In his annual letters, Buffett from time to time analyzes the business of insurance – and provides the truest and simplest explanation of the nature of the property-casualty business and its economics. His letter for year 2004 (released in March 2005) focuses on the business models of the three main areas of Berkshire Hathaway’s business. It is available at http://www.berkshirehathaway.com/letters/2004ltr.pdf and in particular see pages 6 through 11.

Before reading the year 2004 letter, however, read Buffett’s letter about 2001, available at http://www.berkshirehathaway.com/letters/2001pdf.pdf and in particular pages 6 through 11. This analysis should be required reading for anyone in the property-casualty business (lawyers included). The 2004 letter is good and interesting; the 2001 letter (which recapitulates points and themes Mr. Buffett has set forth before) is essential to understanding insurance markets and dispelling pervasive myths about the pricing and profitability of insurance companies.