Buffett firm's Q1 profit drops on insurance losses

OMAHA, Nebraska (AP) – Berkshire Hathaway’s first-quarter profits fell 58 percent because of an estimated $1.7 billion in pretax insurance losses from major disasters in Japan, Australia and the US.

CEO Warren Buffett estimates that Berkshire will report $1.5 billion in net income, down from $3.6 billion the year before. He did not offer earnings per share figures.

Buffett offered a, earnings preview at Saturday’s annual shareholders’ meeting. Berkshire’s full earnings report is scheduled to be released Friday.

Buffett said the biggest factor in the earnings drop was losses related to the damage from the Japanese earthquake and tsunami, Australian floods and the New Zealand earthquake.

“We had probably the second-worst quarter for the insurance industry in terms of disasters around the globe,” Buffett said.

Reinsurance companies, like Berkshire’s General Re and National Indemnity, sell backup insurance to primary insurers so the industry can cover big losses.

Berkshire expects to record an $821-million underwriting loss in its insurance businesses during the quarter because of the catastrophes. That compares with a $226 million underwriting gain in last year’s first quarter.

Berkshire’s insurance businesses will still contribute $131 million to net income for the first quarter, because of investment gains. That’s considerably less than a year ago when Berkshire’s insurance businesses, which include auto and home insurer Geico, added $1.2 billion to net income.

Buffett said most of Berkshire’s companies continue to improve gradually along with the overall economy — except for those tied to residential construction. Berkshire subsidiaries that are particularly sensitive to the housing market, such as Acme Brick, Shaw Carpet, and Johns Manville haven’t improved significantly since the recession slammed the home-building industry.

Berkshire’s railroad and utility division, which includes Burlington Northern Santa Fe railroad and MidAmerican Energy, posted a big jump in profits. That unit will add $908 million to Berkshire’s net income in the quarter, up from $505 million last year.

Berkshire recorded an $82- million loss on investments and derivatives in the first quarter. In 2010, Berkshire posted a $1.4- billion gain.

The true value of the derivatives won’t be clear for at least several years, because they don’t mature until at least a decade from now on average. But Berkshire is required to estimate their value every time the company reports earnings. Buffett has told investors he believes the contracts will ultimately be profitable because the premiums are being invested.

Berkshire’s operating earnings were $1.59 billion in the first quarter, down 28 percent from a year ago. Buffett has said Berkshire’s operating earnings are a better measure of how the company is performing in any given period, because those figures exclude the value of derivatives and investment gains or losses.

Berkshire owns roughly 80 subsidiaries, including clothing, furniture and jewelry firms. Its insurance and utility businesses typically account for more than half of the company’s net income. It also has major investments in such companies as Coca-Cola Co. and Wells Fargo & Co.