May 3 (Bloomberg) -- Billionaire Warren Buffett's Berkshire Hathaway Inc. said profit plunged 64 percent to the lowest since 2005 as falling rates cut returns from insurance operations and the company marked down the value of derivative contracts.
First-quarter net income decreased to $940 million, or $607 a share, from $2.6 billion, or $1,682, a year earlier, the Omaha, Nebraska-based company said yesterday in a statement. Operating earnings, which excluded $991 million in investment losses, were $1,247 a share, lagging behind the $1,430 average estimate of three analysts compiled by Bloomberg.
``Berkshire Hathaway has a significant risk posed on derivative contracts,'' said Charles Hamilton, an analyst at FTN Midwest Securities Corp., in a Bloomberg Television interview. ``We've seen some of those derivatives come back to bite them.'' Hamilton has a ``neutral'' rating on the stock.
Buffett is looking to acquire businesses in Europe and is adding to holdings of consumer-products companies as competition forces down insurance rates in the U.S. Berkshire, which owns National Indemnity, General Re Corp. and Geico Corp., typically gets about half its profit from insurance.
Profit from underwriting insurance policies fell 70 percent to $181 million. Pretax underwriting profit at Berkshire Hathaway Reinsurance Group, which sells catastrophe coverage, dropped 95 percent to $29 million.
Shareholders interviewed at a party for investors in Omaha were unfazed by the loss on derivatives. ``They're unrealized losses,'' said Magen Marcus, a medical doctor from New Haven, Connecticut, who has been a shareholder for five years. ``You've got to trust the man in charge.''
Unrealized Losses
Most companies in the KBW Insurance Index have reported declines in first-quarter profit on the falling value of investments, slipping rates for commercial coverage, and higher costs from auto accidents.
Berkshire's investment loss compared with a gain of $382 million a year earlier. Berkshire recorded $1.7 billion of unrealized losses from contracts that protect fixed-income investors, and from options sold on the value of the Standard & Poor's 500 Index and three other stock indexes. The S&P Index dropped by 9.9 percent in the first quarter.
``Berkshire's earnings may swing widely because of the accounting regulations that govern the reporting of derivatives,'' the company said in the statement, calling the changes ``meaningless.''
The earliest Berkshire would have to pay on any of the equity index puts is 2019, and Buffett gets to invest the $4.88 billion Berkshire received for writing them in the meantime. The credit default swaps could easily become genuine losses, not just an accounting convention, Hamilton said.
Geico Profit
American International Group Inc., the world's largest insurer, had the biggest loss in its 89-year history in the fourth quarter after an $11.1 billion writedown of derivatives. AIG's swaps protected investors against losses in $61.4 billion of securities that included subprime mortgages. The New York- based company is scheduled to report first-quarter results on May 8.
Geico's profit fell 37 percent to $186 million before taxes on rising claims costs. Price reductions from last year, which went into effect as drivers renewed their policies, also cut into the insurer's profit margin, which fell to 6.1 cents on every dollar in premium from 10.3 cents in the same period a year earlier.
``Auto insurance has been surprisingly good for quite awhile. That's turning now,'' said Buffett at an appearance in Toronto in February. ``Frequency of accidents just kept going down for three or four years, which was just amazing, and the severity was not particularly bad. Now both are picking up somewhat.''
Coverage Reduced
State Farm Mutual Automobile Insurance Co., the largest U.S. car insurer, lost money from underwriting auto coverage last year. No. 2 Allstate Corp. and No. 3 Progressive Corp. said last month that first-quarter profit at their auto businesses declined. Geico ranked fourth, with a 7.1 percent market share, according to 2007 data compiled by the National Association of Insurance Commissioners.
Business insurance prices in the U.S. fell 14 percent in the first quarter from the same period a year earlier, according to a survey by the Council of Insurance Agents and Brokers.
Rates for catastrophe protection are falling industrywide after successive hurricane seasons left the U.S. untouched by major storms. Buffett scaled back coverage last year after stepping up sales in 2006 when prices doubled and tripled following Hurricane Katrina in 2005, the costliest U.S. storm.
``It is a certainty that insurance industry profit margins, including ours, will fall significantly in 2008,'' Buffett wrote in his annual letter to shareholders in February.
Annual Meeting
Buffett, 77, built Berkshire during more than four decades, transforming a failing textile manufacturer into a $200 billion investment and holding company. In addition to insurance, Berkshire businesses range from candy to manufactured homes to corporate jet leasing.
More than 27,000 people are expected to attend the annual shareholder meeting today to hear Buffett and his partner, Vice Chairman Charlie Munger, answer questions and talk about their plans.
Berkshire has risen 23 percent in New York trading during the past 12 months and gained about 4,700 percent in 20 years through Dec. 31, about six times more than the Standard & Poor's 500 Index including dividends.
Berkshire fell $300, or 0.2 percent, to $133,600 yesterday in New York Stock Exchange composite trading.
Overseas Investment
Buffett, who has been investing in China, Israel and the U.K. to spur profit growth, will embark on a four-city European trip this month to scout potential acquisitions.
At the center of Buffett's European efforts is Angelo Moratti, scion of the founding family of Italian energy company Saras SpA. Moratti is organizing visits to Milan and Madrid. For the past seven years, Moratti traveled to Omaha at least four times a year to brief Buffett on companies and issues in Europe.
Buffett's trip will also include stops in Frankfurt and Lausanne.
Buffett has said in recent years that investments meeting his criteria and big enough to make a difference to Berkshire have become scarce, prompting him to look abroad. He said at last year's annual meeting that he would welcome a $40 billion to $60 billion deal. Buffett also has said he expects the dollar to depreciate, making earnings in other currencies more important.
Berkshire has been investing in consumer products companies with global brands, committing $6.5 billion this week to help finance Mars Inc.'s takeover of Wm. Wrigley Jr., the world's biggest maker of chewing gum.
Other Divisions
Berkshire in February disclosed it became the largest shareholder in Kraft Foods Inc., the world's second-biggest foodmaker. Kraft, based in Northfield, Illinois, sells Ritz crackers and Oscar Mayer deli meats.
Buffett made his first non-U.S. acquisition in 2006, paying $4 billion for 80 percent of Israel-based Iscar Metalworking Cos., a closely held maker of industrial tools with global operations.
Buffett has also been increasing holdings of Johnson & Johnson, the world's largest health-products maker. The New Brunswick, New Jersey-based company sells Listerine mouthwash, Sudafed cold pills and prescription drugs.
Earnings from Berkshire's energy and utilities unit, which includes MidAmerican Energy Holdings Co. and PacifiCorp, increased 7.8 percent to $316 million, according to a regulatory filing.
`General Slowdown'
The worst housing recession in a quarter century has hurt Berkshire's construction-related companies as homebuilders scale back their businesses. First-quarter profit fell 44 percent to $51 million at Shaw Industries, the world's largest carpet manufacturer.
The company didn't include results for other individual units whose profits are tied to construction, including Acme Brick and Benjamin Moore paints, saying only that ``demand for certain building products continues to be low as a result of the general slowdown in housing construction.''
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