Chapter 7 Part 1: Berkshire 2005-2007
The Complete Financial History of Berkshire Hathaway by Adam J. Mead (ISBN 978-0-85719-912-6)
Chapter 7 covers 2005-2014, Berkshire’s fifth decade under Buffett. These first three years are the calm before the storm. Housing still booms. Insurance prints money. Then hurricanes, Iscar, and the first overseas elephant arrive. Mead tracks both the numbers and the warning signs Buffett dropped at annual meetings.
2005: hurricanes and the two-column shift
Book value rose 6.4%, beating the S&P by 1.5 points. Not spectacular by Berkshire standards, but solid.
Katrina, Rita, and Wilma cost Berkshire $3.4 billion. Katrina alone was $2.5 billion, the worst insured loss in industry history. Yet the insurance group still earned $53 million underwriting profit. Negative cost of float on $49.3 billion. That is the model working under stress.
Buffett updated the two-column intrinsic value framework. The big story in the data: operating earnings per share growth accelerated relative to investments per share. Acquisitions and retained earnings were shifting Berkshire from “investment company with subsidiaries” toward “operating conglomerate with a huge portfolio.”
PacifiCorp deal lined up ($5.1 billion, closing 2006). Medical Protective bought for $825 million cash from GE. Forest River RV maker (~$800 million) from founder Pete Liegl, who rebuilt after an LBO fired him.
Gen Re scandal: former executives used reinsurance to hide risks instead of transfer them. Berkshire cut ties fast.
NetJets lost $80 million building out Europe. GEICO shined. HomeServices at MidAmerican showed early housing slowdown.
At the 2006 meeting Buffett flagged “ridiculous credit” extended to homeowners. Hindsight makes that line famous.
2006: the luck year
18.4% book value gain. Buffett said insurers had a large dose of luck. No major cats. Soft markets anyway.
Insurance underwriting profit exploded from $53 million to $3.8 billion:
- GEICO: $1.3 billion profit, 88.1% combined ratio
- Gen Re: swung from -$334M to +$526M
- BHRG: from -$1.1B to +$1.7B
Equitas deal signed: $7.1 billion premium, possibly largest reinsurance contract ever. Covers Lloyd’s names for pre-1993 liabilities up to $13.9 billion. Buffett’s accounting walkthrough in the letter is a masterclass. Economics: get cash now, pay claims over decades, invest the float. Accounting: DCRA amortization creates annual underwriting losses. Shareholders need both lenses.
Iscar (July 2006): $4 billion for 80%, Israel’s metal-cutting tools leader. First major foreign operating acquisition. Short letter from Eitan Wertheimer to Buffett, same playbook as other family businesses.
Also: PacifiCorp closed, Business Wire, Applied Underwriters, Russell Corp. via Fruit of the Loom, bolt-ons everywhere.
MSR earned $2.1 billion net, 25% return on tangible equity. Shaw margins jumped on price increases even as volume slowed. Buffalo News down 40% from peak. Buffett said lush newspaper profits are over but they will not sell unless cash drains irreversibly.
PUHCA repeal let Berkshire align voting with economic interest in MidAmerican. Balance sheet presentation changed but economics did not.
2007: TTI, housing cracks, Equitas in force
Mead covers 2007’s continued deal flow (including TTI electronics distribution) and the housing-linked slowdown showing up in Shaw, Johns Manville, and HomeServices.
BHRG’s Equitas policy began in 2007, swelling premium volume to $11.9 billion that year (skewing comparisons). Ajit Jain’s shop became a crisis-era weapon before the crisis arrived.
Insurance remained profitable but competition returned. Buffett repeated: be fearful when others are greedy. Cat exposure would shrink at wrong prices. Stand ready when fear returns.
What 2005-2007 sets up
This trilogy is peak pre-crisis Berkshire:
- Insurance machine proven through Katrina
- Global expansion via Iscar
- Regulated capital sinks via MidAmerican/PacifiCorp (prototype for BNSF)
- Housing warning signs ignored by markets, not by Buffett
Mead’s per-share investment vs operating earnings chart (Figure 7.1 in the book) is the structural story. The crisis posts that follow show why redundant capital and willingness to write big reinsurance checks matter when fear peaks.
Previous: Chapter 6 Part 5: 2004 and Decade Review
Next: Chapter 7 Part 2: Berkshire 2008-2009 Financial Crisis