It is a pleasure to report that operating earnings in 1971,excluding capital gains, amounted to more than 14% of beginningshareholders' equity.This result--considerably above the average ofAmerican industry--was achieved in the face of inadequate earningsin our textile operation,making clear the benefits of redeploymentof capital inaugurated five years ago.It will continue to be theobjective of management to improve return on total capitalization(long term debt plus equity), as well as the return on equitycapital. However, it should be realized that merely maintaining thepresent relatively high rate of return may well prove moredifficult than was improvement from the very low levels of returnwhich prevailed through out most of the 1960's.
Textile Operations
We, in common with most of the textile industry, continued tostruggle throughout 1971 with inadequate gross margins.Strongefforts to hammer down costs and a continuous search for lessprice-sensitive fabrics produced only marginal profits.
However,without these efforts we would have operated substantiallyin the red.Employment was more stable throughout the year as ourprogram to improve control of inventories achieved reasonablesuccess.
As mentioned last year,Ken Chace and his management group havebeenswimming against a strong industry tide. This negativeenvironment has only caused them to intensify theirefforts.Currently we are witnessing a mild industry pick up whichwe intend to maximize with our greatly strengthened sales force.With the improvement now seen in volume and mix of business, wewould expect better profitability--although not of a dramaticnature--from our textile operation in 1972.
Insurance Operations
An unusual combination of factors--reduced auto accident frequency,sharply higher effective rates in large volume lines, and theabsenceof major catastrophes--producedan extraordinarily good yearfor the property and casualty insurance industry.We shared in thesebenefits,although they are not without their negative connotations.Our traditional business--and still our largest segment--is in thespecialized policy or non- standard insured.When standard marketsbecome tight because of unprofitable industry underwriting,weexperience substantial volume increases as producers look tous.This was the condition several years ago,and largely accountsfor the surge of direct volume experienced in 1970 and1971.
Now that underwriting has turned very profitable on anindustry-wide basis,more companies are seeking the insureds theywere rejecting a short while back and rates are being cut in someareas.
We continue to have underwriting profitability as our primary goaland this may well mean a substantial decrease in NationalIndemnity's direct volume during 1972.Jack Ringwalt and PhilLiesche continue to guide this operation in a manner matched byvery few in the business.Our reinsurance business,which has beendeveloped to a substantial operation in just two years by the outstanding efforts of GeorgeYoung,faces much the same situation.Weentered the reinsurance business late in 1969 at a time when rateshad risen substantially and capacity
We inaugurated our "home-state" insurance operation in 1970 by theformation of Cornhusker Casualty Company. To date, this has workedwell from both a marketing and an underwriting standpoint.We havethe refore further developed this approach by the formation ofLakeland Fire & Casualty Company in Minnesotaduring 1971, and Texas United Insurancein 1972. Each of thesecompanies will devote its entire efforts to a single state seekingto bring the agents and insureds of its area a combination of largecompany capability and small company accessibility and sensitivity.John Ringwalt has been in overall charge of this operation sinceinception.Combining hard work with imagination and intelligence,hehas transformed an idea into a well organized business.The"home-state" companies are still very small,accounting for a littleover $1.5 million in premium volume during 1971. It looks as thoughthis volume will more than double in 1972 and we will develop amore creditable base upon which to evaluate underwritingperformance.
A highlight of 1971 was the acquisition of Home &Automobile Insurance Company,located in Chicago.This company wasbuilt by Victor Raab from a small initial investment into a majorauto insurer in Cook County,writing about $7.5 million in premiumvolume during 1971.Vic is cut from the same cloth as Jack Ringwaltand GeneAbegg, with a talent for operating profitably accompaniedby enthusiasm for his business.These three men have built theircompanies from scratch and, after selling their ownership positionfor cash, retain every bit of the proprietary interest and pridethat they have always had.
While Vic has multiplied the original equity of Home& Auto many times since its founding,his ideas andtalents have always been circumscribed by his capital base.We haveadded capital funds to the company, which will enable it toestablish branch operations extending its highly-concentrated andon-the-spot marketing and claims approach to other denselypopulated areas.
All in all, it is questionable whether volume added by Home& Auto, plus the "home-state" business in 1972,will offset possible declines in direct and reinsurance business ofNational Indemnity Company.However,our large volume gains in 1970and 1971 brought in additional funds for investment at a time ofhigh interest rates,which will be of continuing benefit in futureyears. Thus, despite the unimpressive prospects regarding premiumvolume, the outlook for investment income and overall earnings frominsurance in 1972 is reasonably good.
Banking Operations
Our banking subsidiary, The Illinois National Bank& Trust Company, continued to lead its industry asmeasuredby earnings asapercentage of deposits. In 1971, IllinoisNational earned well over 2% after tax on average deposits while(1) not using borrowed funds except for very occasional reservebalancing transactions;(2)maintaining a liquidity position farabove average;(3)recording loan losses far belowaverage;and(4)utilizing a mix of over 50% time deposits with allconsumer savings accounts receiving maximum permitted interestrates through out the year.This reflects a superb management job byGene Abegg and Bob Kline.
Interest rates received on loans and investments were downsubstantially throughout the banking industry during 1971. In thelast few years, Illinois National's mix of deposits has movedconsiderably more than the industry average away from demand moneyto much more expensive time money.For example,interest paid ondeposits has gone from under $1.7 million in 1969 to over $2.7million in 1971.Nevertheless,the unusual profitability of the Bankhas been maintained.
Marketing efforts were intensified during the year,with excellentresults.
With interest rates even lower now than in 1971, the bankingindustry is going to have trouble achieving gains in earningsduring 1972.Our deposit gains at Illinois National continue to comein the time money area,which produces only very marginalincremental income at present.It will take very close cost controlto enable Illinois National to maintain its 1971 level of earningsduring 1972.
Financial
Because of the volume gains being experienced by our insurancesubsidiaries early in 1971,we re-cast Berkshire Hathaway's bankloan so as to provide those companies with additional capitalfunds.This financing turnedoutto beparticularly propitious whentheopportunity to purchase Home & Auto occurred laterin the year. Our insurance and banking subsidiaries possess afiduciary relationship with the public.We retain a fundamentalbelief in operating from a very strongly financed position so as tobe in a position to unquestionably fulfill ourresponsibilities.Thus, we will continue to map our financial futurefor maximum financial strength in our subsidiaries as well as atthe parent company level.
Warren E. Buffett
Chairman of the Board
March 13,1972
联系客服
