Berkshire Hathaway reported today that its book value per share rose 4.6% in 2011—hardly a mighty leap but enough for the company’s chairman, Warren Buffett, to meet his annual goal of beating the total return of the S&P 500 index, which rose only 2.1%.
That was the 39th year out of the 47 years in which Buffett has run Berkshire that the company’s performance was better than the S&P’s.
Even so, this 47th year brought an end to Buffett’s remarkable long-term record of averaging a better-than-20% annual gain in Berkshire’s book value per share. For the first time, the average dropped into the teens, hitting 19.8%.
Much as Buffett would have liked to maintain an average above 20%, he had for years known it would slip away. He has repeatedly warned Berkshire’s shareholders that the company’s huge capital base–$165 billion at the end of 2011–would inevitably slow gains in per-share book value.
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Per-share book value changes are the customary way that Buffett reports shareholder results because this method incorporates all of Berkshire’s capital gains and losses whether these are realized or unrealized. Because Berkshire (BRKA) holds such a giant portfolio of common stocks ($77 billion at yearend) and has accumulated large unrealized gains, changes in their level can be important to results.
Under the more commonly used financial standard of earnings (which reflect no unrealized gains and only certain unrealized losses), Berkshire reported Class A per-share results for 2011 of $6,215 versus $7,928 in 2010.
An important reason for the decline in earnings (and also for the relatively modest gain in book value per share) is that 2011 was a difficult year for Berkshire’s core insurance business. Catastrophe losses were high–$2.6 billion in total–and pricing was not generous.
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Overall, Berkshire’s insurance businesses had an underwriting profit in 2011 of only $248 million against just over $2 billion in 2010. The company’s reinsurance business, which writes very large policies and suffered $800 million of losses from earthquakes in New Zealand and Japan, was in the red, showing losses of $714 million.
In his chairman’s letter, Buffett focused not on the level of profits in this one year, but on the fact that 2011 was the ninth consecutive year in which Berkshire’s insurance operations produced an underwriting profit. In most other corners of the insurance world, by sharp contrast, underwriting losses are common.
In Berkshire’s nine years of underwriting profits, its “float” — money that doesn’t belong to Berkshire, but that it gets to invest for its own benefit — has grown from $41 billion to $70 billion. Buffett said in his letter that he does not expect float to grow much beyond that, because the amount is already outsized in relation to Berkshire’s premium volume.
Another downer for Berkshire’s profits in 2011 was the failure of the housing industry to rebound. A relative optimist a year ago about housing, Buffett admits now to having been “dead wrong.”
Berkshire owns not only the largest producer of homes in the U.S. — Clayton Homes, which manufactures housing — but also four other housing-related businesses: Acme Brick, Shaw (carpets), Johns Manville (insulation), and Mitek (building products). Together, these businesses had $1.8 billion in pre-tax profits back in 2006. In 2011, pre-tax profits were a measly $513 million.
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Right now, Buffett views housing as still stuck in its own special “depression.” But he believes the situation is easing steadily and that the industry will make a comeback consistent with that already visible in most other sectors of the economy.
On the good-news front, Buffett gave a new label to Berkshire’s largest non-insurance businesses, calling them the “fabulous five.” They are BNSF, Iscar, Lubrizol, Marmon Group, and MidAmerican Energy. Their combined pre-tax earnings in 2011 were more than $9 billion (though that includes more than half a year of Lubrizol profits that were earned before Berkshire bought Lubrizol in September). Buffett says in his letter that he expects each of the five to set a new profit record this year.
BNSF, one of the nation’s largest railroads, has been a star since it was purchased by Berkshire in early 2010. Its pre-tax profits last year were $4.74 billion, up from about $4 billion in 2010, a gain of more than 18%.
The writer of this article, FORTUNE senior editor-at-large Carol Loomis, is a longtime friend of Warren Buffett’s and a shareholder of Berkshire Hathaway. She has been the pro bono editor of Buffett’s annual letter to shareholders for 35 years.
