Berkshire Hathaway Sees Profits Drop 42%
Berkshire Hathaway
Combined Ratios
Insurance units' 2nd-quarter results.
Companies 2004 2003
Geico 89.5 96.5
General Re 98.1 97.3
Berkshire Re 60.1 81.4
Aggregate 88.1 92.8
Source
: Morgan Stanley

 

Berkshire Hathaway Inc.'s secondquarter
profit fell 42%, as investment
losses outpaced gains in the group's
insurance underwriting results.
Second-quarter net income for
Berkshire Hathaway (NYSE:BRKa) fell
to $1.28 billion, or $834 a share, from
$2.23 billion, or $1,452 a share, a year
earlier.The group had investment losses
of $172 million, compared with
gains of $905 million for the second
quarter last year.
Net income from insurance underwriting
rose to $422 million from $263
million, and net income from noninsurance
business rose to $579 million from
$512 million. Investment income for the
insurance operations fell to $479 million
from $571 million.
Emphasizing management's traditional
view that the group's investment
results are best judged over the long
term, Berkshire Hathaway noted that
investment gains or losses in any one
period are "meaningless" for analytical
purposes. "Shareholders and others
should focus their attention on net earnings
excluding investment gains/losses,"
the group said in a statement.
"All of Berkshire's insurance operations
are performing very well," the
group said. "However, there were no
major catastrophes during the first
half of either 2004 or 2003 and Berkshire's
underwriting results benefited
from this environment."
Morgan Stanley equity analyst Vinay
Saqi said in a research note that Berkshire
Hathaway's business growth was
generally in line with predictions but
that several pressure points could
impact future insurance earnings.
Excluding auto insurer Geico Corp. and
a large retroactive reinsurance policy,
Berkshire's premiums earned fell 15% in
the second quarter, the largest drop
among property/casualty companies
covered by Morgan Stanley, Saqi wrote.
"Management's commentary that
the reinsurance market was becoming
'increasingly price-competitive' along
with its move to reduce its future participation
as a reinsurer of Lloyd's,
should be a pretty clear sign of what
Berkshire sees in the insurance market,"
Saqi wrote.
Saqi also noted that inflationary
trends could trim future earnings in Berkshire's
noninsurance businesses, and
investment earnings are uncertain, given
trends in interest rates and credit
spreads. Berkshire also recorded a pretax
loss of $445 million on its foreign currency
contracts, and "it appears the company
still maintains a sizeable foreign currency
position," with a notional value of
$12 billion as of year-end 2003,Saqi said.
-David Pilla