It’s easy to see why Warren Buffett’s Berkshire Hathaway is looking at two large acquisitions on the scale of its $US9 billion cash purchase of chemical company Lubrizol Corp.
Just look at the damage the insurance business did to the company’s latest quarterly figures (and no doubt for all of 2011) as it battled flood, fire, earthquake and tsunami, in Australia, Japan, New Zealand and now the worst tornados in the US form more than two decades.
The total initial loss for the company’s re-insurance business, the world’s third biggest, was $US1.67 billion in the three months to March.
Losses totalled $US1.07 billion from the Japan earthquake and $US412 million from the New Zealand earthquake alone.
If the rest of the year is catastrophe free, then it is conceivable that the insurance business may break even, Mr Buffett said, but he predicted a loss for the full year.
But the terrible tornados of the past fortnight which have killed over 400 people and damaged tens of thousands of homes and other buildings, will produce losses in the company’ primary US insurance arms, most notable car insurer Geico which is looking at claims for at least 25,000 cars damaged in the storms.
The catastrophe modeller, Equecat estimated the damage from last week’s storms at an initial $US5 billion (remember the first estimate is always the lowest). There are damage bills from storms earlier in April that killed 47 people.
This is pointing to more loses for Berkshire’s insurance arm this quarter.
The company relies on insurance businesses as a low-cost funding source for investments (by using the so-called ‘float’) because it receives premiums and had to hold the money in cash or in high grade liquid securities, before it pays out money to cover insurance losses.
Losses such as those in the March quarter effectively raise funding costs for the company.
At March 31 Berkshire held cash or securities of just over $US38 billion in the float.
So it’s no wonder after announcing the loss and profit fall for the group as a whole in the quarter, that investors were looking for news of any more takeovers.
Buffet told the company’s AGM in Omaha that the conglomerate would not be looking at deals larger than the just completed (and controversial) $US9 billion takeover of Lubrizol for the moment.
He said in late February that he was on the hunt for acquisitions to add margin growth to Berkshire’s non-insurance businesses and yesterday he told the meeting that he still has a preference for large acquisitions, but that some of Berkshire’s roughly 80 operating companies had already had several "bolt-on" acquisitions this year.
Buffett estimated that the natural disasters had cost the reinsurance industry, which provides coverage to regular insurers of homes, cars and property, around $US50 billion, which would make 2011 one of the most expensive years on record for the sector.
Berkshire’s insurance arm lost $US821 million in the quarter because of the cost of the disasters, compared to an underwriting gain of $US226 million in the first quarter of 2010.
The insurance losses hit preliminary earnings for the first quarter, which fell 58% to $US1.51 billion.
However Mr Buffett said that almost all of the companies businesses, with the expectation of residential housing, were recovering from the recession.
Using Buffett’s preferred method of looking at quarterly profit – operating earnings before exclude investment gains and losses and changes in the value of derivatives trades – Berkshire’s profits fell 27% from a year ago, to $US1.6 billion.
Buffett said most of Berkshire’s businesses continued to improve in the quarter, notably the Burlington Northern railroad that the company purchased last year.
Profits there surged 80%, to $US908 million in the quarter.
But the big issue at the meeting and widely reported was the continuing controversy about the so-called Sokol affair.
Once Buffett’s heir apparent, David Sokol resigned after it emerged he bought $US10 million worth of shares in chemicals firm Lubrizol before recommending Buffett’s Berkshire Hathaway group buy the company. He made an estimated $US3 million as a result.
According to the various media reports, Buffett told the huge meeting that Sokol had "violated" company rules.
"I don’t think there is any question about the inexcusable part. He violated the code of ethics. He violated our insider trading rules. He violated the principles I lay out every two years," Buffett said.
Addressing whether Sokol’s actions appeared to be motivated by greed, Buffett recounted that the aide once turned down a $US50 million pay package, preferring instead to split it with a colleague.
He also noted that Sokol had not sought to disguise the trade, instead buying shares in his name.
Warren Buffett said he was wrong not to press David Sokol about the purchases of Lubrizol shares when his former senior report was arguing for the chemicals company as a possible takeover target for Berkshire Hathaway.
Buffett said Sokol had violated Berkshire insider trading rules, and other rules he orders managers to follow, by failing to disclose his January purchase of Lubrizol shares, less than four weeks after starting talks with Citigroup Inc bankers about the company.
Some shareholders wanted to know why Buffett didn’t sack Sokol imme
