The highly anticipated annual Letter to Shareholders was published by Berkshire Hathaway this past weekend. This year’s letter was particularly alluring, as it may be one of the final letters penned by Warren Buffett, before Greg Abel steps into the role of CEO and takes on the responsibility of reporting to shareholders. But even more noteworthy, at least for this readership, may be the emphasis that Buffett places on the invaluable nature of Berkshire’s insurance business. Below are a few key takeaways that highlight this fact:

#1: It Only Takes One Winning Decision

Buffett opens his letter by acknowledging mistakes that he has made, both in “assessing the future economics” of certain businesses and in judging "the abilities or fidelity of managers” during hiring decisions. But rather than focusing on these missteps, he emphasizes that one big, successful decision can make all the difference in the trajectory of a company. Buffet points to several business wins for Berkshire, most notable of which include the acquisition of GEICO in 1996 and the selection of Ajit Jain for Vice Chairman of Insurance Operations. Both decisions have undoubtedly attributed to Berkshire’s financial fortitude and status as a titan in the insurance industry.

#2: A “Better Than Expected” Performance

Although Berkshire experienced a decline in 53% of their operating businesses’ reported earnings, Buffett notes that the company’s performance was better than he could have expected for the 2024 fiscal year, in large part due to the improvement of Treasury Bill yields and the success of Berkshire’s insurance business. The total operating earnings for 2024 were $47.4 billion, of which the combined insurance underwriting and investment income comprised nearly half, at $22.7 billion.

Despite Berkshire’s current cash position, Buffett continues to make clear that the company is unwavering in its commitment to investing in equities and businesses. He notes that Berkshire will continue to maintain holdings in staples of the American economy, as well as grow its investments in Japan by deepening ownership in several companies.

#3: Float is Foundational to Berkshire’s Business

One of the most important parts of Buffett’s letter focuses on Berkshire’s Property and Casualty (P/C) insurance business. He dives into the “money-up-front, loss-payments-later" model, which is a rarity in the financial world but crucial to the company’s operations. One of the greatest advantages to this model is that it grants Berkshire the ability to invest float without worrying about paying future claims for years, or even decades to come. With careful and efficient underwriting practices resulting in a profit for the company, Buffett asserts that the float can be effectively “costless.”

Yet, the model also comes with significant risks, particularly that the costs of liabilities can exceed the premiums received and thus result in tremendous underwriting losses. Such losses may not be realized by the company for years, or even decades. An example of this risk, of which KCIC is particularly knowledgeable, is asbestos exposure. Buffett acknowledges that Berkshire continues to make “substantial payments” due to the company’s asbestos liabilities that were assumed over 50 years ago. Other materials, such as talc and PFAS chemicals, could lead to similar challenges and costs for P/C insurers in the future.

To mitigate the disadvantages associated with this business model, Buffett stresses that the company must be active in objecting to “runaway verdicts” and “fraudulent behavior,” which can result in lengthy and costly legal battles. With the rise of nuclear verdicts, which are jury awarded values exceeding $10 million, Buffett’s worries ring true. A defendant held liable for a nuclear verdict, along with their insurer, faces not only the immediate financial costs but also the risk of becoming a target for future litigation. To learn more about nuclear verdicts and their impact on defendants, check out Trevor Cornell’s article Nuclear Verdicts and Social Inflation.

Despite these challenges, Buffett remains optimistic about Berkshire’s dependance on the insurance model and notes that risk fuels business: “P/C insurance growth is dependent on increased economic risk. No risk – no need for insurance.”

Buffett’s admiration for Berkshire's P/C insurance operations and focus on its perpetual growth permeates his letter. As Berkshire Hathaway transitions to a new era under Greg Abel’s leadership, the P/C insurance business will undoubtedly remain a crucial driver of the company's long-term success.