By Jonathan Stempel
NEW YORK (Reuters) - Warren Buffett's Berkshire Hathaway Inc said on Friday quarterly profit fell 18 percent, hurt by lower earnings from insurance underwriting and a decrease in investment gains.
In his annual letter to Berkshire shareholders, Buffett said insurance earnings would likely fall further, after a second straight year without major insured catastrophes.
Berkshire had been able to boost insurance premiums following Hurricane Katrina in 2005, as weaker rivals reduced storm exposures.
"That party is over," Buffett said. "It's a certainty that insurance industry profit margins, including ours, will fall significantly in 2008. Prices are down.... Be prepared for lower insurance earnings during the next few years."
Fourth-quarter profit fell to $2.95 billion, or $1,904 per Class A share, from $3.58 billion, or $2,323, a year earlier.
Operating profit, excluding investments, also fell 18 percent, to $2.35 billion, or $1,518 per share, from $2.87 billion, or $1,859.
On that basis, the average analyst expectation was $1,695 per share, according to Reuters Estimates. Revenue rose 7 percent to $28.04 billion.
Frank Betz, who oversees $800 million including Berkshire stock at Carret/Zane Capital Management LLP in Warren, New Jersey, said he was not surprised at Buffett's pessimism on future insurance results.
"It's hard to expect any other outcome, largely from higher competition," he said. "But Warren has always understated his expectations, and then pulls a couple of rabbits out of the hat."
The 77-year-old Buffett also confirmed on Friday that he has three internal candidates to succeed him as chief executive, including one who would step in now if needed, and four candidates to serve as chief investment officer.
He called the four "young to middle-aged, well-to-do to rich, and all wish to work for Berkshire for reasons that go beyond compensation." Buffett said each manages a substantial amount now, and that one or more may eventually be hired.
Omaha, Nebraska-based Berkshire ended 2007 with $44.33 billion of cash, enough for the huge acquisition Buffett wants, and more than $150 billion of stocks, bonds and cash.
For all of 2007, profit rose 20 percent to $13.21 billion, or $8,548 per Class A share. Revenue also rose 20 percent, to $118.25 billion.
Berkshire's Class A shares had closed down $250 at $140,000, while its Class B shares rose $14.50 to $4,674.50.
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Fourth-quarter insurance underwriting profit fell 46 percent to $465 million, while insurance investment income rose 12 percent to $978 million. Profit from other businesses fell 8 percent to $984 million.
Pre-tax underwriting gains at Geico Corp fell 49 percent to $158 million as claims and advertising costs increased. They fell 18 percent at the General Re Corp reinsurance unit to $138 million as premiums declined.
In other businesses, net income from utilities and energy rose 4 percent to $251 million, while income from manufacturing and retailing businesses fell 8 percent to $615 million.
Buffett in December moved further to diversify Berkshire, which owns more than 70 companies, by creating Berkshire Hathaway Assurance Corp to guarantee municipal bonds.
Berkshire, with its "triple-A" credit ratings, has been winning business from MBIA Inc and Ambac Financial Group Inc, which have struggled to keep their triple-A ratings, and on Friday said they are writing less business.
"As long as the municipal bond business is profitable, Berkshire will take market share," said Glenn Tongue, who oversees $140 million of hedge fund capital at T2 Partners LLC in New York, which owns Berkshire stock.
Buffett has transformed Berkshire since 1965 into a $216 billion conglomerate by acquiring out-of-favor companies with strong earnings and management, and investing in stocks.
Berkshire companies offer such things as Benjamin Moore paint, Dairy Queen ice cream and Fruit of the Loom underwear. It also invests in stocks including American Express Co, Coca-Cola Co, Procter & Gamble Co and Wells Fargo & Co.
The company's book value rose to $120.73 billion from $108.42 billion a year earlier.
(Editing by Braden Reddall)
