Price competition has driven down revenue at Berkshire's insurance units, which account for about half of its income.

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It must be a bear market because even billionaire Warren Buffett’s Berkshire Hathaway has slumped 20 percent since December.

The decline exceeds the drop of the Standard & Poor’s 500 Index and marks the worst first half for the Omaha, Neb.-based investment and holding company since 1990. Price competition has driven down revenue at Berkshire’s insurance units, which account for about half of its income.

Berkshire is “close to getting more fairly priced,” said Charles Hamilton, an analyst at FTN Midwest Securities, who has a “neutral” rating on Berkshire. “I wouldn’t say it presents a buying opportunity right now.”

Warning issued

After reporting record 2007 earnings of $13.2 billion, the 77-year-old Buffett told shareholders in February that profit margins from insurance will drop.

“That party is over,” Buffett wrote in his annual letter to shareholders in February. “It is a certainty that insurance-industry profit margins, including ours, will fall significantly in 2008.”

Berkshire also has been hurt by the declines of Wells Fargo, American Express and U.S. Bancorp, three of the company’s 10 biggest equity holdings at the end of March.

Wells Fargo, Berkshire’s second-largest holding, dropped 18 percent in the second quarter, while American Express and U.S. Bancorp slipped 14 percent.

Berkshire declined $1,435 to $118,665 Wednesday, and is down 20 percent since its all-time closing high of $149,200 on Dec. 10. That exceeds the 17 percent slide of the S&P 500 in the same period. Berkshire spokeswoman Jackie Wilson didn’t respond to a request for comment.

The slide hasn’t deterred Buffett devotees, who think Berkshire’s decline represents a buying opportunity.

“I’d put a new client in Berkshire right now,” said Frank Betz, a partner at Carret Zane Capital Management, which oversees $800 million, including Berkshire shares. “It’s probably the highest-quality collection of individual companies that’s ever been assembled. Long slides are not in the Berkshire Hathaway lexicon.”

History on their side

Berkshire bulls are betting with history on their side: the shares advanced in 17 of the past 20 years. The last annual decline was 3.8 percent in 2002. The company had record earnings last year as Buffett booked a $3.5 billion profit on a $500 million investment in oil producer PetroChina, and insurance units made money selling coverage against storms that never came.

The decline in financial shares may provide Buffett an opportunity to boost holdings, said Whitney Tilson, a principal at hedge fund T2 Partners, which counts Berkshire among its investments.

“Where Buffett makes his money is taking advantage of weak, chaotic markets,” Tilson said. “The odds that Buffett could do a large transformative deal have gone up substantially.”

Buffett built Berkshire over four decades from a failing maker of men’s suit linings into a $185 billion company.

He plows revenue into companies whose management he trusts and whose business models he deems superior. The billionaire’s Berkshire stake makes him the world’s richest person, according to Forbes magazine.

Buffett and bargains

With Berkshire’s $35 billion in cash, Buffett can scoop up bargains on beaten-down securities and make acquisitions while near-frozen credit markets curb purchases by leveraged buyout firms, Tilson said.

Buffett entered the bond-insurance business in December as the largest companies in the industry, MBIA and Ambac Financial, struggled to maintain their credit ratings.

CIT Group, the lender that lost 84 percent of its market value in 12 months, said Tuesday that a Berkshire subsidiary agreed to pay $300 million for its portfolio of loans backing factory-built homes.

Tilson calculates the so-called intrinsic value of Berkshire’s assets and operations at $157,000 a share. The stock reached intrinsic value in 11 of the past 12 years, Tilson said.

This year’s gap emerged amid a drop in commercial property rates from their peaks after Hurricane Katrina in 2005. Property and casualty prices in the U.S. fell 14 percent in the first quarter from the same period a year earlier, according to a survey by the Council of Insurance Agents and Brokers.

Berkshire, which owns National Indemnity, General Re and Geico, saw first-quarter earnings from underwriting insurance policies fall 70 percent to $181 million. Pretax underwriting profit at Berkshire Hathaway Reinsurance Group, which sells catastrophe coverage, dropped 95 percent.

Also damaging to Berkshire’s earnings is the biggest housing slump since the Great Depression, which slowed the company’s building-related businesses, including Acme Brick, wallboard maker Johns Manville and Shaw Industries, the world’s largest carpet manufacturer.

Buffett says the U.S. is mired in “stagflation,” a period of slowing economic growth and accelerating inflation.

“We’re right in the middle of it,” Buffett said in a June 25 interview. “I think the ‘flation’ part will heat up, and I think the ‘stag’ part will get worse.”

Recovery won’t be soon

An economic recovery isn’t “going to be tomorrow, it’s not going to be next month, and may not even be next year,” he said.

Tilson and Carret Zane’s Betz say they’ll wait. Berkshire gained 26-fold since 1988 in NYSE trading — a return more than three times greater than the S&P 500.

“I sleep well,” Tilson said. “It’s not going to double overnight, but we think it will in five years, which is a 15 percent compounded annual rate. It’s the stock you want to own.”