1976 Letter
To the Stockholders of Berkshire Hathaway Inc.:
After two dismal years, operating results in 1976 improved significantly. Last year we said the degree of progress in insurance underwriting would determine whether our gain in earnings would be “moderate” or “major.” As it turned out, earnings exceeded even the high end of our expectations. In large part, this was due to the outstanding efforts of Phil Liesche’s managerial group at National Indemnity Company.
In dollar terms, operating earnings came to \$16,073,000, or \$16.47 per share. While this is a record figure, we consider return on shareholders’ equity to be a much more significant yardstick of economic performance. Here our result was 17.3%, moderately above our longterm average and even further above the average of American industry, but well below our record level of 19.8% achieved in 1972.
Our present estimate, subject to all the caveats implicit in forecasting, is that dollar operating earnings are likely to improve somewhat in 1977, but that return on equity may decline a bit from the 1976 figure.
Textile Operations
Our textile division was a significant disappointment during 1976. Earnings, measured either by return on sales or by return on capital employed, were inadequate. In part, this was due to industry conditions which did not measure up to expectations of a year ago. But equally important were our own shortcomings. Marketing efforts and mill capabilities were not properly matched in our new Waumbec operation. Unfavorable manufacturing cost variances were produced by improper evaluation of machinery and personnel capabilities. Ken Chace, as always, has been candid in reporting problems and has worked diligently to correct them. He is a pleasure to work with—even under difficult operating conditions.
While the first quarter outlook is for red ink, our quite tentative belief is that textile earnings in 1977 will equal, or exceed modestly, those of 1976. Despite disappointing current results, we continue to look for ways to build our textile operation and presently have one moderate‐size acquisition under consideration. It should be recognized that the textile business does not offer the expectation of high returns on investment. Nevertheless, we maintain a commitment to this division—a very important source of employment in New Bedford and Manchester—and believe reasonable returns on average are possible.
Insurance Underwriting
Casualty insurers enjoyed some rebound from the disaster levels of 1975 as rate increases finally outstripped relentless cost increases. Preliminary figures indicate that the stockholder owned portion of the property and casualty industry had a combined ratio of 103.0 in 1976, compared to 108.3 in 1975. (100 represents a break‐even position on underwriting—and higher figures represent underwriting losses.) We are unusually concentrated in auto lines where stock companies had an improvement from 113.5 to 107.4. Our own overall improvement was even more dramatic, from 115.4 to 98.7.
Our major insurance sector in insurance, the traditional auto and general liability business of National Indemnity Company, had an outstanding year, achieving profit levels significantly better than the industry generally. Credit for this performance must be given to Phil Liesche, aided particularly by Roland Miller in Underwriting and Bill Lyons in Claims.
Volume at National Indemnity Company grew rapidly during 1976 as competitors finally reacted to the inadequacy of past rates. But, as mentioned in last year’s annual report, we are concentrated heavily in lines that are particularly susceptible to both economic and social inflation. Thus present rates, which are adequate for today, will not be adequate tomorrow. Our opinion is that before long, perhaps in 1978, the industry will fall behind on rates as temporary prosperity produces unwise competition. If this happens, we must be prepared to meet the next wave of inadequate pricing by a significant reduction in volume.
Reinsurance underwriting has lagged the improvement in direct business. When mistakes are made in the pricing of reinsurance, the effects continue for even longer than when similar mistakes are made in direct underwriting. George Young, an outstanding manager, has worked tirelessly to achieve his goal of profitable underwriting, and has cancelled a great many contracts where appropriate rate adjustments were not obtainable. Here, as in the direct business, we have had a concentration in casualty lines which have been particularly hard hit by inflationary conditions. The near term outlook still is not good for our reinsurance business.
Our “home state” operation continues to make substantial progress under the management of John Ringwalt. The combined ratio improved from 108.4 in 1975 to 102.7 in 1976. There still are some excess costs reflected in the combined ratio which result from the small size of several operations. Cornhusker Casualty Company, oldest and largest of the home state companies, was the winner of the Chairman’s Cup in 1976 for achievement of the lowest loss ratio among the home state companies. Cornhusker also achieved the lowest combined ratio in its history at 94.4, marking the fifth time in its six full years of existence that a ratio below 100 has been recorded. Premium growth was 78% at the home state companies in 1976, as market position improved significantly. We presently plan a new home state operation later this year.
Our Home and Automobile Insurance Company subsidiary, writing primarily automobile business in the Cook County area of Illinois, experienced a strong recovery in 1976. This is directly attributable to John Seward who, in his first full year, has revamped significantly both rating methods and marketing. The auto business has been shifted to a six month direct bill policy, which permits a faster reaction time to underwriting trends. Our general liability business at Home and Automobile has been expanded significantly with good results. While it remains to be proven that we can achieve sustained underwriting profitability at Home and Auto, we are delighted with the progress John Seward has achieved.
Overall, we expect a good year in insurance in 1977. Volume is high and present rate levels should allow profitable underwriting. Longer term, however, there are significant negatives in the insurance picture. Auto lines, in particular, seem highly vulnerable to pricing and regulatory problems produced by political and social factors beyond the control of individual companies.
Insurance Investments
Pre‐tax investment income in 1976 improved to \$10,820,000 from \$8,918,000 as invested assets built up substantially, both from better levels of profitability and from gains in premium volume.
In recent reports we have noted the unrealized depreciation in our bond account, but stated that we considered such market fluctuations of minor importance as our liquidity and general financial strength made it improbable that bonds would have to be sold at times other than those of our choice. The bond market rallied substantially in 1976, giving us moderate net unrealized gains at yearend in the bond portfolios of both our bank and insurance companies. This, too, is of minor importance since our intention is to hold a large portion of our bonds to maturity. The corollary to higher bond prices is that lower earnings are produced by the new funds generated for investment. On balance, we prefer a situation where our bond portfolio has a current market value less than carrying value, but more attractive rates are available on issues purchased with newly‐generated funds.
Last year we stated that we expected 1976 to be a year of realized capital gains and, indeed, gains of \$9,962,000 before tax, primarily from stocks, were realized during the year. It presently appears that 1977 also will be a year of net realized capital gains. We now have a substantial unrealized gain in our stock portfolio as compared to a substantial unrealized loss several years ago. Here again we consider such market fluctuations from year to year relatively unimportant; unrealized appreciation in our equity holdings, which amounted to \$45.7 million at yearend, has declined by about \$5 million as this is written on March 21st.
However, we consider the yearly business progress of the companies in which we own stocks to be very important. And here, we have been delighted by the 1976 business performance achieved by most of our portfolio companies. If the business results continue excellent over a period of years, we are certain eventually to achieve good financial results from our stock holdings, regardless of wide year‐to‐year fluctuations in market values.
Our equity holdings with a market value of over \$3 million on December 31, 1976 were as follows:
| No. of Shares | Company | Cost |
| 141,987 | California Water Service Company | $3,608,711 |
| 1,986,953 | Government Employees Insurance Company Covertible Preferred | 19,416,635 |
| 1,294,308 | Government Employees Insurance Company Common Stock | 4,115,670 |
| 395,100 | Interpublic Group of Companies | 4,530,615 |
| 562,900 | Kaiser Industries, Inc. | 8,270,871 |
| 188,900 | Munsingwear, Inc. | 3,398,404 |
| 83,400 | National Presto Industries, Inc. | 1,689,896 |
| 170,800 | Ogilvy & Mather International | 2,762,433 |
| 934,300 | The Washington Post Company Class B | 10,627,604 |
1976年
致伯克希尔·哈撒韦股份有限公司股东：
在经历了两年的惨淡之后，1976年的经营业绩显著改善。去年我们曾表示，保险承销方面的进步程度将决定我们的盈利增长是“温和”还是“重大”。结果证明，盈利甚至超过了我们预期的上沿。这在很大程度上要归功于Phil Liesche领导的国民 indemnity 公司（National Indemnity Company）管理团队的杰出努力。
按美元计，经营利润达到16,073,000美元，合每股16.47美元。虽然这是一个创纪录的数字，但我们认为股东权益回报率是衡量经济表现更有意义的标尺。在这方面，我们的结果是17.3%，略高于我们的长期平均水平，更远高于美国工业的平均水平，但远低于我们在1972年创下的19.8%的纪录水平。
我们目前对1977年的预测（所有预测都免不了各种前提条件）是：按美元计的经营利润可能会有所改善，但股东权益回报率可能会比1976年的数字略有下降。
纺织业务
我们的纺织部门在1976年令人大失所望。无论是按销售回报率还是按投入资本回报率衡量，盈利都远不达标。部分原因是行业状况未能达到一年前的预期。但同样重要的是我们自身的缺陷。在我们新收购的Waumbec业务中，营销努力与工厂产能未能妥善匹配。对机器和人员能力的错误评估导致了不利的制造成本差异。Ken Chace一如既往地坦率报告问题，并勤奋地致力于纠正它们。与他共事是一种愉快——即便是在困难的经营条件下也是如此。
虽然第一季度的前景是亏损，但我们一个非常初步的看法是，1977年纺织业务的盈利将持平或略高于1976年。尽管当前的业绩令人失望，我们仍继续寻找发展纺织业务的方法，目前正在考虑一项中等规模的收购。应当认识到，纺织业务并不能提供很高的投资回报预期。然而，我们仍然坚守对这个部门的承诺——它是新贝德福德和曼彻斯特地区非常重要的就业来源——并且相信平均而言，获得合理的回报是可能的。
保险承销
随着费率的最终上涨超过了无情的成本增长，财产险公司在1975年的灾难性水平基础上迎来了一些反弹。初步数据显示，1976年股东拥有的财产与意外险行业的综合成本率为103.0，而1975年为108.3。（100代表承销盈亏平衡点——更高的数字代表承销亏损。）我们特别集中于汽车险业务，而该领域的上市公司整体综合成本率从113.5改善到了107.4。我们自身的整体改善更为显著，从115.4降到了98.7。
我们保险业务中最大的板块，即National Indemnity Company传统的汽车险和一般责任险业务，在1976年取得了出色的业绩，盈利水平显著优于整个行业。这一成绩要归功于Phil Liesche，尤其要感谢承销部门的Roland Miller和理赔部门的Bill Lyons的协助。
National Indemnity Company的业务量在1976年迅速增长，因为竞争对手最终对过去费率的不足做出了反应。但是，正如去年的年报中提到的，我们高度集中于那些特别容易受到经济通胀和社会通胀双重影响的险种。因此，目前对于今天来说是充足的费率，明天就不够了。我们的看法是，不久之后，也许就在1978年，随着暂时的繁荣引发不明智的竞争，整个行业将在费率上再次落后。如果这种情况发生，我们必须准备好通过大幅缩减业务量来应对下一波定价不足的浪潮。
再保险承销的改善落后于直接业务。当再保险定价出现错误时，其影响持续的时间甚至比直接承销中类似的错误更长。George Young是一位杰出的管理者，为了实现盈利承销的目标，他不知疲倦地工作，并且取消了大量无法获得适当费率调整的合同。与直接业务一样，我们在此也集中于那些受通胀状况打击尤为严重的意外险业务。我们的再保险业务的近期前景仍然不佳。
我们的“本州”业务在John Ringwalt的管理下继续取得实质性进展。综合成本率从1975年的108.4改善到了1976年的102.7。综合成本率中仍然反映出一些由于几个业务规模较小而产生的超额成本。Cornhusker Casualty Company是本州公司中历史最悠久、规模最大的，在1976年因实现本州公司中最低的损失率而赢得了主席杯（Chairman's Cup）。Cornhusker还实现了其历史上最低的综合成本率94.4，这标志着在其成立的六年中，第五次记录了低于100的综合成本率。随着市场地位的显著提升，1976年本州公司的保费增长了78%。我们计划在今年晚些时候再开展一项新的本州业务。
我们的Home and Automobile Insurance Company子公司主要在伊利诺伊州库克县地区承保汽车险业务，在1976年实现了强劲复苏。这直接归功于John Seward，他在他的第一个完整年度里，对定价方法和市场营销都进行了重大改革。汽车险业务已转为六个月直接账单保单，这使得对承销趋势的反应速度更快。Home and Automobile的一般责任险业务已显著扩张，并取得了良好效果。虽然我们能否在Home and Auto实现持续的承销盈利能力仍有待证实，但我们对John Seward取得的进展感到非常满意。
总体而言，我们预计1977年保险业务将迎来一个丰收年。业务量很高，目前的费率水平应该能够实现盈利承销。然而，从更长远来看，保险业前景存在显著的不利因素。尤其是汽车险业务，似乎极易受到单个公司无法控制的政治和社会因素所产生的定价与监管问题的影响。
保险投资
随着投资资产因盈利水平提高和保费增长而大幅增加，1976年的税前投资收益从8,918,000美元增加到10,820,000美元。
在近期的报告中，我们曾指出债券账户中存在未实现减值，但认为这种市场波动并不重要，因为我们的流动性和整体财务实力使得我们几乎不可能不得不在非我们选择的时间出售债券。1976年债券市场大幅反弹，使我们的银行和保险公司的债券投资组合在年末有适度的未实现净收益。这一点同样不重要，因为我们打算将大部分债券持有至到期。债券价格上涨的必然结果是，用于投资的新资金所产生的收益会降低。总的来说，我们更偏好这样一种情境：债券投资组合的当前市值低于账面价值，但用新产生的资金购买的债券却能提供更具吸引力的收益率。
去年我们曾表示，预计1976年将是实现资本利得的一年，确实，当年实现了9,962,000美元的税前资本利得，主要来自股票。目前看来，1977年也将是净实现资本利得的一年。我们目前的股票投资组合持有大量未实现利得，而几年前则是庞大的未实现亏损。在此，我们再次认为，这种年复一年的市场波动相对不重要；我们在股权投资中的未实现增值在年末为4570万美元，但在撰写本文的3月21日已减少了约500万美元。
然而，我们认为我们持股的公司在年度内的业务进展非常重要。在这方面，我们对1976年投资组合中大多数公司取得的经营业绩感到非常满意。如果这些公司的业务成果在数年内持续优异，我们确信，无论市值的年波动多大，我们最终都将从持股中获得良好的财务成果。
截至1976年12月31日，我们市值超过300万美元的股权投资如下：
| 持股数量 | 公司 | 成本 |
| 141,987 | California Water Service Company | $3,608,711 |
| 1,986,953 | Government Employees Insurance Company 可转换优先股 | 19,416,635 |
| 1,294,308 | Government Employees Insurance Company 普通股 | 4,115,670 |
| 395,100 | Interpublic Group of Companies | 4,530,615 |
| 562,900 | Kaiser Industries, Inc. | 8,270,871 |
| 188,900 | Munsingwear, Inc. | 3,398,404 |
| 83,400 | National Presto Industries, Inc. | 1,689,896 |
| 170,800 | Ogilvy & Mather International | 2,762,433 |
| 934,300 | The Washington Post Company B类股 | 10,627,604 |