NEW YORK—Berkshire Hathaway Inc. said that the conglomerate’s quarterly profit fell by 30 percent as the company was hurt by weaker performance from its insurance units and derivative bets. Warren Buffett, its chairman, also revealed that a successor has been identified.
Berkshire, the company that serves as a holding company to Buffett’s investments, saw its fourth-quarter earnings tumble to $3.05 billion, compared to $4.4 billion from a year earlier. Profits for the full year fell 21 percent compared to last year.
The performance was largely due to losses at Geico Corp., the auto insurance company owned by Berkshire.
Geico has been hurt by additional claims and higher insurance underwriting costs. In addition, the company’s derivatives portfolio suffered losses, specifically derivatives tied to certain stock indices.
Berkshire Hathaway Reinsurance Group, in addition, recorded underwriting losses of $392 million. Berkshire executive Ajit Jain runs this unit.
In total, the insurance arms suffered $1.7 billion in catastrophe losses last year, which can be attributed to the massive earthquake and tsunami in Japan in early 2011.
In his customary letter to Berkshire shareholders, Buffett wrote that he does not plan to enter into significant derivative contracts because of additional collateral requirements. “The possibility of some sudden and huge posting requirement—arising from an out-of-the-blue event such as a worldwide financial panic or massive terrorist attack—is inconsistent with our primary objectives,” he wrote in the letter, which was posted on Berkshire’s website. Buffett had criticized derivatives in the past and blamed them in part for the recent financial crisis.
Buffett Names Successor
Buffett said that he has identified Berkshire’s future CEO, but did not reveal his name.
The future CEO is “an individual to whom they [the company’s board members] have had a great deal of exposure and whose managerial and human qualities they admire,” Buffett said. He also stated that he has two backups in mind as well.
Both Buffett and his vice chairman, Charlie Munger, don’t plan to retire any time soon. “When a transfer of responsibility is required, it will be seamless, and Berkshire’s prospects will remain bright,” he stated.
Todd Combs and Ted Weschler, portfolio managers who are relatively new to Berkshire, will have a hand in investment decisions going forward, Buffett suggested. It is unclear if one of them is among the three candidates in play to become Buffett’s successor.
Investment Mistakes and Successes
Buffett, in his usual candor, also admitted that he was “dead wrong” regarding the prospects of the U.S. real estate market, which he predicted to have begun its recovery by now.
He does predict that as the nation’s job market recovers, the housing sector will follow. “And while ‘doubling-up’ may be the initial reaction of some during a recession, living with in-laws can quickly lose its allure,” Buffett wrote.
While Berkshire has a wide variety of holdings, it does own some major companies in the home building and home furnishing sectors.
Buffett also said that he made a mistake in purchasing Energy Future Holdings bonds for $2 billion a few years ago. The company is in the natural gas sector, and Buffett has had to write down the investment by $1.4 billion in total due to depressed natural gas prices.
On the upside, Burlington Northern Santa Fe (BNSF) railroad and MidAmerican Energy recorded record earnings. BNSF reported net income of $3.0 billion, while MidAmerican earned $1.3 billion in 2011.