To the Shareholders of Berkshire Hathaway Inc.,
Berkshire’s net worth during 2007 grew by $12.3 billion, and that increased the per - share book value of both our Class A and Class B stock by 11.19% to $78,008, a rate of 21.1% compounded annually.
Our insurance operations generated substantial underwriting profits for the fifth consecutive year, producing $3.2 billion pre-tax. This result is far better than our expectations of breakeven results. The excellent underwriting performance was led by GEICO, whose policies-in-force rose by more than one million during the year.
Non-insurance Businesses
We have about 76 non-insurance businesses now. Most of them turned in great performances in 2007. Among the standouts were Shaw Carpet, Acme Brick, MiTek, and Forest River. However, several businesses linked to residential construction experienced disappointing results due to the weakening housing market.
Investments
Our investments in stocks are valued at 68.1 billion at yearend, up from 59.3 billion at the beginning of the year. This gain includes dividends received but does not include the impact of our acquisitions of Marmon and Iscar.
Acquisitions
We made significant acquisitions in 2007, most notably Marmon Group and Iscar. Both purchases involved outstanding businesses managed by first-class people. We expect these acquisitions to add substantially to Berkshire's earnings in future years.
Philosophy
Charlie and I believe in operating with plenty of spare capacity and eschew any activity or commitment that could threaten our well-being. That means we will forego many opportunities that others might embrace. Corporate America, we regret to say, has often been seduced by wide-eyed promoters bearing grand plans – the kind of promoters who occupy much of the space in this letter.
Manufacturing, Service and Retailing Businesses
Now let’s take a look at “manufacturing, service and retailing businesses,” which covers a waterfront of activities. It includes everything from selling lollipops to manufacturing travel trailers. Last year, they earned an average return on tangible net worth of 23%, a very satisfactory figure achieved with minimal financial leverage. Clearly, we own some terrific businesses. But it should be noted that when we purchased these companies, we paid premiums that were quite substantial versus their net worths, and this premium is reflected in the goodwill item on our balance sheet. In fact, it narrows the average return on carrying value (which includes goodwill) to 9.8%.
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Investment Philosophy
When investing in securities, Charlie and I seek businesses that possess excellent economics, able and honest management, and a reasonable price tag. We prefer buying entire companies or large portions of them. If outright ownership is unattainable, we’re content to buy small pieces of great businesses in the stock market. It’s like owning a portion of the Hope Diamond rather than all of a rhinestone.
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Conclusion
We had a good year at Berkshire despite problems in certain areas. Our insurance operations did wonderfully, and we made two important acquisitions. We remain optimistic about the future, even as we recognize that challenges lie ahead.
