Buffett Says 'Party Over' For Underwriters

Berkshire Hathaway Inc. reported fourth-quarter net income dropped 18 percent in the quarter, and its chairman announced that "the party is over" for insurer's profit margins.

Warren Buffett, the company chair and chief executive officer, followed that news today by saying in a television interview that he was rescinding an offer to reinsure the municipal business of three major bond insurers.

Berkshire, the Omaha, Neb.-based financial holding company, home of GEICO, General Reinsurance and other insurance and non-insurance companies, reported net income dropped $636 million to $2.9 billion in the quarter but rose 20 percent, or $2.2 billion, to $13.2 billion for the year.

The corporation's revenues increased 20 percent, or $20 billion, to $118 billion for the year.

In a letter to shareholders, Mr. Buffett said the insurance business--"the cornerstone of Berkshire--had an excellent year." However, he warned "that the party is over," noting that "insurance-industry profit margins, including ours, will fall significantly in 2008."

Prices are down, he noted, and exposures are rising, and if the United States does have a third year of light catastrophe, profit margins will still shrink by four percentage points.

"If the winds roar and the earth trembles, results could be far worse. So be prepared for lower insurance earnings for the next few years," he wrote.

As a whole, Berkshire insurance premium earned in 2007 rose 33 percent, or $8 billion, to $32 billion compared to 2006. However, underwriting profit dropped 12 percent, or $464 million, to $3.37 billion.

General Re underwriting profit increased 6 percent, or $29 million, to $555 million, while Berkshire Hathaway Reinsurance dropped 14 percent, GEICO fell 15 percent, and other primary insurance operations fell 18 percent.

Berkshire reported insurance liabilities of $56 billion for 2007.

During an interview today with CNBC, Mr. Buffett said he was withdrawing his offer to bond insurers to offer reinsurance to them for their municipal bonds. He said the offer was put on the table and rejected by the two major financial guarantee insurers, MBIA and FGIC.

Concerning the economic outlook, he said, "By any common-sense definition we are in a recession."

However, he was optimistic about the future, saying, "We will be fine. The factories don't go away, the people and their talents don't go away, the houses don't go away, the population grows. Over time, my children will live better than I do."