Buffett Says Berkshire Saw a 'Lackluster' 2004 (WSJ)

**night** Sat Mar 05, 2005 6:46 pm

Buffett Says Berkshire Saw a 'Lackluster' 2004 (WSJ)
Buffett Says Berkshire Saw a 'Lackluster' 2004

By KAREN RICHARDSON
Staff Reporter of THE WALL STREET JOURNAL
March 5, 2005 4:44 p.m.

Investor Warren Buffett took the blame in his annual report for a fall in his Berkshire Hathaway Inc.'s 2004 earnings.

( Buffett's annual letter is here: http://www.berkshirehathaway.com/2004ar/2004ar.pdf )

"My hope was to make to make several multi-billion dollar acquisitions that would add new and significant streams of earnings to the many we already have," Mr. Buffett, head of the Omaha, Neb., insurance and investment vehicle wrote in his 26-page annual report. "But I struck out."

The source of Mr. Buffett's guilty complex comes from the company's change in book value -- assets minus liabilities -- a measure he likes to use to gauge Berkshire's performance. Last year, the company made a book-value gain of 10.5%, falling short of the S&P 500's 10.9%, a performance Mr. Buffett said was "lackluster." (Buffett's letter1)

A key problem was the lack of "attractive securities to buy," he said. Mr. Buffett has been lamenting the lack of stocks of good value to buy in large enough volumes to put some of Berkshire's mounting cash hoard to work. By the end of 2004, Berkshire had cash and cash equivalents of more than $40 billion, up from some $31 billion in 2003.

Mr. Buffett said that despite the lack of attractive investments 2004 was a "remarkable" year for the stock market in the respect that the S&P 500 Index fetched a better return than at nearly any earlier point. "Last year's 'normal' return was anything but," he wrote.

While Berkshire's profit fell 10% from 2003 to $7.31 billion, Berkshire's fourth-quarter results were strong, thanks in large part to investment gains. Net earnings climbed to $3.34 billion in the fourth quarter, up some 40% from $2.39 billion in the same period in 2003. The big quarterly jump included an after-tax investment gains of $1.5 billion.

Fourth-quarter revenue edged up 0.9% to $20 billion from $19.9 billion in the fourth quarter of 2003. Full-year revenue jumped 16.5% to $74.38 billion from $63.86 billion in 2003.

Analysts had not expected such a strong performance from the fourth quarter, since results from Berkshire's reinsurance business and investment income within the insurance operations in the year-earlier period were particularly strong.

Berkshire's insurance operations, which typically contribute more than 65% of Berkshire's revenues, earned lower premiums of $21.1 billion last year compared to $21.5 billion 2003, which was a strong year. However, the "float" -- money that Berkshire can use to buy companies and securities, largely generated by policy premiums that the company's insurance units collect and don't anticipate paying out on claims for years -- rose $1.9 billion to $46.1 billion. More than half of the float was generated by Berkshire's General Reinsurance, one of the biggest reinsurers in the world.

Mr. Buffett's letter shed no new light on various investigations into transactions between insurance clients and General Re and other Berkshire Hathaway reinsurance subsidiaries by state regulators and federal prosecutors. Mr. Buffett congratulated Joe Brandon, General Re's chief executive officer, for restoring "a long-admired culture of underwriting discipline that, for a time, had lost its way." In the past, Mr. Buffett has referred to General Re, which Berkshire bought in 1998, as a 400-lbs. "problem child."

The earnings filing reiterated details from previous Berkshire news releases and filings regarding separate investigations by the Securities and Exchange Commission, the New York Attorney General Eliot Spitzer, the U.S. Attorney for the Eastern District of Virginia and the Department of Justice, as well as a civil lawsuit filed in the Western District Court of Tennessee.

The filing also said that Australian insurance-insolvency officials had notified two General Re subsidiaries that it intends to "assert" claims, or sue, them for deceptive conduct that assisted an Australian insurance company to commit fraud, which led to the collapse of one of Australia's biggest insurers.

Regulatory and federal authorities have been investigating a transaction between insurer AIG and General Re, as well as other transactions in General Re's finite insurance business.

Most of Berkshire's other companies turned in better performances in 2004 than the year earlier. NetJets, Berkshire's jet fractional-ownership company, continues to struggle with losses in Europe, but is gaining more ground in the U.S. Overall, Berkshire's flight-services units, which includes NetJets and pilot-training company FlightSafety, saw its pretax earnings rise to $191 million last year from $72 million in 2003, thanks to a rebound in corporate aviation and an increase in regional business.

Berkshire's apparel and footwear sector, which includes underwear-maker Fruit of the Loom, also improved with pretax earnings rising to $325 million from $289 million a year earlier. Fruit of the Loom's unit sales increased 14%.

Mr. Buffett used Fruit of the Loom's surge in sales of women's and girls' underwear to poke fun at his octogenarian Berkshire partner, Charlie Munger. "Charlie, who is far more knowledgeable than I am on this subject, assures me that women are not wearing more underwear," Mr. Buffett wrote. "With this expert input, I can only conclude that our market share in the women's category must be growing rapidly."

Berkshire's common-stock portfolio climbed in value to $37.7 billion by the end of 2004 from $35.3 billion by the end of 2003. Mr. Buffett said he and Mr. Munger would like "a little action now," referring to more stocks and business to buy.

In discussing foreign currencies, Mr. Buffett devoted more than two full pages to explain why the decline in the value of the greenback is "likely to continue" due in part to the country's current-account deficit. "Here, we are like a family that consistently overspends its income," he wrote. "As time passes, the family finds that is working more and more for the 'finance company' and less for itself." Berkshire's foreign-currency position, spread over 12 currencies, was $21.4 billion last year.

In other highlights:

• Returning to the topic of Berkshire's $43 billion cash position, Mr. Buffett wrote: "We don't enjoy sitting on $43 billion in cash equivalents that are earning paltry returns. Instead, we can yearn to buy more fractional interests similar to what we own now or -- better still -- more large businesses outright. We will do either, however, only when purchases can be made at prices that offer us the prospect of a reasonable return on our investment."

• Mr. Buffett reminded shareholders that mandatory expensing of stock options begins June 15, and expects, as a result, "intensified efforts to stall or emasculate this rule between now and then" by lawmakers. Mr. Buffett supports the idea, however, calling the non-expensing of options an "absurdity."

• The "whistleblower line," an outgrowth of regulations that emerged after the equity bubble bursting in 2001, has been a positive, Mr. Buffett said. On occasion, he said, company problems that would not have been noticed were reported to him, even though many of the complaints are in "the guy next to me has bad breath" vein, he said.

• Another reform that is working, Mr. Buffett said, is having regular meetings of company boards without the CEO present. "On many occasions, this process would have led to dubious plans being examined more thoroughly. In a few cases, CEO changes that were needed would also have been made more promptly."