– Profit loss of $1.53B (first quarterly loss since 2001), due to losses on derivative contracts and the investment in ConocoPhillips (COP).
– Insurance underwriting profit increased 21% to $219M.
– Insurance investment income increased 29% to 1.03B.
– Income from Non-insurance businesses declined.
– Operating earnings fell 12% to $1.71B, from $1.93B.
– For those of us who have been following Warren Buffett and Berkshire Hathaway for some time we already know not to be overly critical of the reported numbers in the quarterly results for the company. For those who have recently started to follow Buffett and Berkshire, investors should really focus on operating earnings, and 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. In addition investors need to be familiar with and aware of reporting under GAAP, which for Berkshire, does not adequately reflect the overall financial condition and health of the businesses. Other impacts that do not give an accurate account of the financial condition, are investments that are marked-to-market, and the timing of realized gains/losses. The Berkshire quarterly report explains and summarizes as to why the reported quarterly results are not necessarily that meaningful for Berkshire and insurance companies in particular, as well as the impact that GAAP reporting has. Investors should commit this knowledge to memory:
“For a number of reasons, Berkshire’s results for interim periods are not normally indicative of results to be expected for the year. The timing and magnitude of catastrophe losses incurred by insurance subsidiaries and the estimation error inherent to the process of determining liabilities for unpaid losses of insurance subsidiaries can be relatively more significant to results of interim periods than to results for a full year. Variations in the amounts and timing of investment gains/losses can cause significant variations in periodic net earnings. Investment gains/losses are recorded when investments are sold, other-than temporarily impaired or in instances as required under GAAP, when investments are marked-to-market. In addition, changes in the fair value of derivative assets/liabilities associated with derivative contracts that do not qualify for hedge accounting treatment can cause significant variations in periodic net earnings.”
– The 1st quarter included $986M of losses from derivative contracts. This includes $675M of payments tied to junk bond defaults from bankruptcies. Another $450M of payments has also been made due to defaults. Berkshire disclosed derivatives contracts that will make money if particular stock indexes rise. Declines in debt & equity markets also contributed to the decline in the value of investments and derivative contracts, but are not actually realized. Almost all of the derivative contracts are very long term, so the short term market value reporting of them is not very meaningful. Buffett recently mentioned in the letter to shareholders that he expects them to be profitable, as the contracts that are tied to stock indexes mature between 2019 and 2027. The contracts tied to junk bonds will also make money if they do not default. Buffett mentioned that they MAY lose money because of the economic downturn. The bonds mature between 2009 and 2013.
– Profits across all business units declined again (except in insurance), due to the economic recession and lower consumer spending:
In the insurance business underwriting profit at Geico Corp declined 20% to $148M due to claim costs offsetting a 10.3.% increase in number of policies. General Re Corp had $16M in underwitting losses due to storm losses. Berkshire’s Reinsurance Group experienced a large increase in underwriting profit of $203M, due to the transaction with Swiss Re.
The utilities and energy businesses experienced a 36% decline in net income to $203M due to lower energy prices. However, as mentioned by Buffett, as with most utilities the underlying business is relatively stable and should remain healthy turbulent economic times. Berkshire’s building and materials related business, as well as consumer divisions, declined 47% to $258M. They were affected by the economic downturn and significant decline in real estate development, as we pretty much expected.
– On the investment front, Berkshire’s results included $2.01B of writedowns on investments. $1.9M is tied to Buffett’s $7.01B investment in ConocoPhillips stock. Berkshire sold 13.7M shares in Q1 (71.2M shares now held). Berkshire has indicated it has since sold more shares, and will probably keep selling shares (at a loss). This is likely to use that money for better investments, while at the same time offsetting capital gains from previous years. Buffett openly admits that although the company itself was not overvalued, the timing of the investment was terrible. His investment came at a time of record oil prices. Most of the loss has already been accounted for in the company’s book value last quarter.
Although most of his holdings have declined in market value, and profits from some business segments have decreased, as always Berkshire Hathaway shareholders will definitely appreciate his investment and business decisions in times like this for years to come.
The Berkshire Hathaway 1st quarter report can be found at the following link:
Thanks & Happy Investing!
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