Buffett profit declines but tops forecasts

Date: Monday, August 11, 2008
Author: The Sydney Morning Herald

Billionaire investor Warren Buffett's Berkshire Hathaway posted its third straight profit decline as lower rates pressured results in insurance operations.

Second-quarter net income fell 7.6% to $US2.88 billion ($3.23 billion), or $US1,859 a share, from $US3.12 billion, or $US2,018, a year earlier, the Omaha, Nebraska-based company said yesterday. Excluding investment gains, profit was $US1,465 a share, beating the $US1,352 average estimate of two analysts compiled by Bloomberg.

Buffett has been seeking non-US acquisitions, purchasing distressed securities and funding buyouts as he scales back sales in some insurance units because of price competition. Buffett last month pledged $US3 billion to Dow Chemical Co.'s $US15.4 billion purchase of Rohm & Haas Co. In April, he agreed to put up $US6.5 billion to help Mars Inc. buy Wm. Wrigley Jr. Co. in a deal that gives Berkshire a discounted stake in the chewing gum maker.

``He doesn't have to keep writing bad policies, say in reinsurance, just to maintain market share at the cost of big losses later on,'' said Tom Russo, a partner at Gardner Russo & Gardner in Lancaster, Pennsylvania, which manages more than $US3 billion, including Berkshire shares. ``Most competitors do just the opposite, favoring reported profits at the cost of long-term wealth creation.''

Berkshire's earnings from underwriting insurance and reinsurance policies fell 43% to $US360 million. The businesses typically provide about half of Berkshire's profit. Commercial insurance rates in the US fell 13% from a year earlier, the Council of Insurance Agents and Brokers said.

`Fewer opportunities'

``Price competition resulted in fewer opportunities'' to sell reinsurance at acceptable prices, the company said in a regulatory filing. Reinsurers assume liabilities from insurers for a share of their premiums.

Investment losses, fallout from the collapse of the subprime mortgage market, catastrophe claims and falling property and casualty rates caused second-quarter profit declines or losses at 18 of the 24 companies in the KBW Insurance Index.

Berkshire shares had their worst first half since 1990 and are down 18% this year in New York Stock Exchange composite trading. Berkshire's results were posted yesterday after the close of regular trading.

Profit from selling policies at car insurer Geico Corp. fell 8.3% to $US298 million before taxes on rising claims costs. Price reductions from last year, which went into effect as drivers renewed their policies, cut into the profit margin. The unit added about 105,000 new policyholders in the quarter.

`Caution flag'

``Even Warren Buffett himself threw the caution flag earlier when he said look, don't expect the earnings from 2006 and 2007 to continue into 2008,'' said Charles Hamilton, an analyst at FTN Midwest Securities Corp. in Nashville, Tennessee, in a Bloomberg Television interview. ``We're not particularly surprised by the weaker earnings.''

Increases in the value of some holdings and derivatives raised earnings by $US610 million, compared with $US608 million a year earlier. Investment income at Berkshire's insurance units, including stock dividends, rose 2.6% to $US884 million.

Berkshire boosted holdings of auction-rate securities to $US6.5 billion as of June 30 from $US3.8 billion March 31 and none at the end of 2007. The market froze in February when investors were left unable to redeem the securities after dealers that ran the periodic bidding to determine interest costs suddenly stopped supporting the auctions.

Buffett told investors at Berkshire's annual meeting in May that bonds from the same issue were selling simultaneously from the same broker with yields of 6% and 11%.

Auction-rate securities

``Those are extreme dislocations,'' Buffett said. ``Those are great times to make unusual amounts of money.''

The worst housing slump since the Great Depression has hurt Berkshire's building-related companies.

Earnings fell 26% to $US82 million at Shaw Industries, the world's largest carpet manufacturer, as sales to residential customers declined. Profit at furniture stores, jewelry shops and the candy business declined 47% to $US29 million.

``Pretax earnings in 2008 declined in all of Berkshire's retail operations,'' the company said, citing ``weak local residential housing markets and general economic conditions as well as an overall decline in consumer confidence.''

Earnings from Berkshire's energy and utilities unit decreased 10% to $US208 million.

Marmon Holdings Inc., purchased this year, helped increase profit at Berkshire's manufacturing, service and retailing businesses by 11% to $US719 million.

Seeking acquisitions

Marmon employs about 20,000 people in 125 business units, mostly in North America, Europe and China, according to the company's Web site. Its operations include manufacturing and leasing railroad tank cars and making wire and cable products. The unit earned $US261 million in the period ended June 30.

Buffett, 77, completed a four-city European tour in May aimed at drumming up potential acquisitions of family-owned companies as US results slump. Berkshire had about $US31 billion in cash as of June 30, most of it in insurance units.

Buffett, ranked the world's richest person by Forbes magazine, built Berkshire over four decades from a failing textile manufacturer into a $US175 billion holding company by buying out-of-favor securities and businesses whose management he deemed superior.