Buffett’s Accounting `Nightmare' Fuels First Loss Since 2009

(Bloomberg) -- Warren Buffett has warned about the “nightmare” tied to new accounting-rule changes. Now it's beginning.

The rules, which require Berkshire to report unrealized gains or losses in equity investments in net income, helped fuel a $1.14 billion loss at Buffett's Berkshire Hathaway Inc. in the first quarter, the Omaha, Nebraska-based company said Saturday in a statement. That marked the company's first net loss since 2009.

The “requirement will produce some truly wild and capricious swings in our GAAP bottom line,” Buffett said in his annual letter to shareholders released in February. The accounting change “will severely distort Berkshire's net income figures and very often mislead commentators and investors.”

Buffett has said operating results are a better barometer of company performance, in part because Berkshire's more than $170 billion stock portfolio can fluctuate from quarter to quarter. Operating profit, which doesn't include those changes, jumped 49 percent to $5.29 billion during the first quarter as insurance underwriting swung to a profit after a difficult 2017.

A 16 percent jump in revenue at auto insurer Geico helped the company turn an underwriting profit, according to a regulatory filing. Geico was helped by rate increases that pushed premiums higher. The railroad business also posted a gain in profit due to increased revenues per car as fuel prices rose.

Berkshire's cash pile fell to $109 billion at the end of March from the record $116 billion at year-end, the first decline in two years. Buffett has said that deploying that cash into new, large acquisitions is key to increasing earnings over time. The first quarter's drop was driven in part by spending more than $12 billion on more Apple Inc. shares.

The company reported the value of Apple its stake at $40.7 billion as of March 31, a jump from $28.2 billion at the end of 2017. Buffett said in a CNBC interview that aired Friday that his company bought an additional 75 million shares of the technology company in the first quarter.

Berkshire said the fair value of its investment in Kraft Heinz Co. dropped by more than $5 billion to $20.3 billion in the quarter, as shares slipped almost 20 percent.

Berkshire shareholders are gathering in Omaha for the company's annual meeting Saturday, where Buffett and his business partner Charles Munger discuss everything from the economy to investing tips and even the pair's wagers on certain companies.

During the weekend, Buffett also showcases the businesses that Berkshire owns, including Geico and BNSF Railway Co. Berkshire's railroad, utilities and energy businesses reported a 31 percent increase in profit during the first quarter.

Here's some other takeaways from Berkshire's earnings release:

• Book value, a measure of assets minus liabilities, declined to $211,184 a share from $211,750 per Class A share at the end of 2017.
• Underwriting at the insurance businesses generated a gain of $407 million in the first quarter, compared to a loss of $267 million during the same period a year earlier.
• Investment income at those operations rose 11 percent to $1.01 billion.

--With assistance from Hannah Levitt Sonali Basak and Noah Buhayar

To contact the reporter on this story: Katherine Chiglinsky in New York at kchiglinsky@bloomberg.net.

To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, Margaret Collins

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