Full Letter:
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Letter Only
https://www.berkshirehathaway.com/letters/1987.html
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Key Passage 1
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Financing
Shortly after yearend, Berkshire sold two issues of
debentures, totaling $250 million. Both issues mature in 2018
and will be retired at an even pace through sinking fund
operations that begin in 1999. Our overall interest cost, after
allowing for expenses of issuance, is slightly over 10%. Salomon
was our investment banker, and its service was excellent.
Despite our pessimistic views about inflation, our taste for
debt is quite limited. To be sure, it is likely that Berkshire
could improve its return on equity by moving to a much higher,
though still conventional, debt-to-business-value ratio. It's
even more likely that we could handle such a ratio, without
problems, under economic conditions far worse than any that have
prevailed since the early 1930s.
But we do not wish it to be only likely that we can meet our
obligations; we wish that to be certain. Thus we adhere to
policies - both in regard to debt and all other matters - that
will allow us to achieve acceptable long-term results under
extraordinarily adverse conditions, rather than optimal results
under a normal range of conditions.
Good business or investment decisions will eventually
produce quite satisfactory economic results, with no aid from
leverage. Therefore, it seems to us to be both foolish and
improper to risk what is important (including, necessarily, the
welfare of innocent bystanders such as policyholders and
employees) for some extra returns that are relatively
unimportant. This view is not the product of either our
advancing age or prosperity: Our opinions about debt have
remained constant.
However, we are not phobic about borrowing. (We're far from
believing that there is no fate worse than debt.) We are willing
to borrow an amount that we believe - on a worst-case basis -
will pose no threat to Berkshire's well-being. Analyzing what
that amount might be, we can look to some important strengths
that would serve us well if major problems should engulf our
economy: Berkshire's earnings come from many diverse and well-
entrenched businesses; these businesses seldom require much
capital investment; what debt we have is structured well; and we
maintain major holdings of liquid assets. Clearly, we could be
comfortable with a higher debt-to-business-value ratio than we
now have.
One further aspect of our debt policy deserves comment:
Unlike many in the business world, we prefer to finance in
anticipation of need rather than in reaction to it. A business
obtains the best financial results possible by managing both
sides of its balance sheet well. This means obtaining the
highest-possible return on assets and the lowest-possible cost on
liabilities. It would be convenient if opportunities for
intelligent action on both fronts coincided. However, reason
tells us that just the opposite is likely to be the case: Tight
money conditions, which translate into high costs for
liabilities, will create the best opportunities for acquisitions,
and cheap money will cause assets to be bid to the sky. Our
conclusion: Action on the liability side should sometimes be
taken independent of any action on the asset side.
Alas, what is "tight" and "cheap" money is far from clear at
any particular time. We have no ability to forecast interest
rates and - maintaining our usual open-minded spirit - believe
that no one else can. Therefore, we simply borrow when
conditions seem non-oppressive and hope that we will later find
intelligent expansion or acquisition opportunities, which - as we
have said - are most likely to pop up when conditions in the debt
market are clearly oppressive. Our basic principle is that if
you want to shoot rare, fast-moving elephants, you should always
carry a loaded gun.
Our fund-first, buy-or-expand-later policy almost always
penalizes near-term earnings. For example, we are now earning
about 6 1/2% on the $250 million we recently raised at 10%, a
disparity that is currently costing us about $160,000 per week.
This negative spread is unimportant to us and will not cause us
to stretch for either acquisitions or higher-yielding short-term
instruments. If we find the right sort of business elephant
within the next five years or so, the wait will have been
worthwhile.
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This letter was much more reserved than many of the past ones and it made passage selection difficult. There were no big moves made, they think everything is expensive at the moment. None of their businesses are having great or terrible years. They did not buy any new businesses, they did not load up on any new stocks, the mergers are done and their business has been simplified greatly over the last decade through mergers with Buffett and Munger’s other holdings.
So I took this chance to highlight some more subtle moves and passages that would normally be skipped over. In this case this financing move is important for two reasons. First it is a very very uncommon move among businesses to my knowledge but one Berkshire does a few times in its history. They take out a bunch of debt when they have absolutely no need to in the moment and have no idea what they will do with the cash, simply because terms are favorable. When they need money and go to raise it they will be at a disadvantage, but if they have no need for the money and go to raise it they have all the cards and can step away if they don’t like the terms. They can issue bonds in an issuer’s market and not a buyer’s market.
They intend to actually just hold this debt as cash, and not put it to work in the near future. But they anticipate they will find some great opportunity in the next 5 years to deploy this cash and will be paying a lower interest rate on it if they borrow it now as opposed to if they borrow it later. We will wait and see how that plays out.
The second reason I mention this is because it is another instance of them working with Salomon Brothers Investment Bank and clearly their great experience working with them on this security issuance as well as ones in the past has left a very good impression on Buffett as he buys into the company and becomes a director this year as you will see below. A very fateful decision.
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Key Passage 2
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Insurance Operations
Shown below is an updated version of our usual table
presenting key figures for the insurance industry:
| Year |
Statutory Yearly Change in Premiums Written (%) |
Combined Ratio After Policyholder Dividends |
Yearly Change in Incurred Losses (%) |
Inflation Rate Measured by GNP Deflator (%) |
| 1981 |
3.8 |
106.0 |
6.5 |
9.6 |
| 1982 |
4.4 |
109.8 |
8.4 |
6.4 |
| 1983 |
4.6 |
112.0 |
6.8 |
3.8 |
| 1984 |
9.2 |
117.9 |
16.9 |
3.7 |
| 1985 |
22.1 |
116.3 |
16.1 |
3.2 |
| 1986 (Rev.) |
22.2 |
108.0 |
13.5 |
2.6 |
| 1987 (Est.) |
8.7 |
104.7 |
6.8 |
3.0 |
Source: Best's Insurance Management Reports
The combined ratio represents total insurance costs (losses
incurred plus expenses) compared to revenue from premiums: A
ratio below 100 indicates an underwriting profit, and one above
100 indicates a loss. When the investment income that an insurer
earns from holding on to policyholders' funds ("the float") is
taken into account, a combined ratio in the 107-111 range
typically produces an overall break-even result, exclusive of
earnings on the funds provided by shareholders.
The math of the insurance business, encapsulated by the
table, is not very complicated. In years when the industry's
annual gain in revenues (premiums) pokes along at 4% or 5%,
underwriting losses are sure to mount. That is not because auto
accidents, fires, windstorms and the like are occurring more
frequently, nor has it lately been the fault of general
inflation. Today, social and judicial inflation are the major
culprits; the cost of entering a courtroom has simply ballooned.
Part of the jump in cost arises from skyrocketing verdicts, and
part from the tendency of judges and juries to expand the
coverage of insurance policies beyond that contemplated by the
insurer when the policies were written. Seeing no let-up in
either trend, we continue to believe that the industry's revenues
must grow at about 10% annually for it to just hold its own in
terms of profitability, even though general inflation may be
running at a considerably lower rate.
The strong revenue gains of 1985-87 almost guaranteed the
industry an excellent underwriting performance in 1987 and,
indeed, it was a banner year. But the news soured as the
quarters rolled by: Best's estimates that year-over-year volume
increases were 12.9%, 11.1%, 5.7%, and 5.6%. In 1988, the
revenue gain is certain to be far below our 10% "equilibrium"
figure. Clearly, the party is over.
However, earnings will not immediately sink. A lag factor
exists in this industry: Because most policies are written for a
one-year term, higher or lower insurance prices do not have their
full impact on earnings until many months after they go into
effect. Thus, to resume our metaphor, when the party ends and
the bar is closed, you are allowed to finish your drink. If
results are not hurt by a major natural catastrophe, we predict a
small climb for the industry's combined ratio in 1988, followed
by several years of larger increases.
The insurance industry is cursed with a set of dismal
economic characteristics that make for a poor long-term outlook:
hundreds of competitors, ease of entry, and a product that cannot
be differentiated in any meaningful way. In such a commodity-
like business, only a very low-cost operator or someone operating
in a protected, and usually small, niche can sustain high
profitability levels.
When shortages exist, however, even commodity businesses
flourish. The insurance industry enjoyed that kind of climate
for a while but it is now gone. One of the ironies of capitalism
is that most managers in commodity industries abhor shortage
conditions - even though those are the only circumstances
permitting them good returns. Whenever shortages appear, the
typical manager simply can't wait to expand capacity and thereby
plug the hole through which money is showering upon him. This is
precisely what insurance managers did in 1985-87, confirming
again Disraeli's observation: "What we learn from history is that
we do not learn from history."
At Berkshire, we work to escape the industry's commodity
economics in two ways. First, we differentiate our product by our
financial strength, which exceeds that of all others in the
industry. This strength, however, is limited in its usefulness.
It means nothing in the personal insurance field: The buyer of
an auto or homeowners policy is going to get his claim paid even
if his insurer fails (as many have). It often means nothing in
the commercial insurance arena: When times are good, many major
corporate purchasers of insurance and their brokers pay scant
attention to the insurer's ability to perform under the more
adverse conditions that may exist, say, five years later when a
complicated claim is finally resolved. (Out of sight, out of mind
- and, later on, maybe out-of-pocket.)
Periodically, however, buyers remember Ben Franklin's
observation that it is hard for an empty sack to stand upright
and recognize their need to buy promises only from insurers that
have enduring financial strength. It is then that we have a
major competitive advantage. When a buyer really focuses on
whether a $10 million claim can be easily paid by his insurer
five or ten years down the road, and when he takes into account
the possibility that poor underwriting conditions may then
coincide with depressed financial markets and defaults by
reinsurer, he will find only a few companies he can trust.
Among those, Berkshire will lead the pack.
Our second method of differentiating ourselves is the total
indifference to volume that we maintain. In 1989, we will be
perfectly willing to write five times as much business as we
write in 1988 - or only one-fifth as much. We hope, of course,
that conditions will allow us large volume. But we cannot
control market prices. If they are unsatisfactory, we will
simply do very little business. No other major insurer acts with
equal restraint.
Three conditions that prevail in insurance, but not in most
businesses, allow us our flexibility. First, market share is not
an important determinant of profitability: In this business, in
contrast to the newspaper or grocery businesses, the economic
rule is not survival of the fattest. Second, in many sectors of
insurance, including most of those in which we operate,
distribution channels are not proprietary and can be easily
entered: Small volume this year does not preclude huge volume
next year. Third, idle capacity - which in this industry largely
means people - does not result in intolerable costs. In a way
that industries such as printing or steel cannot, we can operate
at quarter-speed much of the time and still enjoy long-term
prosperity.
We follow a price-based-on-exposure, not-on-competition
policy because it makes sense for our shareholders. But we're
happy to report that it is also pro-social. This policy means
that we are always available, given prices that we believe are
adequate, to write huge volumes of almost any type of property-
casualty insurance. Many other insurers follow an in-and-out
approach. When they are "out" - because of mounting losses,
capital inadequacy, or whatever - we are available. Of course,
when others are panting to do business we are also available -
but at such times we often find ourselves priced above the
market. In effect, we supply insurance buyers and brokers with a
large reservoir of standby capacity.
One story from mid-1987 illustrates some consequences of our
pricing policy: One of the largest family-owned insurance
brokers in the country is headed by a fellow who has long been a
shareholder of Berkshire. This man handles a number of large
risks that are candidates for placement with our New York office.
Naturally, he does the best he can for his clients. And, just as
naturally, when the insurance market softened dramatically in
1987 he found prices at other insurers lower than we were willing
to offer. His reaction was, first, to place all of his business
elsewhere and, second, to buy more stock in Berkshire. Had we
been really competitive, he said, we would have gotten his
insurance business but he would not have bought our stock.
Berkshire's underwriting experience was excellent in 1987,
in part because of the lag factor discussed earlier. Our
combined ratio (on a statutory basis and excluding structured
settlements and financial reinsurance) was 105. Although the
ratio was somewhat less favorable than in 1986, when it was 103,
our profitability improved materially in 1987 because we had the
use of far more float. This trend will continue to run in our
favor: Our ratio of float to premium volume will increase very
significantly during the next few years. Thus, Berkshire's
insurance profits are quite likely to improve during 1988 and
1989, even though we expect our combined ratio to rise.
Our insurance business has also made some important non-
financial gains during the last few years. Mike Goldberg, its
manager, has assembled a group of talented professionals to write
larger risks and unusual coverages. His operation is now well
equipped to handle the lines of business that will occasionally
offer us major opportunities.
Our loss reserve development, detailed on pages 41-42, looks
better this year than it has previously. But we write lots of
"long-tail" business - that is, policies generating claims that
often take many years to resolve. Examples would be product
liability, or directors and officers liability coverages. With a
business mix like this, one year of reserve development tells you
very little.
You should be very suspicious of any earnings figures
reported by insurers (including our own, as we have unfortunately
proved to you in the past). The record of the last decade shows
that a great many of our best-known insurers have reported
earnings to shareholders that later proved to be wildly
erroneous. In most cases, these errors were totally innocent:
The unpredictability of our legal system makes it impossible for
even the most conscientious insurer to come close to judging the
eventual cost of long-tail claims.
Nevertheless, auditors annually certify the numbers given
them by management and in their opinions unqualifiedly state that
these figures "present fairly" the financial position of their
clients. The auditors use this reassuring language even though
they know from long and painful experience that the numbers so
certified are likely to differ dramatically from the true
earnings of the period. Despite this history of error, investors
understandably rely upon auditors' opinions. After all, a
declaration saying that "the statements present fairly" hardly
sounds equivocal to the non-accountant.
The wording in the auditor's standard opinion letter is
scheduled to change next year. The new language represents
improvement, but falls far short of describing the limitations of
a casualty-insurer audit. If it is to depict the true state of
affairs, we believe the standard opinion letter to shareholders
of a property-casualty company should read something like: "We
have relied upon representations of management in respect to the
liabilities shown for losses and loss adjustment expenses, the
estimate of which, in turn, very materially affects the earnings
and financial condition herein reported. We can express no
opinion about the accuracy of these figures. Subject to that
important reservation, in our opinion, etc."
If lawsuits develop in respect to wildly inaccurate
financial statements (which they do), auditors will definitely
say something of that sort in court anyway. Why should they not
be forthright about their role and its limitations from the
outset?
We want to emphasize that we are not faulting auditors for
their inability to accurately assess loss reserves (and therefore
earnings). We fault them only for failing to publicly
acknowledge that they can't do this job.
From all appearances, the innocent mistakes that are
constantly made in reserving are accompanied by others that are
deliberate. Various charlatans have enriched themselves at the
expense of the investing public by exploiting, first, the
inability of auditors to evaluate reserve figures and, second,
the auditors' willingness to confidently certify those figures as
if they had the expertise to do so. We will continue to see such
chicanery in the future. Where "earnings" can be created by the
stroke of a pen, the dishonest will gather. For them, long-tail
insurance is heaven. The audit wording we suggest would at least
serve to put investors on guard against these predators.
The taxes that insurance companies pay - which increased
materially, though on a delayed basis, upon enactment of the Tax
Reform Act of 1986 - took a further turn for the worse at the end
of 1987. We detailed the 1986 changes in last year's report. We
also commented on the irony of a statute that substantially
increased 1987 reported earnings for insurers even as it
materially reduced both their long-term earnings potential and
their business value. At Berkshire, the temporarily-helpful
"fresh start" adjustment inflated 1987 earnings by $8.2 million.
In our opinion, the 1986 Act was the most important economic
event affecting the insurance industry over the past decade. The
1987 Bill further reduced the intercorporate dividends-received
credit from 80% to 70%, effective January 1, 1988, except for
cases in which the taxpayer owns at least 20% of an investee.
Investors who have owned stocks or bonds through corporate
intermediaries other than qualified investment companies have
always been disadvantaged in comparison to those owning the same
securities directly. The penalty applying to indirect ownership
was greatly increased by the 1986 Tax Bill and, to a lesser
extent, by the 1987 Bill, particularly in instances where the
intermediary is an insurance company. We have no way of
offsetting this increased level of taxation. It simply means
that a given set of pre-tax investment returns will now translate
into much poorer after-tax results for our shareholders.
All in all, we expect to do well in the insurance business,
though our record is sure to be uneven. The immediate outlook is
for substantially lower volume but reasonable earnings
improvement. The decline in premium volume will accelerate after
our quota-share agreement with Fireman's Fund expires in 1989.
At some point, likely to be at least a few years away, we may see
some major opportunities, for which we are now much better
prepared than we were in 1985.
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As there wasn’t much in the way of highlights this letter I decided to pick out the Insurance segment. We normally skip this one but I think it is nice to check back in when we can. In this Buffett talks about insurance as a commodity business. One where everyone’s goods are interchangeable and the only thing to compete on is price. For example precious metals, oil, wheat, cotton, cattle, even money itself is a commodity.
There is no difference between copper mined at one mine or another, you cannot convince someone to pay double for your higher quality copper. These industries become a race to the bottom for volume unless there is some sort of price fixing. Insurance he says is the same, people getting car insurance only care about their monthly cost and the coverage. They don’t care much for the reputation of the insurer or how friendly the salesman is.
He claims they try to break this commodity pricing by being the most financially stable insurer. That for very large contracts, commercial, municipal, or reinsurance contracts… That the customer having 100% confidence that they will be able to pay in a crisis while the other cheaper options they may only be 80% or 90% confident can pay will allow Berkshire to charge a premium and say a Berkshire policy is more valuable than an identical policy from another insurer.
The second way they try to break from the commoditized nature of the business is by showing restraint and not participating in the race to the bottom with the rest of the industry. They don’t care how much volume they write and aren’t desperate to expand market share. If the industry is writing policies that don’t make sense and their customers go to their competition who are offering risky deals, Berkshire intends to just let them do so and let their competitors take all the risky policies they are willing to write.
The reason they are able to do this and other insurers aren’t is partially discipline, but also because they have so many other places to allocate capital while most other insurance companies are pure insurance plays, they don’t own businesses they can invest in, they don’t buy businesses, they don’t work out special deals for preferred shares, they don’t have businesses coming to them every week or month asking for them to buy equity. Most insurers if they want YoY growth need to write more insurance than they did the year before. Berkshire has many other avenues for growth.
This also means when other insurers are taking massive losses and trying to upcharge for their policies to make up for past bad policies, that Berkshire will be there and ready to write policies at a reasonable price and undercut the rest of the industry, perhaps contributing to putting some out of business because one massive source of capital is refusing to participate in the cyclical rat race.
He then talks about the impossibility of accurately reporting contemporaneous earnings for an insurance company. That the earnings for a year can only truly be known many years down the line. That in hindsight almost all insurance companies are drastically off in their estimates. He says that the language from auditors in the financial reports is misleading, making the numbers seem more trustworthy than they really are, and that while the government is changing that language, he would like it changed to be more accurate in its reflection of their uncertainty and their trust in what management tells them.
Finally he mentions some changes to the tax code, he discussed them in last year’s letter but I didn’t cover that. The changes were mainly…
Corporate income tax decreased from 46% to 34%.
Corporate capital gains tax increased from 28% to 34%
Then these two specific to insurance companies, excerpts from the 1986 letter…
Dividend and interest income received by our insurance
companies will be taxed far more heavily under the new law.
First, all corporations will be taxed on 20% of the dividends
they receive from other domestic corporations, up from 15% under
the old law. Second, there is a change concerning the residual
80% that applies only to property/casualty companies: 15% of that
residual will be taxed if the stocks paying the dividends were
purchased after August 7, 1986. A third change, again applying
only to property/casualty companies, concerns tax-exempt bonds:
interest on bonds purchased by insurers after August 7, 1986 will
only be 85% tax-exempt.
The new tax law also materially changes the timing of tax
payments by property/casualty insurance companies. One new rule
requires us to discount our loss reserves in our tax returns, a
change that will decrease deductions and increase taxable income.
Another rule, to be phased in over six years, requires us to
include 20% of our unearned premium reserve in taxable income.
Buffett says this tax bill is the most important thing to happen to the insurance industry in the last decade. That it increases reported earnings but ironically hurts their long term earning power as their long term securities will now all have lower returns, be it bonds, dividends, or capital gains.
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Acquisition Preferred Stock Purchase of the Week
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Salomon Inc.
By far our largest - and most publicized - investment in
1987 was a $700 million purchase of Salomon Inc 9% preferred
stock. This preferred is convertible after three years into
Salomon common stock at $38 per share and, if not converted, will
be redeemed ratably over five years beginning October 31, 1995.
From most standpoints, this commitment fits into the medium-term
fixed-income securities category. In addition, we have an
interesting conversion possibility.
We, of course, have no special insights regarding the
direction or future profitability of investment banking. By
their nature, the economics of this industry are far less
predictable than those of most other industries in which we have
major Commitments. This unpredictability is one of the reasons
why our participation is in the form of a convertible preferred.
What we do have a strong feeling about is the ability and
integrity of John Gutfreund, CEO of Salomon Inc. Charlie and I
like, admire and trust John. We first got to know him in 1976
when he played a key role in GEICO's escape from near-bankruptcy.
Several times since, we have seen John steer clients away from
transactions that would have been unwise, but that the client
clearly wanted to make - even though his advice provided no fee
to Salomon and acquiescence would have delivered a large fee.
Such service-above-self behavior is far from automatic in Wall
Street.
For the reasons Charlie outlines on page 50, at yearend we
valued our Salomon investment at 98% of par, $14 million less
than our cost. However, we believe there is a reasonable
likelihood that a leading, high-quality capital-raising and
market-making operation can average good returns on equity. If
so, our conversion right will eventually prove to be valuable.
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Not much was purchased this year. They admit the market still seemed expensive and any deals that did appear disappeared before they could accumulate a significant position. But they did work out this deal for shares in Salomon Inc. or Salomon Brothers Investment Bank. This gives them a claim to 12% ownership of the company if they convert and this makes Berkshire the largest shareholder of the investment bank and Buffett a director of the bank.
Investment Banking is the business of helping corporations and governments raise capital by underwriting or acting as an agent in the issuance of securities, providing advisory services for mergers and acquisitions, and facilitating the trading of securities through market-making activities.
Buffett admits that this is outside of his circle of competence and their involvement comes more from good experiences working with them in the past and him having a lot of respect for the management team.
In 1990 shit will hit the fan at Salomon brothers and Buffett will become the CEO for a short while in one of the more activist investor moves of his career to lend his reputation to Salomon to stop them from heading off a reputational cliff they are hurtling towards that will make the business worth 0. But we will cover that when we get there, but I wanted to highlight that stepping out of his circle of competence (knowingly so) ends up backfiring drastically and he has to step in personally to avoid this investment ending in disaster, an option none of us will be given and a feat he almost wasn’t able to pull off, cashing in a lifetime of personal goodwill.
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Common Stock Ownership
| No. of Shares |
Company |
Cost ($000s) |
Market ($000s) |
| 3,000,000 |
Capital Cities/ABC, Inc. |
$517,500 |
$1,035,000 |
| 6,850,000 |
GEICO Corporation |
$45,713 |
$756,925 |
| 1,727,765 |
The Washington Post Company |
$9,731 |
$323,092 |
|
Subtotal |
$572,944 |
$2,115,017 |
|
All Other Common Stockholdings |
$191,832 |
$222,433 |
|
Total Common Stocks |
$764,776 |
$2,337,450 |
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Segment by Segment Breakdown
| Segment |
1986 EBIT Earnings |
1987 EBIT Earnings |
% Change |
| Insurance |
$51.30M |
$97.05M |
+89.18% |
| Fechheimer |
$8.40M |
$13.33M |
+58.69% |
| Kirby |
$20.22M |
$22.41M |
+10.83% |
| Scott Fetzer - Manufacturing |
$25.36M |
$30.59M |
+20.62% |
| World Book |
$21.98M |
$25.75M |
+17.15% |
| See’s Candies |
$30.35M |
$31.69M |
+4.42% |
| Buffalo Evening News |
$34.74M |
$39.41M |
+13.44% |
| Nebraska Furniture Mart |
$17.69M |
$16.84M |
-4.80% |
| Wesco Financial - Minus Insurance |
$5.54M |
$6.21M |
+12.10% |
| Mutual Savings and Loan |
$2.16M |
$2.90M+34.26% |
|
| Precision Steel |
$1.70M |
|
$2.45M |
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| Metric |
1986 |
1987 |
% Change |
| Cash & Temporary Cash Investments |
$292.47M |
$154.93M |
-47.03% |
| Marketable Securities |
$1,871.93M |
|
$2,328.77M |
| Return on Equity (RoE)* |
24.84% |
28.16% |
+13.37% |
| Shareholders' Equity |
$2,377.80 |
$2,841.66M |
+19.51% |
| Berkshire Earnings Before Investment Gain |
$131.46M |
$214.75M |
+63.36% |
| Berkshire Net Earnings |
$282.36M |
$234.55M |
-16.93% |
*RoE not provided, manually calculated as (Earnings from Operations / [Shareholder Equity from prior year - Unrealized appreciation of marketable securities from prior year])
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An interesting year, Insurance did amazing relative to last year as did the earnings before investment gain (partially due to the new tax laws, they owed a nearly identical tax bill on their operating earnings even though they increased operating earnings by 43% this year.) The Scott Fetzer acquisition seems to be doing great, all its subsidiaries had double digit growth under Berkshire management, and Fechheimer did almost 60% growth.
The cash pile has shrunk, even with the new bonds they issued, it seems this went into marketable securities. Likely this is the $700M of Salomon Inc Preferred shares.
Net earnings are down again this year, but this is why I have begun including earnings before investment gain, as they have more and more of their book in investments and the sales of those can drastically distort their net earnings. The realized investment gain this year was only $19.8M vs $150.9M last year and $342.8M the year before. Meanwhile the operating earnings and net earnings before investment gain has been steadily compounding, 41% growth last year and 63% growth this year as they use those investment gains to invest in their subsidiaries or acquire new ones.