Warren Buffett’s Berkshire Hathaway Annual Letter: Insights on GDP and P&C

By John Fox, Chief Investment Officer 

I always look forward to reading Warren Buffett’s Berkshire Hathaway Annual Letter. Here at Fenimore Asset Management, the investment advisor to FAM Funds, we have followed Warren for decades. As usual, he focuses on interesting topics in his 2015 Annual Letter. I’d like to highlight a couple: GDP and Property and Casualty (P&C) Insurance.

America’s GDP Growth Potential

  • U.S. newborns are the “luckiest” in history says Warren. American GDP per capita is now about $56,000, an astounding six times the amount it was in 1930, the year in which Warren was born.
  • Today, American citizens are not smarter or harder workers than their 1930 counterparts, but they work much more efficiently producing many more products and services. According to Warren, “This all-powerful trend is certain to continue: America’s economic magic remains alive and well.”
  • Some pundits grouse about our current annual 2% growth in real GDP. However, Warren affirms that doing some straightforward math using this 2% figure demonstrates amazing potential gains for GDP over time.
    • Warren stated, “America’s golden goose of commerce and innovation will continue to lay more and larger eggs. America’s social security promises will be honored and perhaps made more generous. America’s kids will live far better than their parents did.”

P&C Insurance Industry Characteristics

  • Warren is attracted to the P&C Industry due to certain financial attributes, including:
    • P&C companies “receive premiums upfront and pay claims later.” This model provides P&C insurers with large sums of money termed “float” that they will have to pay later. In the interim, insurers get the benefit of investing this float. Typically, an insurer’s float amount is relatively stable compared to premium volume.
    • In addition to the investment income the float can create, insurers have the potential to earn an underwriting profit with their premiums.

Warren also discusses the flip side to this, including the effect of intense industry competition and a protracted period of low interest rates. If you want to glean more insights on this subject, and others such as “Productivity and Prosperity,” you may want to read his letter.

I look forward to attending Berkshire Hathaway’s Annual Meeting at the end of April.

Please see Fenimore disclosure.