OMAHA, Neb. – Warren Buffett's investment company, Berkshire Hathaway Inc., had such a rough third quarter that the quarterly earnings report came with a rare letter of explanation from the multibillionaire investor.
For the three months ended Sept. 30, Berkshire lost $679 million, compared with a $797 million profit in the year-ago period. In per-share terms, Berkshire lost $445 compared with a $523 gain during the same period last year.
The loss was due to a $2.28 billion charge for pre-tax insurance losses on Sept. 11; the company had previously said it expected a $2.2 billion charge. The charge includes $1.7 billion in losses at General Re and $575 million at Berskshire Hathaway's Reinsurance Group.
Buffett normally writes to shareholders once a year, but said that this year's third quarter results are "anything but normal."
The estimated insurance charge for the Sept. 11 attacks remains a guess, Buffett wrote, adding that no one in the industry can be reasonably precise now as to final losses.
In the letter, Buffett blamed himself for not pricing insurance to plan for managing manmade mega-catastrophies.
"In effect, we, and the rest of the industry, included coverage for terrorist acts in policies covering other risks, and received no additional premium for doing so," he wrote.
"At Berkshire, we will never knowingly write policies containing promises we can't keep. If we have been paid appropriately for that risk, we don't mind losing $20 billion. But we don't want to lose $20 billion, even though we could handle that."
The company is revamping its underwriting practices to make sure it focuses on three basic rules to running an insurance company, Buffett wrote.
-- Only accept risks that you are able to properly evaluate.
-- Limit the business accepted in a manner that guarantees you will suffer no aggregation of losses from a single event or from related events that will threaten your solvency.
-- Avoid business involving moral risk: No matter what the rate, you can't write good contracts with bad people.
All of those rules were broken during the past three years at General Re, Buffet said, but the consequences are not lethal to the business. The losses are punishing to current earnings, but the company remains as strong as any insurer in the world, he said.
Berkshire's other insurance businesses, like GEICO, did well during the third quarter, Buffett said.
Retail, manufacturing and service business are experiencing the effects of the recession that Buffett said started many months ago, he wrote.
The company's Dexter shoe manufacturing has ended production in the U.S. and Puerto Rico because of wage advantages enjoyed by competitors. Buffett wrote that his delay in closing that operation cost shareholders considerable money. Dexter's business will continue under the management of H.H. Brown, but Dexter lost $31 million in the third quarter.
The company will continue to look for companies to acquire, he said.
For the nine months ended Sept. 30, Berkshire Hathaway earned $700 million, or $458 per share, compared with $2.24 billion, or $1.48 per share in the year-ago period.
The results were released after the close of trading. Class A shares of Berkshire Hathaway fell $1,300, or 2 percent, to $69,600.