Berkshire Hathaway: Insurance Market Turmoil Impacting the Bottom Line

Includes: BRK.A, BRK.B
by: Ron Haruni

In a regulatory filing on Friday, Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A), said the company's 3Q’08 net income fell 77% to $1.06 billion, ($682/Class A share) from $4.55 billion $2,942/share, in last year’s first quarter.

Operating profit in Berkshire’s insurance underwriting business, which is the company’s core commercial activity, dropped 83% to $81 million from $486 million on a YoY basis. The company's operating earnings fell as well by registering a drop of 19.3% to $1,335/share from $1,655/share in the same period the year before.

Insurance-investment income earnings fell 12% to $809 million from $922 million, while income from non-insurance businesses slipped 7.9% to $1.08 billion from the year-earlier $1.17 billion.

Investment and derivative represented a loss too, posting $1.01 billion negative, compared to gains of $1.99 billion in last year’s quarter where the company got a boost from Berkshire’s profitable sale of PetroChina (NYSE:PTR) stock. At the end of the third quarter fiscal ‘08, Berkshire had a liability of $6.72 billion for equity index put option contracts for which the company, as noted in its release, has received cash payments of $4.85 billion. This means Berkshire’s current recorded loss is $1.87 billion though the first payment that could be triggered would be in fiscal 2019, and the average maturity is 13.5 years. In the meantime, Berkshire can invest all of the $4.85 billion. Mr. Buffett has said the derivative contracts held by Berkshire will eventually be profitable, unless stock markets crumble over the next two decades.

During the first three quarters of fiscal ‘08, Berkshire said its net worth declined slightly from $120.73 billion to $120.15 billion. However, a combination during the month of October of price declines in the company's equity, fixed maturity investments and an increase in the liability calculated for Berkshire’s equity index put option contracts will account for a decline in net worth of nearly $9 billion.

This is the fourth straight quarterly decline for the Omaha-based conglomerate and longest streak of quarterly declines in at least 13 years. The company continues to get impacted by the escalating turmoil in the insurance market, which has clearly affected its bottom line.

Berkshire finished the third quarter with a trailing twelve of 15.20% in operating margin and $33.4 billion cash on hand. At the end of the second quarter, the company had $31.16 billion in total cash.

Since taking over Berkshire Hathaway in 1965, Mr. Buffett has transformed the once textile manufacturer into a very profitable investment vehicle. Berkshire’s current market cap stands at more than $175 billion. Its class A shares closed at $113,000, up $800.00 or 0.71% in Friday’s trading. Its 52-week range is $102,010.00 - $151,650.00.

Disclosure: None