In 2005 Warren Buffett letter to shareholders (a)
In 2005 Warren Buffett letter to shareholders (a)
Berkshire&#39;s net profit in 2005 was 5.6 billion U.S. dollars, per share A
stock and B stock book value increased by 6.4%. In the past 41 years, that is from the
current management took over the years, book value per share increased from 19 U.S.
dollars to 59,377 dollars, the annual compound growth rate of 21.5% (this report
apply to the use of all data Boke Xi A Seoul stocks, this is the company before 1996
the only outstanding shares, B shares stock has A one-thirtieth of the economic
2005, Berkshire&#39;s performance is quite good. Since we were 5 M, 2 of
the deal has been completed and most of our affiliated business well-run. Although
Hurricane Katrina (Hurricane Katrina) to Berkshire, and the entire insurance industry
suffered a great loss record. We estimated that Hurricane Katrina caused damage to up
to 25 billion U.S. dollars, her two equally odious sister Rita (Rita) and Wilma (Wilma)
hurricane, perhaps we should further loss of 900 million U.S. dollars.
In 2005, the year of our catastrophe insurance business to achieve such excellent
results can be attributed to its outstanding GEICO CEO Tony Nicely. Statistical data
clearly show that in the past two years alone, GEICO operating efficiency increased
by 32%. What is noticeable is that the number of policies increased by 26%, the sharp
increase at the same time, the number of employees has decreased by 4%. Since we
have been able to significantly reduce unit costs, so they can create more value for our
customers. Such a result? GEICO last year won more market share, gained an
enviable profitability and further enhance the brand&#39;s impact. If you have
children in 2006 Xidelong Long Sun, then give him the name Tony.
I wrote this report aims to Berkshire shareholders estimate the intrinsic value and
provide the appropriate information, the reason is estimated, because despite the
intrinsic value calculated for the most important investment, but not always accurate,
and the error is often very serious. The more uncertain business prospects, the more
intrinsic value calculation is possible absurdity miles (on the intrinsic value of the
explanation, see the annual reports of the first 77-78 pages). However, Berkshire has
the following favorable factors: a wide variety of relatively stable income stream, and
has great mobility and very little debt. These factors make Berkshire the company to
be more accurate than most other companies estimate the intrinsic value.
While Berkshire&#39;s financial characteristics help to improve the accuracy
of the valuation, but the calculation of the intrinsic value of work because so many
revenue streams become more complex. As early as 1965, we have only a small
textile mill, the valuation is only a piece of cake. Now we already have the operating
characteristics of 68 species and the difference between the financial characteristics of
great business because of these various unrelated businesses, plus we have great the
Touziguimo, Shi Di of you Gen Ben can not hardly look at our consolidated
statements can be on the Gongsineizai make a reasonable estimate of value.
In order to better address this problem, we will own the business reasonably
divided into four categories and in the following report, detailed analysis of Mei Yi
Lei business discussions, we Huitigongmei enterprise class business and Zhu
Yao&#39;s critical data. Of course, Berkshire&#39;s overall value may be
higher or lower than the value of four types of business and. The end result depends
on two factors, one being that we as a subsidiary of a larger number of sector
corporate part work better or worse? Second, the parent company&#39;s
management, capital allocation and further improved or worsened? In short, as the
parent company Berkshire subsidiary of what benefits the company? Is
Berkshire&#39;s shareholders a direct stake, rather than indirectly through
Berkshire holding more favorable? This is a critical issue, all shareholders must find
their own answers.
In discussing the various subsidiary companies, let us first look at how we start the
two groups and explain how the status of the data. The first set of data (see Table 1) is
the investment amount per share (including cash and cash equivalents), making
calculations, we will be affiliated financial institutions held in the investment is
excluded, because most of these investments are offset by the borrower.
Table 1: Berkshire&#39;s per share investment
Annual amount of investment per share
1965 $ 4
1975 $ 159
1985 $ 2,407
1995 $ 21,817
2005 $ 74,129
1965-2005 CAGR of 28.0%
1995-2005 CAGR of 13.0%
Securities, and affiliated insurance companies in addition to holding a few exceptions,
we hold a wide range of non-insurance business.
Table 2 is that these companies share, after amortization of goodwill pre-tax profit.
Table 2: Pre-tax profit per share for subordinate enterprises
Annual earnings per share
1965 $ 4
1975 $ 4
1985 $ 52
1995 $ 175
2005 $ 2,441
1965-2005 CAGR of 17.2%
1995-2005 CAGR of 30.2%
* Pre-tax and net of minority interests
In the discussion of growth, you need to pay attention to the base is with the final
choice of the year. Both start and end of the year there is a poor choice in any case,
the growth rate calculated will be distorted, especially when the base year when very
little profit, calculated by the surprisingly high growth rate has no practical
significance. In Table 2, as the base of the profit for the year 1965, is unusually good,
Berkshire higher level of profitability in 1965 after 10 years in nine years.
From Table 1, Table 2, we can see that Berkshire&#39;s per share earnings per
share of investment relative compound growth rate is concerned, in the last 10 years,
great changes have taken place, this result reflects the Our business focus increasingly
tilted to the merger. Nevertheless, Berkshire&#39;s vice chairman, is my partner
- Charlie Munger, and my goal is to make the two tables that the figures of both
growth. Our ambition for this, we hope (analogy), to avoid the elderly couple who
once faced challenges in romantic destiny. When the couple a dinner celebrating the
50th anniversary of the end of marriage after the wife gentle music, intoxicating
champagne and candlelight flickering stimulation, suddenly felt a long absence, the
impulse, then pretending to be shy to suggest that her husband upstairs to bedroom
ML. Her husband agony for quite a while before answering, said: &quot;upstairs
line, ML also, the only ML I can not do it upstairs.&quot;
The next few years, our current business in general should be at the Jing Ying profit
on the show some growth, but only by the business itself can not produce a
satisfactory return in order to achieve this ideal goal, we must make some scale large
acquisitions. 2005 has been in the past, we are encouraging large-scale mergers and
acquisitions, we reached a five merger agreement, including two completed in 2005;
one completed in early 2006; the other two are also expected to be completed soon .
No one involved in the merger agreement to issue new shares of Berkshire Hathaway,
which is very critical and often overlooked: When a company management is proud to
announce to the stock when the acquisition of another company as a buy side
shareholders have to do this sacrifice part of their equity. I have been several similar
deals, of course, Berkshire&#39;s shareholders to pay for my move to the
Following the acquisition last year, we discussed one by one:
June 30, 2005, we acquired medical protection insurance (Medical Protective
Company, MedPro), which is located in Fort Wayne, and has a 106-year history of
medical malpractice insurance business. Malpractice insurance is a very difficult to
cover the insurance, many insurance companies became a nightmare for the land.
However, MedPro has to be well managed for the following reasons: First, MedPro
will, like other insurers, and Berkshire subsidiary of a chip lead in the system that
underwriting discipline is more important than all other business objectives; Secondly,
as Berkshire an integral part of the company, MedPro has far exceeded its
rival&#39;s financial strength, which is sufficient to doctors to pledge, for those
very Chang Shijian of Su Song cases Jue Bu Hui Youyutamen&#39;ve covered
Baoxiangongsi of insolvent and can not closed; s Third, the company has a bright and
capable CEO Tim Kenesey, he instinctively and other Berkshire executives follow the
same thinking the same.
Our second acquisition is the Forest River (Forest River), has been on August 31,
2005 to complete. Prior to the July 21, I received a fax only 2 pages, above the forest
of the river one by one we have full compliance with the disclosure in its annual
report on the acquisition of standards (see page 25 of this year the annual report).
Before this, I had never heard of sales of 1.6 billion U.S. dollars this weekend tourist
vehicle manufacturers and their owners and general manager Pete Liegl. But the fax
made me very fond of him, I immediately ask for more data. The next morning I got
the data, the morning I made to Pete Liegl offer. July 28, we both shook hands. Pete
Liegl is an outstanding entrepreneur, a few years ago, his business is far smaller than
now, when he sold to a leveraged buyout company (LBO) sector, immediately after
they took over the indiscreet remarks to him, and soon Pete Liegl on left the company.
Shortly thereafter, the company plunged into bankruptcy, Pete Liegl to re-enter this
company. You can rest assured that I will not interfere with Pete Liegl conduct any
Forest Creek has 60 plants and 5,400 employees, in recreational vehicles
(Recreation Vehiele, RV) manufacturing industry continued to maintain a
considerable market share, and will also ship manufacturing and other businesses to
expand. Pete Liegl, 61, is absolutely in the state of accelerated progress. Please
carefully read the attached annual report published in the &quot;RV
Business&quot; on an article, you&#39;ll understand why Pete and the
Berkshire tie the knot.
November 12, 2005, Wall Street Journal published an article discussing the
acquisition of Berkshire and the management and operation of different articles. Pete
paper declared: &quot;I sold the company to Buffett than to update my
driver&#39;s license is also easy.&quot;
New York, Cathy Baron Tamraz, after reading this article, touched a chord.
November 21, she wrote me a letter at the beginning, writes: &quot;As the
Business Wire&#39;s president, I would like to introduce you to my company
because I think my company found a recent article published in the Wall Street
Journal The article detailed the characteristics of a subsidiary of Berkshire.
One read a letter from Cathy, I&#39;ll find Business Wire and Berkshire is a
good couple, I especially like the second last paragraph of her letter: &quot;We
strictly control the cost and restrict all unnecessary expenditure. Our company no
secretary, no management layer. but we will invest heavily to achieve technological
leadership and promote business development. &quot;
I immediately made a call to Cathy, Berkshire and Business Wire&#39;s
controlling shareholder Lorry Lokey acquisition agreement was reached quickly.
Lorry Lokey in 1961 founded the company, Cathy has just been hired as CEO. I really
appreciate the like Lorry Lokey&#39;s business success story that the story of
78-year-old this year, he has put a company into the information transmitted to 150
countries and 25,000 clients of excellent enterprises, and many other equally choose
to Berkshire As their lives to create the ultimate business destination for entrepreneurs,
business success story of his story is a good idea, a business genius, a hardworking
attitude of the perfect combination of hard work a successful model.
December 2005 we reached an agreement to acquire Applied Underwriters 81% of
the shares. This is a small business to provide services and staff salaries to pay
compensation insurance companies, most of its customers in California.
In 1998, only 12 employees, this small company acquired a base in Omaha, there
were 24 employees of companies operating similar businesses. Applied Underwriters
outstanding business founder Sid Ferenc and Steve Menzies after analysis concluded
that Omaha has many advantages as an operating base - I would say it is really
far-sighted - and now the company&#39;s 479 employees, 400 people This
Less than a year ago, Applied Underwriters and National Indemnity reinsurance
sector reached an outstanding manager Ajit Jain, a large reinsurance contract. Ajit Jain
on Sid Ferenc and Steve Menzies impressed, but the two of them on
Berkshire&#39;s business management are amazed that we both decided to
cooperate. We are very pleased to see that, Sid Ferenc and Steve Menzies after the
acquisition to maintain 19% of the shares 12 years ago when they first started out with
only a small amount of capital, and now was such a success, think of a Berkshire
strong capital support, after which they will get what a huge success, I just overjoyed.
The spring of 2005, we holding 80.5% of U.S. energy agreement for the acquisition
of a western six states provide electricity service company PacifiCorp. Many of these
acquisitions will need regulatory approval, now we have been approved, is expected
to soon complete the transaction. Berkshire will buy 3.4 billion U.S. dollars for this
US-China Energy common stock, U.S. Energy with the funds with 1.7 billion U.S.
dollars of loans to complete the deal. Investment in government regulation of public
utilities, you can not expect to be particularly high profit, but the industry was able to
provide a reasonable return for the huge sums of profit opportunities, and therefore
large capital Berkshire, this investment is very favorable. As early as a few years ago,
I said we hope to conduct a number of huge utility investment. Please note that I said
some, we will look for more such investment opportunities.
In addition to new business acquisition, we continue making indirect (bolt-on)
mergers and acquisitions, which can not underestimate the scale of some of mergers
and acquisitions - our affiliated companies carpet Shaw 2005 for 500 million U.S.
dollars annual investment from the merger of two vertically integrated business chain
This will further enhance its margins. XTRA and Clayton Homes also conducted to
enhance the value of mergers and acquisitions.
Different from other M &amp; A side, Berkshire is no &quot;exit
strategy&quot;, we bought only for long-term hold. But we do have a entry
strategy, looking in the U.S. and internationally in line with our 6 standard and the
price is reasonable, to provide a reasonable return target company, if you have the
right business, please give me call. Like a little girl full of love, longing, I will dream
boy waiting by the phone call.
I began to discuss our four major businesses. First of all, from our core insurance
started in insurance in the amount and time cost of float is significant.
Taking into account my new readers, need to explain the float (Float). Insurance is
a float, while not belong to us but can be used temporarily for our money. Our float
increased to two main factors: (1) in the insurance business, we collect the first
premium, usually about 1 year after the provision of insurance services; (2) The loss
occurred does not mean we immediately To claim, from the discovery of damage to
the final settlement mediation, sometimes after several years (such as asbestos
litigation is a good example. As asbestos containing carcinogenic substances, many of
the workers in the industry so sick. the 20th century 80 the United States, nearly 20
million workers claim this action, in which case the most intense, Texas - Translator
Note). 1967, our insurance float 2,000 million, after years of internal growth and
external acquisitions, has grown to 49 billion U.S. dollars today is huge.
Float is really a good thing, but only if the price can not get too high. The cost
depends on the underwriting results, which is our ultimate bear the costs and losses
and premiums charged by the results of the comparison. When an insurance company
was underwriting profits, as in the past 38 years, Berkshire&#39;s insurance
business, as most of the year, the cost of float or even below zero cost. In these year,
we actually have to hold client funds charging them. However, for most other
insurance, the industry, the time it passes very difficult - in general, cover the property
casualty insurance Tongchang inevitably underwriting loss, when the loss is large,
they would have to float to pay the price, sometimes even devastating price.
In 2004, our cost of float less than zero, that negative cost, I tell you, unless there is
a super catastrophe in 2005, we are still a chance that the cost of float is zero.
Unfortunately, as a super-supermassive catastrophe insurance coverage experts, and
we certainly caught a super catastrophe, due to hurricane Bokexier losses amounted to
3.4 billion. Nevertheless, our float is still required to pay any costs, mainly because
our other insurance business, especially GEICO&#39;s outstanding business
performance by creating super.
GEICO auto insurance business increased by 12.1% of mass, which makes private
auto insurance industry in the U.S. market share increased from 5.6% to about 6.1%.
Car insurance market is huge, growing market share by 1% each, equivalent to sales
growth of 16 billion U.S. dollars.
Although our brand can not be quantified, but I believe equally in the significant
growth. GEICO 1996, Berkshire&#39;s wholly-owned, its annual advertising
expenditure of 3,100 million. Advertising spending in 2005 to 502 million U.S.
dollars, and we can not wait to continue to invest additional advertising costs.
The reason why our advertising effective, is the Yin Wei tells us a very good story:
with any all customers of the national insurance company car insurance services
Xiangbi, Zai GEICO Gongsi insurance car insurance similar savings Qian (Yi Xie car
insurance companies do in their professional areas of good to the applicant to provide
special sound services; the same, because of our national Jingzhengduishou
Yunyongbutong the classification system, Suoyiyoushi than we can provide better
price). In 2004 we received the highest conversion rate so far, that is, network and
telephone orders into sales ratio, this is our price and competitors, are now more
attractive than before, a strong evidence. Access GEICO.com or call 800-847-7536,
you will find that I said is true, remember that you are sure to Berkshire shareholders,
because shareholders tend to make you enjoy a special discount.
I had people say, in August 2004 GEICO into New Jersey, where motorists are like
GEICO. Our new policy holders in the state&#39;s retention rate (retention rate,
which measures the current one when there is still a percentage of customers -
translators note) much higher than other states, estimated that around 2007, GEICO
may become the third largest auto insurer in New Jersey. In addition, our low-cost to
low-price sales at the same time maintain a stable profit.
55 years ago, when I first found that GEICO, the company simple but effective
business management left me a deep impression. In fact, I was 21 years old also wrote
an article about this company (the copy of the Annual Report, p. 24), the company
was worth only 700 million. In the article, you will see, I called GEICO to
&quot;my favorite stocks.&quot; Now I call it.
Our reinsurance business primarily by General Re and National Indemnity business,
the former by Joe Brandon and Tad Montross, the latter managed by the Ajit Jain.
Taking into account the seriousness of the 2005 hurricane damage to re-insurance
industry suffered a serious blow, the two companies can be quite good performance.
Atmospheric, oceanic or other causal factors have dramatically changed if the
frequency and intensity of hurricanes, it is still a failure to solve the mystery.
Happened in the recent hurricanes is quite fearful. For example, we know that in 2004
approximately 100 years, 59 times 3 or more of some of the hurricanes struck the
southeast and Gulf Coast (Gulf Coast) regional states, of which only 3 to 5 hurricanes.
We know that in 2004 there were three three hurricanes in these regions occurred four
times in 2005, of which 1 is the history of the most devastating Hurricane Katrina. In
addition, coastal occurred in 2005 3 5 hurricane, fortunately, the wind weakened
This more frequent and more intense hurricanes is an abnormal phenomenon? Or
because of climate, water temperature, or we do not fully understand the changes
caused by other factors? These factors can develop into a pattern, resulting in future
there will be Hurricane Katrina has dwarfed even greater disaster?
Joe, Ajit and I do not know the answers to these questions, we know that we know
nothing about the answers to these questions, it means that we must follow the Pascal
(Pascal) proposed response to it. As you know, in a famous wager about the existence
of God, Pascal concluded that, since he did not know the answer to what percentage
of individuals destined to win or lose he should choose to answer a God must exist.
(Seventeenth-century French mathematical scientists, thinkers Pascal (Blaise
Pascal ,1623-1662 years) proposed the existence of gambling on the belief in God
argument. This means that the existence of God on this issue, people can choose the
existence of God can also be Select God does not exist, but must make choices in life
have to have a choice, you must bet. bet the existence of God, if God exists, people
will believe in God, victory, have unlimited income, will be happy. If God does not
exist, and no little to lose. rational though can not prove the existence of God, but it
can tell that we should choose the existence of God - Translator Note).
Guided by this principle, we have concluded that we are only at the price much
higher than last year&#39;s level but also in the future some Zhong Yao factors
if the recent change induced Fa Sheng Wei Hai Gengweiyanchong the storm occurred,
our general Fengxian level does not make us sad, the only super-catastrophe insurance
coverage. Since 2004, the relatively weak to the extent we have been aware of such
changes in the prices had not improved, reducing the coverage. Now we will be more
careful, but if the price is right, we will still have ability and desire to become the
world&#39;s largest super-catastrophe insurance premium insurers.
We are affiliated smaller insurance companies, including the recently joined the
MedPro, 2005 Year has scored a very outstanding performance. However, you can see
in the following table of data is not fully reflect their performance, because
immediately after our acquisition of MedPro its loss reserves (the loss reserves)
increased by about 125 million U.S. dollars.
No one can know exactly how much money to pay for our insurance policies cover
the claims, medical malpractice liability insurance (Medical malpractice Insurance) is
a long tail (long-tail) type of insurance, which means claims often take years the
ultimate solution. There would be additional loss, but we may know nothing about
this for some time. Insurers on the imminent loss problems are often too optimistic,
they act like a spring pocket knife fight a guy, when opponents knife stabbed in his
throat, he shouted: &quot;You should not even think close to me.&quot; his
opponent replied: &quot;When you shook his head and shouting numerous try
In addition to our insurance policy for the early increase in loss reserves in addition,
MedPro only able to achieve an underwriting profit in the insurance policy when
issued. We are subordinate to other major insurance companies underwriting the 1.27
billion U.S. dollars in business has made an underwriting profit of 324 million U.S.
dollars, this is a very excellent performance, and we should thank the Berkshire
Hathaway Homestate Companies of Rod Eldred, Central States Indemnity of John
Kizer, US Liability of Tom Nerney, Kansas Bankers Surety&#39;s Don Towle,
National Indemnity&#39;s Don Wurster.
Table 3 is the principal subsidiary underwriting the insurance companies and the
general situation of the float.
Table 3: Berkshire subsidiary underwriting the major insurance companies and the
general situation of float (Unit: millions of dollars)
Underwriting profit (loss) by the end of float
General Re (334) 322,92023,120
B-H Reinsurance (1,069) 41716,23315,278
235 other major companies * 1613,4421,736
* From June 30, 2005 onwards, including MedPro account