• A conservative evaluation of the likelihood an exposure could cause loss and the probable cost if it does;

• Setting the proper premium to achieve a profit; and

• Walking away from a risk if the appropriate premium cannot be obtained.

“Many insurers pass the first three tests and flunk the fourth,” Mr. Buffett said. “The urgings of Wall Street, pressures from the agency force and brokers, or simply a refusal by a testosterone-driven CEO to accept shrinking volumes had led too many insurers to write business at inadequate prices. 'The other guy is doing it so we must as well' spells trouble in any business, but none more so than insurance.”

The Omaha, Neb.-based holding company reported underwriting profit in its four insurance operations rose $553 million in 2010 to more than $2 billion over the prior year.

The company's four units include:

• General Re—underwriting profit of $452 million, down $25 million from the prior year.

• Berkshire Hathaway Reinsurance—underwriting profit of $176 million, down $74 million.

• GEICO—underwriting profit of $1.12 billion, an increase of $468 million.

•Other Primary Insurers—underwriting profit of $268 million, an increase of $184 million.

“At Berkshire, we have now operated at an underwriting profit for eight consecutive years, our total underwriting gain for the period having been $17 billion,” said Mr. Buffett. “I believe it likely that we will continue to underwrite profitably in most—though certainly not all—future years.”

Overall, the company reported insurance premium earned rose 10 percent, or $2.87 billion, to $31 billion.

For the company as a whole, Berkshire's net earnings increased 60 percent, or $5 billion, to more than $13 billion. Net earnings per share attributable to Berkshire shareholders rose 53 percent, or $2.7 billion, to $8 billion. Total revenues increased 21 percent, or $24 billion, to $136 billion.

Mr. Buffett noted that GEICO has developed a major personal lines insurance agency that primarily sells homeowners' policies to the company's auto customers that are underwritten by other insures. He said that last year the company sold 769,898 new policies at this operation, an increase of 34 percent from the year before.

He noted that this produces commission for the company and increases customer loyalty.

From the fallout of the recent economic crisis, Mr. Buffett noted that Berkshire was a party to 251 derivative contracts for premium of $3.4 billion. As a result of the financial panic, the company paid losses of $2.5 billion.

Despite the loss, he said the company has managed to make an underwriting profit of $2 billion over the life of the contracts and has reduced the number of derivative contracts to 203, adding a few while the contracts either expired or unwound.

Mr. Buffett said that for “the purpose of estimating our current earning power, we are envisioning a year free of a mega-catastrophe in insurance and possessing a general business climate somewhat better than that of 2010, but weaker than that of 2005 or 2006.”

Regarding the general business climate, Mr. Buffett said, “Money will always flow toward opportunity, and there is an abundance of that in America. Commentators today often talk of 'great uncertainty.' But think back, for example to Dec. 6, 1941, Oct. 18, 1987, and Sept. 10, 2001. No matter how serene today may be, tomorrow is always uncertain.

“Don't let that reality spook you. Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America. Yet our citizens now live an astonishing six times better than when I was born. The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential—a system that has worked wonders for over two centuries despite frequent interruptions for recessions and even a Civil War—remains alive and effective.”