Buffett's a Genius Again

And the rebound in 2006 was remarkable. That $897 million loss turned into a $2.5 billion profit.

Buffett has attributed the turnaround to good luck. Well, partly, since the stunningly good results in the third quarter of 2006 were due to an absence of hurricanes, just as the stunning losses of 2005 had been the result of an overabundance of big storms, including Katrina. That shift reduced the losses that Berkshire Hathaway's insurance businesses had to cover, and, as is typical in the insurance business, the huge losses of one year led to a huge increase in premiums in the next.

But Berkshire Hathaway also took conscious risks in 2006 that led to maximum returns from that "luck." The company decided to aggressively use its financial strength -- Berkshire Hathaway is one of the few companies left with a top credit rating from Standard & Poor's -- to write more business at a time when financially weaker insurers were pulling out of the market.

In some cases, Berkshire Hathaway became the insurer of "only resort" after all other companies refused to underwrite a risk. That let the company reap the maximum advantage from the post-Katrina increase in insurance premiums.

Too Much of a Good Thing

The environment for the company's third leg, investing, has remained a tough one in 2006. Oh, investment gains went up. As you'd expect, the rally in big-company stocks was good to Buffett's portfolio. The increase in unrealized appreciation of investments climbed to $2.7 billion in the September 2006 quarter from $1.2 billion in the third quarter of 2005.