Disasters Slice Berkshire Hathaway Q1 Profits
Warren Buffett’s Berkshire Hathaway Inc. said Friday (May 6) that its first-quarter profit tumbled 58% from a year ago due to insurance losses from major disasters in Japan, New Zealand and Australia.
The sharp drop is in line with preliminary results outlined by Buffett at the Omaha, Neb.-based company’s annual shareholders’ meeting, the Associated Press reported.
Berkshire, parent company of Forest River Inc., the nation’s second largest RV manufacturer, reported net income of $1.5 billion, or $917 per Class A share, for the three months ended March 31. That’s down from net income of $3.6 billion, or $2,272 per Class A share, a year ago.
Revenue rose to $33.7 billion, up from $32 billion last year.
The biggest drag on Berkshire’s quarter was $1.7 billion in insurance losses related to the March 11 earthquake and tsunami in Japan, the Feb. 22 New Zealand earthquake, as well as cyclones and floods in Australia, among other disasters.
“We had probably the second-worst quarter for the insurance industry in terms of disasters around the globe,” Buffett told shareholders.
Given the magnitude of the catastrophe insurance losses in the first quarter, as well as the potential for additional losses from hurricanes in the U.S. between June and December, Berkshire said it is unlikely that its combined insurance operations will achieve an underwriting profit this year.
Reinsurance companies, like Berkshire’s General Re and National Indemnity, sell backup insurance to primary insurers so the industry can cover big losses.
The $1.7 billion in losses is an estimate of Berkshire’s insurance and reinsurance claims that will be settled and paid over time, though that figure could change, the company said.
Berkshire reported an $821 million underwriting loss for the quarter because of the catastrophes. That compares with a $226 million underwriting gain in last year’s first quarter.
Still, the company’s insurance businesses overall, which include auto and home insurer Geico, contributed $131 million to Berkshire’s net income in the first quarter, because of investment gains. That’s considerably less than a year ago when they added $1.2 billion to net income.
Berkshire owns roughly 80 subsidiaries, including clothing, furniture and jewelry firms. Its insurance and utility businesses typically account for more than half of the company’s net income. It also has major investments in such companies as Coca-Cola Co. and Wells Fargo & Co.
The company’s results were buoyed by a strong performance from Burlington Northern Santa Fe railroad, which the company acquired a year ago.
The railroad segment contributed $607 million to net income, up from $282 million a year earlier, although the prior-year results did not covered the entire quarter.
Revenues for the segment increased 17% to $4.53 billion, reflecting higher average revenue per railcar. Higher fuel prices contributed to the increase in the form of larger fuel surcharges, the company said.
Berkshire’s manufacturing, service and retailing segment generated income of $558 million, up from $477 million a year earlier.
Most of the improvement in that sector came from manufacturing businesses like building products maker Acme Building Brands and Benjamin Moore, apparel companies like Fruit of the Loom, and leisure product makers like Forest River and Iscar Metalworking Cos.
Berkshire noted that many of its manufacturers were hit by higher commodity costs for certain raw materials, including cotton, steel and petrochemicals, in addition to higher energy costs.
As a result, the companies have hiked prices in recent months for certain products — something that’ll likely be necessary if costs remain elevated or go higher, the company said.
Berkshire’s utilities and energy division, which includes MidAmerican Energy, added $301 million to Berkshire’s net income in the quarter, up from $223 million last year.
Elsewhere on its balance sheet, Berkshire recorded a paper loss of $82 million on its derivative contracts and investments. Last year, Berkshire posted a $1.4 billion gain.
The true value of the derivatives won’t be clear for at least several years, because they don’t mature until at least a decade from now on average. But Berkshire is required to estimate their value every time the company reports earnings. Buffett has told investors he believes the contracts will ultimately be profitable because the premiums are being invested.
Berkshire executives say the company’s operating earnings are a better measure of how the company is performing in any given period because those figures exclude its derivatives and investment gains or losses.
The company’s operating earnings fell to $1.6 billion for the quarter, down from $2.2 billion a year ago.