Quake and Spill Costs Berkshire Unit $216 Million

The Wall Street Journal

A reinsurance operation at Warren Buffett's Berkshire Hathaway Inc. reported $216 million in catastrophe losses tied to the earthquake in Chile and the sinking of the Deepwater Horizon oil rig.

The unit, called the Berkshire Hathaway Reinsurance Group, incurred the costs in the first six months of 2010, when it had an overall underwriting gain of $169 million. Both figures were reported along with second-quarter results in a filing with securities regulators Friday.

Berkshire had estimated three months ago that losses at the reinsurance operation from just the Chilean earthquake would be $140 million. The latest filing didn't say what portion of the $216 million was from the sinking of the oil rig, which touched off the massive spill in the Gulf of Mexico, and how much was from a re-estimation of costs tied to the quake.

The unit, run by Buffett's insurance lieutenant, Ajit Jain, has "constrained" how much new insurance it sells this year because it hasn't been satisfied with the going rate for the types of coverage it sells, according to Berkshire's latest securities filing. Rates for many types of commercial coverage have been declining for several years, and Buffett and Jain are well known for leaping into the market when prices are at their highest.

And while much of the language in Berkshire's securities filing was unchanged from last quarter, the discussion about results at Jain's operation contained one substantial revision: "We have the capacity and the willingness to write substantially more business when appropriate pricing can be obtained," it said.

Bill Gates: Still Rich, but No Longer the Richest

Forbes

For the third time in three years, the world has a new richest man.

Riding surging prices of his various telecom holdings, including giant mobile outfit America Movil, Mexican tycoon Carlos Slim Helu has beaten out Americans Bill Gates and Warren Buffett to become the wealthiest person on earth and nab the top spot on the 2010 Forbes list of the World's Billionaires.

Slim's fortune has swelled to an estimated $53.5 billion, up $18.5 billion in 12 months. Shares of America Movil, of which Slim owns a $23 billion stake, were up 35% in a year.

That massive hoard of scratch puts him ahead of Microsoft cofounder Bill Gates, who had held the title of world's richest 14 of the past 15 years.

Gates, now worth $53 billion, is ranked second in the world. He is up $13 billion from a year ago as shares of Microsoft rose 50% in 12 months. Gates' holdings in his personal investment vehicle Cascade also soared with the rest of the markets.

Buffett's fortune jumped $10 billion to $47 billion on rising shares of Berkshire Hathaway. He ranks third.

The Oracle of Omaha shrewdly invested $5 billion in Goldman Sachs and $3 billion in General Electric amid the 2008 market collapse. He also recently acquired railroad giant Burlington Northern Santa Fe for $26 billion.

In his annual shareholder letter Buffett wrote, "We've put a lot of money to work during the chaos of the last two years. When it's raining gold, reach for a bucket, not a thimble."

Many plutocrats did just that. Indeed, last year's wealth wasteland has become a billionaire bonanza. Most of the richest people on the planet have seen their fortunes soar in the past year.

This year the World's Billionaires have an average net worth of $3.5 billion, up $500 million in 12 months. The world has 1,011 10-figure titans, up from 793 a year ago but still shy of the record 1,125 in 2008. Of those billionaires on last year's list, only 12% saw their fortunes decline.

U.S. billionaires still dominate the ranks--but their grip is slipping. Americans account for 40% of the world's billionaires, down from 45% a year ago.

The U.S. commands 38% of the collective $3.6 trillion net worth of the world's richest, down from 44% a year ago.

Of the 97 new members of the list, only 16% are from the U.S. By contrast, Asia made big gains. The region added 104 moguls and now has just 14 fewer than Europe, thanks to several large public offerings and swelling stock markets.

The new billionaires include American Isaac Perlmutter, who flipped Marvel Entertainment to Disney for $4 billion last December. The Spider-Man mogul netted nearly $900 million in cash and 20 million shares of Disney in the transaction.

Also new to the ranking: 27 billionaires from China, including Li Shufu, whose automaker, Geely, announced plans to buy Swedish brand Volvo from Ford in December. The deal is expected to close in March 2010.

Finland and Pakistan both welcomed their first billionaires.

For the first time China (including Hong Kong) has the most billionaires outside the U.S. with 89.

Russia has 62 billionaires, 28 of them returnees who had fallen off last year's list amid a meltdown in commodities. Total returnees to the list this year: 164.

Eleven countries have at least double the number of billionaires they had a year ago, including China, India, Turkey and South Korea.

Thirty members of last year's list fell out of the billionaire's club. Moguls who couldn't make the cut: Iceland's Thor Bjorgolfsson, Russia's Boris Berezovsky and Saudi Arabia's Maan Al-Sanea.

Another 13 members of last year's list died. Among the deceased: real estate developer Melvin Simon and glass tycoon William Davidson.

Americans Line up for a Piece of Buffett

The Wall Street Journal

On Friday, millions of Americans will for the first time own a piece of Warren Buffett.

Mr. Buffett's Berkshire Hathaway Inc., whose multi-thousand-dollar share price made it a thinly traded luxury of wealthy investors and institutions, is going mainstream as it joins the Standard & Poor's 500-stock index.



More than $1 trillion of investor money directly tracks the index. The result is a scramble for Berkshire shares by index funds that, by one estimate, will reach $14 billion of buying. This further exposes Berkshire stock to the stratagems of fast-moving traders, a brand of investor anathema to Mr. Buffett's general buy-and-hold approach.

Small-time investors, meanwhile, will finally be getting a piece of Mr. Buffett just as uncertainty builds about the future of his $178 billion conglomerate, which is one of the largest public companies in the U.S., selling everything from insurance to underwear. The 79-year-old Mr. Buffett is entering the twilight of his career, and little is known about his succession plans, other than that he has placed the name of his replacement in an envelope he keeps in his office.

Yet small investors are likely soon to have billions of dollars more in Berkshire stock, thanks both to its entry into the index and to a recent stock split.

Berkshire has long had two classes of stock. It split the lower-priced of these, known as the B shares, 50 to 1, making them affordable to more individual investors.

Joel Nath, a 25-year-old accountant who participates in an investment club called "Scratch & Win," always wanted to buy some Berkshire. The late-January split put the B shares, commonly known as Baby B's, within his reach. He bought nine at $73 each. (They closed Thursday at $76.69.)

Mr. Nath, who lives and works in Omaha, Neb., where Berkshire is based, was turned on to investing at a young age by his grandmother, Marlene Matney. While baby-sitting for him and his two brothers, Ms. Matney, now 78, taught them to look at ticker symbols on television when they were learning the alphabet.

More recently, Ms. Matney was disappointed when she wasn't allowed to join "Scratch & Win," because the investment club didn't want two members from the same family. But she still has an edge. In the aftermath of the stock split, Mr. Nath and his brothers all bought shares for more than $70 each, Ms. Matney said, "but they didn't know that I waited until it went down." She bought hers for $68.

Sensing opportunity in Berkshire's move to the S&P 500 index, hedge-fund manager Jonathan Carmel has already made his move to play the stock.

In early November, when Berkshire first said it would split its Class B shares as part of a $26 billion deal to purchase Burlington Northern Santa Fe Corp., he raced to crunch the numbers on how Berkshire's share price might be affected.

Conventional wisdom holds that the flood of purchase orders from fund managers with portfolios tied to the S&P 500 will drive up the price of Berkshire shares as the markets close Friday. Both the A and B shares would appear to be proving the theory correct: They are up more than 10% since the stock split.

Realizing that the split made Berkshire a likely candidate for the S&P 500, Mr. Carmel calculated how big a weighting the company would be in the index. From there, he estimated that maybe $40 billion in investor capital might flow into the stock, and began scooping up the higher-priced Class A shares for about $100,000 apiece. (There's no affordability issue for an institutional investor.)

His expectation was for a 20% pop in Berkshire stock as the S&P addition neared; so far, he is more than halfway there. The A shares closed at $114,950 Thursday.

On Thursday, Berkshire shares gained 3% on the New York Stock Exchange.

Berkshire is expected to make up about 1.4% of the S&P 500, although the figure could change based on Friday's trading. Other funds that closely follow the index are likely to buy billions more, pushing the amount closer to the estimate of Mr. Carmel, whose fund is Carmel Asset Management.

A continued upswing would allow speculative traders who recently bought Berkshire shares to flip them for a profit to index managers. But that isn't guaranteed. "Some traders will buy now and try to sell on the close," said Tom Joyce, chief executive of the trading firm Knight Capital Group. "But if everybody does that, then there's nothing to buy. Then you have a surprise on the other side of the trade, meaning the close is lower." Mr. Joyce's traders estimated that of about 160 million B shares that index managers will need to buy, half have already been snapped up.

Berkshire's B shares, which traded an average of 36,000 shares a day before the split, spiked to 23 million shares of trading volume on Thursday. As of Feb. 9, the Bill & Melinda Gates Foundation was the issue's largest holder, with a 10.5% stake, followed by Mr. Buffett, with a 10.1% stake, according to data from FactSet Research Systems Inc.

A typical new S&P component stock would be heavily traded for three to five days before it joins the index, traders say, with volume spikes at the open and close of trading on the final day or two. Since Berkshire trading jumped dramatically after the Class B stock split and the S&P announcement, though, there's talk that Friday's traffic could be lighter than expected.

The jockeying among hedge-fund pros hasn't stopped smaller players from making a grab at Berkshire B shares.

Retail brokers like 82-year-old Floyd Jones, who has been recommending Berkshire to his clients for decades, advocated adding to Berkshire positions.

An investment in the company "will be paying off for many years to come," Mr. Jones said. He and his son Steve Jones, who works two doors down from him at the small brokerage firm First Washington Corp., believe they and their clients together have one of the largest concentrations of Berkshire shares in the Seattle area.

Union Pacific Gains Steam With Shipping Record

Forbes

The nation's second largest railroad rides an intermodal shipment high, as railroads get boost from Buffett.

Union Pacific Railroad Corp., the second-largest railroad by revenue, chugged through the recession and set a new record for intermodal shipments in 2009. Intermodal is industry talk for freight that's moved by more than one transportation type -- over see, land and air.

"More and more customers are recognizing the value Union Pacific ( UNP - news - people ) brings to their businesses," said John Kaiser, Union Pacific vice president and general manager of its intermodal business.

Union Pacific said it made 1.25 million domestic intermodal shipments last year, besting its previous record of 1.2 million shipments in 2007.

In addition, for the second consecutive year, Union Pacific and UPS ( UPS - news - people ) achieved a "perfect peak season" by delivering 100% of UPS peak season freight without a sort failure. The UPS peak season runs from the Tuesday following Thanksgiving through Christmas Eve.

"It takes coordination, communication and excellent shipping software from the UPS and Union Pacific teams to achieve the level of performance we attained during the 2009 UPS peak season," Kaiser said.

Billionaire Warren Buffett, chairman of Berkshire Hathaway Inc.  ( BRK -  news  -  people ), divested the firm's equity stakes in Omaha, Neb.-based Union Pacific and rival Norfolk Southern Corp.  ( NSC -  news  -  people ) of Norfolk, Va. , as part of his $26 billion purchase of Fort Worth, Texas-based Burlington Northern Santa Fe Corp.

“We want Union Pacific to do well, too,” Buffett told Burlington Northern workers last month. “There’s going to be four big railroads that are moving around more and more goods. So it’s, it’s a good business.” The fourth is Jacksonville, Fla.-based CSX Corp.  ( CSX -  news  -  people ), which is scheduled to release its earnings Jan. 19.

Buffet Votes 'No' In Kraft's Bid For Cadbury

Fortune

Kraft's biggest shareholder isn't sweet on the food giant's hostile bid for candy maker Cadbury.

Billionaire investor Warren Buffett said Tuesday he voted against Kraft's plan to issue new shares for the approximately $16 billion cash and stock offer. Buffett said the merger -- which has been opposed by Cadbury's board -- would hurt Kraft shareholders.

Buffett is CEO of Berkshire Hathaway, which owns 138 million Kraft shares. That gives it a 9.4% stake in the Northfield, Ill., maker of Oreo cookies and American cheese slices and makes Berkshire Kraft's largest shareholder.



The news came on the same day that Kraft announced it was selling its North American frozen pizza business to Swiss food giant Nestle for $3.7 billion. Kraft said it would use the proceeds from that sale to increase the cash portion of its offer for Cadbury. Cadbury rejected the new bid, calling it "derisory."

Kraft is asking shareholders to approve a proposal that would let Kraft issue 370 million common shares in the Cadbury deal. Kraft began mailing voting materials to shareholders last month for a vote scheduled for Feb. 1

The company needs shareholder approval for the move to satisfy rules about increases in outstanding shares set by the New York Stock Exchange, where Kraft is listed.

Buffett's opposition to the proposal could complicate Kraft CEO Irene Rosenfeld's efforts to expand her company's global reach. Kraft shares have traded at a discount to food industry peers amid questions about the company's growth prospects. Kraft noted in mailings to shareholders that a "no" vote would prevent it from issuing the planned number of shares in the Cadbury deal.

Kraft proposed in September to buy Cadbury in a transaction it said would create a "global powerhouse in snacks, confectionery and quick meals." London-based Cadbury quickly rejected the unsolicited proposal, saying it "fundamentally undervalues" the company.

Taking that analysis a step further, Buffett said Tuesday he believes the Kraft proposal fundamentally undervalues Kraft, by relying in part on massive stock sales at what he suggests are cut-rate prices.

"Kraft stock, at its current price of $27, is a very expensive 'currency' to be used in an acquisition," Buffett said in a statement Tuesday morning. "In 2007, in fact, Kraft spent $3.6 billion to repurchase shares at about $33 per share, presumably because the directors and management thought the shares to be worth more."

Buffett himself seems to have been in that camp. Starting in 2007, Berkshire paid an average of around $33 a share for the bulk of its Kraft holdings. At current prices Berkshire is under water on that investment, its third-largest in a single public company, by around $900 million.

The price of Kraft shares isn't Buffett's only quibble with the Kraft proposal. He said a "yes" vote would give management the leeway to change the terms of the deal, further damaging shareholder interests.

"The share-issuance proposal, if enacted, will give Kraft a blank check allowing it to change its offer to Cadbury -- in any way it wishes -- from the transaction so carefully described to shareholders in the proxy statement," Buffett wrote. "We worry very much, indeed, that there will be a change."

The Kraft bid is worth about 740 pence per Cadbury shares. But Cadbury shares have traded near 800 pence in London, as investors wager that Kraft would be willing to raise its offer.

Kraft said Tuesday that it expected to offer about 60 pence more in cash to Cadbury shareholders following the completion of the frozen pizza sale to Nestle. But the total value of the offer is not changing. Kraft also said it was extending its offer, which originally set to expire on Tuesday, to February 2.

Hershey (HSY, Fortune 500), the U.S. chocolate company that has been struggling with growth issues of its own, has reportedly been studying a rival bid for Cadbury, but so far has remained on the sidelines.

Nestle (NSRGY), which had also been said to be mulling a bid for Cadbury, said Tuesday that it "does not intend to make, or participate in, a formal offer for Cadbury."

Cadbury maintained in a presentation last month that the Kraft offer is low, given Cadbury's strong growth, rising profit margins and market share gains.

Kraft, in turn, questioned the validity of Cadbury's projections, while promising not to overspend.

"Kraft Foods will continue to maintain a disciplined approach with respect to the acquisition of Cadbury in line with the criteria outlined in our offer documentation," Rosenfeld said in a statement last month.

Warren's Been Working On The Railroad

Business Week

With his $34 billion purchase of Burlington Northern, is Buffett signaling confidence in an upturn—or just rebalancing his portfolio?

Berkshire Hathaway (BRKA) CEO and value investing demigod Warren Buffett has been hinting for some time that he was looking for a large company to buy with Berkshire's huge cash hoard, which stood at about $21 billion at the end of the second quarter. Last year he described his likely targets as "big ones, elephants." On Nov. 3, Buffett bagged a good-sized pachyderm, paying $34 billion—$44 billion, including debt—for sole ownership of Fort Worth (Tex.)-based Burlington Northern Santa Fe Corp. (BNI), the second-largest U.S. railroad.

The deal is the biggest acquisition in Berkshire's history and, in Buffett's words, "an all-in wager on the economic future of the United States." In a statement, Burlington Northern CEO Matthew Rose added: "We admire Warren's leadership philosophy supporting long-term investment that will allow BNSF to focus on the future needs of our railroad." Pending an antitrust review by the Justice Dept. because Berkshire has smaller stakes in other railroads, the deal is expected to close early next year.

Berkshire has been eyeing freight trains for some time. In 2006, the company bought a 10.9% stake in Burlington Northern, later increasing its holding to 22%. On Tuesday Berkshire bought the rest of the company for $100 a share in cash and newly issued Berkshire Hathaway stock. About $16 billion of the purchase price is in cash, half of it coming from Berkshire's coffers and the other half borrowed from banks. The price represents a roughly 30% premium over Burlington Northern's New York Stock Exchange closing price on Monday. Berkshire also agreed to assume $10 billion in outstanding Burlington Northern debt.
Buffett holdings: "a tick better?"

As with every Buffett move, the deal is being examined for signs and portents about the U.S. economy. Is Buffett calling a bottom in the recession? Is Buffett firing the starting gun for a mergers-and-acquisitions resurgence? The simplest interpretation is that if Buffett—the most ardent devotee of the "intrinsic value" school of equity analysis propounded by his late mentor Ben Graham—thinks Burlington Northern is worth buying now, he simply thinks it's a good business at a cheap price. Burlington Northern's results for the third quarter, which it reported on Oct. 22, showed an earnings decline of roughly 30%—$1.42 per share, compared with $1.99 for the same period in 2008. While the company said it had improved productivity and cut costs, it also noted that this year's third-quarter revenues from carrying freight had dropped $1.28 billion, or 27%, compared with last year.

The question is when might the economy start to perk up and fire demand for goods hauled by rail? Buffett has always been far too canny to publicly make that kind of short-term forecast. He told CNBC on Tuesday that he was confident the U.S. economy would recover, although he had no idea whether it would be this month, this year, or next year. He also said that he had seen no big bounce at any of Berkshire's portfolio companies, although he said "they might be doing just a tick better" than they were six months ago.

Berkshire's purchase has also widely been interpreted as a bet on coal. About a quarter of Burlington Northern's revenues come from hauling coal along its routes throughout the U.S., Canada, and Mexico. There are currently 25 coal-fired power plants under construction in the U.S. Berkshire owns coal plants through its portfolio company MidAmerican Energy, which is not only Iowa's largest utility, but also serves other midwestern states. The company's CEO, David Sokol, has frequently been mentioned as possible successor to Buffett, 79.
Is Buffett really just diversifying?

There's another way to look at the Burlington Northern deal, says hedge fund manager Doug Kass of Palm Beach (Fla.)-based Seabreeze Partners Management. Kass, who earlier this year shorted Berkshire Hathaway stock—he says he has no position in the stock now—doesn't think the Burlington Northern purchase was a Ben Graham-style value purchase. Berkshire, after all, bought Burlington Northern at a premium to its stock price, not a discount.

Kass thinks the purchase represents a move by Buffett to rebalance a portfolio that has become overweighted in stocks with heavy exposure to the financial sector, among them General Electric (GE), Swiss Re, and Goldman Sachs (GS). Berkshire Hathaway has also recently been shrinking its holdings in ratings agency Moody's. Says Kass: "I think the real headline here is 'Buffett Diversifies.'"

Berkshire, in Blow to Banks, Reins In Its Deposit Insurer

Warren Buffett's Berkshire Hathaway Inc. has told one of its subsidiaries to stop insuring bank deposits above the amount guaranteed by the federal government, dealing a fresh blow to the financial-services industry as it tries to assuage anxious customers.

The subsidiary, Kansas Bankers Surety Co., is notifying about 1,500 banks in more than 30 states that it will no longer offer a program called "bank deposit guaranty bonds." KBS is an 18-employee subsidiary of Berkshire Hathaway, according to the parent firm's 2007 annual report. It is one of a handful of firms that offer such insurance, a big selling point for banks trying to attract wealthy customers.

Two people briefed on the matter said the order was made Monday by Mr. Buffett, Berkshire Hathaway's chief executive. Chuck Towle, a senior vice president at KBS, declined to comment on why his firm was leaving the business. "We have decided to do so," he said. "We'll work with each individual bank and work it out with them."

Mr. Towle wouldn't confirm or deny Mr. Buffett's involvement, calling it "strictly rumor." Mr. Buffett declined to comment.

Eleven banks have failed this year. Seven have fallen since July 11, a concentration not seen since the savings-and-loan crisis of the late 1980s and early 1990s. The Federal Deposit Insurance Corp. backs deposits of as much as $100,000 on most accounts or $250,000 on some retirement accounts.

That Mr. Buffett is withdrawing from this insurance market is an indicator of how many in the industry are worried about future bank failures.

In some cases, companies that acquire failed banks will buy all the deposits, making the government insurance limits irrelevant.

But customers with large deposits can lose money if the acquiring bank doesn't take on the extra deposits. When Columbian Bank & Trust Co., of Topeka, Kan., failed Aug. 22, there were about 610 accounts with $46 million total that potentially exceeded government insurance limits, the FDIC said.

KBS insured some deposits at this bank and lost money in the failure, people familiar with the matter said. Mr. Towle declined to comment on whether the bank was a customer.

Rodney Sargent, CEO of BancInsure Inc., a KBS competitor, said many firms are expected to compete for KBS's customers because the company has a large network across the country.

By: Damian Paletta
Wall Street Journal; September 10, 2008