▶ Full Post Text
**Full Letter:**
https://theoraclesclassroom.com/wp-content/uploads/2019/09/1972-Berkshire-AR.pdf
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**Key Passage:**
**Insurance Underwriting**
>Our exceptional underwriting profits during 1972 in the large traditional area of our insurance
business at National Indemnity present a paradox. They served to swell substantially total corporate profits for 1972, but the factors which produced such profits induced exceptional amounts of new competition at what we believe to be a non-compensatory level of rates. Over-all, we probably would have retained better prospects for the next five years if profits had not risen so dramatically this year.
>Substantial new competition was forecast in our annual report for last year and we experienced in 1972 the decline in premium volume that we stated such competition implied. Our belief is that industry underwriting profit margins will narrow substantially in 1973 or 1974 and, in time, this may produce an environment in which our historical growth can be resumed. Unfortunately, there is a lag between deterioration of underwriting results and tempering of competition. During this period we expect to continue to have negative volume comparisons in our traditional operation. Our seasoned management, headed by Jack Ringwalt and Phil Liesche, will continue to underwrite to produce a profit, although not at the level of 1972, and base our rates on long-term expectations rather than short-term hopes. Although this approach has meant dips in volume from time to time in the past, it has produced excellent long-term results.
>Also as predicted in last year's report, our reinsurance division experienced many of the same
competitive factors in 1972. A multitude of new organizations entered what has historically been
rather small field, and rates were often cut substantially, and we believe unsoundly, particularly
in the catastrophe area. The past year turned out to be unusually free of catastrophes and our underwriting experience was good.
>George Young has built a substantial and profitable reinsurance operation in just a few years.
In the longer term we plan to be a very major factor in the reinsurance field, but an immediate eхpansion of volume is not sensible against a background of deteriorating rates. In our view, underwriting exposures are greater than ever. When the loss potential inherent in such exposures becomes an actuality, repricing will take place which should give us a chance to expand significantly.
>In the "home state" operation, our oldest and largest such company, Cornhusker Casualty
Company, operating in Nebraska only, achieved good underwriting results. In its second full year, the home state marketing appeal has been proven with the attainment of volume on the order of one-third of that achieved by "old line" giants who have operated in the state for many decades.
>Our two smaller companies, in Minnesota and Texas, had unsatisfactory loss ratios on very
small volume. The home state managements understand that underwriting profitability is the yardstick of success and that operations can only be expanded significantly when it is clear that we are doing the right job in the underwriting area. Expense ratios at the new companies are also high, but that is to be expected when they are in the development stage.
>John Ringwalt has done an excellent job of launching this operation, and plans to expand into
at least one additional state during 1973. While there is much work yet to be done, the home state operation appears to have major long-range potential.
>Last year it was reported that we had acquired Home and Automobile Insurance Company of
Chicago. We felt good about the acquisition at the time, and we feel even better now. Led by Vic
Raab, this company continued its excellent record in 1972. During 1973 we expect to enter the Florida (Dade County) and California (Los Angeles) markets with the same sort of specialized urban auto coverage which Home and Auto has practiced so successfully in Cook County. Vic has the managerial capacity to run a much larger operation. Our expectation is that Home and Auto will expand significantly within a few years.
**Insurance Investment Results**
>We were most fortunate to experience dramatic gains in premium volume from 1969 to 1971
coincidental with virtually record-high interest rates. Large amounts of investable funds were thus received at a time when they could be put to highly advantageous use. Most of these funds were placed in tax-exempt bonds and our investment income, which has increased from $2,025,201 in 1969 to $6,755,242 in 1972, is subject to a low effective tax rate.
>Our bond portfolio possesses unusually good call protection, and we will benefit for many
years to come from the high average yield of the present portfolio. The lack of current premium
growth, however, will moderate substantially the growth in investment income during the next
several years.
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Here we just get some Buffet insights into the insurance business. Expanding on the insurance underwriting cycle from last week he says that their fantastic underwriting profit this year is actually probably going to be bad news in the long term as it has created a rush of novice competition writing policies at unprofitable rates which Berkshire will either have to eat into their margins to match or eat into their float by not taking the business. This is already starting to take place this year with their insurance operations leaving business on the table.
The home-state experiment is having mixed results, the original Nebraska company is doing well but the success has not yet translated to Minnesota or Texas. They also note that bond interest rates being at all time highs and an underwriting profit has lead to a lot of profit and that is just as large an ingredient in their success. The high interest bonds will be held by them for a long time it sounds like and be a tailwind to their business for the whole duration.
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**Acquisition of the Week**
There was no new acquisition in 1972 but tucked away in the footnotes is this
>(3) Common Stock of Blue Chip Stamps During 1972 the Berkshire Hathaway Insurance Group increased its holdings of Blue Chip Stamps from approximately 6% of that company's outstanding capital stock at December 31, 1971 to approximately 17% at December 31, 1972. The holdings were purchased in the open market. Blue Chip Stamps is engaged in the trading stamp business in California, and through a subsidiary, See's Candy Shops, Incorporated, in the manufacture and sale of candy.
So they have tripled their ownership of Blue Chip Stamps this year which is kind of an acquisition.
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**Overview**
| Segment | 1971 Earnings | 1972 Earnings | % Change |
| :--- | :--- | :--- | :--- |
| **Insurance** | $5.94M | $8.98M | +51.2% |
| **Banking** | $2.24M | $2.76M | -23.2% |
| **Textiles** | $0.2M | $1.03M* | +415% |
*Textile net income calculated by hand, using operating income for textile business minus non-bank/insurance taxes
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| Metric | 1971 | 1972 | % Change |
| :--- | :--- | :--- | :--- |
| **Net Earnings** | $7.69M | $12.13M | +57.7% |
| **Return on Equity (RoE)** | 14.0% | 19.8% | +41.4% |
| **Total Shareholders' Equity** | $56.17M | $68.30M | +21.5% |
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Return on equity keeps going up, earnings are through the roof the book value (which later becomes how they roughly value the business) is up 21.5%. As he says though, the great insurance years now will be paid back with bad years in the future most likely.
There is nothing relevant from The Snowball for this year. Feel free to read the non–insurance sections of the letter on your own and discuss anything below.