1975 Shareholder Letter

Date: March 26, 1976 Author: Warren Buffett Company: Berkshire Hathaway

Overview

1975 produced the worst ROE since 1967 at 7.6% on beginning shareholders' equity. Operating earnings were $6,713,592 ($6.85 per share). The insurance industry had its worst year in history, but a "V-shaped" textile recovery and the Waumbec acquisition provided bright spots.

Key Points

Why Insurance Struggles with Inflation

Buffett explained the disproportionate impact of inflation on insurance:

"Economic inflation, with the increase in cost of repairing humans and property far outstripping the general rate of inflation, produced ultimate loss costs which soared beyond premium levels established in a different cost environment."

Social Inflation Problem

"'Social' inflation caused the liability concept to be expanded continuously, far beyond limits contemplated when rates were established — in effect, adding coverage beyond what was paid for."

Textile V-Shaped Recovery

"'V' shaped textile depression, while one of the sharpest on record, also became one of the shortest ones in our experience. The fourth quarter produced an excellent profit for our textile division, bringing results for the year into the black."

Waumbec Acquisition

"On April 28, 1975 we acquired Waumbec Mills Incorporated and Waumbec Dyeing and Finishing Co., Inc. located in Manchester, New Hampshire."

Despite pre-acquisition losses, the Waumbec operations turned profitable after acquisition through improved management.

Home-State Success

Texas United Insurance (previously a major problem) turned around under George Billing's leadership and won the "Chairman's Cup" for lowest loss ratio.

Related

• letter-1974 — Worst year leading into 1975
• letter-1976 — Recovery year
• warren-buffett
• insurance-moat