On Friday, Berkshire Hathaway (BRK-A) reported first quarter earnings, which, not unexpectedly, were somewhat weak, given the current global economic downturn. In aggregate, Berkshire posted its first quarterly loss since 2001, and while I think the near term could remain challenging for many of the company’s businesses, longer-term Berkshire should emerge even stronger, given the current opportunities for Chairman Warren Buffett to put more capital to work, as well as the potential for some of the conglomerate’s businesses to gain market share.
Overall, Berkshire posted a net loss of almost $1.5 billion in the first quarter. This was primarily driven by write-downs on the conglomerate’s equity holdings of Conoco Philips (COP), as well as declines in some of its derivative positions. The latter are, for the most part, accounting, and not cash, losses, though Berkshire has begun to pay out losses approximating $675 million during the first quarter on some of its high yield credit default swaps (CDS). Since the end of the quarter, Berkshire paid another $450 million of losses on these contracts. As for Conoco, while the writedown is never a good thing, the losses should also allow Berkshire to shield some of its potential future gains from taxes.
Most of Berkshire’s operating business had fairly steep revenue declines during the quarter, and profits fell even more. This isn’t surprising given that many of these businesses are tied to the consumer. The declines were broad based for the most part, though McLane’s revenues held-up, and were relatively flat on the quarter. NetJets probably had the sharpest decline, posting a net loss of $96 million on the quarter, thanks, in part, to $55 million of writedowns of aircraft.
Despite these challenges, not all of Berkshire’s businesses were weak. The insurance businesses produced fairly good results, primarily led by auto-insurer Geico. As consumers have retrenched and examined their expenditures, many have turned to Geico to try and reduce their auto-insurance costs. As such, Geico’s policies-in-force increased at a healthy 10.4% clip on the quarter to 430,000, as the company continues to gain share. In addition, premiums in the Berkshire Hathaway Reinsurance Group increased thanks to a retroactive reinsurance contract with Swiss Re, as well as the continued premium inflows from an already existing pro-rata reinsurance contract with Swiss Re. These contracts have helped push Berkshire’s float—insurance premiums collected but not yet paid as claims—to $60 billion. The utility businesses also produced good results.
On the investing side of the house, and as I’ve written about previously, Berkshire invested 3 billion Swiss Francs in Swiss Re during the quarter, which likely helped to bolster Swiss Re’s ratings during a time of stress for the company. In addition, on April 1, after the first quarter closed, Berkshire invested $3 billion in convertible preferred stock in Dow Chemical (DOW), which helped Dow close its acquisition of Rohm & Haas. Taking account of the Dow deal, Berkshire now has around $20 billion of cash on hand for insurance regulatory purposes and additional investments.
Not surprisingly, Berkshire’s equity holdings, in aggregate, declined during the quarter, given the continued tumult in markets. This, along with the net loss, helped push Berkshire’s book value per share down by approximately 6% during the quarter to about $66,330 per each class-A share.
You might also be interested to know that this newsletter was mentioned in the following Associated Press article, which I have linked here.
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Copyright 2009 buffettinsights.blogspot.com
Justin
The content contained in this blog represents the opinions of Mr. Fuller. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business. This content is intended solely for the entertainment of the reader, and the author.
