Berkshire quarterly operating profit falls

By Alistair Barr, MarketWatch
Last update: 3:04 p.m. EDT May 2, 2009Comments: 3OMAHA, Neb. (MarketWatch) -- Berkshire Hathaway's first-quarter profit fell slightly compared to a year ago, as many of the company's businesses suffered from the recession, Chairman Warren Buffett said Saturday.
Berkshire generated first-quarter operating earnings of $1.7 billion, down from $1.9 billion a year earlier, Buffett told shareholders at the company's annual meeting. He didn't mention net income. Berkshire is due to report full quarterly results next week.
Book value per share declined 6% in the latest quarter, mostly because of a decline in the value of Berkshire's investments.
Berkshire ended the quarter with $22.7 billion in cash and cash equivalents. The company made a $3 billion investment the following day, so that left it with less than $20 billion in cash, Buffett said.
Berkshire owns 67 non-insurance operating companies and many of these businesses are in economically sensitive industries such as retailing, manufacturing and real estate.
Buffett said Saturday that most of Berkshire's businesses outside of insurance and the regulated utility industry suffered during the first quarter.
"We're lucky to be in the insurance and utilities businesses," Buffett said.
Berkshire's insurance businesses generated first-quarter underwriting profit that was "a little larger" than during the same period a year earlier, Buffett reported.
Reported first-quarter earnings from Berkshire's utilities business declined "somewhat" versus a year earlier, he added.
The decline was mainly from marking the value of Berkshire's holdings of
shares to market and a final payment the company made to buyout options related to its acquisition of MidAmerican a decade ago, Buffett reported.
"All of the other businesses are basically down" during the first quarter, Buffett said. "We will continue to do quite well in our insurance and utility operations. We won't do well in other operations."
Buffett also warned that one type of credit derivative written by Berkshire has deteriorated in recent months.
These derivatives require Berkshire to pay when losses occur at companies that are included in several high-yield, or junk, indexes. The standard contract runs for five years and is tied to 100 companies, although the average life of Berkshire's contracts are now less than three years.
Berkshire made $97 million in payments in these credit derivatives in 2008. But Buffett warned in his latest shareholder letter in late February that losses have accelerated sharply amid a rash of bankruptcies.
Those derivatives have "turned worse since I wrote the annual report," Buffett said on Saturday.
The potential and expected losses from these credit derivatives were reflected in Berkshire's first-quarter results, Buffett said.
Alistair Barr is a reporter for MarketWatch in San Francisco.

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