkshirehathaway.com/news/nov0708.pdf

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– Let me know if you enjoyed this article, or if there is a question or topic you would like my to discuss in a future article. Feel free to comment! Also stay tuned for Bank Valuation VII. In the mean time review other Warren Buffet articles, or the Bank Valuation Series (I, II, III, IV, V, & VI).

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Thanks & Happy Investing!
The Investment Blogger

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