1974 Letter

To the Stockholders of Berkshire Hathaway Inc.:

Operating results for 1974 overall were unsatisfactory due to the poor performance of our insurance business. In last year’s annual report some decline in profitability was predicted but the extent of this decline, which accelerated during the year, was a surprise. Operating earnings for 1974 were \$8,383,576, or \$8.56 per share, for a return on beginning shareholders’ equity of 10.3%. This is the lowest return on equity realized since 1970. Our textile division and our bank both performed very well, turning in improved results against the already good figures of 1973. However, insurance underwriting, which has been mentioned in the last several annual reports as running at levels of unsustainable profitability, turned dramatically worse as the year progressed.

The outlook for 1975 is not encouraging. We undoubtedly will have sharply negative comparisons in our textile operation and probably a moderate decline in banking earnings. Insurance underwriting is a large question mark at this time—it certainly won’t be a satisfactory year in this area, and could be an extremely poor one. Prospects are reasonably good for an improvement in both insurance investment income and our equity in earnings of Blue Chip Stamps. During this period we plan to continue to build financial strength and liquidity, preparing for the time when insurance rates become adequate and we can once again aggressively pursue opportunities for growth in this area.

Textile Operations

During the first nine months of 1974 textile demand was exceptionally strong, resulting in very firm prices. However, in the fourth quarter significant weaknesses began to appear, which have continued into 1975.

We currently are operating at about one‐third of capacity. Obviously, at such levels operating losses must result. As shipments have fallen, we continuously have adjusted our level of operations downward so as to avoid building inventory.

Our products are largely in the curtain goods area. During a period of consumer uncertainty, curtains may well be high on the list of deferrable purchases. Very low levels of housing starts also serve to dampen demand. In addition, retailers have been pressing to cut inventories generally, and we probably are feeling some effect from these efforts. These negative trends should reverse in due course, and we are attempting to minimize losses until that time comes.

Insurance Underwriting

In the last few years we consistently have commented on the unusual profitability in insurance underwriting. This seemed certain eventually to attract unintelligent competition with consequent inadequate rates. It also has been apparent that many insurance organizations, major as well as minor, have been guilty of significant underreserving of losses, which inevitably produces faulty information as to the true cost of the product being sold. In 1974, these factors, along with a high rate of inflation, combined to produce a rapid erosion in underwriting results. The costs of the product we deliver (auto repair, medical payments, compensation benefits, etc.) are increasing at a rate we estimate to be in the area of 1% per month. Of course, this increase doesn’t proceed in an even flow but, inexorably, inflation grinds very heavily at the repair services—to humans and to property—that we provide. However, rates virtually have been unchanged in the property and casualty field for the last few years. With costs moving forward rapidly and prices remaining unchanged, it was not hard to predict what would happen to profit margins.

Best’s, the authoritative voice of the insurance industry, estimates that in 1974 all auto insurance premiums in the United States increased only about 2%. Such a growth in the pool of dollars available to pay insured losses and expenses was woefully inadequate. Obviously, medical costs applicable to people injured during the year, jury awards for pain and suffering, and body shop charges for repairing damaged cars increased at a dramatically greater rate during the year. Since premiums represent the sales dollar and the latter items represent the cost of goods sold, profit margins turned sharply negative.

As this report is being written, such deterioration continues. Loss reserves for many giant companies still appear to be understated by significant amounts, which means that these competitors continue to underestimate their true costs. Not only must rates be increased sufficiently to match the month‐by‐month increase in cost levels, but the existed expenserevenue gap must be overcome. At this time it appears that insurors must experience even more devastating underwriting results before they take appropriate pricing action.

All major areas of insurance operations, except for the “home state” companies, experienced significantly poorer results for the year.

The direct business of National Indemnity Company, our largest area of insurance activity, produced an underwriting loss of approximately 4% after several years of high profitability. Volume increased somewhat, but we are not encouraging such increases until rates are more adequate. At some point in the cycle, after major insurance companies have had their fill of red ink, history indicates that we will experience an inflow of business at compensatory rates. This operation, headed by Phil Liesche, a most able underwriter, is staffed by highly profit‐oriented people and we believe it will provide excellent earnings in most future years, as it has in the past.

Intense competition in the reinsurance business has produced major losses for practically every company operating in the area. We have been no exception. Our underwriting loss was something over 12%—a horrendous figure, but probably little different from the average of the industry. What is even more frightening is that, while about the usual number of insurance catastrophes occurred during 1974, there really was no “super disaster” which might have accounted for the poor figures of the industry. Rather, a condition of inadequate rates prevails, particularly in the casualty area where we have significant exposure. Our reinsurance department is run by George Young, an exceptionally competent and hardworking manager. He has cancelled a great many contracts where prices are totally inadequate, and is making no attempt to increase volume except in areas where premiums are commensurate with risk. Based upon present rate levels, it seems highly unlikely that the reinsurance industry generally, or we, specifically, will have a profitable year in 1975.

Our “home state” companies, under the leadership of John Ringwalt, made good progress in 1974. We appear to be developing a sound agency group, capable of producing business with acceptable loss ratios. Our expense ratios still are much too high, but will come down as the operation develops into units of economic size. The Texas problem which was commented upon in last year’s report seems to be improving. We consider the “home state” operation one of our most promising areas for the future.

Our efforts to expand Home and Automobile Insurance Company into Florida proved disastrous. The underwriting loss from operations in that market will come to over \$2 million, a very large portion of which was realized in 1974. We made the decision to drop out of the Florida market in the middle of 1974, but losses in substantial amounts have continued since that time because of the term nature of insurance contracts, as well as adverse development of outstanding claims. We can’t blame external insurance industry conditions for this mistake. In retrospect, it is apparent that our management simply did not have the underwriting information and the pricing knowledge necessary to be operating in the area. In Cook County, where Home and Auto’s volume traditionally has been concentrated, evidence also became quite clear during 1974 that rates were inadequate. Therefore, rates were increased during the middle of the year but competition did not follow; consequently, our volume has dropped significantly in this area as competitors take business from us at prices that we regard as totally unrealistic.

While the tone of this section is pessimistic as to 1974 and 1975, we consider the insurance business to be inherently attractive. Our overall return on capital employed in this area—even including the poor results of 1974—remains high. We have made every effort to be realistic in the calculation of loss and administrative expense. Because of accruals, this had a double effect at both the bank and corporate level in 1974.

Under present money market conditions, we expect bank earnings to be down somewhat in 1975 although we believe they still are likely to compare favorably with those of practically any banking institution in the country.

Blue Chip Stamps

During 1974 we increased our holdings of Blue Chip Stamps to approximately 25.5% of the outstanding shares of that company. Overall, we are quite happy about the results of Blue Chip and its prospects for the future. Stamp sales continue at a greatly reduced level, but the Blue Chip management has done an excellent job of adjusting operating costs. The See’s Candy Shops, Inc. subsidiary had an outstanding year, and has excellent prospects for the future.

Your Chairman is on the Board of Directors of Blue Chip Stamps, as well as Wesco Financial Corporation, a 64% owned subsidiary, and is Chairman of the Board of See’s Candy Shops, Inc. We expect Blue Chip Stamps to be a source of continued substantial earning power for Berkshire Hathaway Inc.

The annual report of Blue Chip Stamps, which will contain financial statements for the year ended March 1, 1975 audited by Price, Waterhouse and Company, will be available in May. Any shareholder of Berkshire Hathaway Inc. who desires an annual report of Blue Chip Stamps may obtain it at any time by writing Mr. Robert H. Bird, Secretary, Blue Chip Stamps, 5801 South Eastern Avenue, Los Angeles, California 90040.

Merger with Diversified Retailing Company, Inc.

As you previously have been informed, the proposed merger with Diversified Retailing Company, Inc. was terminated by the respective Boards of Directors on January 28, 1975. We continue to view such a merger as eventually desirable, and hope to reopen the subject at some future time.

Warren E. Buffett Chairman of the Board March 31, 1975

1974年致股东信

致伯克希尔·哈撒韦公司的股东：

1974年的整体经营业绩令人不满，原因是我们的保险业务表现糟糕。在去年的年报中，我们曾预测盈利能力会有所下降，但下降的幅度——而且在这一年中还在加速——却出乎意料。1974年的营业利润为8,383,576美元，每股8.56美元，按期初股东权益计算的回报率为10.3%。这是自1970年以来实现的最低净资产收益率。我们的纺织部门和银行都表现得非常出色，在1973年已经很好的基础上进一步改善。然而，保险承销业务——过去几年的年报中一直提到其盈利能力不可持续——在年内急剧恶化。

1975年的前景并不乐观。我们的纺织业务无疑将出现大幅下滑的比较，而银行业盈利可能温和下降。保险承销目前是一个巨大的问号——这一领域肯定不会有好年景，甚至可能极为糟糕。保险投资收益和我们按权益法享有的蓝筹印花公司（Blue Chip Stamps）盈利改善的前景相当不错。在此期间，我们计划继续增强财务实力和流动性，为保险费率恢复到合理水平、我们能够再次积极抓住这一领域增长机会的那一天做准备。

纺织业务

1974年的前九个月，纺织需求异常强劲，价格非常坚挺。然而，在第四季度，明显的疲软开始出现，并持续到1975年。

我们目前的产能利用率约为三分之一。显然，在这样的水平下必然会出现经营亏损。随着出货量下降，我们不断下调运营水平，以避免积累库存。

我们的产品主要集中在窗帘布领域。在消费者信心不确定的时期，窗帘很可能被列为可推迟购买的前列。极低的房屋开工率也抑制了需求。此外，零售商普遍在努力削减库存，我们可能也感受到了这些努力的一些影响。这些负面趋势应该会在适当时候逆转，我们正努力在那之前将损失降到最低。

保险承销

过去几年，我们一直评论保险承销业务异常高的盈利能力。这似乎必然会最终吸引来不明智的竞争，导致费率不足。另外，很明显，许多保险公司，无论大小，都存在严重的损失准备金不足的问题，这不可避免地导致对出售产品真实成本的错误信息。1974年，这些因素加上高通胀率，共同导致了承销结果的迅速恶化。我们交付产品的成本（汽车修理、医疗支付、工伤赔偿等）正以我们估计每月约1%的速度增长。当然，这种增长并非均匀推进，但通货膨胀无情地严重侵蚀着我们提供的修理服务——无论是人员还是财产。然而，过去几年财产和意外伤害领域的费率几乎没有变化。成本快速上升而价格保持不变，利润率的走向不难预测。

保险业的权威声音Best's估计，1974年美国所有汽车保险的保费仅增长了约2%。可用于支付保险损失和费用的资金池的增长，少得可怜。显然，当年受伤人员的医疗费用、陪审团对痛苦和折磨的裁决、以及修理受损汽车的钣金车间收费，都以远高于此的速度增长。由于保费代表销售收入，而后者代表销售成本，利润率急剧转为负数。

在撰写本报告时，这种恶化仍在继续。许多大型公司的损失准备金似乎仍然被大幅低估，这意味着这些竞争对手继续低估其真实成本。不仅必须将费率提高到足以匹配每月成本水平上涨的程度，还必须克服现有的费用-收入差距。目前看来，保险公司可能必须经历更惨重的承销结果，才会采取适当的定价行动。

所有主要的保险业务领域，除了"本州"公司，都出现了显著恶化的业绩。

国民赔偿公司（National Indemnity Company）的直接业务——我们最大的保险活动领域——在经历了数年的高盈利后，产生了约4%的承销损失。业务量略有增长，但在费率更加充足之前，我们不鼓励此类增长。历史表明，在主要保险公司受够了亏损之后，周期中的某个时点，我们将迎来以补偿性费率流入的业务。该业务由菲尔·利舍（Phil Liesche）领导，他是一位非常能干的核保人，手下都是高度注重利润的人员，我们相信它将像过去一样，在未来大多数年份产生出色的收益。

再保险业务的激烈竞争给几乎所有在这一领域经营的公司都带来了重大损失。我们也不例外。我们的承销损失超过了12%——一个可怕的数据，但可能与该行业的平均水平相差无几。更令人担心的是，尽管1974年发生的保险巨灾数量与往年相当，但实际上并没有出现可能解释行业糟糕数字的"超级灾难"。相反，普遍存在的是费率不足的状况，特别是在我们面临重大风险的意外伤害领域。我们的再保险部门由乔治·杨（George Young）管理，他是一位异常能干且勤奋的经理。他已经取消了许多价格完全不合理的合同，并且除了在保费与风险相称的领域外，并不试图增加业务量。基于目前的费率水平，再保险行业整体或我们本公司在1975年似乎都不太可能盈利。

我们的"本州"公司，在约翰·林沃尔特（John Ringwalt）的领导下，1974年取得了良好进展。我们似乎正在建立一个稳固的代理团队，能够产生可接受损失率的业务。我们的费用率仍然太高，但随着业务发展到经济规模单位，费用率将会下降。去年年报中提到的德克萨斯州问题似乎正在改善。我们认为"本州"业务是未来最有前途的领域之一。

我们将家庭与汽车保险公司（Home and Automobile Insurance Company）扩展到佛罗里达州的努力被证明是灾难性的。在该市场的运营承销损失将超过200万美元，其中很大一部分发生在1974年。我们在1974年年中决定退出佛罗里达市场，但由于保险合同的期限性质以及未决赔案的不利发展，此后仍继续出现大量损失。我们不能将这一错误归咎于外部保险行业状况。事后看来，很明显，我们的管理层根本没有在这一地区运营所必需的承保信息和定价知识。在库克县——家庭与汽车的传统业务集中地——1974年也明显出现费率不足的证据。因此，我们在年中提高了费率，但竞争对手没有跟进；结果，我们在这一地区的业务量大幅下降，因为竞争对手以我们认为完全不现实的价格从我们手中抢走了业务。

尽管本节对1974年和1975年的语气是悲观的，但我们认为保险业务本身具有吸引力。我们在这一领域使用的整体资本回报率——即使算上1974年的糟糕结果——仍然很高。我们已尽一切努力在损失和行政费用的计算中保持现实。

银行

我们的子公司，位于罗克福德的伊利诺伊国民银行信托公司（Illinois National Bank and Trust Company），继续取得优异成绩。该银行的盈利能力——按平均资产回报率衡量——在我们所了解的大型美国银行中仍属最佳之列。1974年，该银行的平均贷款约为7000万美元，平均资产约为1亿美元，平均存款约为8500万美元。净利润约为200万美元，净资产收益率超过19%。约有47%的资产以美国国债和市政债券的形式持有——这个比例与大型银行相比极高。由于应计项目，这在1974年对银行和公司层面都产生了双重影响。

在当前货币市场条件下，我们预计1975年银行盈利将略有下降，尽管我们相信它们仍可能与国内几乎所有银行机构的业绩相媲美。

蓝筹印花公司

1974年，我们将蓝筹印花公司（Blue Chip Stamps）的持股比例增加到该公司流通股的约25.5%。总体而言，我们对蓝筹印花公司的业绩及其未来前景非常满意。印花销售额继续大幅下降，但蓝筹印花管理层在调整运营成本方面做得非常出色。其子公司喜诗糖果公司（See's Candy Shops, Inc.）度过了出色的一年，未来前景极佳。

您的董事会主席是蓝筹印花公司以及韦斯科金融公司（Wesco Financial Corporation，持股64%的子公司）的董事会成员，也是喜诗糖果公司的董事会主席。我们预计蓝筹印花公司将成为伯克希尔·哈撒韦公司持续可观盈利能力的来源。

蓝筹印花公司的年度报告将包含截至1975年3月1日的经普华永道会计师事务所（Price, Waterhouse and Company）审计的财务报表，将于5月发布。任何希望获得蓝筹印花公司年度报告的伯克希尔·哈撒韦公司股东，可随时致函：蓝筹印花公司秘书罗伯特·H·伯德（Robert H. Bird），地址：5801 South Eastern Avenue, Los Angeles, California 90040。

与多元零售公司（Diversified Retailing Company, Inc.）的合并

正如先前告知各位的那样，与多元零售公司的拟议合并已于1975年1月28日由各自董事会终止。我们仍认为此类合并最终是可取的，并希望在未来的某个时候重新讨论这一议题。

沃伦·E·巴菲特
董事会主席
1975年3月31日