Below is the first part of Todd Kenyon's notes on Warren Buffett's annual shareholder letter that was released last night.

"As always, Buffett reinforced many of his main tenants: good businesses have sustainable competitive advantages, generate attractive returns on capital, and are run by extraordinary managers, even if they don't have to be:

"if a business requires a superstar to produce great results, the business itself cannot be deemed great." - WEB

While I agree with this, I think one might therefore consider Berkshire's insurance businesses "not great", but still very good. Whether it's GEICO, National Indemnity or General Re, each is a disaster waiting to happen without an excellent manager. The same can be said for any financial business really. Look at Citigroup which has arguably been rudderless for years. Compare this to Wells Fargo, which largely avoided the recent subprime mess even though it is a huge mortgage lender in one of the hardest hit areas of the country. Buffett spent some time praising Wells' managment team.

A comment that will surely be reported ad nauseum by the financial media is that "the party is over" for insurance companies...

Another important point Buffett makes near the end of the 21-page letter is that the insurance businesses produce a large balance sheet item that is comp[l]ete fantasy. By that, I mean entirely made up by the managers of the business: the estimated loss reserves. The mangers must guestimate how much they will lose on their insurance policies in the future...

Along these lines, Buffet spends some time criticizing corporate accounting practices. He wrote:

"Former Senator Alan Simpson famously said: "Those who travel the high road in Washington need not fear heavy traffic. - If he had sought truly deserted streets, however, the Senator should have looked to Corporate America's accounting."

Specifically, he thinks the return assumptions for corporate pension plans are extremely optimistic. Without spending any time on the arcane subject of pension accounting, all one needs to know here is that increasing the expected return for a company's pension plan assets can boost earnings, and vice-versa...

One very interesting item was Buffet's description of some derivative contracts written by Berkshire. He wrote (sold) long-term puts on the S&P 500 and three other worldwide equity indices. They expire in 15-20 years, and are only exercisable at expiration. The strike prices are at the level of the indices on the day written. In return for selling these puts, Berkshire received $4.5 Billion in cash...

This is just a summary of the first part, make sure to check out the link for the full article. There is more to come in part 2, including his current estimate of Berkshire's intrinsic value.