(Bloomberg) — Berkshire Hathaway Inc. reported a 3.8% decline in first-quarter profit, as underwriting results declined at insurance businesses and on reduced earnings from Chairman Warren Buffett’s derivatives wagers.
Net income slipped to $4.71 billion, or $2,862 a share, from $4.89 billion, or $2,977, a year earlier, the Omaha, Nebraska-based company said yesterday. The decrease in profit was the first since 2012.
Buffett, who welcomed shareholders to Berkshire’s annual meeting May 3, has been expanding in businesses like energy and railroads that provide opportunities for billions of dollars in capital spending and relatively stable returns tied to the U.S. economy. Results can be more volatile on Buffett’s financial- market bets and in reinsurance, in which the company takes on risks from other insurers in the U.S. and beyond.
“When you get a substantial portion of your earnings from insurance, you live with the fact that the numbers bump around,” Bill Smead, chief investment officer at Smead Capital Management, which oversees about $950 million including Berkshire shares, said in an interview.
Underwriting profit declined 49% to $461 million at the insurance segment, on smaller gains from the reinsurance group. The group benefited last year from a gain on a contract with Swiss Re Ltd.
Float from insurance units including car insurer Geico has provided Buffett with funds to amass the largest equity stakes in companies including Coca-Cola Co., Wells Fargo & Co. and American Express Co. Float, which counts money held to back obligations to policyholders, was $78 billion as of March 31, up from about $77 billion at the end of 2013.
Berkshire’s stock portfolio was valued at $118.5 billion on March 31, up about $1 billion from the end of 2013. Berkshire spent $1.2 billion on equities and $2 billion on fixed-maturity securities in the quarter.
The allocation to foreign-government debt climbed to $12.2 billion from $11 billion in December. The U.K., Germany, Canada, Australia and the Netherlands represented 75 percent of that portfolio as of March 31, down from 78 percent on Dec. 31.
Berkshire posted a $132 million pretax loss from equity index puts in the three months ended March 31, compared with a $1.25 billion gain a year earlier, the company said in a regulatory filing. Buffett, the chairman and chief executive officer, uses the contracts to wager on gains in stock markets.
Credit-default contracts, in which Buffett bets on the ability of borrowers to repay debt, contributed $373 million, compared with a loss of $14 million a year earlier.
Book value, a measure of assets minus liabilities, rose in the quarter to $138,426 a share from $134,973 at the end of last year. The cash pile grew to $48.9 billion from $48.2 billion on Dec. 31. Class A shares rose 8.1% this year in New York, beating the 1.8% gain in the Standard & Poor’s 500 Index.
Stimulus from the Federal Reserve, a pickup in consumer spending and a recovering housing market have bolstered the U.S. economy. Berkshire stands to gain from those trends because its subsidiaries include a railroad, a home builder, a trucking company, electric utilities, manufacturers and retailers.
The Burlington Northern Santa Fe railroad, which was Buffett’s biggest takeover, contributed $724 million to quarterly earnings, down from $798 million a year earlier, as winter weather and rising cargo shipments disrupted operations. Carl Ice, the CEO of BNSF, said last month that the railroad will need the rest of the year to untangle train tie-ups in the corridor that serves North Dakota’s Bakken shale region.
Berkshire’s operating earnings, which exclude some investment results, were $2,149 a share, missing the $2,171 average estimate of three analysts surveyed by Bloomberg.
The utility unit added $452 million to Berkshire’s earnings, compared with $394 million a year earlier. The business benefited from demand driven by cold weather, according to the filing.
The subsidiary completed its acquisition of Nevada’s largest electric utility in December and announced a deal this week to buy SNC-Lavalin Group Inc.’s AltaLink for about $2.9 billion to expand in electricity transmission in western Canada.
Berkshire’s stake in ketchup-maker HJ Heinz Co. added $188 million to earnings in the quarter, mostly from dividends on a preferred stake. Buffett’s company and 3G Capital took Heinz private last year in a $23.3 billion deal.
Buffett, 83, has touted business prospects in the world’s largest economy, where most of Berkshire’s operations are based. He said in his annual letter to shareholders that his company has plenty of opportunity to invest in plants and equipment.
“Though we invest abroad as well, the mother lode of opportunity resides in America,” Buffett wrote in the letter posted March 1.
Buffett was expected to highlight the accomplishments of Berkshire managers at the May 3 meeting in Omaha. The gathering draws tens of thousands of spectators, who come to hear him and Vice Chairman Charles Munger, 90, answer questions from shareholders, journalists and analysts.
Topics at past meetings have ranged from the operating businesses to taxes and politics. Shareholders may ask this year about why Buffett abstained from voting on Coca-Cola’s executive-pay plan, which he called “excessive.” Berkshire is the soft-drink maker’s largest shareholder.
“People like to raise tricky issues at the Berkshire meeting, and that’s probably the trickiest one,” said Lawrence Cunningham, a professor at George Washington University.
“You’ve got to decide when you’re going to throw that weight around,” he said of Buffett.
While investors are drawn to the weekend by the session with the executives and the chance to see old friends, many will also shop. Berkshire subsidiaries will sell products from running shoes to rubber duckies in an expo the size of three football fields. Berkshire will also host other shareholder events over the weekend, including a picnic and 5-kilometer (3.1-mile) fun run.
The mood at the meeting will be “celebratory,” with the stock near an all-time high, Cunningham said. Buffett’s topics at the gathering are often similar from year to year, he said.
“From one meeting to the next, the big thing that changes is size,” Cunningham said. “Everything’s bigger.”