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Buffett's Berkshire Posts 30% Drop in Q4 Earnings

OMAHA, Neb. (AP) — A drop in the paper value of the financial instruments known as derivatives hurt profits at Berkshire Hathaway Inc., the conglomerate run by billionaire investor Warren Buffett.

Some of its subsidiaries performed well enough to offset some of the losses. Buffett detailed the company's 2011 performance Saturday in his annual letter to shareholders.

Berkshire reported fourth-quarter net income of $3.05 billion, or $1,846 per Class A share. That was down from $4.4 billion net income, or $2,656 per share, a year ago.

Berkshire's profit fell short of the $1,875 per share expected by the four analysts surveyed by FactSet, a provider of financial data. Quarterly revenue grew 5 percent to $37.96 billion from last year's $36.17 billion.

The biggest difference in the quarter was the change in estimated value of Berkshire's investments and derivative contracts. That fell to $382 million this year from last year's $1.4 billion.

Derivatives are complex investments that have been blamed in part for the 2008 financial crisis and the recession. Berkshire's derivatives are designed to operate like insurance policies, with some covering the risk of bond defaults by certain companies and some covering whether certain stock market indexes will be lower 15 or 20 years in the future.

Buffett reiterated Saturday that he believes Berkshire's derivative contracts will ultimately prove profitable, but he said the company doesn't plan to write any more major derivative contracts. Buffett said he does not want Berkshire to deal with new requirements for how much collateral companies must post when they hold derivatives.

For 2011, Berkshire generated $10.3 billion in net income, or $6,215 per Class A share, down from nearly $13 billion, or $7,928 per share, in 2010.

Strength in the Burlington Northern Santa Fe railroad, MidAmerican Energy, and the Marmon Group helped offset insurance underwriting losses related to catastrophes like the Japan tsunami. Newly acquired chemical maker Lubrizol added $1.7 billion in revenues to Berkshire since September.

Stockbroker Andy Kilpatrick, who wrote "Of Permanent Value: The Story of Warren Buffett," said Buffett managed to outperform the overall market in a tough year for Berkshire's insurance and housing-related subsidiaries.

"It was not a great year, but he still beat the S&P. It's still an incredible moneymaking machine," Kilpatrick said.

Buffett's preferred measure of Berkshire's performance is the growth in its book value, which is a calculation of the company's assets minus its liabilities. Buffett said Berkshire's book value grew 4.6 percent to $99,860 per share in 2011. The S&P 500, which Berkshire is part of, gained 2.1 percent last year when dividends were factored in.

Berkshire owns roughly 80 subsidiaries, including clothing, furniture and jewelry companies, but its insurance and utility businesses typically account for more than half the company's net income. It also has major investments in such companies as Coca-Cola, IBM and Wells Fargo.

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