Mother Nature was good to Warren Buffett in 2006.
Berkshire Hathaway reported higher full-year profit Thursday, helped by gains in its core insurance operations -- a welcome relief from two years of billion-dollar payouts for hurricane claims.
"Our most important business, insurance, benefited from a large dose of luck: Mother Nature, bless her heart, went on vacation," Buffett wrote in his annual shareholder letter. "After hammering us with hurricanes in 2004 and 2005-–storms that caused us to lose a bundle on super-cat insurance-–she just vanished. Last year, the red ink from this activity turned black – very black.”
Buffett said the company's net worth rose by $16.9 billion, or 18.4%, in 2006. While Geico had a blockbuster year, Berkshire’s non-insurance businesses also did well, with earnings up 38%.
Buffett also renewed speculation about who will replace him at Berkshire, saying he plans to hire at least one young investment manager to help succeed him.
Buffett's annual letter is widely read not only by Berkshire shareholders but by average investors interested in investment insights from the “Oracle of Omaha.” The long-standing tradition had been to release the letter on a Saturday, but because the SEC cut its filing deadline, the company released it on Thursday this year.
Buffett points to the importance of “major and sensible acquisitions,” giving updates on his $6 billion deals for PacifiCorp, Business Wire and Applied Underwriters.
“We need ‘elephants’ in order for us to use Berkshire’s flood of incoming cash," Buffett wrote in his signature folksy manner. "Charlie and I must therefore ignore the pursuit of mice and focus our acquisition efforts on much bigger game.”
He also discussed his global strategy, specifically the deals with ISCAR and Equitas Holdings, the reinsurer set up by Lloyd's of London.
He warned that the country’s trade deficit could eventually lead to a “severe political backlash“ and that “to expect a ‘soft landing’ seems like wishful thinking.”
“Foreigners now earn more on their U.S. investments than we do on our investments abroad,” he wrote. “In effect, we’ve used up our bank account and turned to our credit card. And, like everyone who gets in hock, the U.S. will now experience ‘reverse compounding’ as we pay ever-increasing amounts of interest on interest.”
Buffett also weighed in on the CEO compensation debate.
“Irrational and excessive comp practices will not be materially changed by disclosure or by ‘independent’ comp committee members," he wrote. "Indeed, I think it’s likely that the reason I was rejected for service on so many comp committees was that I was regarded as too independent. Compensation reform will only occur if the largest institutional shareholders--it would only take a few-–demand a fresh look at the whole system. The consultants’ present drill of deftly selecting 'peer' companies to compare with their clients will only perpetuate present excesses.”
Three Internal Candidates
Buffett said last year that Berkshire's board had three outstanding internal candidates for chief executive, and the board knows "who should take over if I should die tonight." Each of those candidates is significantly younger then the 76-year-old Buffett.
But Buffett is not as well-prepared for a successor on the investment side of the business. He said those who might replace him on the investment side are too close to his own age to do it for very long.
Lou Simpson, 70, who manages Geico's investment portfolio, would "fill in magnificently for a short period," Buffett said.
But Buffett also tried to reassure shareholders about his health. "The good news: At 76, I feel terrific and, according to all measurable indicators, am in excellent health," Buffett said. "It's amazing what Cherry Coke and hamburgers will do for a fellow."
Berkshire's Class A shares are the most expensive U.S. stock, and they have traded above $100,000 a share since last fall. The stock was trading at $106,600 a share late Thursday.
Buffett announced last summer that he plans to give most of his stock in Berkshire, worth about $48.5 billion, to the Bill and Melinda Gates Foundation and other charities.
Berkshire's insurance group includes Geico, reinsurance giant General Re and several other firms. Berkshire also has major investments in such companies as Coca-Cola and Wells Fargo and owns furniture, carpet, jewelry and candy companies, restaurants, natural gas and corporate jet firms.