Berkshire Net Down 18%; Buffett Eyes Successors, Lower Insurance Earnings Ahead

By | February 29, 2008

Warren Buffett’s Berkshire Hathaway Inc. said Friday quarterly profit fell 18 percent, hurt by lower earnings from insurance underwriting and a decrease in investment gains.

In his annual letter to Berkshire shareholders, Buffett said insurance earnings may remain under pressure, after a second straight year without major insured catastrophes.

Berkshire had been able to boost insurance premiums following Hurricane Katrina in 2005, as weaker rivals reduced their storm exposures, but rates have since come under pressure.

“That party is over,” Buffett said. “It’s a certainty that insurance industry profit margins, including ours, will fall significantly in 2008. Prices are down, and exposures inexorably rise … So be prepared for lower insurance earnings during the next few years.”

Fourth-quarter net income at the insurance and investment company fell to $2.95 billion, or $1,904 per Class A share, from $3.58 billion, or $2,323 per share, a year ago.

Operating profit, excluding investments, also fell 18 percent, to $2.35 billion or $1,518 per share, from $2.87 billion, or $1,859 per share, a year earlier.

Analysts, who generally exclude investments in estimating earnings, on average expected profit of $1,695 per share, according to Reuters Estimates.

Revenue rose 7 percent to $28.04 billion. The Omaha, Nebraska-based company ended 2007 with $44.33 billion of cash, enough to make the giant acquisition Buffett has said he wants.

Separately, the 77-year-old Buffett confirmed he has three internal candidates to succeed him as chief executive, and four candidates to serve as chief investment officer. He called the four “young to middle-aged, well-to-do to rich, and all wish to work for Berkshire for reasons that go beyond compensation.”

For all of 2007, profit rose 20 percent to $13.21 billion, or $8,548 per Class A share. Revenue also rose 20 percent, to $118.25 billion.

Berkshire’s Class A shares had closed down $250 at $140,000, while its Class B shares rose $14.50 to $4,674.50.

BOND INSURANCE ENTRY

Fourth-quarter insurance underwriting profit fell 46 percent to $465 million, while insurance investment income rose 12 percent to $978 million. Profit from other businesses fell 8 percent to $984 million. Net investment gains fell 17 percent to $597 million.

Buffett in December moved further to diversify Berkshire, which owns more than 70 companies, by creating Berkshire Hathaway Assurance Corp to guarantee municipal bonds.

Berkshire, with its “triple-A” credit ratings, is taking market share from existing bond insurers such as MBIA Inc and Ambac Financial Group Inc, which have been struggling to keep their own triple-A ratings.

Known as the Oracle of Omaha, Buffett has transformed Berkshire since 1965 into a $216 billion conglomerate by acquiring out-of-favor companies with strong earnings and management, and investing in stocks.

Berkshire companies offer such things as Geico car insurance, Benjamin Moore paint, Dairy Queen ice cream and Fruit of the Loom underwear. It also invests in stocks including American Express Co, Coca-Cola Co, Procter & Gamble Co and Wells Fargo & Co.

The company’s book value rose to $120.73 billion from $108.42 billion a year earlier.

(Editing by Braden Reddall)

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