– Net earnings increased to $3.6B ($2272 per Class A share), from last year’s Q1 loss of $1.5B (-$990 per Class A).
– Insurance underwriting profit increased to $226M, from $202M.
– Income from investments & derivatives increased to $1.41B from a loss of $3.24B.
– Income from manufacturing & retail businesses increased 85% to $477M.
– Income from energy & utilities increased to $223M from $203M.
– Operating earnings increased to $2.2B, from last year’s $1.7B.
Before starting the summary of the company’s quarterly results, I like to inform investors who have recently started to follow Warren Buffett and Berkshire Hathaway, to really focus on operating earnings, and year end results. This is also another reason why I stopped writing summaries of Berkshire’s quarterly results. However, this quarter is the first that includes results from the railroad Burlington Northern Santa Fe (BNSF). BNSF was consolidated into Berkshire on February 12, 2010, the effective date of the acquisition.
For the manufacturing, retail, and energy businesses of the company, the six month earnings are of significance rather than quarterly earnings. And for the company as a whole the full year are more significant. The different business divisions really need to be looked at separately. For followers of Berkshire Hathaway, we know not to be overly critical of the numbers in the quarterly reports, due to the timing of many business operations which result in non-uniform and misleading results across quarters (especially in the insurance industry). However, in some industries & businesses specific numbers are meaningful such as sales, inventory, 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, our 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 and other-than-temporary impairment losses on investments can cause significant variations in periodic net earnings. Investment gains/losses are recorded when investments are sold or in instances when investments are required to be 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.”
Investors also need to be aware of the newer accounting rules adopted in 2010. Issued by the FASB are ASU 2009-16, ASU 2009-17, and ASU 2010-06.
In the first quarter, Berkshire’s earnings were $3.6B, which is a large increase over last year’s 1Q loss of $1.5B. Last year Berkshire wrote down the value of its ConocoPhillips investment, and saw an unrealized paper loss of $986M on its derivatives portfolio. However, the improving economy, investment and derivative gains, as well as invetment gains related to Burlington Northern Santa Fe railroad positively affected the results.
Insurance underwriting profits and premiums increased as a whole to $226M, due to improving results primarily from Geico.
Volatile investment and derivatives gains/losses have again created large differences in the results of 1Q 2010 over 2009. Berkshire’s gains from investments included a one time paper gain of $979M related to the acquisition of BNSF. However, aside from the investment value of BNSF, the railroad’s net income of $282M helped boost results. Berkshire also saw a $267M gain on the value of its derivatives due to an improved market environment.
An improved economy helped the manufacturing, and retail segments as income grew 85%. However, business related to the building products group continued to be negatively affected by lower overall earnings from relatively weak residential and commercial construction activity. The buildings products group include Acme Building Brands, Benjamin Moore, Johns Manville, Shaw, and MiTek.
Berkshire’s utilities & energy businesses delivered stable results as a whole and was led by MidAmerican Energy.
Berkshire Hathaway’s financial condition remains very strong with a balance sheet that reflects significant liquidity and a strong capital base. Consolidated shareholders’ equity increased to $147.2B, up $16.1B from the previous quarter (4Q 2009).
Consolidated cash and investments of insurance and other businesses were $139.3B. Cash and cash equivalents of insurance and other businesses were $22.7B at the end of the quarter.
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 1Q 2010 stock holding changes. But it shouldn’t be more than a few weeks for it to be made available to the public.
Thanks & Happy Investing!
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