By Lilla Zuill and Jonathan Stempel
"We are lucky," said Buffett, as he addressed thousands of shareholders at Berkshire's annual meeting in his hometown of Omaha on Saturday. Insurance, along with utilities, another big business for Berkshire, are sectors "relatively unaffected by the recession," he said.
Berkshire operates roughly 80 businesses, including See's Candies, Fruit of the Loom underwear and manufactured homebuilder Clayton Homes, but generates about half its results from insurance.
U.S. insurers have been badly battered since last year by investment losses, compounded now by weakened demand amid the economic recession.
Among Berkshire's insurance companies are the auto insurer Geico Corp, reinsurer General Re and bond insurer Berkshire Hathaway Assurance.
"The earnings power of (Berkshire's insurance) businesses was not as good last year as normal," Buffett conceded. "And it won't be as good this year. But most of them will do well, and many of them will do exceptionally. Insurance gives us a lot of earnings power that we are going to increase over time."
Buffett said Berkshire's insurance businesses had a first-quarter, underwriting profit that was "a little better than last year," but the recession hurt results at many other businesses, pushing overall operating profit down about 12 percent from a year ago.
Many in Omaha this weekend said their biggest concern was the broader economic turmoil. A record 35,000 showed up at the annual meeting, where Buffett, called the "Oracle of Omaha," and his Vice Chairman Charlie Munger answered five hours of questions on Berkshire, the economy and other issues.
"Buffett is a kind of beacon that you look to for guidance," said Steve Cook, 48, a web developer from St. Louis, Missouri. "I think that is why there are more people here."
Some investors expressed concern about Berkshire's concentration in insurance, after massive failed bets on credit default swaps drove American International Group Inc, which had been the world's largest insurer, into intensive care, backed with billions of dollars of taxpayer aid.
"The Titanic-like ending at AIG has me spooked," one investor told Buffett.
"The very worst case is a catastrophe" such as Hurricane Katrina or the September 11 attacks, Buffett said. He estimated that a $100 billion catastrophe would cost Berkshire $3 billion to $4 billion in claims.
"Even then I don't think it impairs the business," Buffett said. "We have a marvelous insurance business. I wouldn't trade it for any other."
Berkshire's loss of its "triple-A" credit ratings from Moody's Investors Service and Fitch Ratings earlier this year did "cause us to lose some bragging rights around the world in terms of our insurance promise, but no one ranks ahead of us, that's for sure," he said.
As long as Berkshire's insurance businesses remain in the black, it can invest policyholder funds, keeping investment profits for itself. Invested returns on this insurance "float" enriched Berkshire by $2.8 billion in 2008.
Berkshire's specialty reinsurer -- Berkshire Hathaway Reinsurance -- is where other insurers turn when seeking sophisticated and complex coverage.
In 2008, the business contributed nearly half of Berkshire's total $2.8 billion in underwriting income.
The business has been run for more than two decades by Ajit Jain, seen by analysts and investors as a contender for Berkshire's top job when Buffett leaves.
The next most profitable insurance unit at Berkshire last year was auto insurer Geico, contributing about a third of the division's total underwriting profit.
Buffett said the recession actually helps Geico, which added 665,000 new policies in 2008 and 505,000 so far this year. "Saving became more important," he said.
(Reporting by Lilla Zuill and Jonathan Stempel, editing by Leslie Gevirtz)