Buffet Says Reinsurance Business
Is Recovering After 2001's Losses

OMAHA, Neb. -- Berkshire Hathaway Inc. Chairman Warren Buffett said the company's reinsurance business is recovering after enormous terrorist-related losses last year.

"You're going to see some terrific results" from the General Reinsurance business, Mr. Buffett told a packed auditorium at the company's annual meeting Saturday. He said General Re, as the company is known, "is really going to be our number one asset."

Berkshire Hathaway, a conglomerate of businesses largely acquired with gains from insurance, had accumulated about $1.8 billion in so-called "float" from insurance in the first quarter. Mr. Buffett uses that float to invest in stocks, and to acquire companies. Float is the amount of money that insurers take in premiums, minus their immediate expenses. Eventually much of that money would be paid out in claims, but Berkshire uses it in the interim to invest.

Following insured terrorist-related catastrophes last September, Berkshire Hathaway's net worth declined last year for the first time ever. But Mr. Buffett was clearly upbeat in his outlook for General Re and for the company's other insurance businesses. He said its Geico auto and property casualty unit was growing nicely, as a larger percentage of would-be customers bought policies.

However, Mr. Buffett and Berkshire Vice Chairman Charles Munger warned that asbestos liability could become a major problem for U.S. insurers. "It's really a cancer on the American corporate world," Mr. Buffett said of potential asbestos liabilities. Mr. Munger predicted "we'll have more of a mess than we have now" from asbestos problems in five years, he said of the insurance industry.

Mr. Buffett said some insurance companies have huge potential asbestos liabilities and may not know it. He said Berkshire may have some opportunities to buy other insurers who get into trouble on asbestos, without naming companies. Referring to General Re's problems in insuring what became mega-catastrophes, Mr. Munger added "we were weak, foolish and sloppy." After Sept. 11, "we now face reality with more intelligence," he said.

Because of that wrenching experience, General Re is getting out of what Mr. Buffett called "General Re's financial products derivative book." He said that there would be an $88 million loss in the first quarter from that withdrawal and that there could be more losses to come. "We're now in the process of getting out -- but it's a little like hell. It's easy to get into but very hard to get out off," Mr. Buffett said. Mr. Munger added "to say that derivative accounting is a sewer is an insult to sewage."

Earlier in the marathon meeting, both men criticized the popularity of earnings before tax, depreciation and amortization. Mr. Buffett said he avoids companies that start talking about Ebitda and said there are "very substantial" more frauds perpetrated by people who talk about Ebitda than those who don't. He called Ebitda "a number that is bigger than it really is" and noted that Ebitda isn't a number that appears in the financial statements of such companies as Wal-Mart Stores Inc., General Electric Co. and Microsoft Corp.

Write to Richard Gibson at dick.gibson@dowjones.com¹

Updated May 4, 2002 2:39 p.m. EDT