Berkshire Hathaway May Post Profit Drop as Insurance Rates Fall

Billionaire Warren Buffett's Berkshire Hathaway Inc. may report lower fourth-quarter profit later today because of falling insurance rates.

Berkshire has been scaling back coverage of coastal property as prices drop from their highs following Hurricane Katrina in 2005. Earnings probably declined 10 percent to $1,667 a share, excluding one-time gains such as the sale of shares of PetroChina Co., said Charles Hamilton, an analyst at FTN Midwest Securities Corp. in Nashville, Tennessee. Berkshire typically gets about half its profit from insurance.

``We're going into a much more volatile period for insurance earnings,'' Hamilton said in an interview. The fourth quarter of 2006 ``was extraordinarily good with low catastrophe losses. We're getting back more to normal historical levels.'' Hamilton rates the shares ``neutral.''

Berkshire has been investing in countries including China, the U.K. and Israel to spur profit growth at the Omaha, Nebraska-based company. Now, Buffett, 77, is expanding into bond insurance.

Buffett started a new bond insurer in December to compete with companies including MBIA Inc., charging more than rivals to guarantee payment on municipal debt while avoiding the mortgage- related securities that jeopardized their credit ratings.

As defaults on the securities climbed, Buffett offered to assume $800 billion of municipal bond obligations from MBIA, Ambac Financial Group Inc. and FGIC Corp. in exchange for more than $9 billion in reinsurance premiums.

``In the same way Buffett took advantage of the catastrophe market two years ago, there's a dislocation right now in the municipal bond marketplace,'' Joshua Shanker, an analyst at Citigroup Inc., said in an interview. ``He's happy to participate.'' Shanker rates Berkshire ``hold.''

Stock Gains

Berkshire rose 32 percent in New York trading during the past 12 months and gained about 4,700 percent in 20 years through Dec. 31, about six times more than the Standard & Poor's 500 Index including dividends.

Buffett is moving into bond insurance and expanding overseas after third-quarter earnings from insurance underwriting declined 47 percent and the U.S. housing slump reduced profit at its construction-related businesses.

Berkshire agreed in December to buy 60 percent of Marmon Holdings Inc. for $4.5 billion from the Pritzker family. Companies owned by Chicago-based Marmon have operations in North America, the U.K., Europe and Asia, making products ranging from railroad tank cars to wire used in appliances and telecommunications. The takeover will provide a ``steady stream of income,'' Shanker said.

Candy, Jets

Buffett built Berkshire over the past four decades through dozens of acquisitions. Along with insurance and reinsurance operations and a stock portfolio valued at $78 billion as of Sept. 30, Berkshire owns businesses ranging from candy making and jewelry to utilities and corporate jet leasing.

In the fourth quarter, investment losses, fallout from the collapse of the subprime mortgage market, claims from California wildfires, and falling property and casualty rates caused earnings declines or losses at 21 of the 24 members of the KBW Insurance Index.

Business insurance rates fell 12 percent in the fourth quarter, according to data compiled by the Washington-based Council of Insurance Agents and Brokers. Prices for reinsurance, which is coverage for insurance companies, dropped as much as 15 percent in the January renewal season, according to Willis Group Holdings Ltd., the world's fourth-largest reinsurance broker.

Housing Slump

At the same time, the worst housing slump in a quarter century hurt Berkshire's building-related businesses, including Shaw Industries, the world's largest carpet maker.

Along with fourth-quarter results, Buffett will publish his annual letter to shareholders. He wrote in his last letter that Berkshire ``sharply reduced'' its appetite for covering storm damage as prices fell.

``In 2007, our results from the bread-and-butter lines of insurance will deteriorate, though I think they will remain satisfactory,'' he wrote.

Buffett also revealed a year ago that he plans to split the roles of chief executive officer and chief investment officer among different successors. The CEO spot will go to an unnamed Berkshire manager who has already been selected, Buffett said.