Successor is chosen, Buffett tells investors
By George Stein and Jesse Westbrook Bloomberg News
MONDAY, MARCH 6, 2006
NEW YORK Amid what was a rough year for Berkshire Hathaway, Warren Buffett, the billionaire who runs the insurance and investment company, says one thing has been assured: a successor.
In reporting over the weekend that fourth-quarter earnings at the company were little changed because of claims from a record hurricane season, Buffett, 75, said his board had selected someone to eventually succeed him as chief executive.
The choice was made from among a group of three "reasonably young" managers at the company, Buffett said in his annual letter to shareholders on Saturday.
But he did not identify them or discuss the timing of succession.
"Berkshire's board has fully discussed each of the three CEO candidates and has unanimously agreed on the person who should succeed me if a replacement were needed today," Buffett said in the letter. "The directors know now - and will always know in the future - exactly what they will do when the need arises."
Berkshire's profit before investment gains was $1.84 billion, or $1,196 a share, about the same as a year earlier and higher than analysts had expected. An increase in interest income cushioned claims from hurricanes.
Buffett, who took control of the company in 1965, cut his bet against the dollar after Berkshire's first annual loss from foreign-currency investments.
Frank Betz of Carret Zane Capital Management said that "considering the terrible year for catastrophic insurance, this is a good performance." The statement on succession, Betz added, "was needed and will be comforting to many investors."
Investors have said possible successors include David Sokol, 49, chief of MidAmerican Energy Holdings, a unit of Berkshire; Joseph Brandon, 47, chief of the reinsurer General Re; Ajit Jain, 54, head of Berkshire's remaining reinsurance business; Tony Nicely, 62, chief of Geico, the company's car insurance unit; and Richard Santulli, 61, who runs NetJets, the aircraft unit of Berkshire.
Berkshire's fourth-quarter revenue rose 27 percent to $25.4 billion.
Net income climbed 54 percent to $5.13 billion, or $3,330 a share, because of a $3.25 billion noncash gain from a stake in Gillette, the razor maker.
Berkshire was Gillette's largest shareholder before Procter & Gamble's acquisition of the company in October. The gain was required by generally accepted accounting principles and is "meaningless from an economic standpoint," Buffett wrote.
Net income for the full year increased 17 percent to $8.53 billion, or $5,538 a share. Earnings before investment gains fell 1 percent to $5 billion. On that basis, it was the second straight annual decline, the worst streak for Buffett in at least two decades.
U.S. insurers paid homeowners and businesses a record $56.8 billion for 2005 hurricanes and other catastrophes, more than twice the annual record, Insurance Services Office has estimated.
At Berkshire, Hurricanes Katrina, Rita and Wilma resulted in $3.4 billion in pretax claims in 2005, including $400 million in the fourth quarter.
The losses have prompted the company to reconsider the prices that it must charge for catastrophe policies, Buffett said.
"We've concluded that we should now write mega-cat policies only at prices far higher than prevailed last year," he wrote in the report.
"To a lesser degree, we felt this way after 2004 - and cut back our writings when prices didn't move. Now our caution has intensified."
Berkshire depends on its insurance units for more than half of profit. Results were hurt by Berkshire Reinsurance Group and General Re, while Geico, which gained market share in 2005, posted an increase.
Geico is "just doing fabulous," said Keith Trauner of Fairholme Capital Management in Short Hills, New Jersey. "They keep chipping away a little share every year."
Buffett reduced the company's foreign currency forward contracts to $13.8 billion from $16.5 billion in September after the dollar's value strengthened against currencies including the euro, the yen and the pound.
A year ago, the bet was $21.4 billion.
Berkshire had $58 million in pretax losses on the investments in the fourth quarter, contributing to $955 million in losses for the year.
Buffett, who made $2.96 billion on the wager from 2002 to 2004, is betting that the trade deficit will weaken the dollar. Forward contracts are agreements to purchase a foreign currency in the future at a preset price.
"We reduced our direct position in currencies somewhat during 2005," Buffett wrote.
"We partially offset this change, however, by purchasing equities whose prices are denominated in a variety of foreign currencies and that earn a large part of their profits internationally."
The underlying factors affecting the current account deficit continue to worsen, he wrote.
"Not only did our trade deficit - the largest and most familiar item in the current account - hit an all-time high in 2005, but we also can expect a second item - the balance of investment income - to soon turn negative," he said.
In reporting over the weekend that fourth-quarter earnings at the company were little changed because of claims from a record hurricane season, Buffett, 75, said his board had selected someone to eventually succeed him as chief executive.
The choice was made from among a group of three "reasonably young" managers at the company, Buffett said in his annual letter to shareholders on Saturday.
But he did not identify them or discuss the timing of succession.
"Berkshire's board has fully discussed each of the three CEO candidates and has unanimously agreed on the person who should succeed me if a replacement were needed today," Buffett said in the letter. "The directors know now - and will always know in the future - exactly what they will do when the need arises."
Berkshire's profit before investment gains was $1.84 billion, or $1,196 a share, about the same as a year earlier and higher than analysts had expected. An increase in interest income cushioned claims from hurricanes.
Buffett, who took control of the company in 1965, cut his bet against the dollar after Berkshire's first annual loss from foreign-currency investments.
Frank Betz of Carret Zane Capital Management said that "considering the terrible year for catastrophic insurance, this is a good performance." The statement on succession, Betz added, "was needed and will be comforting to many investors."
Investors have said possible successors include David Sokol, 49, chief of MidAmerican Energy Holdings, a unit of Berkshire; Joseph Brandon, 47, chief of the reinsurer General Re; Ajit Jain, 54, head of Berkshire's remaining reinsurance business; Tony Nicely, 62, chief of Geico, the company's car insurance unit; and Richard Santulli, 61, who runs NetJets, the aircraft unit of Berkshire.
Berkshire's fourth-quarter revenue rose 27 percent to $25.4 billion.
Net income climbed 54 percent to $5.13 billion, or $3,330 a share, because of a $3.25 billion noncash gain from a stake in Gillette, the razor maker.
Berkshire was Gillette's largest shareholder before Procter & Gamble's acquisition of the company in October. The gain was required by generally accepted accounting principles and is "meaningless from an economic standpoint," Buffett wrote.
Net income for the full year increased 17 percent to $8.53 billion, or $5,538 a share. Earnings before investment gains fell 1 percent to $5 billion. On that basis, it was the second straight annual decline, the worst streak for Buffett in at least two decades.
U.S. insurers paid homeowners and businesses a record $56.8 billion for 2005 hurricanes and other catastrophes, more than twice the annual record, Insurance Services Office has estimated.
At Berkshire, Hurricanes Katrina, Rita and Wilma resulted in $3.4 billion in pretax claims in 2005, including $400 million in the fourth quarter.
The losses have prompted the company to reconsider the prices that it must charge for catastrophe policies, Buffett said.
"We've concluded that we should now write mega-cat policies only at prices far higher than prevailed last year," he wrote in the report.
"To a lesser degree, we felt this way after 2004 - and cut back our writings when prices didn't move. Now our caution has intensified."
Berkshire depends on its insurance units for more than half of profit. Results were hurt by Berkshire Reinsurance Group and General Re, while Geico, which gained market share in 2005, posted an increase.
Geico is "just doing fabulous," said Keith Trauner of Fairholme Capital Management in Short Hills, New Jersey. "They keep chipping away a little share every year."
Buffett reduced the company's foreign currency forward contracts to $13.8 billion from $16.5 billion in September after the dollar's value strengthened against currencies including the euro, the yen and the pound.
A year ago, the bet was $21.4 billion.
Berkshire had $58 million in pretax losses on the investments in the fourth quarter, contributing to $955 million in losses for the year.
Buffett, who made $2.96 billion on the wager from 2002 to 2004, is betting that the trade deficit will weaken the dollar. Forward contracts are agreements to purchase a foreign currency in the future at a preset price.
"We reduced our direct position in currencies somewhat during 2005," Buffett wrote.
"We partially offset this change, however, by purchasing equities whose prices are denominated in a variety of foreign currencies and that earn a large part of their profits internationally."
The underlying factors affecting the current account deficit continue to worsen, he wrote.
"Not only did our trade deficit - the largest and most familiar item in the current account - hit an all-time high in 2005, but we also can expect a second item - the balance of investment income - to soon turn negative," he said.
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