NU Online News Service, March 2, 2:28 p.m. EST
Warren E. Buffett, chairman and chief executive officer of Berkshire Hathaway told investors that he goofed and should have listened to the management of GEICO when the company introduced its own credit card.
In his annual letter to investors in his Omaha, Neb.-based firm, Mr. Buffett said he had to make a "painful confession: Last year your chairman closed the book on a very expensive business fiasco entirely of his own making."
He said in his effort to introduce side products for the "millions of loyal GEICO customers" he had the "brilliant insight that we should market our own credit card."
Mr. Buffett said he reasoned that the auto insurer's customers were likely to be good credit risks, and with an attractive card, the company would receive good business.
"We got business all right-but of the wrong type," he said.
When pre-tax losses on the business came to $6.3 million he said he "woke up" and sold the $98 million of "troubled receivables" for 55-cents on the dollar, losing an additional $44 million.
"GEICO's managers, it should be emphasized, were never enthusiastic about my idea," he went on to say. "They warned me that instead of getting the cream of GEICO's customers we would get the—–well, let's call it the non-cream. I subtly indicated that I was older and wiser."
"I was just older," he concluded.
In his letter, he reported that the companies for main insurance operations, property and casualty and life insurance businesses, had an underwriting profit of $1.56 billion in 2009, down from an underwriting profit of $2.79 billion in 2008.
General Re reported an underwriting profit of $477 million, compared to $342 million in 2008.
BH Reinsurance had an underwriting profit of $349 million, down from $1.32 billion in 2008.
GEICO's underwriting profit dropped from $916 million in 2008 to $649 million in 2009.
In the fourth segment, other primary underwriting profit fell from $210 million in 2008 to $84 million.
Mr. Buffett indicated that growth may slow for GEICO in 2010 because of slumping auto sales and high unemployment is forcing people to drive without insurance.
According to the Securities and Exchange Commission filing, Berkshire Hathaway's revenues from its insurance operations dropped 3 percent on a year-over-year basis, or $2.92 billion, to $92.8 billion in 2009 primarily due to investment losses.
Insurance premium earned grew 9 percent, or $2.4 billion, on a year-over-year basis to $27.88 billion.
Net earnings for the holding company increased 51 percent, or $2.8 billion, to $8.44 billion.
Regarding legal entanglements over Gen Re and American International Group allegations of false accounting and sham insurance contracts designed to cover-up AIG losses, Berkshire Hathaway said it paid the Department of Justice $19.5 million after entering into a non-prosecution agreement and, under the agreement, will pay AIG shareholders $60.5 million to settle pending civil class action suits.
This is on top of the $12.5 million the company agreed to pay the SEC to settle accounting fraud allegations.
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