updated 2/29/2008 8:55:34 PM ET 2008-03-01T01:55:34

Berkshire Hathaway Inc. said Friday its fourth-quarter profit fell almost 18 percent as its companies linked to construction were hurt by nationwide housing woes, and the company generated smaller insurance underwriting profits and investment gains.

But the full-year picture CEO Warren Buffett described in his annual letter to shareholders appeared much brighter. The company's net income soared 20 percent as it took on more derivative risk.

Berkshire reported earning $2.95 billion, or $1,904 per share, in the quarter. That's down from $3.58 billion, or $2,323 per share, in the year earlier period.

For 2007, Berkshire earned $13.2 billion, or $8,548 per share, up 20 percent from $11.02 billion, or $7,144 per share, the prior year.

On average, the four analysts surveyed by Thomson Financial have been expecting fourth-quarter earnings per share of $1,606 and annual earnings per share of $6,321.

Berkshire generated revenue of $118.2 billion in 2007, up from $98.5 billion in the previous year.

Buffett said Berkshire gained $12.3 billion in net worth during 2007, which represents an 11 percent increase in the per-share book value of the company. That beat the 5.5 percent gain in the S&P 500's value over the same period.

On succession, Buffett said his company is well prepared to replace him whenever he's no longer able to run Berkshire. But the 77-year-old Buffett did not offer many new details about the company's plan.

To replace Buffett, Berkshire plans to split his CEO job into two parts: chief executive officer and chief investment officer.

Buffett said that over the past year, he has identified four investment managers outside Berkshire who could take over managing the company's $75 billion stock portfolio and investing its $44.3 billion cash. And all four want to work at Berkshire for reasons besides compensation.

"I've reluctantly discarded the notion of my continuing to manage the portfolio after my death — abandoning my hope to give new meaning to the term 'thinking outside the box,'" Buffett said.

Buffett has previously said that Berkshire's board had three outstanding internal candidates for chief executive. And Berkshire's board knows who to chose for both jobs.

Buffett has previously said that when he dies, his son will take over the job to ensure Berkshire's culture is preserved. Howard Buffett already serves on the board.

Buffett said he was managing 94 derivative contracts for Berkshire by the end of 2007, up from 62 contracts at the end of 2006.

Buffett said Berkshire took in $3.2 billion in premiums on 54 contracts that Berkshire will have to pay on if certain bonds default. So far, Berkshire has paid $472 million on those contracts, but Buffett predicted they will ultimately be profitable.

The other derivatives Berkshire has will have to be paid if the S&P 500 and three foreign stock indices are lower when the contract expires than they were when it was written. Those contracts have 15- or 20-year terms, and have generated $4.5 billion in premiums.

Berkshire recorded a $4.6 billion liability for those stock index contracts at year-end.

Buffett said the few companies Berkshire owns that had problems last year were ones tied to housing, such as Acme Brick, Shaw carpet and Berkshire's real estate brokerage businesses.

"Their setbacks are minor and temporary," he said. "Our competitive position in these businesses remains strong, and we have first-class CEOs who run them right, in good times or bad."

Buffett said Berkshire's insurance group, which includes GEICO, reinsurance giant General Re and several other firms, had an excellent year, partly because of good management and partly because of luck. But Buffett predicts that will change in 2008.

"It's a certainty that insurance-industry profit margins, including ours, will fall significantly in 2008," he said. "Prices are down, and exposures inexorably rise. Even if the U.S. has its third consecutive catastrophe-light year, industry profit margins will probably shrink by 4 percentage points or so.

"If the winds roar or the earth trembles, results could be far worse."

Buffett said Berkshire generated a $3.4 billion underwriting profit on insurance in 2007, which is down from the previous year when it made a $3.8 billion underwriting profit.

In 2006, Berkshire insurance companies wrote a number of policies for catastrophic events because some other companies were reluctant to insure such risks after the devastation hurricanes Katrina and Rita caused the previous year. Few hurricanes struck in 2006, so Berkshire posted strong insurance results.

There was more competition for catastrophic insurance policies in 2007 and that produced lower premiums.

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