Berkshire Hathaway is one of the most remarkable companies in American corporate history. When Warren Buffett, one of the greatest investors who have ever lived, purchased the firm in 1965, it was a waning textile company with a book value of $19 per share. In the nearly four decades since then, Berkshire has become a holding company containing almost 100 subsidiary operating units and joint ventures, a portfolio of billions of dollars of blue chip equities and debt, and one of the highest reputations for ethics and corporate governance.
In 2003, the most recent year of fully available data, Berkshire’s book value was $50,498. This represents a growth rate of 22. 2% compounded annually, almost twice the growth rate of the S;P 500 over the same period. In absolute terms, a single dollar invested in Buffett’s firm in 1965 would be theoretically worth $259,485 after taxes in 2003, compared to $4,743 if invested in the S&P 500 pre-tax with dividends reinvested. What is the source of this tremendous success story?
Fully analyzing all of Berkshire’s businesses is clearly beyond the scope of this paper, but we can begin to get an idea by focusing on the firm’s two main strengths: insurance and investments. Buffett transformed the ailing textile firm into the perfect vehicle for his investing genius. Cash pours into the firm from its primary insurance and reinsurance units’ premiums. Since there is usually a time lag, often measured in years, between the premiums coming in and the claims being paid out, Buffett can use this cash, called “float” in insurance terminology, to buy either undervalued securities or entire businesses.
We will begin by looking at some of Berkshire’s ratios from the consolidated level. Then, we will look at the firm’s insurance subsidiaries and disaggregate their data in order to assess their performance relative to the conglomerates. Finally, we will look at Buffett’s philosophy of value investing, which depends on accounting and financial statement analysis much more than on academic finance theory. Berkshire’s Sales Growth Rate is currently 5. 6%, but its 5 year average Sales Growth Rate is 35. 79%, well above the S;P 500’s corresponding figure of 9. 65%.
The firm employs very little debt, in accordance with Buffett’s conservative investment philosophy, and has a Debt to Equity Ratio of 0. 11. In terms of profitability, Berkshire has an Operating Margin of 12. 65% and a Net Profit Margin of 8. 63%; both of these figures are within 1 percent of their corresponding 5 year averages. Finally, the firm’s ROE is 11. 51% (6. 6% five-year average) and its ROA is 4. 66% (2. 57% five year average).
Insurance Let us now turn to the insurance operations. The firm wholly owns GEICO, which underwrites private passenger car insurance, the Berkshire Hathaway Primary Group, which underwrites property and casualty policies for commercial accounts, and General Re and the Berkshire Hathaway Reinsurance Group, both of which underwrite excess-of-loss and quota-share reinsurance for other insurers and reinsurers.
Unless otherwise noted, we will aggregate data from these four companies in our analysis, treating insurance and reinsurance as a single entity on par with the conglomerate’s manufacturing, finance, wholesale, and retail business operating segments. All dollar figures, except for per-share measures, are in millions.