Warren Buffett’s Berkshire Hathaway Inc said on Friday that its third-quarter profit fell 24 percent from a year ago because of a sharp decline in the value of its equity derivative contracts following the wild swings in the stock market this summer.
Paper losses aside, most of the mammoth company’s business segments, including its railroad, insurance underwriting and manufacturing operations, reported improved earnings for the quarter.
Berkshire said net income was US$2.28 billion, or US$1,380 per Class A share, for the three months ended on Sept. 30. That is down from net income of nearly US$3 billion, or US$1,814 per Class A share, a year earlier.
On a Class B share basis, the company’s earnings amounted to US$0.92 a share, down from US$1.21 a share.
Berkshire’s results fell short of the US$1.20 per Class B share three analysts surveyed by FactSet had expected on average.
Revenues slid to US$33.7 billion from US$36.3 billion last year.
The US-based company recorded a loss from its derivative contracts of about US$1.59 billion, much wider than the loss of US$95 million booked the year before.
“A lot of that will be reversed this quarter because the market’s come back,” said Jeff Matthews, a shareholder who wrote Secrets in Plain Sight: Business & Investing Secrets of Warren Buffett.
All told, Berkshire’s investment gains and derivative losses combined to sap US$1.53 billion from its profit in the third quarter. A year earlier, the company’s derivatives and investments added US$202 million to quarterly net income.
The true value of the derivatives will not be clear for at least several years because they do not mature until an average of about 10 years from now. However, Berkshire is required to estimate their value every time the company reports earnings. Buffett has said he believes the contracts will ultimately be profitable because the premiums are being invested.
Berkshire executives say the company’s operating earnings are a better measure of how the company is performing in any given period because those figures exclude its derivatives and investment gains or losses.
The company said its operating income climbed 37 percent to US$3.81 billion in the quarter from US$2.79 billion a year earlier.
Besides investments, Berkshire owns roughly 80 subsidiaries, including clothing, furniture and jewelry firms, but its insurance and utility businesses typically account for more than half of the company’s net income.
In the latest quarter, most of the company’s business segments turned in annual gains in earnings, led by insurance underwriting.
The segment generated net earnings of US$1.09 billion, up from US$199 million a year earlier.
That included an after-tax gain of about US$855 million as the company reduced its estimate of reinsurance contract liabilities and changes in currency exchange rates.
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