Berkshire Posts Loss on Derivatives, ConocoPhillips (Update3)

By Erik Holm
Bloomberg News
May 8, 2009

May 8 (Bloomberg) -- Warren Buffett's Berkshire Hathaway Inc. posted its first loss since 2001 on what the billionaire chairman has called his "major mistake" of buying ConocoPhillips shares when oil prices were near their peak.

The first-quarter net loss of $1.53 billion, or $990 a share, compares with profit of $940 million, or $607, in the same period a year earlier, the Omaha, Nebraska-based firm said today in a statement. Writedowns on derivatives tied to corporate-debt indexes cost the company about $1.3 billion and Berkshire took a $1.9 billion charge on ConocoPhillips, contributing to the worst net loss in at least two decades.

Buffett is cutting the ConocoPhillips stake to gain a tax advantage for Berkshire less than a year after becoming the Houston-based firm's largest shareholder, the company said in the statement. Buffett wrote in his annual letter to shareholders in February that buying the stock while oil was near $140 a barrel cost his firm "several billion dollars." ConocoPhillips has fallen by half since June 2008.

"Warren Buffett isn't perfect," said Michael Yoshikami, chief investment strategist at Walnut Creek, California-based YCMNet Advisors. "He's trying to get some benefit out of that mistake, and he's diversified enough that he can recover those losses somewhere else."

Berkshire sold 13.7 million shares of ConocoPhillips in the first three months of the year, reducing the holding to 71.2 million shares, and an undisclosed number since, the statement said. Berkshire said that it could recover as much as $690 million in federal taxes on capital gains from 2006 by selling investments at a loss this year.

Derivative Liabilities

Book value, a measure of assets minus liabilities, fell 5.9 percent in the three months ended March 31 to $102.8 billion on declines in the equity portfolio and derivatives. Berkshire's liability on derivatives at the finance and financial products operations widened to $15.4 billion as of March 31 from $14.6 billion three months earlier, the company said in a regulatory filing.

The derivatives have weighed on Berkshire results for more than a year. Berkshire's commitments, which cover possible losses on corporate debt, stock indexes and municipal bonds, prompted Fitch Ratings and Moody's Investors Service to strip the firm of its top-level credit ratings this year.

Berkshire paid $675 million in the quarter to investors who bet on defaults by companies in undisclosed high-yield bond indexes and $450 million since, the statement said. Until this year, the company had paid $542 million. Berkshire collected $3.4 billion in premiums on the contracts as of Dec. 31.

Corporate Bankruptcies

Most of the declines in Buffett's equity-linked derivative portfolio are paper losses, which haven't required payments.

"The odds are extremely good" that the contracts tied to stock markets will be profitable in the long term, Buffett, 78, told shareholders at the company's annual meeting May 2. He said he wasn't as confident on the swaps tied to corporate debt.

"Several issuers included in the various high-yield indices filed for bankruptcy during the quarter," Berkshire said in today's statement.

Buffett told shareholders in his annual letter in February that he mistimed the ConocoPhillips investment.

'Dead Wrong'

"I in no way anticipated the dramatic fall in energy prices that occurred," said Buffett, writing that he still expects an increase over time. "But so far I have been dead wrong. Even if prices should rise, moreover, the terrible timing of my purchase has cost Berkshire several billion dollars."

Buffett, Berkshire's chairman, chief executive officer and head of investing, has said the economic slump depressed revenue at the company's jewelry businesses and operations tied to housing markets. Berkshire last year cut jobs at units including Clayton Homes Inc., which builds manufactured housing, and brickmaker Acme Building Brands. He replaced the CEO of Helzberg Diamond Shops Inc. in April.

Profit at furniture stores, jewelry shops and the candy business fell by half to $16 million. The NetJets unit, which leases planes to corporate customers and individuals, posted a $96 million pretax loss, compared with profit of $45 million a year earlier, on writedowns of aircraft.

Profit at Marmon Holdings Inc., the collection of more than 100 businesses purchased by Berkshire from the Pritzker family last year, rose more than fivefold to $162 million. The unit's operations include manufacturing and leasing railroad tank cars and making wire and cable products.

Gas Pipelines

Earnings from Berkshire's MidAmerican Energy Holdings Co. unit, which includes gas pipelines and Portland, Oregon-based PacifiCorp, decreased 36 percent to $203 million after taxes. MidAmerican said April 1 that financial results at its Iowa- based utility were "running slightly behind 2008" on a decline in industrial sales and lower wholesale prices.

Berkshire, which owns National Indemnity Co., General Re Corp. and Geico Corp., said profit from underwriting insurance policies rose 21 percent to $219 million. Pretax profit at Berkshire Hathaway Reinsurance Group jumped sevenfold to $203 million.

Profit from selling policies at car insurer Geico slipped 20 percent to $148 million before taxes. The unit added about 430,000 new policyholders in the quarter. Expenses rose 6.8 percent on higher salaries. Customers are raising deductibles and scaling back coverage to save money, the company said.

Stone Crushing

Buffett has been investing in preferred shares of Goldman Sachs Group Inc. and General Electric Co. and buying corporate debt to lock in fixed returns after stock market declines. He bought bonds in firms including motorcycle-maker Harley-Davidson Inc., luxury jeweler Tiffany & Co., bubble-wrap maker Sealed Air Corp. and Vulcan Materials Co., the largest U.S. producer of crushed stone, commanding yields as high as 15 percent.

The purchases helped boost investment income at insurance units 29 percent to $1.03 billion. Results will be pressured by lower dividends from stocks including shares of Wells Fargo & Co., Berkshire said in the filing.

Berkshire shares have fallen about 1.4 percent this year, after a 32 percent in decline in 2008. Eleven of the top 12 stocks in Berkshire's U.S. portfolio declined in the first quarter. Coca-Cola Co., Berkshire's top holding, dropped 2.9 percent. Wells Fargo, the next largest, plunged 52 percent.

Stock Portfolio

Berkshire said its stock portfolio at its insurance units was valued at $37.6 billion as of March 31, a 23 percent decrease from the end of 2008. Buffett spent $4.9 billion on fixed-maturity securities and $624 million on equities in the quarter. The firm had $25.6 billion in cash, compared with about $25.5 billion three months earlier.

Stocks in Berkshire's portfolio gained about $5 billion in market value from the end of the quarter through May 7, the company said in today's filing.

Buffett built Berkshire into a $145 billion enterprise over four decades with dozens of acquisitions, buying companies that sell ice cream, lease private jets and operate power plants. The firm typically gets about half its profit from insurance units.

Berkshire, which posted five straight declines in quarterly profit through the end of 2008, last posted a loss in the three months ended Sept. 30, 2001, on claims tied to the terrorist attacks that month.

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