Buffett’s Berkshire Hathaway reports big jump in 4Q profit on unrealized investment gains

Paper gains drive Berkshire’s profit skyward

OMAHA, Neb. — Berkshire Hathaway Inc.’s fourth-quarter profit bounced back sharply, thanks largely to an unrealized $1 billion gain on derivative contracts and investments.

Warren Buffett’s company said Saturday that its insurance and utility divisions performed well enough to help offset weakness in subsidiaries hurt most by the weak economy, such as NetJets, Acme Brick and other manufacturing and retail businesses.

Berkshire generated $3.056 billion in net income, or $1,969 per Class A share, during the quarter. That’s up from $117 million net income, or $76 per share, a year ago.

The three analysts surveyed by Thomson Reuters had expected Berkshire to report fourth-quarter earnings per share of $1,208.33 on average.

Berkshire said it generated $30.2 billion in revenue in the fourth quarter. That is nearly 23 percent higher than last year’s fourth quarter revenue of $24.6 billion.

At the businesses Berkshire owns, “The earnings continued to struggle across the board,” said analyst Justin Fuller, who writes about Berkshire online at www.buffettologist.com.

But Fuller, who works with Midway Capital Research & Management in Chicago, said Berkshire’s investment income was a bright spot. It received a boost from loans made to several companies in the depths of the financial crisis in late 2008 and early 2009. Companies such as Goldman Sachs, GE, and Harley-Davidson are paying at least 10 percent interest on nearly $9 billion Berkshire loaned them.

Those deals are part of why Berkshire’s investments and derivatives added $1.03 billion to its fourth-quarter profit. A year ago, largely unrealized losses of $3.3 billion from the investments and long-term derivative contracts weighed heavily on the Omaha-based company’s fourth quarter profit.

Buffett reiterated Saturday that he believes the derivatives, some of which are tied to the value of stock market indexes, will be profitable over their lifetime, partly because Berkshire held about $6.3 billion in derivative premiums at year end that it can invest.

Berkshire released its annual report along with Buffett’s letter to shareholders Saturday. The company describes the performance of its subsidiaries throughout 2009 in those reports, but doesn’t break out detailed information about the fourth quarter alone.

Buffett said Berkshire’s insurance unit, which includes Geico and reinsurance giant General Re, generated $1.01 billion in net income from underwriting in 2009, down from $1.7 billion last year. But the investment income in the insurance division grew to $4.1 billion in 2009 from last year’s $3.5 billion.

Berkshire’s utility division, which includes MidAmerican Energy Holdings Co. and PacifiCorp, added $1.07 billion net income during 2009, down from $1.7 billion in 2008.

In future quarters, Berkshire’s utility division will include its newest subsidiary, Burlington Northern Santa Fe railroad. Buffett said the railroad’s results and capital-intensive business are similar to a utility, so it made sense to put BNSF with Berkshire’s utilities.

The manufacturing, service and retail unit at Berkshire generated less than half the profit it did the previous year. Those businesses generated $1.1 billion in net income in 2009, down from $2.3 billion the year before.

Those businesses suffered because of the recession last year. Buffett said Shaw Carpet, Acme Brick, MiTek and Johns Manville combined to generate a pretax profit of $227 million last year, nearly 83 percent below the $1.3 billion in 2006, when construction was booming.

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

On the Net:

Berkshire Hathaway Inc.: www.berkshirehathaway.com