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1971 Shareholder Letter

Buffett's 1971 letter announces 14% return on equity, discusses insurance excellence driven by favorable conditions, and explains the Home-State expansion strategy with key acquisitions like Home & Auto.

buffettberkshire1971insurancehome-stateannual-letter

1971 Shareholder Letter

Date: March 13, 1972 Author: Warren Buffett Company: Berkshire Hathaway

Overview

Operating earnings in 1971 amounted to more than 14% of beginning shareholders' equity — considerably above American industry average. This was achieved despite inadequate earnings in textile operations, demonstrating the benefits of capital redeployment that began five years earlier. The insurance business had an exceptionally good year driven by reduced auto accident frequency, higher rates, and absence of major catastrophes.

Key Points

Insurance Industry Tailwinds

"An unusual combination of factors — reduced auto accident frequency, sharply higher effective rates in large volume lines, and the absence of major catastrophes — produced an extraordinarily good year for the property and casualty insurance industry."

Home-State Expansion Strategy

The Home-State insurance concept (operating in single states with big-company capability and small-company accessibility) showed promise:

  • Cornhusker Casualty (Nebraska): $1.5 million premium volume in first year
  • Lakeland Fire & Casualty (Minnesota): Launched 1971
  • Texas United Insurance: Planned for 1972

Home & Auto Acquisition

Buffett acquired Home & Automobile Insurance Company of Chicago, built by Vic Raab:

"Vic is cut from the same cloth as Jack Ringwalt and Gene Abegg, with a talent for operating profitably accompanied by enthusiasm for his business. These three men have built their companies from scratch and, after selling their ownership position for cash, retain every bit of the proprietary interest and pride that they have always had."

Banking Excellence

Illinois National Bank & Trust continued its record of leadership:

"Illinois National earned well over 2% after tax on average deposits while (1) not using borrowed funds... (2) maintaining a liquidity position far above average; (3) recording loan losses far below average; (4) utilizing a mix of over 50% time deposits."

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