March 4 (Bloomberg) -- Berkshire Hathaway Inc., the investment and insurance company controlled by billionaire Warren Buffett, probably will report a decline in fourth-quarter profit after interest income and reinsurance prices dropped.

Berkshire may say tomorrow that earnings fell 8.9 percent to $1.4 billion, or $913 a share, excluding the effect of Buffett's currency bet against the U.S. dollar and changes in the value of some of his investments, according to Gary Ransom, an insurance analyst at Fox-Pitt Kelton Inc. in Hartford, Connecticut. Investment income such as interest and dividends fell 16 percent, he estimated.

The Omaha, Nebraska-based company's cash probably swelled after Buffett, 74, said foreign exchange was one of the few investments that met his profit goals. Buffett had $20 billion of forward contracts -- agreements to purchase or sell an asset at its current price on a future date -- on at least five foreign currencies at the start of the quarter, according to Berkshire's Sept. 30 financial report. The dollar fell 7.5 percent against major currencies during the three months.

``He's battening down the hatches and building liquidity,'' said James Armstrong, who helps manage $450 million at Henry H. Armstrong Associates in Pittsburgh, of which about $80 million is invested in Berkshire. ``That doesn't bother me at all.''

Buffett, who has become the world's second-richest man by buying out-of-favor assets and companies, drew about 19,000 admirers to Berkshire's annual meeting last year. A $10,000 investment in Berkshire the day Buffett took control in 1965 would be valued at about $50 million today. Buffett's own stake is worth $43 billion.

SEC, Spitzer Requests

Berkshire's cash, which stood at $43 billion on Sept. 30, probably rose in the fourth quarter because Berkshire didn't announce acquisitions, said Ransom. Berkshire Chief Financial Officer Marc Hamburg declined to comment.

Profit probably fell because the company is selling less reinsurance as some competitors lower prices. Its rivals include Swiss Reinsurance Co. and more than 10 Bermuda-based insurers established since the Sept. 11 attacks in 2001, which caused reinsurance prices to rise.

Berkshire is one of more than nine insurers that received requests for information from New York Attorney General Eliot Spitzer and the Securities and Exchange Commission as part of a probe of policies that may help clients smooth their earnings.

`Default Position'

Buffett told shareholders last year he's willing to hold cash for years and said as recently as Jan. 19 that he sees little value in stocks, bonds and commodities. Buffett began buying foreign-currency forward contracts in 2002 and said he views them as a ``long-term'' position.

The widening of the U.S. trade deficit to a record $617.7 billion in 2004 and a record $412.3 billion budget shortfall will erode the dollar, he said in interviews last year and most recently to CNBC on Jan. 19.

Buffett's previous bets have paid off. In 2002 he bought more than $7 billion of junk bonds, or high-yield, high-risk debt, months before they rallied. He sold almost all of Berkshire's U.S. Treasury bonds the quarter before a July 2003 price slump during which yields had their biggest monthly jump since 1984.

While bearish on the dollar, Buffett is holding U.S. Treasury bills.

``When we can't find anything exciting in which to invest, our `default' position is U.S. Treasuries, both bills and repos,'' Buffett said in a March 2004 letter to shareholders, referring to short-term investments that are equivalent to cash. ``No matter how low the yields on these instruments go, we never `reach' for a little more income, he said.

Buffett doesn't disclose the composition of his cash holdings.

Benchmarks

``We have -- and will continue to have -- the bulk of Berkshire's net worth in U.S. assets,'' Buffett wrote in last year's letter. ``I feel more comfortable owning foreign-exchange contracts that are at least a partial offset to that position.''

The dollar's 7.5 percent decline in the quarter was against a basket of six major currencies, including the euro and yen. U.S. Treasuries maturing in one year or longer returned 0.4 percent, compared with 7.75 percent for Japanese debt and 9.1 percent for U.K. bonds.

The Standard & Poor's 500 Index rose 8.7 percent in the period, less than the 12 percent gain in the MSCI World Index, a global benchmark.

Shares Drop

Credit Suisse First Boston analyst Charles Gates predicted Berkshire's fourth-quarter profit fell to $915 a share, excluding changes in investment value. Berkshire earned $1,004 a share, or $1.54 billion, on that basis a year earlier.

Gates, who's based in New York, has a ``neutral'' rating on Berkshire's stock and Fox-Pitt's Ransom recommends investors sell it. Fox-Pitt is owned by Berkshire competitor Swiss Re.

Shares of Berkshire have fallen 2.4 percent in the past 12 months, compared with the 9.5 percent gain of the NYSE Composite Index. They have doubled over five years, outperforming the 14 percent increase in the index.

Buffett receives a $100,000 annual salary and trails Microsoft Corp.'s Bill Gates on Forbes's list of billionaires. Gates, 49, joined Berkshire's board in December, plays bridge with Buffett and is also betting against the dollar.

Berkshire's General Re and National Indemnity units make it the largest U.S. reinsurer, or seller of insurance to other insurers. The company also owns dozens of units selling auto insurance, paint, carpets, and mobile homes. Buffett's stock investments have made Berkshire the largest shareholder in Coca- Cola Co., American Express Co. and Gillette Co.

Reinsurance

Reinsurance prices rose as much as 50 percent in the two years after the September 2001 terrorist attacks in New York and Washington, said Bob Hartwig, chief economist at the Insurance Information Institute in New York.

Now they are falling on property policies and some casualty insurance as new entrants increase competition, according to a January report by broker Guy Carpenter & Co.

``Everybody expects insurance pricing to get more difficult,'' said Kevin Lampo, an analyst at Edward Jones & Co. in Des Peres, Missouri, who rates Berkshire shares a ``buy.'' Reducing sales ``is the right thing to do at this point,'' he said.

Investigations by the SEC and Spitzer may cut demand for a type of reinsurance known as finite or retroactive insurance, which regulators say can act as a disguised loan.

The policies are at the heart of a separate probe into the collapse of Reciprocal of America, a Richmond, Virginia-based medical malpractice insurer that used to be a General Re client.

Reciprocal

Federal prosecutors sent subpoenas to Berkshire in 2003, and since December have made additional requests about General Re's transactions with the failed company, Berkshire said in a March 1 filing. The company said in the filing it is cooperating with all the investigations.

``Berkshire so rarely gets egg on its face, it really attracts attention when it does,'' said Armstrong. ``You've got to believe demand is going to dry up'' for finite insurance, he said.

Those policies account for 22 percent of Berkshire's $45.5 billion of insurance loss reserves -- the funds the company invests while waiting to pay claims, Berkshire said in its third- quarter earnings report.

``They will figure out something else to do,'' said Dreyfus Neenan, an insurance analyst at Morningstar Inc. in Chicago.

To contact the reporter on this story: David Plumb in New York at dplumb@bloomberg.net.

Last Updated: March 4, 2005 01:16 EST