Berkshire Hathaway relies less on its insurance units

Many wonder what company will be like when Warren Buffett is gone as chairman and CEO.
By JOSH FUNK Published: September 1, 2012
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The shift in the mix of Berkshire's businesses could make the company more attractive to investors who found the world of insurance and reinsurance complicated. Analysts say the nature of the company isn't likely to change, even though Berkshire's profits may be coming in different places.

“He's got diversity,” said stockbroker-author Andy Kilpatrick. “Rather than just a stock company or an insurance company, it's an operating company.”

Kilpatrick says he doesn't really think the nature of the company has changed because Berkshire just tacks acquisitions on to the existing structure with little attempt to integrate them.

“It's not a simple company. It's a complicated company, but it's a successful company,” said Kilpatrick, who wrote “Of Permanent Value: The Story of Warren Buffett.”

Insurance still vital

Berkshire's insurance and reinsurance companies such as Geico had long driven the company's profits. And they generate $71.1 billion in “float” that Berkshire is able to invest between the time when customers buy policies and when claims are filed.

Regardless of how big Berkshire's insurance companies are, they will remain important to the company because of the risk involved with some of the big policies written by the company's reinsurance division.

For example, in one 2006 deal Berkshire agreed to cover up to $13.9 billion in potential asbestos claims in exchange for $7.12 billion. And the derivative contracts Buffett wrote insuring the level of certain stock market indexes could create multibillion-dollar losses if they weren't priced right, although Buffett has said he believes those deals will prove profitable.

Matthews said insurance is clearly still the riskiest part of Berkshire's business, so Buffett, and whoever follows him, must understand it.

“If you do a bad job at the railroad, your earnings might get hurt, but the railroad is not going away. If you do a bad job in insurance, your whole company can go away,” he said.

Berkshire plans to split Buffett's job into three parts once he is gone. The next CEO will run Berkshire, but two other men hired by Buffett in recent years will oversee investment. Buffett wants his eldest son to succeed him as chairman.

As a result of the shift in Berkshire's business mix, the company's earnings should become less volatile over time. But who knows how the mix of companies might change if Buffett finds a way to use the roughly $41 billion cash Berkshire has on hand for another big acquisition.



Other subsidiaries

Besides insurance and manufacturing, Berkshire's subsidiaries include clothing, furniture, ice cream, private jet and jewelry companies. It also has major investments in such companies as Coca-Cola Co., IBM and Wells Fargo & Co.

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