– Profit of $3.3B, an increase of 14%.
– Insurance underwriting profit decreased 77% to $83M.
– Insurance investment income increased 31% to 1.16B.
– Income from non-insurance businesses declined 47% to $574M.
– Operating earnings fell to $1780 per Class A share, from $2270.
– Like Berkshire Hathaway’s quarterly reports, I always like to start my quarterly summary of the company’s results by informing investors who have recently started to follow Warren Buffett and Berkshire Hathaway, to really focus on operating earnings, and year end results. For the manufacturing, retail, and energy businesses of the company, the six month earnings are of significance, but not so much for the company as a whole. You really need to look at the different business divisions separately. For those of us who have been following Buffett and Berkshire Hathaway for some time, we know not to be overly critical of the reported numbers in the quarterly results. The reason is that timing of many business operations result in non-uniform and misleading results across quarters, especially in the insurance industry. Berkshire does not time anything to produce results specifically to coincide with quarterly results, nor should any other company run their business in such a manner! 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 $30M of losses from investments. However this quarter gains from derivative contracts increased significantly to $2.357B. This includes the equity index put option contracts tied to four major stock indexes that was reported in the previous quarter. The contract expiration dates expire between 2018 and 2028. Increases and declines in debt & equity markets contribute to either increases/decreases in the value of investments and derivative contracts, but are not actually realized. Again, the derivative contracts are very long term, so the short term market value reporting of them is not meaningful.
Notable is Berkshire’s investment in BYD, the Chinese car and battery company. BYD’s shares have quintupled since its purchase about 10 months ago. This generated unrealized gains of $1.02B. In addition warrants from its $5B investment in preferred shares of Goldman Sachs Group has generated unrealized gains of $2B. In general, many of Berkshire’s stock holdings have increased in value over the last 6 months as well.
Profits across most business units declined (especially in manufacturing, service, retail), due to the continued economic recession and lower consumer spending.
In the insurance business underwriting profit declined to $83M, down from $302M in the 1st quarter, and $360M in the corresponding quarter of 2008. This is due to a losses from Berkshire Hathaway Reinsurance Group resulting primarily from declines of the US currency. GEICO underwriting profit decreased mainly due to higher losses and loss adjustment expenses incurred. Results at General Re did not significantly change from that of the 1st quarter.
The utilities and energy businesses performed well and experienced a 21.6% increase in net income to $253M from the same period in 2008. In the 1st quarter Buffett mentioned that most utility businesses are relatively stable and should remain healthy during turbulent economic times. However the earnings for the first six months of 2009 declined to $520M, compared to $754M in the first half of 2008. Revenues from MidAmerican Energy Company, PacifiCorp, and the natural gas pipelines all declined due to lower average per-unit costs of gas sold, decrease in sales volume, and reduced transportation revenues.
Berkshire’s manufacturing, service, and retail related business declined 66% to $239M in the 2nd quarter, compared to $719M in 2008. For the first six months earnings declined 58% to $497M, compared to $1.2B in the first of half of 2008. With the exception of retail store fixtures and food service equipment sectors, earnings in the 2009 periods (2nd quarter and first six months) declined significantly from the earnings in the same periods in 2008. Shaw’s earnings declined 36% to $85M in the first six months, compared to the first half in 2008, which highlights the effects of the recession and slow down in residential real estate activities. Other manufacturing businesses at Berkshire experienced declines of 57% to $226M from $528M in the 2nd quarter, and a decline of 65% to $633M in the first six months, compared to the same periods in 2008. Other services also experienced a decline leading to a $76M loss from a $317M profit in the 2nd quarter, and a $62M loss from a $526M profit during the first six months, compared to similar periods in 2008. Finance and Financial Products businesses also experienced earnings decline of 48% to $82M from $159 in the 2nd quarter, and a decline of 48% to $160M from $306M in the first six months, compared to the same periods of 2008.
Although most of the business segments have experienced profit declines, Berkshire Hathaway shareholders will definitely appreciate the return from his investment and business decisions in the coming years.
The Berkshire Hathaway’s quarterly report can be found at the following link. I encourage everyone to actually read it:
The complete Form 13-F is not available for Berkshire’s stock holding changes for this quarter. But it shouldn’t be more than a few weeks to be made available to the public, at which time I will do my quarterly summary of the changes.
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Buffett Related Books:
The Warren Buffett Way (Robert G. Hagstrom)