Derivatives Boost Berkshire Earnings

Josh Funk, AP Business Writer

OMAHA, Neb. -- Warren Buffett's company on Friday reported a 14% jump in second-quarter profit as the improving stock market boosted the value of Berkshire Hathaway's(BRK.A Quote) derivative contracts, but the recession continued to weigh on its operating businesses.

The Omaha-based company reported $3.3 billion in net income, or $2,123 per share, for the quarter ending June 30. That's up from $2.88 billion, or $1,859 per share, in the same period a year ago.

The three analysts surveyed by Thomson Reuters on average expected Berkshire to report earnings per share of $1,238.38.

"The headline number looks better because of the derivatives, but it wasn't the greatest quarter," said analyst Justin Fuller, who works with Midway Capital Research & Management in Chicago and writes about Berkshire online at www.buffettologist.com.

Berkshire executives typically do not comment on quarterly earnings reports, and they did not respond to an interview request on Friday.

The value of Berkshire's derivative contracts tied to equity indices soared during the second quarter, and Berkshire recorded a mostly unrealized $1.5 billion gain on its derivatives. That result contrasts sharply with the unrealized $986 million derivative loss Berkshire recorded in the first quarter, and through the first half of 2009, Berkshire recorded an unrealized $1.7 billion loss on its derivative contracts.

Those numbers reinforce Buffett's previous warning that the derivatives will vary widely quarter-to-quarter.

On average, Berkshire's derivative contracts won't expire for another 12 years, but the company is required to estimate their value every time it reports earnings. The true value of the derivatives won't be clear for several years, but Buffett has predicted they will ultimately be profitable because Berkshire is investing the premiums.