Updated from 8:59 a.m. EST

By Josh Funk

OMAHA, Neb. -- Warren Buffett's Berkshire Hathaway ( BRK.A) reported a 96% drop in its fourth-quarter profit because of largely unrealized losses of $3.25 billion on investments and derivative contracts.

The Omaha-based company released its results Saturday morning along with Buffett's annual letter to shareholders.

Berkshire reported net income of $117 million, or $76 per Class A share, in the quarter ending Dec. 31. That's down from net income of $2.95 billion, or $1,904 per share, in the same period a year ago.

The two analysts surveyed by Thomson Reuters expected Berkshire to report fourth-quarter net income of $1,486.50 per share on average. The estimates typically exclude one-time items.

Berkshire owns a diverse mix of more than 60 companies, including insurance, furniture, carpet, jewelry, restaurants and utility businesses. And it has major investments in such companies as Wells Fargo ( WFC) and Coca-Cola ( KO).

Buffett said the retail businesses, such as the furniture and jewelry stores, and those tied to residential construction, such as Shaw carpet and Acme Brick, were hit hard last year, and they will likely continue to perform below their potential in 2009.

But he said Berkshire's utility and insurance businesses, which includes the insurer Geico, both delivered outstanding results in 2008 that helped balance out the other businesses.

Most of the investment losses that affected Berkshire's results were unrealized losses on long-term derivative contracts, some of which are tied to the value of stock market indexes.

Buffett has predicted the company's derivative contracts will ultimately be profitable partly because Berkshire has received $8.1 billion in premiums up front for them. That allows Berkshire to invest the premium money until the contracts start maturing a decade from now.

Buffett said he initiated all of Berkshire's 251 different derivative contracts because he believes they were mispriced in Berkshire's favor.

"If we lose money on our derivatives, it will be my fault," Buffett said.

Berkshire has to estimate the value of its derivatives every quarter. Buffett says he supports that mark-to-market accounting, but the formula used to estimate that value can produce absurd results for long-term contracts.

For the full year, Berkshire's net income fell to $4.99 billion, or $3,224 per share, down from last year's $13.21 billion, or $8,548 per share, in 2007.

Andy Kilpatrick, the stockbroker and author who wrote Of Permanent Value: The Story of Warren Buffett, said Berkshire's results were still impressive given how they compare to the rest of the world.

"I would argue that he's more competitive than ever in the world," Kilpatrick said.

Buffett estimates Berkshire's book value -- assets minus liabilities -- declined 9.6% to $70,530 per share in 2008. Berkshire's book value declined only one other time under Buffett, and that was a 6.2% decline in 2001.

But Berkshire's 9.6% decline still beat the S&P 500's 37% decline in 2008, the report said.
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