property and accident Insurance (P / C)

In 1967, we acquired National Indemnity and its sister company National Fire & Marine for 8.6 million dollars. Since then, our property / accident insurance business has been driving  Berkshire Hathaway Growth engine.

Today, National Insurance Corporation is the world's largest property and accident insurance company by net value. Insurance is a commitment-filled industry, and Berkshire's ability to fulfill its commitments is unparalleled.

One of the reasons we were attracted to the P / C business was the industry model of this industry: P / CInsurance companies charge premiums in advance, and then pay for the claims. In extreme cases, such as claims arising from exposure to asbestos or serious workplace accidents, the pay period can be decades.

This pay-as-you-go model allows P / C companies to hold a large amount of funds-what we call "floating funds"-that funds will eventually flow into other companies. At the same time, Insurance companies can use the float for their own benefit. Although individual policies and claims often come and go without interruption, the float held by Insurance companies generally remains fairly stable relative to the premium amount. So as our business grows, so does our floating capital. As for how it has grown, as shown in the following table:

We may eventually experience a decline in float. If so, the decline will be very slow-at least 3% outside at least in any one year. The nature of our insurance treaty is such that we can never be constrained by the amount of immediate or imminent impact on our cash resources. This structure is designed to be a key component of our Insurance's unmatched Finance strength. This power will never be weakened.

If our Insurance fee exceeds the sum of our expenses and eventual losses, our Insurance business will generate underwriting profits, which will increase investment income from floating funds. When we make such a profit, we enjoy the use of free money-and, better yet, get paid for holding it.

For the entire P / Cindustry, the finance value of floating gold is now much lower than it has been for many years. This is because the standard investment strategy of almost all P / C companies is serious-and appropriately-biased towards high-level Bond. Therefore, the change of the Interest Rate is very important for these companies. In the past ten years, the Bond market has provided extremely low Interest Rate.

As a result, Insurance companies are forced every year—due to maturity or issuer redemption clauses—to recycle their “old” investment portfolio into new assets that provide much lower returns. These Insurance companies used to make 5 cents or 6 cents on every dollar of float, but now they can only make 2 cents or 3 cents (if their business is concentrated in a business Countries with a negative Interest Rate earn even less).

Some Insurance companies may try to mitigate lost revenue by buying low-quality Bonds or illiquid "substitute" investments that promise higher returns. But these are dangerous games and activities, and most institutions are not capable of playing.

Berkshire's situation is more favorable than the average Insurance company. Most importantly, our unparalleled capital, abundant cash and huge and diversified non-Insurance benefits allow us to have greater investment flexibility than other companies in the industry generally have. Many choices that are open to us are always favorable-and sometimes they give us great opportunities.

At the same time, our P / C company has an excellent underwriting record.  Berkshire Hathaway Underwriting profits have been realized in 16 of the past 17 years, with the only exception being 2017, when our loss before income taxes reached 3.2 billion dollars. ． Throughout the 17-year period, our pre-tax income totaled 27.5 billion dollars, of which 0.4 billion dollars were recorded in 2019.

This record is not accidental: a disciplined Risk assessment is a daily focus of our Insurance managers who know that the return on float can be overwhelmed by poor underwriting results. All Insurance companies make verbal commitments. And in Berkshire, it is a religion, Old Testament-style religion.

As I have done repeatedly in the past, what I want to emphasize now is that the happiness outcome of the insurance industry is far from a certainty: we certainly cannot achieve underwriting profits in 16 of the next 17 years. Danger is always lurking.

The mistakes in assessing Insurance risks can be huge and can take many years-even decades-to surface and mature. (Think of asbestos.) A catastrophe that dwarfs "Katrina" and "Michael" will happen—maybe tomorrow, maybe decades later. A "catastrophy" could come from a traditional source, such as a wind or earthquake, or it could be a completely surprising thing, such as a The internet attack, the consequences of which were catastrophic and beyond what Insurance currently considers. When such a huge disaster happens, Berkshire will bear its share of the losses, and they will be huge-very large. Unlike many other Insurance companies, however, dealing with losses does not strain our resources and we will be eager to increase our business the next day.

Close your eyes and try to imagine a place that might produce a vibrant P / CInsurance company. new York? London? Silicon Valley?

How about Wilkes-Barre?

In late 2012, our Insurance business manager, Ajit Jain, called me on the phone and told me that he would buy a small company in a small town in Pennsylvania, GUARD Insurance, for 0.221 billion dollars (the company's net worth at the time). group. He also said that GUARD's CEO, Sy Foguel, will be Berkshire's star. GUARD and Sy are new names for me.

Awesome: In 2019, GUARD's premium income was 1.9 billion dollars, an increase of 379% over 2012, and the underwriting profit was satisfactory. Since joining Berkshire, Fogel has led the company into new products and regions, and has increased GUARD's float by 265%.

In 1967, Omaha seemed unlikely to be a springboard for P / CGiant. Wilkes-Barre is likely to bring similar surprises.

Berkshire Hathaway energy

Berkshire Hathaway Energy companies are celebrating their 20th year in our Subsidiary. This anniversary shows that we should catch up with the company's achievements.

We will now talk about electricity prices. When Berkshire entered the Utilities field in 2000, it acquired a 76% stake in BHE, and the company charged an average price of 8.8 cents per kilowatt-hour to residential customers in Iowa. Since then, electricity prices for residential customers have risen by less than 1% each year, and we promise that by 2028, the underlying electricity price will not rise. In contrast, the situation at another large Utilities company in Iowa was this year: Last year, the company charged residents 61% more than BHE. Recently, the electricity price of this Utilities company has risen again, and it will widen the gap with our electricity price to 70%.

The huge difference between us and them is largely due to our tremendous achievements in transforming Wind energy into Electric energy. By 2021, we expect BHE in Iowa to generate approximately 25.2 million megawatt-hours (MWh) of electric power through Wind power turbines it owns and operates. These electric power will fully meet the annual needs of its Iowa customers: approximately 24.6 million MWh. In other words, our Utilities will make Wind energy self-sufficient in Iowa.

In sharp contrast, Wind Power Power Generation, another Utilities company in Iowa, accounts for less than 10% of the total Power generation. Furthermore, as far as we know, no other investor-owned Utilities company can achieve Wind energy self-sufficiency by 2021. In 2000, BHE was mainly serving an agriculture economics; today, three of its five largest customers are high tech giants. I believe their decision to build a factory in Iowa was based in part on BHE's ability to provide renewable, low-cost energy.

Of course, the wind is intermittent, and our Wind power hair Motor in Iowa only turns part of the time. At certain times, when the air is still, we rely on other Power generation facilities to ensure the electric power required by our customers. While working at Wind power hair Motor, we sold the excess electric power provided to us by Wind energy to other Utilities companies, serving them through the so-called "grid". "The electric power we sold them replaced their demand for carbon resources, such as coal or natural gas.

Berkshire Hathaway Currently holds 91% of BHE shares with Walter Scott (Jr.) and Greg Abel. Since we acquired BHE, BHE has never paid dividends, and over time, BHE has earned 28 billion dollars. This model is an exception in the field of Utilities. Utilities companies usually pay high dividends, sometimes even more than 80% of the profit. Our point is: the more we invest, the more we like it.

Today, BHE's Operation talent and experience can be used to manage truly large Utilities projects that require 100 billion dollars or more of investment to support infrastructure that benefits our country, our community, and our shareholders. We are ready, willing and able to accept such opportunities.