Berkshire Hathaway Reports Q1 ‘Accounting’ Loss But Insurance Profit

Warren Buffett lost money but had a pretty good quarter.

Berkshire Hathaway Inc. on Saturday reported an unusual quarterly net loss, the result of an accounting change that Buffett had warned would produce “wild” but in his view meaningless swings in results.

But Berkshire also ended a long stretch of disappointing operating performance, posting record operating profit as insurance rebounded from a difficult quarter while economic growth bolstered results in railroad, industrial and consumer businesses.

Berkshire posted a first-quarter net loss of $1.14 billion, or $692 per Class A share, compared with net income of $4.06 billion, or $2,469 per share, a year earlier.

The accounting change required Berkshire to report $6.2 billion of unrealized losses in its marketable stock portfolio, which totaled $170.5 billion at year end, regardless of whether it planned to sell those stocks.

Two of Berkshire’s biggest stock investments, Wells Fargo & Co. and Coca-Cola Co., had tough first quarters, falling 13.6 percent and 5.3 percent, respectively.

Buffett has called the new accounting rule a “nightmare” that would produce “truly wild and capricious swings” in bottom-line results that could, depending on their direction, unnecessarily scare or embolden investors.

“It really is not representative of what’s going on in the business at all,” Buffett told shareholders at Berkshire’s annual meeting in Omaha, Nebraska.

Berkshire said its operating profit, which Buffett considers a better performance measure, rose 49 percent to $5.29 billion, or about $3,215 per Class A share, from $3.56 billion, or $2,163 per share, a year earlier.

Analysts, on average, expected operating profit of about $3,116 per Class A share, according to Thomson Reuters I/B/E/S. Operating profit had previously fallen for five straight quarters, and missed Wall Street forecasts for eight straight.

Book value, which measures assets minus liabilities, also took a hit from falling stock prices, falling 0.3 percent to $211,184 per Class A share, even though Buffett boosted his stake in Apple Inc by $12.5 billion in the quarter.

Some analysts have said the stock losses have weighed on Berkshireshares, which are 10 percent below their record highs set on Jan. 29. In Friday trading, the Class A shares closed at$292,600, and the Class B shares at $195.64.

Buffett, 87, and Vice Chairman Vice Chairman Charlie Munger, 94, answered questions from shareholders, journalists and analysts at the annual meeting.

Despite the Apple purchase, Berkshire ended the quarter with $108.6 billion of cash and equivalents, giving Buffett ammunition to make one or more “huge” non-insurance acquisitions he has said he wants.

Berkshire’s insurance businesses, which struggled with losses from hurricanes and other events in 2017, posted a $407 million underwriting profit, compared with a year earlier $267 million loss.

Buffett said the GEICO car insurer had “quite a good-sized turnaround in profitability.” Pre-tax underwriting gains nearly quadrupled, as it sold more policies despite having raised rates, while the rate of policyholder losses fell.

“The trends look pretty good,” Tony Nicely, GEICO’s chief executive, told Reuters on Friday. “The number of claims are down somewhat. Yet the costs keep going up.”

An improving economy led to higher business volume at the BNSF railroad, which saw profit rise 37 percent to $1.15 billion.

Pretax profit at industrial businesses such as Precision Castparts rose 32 percent, while lower taxes helped boost profit at the Berkshire Hathaway Energy unit by 22 percent.

(Editing by Jennifer Ablan and Nick Zieminski)

Editor’s Note: More on Berkshire Hathaway Q1 Insurance Results:

• Berkshire Hathaway’s insurance businesses generated after-tax earnings from underwriting of $407 million in the first quarter of 2018, compared to a loss of $267 million in 2017.
• Insurance results thus far in 2018 included reductions of losses for prior years’ property/casualty loss events and the favorable effect of a lower effective income tax rate, partly offset by increased losses on retroactive reinsurance contracts.
• At GEICO, premiums were $7.9 billion, up 15.6 percent, reflecting increased premiums per auto policy of approximately 8.2 percent over the past 12 months. The loss ratio in the first quarter of 2018 declined 5.0 percentage points to 76.7.
• Within the Berkshire Hathaway Reinsurance Group, premiums at National Indemnity Co. (NICO Group) in the first quarter declined 3 percent compared to 2017. General Re Group’s premiums in the first quarter of 2018 were $972 million, an increase of $318 million (49 percent) compared to 2017.
• On a combined basis, the property/casualty reinsurance business generated pre-tax underwriting gains of $130 million in the first quarter compared to pre-tax losses of $410 million in 2017. There were no significant catastrophe loss events in the first quarter of 2018. The company incurred estimated losses of $102 million in the first quarter of 2017 from a cyclone in Australia.
• “Industry capacity dedicated to property and casualty markets remains high and price competition in most reinsurance markets persists. We continue to decline business when we believe prices are inadequate,” the company said in the quarterly report.