Famed investor Warren Buffett is not only the world's most famous investor. The 89-year-old Oracle of Omaha also fancies himself a teacher to others. In his annual letters to Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) shareholders, Buffett usually walks readers through Berkshire's large and diverse operations, dispelling bits of wisdom regarding the various businesses and sprinkling in nuggets of his investing philosophy along the way -- usually punctuated by bawdy jokes and witty quotations.
Buffett's 2019 letter to shareholders was released Saturday, Feb. 22, and is another brief, fun, and informative read. However, the letter also came with quite a few eye-opening surprises. Here are six surprises that stood out to me in Buffett's letter this year.
Berkshire's net income increased by 1,900% over last year
In 2018, Berkshire's net earnings were only $4 billion. In 2019, they were $81.4 billion. How did that happen? Chalk it up to a new accounting rule implemented in 2018 that greatly affects Berkshire's reported net earnings under generally accepted accounting principles (GAAP).
Buffett mentioned these startling statistics to highlight how much he and partner Charlie Munger disagree with the new rule. The rule states that companies that own a portfolio of stocks must account for the unrealized market gains or losses in that portfolio as income each and every year. That's a big change from pre-2018, when accounting rules stated that these unrealized gain and loss fluctuations were never to be included in GAAP earnings.
As many remember, 2018 was a terrible year for stocks, and Berkshire's unrealized losses that year were $20.6 billion, compared with a roaring $53.7 billion gain in 2019, leading to the huge disparity in Berkshire's net income. Buffett thus encouraged investors to look at operating earnings from now on instead of Berkshire's net income.
Buffett's favorite recent Berkshire acquisition wasn't his
Though he does have a couple of younger investing lieutenants managing their own smaller portions of Berkshire's stock portfolio, when making acquisitions of whole companies, the buck usually stops with Buffett.
Yet when it comes to acquisitions at Berkshire's sprawling insurance operations, Buffett now appears to defer to insurance head Ajit Jain. Buffett has previously touted Jain's importance to Berkshire as even greater than his own, and Jain is thought to be a potential successor to Buffett in the CEO role -- or at least CEO of the insurance segment.
In this year's letter, Berkshire praised Jain's 2012 $221 million purchase of GUARD Insurance Group, based in Wilkes-Barre, Pennsylvania, and led by Sy Foguel, whom Jain described as a rising "star" in the industry.
Apparently, he was right. Since 2012, GUARD's premium volume has surged 379%, and its insurance float, the portion of revenue used for investment, is up 265%. Not only has GUARD been terrific in terms of growth and float, but it has also grown all while delivering a solid underwriting profit as well -- an added bonus.
A ridiculously rare insurance record
Speaking of insurance operations and underwriting profits, Buffett highlighted the remarkable record of the insurance team over the past two decades, as Berkshire's various insurance businesses have delivered an underwriting profit in 16 of the past 17 years, with the sole exception of 2017. That's extraordinary when considering most insurance companies actually operate at an underwriting loss, making money on investment gains from float.
Buffett says there's almost no chance the insurance companies will repeat such a feat in the next 17 years, meaning Berkshire's top-performing underwriters have been especially good over the past two decades, even by their own standards.
Berkshire Hathaway Energy is supplying Iowa with 100% wind power
Buffett also made a very solid and practical case for wind energy in his letter. Berkshire's energy subsidiary, Berkshire Hathaway Energy -- previously known as MidAmerican Energy -- is now supplying Iowa with nearly 100% wind power, with only token non-wind capacity to "fill in" when the wind doesn't blow.
You might think Buffett is making a case to combat climate change by mentioning wind power in the letter, but you won't find any mention of the words "climate change" in that section. Rather, Buffett describes wind's advantages purely in financial terms. BHE is able to supply Iowa consumers at rates 70% less than the competing utility. And BHE isn't suffering any financial hardship from that discount -- the subsidiary grew its net income 16.7% last year.
The difference? BHE's competitor gets only 10% of its power from wind, whereas as BHE will be entirely "wind self-sufficient" by 2021.
Buffett laid out specifically what will happen to his shares when he leaves
While Buffett has long let shareholders know that he will donate his Berkshire shares to charity when he moves on, this year's letter spells out those donations in far more detail than stated previously. Buffett owns about a 16.5% economic interest in Berkshire, worth about $93 billion.
In this year's letter, Buffett explained that he has directed the executors of his will to, over time, gradually convert his A shares into B shares, which are 1/1,500 the price of A shares, and distribute them to various foundations, which will be required to "deploy their grants promptly."
Interestingly, Buffett made a point that he would prefer the executors to hold the Berkshire shares until their disposal dates, not to sell outright and then buy Treasuries with maturities matching those dates, as he believes Berkshire shares will be a better investment than Treasuries over the disposal period. Given rock-bottom interest rates and Buffett's disdain for bonds relative to stocks, that's not too much of a surprise. Buffett then says he believes it will take 12 to 15 years for all of his shares to make their way back to the market.
Warren and Charlie won't be alone on stage this year
Finally, Buffett said his customary few words about the Berkshire Hathaway annual meeting that takes place in Omaha this May. While Buffett and Munger usually share the stage by themselves, this year they will be joined by both Greg Abel, who heads BHE, and Jain, the head of insurance operations. Though both have been offered questions from the stage before, this is the first time those two managers will join Buffett and Munger on the main stage.
These two are probably the next leaders of Berkshire once Buffett and Munger are gone, and therefore it probably makes sense to have them answer more questions. Interestingly, younger investing lieutenants Ted Wechsler and Todd Combs, who run part of Berkshire's stock portfolio, won't be joining. Combs was also just made CEO of Berkshire subsidiary GEICO, so his responsibilities are expanding at Berkshire as well.