By - Feb 28, 2011 6:01 PM GMT+1300
Warren Buffett, who said in October that buying bonds amid low yields was a mistake, reported a $1.02 billion impairment in the fourth quarter for fixed-income holdings at his Berkshire Hathaway Inc.
The impairment is equal to about 3 percent of the company’s bond portfolio, according to the annual statement released by Omaha, Nebraska-based Berkshire on Feb. 26. With the writedown, the amortized cost of Berkshire’s fixed-maturity holdings, or the value assigned by the firm to the securities, fell to $31.8 billion on Dec. 31 from $33.6 billion on Sept. 30.
The impairments were taken on “certain fixed-maturity securities where we concluded that we were unlikely to receive all remaining contractual principal and interest amounts when due,” Berkshire said. “These securities had been in an unrealized loss position for more than two years.”
Buffett, 80, oversees $136 billion at Berkshire insurance units including car-coverage specialist Geico and reinsurer General Re. He keeps most of the portfolio in cash and stocks, and has used the assets to negotiate deals for preferred stakes in firms including Goldman Sachs Group Inc. The fixed-maturity investments include more than $11 billion in both corporate bonds non-U.S. government holdings.
“A 3 percent default rate is certainly a rather big default rate,” said Michael Yoshikami, chief investment strategist at Berkshire shareholder YCMNet Advisors. “Berkshire has been impacted, like a number of insurance companies have been impacted, by chasing higher yield.”
Buffett didn’t respond to a request for comment e-mailed to his assistant, Carrie Kizer.
Equity Impairments
Impairment losses jumped to $1.96 billion, including $938 million in equity writedowns, from $4 million in the fourth quarter of 2009. Berkshire’s net income in the last three months of 2010 rose 43 percent to $4.38 billion, the company’s highest quarterly profit since 2007, as the firm booked gains from derivative bets and reported earnings from Burlington Northern Santa Fe, the railroad that Buffett bought last year.
Berkshire’s corporate-bond holdings dropped to $11.8 billion on Dec. 31 from $13.1 billion three months earlier on an amortized cost basis, the company said. The market value of the portfolio slipped to $14.1 billion from $14.9 billion in the same period. Some results were calculated by subtracting figures for the first nine months of 2010 from the full-year data provided Feb. 26.
Berkshire’s cash holdings rose to $38.2 billion in 2010 as earnings advanced and Buffett, the firm’s chairman and chief executive officer, said returns in fixed-income markets discouraged bond purchases. Investors buying bonds after a slide in yields were “making a mistake,” Buffett said in October.
Lower Yields
The yield on two-year U.S. Treasuries fell to a record low of 31 basis points on Nov. 4 before rising to 71 basis points on Feb. 25. Investment-grade company bonds paid an average yield of 9.3 percent on Oct. 30, 2008, according to Bank of America Merrill Lynch index data. That plummeted to 4.04 percent as of Feb. 25, the data show.
Buffett transformed Berkshire through four decades of stock picks and acquisitions from a failing textile mill into a $210 billion insurance, energy and consumer goods firm. He has recorded multibillion dollar gains for Berkshire on investments in Capital Cities/ABC Inc. and PetroChina Co.
Berkshire reported $3.1 billion of impairments in the first quarter of 2009 after Buffett said he made a mistake by paying too much for shares of ConocoPhillips. In 2008, Buffett wrote down an investment in two Irish banks to $27 million from $244 million. In his most recent annual letter, Buffett said he keeps Berkshire’s cash holdings in Treasuries and avoids riskier short-term investments that yield “a few more basis points.”
“We agree with investment writer Ray DeVoe’s observation, ‘More money has been lost reaching for yield than at the point of a gun,’” Buffett said.
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