At Buffet's Diversified Berkshire Hathaway, Insurance Still #1

By Josh Funk
May 4, 2007
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The mix of companies and investments billionaire Warren Buffett's company holds makes some people think investing in Berkshire Hathaway Inc. is a bit like buying shares of a mutual fund that emphasizes insurance.

But some analysts say that's not the right way to think of the Omaha-based company because it owns more than 60 different companies outright in addition to its $61.5 billion (euro45.3 billion) investment portfolios.

"I really think it is a living business organization that is out selling product every day,'' Morningstar analyst Justin Fuller said.

Buffett himself contributed to the notion that Berkshire's diversity gives it strength when he pointed out in the company owners' manual that most of his and vice chairman Charlie Munger's net worth is Berkshire stock. A version of the manual has been part of the company's annual reports for more than a decade.

"Charlie and I feel totally comfortable with this eggs-in-one-basket situation because Berkshire itself owns a wide variety of truly extraordinary businesses,'' Buffett wrote. "Indeed, we believe that Berkshire is close to being unique in the quality and diversity of the businesses in which it owns either a controlling interest or a minority interest of significance.''

Buffett declined an interview request for this story, but he and Munger will field questions for roughly six hours at the annual shareholder meeting Saturday. Between 25,000 and 28,000 people are expected to attend based on requests for credentials.

At the meeting that Buffett likes to call "Woodstock for Capitalists,'' Berkshire's various holdings will be scrutinized and celebrated by his fans.

A few of Berkshire's building material companies � Acme Brick, Benjamin Moore paints and Johns Manville � will show off their wares alongside RV company Forest River and manufactured-home builder Clayton Homes.

The Pampered Chef will offer housewares, Fruit of the Loom will be selling underwear and clothing, and dessert will be available from Dairy Queen.

Berkshire's investment portfolio will be represented by Coca-Cola Co. Berkshire holds 200 million shares � or 8.64 percent � of the soft drink giant.

But the retail and manufacturing companies and investments accounted only for a little more than half of Berkshire's earnings before taxes last year.

Insurance companies such as Geico drive the company's profits.

Berkshire's insurance division generated nearly 49 percent of the company's earnings before taxes last year, and, perhaps more importantly, the insurance companies generates billions of dollars that Berkshire can borrow to invest.

"Insurance is the most important part'' of Berkshire, said Andy Kilpatrick, whose 1,848-page book on Buffett fills two volumes in the 2007 edition.

Besides insurance companies that sell directly to consumers, Berkshire owns several reinsurance companies, such as General Re, that mainly sell insurance to other insurance companies.

The "float'' Berkshire's insurance division generates grew to $57.9 billion (euro42.6 billion) with the agreement Berkshire reached last fall to take on the liabilities of Equitas Holdings Ltd., the reinsurer set up by Lloyd's of London.

Unlike a mutual fund, management fees aren't much of a concern at Berkshire because both Buffett and Munger have earned $100,000 (euro74,000) salaries for many years, Kilpatrick said.

"You can't find a cheaper fund manager,'' said Kilpatrick, whose book is called "Of Permanent Value: The Story of Warren Buffett.''

Berkshire's track record is also better than many mutual funds.

Since 1965, the annual growth in Berkshire's book value � assets minus liabilities � has consistently beaten growth in the S&P 500. Over that time, Berkshire has grown at a compounded annual rate of 21.4 percent compared with the S&P's compounded annual gain of 10.4 percent.

Last year, Berkshire reported making $11.02 billion (euro8.11 billion), or $7,144 (euro5,258) per share, a 29.2 percent improvement over 2005 because few hurricanes or other disasters challenged its insurance companies.

Regardless of how much Berkshire is like a mutual fund, the required minimum investment is significant, with Class A Berkshire shares selling Wednesday, May 2, for $108,600 and Class B shares selling for more than $3,600.

Shareholders will learn about the company's first-quarter performance today, May 4, when Berkshire releases an earnings report less than a day before the annual meeting begins.