Berkshire's Earnings Hit Speed Bump on Insurance Businesses (3)

(Bloomberg) -- Warren Buffett’s Berkshire Hathaway Inc. hit a speed bump in the first quarter as insurance units posted an underwriting loss, overshadowing gains at the company’s railroad and energy business.

The results aren’t likely to damp the festive mood as shareholders gather Saturday for the company’s annual meeting in Omaha, Nebraska. The event doubles as a showcase for Berkshire’s dozens of businesses and a platform for Buffett, 86, to share his investing gospel with thousands of adoring fans.

Over the past five decades, he’s transformed Berkshire from a struggling textile business into a financial powerhouse with insurance, energy, retail, transportation and manufacturing units. With an eye toward value and long-term thinking, his stock picks and acquisitions have helped propel steady increases in the company’s earnings.

Buffett has said there will be blips in that record, in part because insurance results can be volatile. First-quarter operating profit slipped 4.8 percent to $3.56 billion, the company said Friday in a statement.

The result was driven by underwriting losses at Berkshire’s namesake reinsurance group and General Re unit, which both incurred costs tied to a cyclone in Australia. Pretax profit fell 34 percent at Geico, which sells auto coverage.

Despite the occasional setback, insurance has been a significant moneymaker for Berkshire, generating annual underwriting profits for more than a decade. The businesses also provide Buffett with billions of dollars of “float” -- or premiums held before paying claims -- that he can invest.

Hauling Coal

Berkshire’s largest unit, railroad Burlington Northern Santa Fe, added $838 million to net income, 6.9 percent more than in the same period of 2016, according to a regulatory filing. BNSF and its competitors have benefited this year from a rebound in coal volumes after a surge in prices for natural gas, a rival energy source.

Still, carriers aren’t counting on a sustained rebound in coal, because power producers have been shifting away from the fossil fuel. BNSF also saw an increase in car shipments over its network after it won business from a new automotive customer.

The manufacturing, service and retail segment added $1.32 billion to earnings, compared with $1.27 billion a year earlier. The division includes companies like Dairy Queen, NetJets, Fruit of the Loom and Precision Castparts, a supplier to the aerospace industry that Buffett bought last year in one of his biggest acquisitions. Profit fell at the industrial products segment, as the Lubrizol chemicals unit had pretax losses of $184 million on the exit from an “underperforming” business, asset impairments and restructuring charges, according to the filing.

Cash Pile

The contribution from Berkshire Hathaway Energy rose to $501 million from $441 million a year earlier. The business operates electric grids in the U.K., natural gas pipelines that stretch from the Great Lakes to Texas and power companies in states including Iowa and Nevada.

Bill Smead, a Seattle-based money manager who is in Omaha for the meeting, welcomed the gains at the railroad and other operating businesses and wasn’t worried about the insurance results.

“The catastrophic losses, you can’t do anything about,’’ he said. “Much more important to shareholders is that Buffett is burying himself in cash.’’

Berkshire’s war chest totaled $96.5 billion at the end of the first quarter, a record. The climbing cash balance has caused some analysts and investors to speculate that Buffett could do a deal that’s big even by his standards.

While he waits for the right opportunity, Buffett’s been buying lots of stocks. In February, he said that he’d built Berkshire’s holding in Apple Inc. to more than $18 billion. His company also amassed stakes in the four largest U.S. airlines -- American Airlines Group Inc., Delta Air Lines Inc., Southwest Airlines Co. and United Continental Holdings Inc.

Stocks, Bonds

Investors are likely to ask Buffett and Berkshire Vice Chairman Charles Munger about those holdings during the all-day, question-and-answer session with the executives on Saturday. For much of his career, Buffett avoided investing in technology companies, and he spent years criticizing airlines as terrible businesses.

In all, Buffett and his deputy investment managers, Todd Combs and Ted Weschler, spent $10.6 billion on equities in the quarter while selling $3.5 billion in stock. For fixed-income securities, there were $45.3 billion of purchases, compared with a combined $34 billion of sales, redemptions and maturities. Berkshire’s stock portfolio was valued at $135 billion at the end of March, with the largest allocation to financial companies.

Other topics on Saturday will probably include the state of the U.S. economy, investment fees, Trump and Wells Fargo & Co. Berkshire is the largest investor in the bank, which has been working to control damage from a phony account scandal. Buffett will probably also be grilled on his investment in International Business Machines Corp., which he pared by about a third this year.

Berkshire’s net income slumped 27 percent to $4.06 billion in the period. The figure was hurt by a drop in investment gains. In last year’s first quarter, Berkshire recorded a one-time gain of almost $2 billion from a deal that involved exchanging Procter & Gamble Co. stock for the consumer company’s Duracell battery business.

Book value, a measure of assets minus liabilities that’s closely tracked by investors, rose 3.5 percent in the first quarter to $178,073 per share. Berkshire has climbed 2.4 percent this year in New York to $250,000. Results were released after the close of regular trading.

(Updates with Lubrizol losses in the ninth paragraph.)

--With assistance from Sonali Basak

To contact the reporters on this story: Noah Buhayar in Seattle at nbuhayar@bloomberg.net, Katherine Chiglinsky in New York at kchiglinsky@bloomberg.net.

To contact the editors responsible for this story: Dan Kraut at dkraut2@bloomberg.net, Dan Reichl

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