While it's important to see what Buffett has to say about who his possible successor may be, how the next 50 years of Berkshire could look, and what he thinks about the economy and investments in general, it's also critical to remember that Berkshire Hathaway is Buffett's business (or really, businesses), and a glance at its operating results reveals three important things that investors in Berkshire Hathaway need to be aware of.
Crossing $80 billion
It's no secret that the insurance business has been the key engine driving Berkshire's success through the years. Buffett has used the insurance float -- the money taken in through premiums that the insurer holds before ultimately being paid out in claims -- to make many of the incredible investments that have turned Berkshire Hathaway into the behemoth it is today.
He notes that insurance is "Berkshire's core operation," and National Indemnity, the first insurer Buffett acquired, was purchased for $8.6 million back in 1967 and now has a net worth of an incredible $111 billion, "which exceeds that of any other insurer in the world."
But one of the most fascinating things about the insurance business at Berkshire is that its expansion has shown no sign of slowing down anytime soon.
Consider for a moment how much its float has grown since 1970:
While Buffett noted in this year's letter that "[f]urther gains in float will be tough to achieve," he said the identical thing in the 2013 letter to shareholders. Yet in 2014 its float grew by nearly $7 billion -- a gain of more than 8.5%, so take that statement with a hefty grain of salt.
And as a last note regarding the insurance businesses at Berkshire, we also learned for the 12th consecutive year that Berkshire recorded an underwriting profit, hitting roughly $2.7 billion in 2014 and nearly $24 billion in total over the last dozen years.
To provide a little context as to how remarkable this is, consider Buffett's words from his 2010 Letter to Shareholders:
State Farm, by far the country's largest insurer and a well-managed company, has incurred an underwriting loss in seven of the last 10 years. During that period, its aggregate underwriting loss was more than $20 billion.
All of this is to say, when you consider that Buffett says insurance "has been the engine that has propelled our expansion since 1967," it doesn't appear that engine will slow down anytime soon.
The Powerhouse powers on
It's also important to recognize that Berkshire Hathaway isn't only an insurance company. It's a collection of companies across a litany of different industries, including:
- Burlington Northern Santa Fe, which "operates one of the largest railroad systems in North America."
- Berkshire Hathaway Energy Company ("BHE") designated as "an international energy holding company."
- The Marmon Group, "an international association of approximately 185 manufacturing and service businesses."
- The Lubrizol Corporation, "a specialty chemical company that produces and supplies chemical products for transportation, industrial, and consumer markets."
- IMC International Metalworking Companies, "an industry leader in the metal cutting tools business."
And while there are more than 70 other non-insurance businesses under the Berkshire umbrella, Buffett affectionately refers to these as the "Powerhouse Five."
What investors see with these five is that collectively their pre-tax earnings increased to $12.4 billion in 2014, a 15% gain over 2013 levels. Buffett himself notes just how remarkable this is when you consider that only Berkshire Hathaway Energy was owned by Berkshire 10 years ago, and it earned just $393 million at the time.
While a railroad, an energy company, a collection of manufacturing and servicing business, a chemicals firm, and a company in "the metal cutting tools business" won't raise many eyebrows, what they will raise are profits, to the delight of Buffett and Berkshire shareholders alike.
The truly incredible investment
The final thing investors may have missed is actually the first thing in the letter: the table disclosing the performance of Berkshire Hathaway relative to the S&P 500. It has often been one of the most cited references, revealing just how incredibly Berkshire has performed over its lifetime.
So what's most noteworthy about this year's table? For the first time we're also shown not just the book value growth of Berkshire, but also its market value growth. In other words, we can see the growth of both its paper value and what the market has said its value is.
So what has that seemingly inconsequential difference of 2.2% between book value growth and market value growth meant over the past 50 years? When comparing a hypothetical $100 investment, words simply don't do it justice:
No one knows what the next 50 years will look like for Berkshire -- or anything else for that matter -- but we can all agree the past 50 have been truly remarkable.