Buffett upbeat on insurance despite economic ‘shambles’

Billionaire investor Warren Buffett has admitted that his company Berkshire Hathaway reported its worst ever results in 2008 – but said his insurance businesses still performed solidly.

In his annual letter to shareholders, it was revealed that net earnings dropped 62% to $4.99bn (£3.54bn) last year, from $13.21bn in 2007. The letter also disclosed an $11.5bn decrease in net worth during 2008, which reduced the per-share book value of both the company’s Class A and Class B stock by 9.6%.

But reinsurers General Re and BH Reinsurance still recorded healthy profits.

Buffett, the world’s richest man, said the economy would be “in shambles” throughout 2009 and perhaps longer before recovering.

“By year end, investors of all stripes were bloodied and confused, much as if they were small birds that had strayed into a badminton game,” he said.

He pointed out that it was a devastating year for other asset classes, such as corporate and municipal bonds, property and commodities.

Buffett recounted how the year had thrown up a series of “life-threatening problems within many of the world’s great financial institutions”.

But Buffett added that the US had faced far worse before. “In the 20th century alone, we dealt with two great wars, a dozen or so panics and recessions, virulent inflation that led to a 21.5% prime rate cut in 1980, and the Great Depression of the 1930s.”

Buffett said Berkshire Hathaway’s insurance businesses had propelled the group’s growth since 1967.

General Re (see table, above right) posted underwriting profit of $342m in 2008, down from $555m in 2007. BH Reinsurance made underwriting profit of $1.32bn, down from $1.43bn in 2007.

“Reinsurance is a business of long-term promises, sometimes extending for 50 years or more,” said Buffett.

“This past year has re-taught clients a crucial principle: a promise is no better than the person or institution making it. That’s where General Re excels: it is the only reinsurer that is backed by an AAA corporation.”

Last month, Berkshire Hathaway invested in Swiss Re via a CHF3bn (£1.8bn) convertible instrument, after the reinsurer reported a net loss of CHF864m for 2008.