Chapter 6 Part 5: 2004 and Decade Review
The Complete Financial History of Berkshire Hathaway by Adam J. Mead (ISBN 978-0-85719-912-6)
2004 is the year Berkshire’s operating businesses scream success and Buffett still apologizes for sitting on $43 billion in cash. That tension defines the late Buffett era. Mead uses 2004 to teach insurance culture in detail, then zooms out for a full decade reckoning of 1995-2004.
2004: great businesses, nowhere to put the money
Per-share book value rose 10.5%, 0.4 points behind the S&P. Operating subsidiaries were “hitting it out of the park.” The cash pile had no profitable outlet. Buffett blamed himself, not the businesses.
Insurance: portrait of a disciplined underwriter
Buffett’s letter included National Indemnity’s metrics from 1980-2004. Premiums peaked at $366 million in 1986, fell for thirteen straight years to $54.5 million in 1999, then rocketed to $606 million in 2004. Every down year still produced underwriting profit (except 2001 later).
Three pillars Mead emphasizes:
- Culture: profitability over volume, no layoffs tied to premium chasing
- Incentives: pay for underwriting profit, not growth
- Capital strength: sell reinsurance to sophisticated buyers who care if you can pay decades out
All four major insurance segments profited in 2004. $1.55 billion underwriting gain on $21 billion premiums. Float: $46.1 billion, negative cost.
GEICO: ~$1 billion underwriting profit, 89.1% combined ratio, entered New Jersey successfully.
Gen Re: second year of profit ($3 million) after shrinking volume 14%. Walking away from bad pricing.
BHRG: $417 million profit. Hurricane losses of $790 million in cat line still left $385 million profit there.
Non-insurance: housing boom tailwind
Manufacturing, service, and retailing earned $1.5 billion pre-tax on $44 billion revenue. Return on tangible equity: 21.7%.
Shaw, building products, apparel (Fruit of the Loom leading), jewelry and furniture retailers all benefited from strong US economy and housing. RC Willey’s Las Vegas expansion worked despite Buffett’s skepticism. NetJets grew fast but Europe bled money.
MidAmerican stumbled on a zinc recovery project: $579 million pre-tax loss. Buffett’s lesson: chained low-probability steps compound into near-certain failure. Stick to one-foot bars, not seven-foot bars.
Clayton Homes synergy with Berkshire financing grew to $7.35 billion in loans by early 2005. Buffett used the word synergy carefully here. It fits.
Gen Re derivatives book kept winding down. Buffett repeated: weapons of mass destruction.
Foreign currency and the cash problem
Berkshire held $21.4 billion in foreign exchange contracts across eight currencies, a macro bet on dollar weakness tied to trade deficits. Unusual for Buffett, sized as conviction not core strategy.
At the 2005 meeting he predicted a “screamingly intelligent” opportunity would appear within years. He was right.
Decade review: 1995-2004
Equity grew from $11.9 billion to $85.9 billion. A 623% increase in net worth. Per-share book value compounded at 24.1% annually (24.0% underlying, minimal share issuance).
Sources of equity change shifted:
| Source | 1985-94 | 1995-04 |
|---|---|---|
| Net income from operations | 27% | 26% |
| Realized gains | 13% | 19% |
| Unrealized gains | 55% | 20% |
| Mergers/divestitures | 4% | 34% |
Acquisitions dominated this decade. General Re ($22 billion stock) and finishing GEICO were cornerstones. Float averaged over $45 billion by decade end.
Internet mania? Berkshire on the sidelines. Textiles gone. Insurance plus wholly owned businesses defined the model.
Buffett’s formula from 1995 still holds: profitability = what assets earn + what liabilities cost + leverage. Negative-cost float is the cheat code.
Lessons Mead draws
- Discipline beats volume in insurance every cycle
- Conglomerate structure lets great small businesses send cash to Omaha for redeployment
- Size eventually slows returns, but culture and capital matter more in crises
- Even perfect operations cannot force attractive deployment when markets are expensive
Closing thought
The 1995-2004 chapter is the bridge to modern Berkshire. You get Gen Re’s hangover, GEICO’s glory, MidAmerican’s utilities platform, and the cash hoard that sets up 2005-2010’s elephant hunting. Mead’s decade tables make the shareholder equity story visible in a way annual letters scatter across years.
Previous: Chapter 6 Part 4: Berkshire 2002-2003