Berkshire Hathaway’s underwriting profits dip in 2007; Buffett warns profit margins will fall “significantly”

Berkshire Hathaway, which owns General Reinsurance and National Indemnity, has seen its underwriting profits fall in 2007.

Operating earnings from underwriting in the fourth quarter of 2007 fell to $465m from $867m in the same quarter of 2006. For the year, operating earnings from underwriting dipped slightly to $2.2bn, compared to $2.5bn in 2006.

For the company as a whole, its earnings grew marginally from $9.3bn in 2006 to $9.6bn in 2007. Berkshire Hathaway's full year net earnings were $13bn, up from $11bn in 2006.

Despite a drop in underwriting premiums in its insurance business, Berkshire CEO Warren Buffett claimed it had been an “excellent year” for the firm’s insurance business.

“We were very lucky in 2007, the second year in a row free of major insured catastrophes,” he wrote in the firm’s annual report.

“That party is over. It’s a certainty that insurance-industry profit margins, including ours, will fall significantly in 2008. Prices are down, and exposures inexorably rise.

“Even if the US has its third consecutive catastrophe-light year, industry profit margins will probably shrink by four percentage points or so."

“If the winds roar or the earth trembles, results could be far worse. So be prepared for lower insurance earnings during the next few years.”

While General Re’s underwriting profits grew to $555m in 2007 from $526m in 2006, Berkshire Hathaway Reinsurance (which includes National Indemnity) saw its profits drop to $1.4bn in 2007 from $1.7bn in 2006.

On Equitas, Buffett said: "At this very early date, our experience has been good. But this doesn’t tell us much because it’s just one straw in a fifty-year-or-more wind. What we know for sure, however, is that the London team who joined us, headed by Scott Moser, is first-rate and has become a valuable asset for our insurance business"