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1970

Began re-allocating capital away from the textile industry in 1966o Temporarily park the capital in marketable securities pending attractive acquisition targetso Liquidated positions in marketable securities in order to purchase 2 businesseso Any future acquisition will be dependent on access to future financing

Textile operationso Earnings on capital employed remain unsatisfactoryo When theres a lack of demand for products: slow down production to avoid inventory build-up

Insurance operationso Jack Ringwalt (heads the fire and casualty insurance business) maintains the principle of underwriting for

a profito Surety department establishedo Entering workers compensationsubsectoro Established a reinsurance division

Banking operationso 97.7% of The Illinois National Bank and Trust Co. of Rockford, Illinoiso Buffett talks about the banks performance in terms of operating earnings as a percentage of either

deposits or total assets

o It will be hard to achieve greater earnings in 1970 because 1) the bank is already an efficient business and2) unit banking law of Illinois makes more than modest deposit growth difficult for a major downtownbank

Regulation is important in determining a banks future growth trajectory

1972

The managements objective is to improve return on total capitalization (long term debt + equity) and return onequity capital

Textile operationso Struggle with inadequate gross marginso Company has been swimming against a strong industry tide

Insurance operationso Good year for property and casualty insurance industry due to

Reduced auto accident frequency (lowers outflows/payments/costs) Higher effective rates in large volume lines (hire revenue) Absence of major catastrophes (lowers outflows/payments/costs)

o Traditional business is in specialized policy or non-standard insured (more niche, moat, competitiveadvantage)

o Underwriting has turned profitable on an industry wide basis competitors are underwriting more (oftenwith greater exposure) Berkshire will likely see volume decrease in order to maintain profitability

Thoughts: Buffett approaches insurance underwriting in the same way that he approachesinvesting. Be fearful when others are greedy, and be greedy when others are fearful.

Banking operationso Illinois National Bank & Trust Company Earned over 2% after tax on average deposits (an impressive

achievement)

o Mix of deposits has moved away from demand money to much more expensive time money

1973

Strong earnings growth in the context of share buybacks and no addition of equity capital Textile operations

o Although the industry continues to decline, Berkshires relative position within the industry has improved Stronger position in a declining industry

Insurance underwriting

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o 1972 profits have been extraordinarily good, but this short term significant gain may come at the cost ofmedium term profits

o There is a lag between deterioration of underwriting results and tempering of competition (recognition lago Underwriting exposures are greater than ever and rates are still declining; it is not smart to expan volume

during this timeo Understand loss and expense ratios

Insurance investment resultso Large premium volume at a time of record-high interest rates = strong investment income

Banking operationso After-tax earnings of 2.2% on average deposits on a background of

A mix of 50% time deposits Strong liquid position and avoidance of money-market borrowings

1974

Textile operationso Due to significant increase in raw material prices, the company has adopted the LIFO method of

inventory pricing More nearly matches current costs against current revenues (and thus more conservative) Minimizes inventory profits included in reported earnings

Blue Chip Stampso Similar to Berkshires experience with reallocation of capital. The stamp t rading business was declining

and yielded poor return on capital employed. Blue Chip Stamps acquired Wesco and Sees in order to

boost returns

1975

Insurance underwritingo Due to unusual profitability in insurance underwriting, many new entrants and established companies

have been guilty of significant under-reserving of losses Produces faulty information as to the true cost of the insurance products sold

o Cost of the policy (auto repair, medical payments, compensation benefits etc.) increases at around 1% permonth

If rates dont keep up, then you are underwriting at a losso Pulled out of operations in Florida because the management doesnt have the underwriting information

and pricing knowledge necessary to operate in that geography

Insurance investment resultso Having liquidity for an insurance company is good. It prevents you from having to write business at any

price in order to maintain cash flowo On a 15-year bond, an increase of 10 basis points translates to about a 1% downward change in market

value

Banking operationso Tax loss of insurance operations used to offset the tax liability created by banking operations

1976