Berkshire reports earnings decline in fourth quarter
Berkshire Hathaway Inc. said Friday that its fourth-quarter profit fell 18%, hurt by lower earnings from insurance underwriting and a decrease in investment gains.
In his annual letter to Berkshire shareholders, Chairman and Chief Executive Warren Buffett said insurance earnings would probably fall further.
Buffett, 77, also confirmed that he had three internal candidates to succeed him as chief executive, including one who would step in now if needed, and four candidates to serve as chief investment officer.
He called the four would-be investment chiefs “young to middle-aged, well-to-do to rich, and all wish to work for Berkshire for reasons that go beyond compensation.” Buffett said each already manages a substantial amount of assets.
After Hurricane Katrina in 2005, Berkshire was able to boost insurance premiums as weaker rivals reduced storm exposures.
“That party is over,” Buffett said. “It’s a certainty that insurance industry profit margins, including ours, will fall significantly in 2008.”
Berkshire’s fourth-quarter profit fell to $2.95 billion, or $1,904 per Class A share, from $3.58 billion, or $2,323, a year earlier.
Operating profit was $2.35 billion, or $1,518 per share, falling short of the $1,695 a share forecast on average by analysts. Revenue rose 7% to $28.04 billion.
Frank Betz, a money manager at Carret/Zane Capital Management in Warren, N.J., said he was not surprised at Buffett’s pessimism about insurance results.
“But Warren has always understated his expectations, and then pulls a couple of rabbits out of the hat,” he said.
Berkshire’s insurance underwriting profit fell 46% to $465 million in the fourth quarter, while insurance investment income rose 12% to $978 million. Profit from other businesses, which include utilities, energy, manufacturing and retailing, fell 8% to $984 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 AAA credit ratings, has been winning business from MBIA Inc. and Ambac Financial Group Inc., which have struggled to keep their AAA ratings because of exposure to sub-prime mortgages.
“As long as the municipal bond business is profitable, Berkshire will take market share,” said Glenn Tongue, a hedge fund manager at T2 Partners in New York, which owns Berkshire stock.
Buffett has prospered by acquiring out-of-favor companies with strong earnings and management, and investing in stocks.
Berkshire has bought outright companies such as Benjamin Moore & Co., Dairy Queen Inc. and Fruit of the Loom Inc. and holds shares of companies including American Express Co., Coca-Cola Co., Procter & Gamble Co. and Wells Fargo & Co.
