BUFFETT’S LETTERS 1974

Our products are largely in the curtain goods area. During a period of consumer uncertainty, curtains may well be high on the list of deferrable purchases. Very low levels of housing starts also serve to dampen demand.

In 1974, these factors, along with a high rate of inflation, combined to produce a rapid erosion in underwriting results. The costs of the product we deliver (aula repair, medical payments, compensation benefits, etc.) are increasing at a rate we estimate to be in the area of 1% per month. Of course, this increase doesn’t proceed in an even flow but, inexorably, inflation grinds very heavily at the repair services—to humans and to property—that we provide. However, rates virtually have been unchanged in the properly and casualty field for the last few years.

At this time it appears that insurers must experience even more devastating underwriting results before they take appropriate pricing action.

The direct business of National Indemnity Company, our largest area of insurance activity, produced an underwriting loss of approximately 4% after several years of high profitability. Volume increased somewhat, but we are not encouraging such increases until rates are more adequate.

Our efforts to expand Home and Automobile Insurance Company into Florida proved disastrous. …. We can’t blame external insurance industry conditions for this mistake. 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.

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.

With poor underwriting and with generally weakened capital ratios throughout the insurance industry, such a higher level of liquidity is appropriate and comforting. It eliminates the possible temptation to write business at any price, simply to maintain cash flow, which is a major problem faced by many companies.

Our stock portfolio declined again in 1974—along with most equity portfolios—to the point that at yearend it was worth approximately $ 17 million less than its carrying value. Again, we are under-no pressure to sell such securities except at times that we deem advantageous and it is our belief that, over a period of years, the overall portfolio will prove to be worth more than its cost.