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Berkshire net off 64 pct on derivatives
By Jonathan Stempel
OMAHA, Nebraska (Reuters) - Warren Buffett's Berkshire Hathaway Inc <BRKa.N><BRKb.N> said on Friday that first- quarter profit tumbled 64 percent, hurt by losses tied to derivatives contracts and a steep slide in insurance premiums.
Net income for the Omaha, Nebraska-based insurance and investment company fell to $940 million, or $607 per Class A share, from $2.6 billion, or $1,682, a year earlier.
Operating profit fell 13 percent to $1.93 billion, or $1,247 per share, from $2.21 billion, or $1,434. On that basis, analysts on average expected profit of $1,477 per share, according to Reuters Estimates. Revenue tumbled 24 percent to $25.18 billion.
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Results suffered from $991 million of after-tax losses tied mainly to contracts designed to make money if junk bond stay out of default and stock indexes rise.
Meanwhile, insurance underwriting profit fell 70 percent to $181 million, and earned premiums sank 54 percent to $6.21 billion. Berkshire had been able to boost insurance premiums following Hurricane Katrina in 2005, but Buffett said prices and profit margins have reversed course.
"When people see these derivatives numbers, they may be concerned, but Buffett gets his cash up front, so I'm not concerned about balance sheet integrity," said Thomas Russo, a partner at Gardner, Russo & Gardner, which invests more than $3 billion. "I'm not surprised at the insurance decline. Berkshire has a culture in which it will stop writing business it doesn't want."
In Friday trading, Berkshire's Class A shares fell $300 to $133,600, while its Class B shares fell $12 to $4,448.
DERIVATIVES LOSSES
Berkshire said it had a $1.2 billion pre-tax unrealized loss on put options it wrote on the Standard & Poor's 500 <.SPX> and three foreign stock indexes.
It also reported a $490 million pre-tax unrealized loss on contracts that require payouts if some high-yield bonds default between now and 2013.
In February, Buffett revealed that Berkshire ended 2007 with $40 billion of exposure to 94 of these kinds of contracts. Accounting rules require the company to regularly report unrealized gains and losses in earnings, Berkshire said.
The exposure may at first seem odd given that, in his shareholder letter in 2003, Buffett called derivatives "financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal."
But in his letter this year, Buffett said Berkshire had already been paid for its derivatives contracts, giving it cash to invest, and that "there is no counterparty risk."
He also said shareholders should be prepared for gains and losses that could "easily" top $1 billion in a given quarter.
Berkshire ended March with $35.57 billion of cash, down from $44.33 billion at year end.
During the quarter, Berkshire completed its $4.5 billion purchase of a 60 percent stake in Marmon Holdings Inc, whose products are used in energy and construction. Then on April 28, Buffett committed $6.5 billion as part of Mars Inc's purchase of chewing gum maker Wm Wrigley Jr Co <WWY.N>.
(Editing by Andre Grenon)
