1986 Letter to Shareholders

To the Shareholders of Berkshire Hathaway Inc.

In 1986, our insurance operations achieved a major milestone: float exceeded $1 billion. This float—held indefinitely, invested at attractive rates—is the foundation of our investment strategy.

"The best time to write insurance is when everyone else refuses to. The prices are highest, the coverage is most needed, and the clients are most grateful."

The Insurance Moat

Insurance is a business where financial strength matters more than almost anything else. When catastrophe strikes, clients need to know their insurer will pay—promptly and completely.

Berkshire's AAA financial strength rating is worth more than any marketing campaign. Our agents know that when they place business with us, the claim will be paid. This trust is the foundation of our competitive advantage.

Why We Maintain Strength

Most insurance companies operate with minimal capital buffers. They save on financing costs by keeping thin margins of safety. When losses exceed expectations, they scramble to raise capital—often at the worst possible time.

Berkshire operates differently. We maintain enormous capital relative to our insurance exposures. This strength has a cost—we earn slightly lower returns on equity—but it protects us from the forced actions that destroy most insurers.

The Best Insurance Opportunities

The best insurance opportunities arise when others refuse to participate. Natural catastrophes, financial panics, and other systemic events create demand that only the strongest insurers can meet.

In these moments, our capital base becomes a competitive weapon. We can write business at favorable prices while competitors are retreating. This ability to act counter-cyclically is Berkshire's most valuable trait.

Looking Forward

Our approach will not change:

1. We maintain financial strength — It enables us to act when others cannot
2. We write insurance only at profitable prices — Underwriting discipline is non-negotiable
3. We invest float for the long term — Our time horizon is unlimited
4. We build trust — Our reputation is our most valuable asset

Warren E. Buffett February 1987