NEW YORK (Reuters) - Warren Buffett's Berkshire Hathaway Inc (BRKa.N: Quote, Profile, Research, Stock Buzz)(BRKb.N: Quote, Profile, Research, Stock Buzz) said on Friday third-quarter profit fell 77 percent, the fourth straight quarterly decline, hurt by weaker results from insurance underwriting and a big loss on derivatives contracts.
Net income for the Omaha, Nebraska-based insurance and investment company declined to $1.06 billion, or $682 per Class A share, from $4.55 billion, or $2,942, a year earlier.
Operating profit fell 18 percent to $2.07 billion, or $1,335 per share, from $2.56 billion, or $1,655. It fell short of analysts' average expectation for $1,429 per share, according to Reuters Estimates. Revenue fell 7 percent to $27.93 billion. Berkshire's net worth nevertheless rose to $120.2 billion from $118 billion at the end of June.
"You can look at the results as a glass half-full or half- empty," said Frank Betz, a principal at Carret/Zane Capital Management LLP in Warren, New Jersey, which owns Berkshire stock. "Earnings were down, but book value went up. Berkshire hasn't been battered by extraordinary insurance claims and there's nothing alarming in the results that's tied to Berkshire's exposure to the economy."
Berkshire is a roughly $175 billion conglomerate that owns several dozen businesses in such areas as insurance, energy, housing, kitchen supplies, clothing and food.
It also tries to invest in out-of-favor companies with strong earnings and management. Insurance typically generates half of results. Buffett is the second-richest American according to Forbes magazine and an economic adviser to President-elect Barack Obama.
HURRICANES HURT RESULTS
Profit from insurance underwriting fell 83 percent to $81 million, hurt by increased price competition and about $1.05 billion of losses tied to Hurricanes Gustav and Ike.
Berkshire boosted insurance premiums following Hurricane Katrina in 2005, but prices and profit margins have fallen. The 2007 hurricane season was also quiet, making this year's results look comparably worse.
Insurance investment income declined 12 percent in the quarter to $809 million and profit from other businesses declined 8 percent to $1.08 billion. The latter included a decline of 8 percent in utilities and energy and an increase of 3 percent in manufacturing, retailing and services.
Berkshire also had $1.26 billion of pre-tax losses from derivatives contracts. The bulk of this related to previously disclosed contracts tied to the long-term performance of the Standard & Poor's 500 .SPX and three foreign stock indexes and to the credit quality of high-yield bonds.
Accounting rules require Berkshire to regularly report unrealized gains and losses on the contracts.
But Berkshire can invest the cash it got up front to enter the contracts. It would also pay on the stock index contracts only if various indexes are lower between the 2019 and 2027 than when the contracts were created.
Buffett entered the contracts, although he has called derivatives "financial weapons of mass destruction."
Berkshire's Class A shares closed up $800 at $113,000 on Friday, while its Class B shares fell $14 to $3,686. The company released results after U.S. markets closed.
Buffett has committed more than $27 billion of Berkshire's money this year to make acquisitions, finance takeovers and invest in blue-chip companies such as General Electric Co (GE.N: Quote, Profile, Research, Stock Buzz) and Goldman Sachs Group Inc (GS.N: Quote, Profile, Research, Stock Buzz).
The investments give Berkshire new ways to grow as the credit crisis drives asset values down and makes it harder for other companies to borrow.
Despite the investments, Berkshire increased its cash stake to $33.37 billion as of September 30 from $31.16 billion in June, although it was down from $44.33 billion at the end of 2007.
"When you can move money from cash earning 2 percent to distressed assets that can earn 20 percent, it creates a lot of value," said James Armstrong, president of Henry H. Armstrong Associates in Pittsburgh, which owns Berkshire stock. "Buffett isn't doing it with an eyedropper."
Last month, Buffett pledged to move all his personal holdings apart from Berkshire stock, which is pledged to charity, into U.S. stocks from government bonds, citing long- term optimism in corporate America.
Within insurance, pre-tax underwriting gains at auto insurer Geico Corp fell 27 percent to $246 million, hurt by higher claims. Gains before taxes fell 66 percent to $54 million at General Re Corp, which rejected business where it did not believe it was getting paid enough.
Berkshire Hathaway Reinsurance Group, meanwhile, had a $166 million pre-tax loss, hurt by hurricanes and lower premiums.
(Reporting by Jonathan Stempel; Editing by Gary Hill and Andre Grenon)