Berkshire Hathaway Inc. (NYSE: BRK-A; BRK-B) is hosting its annual meeting of shareholders today and the company has just released its preliminary earnings report for the first quarter. 

As a reminder, Warren Buffett is the first one to tell you that NET INCOME IS NOT THE ISSUE TO WATCH….. We recently noted, “There was one troubling admission in this last annual report, although it has been known for some time by professional investors… Net income is almost irrelevant when reported.  Yep, it does not matter what Berkshire Hathaway says “net income” is…  Buffett noted in the most recent annual report, ‘Regardless of how our businesses might be doing, Charlie and I could – quite legally – cause net income in any given period to be almost any number we would like.  We have that flexibility because realized gains or losses on investments go into the net income figure, whereas unrealized gains (and, in most cases, losses) are excluded.’”

Buffett put the net income figure as being down to $1.511 billion, a shocking figure on the surface as it is less than half of the $3.633 billion it reported in the first quarter of 2010.  Operating earnings, something which matters more than the net income, also fell to $1.593 billion in the first quarter versus $2.222 billion seen in the first quarter of 2010.  It is the underwriting of insurance that accounts for the bulk of the damage here to operations, and it is the difference in the gains and losses in investments and derivatives that took the most toll on net income. 

The “investment gains and derivative gain/loss” was -$82 million versus a gain of $1.411 billion in the first quarter of 2011.  Here is a brief breakdown of those Q1-2011 after-tax earnings figures (compared to Q1-2010):

• Insurance-underwriting was -$821 million vs, $226 million;
• Insurance- investment income was $952 million vs. $988 million
• Railroad, utilities, and energy was $908 million vs. $505 million
• Manufacturing, services & retail was $558 million vs. $477 million
• Finance was $96 million vs. $69 million
• “Other” was -$100 million vs. -$43 million

Berkshire Hathaway highlighted what the three big culprits were in this underwriting loss: 

• Australian floods and Cyclone Yasi hit $195 million
• New Zealand Earthquake hit $412 million
• Japan’s earthquake hit $1.066 billion

This is one of those things that just happens in the world of insurance.  Buffett said in his most recent annual letter that he expects insurance to be profitable in most years but not all years.  Stay tuned, more will be coming out today.

JON C. OGG

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