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\*\*Full Letter:\*\*
https://theoraclesclassroom.com/wp-content/uploads/2019/09/1970-Berkshire-AR.pdf
This is the first letter that is signed by buffet himself, the transition to holding company is complete, Ken Chace is now just one of the CEOs. Also with the partnerships dissolved over the course of this year Berkshire has his full focus.
As he pulled all his money from the market while the insurance AND textile industries are both not having great years, with both having lower earnings than last year. The textile operations reduced earnings by 94.3% and only turned a profit of $44,747.
The insurance subsidies net income growth was basically flat as well but the banking subsidies grew tremendously.
The book value is up 10% from $43.9M to $48.5M which as basically all earnings are retained leads to the 10% return on equity in the letter.
The assets actually didn’t increase, they just paid down liabilities like debt and back taxes as Buffet is totally out of the stock market and no major acquisitions were made.
\*\*Key Passage:\*\*
\*\*Banking Operations\*\*
\>Eugene Abegg had the problem in 1970 of topping a banner year in 1969 - and in the face of an unchanged level of deposits, managed to do it. While maintaining a position of above average liquidity, net operating earnings before security gains came to well over 2% of average deposits. This record reflects an exceptionally well-managed banking business.
\>Bob Kline became President of the Illinois National Bank in January, 1971, with Mr. Abegg continuing as Chairman and Chief Executive Officer. Illinois is a unit banking state, and deposit growth is hard to come by. In the year he has been with the bank, Mr. Kline has demonstrated effort and initiative in generating new deposits. Such deposit growth, in line with national trends, will largely be in the consumer savings area with attendant high costs. With generally lower interest rates prevailing on loans throughout the country, it will be a challenge to management to maintain earnings while utilizing a higher cost deposit mix.
\>In the closing days of 1970, new bank holding company legislation was passed which affects Berkshire Hathaway because of its controlling ownership of The Illinois National Bank. In effect, we have about ten years to dispose of stock in the bank (which could involve a spin-off of bank stock to our shareholders) and it will probably be some time before we decide on a course of action. In the meantime, certain activities of all entities in the Berkshire Hathaway group -including acquisitions - are subject to the provisions of the Act and Regulations of the Federal Reserve Board
All three sections and the intro were frankly interesting and the choice was tough. The other two sectors cover the hardships the other two industries are facing. The intro and textile sections are left out here, feel free to read them yourself.
I chose the banking one because this 10 year deadline to divest will be important in future letters and is a very unfortunate development 1 year after buying the bank. Also because their 70.1% earnings growth carried the holding company and is worthy of recognition.
Also as there was no acquisition of the week I would be using the insurance section in the
\*\*\~\~Acquisition\~\~ Startup of the Week\*\*
\*\*Cornhusker Casualty Company\*\*
\>We enjoyed an outstanding year for growth in our insurance business, accompanied by a somewhat poorer underwriting picture. Our traditional operation experienced a surge in volume as conventional auto insurance markets became more restricted. This is in line with our history as a nonconventional carrier which receives volume gains on a "wave" basis when standard markets are experiencing capacity or underwriting problems. Although our combined loss and expense ratio on the traditional business rose to approximately 100% during the year, our management, led by Jack Ringwalt and Phil Liesche, has the ability and determination to return it to an underwriting profit. 1 Our new reinsurance division, managed by George Young, made substantial progress during the year. While an evaluation of this division's underwriting will take some years, initial signs are encouraging. We are producing significant volume in diverse areas of reinsurance and developing a more complete staff in order to handle a much larger volume of business in the future.
\>The surety business, referred to in last year's report, operated at a significant underwriting loss during 1970. The contractor's bond field was a disappointment and we are restricting our writings to the miscellaneous bond area. This will mean much less volume but, hopefully, underwriting profits.
\>Our "home-state" operation - Cornhusker Casualty Company, formed in early 1970 as a 100% owned subsidiary of National Indemnity, writing standard business through Nebraska agents only—is off to a strong start. The combination of big-company capability and small-company accessibility is proving to be a strong marketing tool with first class agents. John Ringwalt deserves credit for translating the concept into reality. Our present plans envision extension of the home-state approach and we plan to have another company in operation later this year.
The insurance operations have been getting adventurous, tossing some seeds out and seeing what will sprout.
They have a new re-insurance division and are hopeful but unsure of its underwriting results. Re-insurance is the act of offering insurance to insurance companies. There might be some local Florida home insurance company that can’t underwrite for a massive hurricane hitting the panhandle, so that insurance company will go to a reinsurance company who might cover their losses beyond a certain point. The reinsurance company does this in multiple states and has a bigger pocketbook and there are much higher barriers to entry so underwriting can be more profitable due to less competition.
They are in the second year of their surety business (basically a three-party agreement where they promise to pay the client if the business they bonded fails to perform) and it has again underperformed. And are moving from things like insuring contractors (ex. insuring a construction project will be done on time/not over budget) to miscellaneous contracts that would represent more obscure, smaller, everyday risks like a businesses ability to pay an electric bill (covering their security deposit for a much smaller fee, eating the loss if they fail to pay and it comes from the security deposit bond).
They have also started up the first home-state insurance operation that operates only in a single state and try to really cater to the local population and create competitive prices by focusing just on the things national insurers might not.
Overall the estimated net profit of the insurance operations is down by 9.9% from $2.28M to $2.05M. But maybe one of these ideas will pay off big for them.