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1972 Shareholder Letter

Buffett's 1972 letter announces record 19.8% return on equity, explains why exceptional underwriting profits contain the seeds of future problems, and highlights three key acquisitions that built Berkshire's foundation.

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1972 Shareholder Letter

Date: March 16, 1973 Author: Warren Buffett Company: Berkshire Hathaway

Overview

1972 delivered 19.8% return on beginning shareholders' equity — a record high and significantly above American industry average. All major business lines improved, with insurance underwriting showing the most dramatic gains. Over the eight years since Buffett took control in May 1965, per-share book value grew from $19.46 to $69.72, a 16.5% compound annual return.

Key Points

The Paradox of Insurance Profits

"Our exceptional underwriting profits during 1972 in the large traditional area of our insurance business 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."

Buffett predicted industry underwriting margins would narrow substantially in 1973-1974 as competition caught up.

Three Foundation Acquisitions

All three major acquisitions worked out exceptionally well:

  1. National Indemnity (Jack Ringwalt) — Built from scratch, exceptional underwriting culture
  2. Illinois National Bank (Gene Abegg) — 2%+ after-tax return on deposits
  3. Home & Auto Insurance (Vic Raab) — Specialized urban auto, Cook County expertise

Capital Allocation Success

"At the end of the 1964 fiscal year, shareholders' equity totaled $22,138,753. Since that time, no additional equity capital has been introduced into the business... The increase in book value per share from $19.46 at fiscal year-end 1964 to $69.72 at 1972 year-end amounts to about 16.5% compounded annually."

Investment Income Growth

Insurance investment income grew from $2,025,201 in 1969 to $6,755,242 in 1972 as large premium volumes coincided with record-high interest rates.

Famous Quotes

"Our seasoned management... 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."

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