Warren Buffett’s 2017 Annual Letter (Berkshire Hathaway)

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Berkshire Hathaway Letter to Shareholders, February 24, 2018

  • Berkshire’s gain in net worth during 2017 was $65.3Bn, which increased per share book value by 23%
  • Over the last 53 years, per-share book value has grown from $19 to $211,750, a rate of 19.1% compounded annually
  • Of the $65.3Bn, only $36Bn came from operations; remaining $29Bn was delivered to us in December when Congress rewrote the US Tax Code


  • 4 building blocks that add value to Berkshire: 1) sizable stand-alone acquisitions; 2) bolt-on acquisitions that fit with businesses we already own; 3) internal sales growth and margin improvement at our many and varied businesses; 4) investment earnings from our huge portfolio of stocks and bonds
  • Ample availability of extraordinarily cheap debt in 2017 further fueled purchase activity. After all, even a high-priced deal will usually boost per-share earnings if it is debt-financed
    • At Berkshire, we evaluate acquisitions on an all-equity basis, knowing that our taste for overall debt is very low and that to assign a large portion of our debt to any individual business would generally be fallacious
  • Made one sensible stand-alone purchase last year, a 38.6% partnership interest in Pilot Flying J (PFJ) – with about $20Bn in annual volume, the company is far and away the nation’s leading travel-center operator
    • PFJ has been run from the get-go by the remarkable Haslam family. Berkshire has a contractual agreement to increase its partnership interest in PFJ to 80% in 2023
    • PFJ sells gasoline as well as diesel fuel, and the food is good. If it’s been a long day, remember, too, that our properties have 5,200 showers
  • Clayton Homes acquired two builders of conventional homes during 2017, a move that more than doubled our presence in a field we entered only 3 years ago. I expect our 2018 site built volume will exceed $1Bn
    • Clayton’s emphasis remains manufactured homes, both their construction and their financing. Clayton accounted for 49% of the manufactured-home market last year. That industry-leading share is a far cry from the 13% Clayton achieved in 2003
  • Near the end of 2016, Shaw Industries, our floor covering business, acquired US Floors (USF), a rapidly growing distributor of luxury vinyl tile. USF delivered 40% increase in sales in 2017, during which their operation was integrated with Shaw’s
  • Berkshire backed into HomeServices in 2000 when we acquired a majority interest in MidAmerican Energy. MidAmerican’s activities were largely in the electric utility field, and I originally paid little attention to HomeServices
    • Year-by-year, company added brokers and, by the end of 2016, HomeServices was the 2nd largest brokerage operation in the country. In 2017, growth exploded – we acquired the industry’s 3rd largest operator, Long and Foster; number 12, Houlihan Lawrence; and Gloria Nilson
    • Now close to leading the country in home sales, having participated in $127Bn of “sides” during 2017
    • Despite its recent acquisitions, HomeServices is on track to do only about 3% of the country’s home-brokerage business in 2018
  • Precision Castparts bought Wilhelm Schulz GmbH, a German maker of corrosion resistant fittings, piping systems and components


  • We began by purchasing National Indemnity and a smaller sister company for $8.6 million in early 1967. With our purchase, we received $6.7 million of tangible net worth that, by the nature of the insurance business, we were able to deploy in marketable securities
    • In effect, we were “trading dollars” for the net worth portion of the cost
    • The $1.9 million premium over net worth that Berkshire paid brought us an insurance business that usually delivered an underwriting profit. The insurance operation carried with it $19.4 million of “float” – money that belonged to others but was held by our two insurers
  • Float materializes at p/c insurers in several ways: 1) premiums are generally paid to the company upfront whereas losses occur the life of the policy, usually a six-month or one-year period; 2) though some losses, such as car repairs, are quickly paid, others – such as the harm caused by exposure to asbestos – may take years to surface and even longer to evaluate and settle; 3) loss payments are sometimes spread over decades in cases, say, of a person employed by one of our workers’ compensation policyholders being permanently injured and thereafter requiring expensive lifetime care
  • Berkshire has been a leader in long-tail business for many years. We have specialized in jumbo reinsurance policies that leave us assuming long-tail losses already incurred by other p/c insurers. We are now country’s second largest p/c company measured by premium volume and its leader in float
  • Float will increase slowly for at least a few years. When we eventually experience a decline, it will be modest – at most 3% or so in any single year. Unlike bank deposits or life insurance policies containing surrender options, p/c float can’t be withdrawn
  • Downside of float is that it comes with risk, sometimes oceans of risk. What looks predictable in insurance can be anything but. Berkshire’s insurance managers are conservative and careful underwriters, who operate in a culture that has long prioritized those qualities
  • No company comes close to Berkshire in being financially prepared for a $400Bn mega-cat. Our share of such a loss might be $12Bn or so, an amount far below the annual earnings we expect from our non-insurance activities. Our unparalleled financial strength explains why other p/c insurers come to Berkshire when they, themselves, need to purchase huge reinsurance coverages for large payments they may have to make in the far future
  • Prior to 2017, had recorded 14 consecutive years of underwriting profits, which totaled $28.3Bn pre-tax. I have regularly warned that I expect Berkshire to attain an underwriting profit in a majority of years, but also to experience losses from time to time; in 2017, we lost $3.2Bn pre-tax from underwriting

Other Businesses

  • Operations other than insurance delivered pre-tax income of $20Bn in 2017, an increase of $950 million over 2016
  • About 44% of the 2017 profit came from 2 subsidiaries: BNSF and Berkshire Hathaway Energy
  • Our next five non-insurance businesses, as ranked by earnings, Clayton Homes, International Metalwork Companies, Lubrizol, Marmon and Precision Castparts had aggregate pre-tax income in 2017 of $5.5Bn, little changed from the $5.4Bn these companies earned in 2016
  • The next five (Forest River, Johns Manville, MiTek, Shaw and TTI) earned $2.1Bn last year, up from $1.7Bn in 2016
  • Remaining businesses recorded little change in pre-tax income, which was $3.7Bn in 2017 versus $3.5Bn in 2016
  • At yearend, held $116Bn in cash an US Treasury Bills


  • Excluding our Kraft Heinz holding because Berkshire is part of a control group and therefore must account for this investment on the “equity” method, our top 15 common stock investments: 1) American Express; 2) Apple; 3) Bank of America; 4) The Bank of New York Mellon Corporation; 5) BYD Company; 6) Charter Communications; 7) The Coca-Cola Company; 8) Delta Airlines; 9) GM; 10) The Goldman Sachs Group; 11) Moody’s Corporation; 12) Phillips 66; 13) Southwest Airlines; 14) US Bancorp; 15) Wells Fargo
  • From our stock portfolio, Berkshire received $3.7Bn of dividends in 2017

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