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Berkshire Hathaway Sees Overall Q2 Profits Up with Insurance Operations Recording Underwriting Loss

Posted on 08 Aug 2011

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Warren Buffett's Berkshire Hathaway Inc. reported that its second-quarter profit rose 74% to $3.42 billion on improved results in its derivatives portfolio.

But operating earnings, Mr. Buffett's preferred metric for evaluating his company, fell 12% to $2.7 billion as the company's insurance operations recorded an underwriting loss, the company said in a statement Friday.

Berkshire said in a regulatory filing, "our manufacturing businesses have, with limited exception, experienced increased levels of business and improved operating results, although the rates of improvement were uneven."

Underwriting profit at Berkshire-owned car insurer Geico Corp. dropped by half to $159 million before taxes, in part because policyholders reported higher losses from natural disasters. The unit added about 154,000 policyholders in the quarter, less than half what it added in the first three months of the year.

Another insurance unit, the Berkshire Hathaway Reinsurance Group, had a $354 million underwriting loss before taxes, compared with a profit of $117 million in the same period a year earlier. The figure fell in part because of $220 million in unrealized foreign currency losses.

Mr. Buffett has said he likes the insurance business because he can invest the policyholder premiums until the money is needed to pay claims. But that strategy didn't work as well in the latest quarter as it did a year ago, as investment income fell 8.5% to $995 million.

Mr. Buffett had warned that a decline was coming, as investment opportunities open to the company now yield far less than the ones he made during the depths of the financial crisis.

The derivatives portfolio includes $35.1 billion of notional value in contracts tied to the performance of four stock indexes, and $16 billion in credit-default contracts on state and municipal debt. All in, the derivatives portfolio had $120 million in losses in the quarter, a significant improvement from the $1.41 billion in losses from the same period a year earlier.

Profit at railroad Burlington Northern Santa Fe, which Berkshire Hathaway acquired early last year, rose 14% to $690 million.

Profit rose 18% to $789 million after taxes at the company's manufacturing, service and retailing operations in the latest quarter, driven in part by improved results at Marmon Holdings Inc., a mini-conglomerate purchased by Berkshire from the Pritzker family in 2008. Marmon's operations include manufacturing and leasing railroad tank cars and making wire and cable products.

Berkshire had $47.9 billion in cash as of June 30, compared with $41.2 billion three months earlier.

Mr. Buffett, one of the world's richest people, has built Berkshire over four decades into a massive conglomerate with more than 70 units, including Dairy Queen, Fruit of the Loom and car insurer Geico. Berkshire owns a railroad and a trucking company; operates power plants and gas pipelines; sells farm supplies and furniture; and makes machine parts and mobile homes.