Omaha, Neb.-based Berkshire Hathaway Inc. reported first-quarter net income decreased 64 percent primarily on losses from credit default swaps, but Berkshire Chairman Warren Buffett assured investors these swings were normal in terms of long-term profitability.

On Friday, Berkshire reported net income of $940 million, down $1.65 billion compared to the first quarter of 2007.

Insurance underwriting suffered the largest hit with a 40 percent drop in operating earnings of $420 million to $181 million.

Insurance investment income increased 7 percent, or $54 million, to $802 million, and non-insurance business rose $56 million, or 6 percent, to $950 million.

The company said in a statement that Berkshire's derivatives had an unrealized pre-tax loss of $1.6 billion. The credit default swaps (CDS) contracts amounted to $3.2 billion in premium in 2007, with losses of $472 million. Paid losses stood at $52 million by the end of 2008.

However, the company had to record a $471 million loss on the CDS group after raising its liability to $2.26 billion--"an increase dictated by market changes," the company said.

This change raised the first-quarter loss to $490 million.

The company now has $2.9 billion in CDS contracts available for investing, Berkshire said.

"When prices are right, as they have been recently, we like the credit insurance business and believe it will be profitable, even without our taking into account investment earnings on the substantial funds we hold," the company said.

Accounting regulations also accounted for losses on put contracts amounting to $1.2 billion.

The company said it believes the contracts will prove profitable over the next 15-to-20 years they cover, but are subject to wide swings over their lifetime.

In a letter to investors, Mr. Buffett, who is Berkshire chief executive as well as chairman, reiterated the warning about large swings in earnings due to the derivative positions, but said he and his partner believe the intrinsic value of the company's derivative position has changed little.

"You will recall that in our catastrophe insurance business, we are always ready to trade increased volatility in reported earnings in the short run for greater gains in net worth in the long run," he wrote. "That is our philosophy in derivatives as well."

Special Reports /

Berkshire Sees Net Fall 64% In Quarter

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