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Berkshire net income falls 64 percent because of derivatives

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OMAHA, Neb. — Berkshire Hathaway Inc. said Friday its first-quarter profit fell 64 percent because it recorded an unrealized $1.6 billion pretax loss on its derivative contracts, and its insurance businesses generated lower profits.

Berkshire reported net income of $940 million, or $607 per share, in the quarter ended March 31. That's down significantly from the net income of $2.6 billion Berkshire generated a year ago.

Berkshire's chairman and CEO Warren Buffett warned shareholders in his annual letter that the derivatives could make the company's earnings volatile. But he predicted the derivatives will ultimately be profitable.

The four analysts surveyed by Thomson Financial expected earnings per share of $1,476.99 on average.

Including the derivative losses, Berkshire's net investment losses in the quarter totaled $991 million. A year ago, the Omaha-based company recorded a $382 million investment gain.

Berkshire's derivatives fit into two major categories. Berkshire will have to pay on some of the contracts if certain U.S. entities default on their credit. Most of the other derivatives will only be paid if the certain stock indices are lower in 15 or 20 years than they were when the contract was written.

Berkshire has received $2.9 billion in premiums on the credit-default derivatives and $4.9 billion on the stock index derivatives.

Berkshire said its operating earnings are a better measure of how the company is performing in any given period because those figures exclude derivatives and investment gains or losses. Berkshire reported $1.93 billion in operating earnings during the first quarter, which was down from $2.21 billion in operating earnings a year earlier.

Officials at Berkshire typically do not comment on quarterly earnings reports. The first-quarter report was released on the eve of Berkshire's annual shareholders meeting, which is expected to attract more than 30,000 people Saturday.

Berkshire's insurance group, which includes Geico, reinsurance giant General Re and several other firms, contributed $181 million to net income from underwriting new policies. A year ago, Berkshire's insurance companies generated a $601 million underwriting profit.

Buffett has said he expects insurance profits to fall during 2008 because increased competition has driven premium prices down, and a catastrophic loss could further hurt insurance profits.

"Berkshire's property and casualty reinsurance operations have benefited during the past two years from relatively low levels of catastrophic losses, which investors should not assume will recur in 2008," Berkshire's CFO Marc Hamburg wrote in the quarterly report.

Berkshire generated $25.2 billion in revenue during the first quarter, down from the $32.9 billion it generated in 2007's first quarter.

Berkshire had $35.6 billion cash on hand at the end of the quarter, which is down from the $44.3 billion the company held at the end of 2007.

The company used some of its cash to complete its $4.5 billion purchase of a 60 percent stake in industrial conglomerate Marmon Holdings Inc. That deal closed March 18.

Marmon includes more than 125 manufacturing and service businesses across the transportation, energy and construction markets. Marmon makes products ranging from railroad tank cars to metal fasteners.

Berkshire owns more than 60 subsidiaries that range from insurance to clothing, furniture, and candy companies, restaurants, natural gas and corporate jet firms. Berkshire also has major investments in such companies as Coca-Cola Co., Anheuser-Busch Cos. and Wells Fargo & Co.

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Berkshire Hathaway Inc.: http://www.berkshirehathaway.com