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Warren Buffett’s Berkshire Hathaway Inc posted its best quarter in nearly two years, as recovering stock markets boosted the value of its equity investments and derivatives bets.

Operating earnings nevertheless fell short of expectations, reflecting lower underwriting gains, including from the Geico Corp auto insurance unit, and the impact of the recession on Berkshire’s (BRK) more economically sensitive manufacturing and service units.

Second-quarter net income for the Omaha, Nebraska-based insurance and investment company rose 14 percent to $3.3 billion, or $2,123 per Class A share, from $2.88 billion, or $1,859, a year earlier. Earnings had previously fallen for six straight quarters.

Excluding investments, operating profit fell 22 percent to $1.78 billion, or $1,147 per share, from $2.27 billion, or $1,465. On that basis, analysts expected profit of $1,238 per share, according to Reuters Estimates. Revenue fell 2 percent to $29.61 billion.

Results included $1.53 billion of derivatives gains. These were tied mainly to the performance of four market indexes in the United States, Europe and Japan, which rose between 8 percent and 23 percent in the quarter.

The derivatives are a major reason earnings had fallen in recent quarters. Accounting rules require Berkshire to report changes in their value with earnings. Berkshire said the bets will continue to generate "extreme volatility" in earnings.

Berkshire’s book value rose 11 percent to $114.53 billion from $102.8 billion in the prior quarter, and on a per-share basis rose to $73,806 from $66,248.

Net income was the highest since the third quarter of 2007, Reuters data show.

Berkshire’s common stock holdings increased 22 percent from the first quarter to $45 faxless payday loan online.79 billion, reflecting price changes as well the purchase of $350 million of stock.

The company is the largest shareholder of American Express Co (AXP, Fortune 500) and Wells Fargo & Co (WFC, Fortune 500), whose shares rose a respective 71 percent and 70 percent in the quarter.

While Berkshire on June 30 had $8.23 billion of paper losses on the stock index derivatives, that was down from $10.19 billion at the end of March.

Berkshire said it modified six of the derivative contracts during the quarter, reducing potential losses.

These derivative contracts now mature between 2018 and 2028, and Buffett has said he expects them to be profitable.

Meanwhile, liabilities on contracts tied to the default rates on junk bonds fell to $2.51 billion from $3.67 billion. Buffett has said these contracts may lose money.

Insurance underwriting profit fell 77 percent to $83 million, as customers of Geico had higher claims losses, while the weak economy caused them to raise deductibles and reduce coverage to save money, Berkshire said.

Though premiums increased, Berkshire now expects underwriting gains at Geico to fall in 2009 from 2008.

Berkshire ended June with $24.51 billion in cash, down from $25.55 billion three months earlier.

In Friday trading, Berkshire Class A shares closed up $1,150, or 1.1 percent, at $108,100, while its Class B shares rose $22.69, or 0.65 percent, to $3,540. Both remain more than one-fourth below their record highs set in December 2007. 

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