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1974 Shareholder Letter

Buffett's 1974 letter announces worst ROE since 1970 at 10.3%, warning about insurance industry underreserving and the destructive combination of 1% monthly cost increases with flat premiums.

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1974 Shareholder Letter

Date: March 31, 1975 Author: Warren Buffett Company: Berkshire Hathaway

Overview

1974 delivered 10.3% return on beginning shareholders' equity — the lowest ROE since 1970. The poor results were driven by catastrophic insurance underwriting deterioration, while textile and banking operations performed well. The letter provides a clear-eyed analysis of why insurance costs were rising 1% monthly while premiums remained flat.

Key Points

The Insurance Crisis Explained

"The costs of the product we deliver (auto repair, medical payments, compensation benefits, etc.) are increasing at a rate we estimate to be in the area of 1% per month... However, rates virtually have been unchanged in the property and casualty field for the last few years."

Buffett predicted even worse results ahead as the industry delayed proper pricing action.

Florida Expansion Failure

"Our efforts to expand Home and Automobile Insurance Company into Florida proved disastrous. The underwriting loss from operations in that market will come to over $2 million."

Buffett took responsibility: "In retrospect, it is apparent that our management simply did not have the underwriting information and the pricing knowledge necessary to be operating in the area."

Industry Underreserving Problem

"Many insurance organizations, major as well as minor, have been guilty of significant underreserving of losses, which inevitably produces faulty information as to the true cost of the product being sold."

Long-Term Confidence

Despite poor current results:

"We consider the insurance business to be inherently attractive. Our overall return on capital employed in this area — even including the poor results of 1974 — remains high."

Famous Quotes

"Many of our competitors are in a substantially weakened financial position, and our strong capital picture leaves us prepared to grow significantly when conditions become right."

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