By Erik Holm and Linda Shen
Nov. 8 (Bloomberg) -- Billionaire Warren Buffett's Berkshire Hathaway Inc. posted a fourth straight profit drop, the longest streak of quarterly declines in more than a decade, as hurricanes hurt returns at insurance operations and investments lost value.
Third-quarter net income decreased 77 percent to $1.06 billion, or $682 a share, from $4.55 billion, or $2,942, a year earlier, the Omaha, Nebraska-based company said yesterday. Further declines in debt and equity markets reduced shareholders equity, a measure of assets minus liabilities, by $9 billion in October, after the quarter ended.
``It's not as good as it might have been, but neither was it as bad as it might have been,'' said Frank Betz, a partner at Carret Zane Capital Management, which holds Berkshire shares. Declining investments, hurricanes and falling property and casualty rates caused net losses at 14 of the 23 companies in the KBW Insurance Index that reported third-quarter results so far.
Buffett, 78, is finding opportunity amid the turmoil, investing in nuclear power, chewing gum and Wall Street as results slump at Berkshire's insurance units and businesses tied to housing. He committed at least $28 billion this year to acquire companies, finance buyouts and purchase securities as prices fall and competitors are hobbled by limited access to credit.
Berkshire said profit from underwriting insurance fell 83 percent to $81 million amid the most costly hurricane season since the record storms of 2005. Its reinsurance group, which sells catastrophe coverage to other insurers, posted a $166 million pretax loss for the quarter. Profit from selling policies at car insurer Geico Corp. fell 27 percent to $246 million. Berkshire typically gets about half its revenue from insurance.
Hurricanes Ike and Gustav cost insurers a combined $10 billion when they struck the Gulf Coast in September, according to preliminary data from Insurance Services Office Inc.
Derivative Losses
Decreases in the value of some holdings and derivatives lowered earnings by $1.01 billion in the period ended Sept. 30, compared with a $1.99 billion gain in the year-earlier quarter when Berkshire booked profits from selling a stake in energy firm PetroChina Inc.
Berkshire believes market declines this year are ``temporary, and that equity prices will ultimately rise,'' the company said in a filing.
Buffett Bet
Losses from derivatives result in part from accounting rules related to bets Buffett made on four stock indexes, including the Standard & Poor's 500. If the indexes fall below contractually agreed-upon levels at expiration dates beginning in 2019, Berkshire will lose the bets. Berkshire has collected $4.85 billion on the contracts and can profit from investing the funds, the firm said.
The investment loss ``doesn't look great,'' said Tom Russo, a partner at Gardner Russo & Gardner, whose largest holding is Berkshire stock. ``But shareholders should rejoice that he was able to obtain that capital to invest on such attractive terms for years before the chance comes that he'll have to pay.''
Buffett in the past two months agreed to spend $5 billion of Berkshire's cash for a stake in Goldman Sachs Group Inc., betting the Wall Street firm would be among the survivors of a worldwide credit crisis, and another $5 billion in preferred shares of General Electric Co.
He also agreed in July to lend $3 billion to Dow Chemical Co. to help fund that firm's takeover of Rohm & Haas Co., and committed $6.5 billion in April to help Mars Inc. buy chewing gum maker Wm. Wrigley Jr. Co. Berkshire's MidAmerican Energy Holdings Co. struck a deal in September to pay $4.7 billion for Constellation Energy Group Inc.
Shares Decline
Deals and investments reduced Berkshire's cash holdings to $33.4 billion on Sept. 30 from $47.1 billion a year earlier. Buffett spent about $5.8 billion on fixed-maturity securities and $3.9 billion on equities in the quarter.
Berkshire shares, which rose in 17 of the last 20 years, are down 20 percent since Dec. 31 as some of the firm's largest stock investments slumped. American Express Co. has plunged 51 percent this year and Coca-Cola Co. dropped 25 percent.
Berkshire said its stock portfolio was worth $76 billion at the end of September, a 9.4 percent increase over three months. Berkshire reported holding about $3.2 billion in auction-rate securities, half as much as on June 30.
The worst housing slump since the Great Depression hurt building-related units including Acme Brick, Benjamin Moore paints and Shaw Industries. Profit at Shaw, the world's largest carpet manufacturer, fell 61 percent to $49 million.
Furniture, Jewelry
Profit at furniture stores, jewelry shops and the candy business declined 67 percent to $11 million. Earnings from Berkshire's energy and utilities unit dropped 8.5 percent to $324 million.
Buffett built Berkshire over four decades from a failing textile maker into a $175 billion company by buying out-of-favor stocks and businesses whose management he deemed superior. His views on the economy and markets are followed by investors and politicians. He participated yesterday by phone in a meeting convened by President-elect Barack Obama to discuss the economy.
To contact the reporters on this story: Erik Holm in New York at eholm2@bloomberg.net; Linda Shen in New York at lshen21@bloomberg.net
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