Berkshire's Buffet Sets Succession Plan

Berkshire Hathaway Inc. has decided upon a succession plan for its legendary chief executive, Warren E. Buffett, and said its insurance business posted a profit despite more than $3 billion in losses from three major hurricanes.

On Saturday, Berkshire reported its financial results and released a letter to investors on the state of the company and plans for its future.

Mr. Buffett, the company president and chief executive officer, said in his investors' letter and annual report that the Berkshire Hathaway board has decided on a successor to replace him if he dies or deteriorates intellectually, "particularly if this decay is accompanied by my delusionally thinking that I am reaching new peaks of managerial brilliance."

Berkshire has chosen one candidate from three managers within the company, but did not name the individuals involved. It will be the responsibility of the board to inform Mr. Buffett if it feels he can no longer perform his duties.

However, he added, "I feel terrific."

Berkshire's insurance operations, which include GEICO, General Re and B-H Reinsurance, reported an underwriting profit of $53 million in 2005, compared with $1.6 billion in 2004. General Re reported a loss for 2005 of $334 million, while B-H reported a loss of $1.1 billion. GEICO posted an underwriting profit of more than $1.2 billion.

The Omaha, Neb.-based company is a diversified holding corporation whose main interest is insurance but which also owns interests in consumer products, services and manufacturing.

As a result of Hurricanes Katrina, Rita and Wilma, and the evidence of increased storm activity, Berkshire will write "mega-cat policies only at prices far higher than prevailed last year--and then only with an aggregate exposure that would not cause distress if shifts in some important variable produce far more costly storms in the near future," Mr. Buffet wrote.

Mr. Buffet continued, "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. If prices seem appropriate, however, we continue to have both the ability and the appetite to be the largest writer of mega-cat coverage in the world."

Don Thorpe, senior director of insurance with Fitch Ratings in Chicago, said that on the issue of succession, there was not much new except that the board had identified one person to succeed Mr. Buffet and it appears the succession will be from internal management. It is also clear, he noted, that Mr. Buffet has no intentions of stepping down anytime soon.

Not naming the individual, said Mr. Thorpe, keeps the board from becoming hamstrung with a single individual that the board could feel it would need to change in the future, depending upon Mr. Buffet's longevity. The announcement, he continued, was aimed at giving comfort to the markets by letting them know there is a plan in place.

On the insurance side, the company is doing the smart thing by increasing rates for catastrophe risks, falling in line with what others are doing, he noted.

The company primarily writes in two niche areas, large catastrophe and retrocession reinsurance, where there are few players, said Mr. Thorpe. Some of the new capital flowing into the Bermuda reinsurance market may help with capacity, he pointed out. But Berkshire's increase and the business troubles of PXRE (which competed for the retrocession business) may point to some tightening, he said.