BERKSHIRE HATHAWAY INC.
2001 ANNUAL REPORT
TABLE OF CONTENTS
Business Activities....................................................
Inside Front Cover
Corporate Performance vs. the S&P 500 ................................................ 2
Chairman's Letter*.................................................................................. 3
Selected Financial Data For The
Past Five Years .................................................................................. 20
Acquisition Criteria ................................................................................ 21
Independent Auditors' Report ................................................................. 21
Consolidated Financial Statements ......................................................... 22
Management's Discussion....................................................................... 47
Chairman’s Memo to Managers
Following September 11th Terrorist Attack ........................................ 61
Owner's Manual ...................................................................................... 62
Shareholder-Designated Contributions................................................... 69
Common Stock Data............................................................................... 71
Subsidiary Listing................................................................................... 72
Directors and Officers of the Company .........................Inside Back Cover
*Copyright © 2002 By Warren E. Buffett
All Rights Reserved
Business Activities
Berkshire Hathaway Inc. is a holding company owning subsidiaries engaged in a
number of diverse business activities. The most important of these is the property and
casualty insurance business conducted on both a direct and reinsurance basis through a
number of subsidiaries. Included in this group of subsidiaries is GEICO Corporation, the
sixth largest auto insurer in the United States and General Re Corporation, one of the four
largest reinsurers in the world.
Investment portfolios of insurance subsidiaries include meaningful equity ownership
percentages of other publicly traded companies. Investments with a market value in
excess of $500 million at the end of 2001 include approximately 11% of the capital stock
of American Express Company, approximately 8% of the capital stock of The Coca-Cola
Company, approximately 9% of
the capital stock of The Gillette Company,
approximately 9% of the capital stock of H&R Block, Inc., approximately 15% of the
capital stock of Moody’s Corporation, approximately 18% of the capital stock of The
Washington Post Company and approximately 3% of the capital stock of Wells Fargo
and Company. Much information about these publicly-owned companies is available,
including information released from time to time by the companies themselves.
Numerous business activities are conducted through non-insurance subsidiaries.
FlightSafety International provides training of aircraft and ship operators. Executive Jet
provides fractional ownership programs for general aviation aircraft. Nebraska Furniture
Mart, R.C. Willey Home Furnishings, Star Furniture, and Jordan’s Furniture are retailers
of home furnishings. Borsheim’s, Helzberg Diamond Shops and Ben Bridge Jeweler are
retailers of fine jewelry. Scott Fetzer is a diversified manufacturer and distributor of
commercial and industrial products, the principal products are sold under the Kirby and
Campbell Hausfeld brand names.
Also included in the non-insurance subsidiaries are several large manufacturing
businesses acquired during 2000 and 2001. Shaw Industries is the world’s largest
manufacturer of tufted broadloom carpet. Benjamin Moore is a formulator, manufacturer
and retailer of architectural and industrial coatings. Johns Manville is a leading
manufacturer of insulation and building products. Acme Building Brands is a
manufacturer of face brick and concrete masonry products. MiTek Inc. produces steel
connector products and engineering software for the building components market.
In addition, Berkshire’s other non-insurance business activities include: Buffalo News,
a publisher of a daily and Sunday newspaper; See’s Candies, a manufacturer and seller of
boxed chocolates and other confectionery products; H.H. Brown, Lowell, Dexter and
Justin Brands, manufacturers and distributors of footwear under a variety of brand
names; International Dairy Queen, which licenses and services a system of about 6,000
stores that offer prepared dairy treats and food; CORT, a provider of rental furniture,
accessories and related services and XTRA Corporation, a leading operating lessor of
transportation equipment.
Operating decisions for the various Berkshire businesses are made by managers of the
business units. Investment decisions and all other capital allocation decisions are made
for Berkshire and its subsidiaries by Warren E. Buffett, in consultation with Charles T.
Munger. Mr. Buffett is Chairman and Mr. Munger is Vice Chairman of Berkshire's Board
of Directors.
************
Note: The following table appears in the printed Annual Report on the facing page of the
Chairman's Letter and is referred to in that letter.
Berkshire’s Corporate Performance vs. the S&P 500
Annual Percentage Change
Year
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
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in Per-Share
Book Value of
Berkshire
(1)
23.8
20.3
11.0
19.0
16.2
12.0
16.4
21.7
4.7
5.5
21.9
59.3
31.9
24.0
35.7
19.3
31.4
40.0
32.3
13.6
48.2
26.1
19.5
20.1
44.4
7.4
39.6
20.3
14.3
13.9
43.1
31.8
34.1
48.3
.5
6.5
(6.2)
in S&P 500
with Dividends
Included
(2)
10.0
(11.7)
30.9
11.0
(8.4)
3.9
14.6
18.9
(14.8)
(26.4)
37.2
23.6
(7.4)
6.4
18.2
32.3
(5.0)
21.4
22.4
6.1
31.6
18.6
5.1
16.6
31.7
(3.1)
30.5
7.6
10.1
1.3
37.6
23.0
33.4
28.6
21.0
(9.1)
(11.9)
Relative
Results
(1)-(2)
13.8
32.0
(19.9)
8.0
24.6
8.1
1.8
2.8
19.5
31.9
(15.3)
35.7
39.3
17.6
17.5
(13.0)
36.4
18.6
9.9
7.5
16.6
7.5
14.4
3.5
12.7
10.5
9.1
12.7
4.2
12.6
5.5
8.8
.7
19.7
(20.5)
15.6
5.7
Average Annual Gain – 1965-2001
Overall Gain – 1964-2001
22.6%
194,936%
11.0%
4,742%
11.6%
190,194%
Notes: Data are for calendar years with these exceptions: 1965 and 1966, year ended 9/30; 1967, 15 months ended 12/31.
Starting in 1979, accounting rules required insurance companies to value the equity securities they hold at market
rather than at the lower of cost or market, which was previously the requirement. In this table, Berkshire's results
through 1978 have been restated to conform to the changed rules. In all other respects, the results are calculated using
the numbers originally reported.
The S&P 500 numbers are pre-tax whereas the Berkshire numbers are after-tax. If a corporation such as Berkshire
were simply to have owned the S&P 500 and accrued the appropriate taxes, its results would have lagged the S&P 500
in years when that index showed a positive return, but would have exceeded the S&P in years when the index showed a
negative return. Over the years, the tax costs would have caused the aggregate lag to be substantial.
2
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
Berkshire(cid:146)s loss in net worth during 2001 was $3.77 billion, which decreased the per-share book value of
both our Class A and Class B stock by 6.2%. Over the last 37 years (that is, since present management took over)
per-share book value has grown from $19 to $37,920, a rate of 22.6% compounded annually.∗
Per-share intrinsic grew somewhat faster than book value during these 37 years, and in 2001 it probably
decreased a bit less. We explain intrinsic value in our Owner(cid:146)s Manual, which begins on page 62. I urge new
shareholders to read this manual to become familiar with Berkshire(cid:146)s key economic principles.
Two years ago, reporting on 1999, I said that we had experienced both the worst absolute and relative
performance in our history. I added that (cid:147)relative results are what concern us,(cid:148) a viewpoint I(cid:146)ve had since forming
my first investment partnership on May 5, 1956. Meeting with my seven founding limited partners that evening, I
gave them a short paper titled (cid:147)The Ground Rules(cid:148) that included this sentence: (cid:147)Whether we do a good job or a
poor job is to be measured against the general experience in securities.(cid:148) We initially used the Dow Jones Industrials
as our benchmark, but shifted to the S&P 500 when that index became widely used. Our comparative record since
1965 is chronicled on the facing page; last year Berkshire(cid:146)s advantage was 5.7 percentage points.
Some people disagree with our focus on relative figures, arguing that (cid:147)you can(cid:146)t eat relative performance.(cid:148)
But if you expect (cid:150) as Charlie Munger, Berkshire(cid:146)s Vice Chairman, and I do (cid:150) that owning the S&P 500 will
produce reasonably satisfactory results over time, it follows that, for long-term investors, gaining small advantages
annually over that index must prove rewarding. Just as you can eat well throughout the year if you own a profitable,
but highly seasonal, business such as See(cid:146)s (which loses considerable money during the summer months) so, too,
can you regularly feast on investment returns that beat the averages, however variable the absolute numbers may be.
Though our corporate performance last year was satisfactory, my performance was anything but. I manage
most of Berkshire(cid:146)s equity portfolio, and my results were poor, just as they have been for several years. Of even
more importance, I allowed General Re to take on business without a safeguard I knew was important, and on
September 11th, this error caught up with us. I(cid:146)ll tell you more about my mistake later and what we are doing to
correct it.
Another of my 1956 Ground Rules remains applicable: (cid:147)I cannot promise results to partners.(cid:148) But Charlie
and I can promise that your economic result from Berkshire will parallel ours during the period of your ownership:
We will not take cash compensation, restricted stock or option grants that would make our results superior to yours.
Additionally, I will keep well over 99% of my net worth in Berkshire. My wife and I have never sold a
share nor do we intend to. Charlie and I are disgusted by the situation, so common in the last few years, in which
shareholders have suffered billions in losses while the CEOs, promoters, and other higher-ups who fathered these
disasters have walked away with extraordinary wealth. Indeed, many of these people were urging investors to buy
shares while concurrently dumping their own, sometimes using methods that hid their actions. To their shame, these
business leaders view shareholders as patsies, not partners.
Though Enron has become the symbol for shareholder abuse, there is no shortage of egregious conduct
elsewhere in corporate America. One story I(cid:146)ve heard illustrates the all-too-common attitude of managers toward
∗All figures used in this report apply to Berkshire’s A shares, the successor to the only stock that the
company had outstanding before 1996. The B shares have an ec onomic interest equal to 1/30th that of the A.
3
owners: A gorgeous woman slinks up to a CEO at a party and through moist lips purrs, (cid:147)I(cid:146)ll do anything (cid:150) anything
(cid:150) you want. Just tell me what you would like.(cid:148) With no hesitation, he replies, (cid:147)Reprice my options.(cid:148)
One final thought about Berkshire: In the future we won(cid:146)t come close to replicating our past record. To be
sure, Charlie and I will strive for above-average performance and will not be satisfied with less. But two conditions
at Berkshire are far different from what they once were: Then, we could often buy businesses and securities at much
lower valuations than now prevail; and more important, we were then working with far less money than we now
have. Some years back, a good $10 million idea could do wonders for us (witness our investment in Washington
Post in 1973 or GEICO in 1976). Today, the combination of ten such ideas and a triple in the value of each would
increase the net worth of Berkshire by only … of 1%. We need (cid:147)elephants(cid:148) to make significant gains now (cid:150) and
they are hard to find.
On the positive side, we have as fine an array of operating managers as exists at any company. (You can
read about many of them in a new book by Robert P. Miles: The Warren Buffett CEO.) In large part, moreover, they
are running businesses with economic characteristics ranging from good to superb. The ability, energy and loyalty
of these managers is simply extraordinary. We now have completed 37 Berkshire years without having a CEO of
an operating business elect to leave us to work elsewhere.
Our star-studded group grew in 2001. First, we completed the purchases of two businesses that we had
agreed to buy in 2000 (cid:150) Shaw and Johns Manville. Then we acquired two others, MiTek and XTRA, and
contracted to buy two more: Larson-Juhl, an acquisition that has just closed, and Fruit of the Loom, which will close
shortly if creditors approve our offer. All of these businesses are led by smart, seasoned and trustworthy CEOs.
Additionally, all of our purchases last year were for cash, which means our shareholders became owners of
these additional businesses without relinquishing any interest in the fine companies they already owned. We will
continue to follow our familiar formula, striving to increase the value of the excellent businesses we have, adding
new businesses of similar quality, and issuing shares only grudgingly.
Acquisitions of 2001
A few days before last year(cid:146)s annual meeting, I received a heavy package from St. Louis, containing an
unprepossessing chunk of metal whose function I couldn(cid:146)t imagine. There was a letter in the package, though, from
Gene Toombs, CEO of a company called MiTek. He explained that MiTek is the world(cid:146)s leading producer of this
thing I(cid:146)d received, a (cid:147)connector plate,(cid:148) which is used in making roofing trusses. Gene also said that the U.K. parent
of MiTek wished to sell the company and that Berkshire seemed to him the ideal buyer. Liking the sound of his
letter, I gave Gene a call. It took me only a minute to realize that he was our kind of manager and MiTek our kind
of business. We made a cash offer to the U.K. owner and before long had a deal.
Gene(cid:146)s managerial crew is exceptionally enthusiastic about the company and wanted to participate in the
purchase. Therefore, we arranged for 55 members of the MiTek team to buy 10% of the company, with each
putting up a minimum of $100,000 in cash. Many borrowed money so they could participate.
As they would not be if they had options, all of these managers are true owners. They face the downside of
decisions as well as the upside. They incur a cost of capital. And they can(cid:146)t (cid:147)reprice(cid:148) their stakes: What they paid
is what they live with.
Charlie and I love the high-grade, truly entrepreneurial attitude that exists at MiTek, and we predict it will
be a winner for all involved.
* * * * * * * * * * * *
In early 2000, my friend, Julian Robertson, announced that he would terminate his investment partnership,
Tiger Fund, and that he would liquidate it entirely except for four large holdings. One of these was XTRA, a
leading lessor of truck trailers. I then called Julian, asking whether he might consider selling his XTRA block or
whether, for that matter, the company(cid:146)s management might entertain an offer for the entire company. Julian
referred me to Lew Rubin, XTRA(cid:146)s CEO. He and I had a nice conversation, but it was apparent that no deal was to
be done.
Then in June 2001, Julian called to say that he had decided to sell his XTRA shares, and I resumed
conversations with Lew. The XTRA board accepted a proposal we made, which was to be effectuated through a
tender offer expiring on September 11th. The tender conditions included the usual (cid:147)out,(cid:148) allowing us to withdraw if
4
the stock market were to close before the offer(cid:146)s expiration. Throughout much of the 11th, Lew went through a
particularly wrenching experience: First, he had a son-in-law working in the World Trade Center who couldn(cid:146)t be
located; and second, he knew we had the option of backing away from our purchase. The story ended happily:
Lew(cid:146)s son-in-law escaped serious harm, and Berkshire completed the transaction.
Trailer leasing is a cyclical business but one in which we should earn decent returns over time. Lew brings
a new talent to Berkshire, and we hope to expand in leasing.
* * * * * * * * * * * *
On December 3rd, I received a call from Craig Ponzio, owner of Larson-Juhl, the U.S. leader in custom-
made picture frames. Craig had bought the company in 1981 (after first working at its manufacturing plant while
attending college) and thereafter increased its sales from $3 million to $300 million. Though I had never heard of
Larson-Juhl before Craig(cid:146)s call, a few minutes talk with him made me think we would strike a deal. He was
straightforward in describing the business, cared about who bought it, and was realistic as to price. Two days later,
Craig and Steve McKenzie, his CEO, came to Omaha and in ninety minutes we reached an agreement. In ten days
we had signed a contract.
Larson-Juhl serves about 18,000 framing shops in the U.S. and is also the industry leader in Canada and
much of Europe. We expect to see opportunities for making complementary acquisitions in the future.
* * * * * * * * * * *
As I write this letter, creditors are considering an offer we have made for Fruit of the Loom. The company
entered bankruptcy a few years back, a victim both of too much debt and poor management. And, a good many
years before that, I had some Fruit of the Loom experience of my own.
In August 1955, I was one of five employees, including two secretaries, working for the three managers of
Graham-Newman Corporation, a New York investment company. Graham-Newman controlled Philadelphia and
Reading Coal and Iron ((cid:147)P&R(cid:148)), an anthracite producer that had excess cash, a tax loss carryforward, and a
declining business. At the time, I had a significant portion of my limited net worth invested in P&R shares,
reflecting my faith in the business talents of my bosses, Ben Graham, Jerry Newman and Howard (Micky) Newman.
This faith was rewarded when P&R purchased the Union Underwear Company from Jack Goldfarb for $15
million. Union (though it was then only a licensee of the name) produced Fruit of the Loom underwear. The
company possessed $5 million in cash (cid:150) $2.5 million of which P&R used for the purchase (cid:150) and was earning about
$3 million pre-tax, earnings that could be sheltered by the tax position of P&R. And, oh yes: Fully $9 million of the
remaining $12.5 million due was satisfied by non-interest-bearing notes, payable from 50% of any earnings Union
had in excess of $1 million. (Those were the days; I get goosebumps just thinking about such deals.)
Subsequently, Union bought the licensor of the Fruit of the Loom name and, along with P&R, was merged
into Northwest Industries. Fruit went on to achieve annual pre-tax earnings exceeding $200 million.
John Holland was responsible for Fruit(cid:146)s operations in its most bountiful years. In 1996, however, John
retired, and management loaded the company with debt, in part to make a series of acquisitions that proved
disappointing. Bankruptcy followed. John was then rehired, and he undertook a major reworking of operations.
Before John(cid:146)s return, deliveries were chaotic, costs soared and relations with key customers deteriorated. While
correcting these problems, John also reduced employment from a bloated 40,000 to 23,000. In short, he(cid:146)s been
restoring the old Fruit of the Loom, albeit in a much more competitive environment.
Stepping into Fruit(cid:146)s bankruptcy proceedings, we made a proposal to creditors to which we attached no
financing conditions, even though our offer had to remain outstanding for many months. We did, however, insist on
a very unusual proviso: John had to be available to continue serving as CEO after we took over. To us, John and
the brand are Fruit(cid:146)s key assets.
I was helped in this transaction by my friend and former boss, Micky Newman, now 81. What goes around
truly does come around.
* * * * * * * * * * * *
5
Our operating companies made several (cid:147)bolt-on(cid:148) acquisitions during the year, and I can(cid:146)t resist telling you
about one. In December, Frank Rooney called to tell me H.H. Brown was buying the inventory and trademarks of
Acme Boot for $700,000.
That sounds like small potatoes. But (cid:150) would you believe it? (cid:150) Acme was the second purchase of P&R, an
acquisition that took place just before I left Graham-Newman in the spring of 1956. The price was $3.2 million,
part of it again paid with non-interest bearing notes, for a business with sales of $7 million.
After P&R merged with Northwest, Acme grew to be the world(cid:146)s largest bootmaker, delivering annual
profits many multiples of what the company had cost P&R. But the business eventually hit the skids and never
recovered, and that resulted in our purchasing Acme(cid:146)s remnants.
In the frontispiece to Security Analysis, Ben Graham and Dave Dodd quoted Horace: (cid:147)Many shall be
restored that now are fallen and many shall fall that are now in honor.(cid:148) Fifty-two years after I first read those lines,
my appreciation for what they say about business and investments continues to grow.
* * * * * * * * * * * *
In addition to bolt-on acquisitions, our managers continually look for ways to grow internally. In that
regard, here(cid:146)s a postscript to a story I told you two years ago about R.C. Willey(cid:146)s move to Boise. As you may
remember, Bill Child, R.C. Willey(cid:146)s chairman, wanted to extend his home-furnishings operation beyond Utah, a
state in which his company does more than $300 million of business (up, it should be noted, from $250,000 when
Bill took over 48 years ago). The company achieved this dominant position, moreover, with a (cid:147)closed on Sunday(cid:148)
policy that defied conventional retailing wisdom. I was skeptical that this policy could succeed in Boise or, for that
matter, anyplace outside of Utah. After all, Sunday is the day many consumers most like to shop.
Bill then insisted on something extraordinary: He would invest $11 million of his own money to build the
Boise store and would sell it to Berkshire at cost (without interest!) if the venture succeeded. If it failed, Bill would
keep the store and eat the loss on its disposal. As I told you in the 1999 annual report, the store immediately
became a huge success ― and it has since grown.
Shortly after the Boise opening, Bill suggested we try Las Vegas, and this time I was even more skeptical.
How could we do business in a metropolis of that size and be closed on Sundays, a day that all of our competitors
would be exploiting? Buoyed by the Boise experience, however, we proceeded to locate in Henderson, a
mushrooming city adjacent to Las Vegas.
The result: This store outsells all others in the R.C. Willey chain, doing a volume of business that far
exceeds the volume of any competitor and that is twice what I had anticipated. I cut the ribbon at the grand opening
in October (cid:150) this was after a (cid:147)soft(cid:148) opening and a few weeks of exceptional sales (cid:150) and, just as I did at Boise, I
suggested to the crowd that the new store was my idea.
It didn(cid:146)t work. Today, when I pontificate about retailing, Berkshire people just say, (cid:147)What does Bill
think?(cid:148) (I(cid:146)m going to draw the line, however, if he suggests that we also close on Saturdays.)
The Economics of Property/Casualty Insurance
Our main business (cid:151) though we have others of great importance (cid:151) is insurance. To understand
Berkshire, therefore, it is necessary that you understand how to evaluate an insurance company. The key
determinants are: (1) the amount of float that the business generates; (2) its cost; and (3) most critical of all, the
long-term outlook for both of these factors.
To begin with, float is money we hold but don’t own. In an insurance operation, float arises because
premiums are received before losses are paid, an interval that sometimes extends over many years. During that
time, the insurer invests the money. This pleasant activity typically carries with it a downside: The premiums that
an insurer takes in usually do not cover the losses and expenses it eventually must pay. That leaves it running an
"underwriting loss," which is the cost of float. An insurance business has value if its cost of float over time is less
than the cost the company would otherwise incur to obtain funds. But the business is a lemon if its cost of float is
higher than market rates for money.
6
Historically, Berkshire has obtained its float at a very low cost. Indeed, our cost has been less than zero in
about half of the years in which we(cid:146)ve operated; that is, we(cid:146)ve actually been paid for holding other people(cid:146)s money.
Over the last few years, however, our cost has been too high, and in 2001 it was terrible.
The table that follows shows (at intervals) the float generated by the various segments of Berkshire(cid:146)s
insurance operations since we entered the business 35 years ago upon acquiring National Indemnity Company
(whose traditional lines are included in the segment (cid:147)Other Primary(cid:148)). For the table we have calculated our float (cid:151)
which we generate in large amounts relative to our premium volume (cid:151) by adding net loss reserves, loss adjustment
reserves, funds held under reinsurance assumed and unearned premium reserves, and then subtracting insurance-
related receivables, prepaid acquisition costs, prepaid taxes and deferred charges applicable to assumed reinsurance.
(Got that?)
Yearend Float (in $ millions)
Year
1967
1977
1987
1997
1998
1999
2000
2001
GEICO
General Re
Other
Reinsurance
2,917
3,125
3,444
3,943
4,251
14,909
15,166
15,525
19,310
40
701
4,014
4,305
6,285
7,805
11,262
Other
Primary
20
131
807
455
415
403
598
685
Total
20
171
1,508
7,386
22,754
25,298
27,871
35,508
Last year I told you that, barring a mega-catastrophe, our cost of float would probably drop from its 2000
level of 6%. I had in mind natural catastrophes when I said that, but instead we were hit by a man-made catastrophe
on September 11th (cid:150) an event that delivered the insurance industry its largest loss in history. Our float cost therefore
came in at a staggering 12.8%. It was our worst year in float cost since 1984, and a result that to a significant
degree, as I will explain in the next section, we brought upon ourselves.
If no mega-catastrophe occurs, I (cid:150) once again (cid:150) expect the cost of our float to be low in the coming year.
We will indeed need a low cost, as will all insurers. Some years back, float costing, say, 4% was tolerable because
government bonds yielded twice as much, and stocks prospectively offered still loftier returns. Today, fat returns
are nowhere to be found (at least we can(cid:146)t find them) and short-term funds earn less than 2%. Under these
conditions, each of our insurance operations, save one, must deliver an underwriting profit if it is to be judged a
good business. The exception is our retroactive reinsurance operation (a business we explained in last year(cid:146)s annual
report), which has desirable economics even though it currently hits us with an annual underwriting loss of about
$425 million.
Principles of Insurance Underwriting
When property/casualty companies are judged by their cost of float, very few stack up as satisfactory
businesses. And interestingly (cid:150) unlike the situation prevailing in many other industries (cid:150) neither size nor brand
name determines an insurer(cid:146)s profitability. Indeed, many of the biggest and best-known companies regularly
deliver mediocre results. What counts in this business is underwriting discipline. The winners are those that
unfailingly stick to three key principles:
1.
2.
They accept only those risks that they are able to properly evaluate (staying within their circle of
competence) and that, after they have evaluated all relevant factors including remote loss
scenarios, carry the expectancy of profit. These insurers ignore market-share considerations and
are sanguine about losing business to competitors that are offering foolish prices or policy
conditions.
They limit the business they accept in a manner that guarantees they will suffer no aggregation of
losses from a single event or from related events that will threaten their solvency. They
ceaselessly search for possible correlation among seemingly-unrelated risks.
7
3.
They avoid business involving moral risk: No matter what the rate, trying to write good contracts
with bad people doesn’t work. While most policyholders and clients are honorable and ethical,
doing business with the few exceptions is usually expensive, sometimes extraordinarily so.
The events of September 11th made it clear that our implementation of rules 1 and 2 at General Re had been
dangerously weak. In setting prices and also in evaluating aggregation risk, we had either overlooked or dismissed
the possibility of large-scale terrorism losses. That was a relevant underwriting factor, and we ignored it.
In pricing property coverages, for example, we had looked to the past and taken into account only costs we
might expect to incur from windstorm, fire, explosion and earthquake. But what will be the largest insured property
loss in history (after adding related business-interruption claims) originated from none of these forces. In short, all
of us in the industry made a fundamental underwriting mistake by focusing on experience, rather than exposure,
thereby assuming a huge terrorism risk for which we received no premium.
Experience, of course, is a highly useful starting point in underwriting most coverages. For example, it(cid:146)s
important for insurers writing California earthquake policies to know how many quakes in the state during the past
century have registered 6.0 or greater on the Richter scale. This information will not tell you the exact probability
of a big quake next year, or where in the state it might happen. But the statistic has utility, particularly if you are
writing a huge statewide policy, as National Indemnity has done in recent years.
At certain times, however, using experience as a guide to pricing is not only useless, but actually
dangerous. Late in a bull market, for example, large losses from directors and officers liability insurance ((cid:147)D&O(cid:148))
are likely to be relatively rare. When stocks are rising, there are a scarcity of targets to sue, and both questionable
accounting and management chicanery often go undetected. At that juncture, experience on high-limit D&O may
look great.
But that(cid:146)s just when exposure is likely to be exploding, by way of ridiculous public offerings, earnings
manipulation, chain-letter-like stock promotions and a potpourri of other unsavory activities. When stocks fall,
these sins surface, hammering investors with losses that can run into the hundreds of billions. Juries deciding
whether those losses should be borne by small investors or big insurance companies can be expected to hit insurers
with verdicts that bear little relation to those delivered in bull-market days. Even one jumbo judgment, moreover,
can cause settlement costs in later cases to mushroom. Consequently, the correct rate for D&O (cid:147)excess(cid:148) (meaning
the insurer or reinsurer will pay losses above a high threshold) might well, if based on exposure, be five or more
times the premium dictated by experience.
Insurers have always found it costly to ignore new exposures. Doing that in the case of terrorism,
however, could literally bankrupt the industry. No one knows the probability of a nuclear detonation in a major
metropolis this year (or even multiple detonations, given that a terrorist organization able to construct one bomb
might not stop there). Nor can anyone, with assurance, assess the probability in this year, or another, of deadly
biological or chemical agents being introduced simultaneously (say, through ventilation systems) into multiple
office buildings and manufacturing plants. An attack like that would produce astronomical workers(cid:146) compensation
claims.
Here(cid:146)s what we do know:
(a)
(b)
(c)
(d)
The probability of such mind-boggling disasters, though likely very low at present, is not zero.
The probabilities are increasing, in an irregular and immeasurable manner, as knowledge and
materials become available to those who wish us ill. Fear may recede with time, but the danger
won(cid:146)t (cid:150) the war against terrorism can never be won. The best the nation can achieve is a long
succession of stalemates. There can be no checkmate against hydra-headed foes.
Until now, insurers and reinsurers have blithely assumed the financial consequences from the
incalculable risks I have described.
Under a (cid:147)close-to-worst-case(cid:148) scenario, which could conceivably involve $1 trillion of damage,
the insurance industry would be destroyed unless it manages in some manner to dramatically limit
its assumption of terrorism risks. Only the U.S. Government has the resources to absorb such a
blow. If it is unwilling to do so on a prospective basis, the general citizenry must bear its own
risks and count on the Government to come to its rescue after a disaster occurs.
8
Why, you might ask, didn(cid:146)t I recognize the above facts before September 11th? The answer, sadly, is that I
did (cid:150) but I didn(cid:146)t convert thought into action. I violated the Noah rule: Predicting rain doesn(cid:146)t count; building arks
does. I consequently let Berkshire operate with a dangerous level of risk (cid:150) at General Re in particular. I(cid:146)m sorry to
say that much risk for which we haven(cid:146)t been compensated remains on our books, but it is running off by the day.
At Berkshire, it should be noted, we have for some years been willing to assume more risk than any other
insurer has knowingly taken on. That(cid:146)s still the case. We are perfectly willing to lose $2 billion to $2‰ billion in a
single event (as we did on September 11th) if we have been paid properly for assuming the risk that caused the loss
(which on that occasion we weren(cid:146)t).
Indeed, we have a major competitive advantage because of our tolerance for huge losses. Berkshire has
massive liquid resources, substantial non-insurance earnings, a favorable tax position and a knowledgeable
shareholder constituency willing to accept volatility in earnings. This unique combination enables us to assume
risks that far exceed the appetite of even our largest competitors. Over time, insuring these jumbo risks should be
profitable, though periodically they will bring on a terrible year.
The bottom-line today is that we will write some coverage for terrorist-related losses, including a few non-
correlated policies with very large limits. But we will not knowingly expose Berkshire to losses beyond what we
can comfortably handle. We will control our total exposure, no matter what the competition does.
Insurance Operations in 2001
Over the years, our insurance business has provided ever-growing, low-cost funds that have fueled much
of Berkshire(cid:146)s growth. Charlie and I believe this will continue to be the case. But we stumbled in a big way in
2001, largely because of underwriting losses at General Re.
In the past I have assured you that General Re was underwriting with discipline (cid:150) and I have been proven
wrong. Though its managers(cid:146) intentions were good, the company broke each of the three underwriting rules I set
forth in the last section and has paid a huge price for doing so. One obvious cause for its failure is that it did not
reserve correctly (cid:150) more about this in the next section (cid:150) and therefore severely miscalculated the cost of the product
it was selling. Not knowing your costs will cause problems in any business. In long-tail reinsurance, where years
of unawareness will promote and prolong severe underpricing, ignorance of true costs is dynamite.
Additionally, General Re was overly-competitive in going after, and retaining, business. While all
concerned may intend to underwrite with care, it is nonetheless difficult for able, hard-driving professionals to curb
their urge to prevail over competitors. If (cid:147)winning,(cid:148) however, is equated with market share rather than profits,
trouble awaits. (cid:147)No(cid:148) must be an important part of any underwriter(cid:146)s vocabulary.
At the risk of sounding Pollyannaish, I now assure you that underwriting discipline is being restored at
General Re (and its Cologne Re subsidiary) with appropriate urgency. Joe Brandon was appointed General Re(cid:146)s
CEO in September and, along with Tad Montross, its new president, is committed to producing underwriting
profits. Last fall, Charlie and I read Jack Welch(cid:146)s terrific book, Jack, Straight from the Gut (get a copy!). In
discussing it, we agreed that Joe has many of Jack(cid:146)s characteristics: He is smart, energetic, hands-on, and expects
much of both himself and his organization.
When it was an independent company, General Re often shone, and now it also has the considerable
strengths Berkshire brings to the table. With that added advantage and with underwriting discipline restored,
General Re should be a huge asset for Berkshire. I predict that Joe and Tad will make it so.
* * * * * * * * * * * *
At the National Indemnity reinsurance operation, Ajit Jain continues to add enormous value to Berkshire.
Working with only 18 associates, Ajit manages one of the world(cid:146)s largest reinsurance operations measured by
assets, and the largest, based upon the size of individual risks assumed.
I have known the details of almost every policy that Ajit has written since he came with us in 1986, and
never on even a single occasion have I seen him break any of our three underwriting rules. His extraordinary
discipline, of course, does not eliminate losses; it does, however, prevent foolish losses. And that(cid:146)s the key: Just as
is the case in investing, insurers produce outstanding long-term results primarily by avoiding dumb decisions, rather
than by making brilliant ones.
9
Since September 11th, Ajit has been particularly busy. Among the policies we have written and retained
entirely for our own account are (1) $578 million of property coverage for a South American refinery once a loss
there exceeds $1 billion; (2) $1 billion of non-cancelable third-party liability coverage for losses arising from acts of
terrorism at several large international airlines; (3) £500 million of property coverage on a large North Sea oil
platform, covering losses from terrorism and sabotage, above £600 million that the insured retained or reinsured
elsewhere; and (4) significant coverage on the Sears Tower, including losses caused by terrorism, above a $500
million threshold. We have written many other jumbo risks as well, such as protection for the World Cup Soccer
Tournament and the 2002 Winter Olympics. In all cases, however, we have attempted to avoid writing groups of
policies from which losses might seriously aggregate. We will not, for example, write coverages on a large number
of office and apartment towers in a single metropolis without excluding losses from both a nuclear explosion and
the fires that would follow it.
No one can match the speed with which Ajit can offer huge policies. After September 11th, his quickness
to respond, always important, has become a major competitive advantage. So, too, has our unsurpassed financial
strength. Some reinsurers (cid:150) particularly those who, in turn, are accustomed to laying off much of their business on a
second layer of reinsurers known as retrocessionaires (cid:150) are in a weakened condition and would have difficulty
surviving a second mega-cat. When a daisy chain of retrocessionaires exists, a single weak link can pose trouble for
all. In assessing the soundness of their reinsurance protection, insurers must therefore apply a stress test to all
participants in the chain, and must contemplate a catastrophe loss occurring during a very unfavorable economic
environment. After all, you only find out who is swimming naked when the tide goes out. At Berkshire, we retain
our risks and depend on no one. And whatever the world(cid:146)s problems, our checks will clear.
Ajit(cid:146)s business will ebb and flow (cid:150) but his underwriting principles won(cid:146)t waver. It(cid:146)s impossible to
overstate his value to Berkshire.
* * * * * * * * * * * *
GEICO, by far our largest primary insurer, made major progress in 2001, thanks to Tony Nicely, its CEO,
and his associates. Quite simply, Tony is an owner(cid:146)s dream.
GEICO(cid:146)s premium volume grew 6.6% last year, its float grew $308 million, and it achieved an
underwriting profit of $221 million. This means we were actually paid that amount last year to hold the $4.25
billion in float, which of course doesn(cid:146)t belong to Berkshire but can be used by us for investment.
The only disappointment at GEICO in 2001 (cid:150) and it(cid:146)s an important one (cid:150) was our inability to add
policyholders. Our preferred customers (81% of our total) grew by 1.6% but our standard and non-standard policies
fell by 10.1%. Overall, policies in force fell .8%.
New business has improved in recent months. Our closure rate from telephone inquiries has climbed, and
our Internet business continues its steady growth. We, therefore, expect at least a modest gain in policy count
during 2002. Tony and I are eager to commit much more to marketing than the $219 million we spent last year, but
at the moment we cannot see how to do so effectively. In the meantime, our operating costs are low and far below
those of our major competitors; our prices are attractive; and our float is cost-free and growing.
* * * * * * * * * * * *
Our other primary insurers delivered their usual fine results last year. These operations, run by Rod
Eldred, John Kizer, Tom Nerney, Michael Stearns, Don Towle and Don Wurster had combined premium volume of
$579 million, up 40% over 2000. Their float increased 14.5% to $685 million, and they recorded an underwriting
profit of $30 million. In aggregate, these companies are one of the finest insurance operations in the country, and
their 2002 prospects look excellent.
“Loss Development” and Insurance Accounting
Bad terminology is the enemy of good thinking. When companies or investment professionals use terms
such as (cid:147)EBITDA(cid:148) and (cid:147)pro forma,(cid:148) they want you to unthinkingly accept concepts that are dangerously flawed.
(In golf, my score is frequently below par on a pro forma basis: I have firm plans to (cid:147)restructure(cid:148) my putting stroke
and therefore only count the swings I take before reaching the green.)
10
In insurance reporting, (cid:147)loss development(cid:148) is a widely used term (cid:150) and one that is seriously misleading.
First, a definition: Loss reserves at an insurer are not funds tucked away for a rainy day, but rather a liability
account. If properly calculated, the liability states the amount that an insurer will have to pay for all losses
(including associated costs) that have occurred prior to the reporting date but have not yet been paid. When
calculating the reserve, the insurer will have been notified of many of the losses it is destined to pay, but others will
not yet have been reported to it. These losses are called IBNR, for incurred but not reported. Indeed, in some cases
(involving, say, product liability or embezzlement) the insured itself will not yet be aware that a loss has occurred.
It(cid:146)s clearly difficult for an insurer to put a figure on the ultimate cost of all such reported and unreported
events. But the ability to do so with reasonable accuracy is vital. Otherwise the insurer(cid:146)s managers won(cid:146)t know
what its actual loss costs are and how these compare to the premiums being charged. GEICO got into huge trouble
in the early 1970s because for several years it severely underreserved, and therefore believed its product (insurance
protection) was costing considerably less than was truly the case. Consequently, the company sailed blissfully
along, underpricing its product and selling more and more policies at ever-larger losses.
When it becomes evident that reserves at past reporting dates understated the liability that truly existed at
the time, companies speak of (cid:147)loss development.(cid:148) In the year discovered, these shortfalls penalize reported
earnings because the (cid:147)catch-up(cid:148) costs from prior years must be added to current-year costs when results are
calculated. This is what happened at General Re in 2001: a staggering $800 million of loss costs that actually
occurred in earlier years, but that were not then recorded, were belatedly recognized last year and charged against
current earnings. The mistake was an honest one, I can assure you of that. Nevertheless, for several years, this
underreserving caused us to believe that our costs were much lower than they truly were, an error that contributed to
woefully inadequate pricing. Additionally, the overstated profit figures led us to pay substantial incentive
compensation that we should not have and to incur income taxes far earlier than was necessary.
We recommend scrapping the term (cid:147)loss development(cid:148) and its equally ugly twin, (cid:147)reserve strengthening.(cid:148)
(Can you imagine an insurer, upon finding its reserves excessive, describing the reduction that follows as (cid:147)reserve
weakening(cid:148)?) (cid:147)Loss development(cid:148) suggests to investors that some natural, uncontrollable event has occurred in the
current year, and (cid:147)reserve strengthening(cid:148) implies that adequate amounts have been further buttressed. The truth,
however, is that management made an error in estimation that in turn produced an error in the earnings previously
reported. The losses didn(cid:146)t (cid:147)develop(cid:148) (cid:150) they were there all along. What developed was management(cid:146)s
understanding of the losses (or, in the instances of chicanery, management(cid:146)s willingness to finally fess up).
A more forthright label for the phenomenon at issue would be (cid:147)loss costs we failed to recognize when they
occurred(cid:148) (or maybe just (cid:147)oops(cid:148)). Underreserving, it should be noted, is a common (cid:150) and serious (cid:150) problem
throughout the property/casualty insurance industry. At Berkshire we told you of our own problems with
underestimation in 1984 and 1986. Generally, however, our reserving has been conservative.
Major underreserving is common in cases of companies struggling for survival. In effect, insurance
accounting is a self-graded exam, in that the insurer gives some figures to its auditing firm and generally doesn(cid:146)t get
an argument. (What the auditor gets, however, is a letter from management that is designed to take his firm off the
hook if the numbers later look silly.) A company experiencing financial difficulties (cid:150) of a kind that, if truly faced,
could put it out of business (cid:150) seldom proves to be a tough grader. Who, after all, wants to prepare his own
execution papers?
Even when companies have the best of intentions, it(cid:146)s not easy to reserve properly. I(cid:146)ve told the story in
the past about the fellow traveling abroad whose sister called to tell him that their dad had died. The brother replied
that it was impossible for him to get home for the funeral; he volunteered, however, to shoulder its cost. Upon
returning, the brother received a bill from the mortuary for $4,500, which he promptly paid. A month later, and a
month after that also, he paid $10 pursuant to an add-on invoice. When a third $10 invoice came, he called his
sister for an explanation. (cid:147)Oh,(cid:148) she replied, (cid:147)I forgot to tell you. We buried dad in a rented suit.(cid:148)
There are a lot of (cid:147)rented suits(cid:148) buried in the past operations of insurance companies. Sometimes the
problems they signify lie dormant for decades, as was the case with asbestos liability, before virulently manifesting
themselves. Difficult as the job may be, it(cid:146)s management(cid:146)s responsibility to adequately account for all possibilities.
Conservatism is essential. When a claims manager walks into the CEO(cid:146)s office and says (cid:147)Guess what just
happened,(cid:148) his boss, if a veteran, does not expect to hear it(cid:146)s good news. Surprises in the insurance world have
been far from symmetrical in their effect on earnings.
11
Because of this one-sided experience, it is folly to suggest, as some are doing, that all property/casualty
insurance reserves be discounted, an approach reflecting the fact that they will be paid in the future and that
therefore their present value is less than the stated liability for them. Discounting might be acceptable if reserves
could be precisely established. They can(cid:146)t, however, because a myriad of forces (cid:150) judicial broadening of policy
language and medical inflation, to name just two chronic problems (cid:150) are constantly working to make reserves
inadequate. Discounting would exacerbate this already-serious situation and, additionally, would provide a new
tool for the companies that are inclined to fudge.
I(cid:146)d say that the effects from telling a profit-challenged insurance CEO to lower reserves through
discounting would be comparable to those that would ensue if a father told his 16-year-old son to have a normal sex
life. Neither party needs that kind of push.
Sources of Reported Earnings
The table that follows shows the main sources of Berkshire’s reported earnings. In this presentation,
purchase-accounting adjustments (primarily relating to (cid:147)goodwill(cid:148)) are not assigned to the specific businesses to
which they apply, but are instead aggregated and shown separately. This procedure lets you view the earnings of
our businesses as they would have been reported had we not purchased them. In recent years, our (cid:147)expense(cid:148) for
goodwill amortization has been large. Going forward, generally accepted accounting principles ((cid:147)GAAP(cid:148)) will no
longer require amortization of goodwill. This change will increase our reported earnings (though not our true
economic earnings) and simplify this section of the report.
Operating Earnings:
Insurance Group:
Underwriting (cid:150) Reinsurance...................................
Underwriting (cid:150) GEICO ..........................................
Underwriting (cid:150) Other Primary ...............................
Net Investment Income ..........................................
Building Products(1)...................................................
Finance and Financial Products Business .................
Flight Services...........................................................
MidAmerican Energy (76% owned) .........................
Retail Operations.......................................................
Scott Fetzer (excluding finance operation) ...............
Shaw Industries(2) ......................................................
Other Businesses .......................................................
Purchase-Accounting Adjustments ...........................
Corporate Interest Expense .......................................
Shareholder-Designated Contributions .....................
Other .........................................................................
Operating Earnings ......................................................
Capital Gains from Investments...................................
Total Earnings (cid:150) All Entities........................................
Pre-Tax Earnings
2000
2001
$(4,318)
221
30
2,824
461
519
186
600
175
129
292
179
(726)
(92)
(17)
25
488
1,320
$1,808
$(1,416)
(224)
25
2,773
34
530
213
197
175
122
--
221
(881)
(92)
(17)
39
1,699
3,955
$5,654
(in millions)
Berkshire’s Share
of Net Earnings
(after taxes and
Minority interests)
2000
2001
$(2,824)
144
18
1,968
287
336
105
230
101
83
156
103
(699)
(60)
(11)
16
(47)
842
$ 795
$(911)
(146)
16
1,946
21
343
126
109
104
80
--
133
(843)
(61)
(11)
30
936
2,392
$3,328
(1) Includes Acme Brick from August 1, 2000; Benjamin Moore from December 18, 2000; Johns Manville from February 27,
2001; and MiTek from July 31, 2001.
(2) From date of acquisition, January 8, 2001.
12
Here are some highlights (and lowlights) from 2001 relating to our non-insurance activities:
• Our shoe operations (included in (cid:147)other businesses(cid:148)) lost $46.2 million pre-tax, with profits at H.H. Brown
and Justin swamped by losses at Dexter.
I(cid:146)ve made three decisions relating to Dexter that have hurt you in a major way: (1) buying it in the first place;
(2) paying for it with stock and (3) procrastinating when the need for changes in its operations was obvious. I
would like to lay these mistakes on Charlie (or anyone else, for that matter) but they were mine. Dexter, prior
to our purchase (cid:150) and indeed for a few years after (cid:150) prospered despite low-cost foreign competition that was
brutal. I concluded that Dexter could continue to cope with that problem, and I was wrong.
We have now placed the Dexter operation (cid:150) which is still substantial in size (cid:150) under the management of Frank
Rooney and Jim Issler at H.H. Brown. These men have performed outstandingly for Berkshire, skillfully
contending with the extraordinary changes that have bedeviled the footwear industry. During part of 2002,
Dexter will be hurt by unprofitable sales commitments it made last year. After that, we believe our shoe
business will be reasonably profitable.
• MidAmerican Energy, of which we own 76% on a fully-diluted basis, had a good year in 2001. Its reported
earnings should also increase considerably in 2002 given that the company has been shouldering a large
charge for the amortization of goodwill and that this (cid:147)cost(cid:148) will disappear under the new GAAP rules.
Last year MidAmerican swapped some properties in England, adding Yorkshire Electric, with its 2.1 million
customers. We are now serving 3.6 million customers in the U.K. and are its 2nd largest electric utility. We
have an equally important operation in Iowa as well as major generating facilities in California and the
Philippines.
At MidAmerican (cid:150) this may surprise you (cid:150) we also own the second-largest residential real estate brokerage
business in the country. We are market-share leaders in a number of large cities, primarily in the Midwest, and
have recently acquired important firms in Atlanta and Southern California. Last year, operating under various
names that are locally familiar, we handled about 106,000 transactions involving properties worth nearly $20
billion. Ron Peltier has built this business for us, and it(cid:146)s likely he will make more acquisitions in 2002 and
the years to come.
• Considering the recessionary environment plaguing them, our retailing operations did well in 2001. In
jewelry, same-store sales fell 7.6% and pre-tax margins were 8.9% versus 10.7% in 2000. Return on invested
capital remains high.
Same-store sales at our home-furnishings retailers were unchanged and so was the margin (cid:150) 9.1% pre-tax (cid:150)
these operations earned. Here, too, return on invested capital is excellent.
We continue to expand in both jewelry and home-furnishings. Of particular note, Nebraska Furniture Mart is
constructing a mammoth 450,000 square foot store that will serve the greater Kansas City area beginning in
the fall of 2003. Despite Bill Child(cid:146)s counter-successes, we will keep this store open on Sundays.
The large acquisitions we initiated in late 2000 (cid:150) Shaw, Johns Manville and Benjamin Moore (cid:150) all came
through their first year with us in great fashion. Charlie and I knew at the time of our purchases that we were
in good hands with Bob Shaw, Jerry Henry and Yvan Dupuy, respectively (cid:150) and we admire their work even
more now. Together these businesses earned about $659 million pre-tax.
Shortly after yearend we exchanged 4,740 Berkshire A shares (or their equivalent in B shares) for the 12.7%
minority interest in Shaw, which means we now own 100% of the company. Shaw is our largest non-
insurance operation and will play a big part in Berkshire(cid:146)s future.
All of the income shown for Flight Services in 2001 (cid:150) and a bit more (cid:150) came from FlightSafety, our pilot-
training subsidiary. Its earnings increased 2.5%, though return on invested capital fell slightly because of the
$258 million investment we made last year in simulators and other fixed assets. My 84-year-old friend, Al
Ueltschi, continues to run FlightSafety with the same enthusiasm and competitive spirit that he has exhibited
since 1951, when he invested $10,000 to start the company. If I line Al up with a bunch of 60-year-olds at the
annual meeting, you will not be able to pick him out.
•
•
13
After September 11th, training for commercial airlines fell, and today it remains depressed. However, training
for business and general aviation, our main activity, is at near-normal levels and should continue to grow. In
2002, we expect to spend $162 million for 27 simulators, a sum far in excess of our annual depreciation charge
of $95 million. Those who believe that EBITDA is in any way equivalent to true earnings are welcome to pick
up the tab.
Our NetJetsfi fractional ownership program sold a record number of planes last year and also showed a gain of
21.9% in service income from management fees and hourly charges. Nevertheless, it operated at a small loss,
versus a small profit in 2000. We made a little money in the U.S., but these earnings were more than offset by
European losses. Measured by the value of our customers(cid:146) planes, NetJets accounts for about half of the
industry. We believe the other participants, in aggregate, lost significant money.
Maintaining a premier level of safety, security and service was always expensive, and the cost of sticking to
those standards was exacerbated by September 11th. No matter how much the cost, we will continue to be the
industry leader in all three respects. An uncompromising insistence on delivering only the best to his
customers is embedded in the DNA of Rich Santulli, CEO of the company and the inventor of fractional
ownership. I(cid:146)m delighted with his fanaticism on these matters for both the company(cid:146)s sake and my family(cid:146)s: I
believe the Buffetts fly more fractional-ownership hours (cid:150) we log in excess of 800 annually (cid:150) than does any
other family. In case you(cid:146)re wondering, we use exactly the same planes and crews that serve NetJet(cid:146)s other
customers.
NetJets experienced a spurt in new orders shortly after September 11th, but its sales pace has since returned to
normal. Per-customer usage declined somewhat during the year, probably because of the recession.
Both we and our customers derive significant operational benefits from our being the runaway leader in the
fractional ownership business. We have more than 300 planes constantly on the go in the U.S. and can
therefore be wherever a customer needs us on very short notice. The ubiquity of our fleet also reduces our
(cid:147)positioning(cid:148) costs below those incurred by operators with smaller fleets.
These advantages of scale, and others we have, give NetJets a significant economic edge over competition.
Under the competitive conditions likely to prevail for a few years, however, our advantage will at best produce
modest profits.
•
Our finance and financial products line of business now includes XTRA, General Re Securities (which is in a
run-off mode that will continue for an extended period) and a few other relatively small operations. The bulk
of the assets and liabilities in this segment, however, arise from a few fixed-income strategies, involving
highly-liquid AAA securities, that I manage. This activity, which only makes sense when certain market
relationships exist, has produced good returns in the past and has reasonable prospects for continuing to do so
over the next year or two.
Investments
Below we present our common stock investments. Those that had a market value of more than $500
million at the end of 2001 are itemized.
Shares
Company
151,610,700 American Express Company.....................................................................
200,000,000 The Coca-Cola Company ..........................................................................
96,000,000 The Gillette Company ...............................................................................
15,999,200 H&R Block, Inc. .......................................................................................
24,000,000 Moody(cid:146)s Corporation ................................................................................
1,727,765 The Washington Post Company................................................................
53,265,080 Wells Fargo & Company ..........................................................................
Others ........................................................................................................
Total Common Stocks...............................................................................
12/31/01
Market
Cost
(dollars in millions)
$ 1,470
1,299
600
255
499
11
306
4,103
$8,543
$ 5,410
9,430
3,206
715
957
916
2,315
5,726
$28,675
14
We made few changes in our portfolio during 2001. As a group, our larger holdings have performed
poorly in the last few years, some because of disappointing operating results. Charlie and I still like the basic
businesses of all the companies we own. But we do not believe Berkshire(cid:146)s equity holdings as a group are
undervalued.
Our restrained enthusiasm for these securities is matched by decidedly lukewarm feelings about the
prospects for stocks in general over the next decade or so. I expressed my views about equity returns in a speech I
gave at an Allen and Company meeting in July (which was a follow-up to a similar presentation I had made two
years earlier) and an edited version of my comments appeared in a December 10th Fortune article. I(cid:146)m enclosing a
talk at our website
copy of
www.berkshirehathaway.com.
the Fortune version of my 1999
You can also view
that article.
Charlie and I believe that American business will do fine over time but think that today(cid:146)s equity prices
presage only moderate returns for investors. The market outperformed business for a very long period, and that
phenomenon had to end. A market that no more than parallels business progress, however, is likely to leave many
investors disappointed, particularly those relatively new to the game.
Here(cid:146)s one for those who enjoy an odd coincidence: The Great Bubble ended on March 10, 2000 (though
we didn(cid:146)t realize that fact until some months later). On that day, the NASDAQ (recently 1,731) hit its all-time high
of 5,132. That same day, Berkshire shares traded at $40,800, their lowest price since mid-1997.
* * * * * * * * * * * *
During 2001, we were somewhat more active than usual in (cid:147)junk(cid:148) bonds. These are not, we should
emphasize, suitable investments for the general public, because too often these securities live up to their name. We
have never purchased a newly-issued junk bond, which is the only kind most investors are urged to buy. When
losses occur in this field, furthermore, they are often disastrous: Many issues end up at a small fraction of their
original offering price and some become entirely worthless.
Despite these dangers, we periodically find a few (cid:150) a very few (cid:150) junk securities that are interesting to us.
And, so far, our 50-year experience in distressed debt has proven rewarding. In our 1984 annual report, we
described our purchases of Washington Public Power System bonds when that issuer fell into disrepute. We(cid:146)ve
also, over the years, stepped into other apparent calamities such as Chrysler Financial, Texaco and RJR Nabisco (cid:150)
all of which returned to grace. Still, if we stay active in junk bonds, you can expect us to have losses from time to
time.
Occasionally, a purchase of distressed bonds leads us into something bigger. Early in the Fruit of the
Loom bankruptcy, we purchased the company(cid:146)s public and bank debt at about 50% of face value. This was an
unusual bankruptcy in that interest payments on senior debt were continued without interruption, which meant we
earned about a 15% current return. Our holdings grew to 10% of Fruit(cid:146)s senior debt, which will probably end up
returning us about 70% of face value. Through this investment, we indirectly reduced our purchase price for the
whole company by a small amount.
In late 2000, we began purchasing the obligations of FINOVA Group, a troubled finance company, and
that, too, led to our making a major transaction. FINOVA then had about $11 billion of debt outstanding, of which
we purchased 13% at about two-thirds of face value. We expected the company to go into bankruptcy, but believed
that liquidation of its assets would produce a payoff for creditors that would be well above our cost. As default
loomed in early 2001, we joined forces with Leucadia National Corporation to present the company with a
prepackaged plan for bankruptcy.
The plan as subsequently modified (and I(cid:146)m simplifying here) provided that creditors would be paid 70%
of face value (along with full interest) and that they would receive a newly-issued 7‰% note for the 30% of their
claims not satisfied by cash. To fund FINOVA(cid:146)s 70% distribution, Leucadia and Berkshire formed a jointly-owned
entity (cid:150) mellifluently christened Berkadia (cid:150) that borrowed $5.6 billion through FleetBoston and, in turn, re-lent this
sum to FINOVA, concurrently obtaining a priority claim on its assets. Berkshire guaranteed 90% of the Berkadia
borrowing and also has a secondary guarantee on the 10% for which Leucadia has primary responsibility. (Did I
mention that I am simplifying?).
15
There is a spread of about two percentage points between what Berkadia pays on its borrowing and what it
receives from FINOVA, with this spread flowing 90% to Berkshire and 10% to Leucadia. As I write this, each loan
has been paid down to $3.9 billion.
As part of the bankruptcy plan, which was approved on August 10, 2001, Berkshire also agreed to offer
70% of face value for up to $500 million principal amount of the $3.25 billion of new 7‰% bonds that were issued
by FINOVA. (Of these, we had already received $426.8 million in principal amount because of our 13% ownership
of the original debt.) Our offer, which was to run until September 26, 2001, could be withdrawn under a variety of
conditions, one of which became operative if the New York Stock Exchange closed during the offering period.
When that indeed occurred in the week of September 11th, we promptly terminated the offer.
Many of FINOVA(cid:146)s loans involve aircraft assets whose values were significantly diminished by the events
of September 11th. Other receivables held by the company also were imperiled by the economic consequences of
the attack that day. FINOVA(cid:146)s prospects, therefore, are not as good as when we made our proposal to the
bankruptcy court. Nevertheless we feel that overall the transaction will prove satisfactory for Berkshire. Leucadia
has day-to-day operating responsibility for FINOVA, and we have long been impressed with the business acumen
and managerial talent of its key executives.
* * * * * * * * * * * *
It(cid:146)s dØj(cid:224) vu time again: In early 1965, when the investment partnership I ran took control of Berkshire, that
company had its main banking relationships with First National Bank of Boston and a large New York City bank.
Previously, I had done no business with either.
Fast forward to 1969, when I wanted Berkshire to buy the Illinois National Bank and Trust of Rockford.
We needed $10 million, and I contacted both banks. There was no response from New York. However, two
representatives of the Boston bank immediately came to Omaha. They told me they would supply the money for
our purchase and that we would work out the details later.
For the next three decades, we borrowed almost nothing from banks. (Debt is a four-letter word around
Berkshire.) Then, in February, when we were structuring the FINOVA transaction, I again called Boston, where
First National had morphed into FleetBoston. Chad Gifford, the company(cid:146)s president, responded just as Bill Brown
and Ira Stepanian had back in 1969 (cid:150) (cid:147)you(cid:146)ve got the money and we(cid:146)ll work out the details later.(cid:148)
And that(cid:146)s just what happened. FleetBoston syndicated a loan for $6 billion (as it turned out, we didn(cid:146)t
need $400 million of it), and it was quickly oversubscribed by 17 banks throughout the world. Sooooo . . . if you
ever need $6 billion, just give Chad a call (cid:150) assuming, that is, your credit is AAA.
* * * * * * * * * * * *
One more point about our investments: The media often report that (cid:147)Buffett is buying(cid:148) this or that security,
having picked up the (cid:147)fact(cid:148) from reports that Berkshire files. These accounts are sometimes correct, but at other
times the transactions Berkshire reports are actually being made by Lou Simpson, who runs a $2 billion portfolio for
GEICO that is quite independent of me. Normally, Lou does not tell me what he is buying or selling, and I learn of
his activities only when I look at a GEICO portfolio summary that I receive a few days after the end of each month.
Lou(cid:146)s thinking, of course, is quite similar to mine, but we usually end up in different securities. That(cid:146)s largely
because he(cid:146)s working with less money and can therefore invest in smaller companies than I. Oh, yes, there(cid:146)s also
another minor difference between us: In recent years, Lou(cid:146)s performance has been far better than mine.
16
Charitable Contributions
Berkshire follows a highly unusual policy in respect to charitable contributions (cid:150) but it(cid:146)s one that Charlie
and I believe is both rational and fair to owners.
First, we let our operating subsidiaries make their own charitable decisions, requesting only that the
owners/managers who once ran these as independent companies make all donations to their personal charities from
their own funds, instead of using company money. When our managers are using company funds, we trust them to
make gifts in a manner that delivers commensurate tangible or intangible benefits to the operations they manage.
Last year contributions from Berkshire subsidiaries totaled $19.2 million.
At the parent company level, we make no contributions except those designated by shareholders. We do
not match contributions made by directors or employees, nor do we give to the favorite charities of the Buffetts or
the Mungers. However, prior to our purchasing them, a few of our subsidiaries had employee-match programs and
we feel fine about their continuing them: It(cid:146)s not our style to tamper with successful business cultures.
To implement our owners’ charitable desires, each year we notify registered holders of A shares (A(cid:146)s
represent 86.6% of our equity capital) of a per-share amount that they can instruct us to contribute to as many as
three charities. Shareholders name the charity; Berkshire writes the check. Any organization that qualifies under
the Internal Revenue Code can be designated by shareholders. Last year Berkshire made contributions of $16.7
million at the direction of 5,700 shareholders, who named 3,550 charities as recipients. Since we started this
program, our shareholders(cid:146) gifts have totaled $181 million.
Most public corporations eschew gifts to religious institutions. These, however, are favorite charities of
our shareholders, who last year named 437 churches and synagogues to receive gifts. Additionally, 790 schools
were recipients. A few of our larger shareholders, including Charlie and me, designate their personal foundations to
get gifts, so that those entities can, in turn, disburse their funds widely.
I get a few letters every week criticizing Berkshire for contributing to Planned Parenthood. These letters
are usually prompted by an organization that wishes to see boycotts of Berkshire products. The letters are
invariably polite and sincere, but their writers are unaware of a key point: It(cid:146)s not Berkshire, but rather its owners
who are making charitable decisions (cid:150) and these owners are about as diverse in their opinions as you can imagine.
For example, they are probably on both sides of the abortion issue in roughly the same proportion as the American
population. We(cid:146)ll follow their instructions, whether they designate Planned Parenthood or Metro Right to Life, just
as long as the charity possesses 501(c)(3) status. It(cid:146)s as if we paid a dividend, which the shareholder then donated.
Our form of disbursement, however, is more tax-efficient.
In neither the purchase of goods nor the hiring of personnel, do we ever consider the religious views, the
gender, the race or the sexual orientation of the persons we are dealing with. It would not only be wrong to do so, it
would be idiotic. We need all of the talent we can find, and we have learned that able and trustworthy managers,
employees and suppliers come from a very wide spectrum of humanity.
* * * * * * * * * * *
To participate in our future charitable contribution programs, you must own Class A shares that are
registered in the name of the actual owner, not the nominee name of a broker, bank or depository. Shares not so
registered on August 31, 2002 will be ineligible for the 2002 program. When you get the contributions form from
us, return it promptly. Designations received after the due date will not be honored.
17
The Annual Meeting
This year’s annual meeting will be on Saturday, May 4, and we will again be at the Civic Auditorium. The
doors will open at 7 a.m., the movie will begin at 8:30, and the meeting itself will commence at 9:30. There will be
a short break at noon for food. (Sandwiches can be bought at the Civic’s concession stands.) Except for that
interlude, Charlie and I will answer questions until 3:30. Give us your best shot.
For at least the next year, the Civic, located downtown, is the only site available to us. We must therefore
hold the meeting on either Saturday or Sunday to avoid the traffic and parking nightmare sure to occur on a
weekday. Shortly, however, Omaha will have a new Convention Center with plenty of parking facilities. Assuming
that we then head for the Center, I will poll shareholders to see whether you wish to return to the Monday meeting
that was standard until 2000. We will decide that vote based on a count of shareholders, not shares. (This is not a
system, however, we will ever institute to decide who should be CEO.)
An attachment to the proxy material that is enclosed with this report explains how you can obtain the
credential you will need for admission to the meeting and other events. As for plane, hotel and car reservations, we
have again signed up American Express (800-799-6634) to give you special help. They do a terrific job for us each
year, and I thank them for it.
In our usual fashion, we will run buses from the larger hotels to the meeting. Afterwards, the buses will
make trips back to the hotels and to Nebraska Furniture Mart, Borsheim’s and the airport. Even so, you are likely to
find a car useful.
We have added so many new companies to Berkshire this year that I’m not going to detail all of the
products that we will be selling at the meeting. But come prepared to carry home everything from bricks to candy.
And underwear, of course. Assuming our Fruit of the Loom purchase has closed by May 4, we will be selling
Fruit’s latest styles, which will make you your neighborhood’s fashion leader. Buy a lifetime supply.
GEICO will have a booth staffed by a number of its top counselors from around the country, all of them
ready to supply you with auto insurance quotes. In most cases, GEICO will be able to give you a special
shareholder discount (usually 8%). This special offer is permitted by 41 of the 49 jurisdictions in which we operate.
Bring the details of your existing insurance and check out whether we can save you money.
At the Omaha airport on Saturday, we will have the usual array of aircraft from NetJets® available for your
inspection. Just ask a representative at the Civic about viewing any of these planes. If you buy what we consider an
appropriate number of items during the weekend, you may well need your own plane to take them home. And, if
you buy a fraction of a plane, we might even throw in a three-pack of briefs or boxers.
At Nebraska Furniture Mart, located on a 75-acre site on 72nd Street between Dodge and Pacific, we will
again be having “Berkshire Weekend” pricing, which means we will be offering our shareholders a discount that is
customarily given only to employees. We initiated this special pricing at NFM five years ago, and sales during the
“Weekend” grew from $5.3 million in 1997 to $11.5 million in 2001.
To get the discount, you must make your purchases on Thursday, May 2 through Monday, May 6 and also
present your meeting credential. The period’s special pricing will even apply to the products of several prestigious
manufacturers that normally have ironclad rules against discounting but that, in the spirit of our shareholder
weekend, have made an exception for you. We appreciate their cooperation. NFM is open from 10 a.m. to 9 p.m.
on weekdays and 10 a.m. to 6 p.m. on Saturdays and Sundays.
Borsheim’s the largest jewelry store in the country except for Tiffany’s Manhattan store will have
two shareholder-only events. The first will be a cocktail reception from 6 p.m. to 10 p.m. on Friday, May 3. The
second, the main gala, will be from 9 a.m. to 5 p.m. on Sunday, May 5. Shareholder prices will be available
Thursday through Monday, so if you wish to avoid the large crowds that will assemble on Friday evening and
Sunday, come at other times and identify yourself as a shareholder. On Saturday, we will be open until 6 p.m.
Borsheim’s operates on a gross margin that is fully twenty percentage points below that of its major rivals, so the
more you buy, the more you save (or at least that’s what my wife and daughter tell me). Come by and let us
perform a walletectomy on you.
In the mall outside of Borsheim’s, we will have some of the world’s top bridge experts available to play
with our shareholders on Sunday afternoon. We expect Bob and Petra Hamman along with Sharon Osberg to host
tables. Patrick Wolff, twice U.S. chess champion, will also be in the mall, taking on all comers blindfolded!
18
Last year, Patrick played as many as six games simultaneously with his blindfold securely in place and this
year will try for seven. Finally, Bill Robertie, one of only two players who have twice won the backgammon world
championship, will be on hand to test your skill at that game. Come to the mall on Sunday for the Mensa Olympics.
Gorat’s my favorite steakhouse will again be open exclusively for Berkshire shareholders on Sunday,
May 5, and will be serving from 4 p.m. until 10 p.m. Please remember that to come to Gorat’s on Sunday, you must
have a reservation. To make one, call 402-551-3733 on April 1 (but not before). If Sunday is sold out, try Gorat’s
on one of the other evenings you will be in town. Show your sophistication by ordering a rare T-bone with a double
order of hash browns.
The usual baseball game will be held at Rosenblatt Stadium at 7 p.m. on Saturday night. This year the
Omaha Royals will play the Oklahoma RedHawks. Last year, in an attempt to emulate the career switch of Babe
Ruth, I gave up pitching and tried batting. Bob Gibson, an Omaha native, was on the mound and I was terrified,
fearing Bob’s famous brush-back pitch. Instead, he delivered a fast ball in the strike zone, and with a Mark
McGwire-like swing, I managed to connect for a hard grounder, which inexplicably died in the infield. I didn’t run
it out: At my age, I get winded playing a hand of bridge.
I’m not sure what will take place at the ballpark this year, but come out and be surprised. Our proxy
statement contains instructions for obtaining tickets to the game. Those people ordering tickets to the annual
meeting will receive a booklet containing all manner of information that should help you enjoy your visit in Omaha.
There will be plenty of action in town. So come for Woodstock Weekend and join our Celebration of Capitalism at
the Civic.
* * * * * * * * * * * *
Finally, I would like to thank the wonderful and incredibly productive crew at World Headquarters (all
5,246.5 square feet of it) who make my job so easy. Berkshire added about 40,000 employees last year, bringing
our workforce to 110,000. At headquarters we added one employee and now have 14.8. (I’ve tried in vain to get
JoEllen Rieck to change her workweek from four days to five; I think she likes the national recognition she gains by
being .8.)
The smooth handling of the array of duties that come with our current size and scope – as well as some
additional activities almost unique to Berkshire, such as our shareholder gala and designated-gifts program – takes a
very special group of people. And that we most definitely have.
February 28, 2002
Warren E. Buffett
Chairman of the Board
19
BERKSHIRE HATHAWAY INC.
Selected Financial Data for the Past Five Years
(dollars in millions, except per share data)
Revenues:
Insurance premiums earned ..........................................
Sales and service revenues............................................
Interest, dividend and other investment income ...........
Income from finance and financial products
2001
2000
1999
1998
1997
$17,905
14,902
2,930
$19,343
7,361
2,791
$14,306
5,918
2,314
$ 5,481
4,675
1,049
$ 4,761
3,615
916
businesses ..................................................................
Realized investment gain (1) ..........................................
568
1,363
556
3,955
125
1,365
212
2,415
32
1,106
Total revenues...............................................................
$37,668
$34,006
$24,028
$13,832
$10,430
Earnings:
Before realized investment gain ...................................
Realized investment gain (1) ..........................................
$ (47) (4) $ 936
2,392
842
$ 671
886
$ 1,277
1,553
$ 1,197
704
Net earnings..................................................................
$ 795
$ 3,328
$ 1,557
$ 2,830
$ 1,901
Earnings per share:
Before realized investment gain ...................................
Realized investment gain (1) ..........................................
$ (30) (4) $ 614
1,571
551
$ 442
583
$ 1,021
1,241
$ 971
571
Net earnings..................................................................
$ 521
$ 2,185
$ 1,025
$ 2,262
$ 1,542
Year-end data (2):
Total assets ................................................................... $162,752
Borrowings under investment agreements
and other debt (3) ........................................................
Shareholders’ equity .....................................................
Class A equivalent common shares
$135,792
$131,416
$122,237
$56,111
3,485
57,950
2,663
61,724
2,465
57,761
2,385
57,403
2,267
31,455
outstanding, in thousands...........................................
1,528
1,526
1,521
1,519
1,234
Shareholders’ equity per outstanding
Class A equivalent share............................................ $ 37,920
$ 40,442
$ 37,987
$ 37,801
$25,488
_________________
(1)
(2)
(3)
(4)
The amount of realized investment gain/loss for any given period has no predictive value, and variations in
amount from period to period have no practical analytical value, particularly in view of the unrealized
appreciation now existing in Berkshire's consolidated investment portfolio.
Year-end data for 1998 includes General Re Corporation acquired by Berkshire on December 21, 1998.
Excludes borrowings of finance businesses.
Includes pre-tax underwriting loss of $2.4 billion in connection with the September 11, 2001 terrorist attack.
Such loss reduced net earnings by approximately $1.5 billion and earnings per share by $982.
20
BERKSHIRE HATHAWAY INC.
ACQUISITION CRITERIA
We are eager to hear from principals or their representatives about businesses that meet all of the following criteria:
Large purchases (at least $50 million of before-tax earnings),
Demonstrated consistent earning power (future projections are of no interest to us, nor are "turnaround" situations),
Businesses earning good returns on equity while employing little or no debt,
(1)
(2)
(3)
(4) Management in place (we can't supply it),
(5)
(6)
Simple businesses (if there's lots of technology, we won't understand it),
An offering price (we don't want to waste our time or that of the seller by talking, even preliminarily,
about a transaction when price is unknown).
The larger the company, the greater will be our interest: We would like to make an acquisition in the $5-20 billion range.
We are not interested, however, in receiving suggestions about purchases we might make in the general stock market.
We will not engage in unfriendly takeovers. We can promise complete confidentiality and a very fast answer —
customarily within five minutes — as to whether we're interested. We prefer to buy for cash, but will consider issuing stock
when we receive as much in intrinsic business value as we give.
Charlie and I frequently get approached about acquisitions that don't come close to meeting our tests: We've found that if
you advertise an interest in buying collies, a lot of people will call hoping to sell you their cocker spaniels. A line from a
country song expresses our feeling about new ventures, turnarounds, or auction-like sales: "When the phone don't ring, you'll
know it's me."
_____________________________________________________________________________________________
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Berkshire Hathaway Inc.
We have audited the accompanying consolidated balance sheets of Berkshire Hathaway Inc. and subsidiaries as of December
31, 2001 and 2000, and the related consolidated statements of earnings, cash flows and changes in shareholders' equity for
each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of
Berkshire Hathaway Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
March 5, 2002
Omaha, Nebraska
21
BERKSHIRE HATHAWAY INC.
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(dollars in millions except per share amounts)
ASSETS
Cash and cash equivalents...................................................................................................
Investments:
Securities with fixed maturities ........................................................................................
Equity securities ...............................................................................................................
Other.................................................................................................................................
Receivables .........................................................................................................................
Inventories...........................................................................................................................
Investments in MidAmerican Energy Holdings Company..................................................
Assets of finance and financial products businesses ...........................................................
Property, plant and equipment.............................................................................................
Goodwill of acquired businesses.........................................................................................
Other assets .........................................................................................................................
LIABILITIES AND SHAREHOLDERS’ EQUITY
Losses and loss adjustment expenses ..................................................................................
Unearned premiums ............................................................................................................
Accounts payable, accruals and other liabilities..................................................................
Income taxes........................................................................................................................
Borrowings under investment agreements and other debt...................................................
Liabilities of finance and financial products businesses .....................................................
Minority shareholders’ interests..........................................................................................
Shareholders’ equity:
Common Stock:*
Class A Common Stock, $5 par value
December 31,
2001
2000
$ 5,313
$ 5,263
36,509
28,675
1,974
11,926
2,213
1,826
41,591
4,776
21,407
6,542
32,567
37,619
1,637
11,764
1,275
1,719
16,829
2,699
18,875
5,545
$162,752
$135,792
$ 40,716
4,814
9,626
7,021
3,485
37,791
$ 33,022
3,885
8,374
10,125
2,663
14,730
103,453
72,799
1,349
1,269
and Class B Common Stock, $0.1667 par value.........................................................
Capital in excess of par value...........................................................................................
Accumulated other comprehensive income......................................................................
Retained earnings .............................................................................................................
8
25,607
12,891
19,444
8
25,524
17,543
18,649
Total shareholders’ equity ..........................................................................................
57,950
61,724
$162,752
$135,792
* Class B Common Stock has economic rights equal to one-thirtieth (1/30) of the economic rights of Class A
Common Stock. Accordingly, on an equivalent Class A Common Stock basis, there are 1,528,217 shares
outstanding at December 31, 2001 versus 1,526,230 shares outstanding at December 31, 2000.
See accompanying Notes to Consolidated Financial Statements
22
BERKSHIRE HATHAWAY INC.
and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(dollars in millions except per share amounts)
Year Ended December 31,
2000
2001
1999
Revenues:
Insurance premiums earned...............................................................
Sales and service revenues ................................................................
Interest, dividend and other investment income ................................
Income from MidAmerican Energy Holdings Company ..................
Income from finance and financial products businesses ...................
Realized investment gain...................................................................
$17,905
14,902
2,765
165
568
1,363
$19,343
7,361
2,686
105
556
3,955
$14,306
5,918
2,314
—
125
1,365
Cost and expenses:
Insurance losses and loss adjustment expenses .................................
Insurance underwriting expenses ......................................................
Cost of products and services sold ....................................................
Selling, general and administrative expenses ....................................
Goodwill amortization.......................................................................
Interest expense .................................................................................
Earnings before income taxes and minority interest.......................
Income taxes......................................................................................
Minority interest................................................................................
Net earnings ........................................................................................
37,668
34,006
24,028
18,398
3,574
10,446
3,000
572
209
36,199
1,469
620
54
$ 795
17,332
3,632
4,893
1,703
715
144
28,419
5,587
2,018
241
$ 3,328
12,518
3,220
4,065
1,164
477
134
21,578
2,450
852
41
$ 1,557
Average common shares outstanding * .............................................
1,527,234
1,522,933
1,519,703
Net earnings per common share *.....................................................
$ 521
$ 2,185
$ 1,025
* Average shares outstanding include average Class A Common shares and average Class B Common
shares determined on an equivalent Class A Common Stock basis. Net earnings per common share
shown above represents net earnings per equivalent Class A Common share. Net earnings per Class B
Common share is equal to one-thirtieth (1/30) of such amount or $17 per share for 2001, $73 per share
for 2000, and $34 per share for 1999.
See accompanying Notes to Consolidated Financial Statements
23
BERKSHIRE HATHAWAY INC.
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
Cash flows from operating activities:
Net earnings................................................................................................
Adjustments to reconcile net earnings to cash flows
from operating activities:
Realized investment gain............................................................................
Depreciation and amortization....................................................................
Changes in assets and liabilities before effects from
business acquisitions:
Losses and loss adjustment expenses.......................................................
Deferred charges – reinsurance assumed .................................................
Unearned premiums .................................................................................
Receivables ..............................................................................................
Accounts payable, accruals and other liabilities ......................................
Finance businesses trading activities .......................................................
Income taxes ............................................................................................
Other...........................................................................................................
Year Ended December 31,
1999
2000
2001
$ 795
$3,328
$1,557
(1,363)
1,076
(3,955)
997
(1,365)
688
7,571
(498)
929
219
(339)
(1,083)
(329)
(404)
5,976
(1,075)
97
(3,062)
660
(1,126)
757
350
3,790
(958)
394
(834)
(5)
473
(1,395)
(145)
Net cash flows from operating activities ....................................................
6,574
2,947
2,200
Cash flows from investing activities:
Purchases of securities with fixed maturities..............................................
Purchases of equity securities.....................................................................
Proceeds from sales of securities with fixed maturities..............................
Proceeds from redemptions and maturities of securities
with fixed maturities ................................................................................
Proceeds from sales of equity securities.....................................................
Loans and investments originated in finance businesses............................
Principal collection on loans and investments
originated in finance businesses .................................................................
Acquisitions of businesses, net of cash acquired........................................
Other...........................................................................................................
(16,475)
(1,075)
8,470
(16,550)
(4,145)
13,119
(18,380)
(3,664)
4,509
4,305
3,881
(9,502)
2,530
6,870
(857)
2,833
4,355
(2,526)
4,126
(4,697)
(727)
1,142
(3,798)
(582)
845
(153)
(417)
Net cash flows from investing activities.....................................................
(11,694)
(2,271)
(12,598)
Cash flows from financing activities:
Proceeds from borrowings of finance businesses .......................................
Proceeds from other borrowings.................................................................
Repayments of borrowings of finance businesses ......................................
Repayments of other borrowings................................................................
Change in short term borrowings of finance businesses.............................
Changes in other short term borrowings.....................................................
Other...........................................................................................................
6,288
824
(865)
(798)
826
(377)
116
120
681
(274)
(806)
500
324
(75)
736
1,118
(46)
(1,333)
(311)
340
(137)
Net cash flows from financing activities ....................................................
6,014
470
367
Increase (decrease) in cash and cash equivalents .......................................
Cash and cash equivalents at beginning of year ...............................................
894
5,604
1,146
4,458
(10,031)
14,489
Cash and cash equivalents at end of year *..................................................
$ 6,498
$ 5,604
$ 4,458
* Cash and cash equivalents at end of year are comprised of the following:
Finance and financial products businesses ................................................
Other...........................................................................................................
$ 1,185
5,313
$ 6,498
$ 341
5,263
$ 5,604
$ 623
3,835
$ 4,458
See accompanying Notes to Consolidated Financial Statements
24
BERKSHIRE HATHAWAY INC.
and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(dollars in millions)
Class A & B
Common
Stock
Capital in
Excess of
Par Value
$ 8
$25,121
88
Accumulated
Other
Comprehensive
Income
$18,510
Retained
Earnings
$13,764
1,557
Comprehensive
Income
$ 1,557
(795)
(1,365)
(16)
889
(1,287)
$ 270
$ 3,328
$4,402
(3,955)
(153)
26
320
$ 3,648
$ 795
(5,706)
(1,363)
(151)
2,568
(4,652)
$(3,857)
(795)
(1,365)
(16)
889
______
$17,223
4,402
(3,955)
(153)
26
______
$17,543
(5,706)
(1,363)
(151)
2,568
______
$12,891
Balance December 31, 1998....................
Net earnings..............................................
Exercise of stock options issued in
connection with business acquisitions ......
Other comprehensive income items:
Unrealized appreciation of investments....
Reclassification adjustment for
appreciation included in net earnings .......
Foreign currency translation losses...........
Income taxes and minority interests .........
Other comprehensive income ...................
Total comprehensive income ....................
Balance December 31, 1999....................
Net earnings..............................................
Common stock issued in connection
with business acquisitions.........................
Exercise of stock options issued in
connection with business acquisitions ......
Other comprehensive income items:
Unrealized appreciation of investments....
Reclassification adjustment for
appreciation included in net earnings .......
Foreign currency translation losses and
other ..........................................................
Income taxes and minority interests .........
Other comprehensive income ...................
Total comprehensive income ....................
Balance December 31, 2000....................
Net earnings..............................................
Exercise of stock options issued in
connection with business acquisitions ......
Other comprehensive income items:
Unrealized appreciation of investments....
Reclassification adjustment for
appreciation included in net earnings .......
Foreign currency translation losses and
other ..........................................................
Income taxes and minority interests .........
Other comprehensive income ...................
Total comprehensive income ....................
_____
$ 8
______
_______
$25,209
$15,321
3,328
224
91
_____
$ 8
______
______
$25,524
$18,649
795
83
_____
______
______
Balance December 31, 2001....................
$ 8
$25,607
$19,444
See accompanying Notes to Consolidated Financial Statements
25
BERKSHIRE HATHAWAY INC.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
(1)
Significant accounting policies and practices
(a)
Nature of operations and basis of consolidation
Berkshire Hathaway Inc. ("Berkshire" or "Company") is a holding company owning subsidiaries engaged in
a number of diverse business activities. The most important of these are property and casualty insurance
businesses conducted on both a direct and reinsurance basis. Further information regarding these
businesses and Berkshire's other reportable business segments is contained in Note 19. Berkshire
initiated and/or consummated several business acquisitions over the past three years. The significant
business acquisitions are described more fully in Note 2. The accompanying Consolidated Financial
Statements include the accounts of Berkshire consolidated with accounts of all its subsidiaries.
Intercompany accounts and transactions have been eliminated. Certain amounts in 2000 and 1999 have
been reclassified to conform with current year presentation.
Since acquired in December 1998 and through the third quarter of 2000, the international property/casualty
and global life/health reinsurance activities of General Re were reported in Berkshire’s financial
statements based on a one-quarter lag to facilitate the timely completion of the Consolidated Financial
Statements. During the fourth quarter of 2000, General Re implemented a number of procedural changes
and improvements to allow reporting of these businesses without the one-quarter lag. Accordingly,
Berkshire’s Consolidated Statements of Earnings and Cash Flows for the year ended December 31, 2000
include five quarters of results of operations and cash flows of these operations. The effect of eliminating
the one-quarter lag in reporting was not significant to Berkshire’s Consolidated Statement of Earnings for
the year ending December 31, 2000.
(b) Use of estimates in preparation of financial statements
(c)
(d)
The preparation of the Consolidated Financial Statements in conformity with generally accepted accounting
principles ("GAAP") requires management to make estimates and assumptions that affect the reported
amount of assets and liabilities at the date of the financial statements and the reported amount of
revenues and expenses during the period. In particular, estimates of unpaid losses and loss adjustment
expenses for property and casualty insurance are subject to considerable estimation error due to the
inherent uncertainty in projecting ultimate claim amounts that will be reported and settled over a period
of many years. Actual results may differ from the estimates and assumptions used in preparing the
Consolidated Financial Statements.
Cash equivalents
Cash equivalents consist of funds invested in money market accounts and in investments with a maturity of
three months or less when purchased.
Investments
Berkshire’s management determines the appropriate classifications of investments at the time of acquisition
and re-evaluates the classifications at each balance sheet date. Investments may be classified as held-for-
trading, held-to-maturity, or, when neither of those classifications is appropriate, as available-for-sale.
Berkshire’s investments in fixed maturity and equity securities are primarily classified as available-for-
sale, except for certain investments, which are classified as held-to-maturity. Held-to-maturity
investments are carried at amortized cost, reflecting Berkshire’s intent and ability to hold the securities to
maturity. Available-for-sale securities are stated at fair value with net unrealized gains or losses reported
as a separate component in shareholders’ equity. Realized gains and losses, which arise when available-
for-sale investments are sold (as determined on a specific identification basis) or other-than-temporarily
impaired are included in the Consolidated Statements of Earnings.
Other investments include investments in commodities, limited partnerships and warrants, which are carried
at fair value in the accompanying Consolidated Balance Sheets. Realized and unrealized gains and
losses associated with these investments are included in the Consolidated Statements of Earnings as a
component of realized investment gain.
Accounting policies and practices for investments held by finance and financial products businesses are
described in Note 9.
26
(1) Significant accounting policies and practices (Continued)
(e)
(f)
Inventories
Inventories are stated at the lower of cost or market. Cost with respect to manufactured goods includes raw
materials, direct and indirect labor and factory overhead. Approximately 46% of the total inventory cost
was determined using the first-in-first-out (FIFO) method with the remainder valued using the last-in-
first-out (LIFO) method. With respect to inventories carried at LIFO cost, the aggregate difference in
value between LIFO cost and cost determined under FIFO methods was not material as of December 31,
2001 and December 31, 2000.
Property, plant and equipment
Property, plant and equipment is recorded at cost. Depreciation is provided principally on the straight-line
method over estimated useful lives as follows: aircraft, simulators, training equipment and spare parts, 4
to 20 years; buildings and improvements, 10 to 40 years; machinery, equipment, furniture and fixtures, 3
to 20 years. Leasehold improvements are amortized over the life of the lease or the life of the
improvement, whichever is shorter. Interest is capitalized as an integral component of cost during the
construction period of simulators and facilities and is amortized over the life of the related assets.
(g) Goodwill of acquired businesses
Goodwill of acquired businesses represents the difference between purchase cost and the fair value of the
net assets of acquired businesses and is being amortized on a straight-line basis generally over 40 years.
The Company periodically reviews the recoverability of the carrying value of goodwill of acquired
businesses to ensure it is appropriately valued. In the event that a condition is identified which may
indicate an impairment issue exists, an assessment is performed using a variety of methodologies.
As a result of new accounting standards issued in June 2001, accounting for goodwill has changed.
Goodwill arising from business acquisitions after July 1, 2001 is subject to an impairment only model,
instead of an amortization and impairment model. See Note 1(n) below for further discussion of these
new standards.
During the fourth quarter of 2000, Berkshire management concluded that an impairment of goodwill
existed with respect to the Dexter Shoe business. Goodwill amortization shown in the accompanying
Consolidated Statements of Earnings for 2000 includes a goodwill impairment charge of $219 million
related to this business.
Revenue recognition
Insurance premiums for prospective property/casualty insurance and reinsurance and health reinsurance
policies are earned in proportion to the level of insurance protection provided. In most cases, premiums
are recognized as revenues ratably over their terms with unearned premiums computed on a monthly or
daily pro rata basis. Premium adjustments on contracts and audit premiums are based on estimates made
over the contract period. Consideration received for retroactive reinsurance policies is recognized as
premiums earned at the inception of the contracts. Premiums for life contracts are earned when due.
Premiums earned are stated net of amounts ceded to reinsurers.
Revenues from product sales are recognized upon passage of title to the customer, which coincides with
customer pickup, product shipment, delivery or acceptance, depending on terms of the sales arrangement.
Service revenues are recognized as the services are performed. Services provided pursuant to a contract
are either recognized over the contract period, or upon completion of the elements specified in the
contract, depending on the terms of the contract.
Insurance premium acquisition costs
Certain costs of acquiring insurance premiums are deferred, subject to ultimate recoverability, and charged
to income as the premiums are earned. Acquisition costs consist of commissions, premium taxes,
advertising and other underwriting costs. The recoverability of premium acquisition costs, generally,
reflects anticipation of investment income. The unamortized balances of deferred premium acquisition
costs are included in other assets and were $1,029 million and $916 million at December 31, 2001 and
2000, respectively.
(h)
(i)
27
Notes to Consolidated Financial Statements (Continued)
(1) Significant accounting policies and practices (Continued)
(j)
Losses and loss adjustment expenses
Liabilities for unpaid losses and loss adjustment expenses represent estimated claim and claim settlement
costs of property/casualty insurance and reinsurance contracts. The liabilities for losses and loss
adjustment expenses are recorded at the estimated ultimate payment amounts, except that amounts
arising from certain reinsurance businesses are discounted as discussed below. Estimated ultimate
payment amounts are based upon (1) individual case estimates, (2) estimates of incurred-but-not-reported
losses, based upon past experience and (3) reports of losses from ceding insurers.
The estimated liabilities of workers’ compensation claims assumed by General Re under reinsurance
contracts and liabilities assumed under structured settlement reinsurance contracts by Berkshire
Hathaway Reinsurance Group are carried in the Consolidated Balance Sheets at discounted amounts.
Discounted amounts pertaining to General Re’s workers’ compensation risks are based upon an annual
discount rate of 4.5%. The discounted amounts for structured settlement reinsurance contracts are based
upon the prevailing market discount rates when the contracts were written and range from 5% to 13%.
The periodic discount accretion is included in the Consolidated Statements of Earnings as a component
of losses and loss adjustment expenses.
(k) Deferred charges-reinsurance assumed
(l)
(m)
(n)
The excess of estimated liabilities for claims and claim costs over the consideration received with respect to
retroactive property and casualty reinsurance contracts that provide for indemnification of insurance risk
is established as a deferred charge at inception of such contracts. The deferred charges are subsequently
amortized using the interest method over the expected settlement periods of the claim liabilities. The
periodic amortization charges are reflected in the accompanying Consolidated Statements of Earnings as
losses and loss adjustment expenses.
Reinsurance
Provisions for losses and loss adjustment expenses are reported in the accompanying Consolidated
Statements of Earnings after deducting amounts recovered and estimates of amounts recoverable under
reinsurance contracts. Reinsurance contracts do not relieve the ceding company of its obligations to
indemnify policyholders with respect to the underlying insurance and reinsurance contracts. Estimated
losses and loss adjustment expenses recoverable under reinsurance contracts are included in receivables.
Foreign currency
The accounts of several foreign-based subsidiaries are measured using the local currency as the functional
currency. Revenues and expenses of these businesses are translated into U.S. dollars at the average
exchange rate for the period. Assets and liabilities are translated at the exchange rate as of the end of the
reporting period. Gains or losses from translating the financial statements of foreign-based operations are
included in shareholders’ equity as a component of other comprehensive income. Gains and losses
arising from other transactions denominated in a foreign currency are included in the Consolidated
Statements of Earnings.
Accounting pronouncements to be adopted subsequent to December 31, 2001
In June 2001, the Financial Accounting Standards Board (“FASB”) issued two Statements of Financial
Accounting Standards (“SFAS”). SFAS No. 141 “Business Combinations” requires usage of the
purchase method for all business combinations initiated after June 30, 2001, and prohibits the usage of
the pooling of interests method. The provisions of SFAS No. 141 relating to the application of the
purchase method are generally effective for business combinations completed after July 1, 2001.
SFAS No. 142 “Goodwill and Other Intangible Assets” changes the current accounting model that requires
amortization of goodwill, supplemented by impairment tests, to an accounting model that is based solely
upon impairment tests. SFAS No. 142 also provides guidance on accounting for identifiable intangible
assets that may or may not require amortization. The provisions of SFAS No. 142 related to accounting
for goodwill and intangible assets will be generally effective for Berkshire at the beginning of 2002,
except, among other things, that goodwill and identifiable intangible assets with indefinite lives arising
from combinations completed after July 1, 2001 are not being amortized.
28
(1) Significant accounting policies and practices (Continued)
(n)
Accounting pronouncements to be adopted subsequent to December 31, 2001 (Continued)
SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” generally retains the
basic accounting model for the identification and measurement of impairments to long-lived assets to be
held and such assets to be disposed. SFAS No. 144 also addresses several implementation and financial
statement presentation issues not previously addressed under GAAP. The provisions of SFAS No. 144
will be effective for Berkshire at the beginning of 2002.
Although Berkshire has not completed its assessment of these new accounting standards, it expects that the
provisions of SFAS No. 142 related to accounting for goodwill will have a significant impact on its
consolidated earnings in 2002 when compared to consolidated earnings for years prior to 2002. The
accompanying Consolidated Statement of Earnings for 2001 includes goodwill amortization of $572
million. Additionally Berkshire’s equity income from its investment in MidAmerican Energy Holdings
Company includes its share of MidAmerican’s $96 million of goodwill amortization.
(2) Significant business acquisitions
During 2001, Berkshire completed four significant business acquisitions. Information concerning these
acquisitions follows.
Shaw Industries, Inc. (“Shaw”)
On January 8, 2001, Berkshire acquired approximately 87.3% of the common stock of Shaw for $19 per share or
$2.1 billion in total. An investment group consisting of Robert E. Shaw, Chairman and CEO of Shaw, Julian D. Saul,
President of Shaw, certain family members and related family interests of Messrs. Shaw and Saul, and certain other
directors and members of management acquired the remaining 12.7% of Shaw. In January 2002, Berkshire acquired all
of the shares of Shaw held by the investment group in exchange for 4,505 shares of Berkshire Class A common stock
and 7,063 shares of Class B common stock.
Shaw is the world’s largest manufacturer of tufted broadloom carpet and rugs for residential and commercial
applications throughout the U.S. and exports to most markets worldwide. Shaw markets its residential and commercial
products under a variety of brand names.
Johns Manville Corporation (“Johns Manville”)
On February 27, 2001, Berkshire acquired Johns Manville. Berkshire purchased all of the outstanding shares of
Johns Manville common stock for $13 per share or $1.8 billion in total. Johns Manville is a leading manufacturer of
insulation and building products. Johns Manville manufactures and markets products for building and equipment
insulation, commercial and industrial roofing systems, high-efficiency filtration media, and fibers and non-woven mats
used as reinforcements in building and industrial applications.
MiTek Inc. (“MiTek”)
On July 31, 2001, Berkshire acquired a 90% equity interest in MiTek from Rexam PLC for approximately $400
million. Existing MiTek management acquired the remaining 10% interest. MiTek, headquartered in Chesterfield,
Missouri, produces steel connector products, design engineering software and ancillary services for the building
components market.
XTRA Corporation (“XTRA”)
On September 20, 2001, Berkshire acquired XTRA through a cash tender offer and subsequent statutory merger
for all of the outstanding shares. Holders of XTRA common stock received aggregate consideration of approximately
$578 million. XTRA, headquartered in Westport, Connecticut, is a leading operating lessor of transportation
equipment, including over-the-road trailers, marine containers and intermodal equipment.
In addition, Berkshire completed six significant acquisitions in 2000. Information concerning five of these
acquisitions follows. Information concerning the other acquisition is contained in Note 3 (Investments in MidAmerican
Energy Holdings Company).
CORT Business Services Corporation (“CORT”)
Effective February 18, 2000, Wesco Financial Corporation, an indirect 80.1% owned subsidiary of Berkshire,
acquired CORT. CORT is a leading national provider of rental furniture, accessories and related services in the “rent-
to-rent” segment of the furniture industry.
Ben Bridge Jeweler (“Ben Bridge”)
Effective July 3, 2000, Berkshire acquired Ben Bridge. Ben Bridge is the leading operator of upscale jewelry
stores based in major shopping malls in the Western U.S.
29
Notes to Consolidated Financial Statements (Continued)
(2) Significant business acquisitions (Continued)
Justin Industries, Inc. (“Justin”)
Effective August 1, 2000, Berkshire acquired Justin. Principal businesses of Justin include: Acme Building
Brands, a leading manufacturer and producer of face brick, concrete masonry products and ceramic and marble floor
and wall tile and Justin Brands, a leading manufacturer of Western footwear under a number of brand names.
U.S. Investment Corporation (“USIC”)
Effective August 8, 2000, Berkshire acquired USIC. USIC is the parent of the United States Liability Insurance
Group, one of the premier U.S. writers of specialty insurance.
Benjamin Moore & Co. (“Benjamin Moore”)
Effective December 18, 2000, Berkshire acquired Benjamin Moore. Benjamin Moore is a formulator,
manufacturer and retailer of a broad range of architectural and industrial coatings, available principally in the U.S. and
Canada.
Aggregate consideration paid for the five business acquisitions consummated in 2000 totaled $2,370 million,
consisting of $2,146 million in cash and the remainder in Berkshire Class A and Class B common stock.
Each of the business acquisitions described above was accounted for under the purchase method. The excess of the
purchase cost of the business over the fair value of net assets acquired was recorded as goodwill of acquired businesses.
The results of operations for each of the nine entities acquired in 2001 and 2000 are included in Berkshire’s
consolidated results of operations from the effective date of each merger. The following table sets forth certain
unaudited consolidated earnings data for 2001 and 2000, as if each of the acquisitions discussed above were
consummated on the same terms at the beginning of each year. Dollars are in millions except per share amounts.
Total revenues ............................................................................................................................
Net earnings ...............................................................................................................................
Earnings per equivalent Class A Common Share......................................................................
2001
$38,137
803
526
2000
$41,724
3,420
2,243
During the second half of 2001 Berkshire initiated two additional business acquisitions which had not closed as of
December 31, 2001. Information concerning these transactions follows.
Albecca Inc. (“Albecca”)
Effective February 8, 2002, Berkshire acquired for cash all of the outstanding shares of Albecca. Albecca designs,
manufactures and distributes a complete line of high-quality custom picture framing products primarily under the
Larson-Juhl name.
Fruit of the Loom (“FOL”)
On November 1, 2001, Berkshire announced that it had entered into an agreement with Fruit of the Loom, LTD.
and Fruit of the Loom, Inc. (together the “FOL entities”) to acquire the FOL entities’ basic apparel business. Under
terms of the agreement, the purchase price of $835 million in cash is subject to significant reduction for certain
liabilities, as well as adjustment upward or downward depending on working capital levels.
The FOL entities are currently operating as debtors-in-possession pursuant to its Chapter 11 bankruptcy filing
currently pending before the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). On
January 2, 2002, the Bankruptcy Court issued an order determining Berkshire as the successful bidder for the FOL
entities’ basic apparel business. A hearing to determine whether the FOL reorganization plan is confirmed (such plan
contemplates the aforementioned sale of the basic apparel business to Berkshire) has been scheduled for April 4, 2002.
If the FOL reorganization plan is confirmed at that time, the closing will occur in the second quarter of 2002.
The FOL apparel business is a leading vertically integrated basic apparel company manufacturing and marketing
underwear, activewear, casualwear and childrenswear. The FOL apparel business operates on a worldwide basis and
sells its products principally in North America under the Fruit of the Loom and BVD brand names.
(3)
Investments in MidAmerican Energy Holdings Company
On March 14, 2000, Berkshire invested approximately $1.24 billion in common stock and a non-dividend paying
convertible preferred stock of MidAmerican Energy Holdings Company (“MidAmerican”). Such investment gave
Berkshire about a 9.7% voting interest and a 76% economic interest in MidAmerican on a fully-diluted basis. Berkshire
subsidiaries also acquired approximately $455 million of an 11% non-transferable trust preferred security. Mr. Walter
Scott, Jr., a member of Berkshire’s Board of Directors, controls approximately 86% of the voting interest in
MidAmerican.
30
(3)
Investments in MidAmerican Energy Holdings Company (Continued)
MidAmerican is a global leader in the production of energy from diversified fuel sources including geothermal,
natural gas, hydroelectric, nuclear and coal. MidAmerican also is a leader in the supply and distribution of energy in the
U.S. and U.K. consumer markets.
Berkshire’s aggregate investments in MidAmerican are included in the Consolidated Balance Sheets as
Investments in MidAmerican Energy Holdings Company. Berkshire is accounting for its investments in the common
and non-dividend paying convertible preferred stock pursuant to the equity method. The carrying value of these equity
method investments totaled $1,372 million at December 31, 2001 and $1,264 million at December 31, 2000. The 11%
non-transferable trust preferred security is classified as a held-to-maturity security, and is carried at cost.
The Consolidated Statements of Earnings reflect, as Income from MidAmerican Energy Holdings Company,
Berkshire’s proportionate share of MidAmerican’s net income with respect to the investments accounted for pursuant to
the equity method, as well as interest earned on the 11% trust preferred security. Income derived from equity method
investments totaled $115 million in 2001 and $66 million for the period beginning on March 14, 2000 and ending
December 31, 2000.
Condensed consolidated balance sheets of MidAmerican as of December 31, 2001 and 2000 are as follows.
Amounts are in millions.
Assets:
Properties, plants, contracts and equipment, net...............................................
Goodwill ...........................................................................................................
Other assets.......................................................................................................
Liabilities and shareholders’ equity:
Term debt..........................................................................................................
Redeemable preferred securities.......................................................................
Other liabilities and minority interests..............................................................
Shareholders’ equity .........................................................................................
2001
2000
$ 6,527
3,639
2,452
$12,618
$ 7,163
1,009
2,734
10,906
1,712
$12,618
$ 5,349
3,673
2,659
$11,681
$ 5,919
1,032
3,154
10,105
1,576
$11,681
Condensed consolidated statements of earnings of MidAmerican for the year ending December 31, 2001 and for
the period from March 14, 2000 through December 31, 2000 are as follows. Amounts are in millions.
2001
2000
Revenues:
Operating revenue.............................................................................................
Other income ....................................................................................................
Costs and expenses:
Cost of sales and operating expenses................................................................
Depreciation and amortization..........................................................................
Interest expense and minority interest ..............................................................
Income before taxes..........................................................................................
Income taxes.....................................................................................................
Cumulative effect of accounting change ..........................................................
Net income........................................................................................................
$ 5,061
276
5,337
3,794
539
606
4,939
398
250
5
$ 143
$ 3,946
94
4,040
3,041
383
482
3,906
134
53
—
$ 81
31
Notes to Consolidated Financial Statements (Continued)
Investments in securities with fixed maturities
(4)
Data with respect to investments in securities with fixed maturities are shown below (in millions).
Amortized
Cost(2)
Unrealized Unrealized
Gains
Losses
Fair
Value
December 31, 2001(1)
Available for sale:
Bonds:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies..............
$ 8,969
Obligations of states, municipalities
and political subdivisions...........................................
Obligations of foreign governments................................
Corporate bonds ..............................................................
Redeemable preferred stocks ..............................................
Mortgage-backed securities ................................................
Held to maturity securities .....................................................
7,390
2,460
5,802
93
11,379
36,093
290
$36,383
$ 62
98
55
427
1
257
900
94
$994
$(212)
$ 8,819
(43)
(15)
(498)
(4)
(2)
(774)
–
$(774)
7,445
2,500
5,731
90
11,634
36,219
384
$36,603
Amortized
Cost(2)
Unrealized Unrealized
Gains
Losses
Fair
Value
December 31, 2000(1)
Available for sale:
Bonds:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies..............
$ 3,662
Obligations of states, municipalities
and political subdivisions...........................................
Obligations of foreign governments................................
Corporate bonds ..............................................................
Redeemable preferred stocks ..............................................
Mortgage-backed securities ................................................
8,185
1,944
5,918
102
12,609
$32,420
$ 26
45
19
147
–
275
$512
$ (9)
$ 3,679
(57)
(20)
(209)
(5)
(65)
$(365)
8,173
1,943
5,856
97
12,819
$32,567
(1) Amounts above exclude securities with fixed maturities held by finance and financial products businesses. See
Note 9.
(2) In connection with the acquisition of General Re on December 21, 1998, fixed maturity securities with a fair
value of $17.6 billion were acquired. Such amount was approximately $1.2 billion in excess of General Re’s
historical amortized cost. The unamortized excess amount was $565 million at December 31, 2001 and $680
million at December 31, 2000.
Shown below are the amortized cost and estimated fair values of securities with fixed maturities at December 31,
2001, by contractual maturity dates. Actual maturities will differ from contractual maturities because issuers of certain of
the securities retain early call or prepayment rights. Amounts are in millions.
Due in one year or less ...............................................................................................
Due after one year through five years ........................................................................
Due after five years through ten years........................................................................
Due after ten years......................................................................................................
Amortized
Cost
$ 2,498
5,141
6,022
11,281
24,942
Fair
Value
$ 2,563
5,265
6,016
11,063
24,907
Mortgage-backed securities........................................................................................
11,441
11,696
$36,383
$36,603
32
(5)
Investments in equity securities
Data with respect to investments in equity securities are shown below. Amounts are in millions.
December 31, 2001
Common stock of:
American Express Company(1).............................................................................
The Coca-Cola Company.....................................................................................
The Gillette Company ..........................................................................................
Wells Fargo & Company .....................................................................................
Other equity securities.............................................................................................
December 31, 2000
Common stock of:
American Express Company(1).............................................................................
The Coca-Cola Company.....................................................................................
The Gillette Company ..........................................................................................
Wells Fargo & Company .....................................................................................
Other equity securities.............................................................................................
Unrealized
Gains
Cost
Fair
Value
$1,470
1,299
600
306
4,868
$8,543
$ 3,940
8,131
2,606
2,009
3,446
$ 5,410
9,430
3,206
2,315
8,314
$20,132(2)
$28,675
Unrealized
Gains
Cost
Fair
Value
$ 1,470
1,299
600
319
6,714
$10,402
$ 6,859
10,889
2,868
2,748
3,853
$ 8,329
12,188
3,468
3,067
10,567
$27,217(2)
$37,619
(1) Common shares of American Express Company ("AXP") owned by Berkshire and its subsidiaries possessed
approximately 11% of the voting rights of all AXP shares outstanding at December 31, 2001. The shares are held
subject to various agreements with certain insurance and banking regulators which, among other things, prohibit
Berkshire from (i) seeking representation on the Board of Directors of AXP (Berkshire may agree, if it so desires,
at the request of management or the Board of Directors of AXP to have no more than one representative stand for
election to the Board of Directors of AXP) and (ii) acquiring or retaining shares that would cause its ownership of
AXP voting securities to equal or exceed 17% of the amount outstanding (should Berkshire have a representative
on the Board of Directors, such amount is limited to 15%). In connection therewith, Berkshire has entered into an
agreement with AXP which became effective when Berkshire's ownership interest in AXP voting securities reached
10% and will remain effective so long as Berkshire owns 5% or more of AXP's voting securities. The agreement
obligates Berkshire, so long as Kenneth Chenault is chief executive officer of AXP, to vote its shares in accordance
with the recommendations of AXP's Board of Directors. Additionally, subject to certain exceptions, Berkshire has
agreed not to sell AXP common shares to any person who owns 5% or more of AXP voting securities or seeks to
control AXP, without the consent of AXP.
(2) Net of unrealized losses of $143 million and $77 million as of December 31, 2001 and 2000, respectively.
(6) Realized investment gains (losses)
Realized gains (losses) from sales and redemptions of investments are summarized below (in millions). Realized
losses include impairment charges of $247 million in 2001.
Equity securities and other investments —
Gross realized gains......................................................................................
Gross realized losses.....................................................................................
$1,522
(369)
$4,467
(317)
$1,507
(77)
Securities with fixed maturities —
Gross realized gains......................................................................................
Gross realized losses.....................................................................................
411
(201)
153
(348)
39
(104)
2001
2000
1999
$1,363
$3,955
$1,365
33
Notes to Consolidated Financial Statements (Continued)
(7)
Receivables
Receivable balances as of December 31, 2001 and 2000 are as follows (in millions).
Insurance and reinsurance premiums............................................................................
Ceded loss reserves ......................................................................................................
Trade receivables and other..........................................................................................
2001
2000
$ 5,571
2,959
3,396
$11,926
$ 5,624
2,997
3,143
$11,764
(8) Accounts payable, accruals and other liabilities
Accounts payable, accruals and other liabilities as of December 31, 2001 and 2000 are as follows (in millions).
Life and health insurance benefits ................................................................................
Other balances due to policyholders.............................................................................
Trade payables and other..............................................................................................
2001
2000
$ 2,058
3,319
4,249
$ 9,626
$ 1,959
3,554
2,861
$ 8,374
(9)
Finance and financial products businesses
Berkshire’s finance and financial products businesses consist of numerous businesses engaged in a variety of
activities. The principal business activities include proprietary investing (BH Finance), real estate financing (Berkshire
Hathaway Credit Corporation), transportation equipment leasing (XTRA Corporation, acquired in September 2001), risk
management products (General Re Securities or “GRS”), annuities (Berkshire Hathaway Life Insurance Company of
Nebraska) and Berkadia LLC (see Note (c) below).
In January 2002, General Re announced that it would commence a long-term run-off of GRS. The run-off is
expected to occur over a period of years, during which, GRS will limit its new business to certain risk management
transactions and will unwind its existing asset and liability positions in an orderly manner.
Assets and liabilities of Berkshire's finance and financial products businesses as of December 31, 2001 and 2000
are summarized below (in millions).
Assets
Cash and cash equivalents................................................................................................................
Investments in securities with fixed maturities:
Held-to-maturity, at cost (fair value $1,888 in 2001; $1,734 in 2000).........................................
Available-for-sale, at fair value (cost $21,125 in 2001; $880 in 2000)*......................................
Trading, at fair value (cost $2,297 in 2001; $5,194 in 2000) .......................................................
Trading account assets .....................................................................................................................
Loans and other receivables.............................................................................................................
Securities purchased under agreements to resell .............................................................................
Other.................................................................................................................................................
Liabilities
Securities sold under agreements to repurchase ..............................................................................
Securities sold but not yet purchased...............................................................................................
Trading account liabilities................................................................................................................
Notes payable and other borrowings**............................................................................................
Annuity reserves and policyholder liabilities...................................................................................
Other.................................................................................................................................................
2001
2000
$ 1,185
$ 341
1,813
21,061
2,252
5,561
6,262
333
3,124
1,664
880
5,244
5,429
1,186
680
1,405
$41,591
$16,829
$21,465
354
4,803
9,019
894
1,256
$ 3,386
715
4,974
2,116
868
2,671
$37,791
$14,730
* Consists primarily of U.S. Treasury securities and obligations of U.S. government corporations and agencies.
** Payments of principal amounts of notes payable and other borrowings during the next five years are due as follows (in
millions).
2002
$2,405
2003
$490
2004
$459
2005
$73
2006
$5,022
34
(9) Finance and financial products businesses (Continued)
Income of Berkshire’s finance and financial products businesses is shown below (in millions).
Revenues
Interest income ........................................................................................
Realized investment gain.........................................................................
Unrealized investment gain (loss) ...........................................................
Other........................................................................................................
Cost and expenses
Annuity expenses ....................................................................................
Selling, general and administrative expenses ..........................................
Interest expense .......................................................................................
Earnings before income taxes...............................................................
2001
2000
1999
$1,377
120
5
62
1,564
57
180
759
996
$ 568
$ 910
367
177
51
1,505
54
123
772
949
$ 556
$ 737
103
(221)
368
987
53
228
581
862
$ 125
Additional information regarding Berkshire’s finance and financial products business follows:
a) Significant accounting policies
Investment securities (principally fixed maturity and equity investments) that are acquired with the expectation of
selling them in the near term are classified as trading securities. Such assets are carried at fair value. Realized and
unrealized gains and losses related to securities classified as trading are included in income. Trading account assets and
liabilities are marked-to-market on a daily basis and represent the estimated fair values of derivatives in net gain
positions (assets) and in net loss positions (liabilities). The net gains and losses reflect reductions permitted under
master netting agreements with counterparties.
Securities purchased under agreements to resell (assets) and securities sold under agreements to repurchase
(liabilities) are accounted for as collateralized investments and borrowings and are recorded at the contractual resale or
repurchase amounts plus accrued interest. Other investment securities owned and liabilities associated with investment
securities sold but not yet purchased are carried at fair value.
GRS is engaged as a dealer in various types of derivative instruments, including interest rate, currency and equity
swaps and options, as well as structured finance products. These instruments are carried at their current estimates of fair
value, which is a function of underlying interest rates, currency rates, security values, volatilities and the
creditworthiness of counterparties. Future changes in these factors or a combination thereof may affect the fair value of
these instruments with any resulting adjustment to be included currently in the Consolidated Statements of Earnings.
The net fair values of derivative contracts reflect the legal right to net transactions through qualifying master netting
arrangements with various counterparties. The carrying values of trading account assets and trading account liabilities
reflect a net decrease of $18,129 million at December 31, 2001 and $14,275 million at December 31, 2000 as a result of
the netting arrangements.
Annuity reserves and policyholder liabilities are carried at the present value of the actuarially determined ultimate
payment amounts discounted at market interest rates existing at the inception of the contracts. Such interest rates range
from 5% to 8%. Periodic accretions of the discounted liabilities are included in annuity expenses.
b) Derivative instruments
Interest rate, currency and equity swaps are agreements between two parties to exchange, at particular intervals,
payment streams calculated on a specified notional amount. Interest rate, currency and equity options grant the
purchaser the right, but not the obligation, to either purchase from or sell to the writer a specified financial instrument
under agreed terms. Interest rate caps and floors require the writer to pay the purchaser at specified future dates the
amount, if any, by which the option’s underlying market interest rate exceeds the fixed cap or falls below the fixed floor,
applied to a notional amount.
Futures contracts are commitments to either purchase or sell a financial instrument at a future date for a specified
price and are generally settled in cash. Forward-rate agreements are financial instruments that settle in cash at a
specified future date based on the differential between agreed interest rates applied to a notional amount. Foreign
exchange contracts generally involve the exchange of two currencies at agreed rates on a specified date; spot contracts
usually require the exchange to occur within two business days of the contract date.
35
Notes to Consolidated Financial Statements (Continued)
(9) Finance and financial products businesses (Continued)
b) Derivative instruments (Continued)
The derivative financial instruments involve, to varying degrees, elements of market, credit, and liquidity risks.
Market risk is the possibility that future changes in market conditions may make the derivative financial instrument less
valuable. The level of market risk is influenced by factors such as volatility, correlation and liquidity. GRS controls
market risk exposures by taking offsetting positions in either cash instruments or other derivatives. GRS manages its
exposures on a portfolio basis and monitors its market risk on a daily basis across all products by calculating the effect on
operating results of potential changes in market variables over a one week period. GRS has established $22 million as its
value at risk (VAR) limit with a 99th percentile confidence interval for potential losses over a weekly horizon.
Credit risk is defined as the possibility that a loss may occur from the failure of another party to perform in
accordance with the terms of the contract which exceeds the value of existing collateral, if any. The derivative’s risk of
credit loss is generally a small fraction of notional value of the instrument and is represented by the fair value of the
derivative financial instrument. GRS evaluates and records a fair value adjustment against trading revenue to recognize
counterparty credit exposure and future costs associated with administering each contract. The fair value adjustment for
counterparty credit exposures and future administrative costs on existing contracts was $126.1 million at December 31,
2001. Counterparty credit limits are established, and credit exposures are monitored in accordance with these limits.
GRS receives cash and/or investment grade securities from certain counterparties as collateral and, where appropriate,
may purchase credit insurance or enter into other transactions to mitigate its credit exposure. GRS also incorporates into
contracts with certain counterparties provisions which allow the unwinding of these transactions in the event of a
downgrade in credit rating or other indications of decline in creditworthiness of the counterparty.
At December 31, 2001, GRS had accepted collateral that is permitted by contract or industry practice to sell or
repledge with a fair value of $1,150 million. Of the securities held as collateral, approximately $41 million were
repledged as of December 31, 2001. At December 31, 2001, securities owned by GRS with a fair value of approximately
$347 million (which includes $41 million of repledged securities as described above) were pledged against derivative
transactions with a fair value of $550 million. Further, securities with a fair value of approximately $97 million were
pledged against futures positions at two futures clearing brokers. Contractual terms with counterparties often require
additional collateral to be posted immediately in the event of a decline in the financial rating of the counterparty or its
guarantor.
Assuming non-performance by all counterparties on all contracts potentially subject to a loss, the maximum
potential loss, based on the cost of replacement, net of collateral held, at market rates prevailing at December 31, 2001
approximated $4,375 million. The following table presents GRS’s derivatives portfolio by counterparty credit quality and
maturity at December 31, 2001. The amounts shown under gross exposure in the table are before consideration of netting
arrangements and collateral held by GRS. Net fair value shown in the table represents unrealized gains on financial
instrument contracts in gain positions, net of any unrealized loss owed to these counterparties on offsetting positions. Net
exposure shown in the table that follows is net fair value less collateral held by GRS. Amounts are in millions.
Gross Exposure
0 – 5
6 – 10
Over 10
Total
Net Fair
Value
Net
Exposure
Percentage
of Total
Credit quality
AAA .......................................
AA ..........................................
A.............................................
BBB and Below......................
Total
$ 1,735
4,913
3,224
1,050
$10,922
$ 738
3,761
2,238
404
$7,141
$1,058
2,719
1,681
133
$5,591
$ 3,531
11,393
7,143
1,587
$23,654
$1,295
2,521
1,338
371
$5,525
$1,295
1,969
1,033
78
$4,375
29%
45
24
2
100%
Liquidity risk can arise from funding of GRS’s portfolio of open transactions. Movements in underlying market
variables affect both future cash flows related to the transactions and collateral required to cover the value of open
positions. Strategies have been developed to ensure GRS has sufficient resources to cover its potential liquidity needs
through its access to General Re Corporation’s (the parent company of GRS) internal sources of liquidity, commercial
paper program, lines of credit and medium-term program.
c) Berkadia LLC
On August 21, 2001, Berkshire and Leucadia National Corporation (“Leucadia”), through Berkadia LLC, a newly
formed and jointly owned entity formed for this purpose, loaned $5.6 billion on a senior secured basis (the “Berkadia
Loan”) to FINOVA Capital Corporation, (“FNV Capital”) a subsidiary of The FINOVA Group (“FNV”). The Berkadia
Loan was made in connection with a restructuring of all of FNV Capital’s outstanding bank debt and publicly traded
debt securities. As of December 31, 2001, the unpaid balance of the Berkadia Loan was $4.9 billion and is included in
loans and other receivables.
36
(9) Finance and financial products businesses (Continued)
c) Berkadia LLC (Continued)
Berkadia financed the entire Berkadia Loan through a third party lending facility led by Fleet Bank (“Fleet Loan”).
Both the Berkadia Loan and the Fleet Loan are due on August 20, 2006. Under the terms of the Fleet Loan, Berkadia is
obligated to use the proceeds received from principal prepayments on the Berkadia Loan to prepay the Fleet Loan. Since
the end of 2001, FNV Capital has prepaid $1.0 billion aggregate principal amount of the Berkadia Loan and Berkadia
has repaid a like amount to its lenders. The Fleet Loan is collateralized by the Berkadia Loan. Among other things, the
Fleet Loan requires that FNV maintain a minimum ratio of its consolidated assets to the outstanding Fleet Loan balance.
Berkadia is required to pay down the loan to the extent such ratio is under the minimum. Berkshire provided Berkadia’s
lenders with a 90% primary guaranty of the Berkadia Loan and also provided a secondary guaranty to the 10% primary
guaranty provided by Leucadia. Berkshire has a 90% economic interest in Berkadia’s loan to FNV Capital and
Berkadia’s borrowings from the lending facility.
In connection with the restructuring and concurrent with the loan to FNV Capital, Berkadia received 61,020,581
shares of FNV common stock representing 50% of the total FNV outstanding shares. Berkadia initially recorded the
FNV common stock at fair value and subsequently accounted for the stock pursuant to the equity method. The value
assigned to the stock increased the discount on the Berkadia Loan, which will subsequently be accreted into interest
income over the life of the Berkadia Loan. Berkshire and Leucadia each have a 50% economic interest in Berkadia’s
ownership of the FNV common stock. Due to post-August 21 operating losses of FNV, the investment in FNV common
stock was completely written off. Consequently, the equity method was suspended as of September 30, 2001.
d) Other investment
On July 1, 1998, Value Capital L.P., a limited partnership commenced operations. A wholly owned subsidiary of
Berkshire is a limited partner in Value Capital. The partnership’s investment objective is to achieve income and capital
growth from investments and arbitrage in fixed income investments. Berkshire accounts for this investment pursuant to
the equity method. Since inception Berkshire has contributed $430 million to the partnership. At December 31, 2001,
the carrying value of $542 million (including Berkshire’s share of accumulated earnings of $112 million) is included as
a component of other assets on the preceding summary of assets and liabilities. Neither Berkshire nor any of its
subsidiaries provides or will provide any financial support of the obligations of this partnership or of the other partners.
As a limited partner, Berkshire’s exposure to loss is limited to the carrying value of its investment.
(10) Unpaid losses and loss adjustment expenses
Supplemental data with respect to unpaid losses and loss adjustment expenses of property/casualty insurance
subsidiaries (in millions) is as follows.
Unpaid losses and loss adjustment expenses:
2001
2000
1999
Gross liabilities at beginning of year ................................................................
Ceded losses and deferred charges....................................................................
$33,022
(5,590)
$26,802
(3,848)
$23,012
(2,727)
Net balance........................................................................................................
27,432
22,954
20,285
Incurred losses recorded:
Current accident year ........................................................................................
All prior accident years .....................................................................................
15,608
1,165
15,252
211
11,275
(192)
Total incurred losses .........................................................................................
16,773
15,463
11,083
Payments with respect to:
Current accident year ........................................................................................
All prior accident years .....................................................................................
4,435
5,366
4,589
5,890
3,648
4,532
Total payments ..................................................................................................
9,801
10,479
8,180
Unpaid losses and loss adjustment expenses:
Net balance at end of year.................................................................................
Ceded losses and deferred charges....................................................................
Foreign currency translation adjustment...........................................................
Net liabilities assumed in connection with business acquisitions.....................
34,404
6,189
30
93
27,938
5,590
(722)
216
23,188
3,848
(234)
—
Gross liabilities at end of year..............................................................................
$40,716
$33,022
$26,802
37
Notes to Consolidated Financial Statements (Continued)
(10) Unpaid losses and loss adjustment expenses (Continued)
The balances of unpaid losses and loss adjustment expenses are based upon estimates of the ultimate claim costs
associated with claim occurrences as of the balance sheet dates. Considerable judgment is required to evaluate claims
and establish estimated claim liabilities, particularly with respect to certain lines of business, such as reinsurance
assumed, or certain types of claims, such as environmental or latent injury liabilities. Additional information regarding
incurred losses will be revealed over time and the estimates will be revised resulting in gains or losses in the periods
made.
The accompanying Consolidated Statement of Earnings for 2001 includes estimated pre-tax underwriting losses of
approximately $2.4 billion resulting from the terrorist attack in the U.S. on September 11, 2001. This amount is
included in the table as incurred loss – current accident year. Berkshire’s management believes it will literally take
years to resolve complicated coverage issues, which could produce a material change in the ultimate loss amount.
Incurred losses “all prior accident years” reflects the amount of estimation error charged or credited to earnings in
each year with respect to the liabilities established as of the beginning of that year. During 2001, Berkshire’s insurance
subsidiaries recorded additional losses of $1,165 million in connection with losses occurring in years prior to 2001. This
amount includes $878 million arising from General Re’s traditional North American property/casualty business. The net
effect of General Re’s prior year reserve adjustments was a reduction of pre-tax income of approximately $800 million
due to additional premiums triggered by the losses. Most of the reserve increases were taken in several casualty lines of
businesses.
Prior accident years’ losses incurred also include amortization of deferred charges related to retroactive
reinsurance contracts incepting prior to the current year. Amortization charges included in prior accident years’ losses
were $328 million in 2001, $145 million in 2000 and $59 million in 1999. The increases in such charges in 2001 and
2000 are the result of several new contracts written over the past three years. The unamortized balance of deferred
charges was $3,232 million at December 31, 2001 compared to $2,593 million at December 31, 2000. Net discounted
liabilities at December 31, 2001 and 2000 were $1,834 million and $1,531 million, respectively. Periodic accretions of
these liabilities are also a component of prior year losses incurred. See Note 1 for additional information.
Berkshire has exposure to environmental, asbestos and other latent injury claims arising from insurance and
reinsurance contracts. Loss reserve estimates for environmental and asbestos exposures include case basis reserves,
which also reflect reserves for legal and other loss adjustment expenses and incurred but not reported (“IBNR”)
reserves. IBNR reserves are determined based upon Berkshire’s historic general liability exposure base and policy
language, previous environmental and loss experience and the assessment of current trends of environmental law,
environmental cleanup costs, asbestos liability law and judgmental settlements of asbestos liabilities.
The liabilities for environmental and latent injury claims and claims expenses net of reinsurance recoverables were
approximately $6.3 billion at December 31, 2001. Approximately, $5.0 billion of these reserves were assumed under
retroactive reinsurance contracts written by the Berkshire Hathaway Reinsurance Group. Claims arising from these
contracts are subject to aggregate policy limits. Thus, Berkshire’s exposure to environmental and latent injury claims
under these contracts are, likewise, limited.
Berkshire monitors evolving case law and its effect on environmental and latent injury claims. Changing
government regulations, newly identified toxins, newly reported claims, new theories of liability, new contract
interpretations and other factors could result in significant amounts of adverse development of the balance sheet
liabilities. Such development could be material to Berkshire’s results of operations. It is not possible to estimate
reliably the amount of additional net loss, or the range of net loss, that is reasonably possible.
(11) Borrowings under investment agreements and other debt
Liabilities as of December 31, 2001 and 2000 for this balance sheet caption are as follows (in millions).
2001
Commercial paper and other short-term borrowings.................................................................... $1,777
478
Borrowings under investment agreements ...................................................................................
150
General Re Corporation 9% debentures due 2009 (non-callable) ................................................
160
GEICO Corporation 7.35% debentures due 2023 (non-callable) .................................................
920
Other debt due 2002 – 2028 .........................................................................................................
$3,485
2000
$ 991
508
150
160
854
$2,663
Commercial paper and other short-term borrowings are obligations of several Berkshire subsidiaries that utilize
short-term borrowings as part of their day-to-day business operations. Berkshire affiliates have approximately $4 billion
available unused lines of credit to support their short-term borrowing programs and, otherwise, provide additional
liquidity.
38
(11) Borrowings under investment agreements and other debt (Continued)
Borrowings under investment agreements are made pursuant to contracts calling for interest payable, normally
semiannually, at fixed rates ranging from 2.5% to 8.6% per annum. Contractual maturities of borrowings under
investment agreements generally range from 3 months to 30 years. Under certain conditions, these borrowings may be
redeemable prior to the contractual maturity dates.
Other debt includes variable and fixed rate term bonds and notes issued by various of Berkshire subsidiaries.
These obligations generally, are redeemable prior to maturity at the option of the issuing company.
No materially restrictive covenants are included in any of the various debt agreements. Payments of principal
amounts expected during the next five years are as follows (in millions).
2002
$1,835
2003
$53
2004
$40
2005
$415
2006
$98
During the second quarter of 2001, Berkshire filed a shelf registration to issue up to $700 million in new debt
securities at a future date. The intended purpose of the future issuance of debt is to fund the repayment of borrowings of
certain Berkshire subsidiaries. The timing and amount of the debt to be issued under the shelf registration has not yet
been determined.
(12) Income taxes
The liability for income taxes as of December 31, 2001 and 2000 as reflected in the accompanying Consolidated
Balance Sheets is as follows (in millions).
Payable currently .................................................................................
Deferred ...............................................................................................
2001
$ (272)
7,293
$7,021
2000
$ 522
9,603
$10,125
The Consolidated Statements of Earnings reflect charges for income taxes as shown below (in millions).
Federal.........................................................................................................................
State.............................................................................................................................
Foreign ........................................................................................................................
Current ........................................................................................................................
Deferred ......................................................................................................................
2001
$ 629
68
(77)
$ 620
$ 109
511
$ 620
2000
$2,136
32
(150)
1999
$ 748
43
61
$2,018
$ 852
$2,012
6
$1,189
(337)
$2,018
$ 852
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred
tax liabilities at December 31, 2001 and 2000 are shown below (in millions).
Deferred tax liabilities:
Relating to unrealized appreciation of investments...........................
Deferred charges reinsurance assumed .............................................
Investments .......................................................................................
Other .................................................................................................
Deferred tax assets:
Unpaid losses and loss adjustment expenses.....................................
Unearned premiums ..........................................................................
Other .................................................................................................
2001
2000
$7,078
1,131
382
1,552
10,143
(752)
(294)
(1,804)
(2,850)
$9,571
916
441
717
11,645
(1,061)
(227)
(754)
(2,042)
Net deferred tax liability ......................................................................
$7,293
$9,603
39
Notes to Consolidated Financial Statements (Continued)
(12) Income taxes (Continued)
Charges for income taxes are reconciled to hypothetical amounts computed at the Federal statutory rate in the table
shown below (in millions).
2001
2000
1999
Earnings before income taxes ................................................................................. $1,469
Hypothetical amounts applicable to above
$5,587
$2,450
computed at the Federal statutory rate ................................................................. $ 514
$1,955
$ 858
Decreases resulting from:
Tax-exempt interest income.................................................................................
Dividends received deduction ..............................................................................
Goodwill amortization ............................................................................................
State income taxes, less Federal income tax benefit ...............................................
Foreign tax rate differential.....................................................................................
Other differences, net..............................................................................................
(123)
(129)
191
44
82
41
(135)
(116)
240
21
34
19
(145)
(95)
161
28
45
—
Total income taxes .................................................................................................. $ 620
$2,018
$ 852
(13) Dividend restrictions – Insurance subsidiaries
Payments of dividends by insurance subsidiaries are restricted by insurance statutes and regulations. Without prior
regulatory approval, insurance subsidiaries may pay up to approximately $637 million as dividends from insurance
subsidiaries during 2002.
Combined shareholders’ equity of U.S. based property/casualty insurance subsidiaries determined pursuant to
statutory accounting rules (Statutory Surplus as Regards Policyholders) was approximately $27.2 billion at December
31, 2001 and $41.5 billion at December 31, 2000. Effective January 1, 2001, Berkshire’s insurance companies adopted
several new statutory accounting policies as required under the Codification of Statutory Accounting Principles. Upon
adoption of the new statutory accounting policies, the combined statutory surplus of Berkshire’s insurance businesses
declined approximately $8.0 billion to $33.5 billion as of January 1, 2001. The most significant new accounting policy
related to the recording of net deferred income tax liabilities, which included deferred taxes on existing unrealized gains
in equity securities. During 2001, combined statutory surplus declined further, primarily as a result of a decline in the
net unrealized appreciation of certain equity investments.
Statutory surplus differs from the corresponding amount determined on the basis of GAAP. The major differences
between statutory basis accounting and GAAP are that deferred charges-reinsurance assumed, deferred policy
acquisition costs, unrealized gains and losses on investments in securities with fixed maturities and related deferred
income taxes are recognized under GAAP but not for statutory reporting purposes. In addition, statutory accounting for
goodwill of acquired businesses requires amortization over 10 years, compared to 40 years under GAAP.
(14) Common stock
Changes in issued and outstanding Berkshire common stock during the three years ended December 31, 2001 are
shown in the table below.
Balance December 31, 1998.....................................
Conversions of Class A common stock
to Class B common stock and other ......................
Balance December 31, 1999.....................................
Common stock issued in connection
with acquisitions of businesses..............................
Conversions of Class A common stock
to Class B common stock and other ......................
Balance December 31, 2000.....................................
Conversions of Class A common stock
to Class B common stock and other ......................
Balance December 31, 2001.....................................
Class A Common, $5 Par Value Class B Common $0.1667 Par Value
(1,650,000 shares authorized)
Shares Issued and
Outstanding
1,349,535
(55,000,000 shares authorized)
Shares Issued and
Outstanding
5,070,379
(7,872)
1,341,663
3,572
(1,331)
1,343,904
(20,494)
1,323,410
296,576
5,366,955
1,626
101,205
5,469,786
674,436
6,144,222
Each share of Class A Common Stock is convertible, at the option of the holder, into thirty shares of Class B
Common Stock. Class B Common Stock is not convertible into Class A Common Stock. Each share of Class B
Common Stock possesses voting rights equivalent to one-two-hundredth (1/200) of the voting rights of a share of Class
A Common Stock. Class A and Class B common shares vote together as a single class.
40
(15) Fair values of financial instruments
The estimated fair values of Berkshire’s financial instruments as of December 31, 2001 and 2000, are as follows
(in millions).
Carrying Value
2000
2001
Fair Value
2001
2000
Investments in securities with fixed maturities ....................................
Investments in equity securities ...........................................................
Assets of finance and financial products businesses ............................
Borrowings under investment agreements and other debt....................
Liabilities of finance and financial products businesses.......................
$36,509
28,675
41,591
3,485
37,791
$32,567
37,619
16,829
2,663
14,730
$36,603
28,675
41,710
3,624
37,917
$32,567
37,619
16,913
2,704
14,896
In determining fair value of financial instruments, Berkshire used quoted market prices when available. For
instruments where quoted market prices were not available, independent pricing services or appraisals by Berkshire’s
management were used. Those services and appraisals reflected the estimated present values utilizing current risk
adjusted market rates of similar instruments. The carrying values of cash and cash equivalents, receivables and accounts
payable, accruals and other liabilities are deemed to be reasonable estimates of their fair values.
Considerable judgment is necessarily required in interpreting market data used to develop the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized in
a current market exchange. The use of different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value.
(16) Litigation
GEICO has been named as a defendant in a number of class action lawsuits related to the use of replacement repair
parts not produced by the original auto manufacturer, the calculation of “total loss” value and whether to pay diminished
value as part of the settlement of certain claims. Management intends to vigorously defend GEICO’s position on these
claim settlement procedures. However, these lawsuits are in various stages of development and the ultimate outcome
cannot be reasonably determined.
Berkshire and its subsidiaries are parties in a variety of legal actions arising out of the normal course of business.
In particular, and in common with the insurance industry in general, such legal actions affect Berkshire’s insurance and
reinsurance businesses. Such litigation generally seeks to establish liability directly through insurance contracts or
indirectly through reinsurance contracts issued by Berkshire subsidiaries. Plaintiffs occasionally seek punitive or
exemplary damages. Berkshire does not believe that such normal and routine litigation will have a material effect on its
financial condition or results of operations.
(17) Insurance premium and supplemental cash flow information
Premiums written and earned by Berkshire’s property/casualty and life/health insurance businesses during each of
the three years ending December 31, 2001 are summarized below. Dollars are in millions.
Property/Casualty
2000
1999
2001
Life/Health
2000
2001
1999
Premiums Written:
Direct................................................................... $ 8,294
9,332
Assumed ..............................................................
(890)
Ceded...................................................................
$16,736
Premiums Earned:
Direct................................................................... $ 7,654
9,097
Assumed ..............................................................
(834)
Ceded...................................................................
$15,917
$ 6,858
11,270
(729)
$17,399
$ 6,666
11,036
(620)
$17,082
$ 5,798
7,951
(818)
$12,931
$ 5,606
7,762
(788)
$12,580
$2,162
(157)
$2,005
$2,520
(257)
$2,263
$1,981
(245)
$1,736
$2,143
(155)
$1,988
$2,513
(252)
$2,261
$1,971
(245)
$1,726
Insurance premiums written by geographic region (based upon the domicile of the insured) are summarized below.
United States ................................................................
Western Europe............................................................
All other .......................................................................
Property/Casualty
2000
$11,409
5,064*
926
$17,399
2001
$13,319
2,352
1,065
$16,736
1999
$ 8,862
2,000
2,069
$12,931
Life/Health
2001
$1,176
518
311
$2,005
2000
$1,296
633
334
$2,263
1999
$ 970
539
227
$1,736
*Premiums attributed to Western Europe include $2,438 million from a single reinsurance policy.
41
Notes to Consolidated Financial Statements (Continued)
(17)
Insurance premium and supplemental cash flow information (Continued)
A summary of supplemental cash flow information is presented in the following table (in millions).
Cash paid during the year for:
Income taxes...............................................................................................................
Interest of finance and financial products businesses .................................................
Other interest ..............................................................................................................
$ 905
672
225
$1,396
794
157
$2,215
513
136
Non-cash investing and financing activities:
Liabilities assumed in connection with acquisitions of businesses.............................
Common shares issued in connection with acquisitions of businesses.......................
Contingent value of Exchange Notes recognized in earnings.....................................
Value of equity securities used to redeem Exchange Notes .......................................
3,507
—
105
228
901
224
117
278
61
—
87
298
2001
2000
1999
(18) Pension plans
Certain Berkshire insurance and non-insurance subsidiaries individually sponsor defined benefit pension plans
covering their employees. Benefits under the plans are generally based on years of service and compensation, although
benefits under certain plans are based on years of service and fixed benefit rates. Funding policies are generally to
contribute amounts required to meet regulatory requirements plus additional amounts determined by management based
on actuarial valuations. Most U.S. plans are funded through assets held in trust. However, pension obligations under
plans for non-U.S. employees are unfunded. Plan assets are primarily invested in fixed income obligations of U.S.
Government Corporations and agencies and cash equivalents and equity securities.
The components of net periodic pension expense for all plans are as follows (in millions).
Service cost ......................................................................................................................
Interest cost ......................................................................................................................
Expected return on plan assets..........................................................................................
Net amortization, deferral and other.................................................................................
2001
$ 71
140
(136)
2
2000
$ 44
73
(73)
(2)
1999
$ 44
66
(66)
6
Net pension expense .........................................................................................................
$ 77
$ 42
$ 50
Changes in projected benefit obligations and plan assets are as follows (in millions).
Projected benefit obligation, beginning of year................................................................
Service cost ......................................................................................................................
Interest cost ......................................................................................................................
Benefits paid.....................................................................................................................
Benefit obligations of acquired businesses.......................................................................
Actuarial (gain) loss and other..........................................................................................
2001
$1,335
71
140
(101)
730
208
2000
$ 978
44
73
(53)
257
36
Projected benefit obligation, end of year..........................................................................
$2,383
$1,335
Plan assets at fair value, beginning of year.......................................................................
Employer contributions ....................................................................................................
Benefits paid.....................................................................................................................
Plan assets of acquired businesses....................................................................................
Actual return on plan assets..............................................................................................
Expenses and other ...........................................................................................................
$1,433
34
(98)
707
140
(2)
$1,015
10
(49)
346
112
(1)
Plan assets at fair value, end of year.................................................................................
$2,214
$1,433
The funded status of the plans is as follows (in millions).
Plan assets over (under) benefit obligations ......................................................................
Unrecognized net actuarial gains and other.......................................................................
Dec. 31,
2001
$ (169)
(107)
Dec. 31,
2000
$ 98
(308)
Accrued benefit cost liability.............................................................................................
$ (276)
$ (210)
42
(18) Pension plans (Continued)
Four of Berkshire’s recently acquired businesses sponsor defined benefit plans. Certain actuarial assumptions
which were being used to value the assets and obligations of these plans at the time of acquisition have been revised in
2001 to better reflect the current economic environment and in particular the recent decline in interest rates. The total
funded status for plans with benefit obligations in excess of assets was $424 million and $211 million as of December
31, 2001 and 2000, respectively.
Weighted average assumptions used in determining projected benefit obligations were as follows.
Discount rate............................................................................................................................
Discount rate – non-U.S. plans................................................................................................
Long-term expected rate of return on plan assets ....................................................................
Rate of compensation increase ................................................................................................
Rate of compensation increase – non-U.S. plans.....................................................................
2001
6.6
5.9
6.5
4.8
4.5
2000
7.4
6.0
8.3
5.1
3.5
Most Berkshire subsidiaries also have defined contribution retirement plans, such as a 401(k) or profit sharing
plans. The plans generally cover all employees who meet specified eligibility requirements. Employee contributions to
the plans are subject to regulatory limitations and the specific plan provisions. Berkshire subsidiaries generally match
these contributions up to levels specified in the plans, and may make additional discretionary contributions as
determined by management. The total expenses related to employer contributions for these plans were $70 million, $80
million and $144 million for the years ended December 31, 2001, 2000 and 1999, respectively.
(19) Business Segment Data
Information related to Berkshire’s reportable business operating segments is shown below.
Business Identity
GEICO
General Re
Berkshire Hathaway Reinsurance Group
Berkshire Hathaway Primary Insurance Group
Acme Building Brands, Benjamin Moore, Johns
Manville and MiTek (“Building products”)
Finance and financial products
FlightSafety and Executive Jet (“Flight services”)
Nebraska Furniture Mart, R.C. Willey Home
Furnishings, Star Furniture Company, Jordan’s
Furniture, Borsheim’s, Helzberg Diamond Shops
and Ben Bridge Jeweler (“Retail”)
Scott Fetzer Companies
Shaw Industries
Business Activity
Underwriting private passenger automobile insurance
mainly by direct response methods
Underwriting excess-of-loss, quota-share and facultative
reinsurance worldwide
Underwriting excess-of-loss and quota-share reinsurance for
property and casualty insurers and reinsurers
Underwriting multiple lines of property and casualty
insurance policies for primarily commercial accounts
Manufacturing and distribution of a variety of building
materials and related products and services
Proprietary investing, real estate financing, transportation
equipment leasing and risk management products
Training to operators of aircraft and ships and providing
fractional ownership programs for general aviation aircraft
Retail sales of home furnishings, appliances, electronics,
fine jewelry and gifts
Diversified manufacturing and distribution of various
consumer and commercial products with principal brand
names including Kirby and Campbell Hausfeld
Manufacturing and distribution of carpet and floor
coverings under a variety of brand names
Other businesses not specifically identified above consist of: Buffalo News, a daily newspaper publisher in
Western New York; International Dairy Queen, which licenses and services a system of about 6,000 Dairy Queen stores;
See’s Candies, a manufacturer and distributor of boxed chocolates and other confectionery products; H.H. Brown Shoe,
Lowell Shoe, Dexter Shoe and Justin Brands, manufacturers and distributors of footwear and CORT Business Services,
a leading national provider of rental furniture and related services.
43
Notes to Consolidated Financial Statements (Continued)
(19) Business Segment Data (Continued)
A disaggregation of Berkshire’s consolidated data for each of the three most recent years is presented in the tables
which follow on this and the following page. Amounts are in millions.
Operating Businesses:
Insurance group:
Premiums earned:
GEICO....................................................................................................
General Re ..............................................................................................
Berkshire Hathaway Reinsurance Group................................................
Berkshire Hathaway Primary Insurance Group ......................................
Investment income.....................................................................................
Total insurance group...................................................................................
Building products .........................................................................................
Finance and financial products.....................................................................
Flight services ..............................................................................................
Retail ............................................................................................................
Scott Fetzer Companies................................................................................
Shaw Industries ............................................................................................
Other businesses...........................................................................................
2001
$ 6,060
8,353
2,991
501
2,844
20,749
3,269
519
2,563
1,998
914
4,012
2,329
36,353
Revenues
2000
$ 5,610
8,696
4,712
325
2,796
22,139
178
530
2,279
1,864
963
—
2,180
30,133
1999
$ 4,757
6,905
2,387
257
2,507
16,813
—
117
1,856
1,402
1,021
—
1,639
22,848
Reconciliation of segments to consolidated amount:
Realized investment gain...........................................................................
Other revenues...........................................................................................
Eliminations...............................................................................................
Purchase-accounting adjustments..............................................................
1,363
35
(16)
(67)
3,955
54
—
(136)
1,365
40
—
(225)
Operating Businesses:
Insurance group operating profit:
Underwriting profit (loss):
$37,668
$34,006
$24,028
Operating Profit before Taxes
1999
2000
2001
GEICO....................................................................................................
General Re ..............................................................................................
Berkshire Hathaway Reinsurance Group................................................
Berkshire Hathaway Primary Insurance Group ......................................
Net investment income ..............................................................................
Total insurance group operating profit (loss) ...............................................
Building products .........................................................................................
Finance and financial products.....................................................................
Flight services ..............................................................................................
Retail ............................................................................................................
Scott Fetzer Companies................................................................................
Shaw Industries ............................................................................................
Other businesses...........................................................................................
Reconciliation of segments to consolidated amount:
Realized investment gain...........................................................................
Interest expense* .......................................................................................
Corporate and other ...................................................................................
Goodwill amortization and other purchase-accounting adjustments .........
$ 221
(3,671)
(647)
30
2,824
(1,243)
461
519
186
175
129
292
344
863
1,320
(92)
8
(630)
$ (224)
(1,254)
(162)
25
2,773
1,158
34
530
213
175
122
—
326
2,558
3,955
(92)
22
(856)
$ 24
(1,184)
(251)
17
2,489
1,095
—
117
225
130
147
—
211
1,925
1,365
(109)
8
(739)
$ 1,469
$ 5,587
$ 2,450
*
Amounts of interest expense represent interest on borrowings under investment agreements and other debt
exclusive of that of finance businesses and interest allocated to certain businesses.
44
(19) Business Segment Data (Continued)
Operating Businesses:
Insurance group:
GEICO ...........................................................................
General Re......................................................................
Berkshire Hathaway Reinsurance Group .......................
Berkshire Hathaway Primary Insurance Group..............
Total insurance group........................................................
Building products..............................................................
Finance and financial products..........................................
Flight services ...................................................................
Retail .................................................................................
Scott Fetzer Companies ....................................................
Shaw Industries .................................................................
Other businesses................................................................
Reconciliation of segments to consolidated amount:
Corporate and other........................................................
Purchase-accounting adjustments...................................
Capital expenditures *
1999
2000
2001
Deprec. & amort.
of tangible assets
2000
2001
1999
$ 20
19
—
3
42
152
16
408
76
6
71
40
811
$ 29
22
—
4
55
15
1
472
48
11
—
28
630
$ 87
17
—
1
105
—
4
323
55
14
—
29
530
$ 70
20
—
2
92
124
50
108
37
10
88
34
543
—
—
—
— — — 1
$ 544
$ 811
$ 630
$ 530
—
$ 64
39
—
1
104
9
3
90
33
10
—
32
281
$ 40
25
—
1
66
—
6
77
27
11
—
27
214
—
1
$ 282
1
3
$ 218
* Excludes expenditures which were part of business acquisitions.
Operating Businesses:
Insurance group:
GEICO........................................................................................................
General Re..................................................................................................
Berkshire Hathaway Reinsurance Group....................................................
Berkshire Hathaway Primary Insurance Group ..........................................
Total insurance group....................................................................................
Building products ..........................................................................................
Finance and financial products......................................................................
Flight services ...............................................................................................
Retail .............................................................................................................
Scott Fetzer Companies.................................................................................
Shaw Industries .............................................................................................
Other businesses............................................................................................
Reconciliation of segments to consolidated amount:
Corporate and other ....................................................................................
Goodwill and other purchase-accounting adjustments ...............................
Identifiable assets
at year-end
2000
2001
1999
$ 11,309
34,575
38,595
3,360
87,839
2,535
41,599
2,816
1,215
281
1,619
2,406
140,310
$ 10,569
31,594
45,775
4,168
92,106
686
16,837
2,336
1,154
295
—
2,388
115,802
$ 9,381
30,168
39,607
4,866
84,022
—
24,235
1,790
906
298
—
712
111,963
992
21,450
$162,752
1,049
18,941
$135,792
945
18,508
$131,416
45
Notes to Consolidated Financial Statements (Continued)
(20) Quarterly data
A summary of revenues and earnings by quarter for each of the last two years is presented in the following
table. This information is unaudited. Dollars are in millions, except per share amounts.
2001
1st
2nd
3rd
4th
Quarter Quarter Quarter Quarter
Revenues.................................................................................................
Earnings:
$8,142
$10,656
$9,310
$ 9,560
Excluding realized investment gain .....................................................
Realized investment gain(1) ..................................................................
$ 462
144
$ 353
420
$ (895)(2) $ 33
62
216
Net earnings (loss) ...............................................................................
$ 606
$ 773
$ (679)
$ 95
Earnings per equivalent Class A common share:
Excluding realized investment gain .....................................................
Realized investment gain(1) ..................................................................
$ 303
94
$ 231
275
$ (586)
141
$ 22
41
Net earnings (loss) ...............................................................................
$ 397
$ 506
$ (445)
$ 63
2000
Revenues .................................................................................................
Earnings:
$6,479
$ 6,564
$8,434
$12,529
Excluding realized investment gain ......................................................
Realized investment gain(1)...................................................................
$ 354
453
$ 245
395
$ 301
496
$ 36
1,048
Net earnings..........................................................................................
$ 807
$ 640
$ 797
$ 1,084
Earnings per equivalent Class A common share:
Excluding realized investment gain ......................................................
Realized investment gain(1)...................................................................
$ 233
298
$ 161
260
$ 197
326
$ 23
687
Net earnings..........................................................................................
$ 531
$ 421
$ 523
$ 710
(1) The amount of realized gain for any given period has no predictive value and variations in amount from period
to period have no practical analytical value particularly in view of the unrealized appreciation now existing in
Berkshire’s consolidated investment portfolio.
(2) Includes pre-tax underwriting losses of $2.275 billion related to the then estimated losses incurred in connection
with the September 11th terrorist attack.
46
BERKSHIRE HATHAWAY INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
Net earnings for each of the past three years are disaggregated in the table that follows. Amounts are after
deducting minority interests and taxes.
Insurance – underwriting ................................................................................
Insurance – investment income ........................................................................
Non-insurance businesses ................................................................................
Interest expense................................................................................................
Goodwill amortization and other purchase-accounting adjustments................
Other ................................................................................................................
— (dollars in millions) —
2000
$(1,041)
1,946
891
(61)
(818)
19
2001
$(2,662)
1,968
1,305
(60)
(603)
5
1999
$ (897)
1,769
513
(70)
(648)
4
Earnings before realized investment gain .............................................
Realized investment gain .................................................................................
(47)
842
936
2,392
671
886
Net earnings..........................................................................................
$ 795
$ 3,328
$ 1,557
The business segment data (Note 19 to Consolidated Financial Statements) should be read in conjunction
with this discussion.
Insurance — Underwriting
A summary follows of underwriting results from Berkshire’s insurance businesses for the past three years.
— (dollars in millions) —
2000
1999
2001
Underwriting gain (loss) attributable to:
GEICO........................................................................................................
General Re..................................................................................................
Berkshire Hathaway Reinsurance Group ...................................................
Berkshire Hathaway Primary Insurance Group..........................................
Underwriting loss — pre-tax............................................................................
Income taxes and minority interest .................................................................
$ 221
(3,671)
(647)
30
(4,067)
(1,405)
$ (224)
(1,254)
(162)
25
(1,615)
(574)
$ 24
(1,184)
(251)
17
(1,394)
(497)
Net underwriting loss............................................................................
$(2,662)
$(1,041)
$ (897)
Berkshire engages in both primary insurance and reinsurance of property and casualty risks. Through
General Re, Berkshire also reinsures life and health risks. In primary insurance activities, Berkshire subsidiaries
assume defined portions of the risks of loss from persons or organizations that are directly subject to the risks. In
reinsurance activities, Berkshire subsidiaries assume defined portions of similar or dissimilar risks that other
insurers or reinsurers have subjected themselves to in their own insuring activities. Berkshire’s principal insurance
businesses are: (1) GEICO, the sixth largest auto insurer in the United States, (2) General Re, one of the four largest
reinsurers in the world, (3) Berkshire Hathaway Reinsurance Group (“BHRG”) and (4) Berkshire Hathaway
Primary Insurance Group. Berkshire’s management views insurance businesses as possessing two distinctive
operations – underwriting and investment. Accordingly, Berkshire evaluates performance of underwriting
operations without any allocation of investment income.
Berkshire’s reinsurance businesses recorded significant underwriting losses as a result of the
September 11, 2001 terrorist attack. In the aggregate, Berkshire’s reinsurance businesses recorded pre-tax
underwriting losses of about $2.4 billion related to the terrorist attack. The losses recorded are based upon
estimates and, therefore, are subject to considerable estimation error. Over time, claims will be paid and additional
information will be revealed that will result in re-estimation of the ultimate amount of losses incurred. Changes in
reserve estimates are included in earnings as a component of losses and loss expenses incurred in the period of the
change. Additional information related to these losses is included in the discussion that follows.
47
Management's Discussion (Continued)
Insurance — Underwriting (Continued)
A significant marketing strategy followed by all these businesses is the maintenance of extraordinary capital
strength. Statutory surplus as regards policyholders of Berkshire’s insurance businesses totaled approximately
$27.2 billion at December 31, 2001. This superior capital strength creates opportunities, especially with respect to
reinsurance activities, to negotiate and enter into contracts of insurance specially designed to meet unique needs of
sophisticated insurance and reinsurance buyers. Additional information regarding Berkshire’s insurance and
reinsurance operations follows.
GEICO
GEICO provides primarily private passenger automobile coverages to insureds in 48 states and the District
of Columbia. GEICO policies are marketed mainly by direct response methods in which customers apply for
coverage directly to the company over the telephone, through the mail or via the Internet. This is a significant
element in GEICO’s strategy to be a low cost insurer and, yet, provide high value to policyholders.
GEICO's underwriting results for the past three years are summarized below.
2001
— (dollars in millions) —
2000
1999
Premiums written ......................................................
Premiums earned.......................................................
Losses and loss expenses ..........................................
Underwriting expenses..............................................
Total losses and expenses..........................................
Amount
$6,176
$6,060
4,842
997
5,839
%
100.0
79.9
16.5
96.4
Underwriting gain (loss) — pre-tax ..........................
$ 221
%
100.0
85.7
18.3
104.0
Amount
$5,778
$5,610
4,809
1,025
5,834
$ (224)
Amount
$4,953
$4,757
3,815
918
4,733
$ 24
%
100.0
80.2
19.3
99.5
Premiums earned by GEICO in 2001 totaled $6,060 million, an 8.0% increase over 2000. Premiums
earned in 2000 exceeded premiums earned in 1999 by 17.9%. The growth in premiums earned during 2001 reflects
increased rates, partially offset by a slight reduction in policies-in-force. In response to the underwriting losses of
2000, GEICO implemented rate increases in many states and tightened underwriting resulting in the much improved
underwriting results in 2001.
Voluntary auto policies-in-force at December 31, 2001 declined 0.8% from December 31, 2000. In
comparison, voluntary policies-in-force increased 8.5% during 2000 and 21.5% during 1999. During 2001,
policies-in-force increased 1.6% in the preferred risk auto market and decreased 10.1% in the standard and
nonstandard auto lines. Voluntary auto new business sales in 2001 decreased 30.2% from 2000 due to decreased
advertising and a lower closure ratio.
Losses and loss adjustment expenses incurred increased 0.7% to $4,842 million in 2001. The loss ratio for
property and casualty insurance, which measures the portion of premiums earned that is paid or reserved for losses and
related claims handling expenses, was 79.9% in 2001 compared to 85.7% in 2000. The lower ratio reflects the effect of
premium rate increases and tightened underwriting standards. Additionally, the rate of increase in claim severity (the
cost per claim) slowed in 2001 and the frequency of accidents decreased in many coverages compared to the prior year.
The mild winter weather conditions during the fourth quarter of 2001 also contributed to the relatively low loss ratio.
Catastrophe losses added slightly less than 1 point to the loss ratio in each of the past three years.
GEICO’s insurance subsidiaries are defendants in a number of class action lawsuits related to the use of
replacement repair parts not produced by the original auto manufacturer, the calculation of “total loss” value and
whether to pay diminished value as part of the settlement of certain claims. Management intends to vigorously
defend GEICO’s position on these claim settlement procedures. However, these lawsuits are in various stages of
development and the ultimate outcome cannot be reasonably determined.
Underwriting expenses incurred in 2001 decreased $28 million (2.7%) from 2000, following an increase of
$107 million (11.7%) in 2000 over 1999. Advertising expense declined significantly in 2001 from 2000 following a
large increase in 2000 over 1999. Although advertising expense declined in 2001, the unit cost of acquiring new
business continued to increase in 2001 as fewer new policies were written in relation to quotes. Other underwriting
expenses for 2001 also reflect lower profit sharing expense in 2001.
Throughout 2001, GEICO focused on improving underwriting profitability, but did so at the expense of
growth. Entering 2002, rates are believed to be adequate in nearly all states and GEICO is in a better position to grow
as many competitors are expected to take rate increases.
48
Insurance — Underwriting (Continued)
General Re
General Re conducts a global reinsurance business, which provides reinsurance coverage in the United
States and 135 other countries around the world. General Re’s principal reinsurance operations are: (1) North
American property/casualty, (2) international property/casualty, and (3) global life/health. The international
property/casualty operations are conducted primarily through Germany-based Cologne Re and its subsidiaries. At
December 31, 2001, General Re had an 88% economic ownership interest in Cologne Re.
General Re’s consolidated underwriting results for the past three years are summarized below. Dollar
amounts are in millions.
Premiums earned ..............................................................................
2001
Amount
$ 8,353
2000(1)
Amount
$ 8,696
1999
Amount
$ 6,905
Underwriting loss — pre-tax............................................................
$(3,671)
$(1,254)
$(1,184)
(1) During the fourth quarter of 2000, the international property/casualty and global life/health operations discontinued reporting
their results on a one-quarter lag. Consequently, General Re’s 2000 results include one additional quarter for these
businesses. See Note 1(a) to the accompanying Consolidated Financial Statements for additional information.
Since Berkshire’s acquisition in 1998, General Re’s overall underwriting results have been very poor.
Over this period, increases in loss costs accelerated and outpaced pricing corrections. Losses from the September
11th terrorist attack severely impacted the results as General Re recorded aggregate net losses of approximately
$1.9 billion related to the terrorist attack. During 2001, it was determined that reserve estimates established for
claims arising in prior years with respect to the North American property/casualty business were insufficient. As a
result, an $800 million underwriting loss was recorded.
General Re’s management has taken several underwriting actions relative to better aligning premium rates
with coverage terms over the past two years. However, as evidenced by the 2001 results, additional actions will be
required to achieve targeted break-even underwriting results. Information with respect to each of General Re’s
underwriting units is presented below. In the tables that follow, dollar amounts are in millions.
General Re’s North American property/casualty underwriting results for the past three years are
summarized below.
2001
— (dollars in millions) —
2000
1999
Premiums written .................................................
Premiums earned ..................................................
Losses and loss expenses......................................
Underwriting expenses .........................................
Total losses and expenses.....................................
Amount
$ 4,172
$ 3,968
5,795
1,016
6,811
%
100.0
146.0
25.6
171.6
Underwriting loss — pre-tax................................ $(2,843)
Amount
$3,517
$3,389
3,161
884
4,045
$ (656)
%
100.0
93.3
26.1
119.4
%
100.0
89.8
30.8
120.6
Amount
$2,801
$2,837
2,547
874
3,421
$ (584)
General Re’s North American property/casualty operations underwrite predominantly excess reinsurance
across multiple lines of business. Premiums earned in 2001 exceeded premiums earned in 2000 by $579 million or
17.1%. Earned premiums in 2000 increased over 1999 levels by $552 million or 19.5%. Much of the increase in
premiums derived from rate increases and new business (net of the non-renewal of unprofitable business) in the
facultative individual risk and casualty treaty markets. Earned premiums in 2001 include $400 million from one
retroactive reinsurance contract and a large quota share agreement. An aggregate excess reinsurance contract
generated earned premiums of $404 million in 2000 and $154 million in 1999. The North American
property/casualty operations generated underwriting losses of $2,843 million in 2001, $656 million in 2000 and
$584 million in 1999. The underwriting results in 2001 reflect an exceptionally large loss from the September 11th
terrorist attack and charges from revisions to inadequate loss reserve estimates established for pre-2001 claims
primarily driven by higher than expected levels of reported claims.
49
Management's Discussion (Continued)
Insurance — Underwriting (Continued)
General Re (Continued)
Underwriting results for 2001 include approximately $1.54 billion of net losses from the September 11th
terrorist attack. While the potential impact of catastrophes and other large individual property losses is normally
factored into reinsurance prices, past pricing did not consider the unprecedented magnitude of possible losses
arising from the terrorist acts. The severity of the losses arising from the September 11th attack underscored that
risks of this kind were not contemplated in premium rates. Lines of business that previously were expected to have
little correlation were adversely affected in the same event to an unforeseen degree. Claims arising from other
catastrophes and large individual property losses ($20 million or greater) in 2001, 2000 and 1999 periods were $87
million, $53 million and $202 million, respectively. In addition, during 2001 General Re recorded $46 million of
estimated losses associated with Enron-related liability coverages.
Results in 2001 also included $800 million of net underwriting losses arising from increases to loss reserve
estimates for loss events occurring in 2000 and prior years. The reserve increases occurred in almost all casualty
lines of business, including commercial umbrella, professional liability, medical malpractice, general liability, and
workers compensation. Long-tail liabilities such as these, particularly reinsurance lines, are inherently difficult to
estimate, and while management now believes that reserves are now approximately correct, there are no guarantees.
In 2000, underwriting results for the traditional reinsurance operations also included underwriting losses from
increases to prior years’ reserves of about $92 million, arising primarily in the medical malpractice, commercial
umbrella and casualty treaty reinsurance lines. In 1999, North American property/casualty results included a small
gain from the reduction of prior years’ loss reserve estimates.
Underwriting results for 2000 also included a net underwriting loss of $239 million from a large excess
reinsurance contract in-force during 1999 and 2000. The effect of this agreement on the 1999 net underwriting
results was not significant due to a retrocession to the Berkshire Hathaway Reinsurance Group. Although, this
contract produced a sizable underwriting loss, it is expected to provide more than commensurate investment benefits
in future years due to the large amount of float generated.
General Re’s international property/casualty underwriting results for the past three years are summarized
below.
Premiums written .......................
Premiums earned ........................
Losses and loss expenses............
Underwriting expenses ...............
Total losses and expenses...........
2001
— (dollars in millions) —
2000(2)
2000(1)
1999
Amount
$2,553
$2,397
2,413
730
3,143
%
100.0
100.7
30.4
131.1
Amount
$3,036
$3,046
2,577
987
3,564
%
100.0
84.6
32.4
117.0
Amount
$2,505
$2,478
2,091
803
2,894
%
100.0
84.4
32.4
116.8
Amount
$2,506
$2,343
2,041
775
2,816
%
100.0
87.1
33.1
120.2
Underwriting loss — pre-tax......
$ (746)
$ (518)
$ (416)
$ (473)
(1) Column includes 15 months of data due to elimination of one-quarter lag reporting in 2000.
(2) Column includes 12 months reported on a one-quarter lag and is shown for comparability with 1999.
The international property/casualty operations write quota-share and excess reinsurance on risks around the
world. In recent years, the largest international markets have been in Germany and Western Europe. As previously
noted, the international property/casualty operations discontinued reporting their results on a one-quarter lag during
the fourth quarter of 2000. Results for the 2000 period contain fifteen months, or one additional quarter of
information (fourth quarter of 1999 plus four quarters of 2000). The preceding table shows underwriting results for
both the twelve month and fifteen month periods. The comparative analysis that follows excludes the additional
quarter.
Earned premiums in 2001 decreased from 2000 amounts by 3.3%, whereas 2000 earned premiums
exceeded 1999 levels by 5.8%. Adjusting for the effects of overall declining foreign exchange rates, earned
premiums in local currencies increased 3.9% during 2001, 16.7% during 2000 and 12.0% during 1999. Growth in
2001 premiums was primarily due to increased premiums in Lloyd’s Syndicate 435 and in the U.K. casualty treaty
business, partially offset by decreased premiums in Latin America and at Cologne Re. The decrease at Cologne Re
relates primarily to the non-renewal of unprofitable treaty business. Earned premium growth in 2000 was
principally attributable to premiums to reinstate coverage as a result of the 1999 European winter storm losses as
well as increases in Lloyd’s Syndicate 435.
50
Insurance — Underwriting (Continued)
General Re (Continued)
Underwriting results for General Re’s international property/casualty businesses have been unsatisfactory.
Included in 2001 underwriting results were $500 million of gross and $313 million of net losses related to the
September 11th terrorist attack. Other international property/casualty net underwriting losses were $433 million in
2001, including a loss of $143 million from an explosion at a steel plant in the United Kingdom. Catastrophe and
other large individual property losses for 2000 and 1999 were $80 million and $112 million, respectively.
Underwriting losses in 1999 also included approximately $100 million related to credit coverages for the motion
picture business. Due to the large amount of property business written in the international property/casualty
operations, periodic underwriting results will be volatile.
General Re conducts reinsurance business in Argentina through a wholly-owned subsidiary. Currently,
Argentina is in the midst of an economic and political crisis. Since the beginning of 2002, the Argentine
government has significantly devalued the peso relative to the U.S. dollar. It is still uncertain what effect this and
other actions that may be taken will have on the international property/casualty business.
General Re’s global life/health underwriting results for the past three years are summarized below.
Premiums written .....................
Premiums earned ......................
Losses and loss expenses .........
Underwriting expenses.............
Total losses and expenses.........
2001
Amount
$2,005
$1,988
1,625
445
2,070
%
100.0
81.7
22.4
104.1
Underwriting loss — pre-tax....
$ (82)
— (dollars in millions) —
2000(1)
2000(2)
1999
Amount
$2,263
$2,261
1,869
472
2,341
$ (80)
%
100.0
82.6
20.9
103.5
Amount
$1,781
$1,773
1,473
384
1,857
%
100.0
83.1
21.6
104.7
Amount
$1,736
$1,725
1,434
418
1,852
%
100.0
83.2
24.2
107.4
$ (84)
$ (127)
(1) Column includes 15 months of data due to elimination of one-quarter lag reporting in 2000.
(2) Column includes 12 months reported on a one-quarter lag and is shown for comparability with 1999.
General Re’s global life/health affiliates reinsure such risks worldwide. Global life/health operations
previously reported their results on a one-quarter lag. As previously noted, the global life/health operations
discontinued reporting results on a one-quarter lag during the fourth quarter of 2000. Reported results for 2000
contain fifteen months. The table above shows underwriting results for both the twelve-month and fifteen-month
periods. The analysis that follows excludes this additional quarter.
In 2001, earned premiums in the U.S. life/health business increased $194 million (20%) to $1,147 million.
In 2000, U.S. life/health premiums exceeded amounts earned in 1999 by $28 million (3.0%). The increase in 2001
was primarily related to increases in the U.S. life business and the acquisition of two Medicare supplement (health)
blocks of business. In 2001, premiums from international life/health business increased $21 million (3%) to
$841 million. In 2000, international life/health premiums exceeded 1999 by $20 million (3.0%). Adjusting for the
effect of foreign exchange, international life/health earned premiums increased 10.4% in 2001 and 14.8% in 2000.
The increases in 2001 occurred primarily in the Western Europe and Asia life markets.
Underwriting losses in the U.S. life/health operations were $87 million in 2001, compared with losses of
$23 million in 2000 and $117 million in 1999. The U.S. life/health underwriting results for 2001 include
$15 million of net losses related to the September 11th terrorist attack. Results for the U.S. life/health reinsurance
operations include $46 million of reserve increases related primarily to special risk business, which was
discontinued in 1999. Partially offsetting the aforementioned losses were the effects of improved mortality in the
U.S. individual life business, favorable claim development and rate increases in the U.S. individual health business.
International life/health operations generated an underwriting gain of $5 million in 2001 compared to
losses of $61 million in 2000 and $10 million in 1999. In 2001, improved results were achieved in both the life and
health businesses, which each reported a small underwriting profit in 2001. The losses in 2000 primarily related to
personal accident and pension lines of business.
51
Management's Discussion (Continued)
Insurance — Underwriting (Continued)
Berkshire Hathaway Reinsurance Group
The Berkshire Hathaway Reinsurance Group (“BHRG”) underwrites principally excess-of-loss reinsurance
coverages for insurers and reinsurers around the world. BHRG is believed to be one of the leaders in providing
catastrophe excess-of-loss reinsurance. In addition, over the past three years, BHRG has generated significant
premium volume from a few very sizable retroactive reinsurance contracts.
Underwriting results for the past three years are summarized in the following table.
Premiums written .......................................................
Premiums earned........................................................
Losses and loss expenses ...........................................
Underwriting expenses...............................................
Total losses and expenses...........................................
2001
— (dollars in millions) —
2000
1999
Amount
$3,254
$2,991
3,443
195
3,638
%
100.0
115.1
6.5
121.6
Amount
$4,732
$4,712
4,759
115
4,874
%
100.0
101.0
2.4
103.4
Amount
$2,418
$2,387
2,572
66
2,638
%
100.0
107.8
2.7
110.5
Underwriting loss — pre-tax......................................
$ (647)
$ (162)
$(251)
Premiums earned by BHRG were $2,991 million in 2001, $4,712 million in 2000 and $2,387 million in
1999. Premiums earned from retroactive coverages were $1,993 million in 2001, $3,944 million in 2000 and
$1,507 million in 1999. Premiums earned from catastrophe and non-retroactive reinsurance business totaled
$998 million in 2001, $768 million in 2000 and $880 million in 1999. Of these amounts, catastrophe reinsurance
policies contributed $511 million in 2001 and $314 million in both 2000 and 1999. In 2001, premiums earned from
these businesses include BHRG’s participation in Lloyd’s Syndicate 1861. Otherwise, the non-catastrophe
premiums earned in each year derive from a few sizable quota-share and excess contracts.
BHRG’s underwriting losses in 2001 were $647 million, compared to losses of $162 million in 2000 and
$251 million in 1999. Underwriting losses from retroactive reinsurance contracts totaled $371 million in 2001,
$191 million in 2000 and $ 97 million in 1999. Retroactive reinsurance contracts indemnify ceding companies for
losses arising under insurance or reinsurance contracts written in the past, usually many years ago. Consequently,
these contracts are often expected to provide indemnification of environmental and other latent injury claims.
While contract terms vary, losses under the contracts are subject to a very large aggregate dollar limit, occasionally
exceeding $1 billion under a single contract.
Generally, it is also anticipated, although not assured, that claims under retroactive contracts will be paid
over long time periods. As a result, premiums are, in part, discounted for time value. However, when written, these
contracts do not produce an underwriting loss for financial reporting purposes because the excess of the estimated
ultimate claims payable over the premiums earned is established as a deferred charge. The deferred charge is
subsequently amortized over the expected claim settlement periods and is included as a component of losses
incurred. When written, retroactive reinsurance contracts are expected to generate significant underwriting losses
over time due to the amortization of these deferred charges. Nevertheless, this business is accepted due to the
exceptionally large amounts of float generated. Unamortized deferred charges under BHRG contracts were
$3.1 billion as of December 31, 2001 compared to $2.6 billion at December 31, 2000. It is currently expected that
losses incurred in 2002 will include about $400 million of deferred charge amortization.
The catastrophe and other non-retroactive reinsurance businesses generated an underwriting loss of $276
million in 2001, an underwriting gain of $29 million in 2000 and an underwriting loss of $154 million in 1999. The
underwriting loss for 2001 includes a net loss of approximately $530 million from the terrorist attack on September
11th. Partially offsetting this loss were profits from the remainder of the catastrophe reinsurance business and loss
reserve reductions on contracts written in prior years. In 2000 and 1999, the catastrophe reinsurance business
generated underwriting gains of $183 million and $196 million, respectively, reflecting relatively minor amounts of
catastrophe losses. The timing and magnitude of catastrophe losses can produce considerable volatility in periodic
underwriting results.
52
Insurance — Underwriting (Continued)
Berkshire Hathaway Reinsurance Group (Continued)
In 2000 and 1999, underwriting losses included $186 million and $220 million, respectively, from an
aggregate excess contract covering losses occurring in those years. In 1999, BHRG recorded an additional
underwriting loss of $126 million from business assumed from General Re related to a similar arrangement written
by General Re in that year. Similar to retroactive reinsurance contracts, premiums under these contracts are in part,
discounted for time value as losses are often expected to be paid over lengthy periods. Unlike retroactive contracts,
no deferred charges are recorded and thus underwriting losses result as premiums are earned. However, similar to
the retroactive contracts, this business was accepted because of the large amounts of float generated.
Berkshire Hathaway Primary Insurance Group
Berkshire’s other primary insurance businesses consist of a wide variety of smaller insurance businesses
that principally write liability coverages for commercial accounts. These businesses include: National Indemnity
Company’s primary group operation (“NICO Primary Group”), a writer of motor vehicle and general liability
coverages; United States Investment Corporation (“USIC”), acquired by Berkshire in August 2000 and whose
subsidiaries underwrite specialty insurance coverages; a group of companies referred to internally as “Homestate”
operations, providers of standard multi-line insurance, and Central States Indemnity Company, a provider of credit
and disability insurance to individuals nationwide through financial institutions.
Collectively, Berkshire’s other primary insurance businesses produced earned premiums of $501 million in
2001, $325 million in 2000 and $257 million in 1999. The increases in premiums earned during the past two years
was largely attributed to the inclusion of USIC’s business beginning in August 2000. During 2001, increased
premiums were also earned by the NICO Primary Group and Homestate businesses. Net underwriting gains of
Berkshire’s other primary insurance businesses totaled $30 million in 2001, $25 million in 2000 and $17 million in
1999. The improvement in year-to-year comparative underwriting results was due in large part to USIC.
Insurance — Investment Income
Following is a summary of the net investment income of insurance operations for the past three years.
— (dollars in millions) —
2000
1999
2001
$2,489
$2,773
$2,824
720
827
856
Investment income before taxes.............................................................................
Applicable income taxes and minority interest ......................................................
Investment income after taxes and minority interest..............................................
$1,968
$1,946
$1,769
Investment income from insurance operations in 2001 increased $51 million (1.8%) over 2000. Investment
income in 2000 exceeded amounts earned in 1999 by $284 million (11.4%). As discussed in Note 1(a) to the
Consolidated Financial Statements, results for 2000 include five quarters with respect to General Re’s international
reinsurance operations. Pre-tax investment income in 2000 includes $103 million related to that extra quarter.
Invested assets decreased during 2001 by $4 billion to $72 billion at December 31. The decrease in invested assets
was primarily attributed to a $6 billion decline in the market values of Berkshire’s major equity investments and $4
billion in dividends paid to Berkshire during the year. Partially offsetting these declines was an increase in
investments from an increase in float generated by insurance operations. Float represents an estimate of the amount
of funds ultimately payable to policyholders that is available for investment.
The total float at December 31, 2001 was approximately $35.5 billion compared to about $27.9 billion at
December 31, 2000. Although the increase in float during 2001 was significant, its cost, represented by the pre-tax
underwriting loss over the average float, was also significant. Due to the magnitude of underwriting losses in 2001,
the cost of float was about 12.8%. In 2000, the cost of float was approximately 6.0%. Pre-tax investment income in
2001 was also adversely affected by declining interest rates, particularly for short to medium term investments.
53
Management's Discussion (Continued)
Non-Insurance Businesses
A summary follows of results from Berkshire’s non-insurance businesses for the past three years.
2001
— (dollars in millions) —
2000
1999
Revenues ......................................................................
Cost and expenses ........................................................
Operating profit............................................................
Income taxes and minority interest ..............................
Amount
$15,604
13,498
2,106
801
Contribution to net earnings.........................................
$ 1,305
%
100
87
13
5
8
Amount
$7,994
6,594
1,400
509
$ 891
%
100
83
17
6
11
Amount
$6,035
5,205
830
317
$ 513
%
100
86
14
5
9
A comparison of revenues and operating profits between 2001, 2000 and 1999 for the non-insurance
businesses follows.
— (dollars in millions) —
Non-Insurance Businesses
Building products .....................................................
Finance and financial products.................................
Flight services...........................................................
Retail ........................................................................
Scott Fetzer Companies ............................................
Shaw Industries ........................................................
Other businesses .......................................................
2001
$ 3,269
519
2,563
1,998
914
4,012
2,329
Revenues
2000
1999
Operating Profits
2000
2001
1999
$ 178
530
2,279
1,864
963
—
2,180
— $ 461
519
186
175
129
292
344
$ 117
1,856
1,402
1,021
—
1,639
$ 34
530
213
175
122
—
326
—
$117
225
130
147
—
211
$15,604
$7,994
$6,035
$2,106
$1,400
$830
2001 compared to 2000
Berkshire's numerous non-insurance businesses grew significantly through the acquisition of several
businesses in 2000 and 2001. As a result, in 2001 there are two new significant non-insurance business segments.
One new segment is Shaw Industries ("Shaw"), in which Berkshire acquired an approximately 87.3% interest on
January 8, 2001. (Subsequent to December 31, 2001, Berkshire acquired the remaining interest in Shaw.) In
addition, the building products segment consists of four recently acquired businesses (MiTek Inc., acquired July 31,
2001, Johns Manville, acquired February 27, 2001, Benjamin Moore, acquired in December 2000 and Acme
Building Brands, acquired in August 2000). Also, Berkshire’s finance and financial products businesses are being
presented as a segment which in 2001 includes XTRA Corporation from the date acquired of September 20, 2001.
Berkshire also acquired Ben Bridge Jeweler in July 2000, which is included as part of Berkshire's retailing segment.
Other businesses acquired in 2000 include CORT Business Services (February 2000), Justin Brands (August 2000)
and MidAmerican Energy Holdings Company (March 2000). The results of each of the aforementioned businesses
are reflected in Berkshire's earnings from their respective acquisition dates.
Additional information regarding each significant business acquisition is contained in Notes 2 and 3 of the
Consolidated Financial Statements. In general, many of Berkshire's non-insurance businesses have been adversely
affected by the general economic slowdown in the United States during 2001 and exacerbated by the effects of the
terrorist attack on September 11, 2001. Nevertheless, Berkshire's management considers that most of its non-
insurance businesses have performed well under these difficult conditions. The following is a discussion of
significant matters impacting comparative results for the non-insurance businesses.
Building products
Berkshire’s building products businesses include Johns Manville, acquired on February 27, 2001,
Benjamin Moore, acquired in December 2000, Acme Brick, acquired in August 2000, and MiTek Inc., acquired
July 31, 2001. Each of these businesses manufactures and distributes products and services for the residential and
commercial construction and home improvement markets. Revenues of the building products group in 2001 totaled
$3,269 million and pre-tax operating profits of the building products group in 2001 totaled $461 million.
54
Non-Insurance Businesses (Continued)
Building products (Continued)
On a comparative full year basis, building products revenues were $3,746 million roughly unchanged from
the prior year. Full year operating profits of approximately $570 million declined about 4%. Most of the decline
occurred at Johns Manville where comparative results were negatively impacted by higher raw material prices and
energy costs.
Finance and financial products
Several finance and financial products businesses are included in this segment. Generally, these businesses
invest in various types of fixed-income securities, loans, leases and other financial instruments, often utilizing
leverage or borrowed funds in the process. The most significant of these businesses are BH Finance, a business
engaged in proprietary trading strategies, General Re Securities (“GRS”), a dealer in derivative contracts and XTRA
Corporation, a transportation equipment leasing business.
Operating income of the finance and financial products group in 2001 decreased $11 million (2.1%) as
compared to 2000. Income of BH Finance in 2001 declined $39 million from 2000. In 2001, interest income, net of
interest expense, of BH Finance increased significantly, but was more than offset by reduced realized investment
gains. Realized gains in 2000 derived from the disposition of a large portfolio of fixed income securities. Under
the current market conditions, BH Finance should continue to produce significant operating profits in 2002.
GRS’s operating profit in 2001 was $11 million compared to a loss of $63 million in 2000. In January
2002, management announced that it would commence a long-term run-off of GRS. During the run-off period,
GRS will limit new business to certain risk management transactions and will unwind existing asset and liability
positions in an orderly manner. It is expected that the run-off will take several years to complete. It is currently
unknown what impact this decision may have on operating results in 2002.
In 2001, Berkshire’s finance and financial products businesses also include the results of Berkadia LLC.
In 2001, the operating results included a pre-tax loss of $40 million from Berkadia. Such loss was caused by a loss
from Berkadia’s application of the equity method of accounting related to its investment in FINOVA common stock
partially offset by net interest income. The structure of this transaction and risks associated with this transaction are
described in Note 9 to the Consolidated Financial Statements.
Flight services
This segment includes FlightSafety and Executive Jet. FlightSafety provides high technology training to
operators of aircraft and ships. FlightSafety’s worldwide clients include corporations, the military and government
agencies. Executive Jet is the world’s leading provider of fractional ownership programs for general aviation
aircraft. Revenues from flight services in 2001 increased $284 million (12.4%) over 2000. About 83% of the
increase in revenues was attributed to Executive Jet, which produced significant increases in revenues from both
flight operations and aircraft sales. Revenues from FlightSafety also increased approximately 7.7% in 2001 as
compared to 2000, reflecting both increased training revenues and product sales. Operating profits in 2001
decreased $27.1 million (12.8%) as compared to 2000. Increased operating profits at FlightSafety were more than
offset by reduced operating profits at Executive Jet. Executive Jet’s results in 2001 and 2000 reflect operating
losses related to expansion into Europe as well as significantly higher operating costs incurred to insure that a
premier level of safety, security and service is maintained. The increases in safety and security costs were
exacerbated by the September 11th terrorist attack.
Retail
Berkshire’s retailing businesses consist of four independently managed retailers of home furnishings
(Nebraska Furniture Mart and its subsidiaries (“NFM”), R.C. Willey Home Furnishings (“RC Willey”), Star
Furniture and Jordan's Furniture) and three independently managed retailers of fine jewelry (Borsheim's Jewelry,
Helzberg's Diamond Shops, and Ben Bridge Jeweler).
55
Management's Discussion (Continued)
Non-Insurance Businesses (Continued)
Retail (Continued)
Revenues of the retail businesses in 2001 increased $134 million (7.2%) as compared to 2000 and
operating profits in 2001 of $175 million were unchanged from 2000. The increase in revenues was attributed to
the inclusion of a full year of results for Ben Bridge, the acquisition of a relatively small furniture retailer by NFM
in November 2000 and sales from a new store opened in 2001 by RC Willey in Henderson, Nevada. Otherwise,
same store sales for the home furnishing retailers were relatively unchanged between years and same store sales for
the fine jewelry retailers declined 7.6%. Home furnishings comparative pre-tax earnings were relatively unchanged
between years and pre-tax earnings declined at each of the jewelry businesses. The economic recession that
developed during 2001 and weak post-September 11th retail sales are believed to be the primary causes for these
results.
Scott Fetzer Companies
The Scott Fetzer companies are a group of about twenty diverse manufacturing and distribution businesses
under common management. Principal businesses in this group of companies sell products under the Kirby (home
cleaning systems), Campbell Hausfeld (air compressors, paint sprayers, generators and pressure washers) and World
Book (encyclopedias and other educational products) names.
Revenues in 2001 from Scott Fetzer's businesses decreased $49 million (5.1%) as compared to 2000.
Operating profits in 2001 increased $7 million (5.7%) as compared to 2000. The decline in revenues was due
primarily to lower foreign unit sales at Kirby, weakening demand for products of many of Scott Fetzer’s smaller
businesses and lower sales volume at World Book. The increase in operating profits in 2001 was attributed to lower
raw material prices and reduced labor and overhead costs at Campbell Hausfeld and the benefit of administrative
cost reduction programs, partially offset by the impact of overall lower sales volume.
Shaw Industries
Berkshire acquired 87.3% of Shaw on January 8, 2001. Shaw is a leading manufacturer and distributor of
carpet and rugs for residential and commercial use. Shaw also provides installation services and offers hardwood
floor and other floor coverings. In January 2002, Berkshire acquired the remaining 12.7% of Shaw.
On a comparative full-year basis, Shaw’s revenues in 2001 of $4,012 million declined by about $100
million from 2000. The decline in revenues reflects primarily a decline in square yards sold. Sales in 2001 were
negatively affected by the economic recession in the U.S., particularly in the commercial markets, and by slowing
demand after the September 11th terrorist attack.
In 2001, Shaw’s pre-tax operating profit totaled $292 million. Shaw’s operating results in 2001 benefited
from lower raw material costs and lower interest costs, partially offset by higher energy costs. Although uncertainty
in the U.S. economy persists, management is cautiously optimistic that sales and results will be stable in 2002.
2000 compared to 1999
Revenues from the non-insurance businesses increased $1,959 million (32.5%) in 2000 as compared to
1999. Operating profits of $1,400 million during 2000 increased $570 million (68.7%) from the comparable 1999
amount. Business acquisitions completed during 1999 and 2000 account for a significant portion of the revenue
increase. The acquisitions of Jordan’s Furniture (November 1999), CORT Business Services (February 2000), Ben
Bridge Jeweler (July 2000) and Justin Brands and Acme Brick (August 2000) account for about 50% of the
increase. The flight services segment and the finance and financial products segment account for most of the
remaining comparative increase. Most of the increase in the flight services segment was attributed to Executive Jet
which produced significant increases in revenues from both flight operations and aircraft sales. Operating profits
for the finance and financial products segment increased $413 million primarily as a result of realized gains on a
large portfolio of fixed maturity securities acquired during 1999 pursuant to a proprietary trading strategy. These
securities were sold during 2000. The aforementioned business acquisitions in the aggregate accounted for
substantially all of the remaining increase in operating profits.
56
Goodwill amortization and other purchase-accounting adjustments
Goodwill amortization and other purchase-accounting adjustments reflect the after-tax effect on net
earnings with respect to the amortization of goodwill of acquired businesses and the amortization of fair value
adjustments to certain assets and liabilities which were recorded at the business acquisition dates. Amortization of
goodwill was $572 million in 2001, $715 million in 2000 and $477 million in 1999. Goodwill amortization in 2000
included a charge of $219 million to write-off the remaining goodwill related to Dexter Shoe (see Note 1(g) to the
Consolidated Financial Statements).
As a result of new accounting standards issued by the FASB in June 2001, accounting for goodwill has
changed. Goodwill arising from business acquisitions completed after July 1, 2001 is not subject to systematic
amortization. In addition, the systematic amortization of goodwill related to businesses acquired before June 30,
2001 will be discontinued effective January 1, 2002. The new accounting standards require that goodwill of
acquired businesses continue to be tested for impairment. Berkshire has not fully completed an assessment of the
new standards, however, adoption of the new standards is expected to have a significant impact on earnings.
Other purchase-accounting adjustments consist primarily of the amortization of the excess market value
over the historical cost of fixed maturity investments that existed as of the date of certain business acquisitions.
Such excess is included in Berkshire’s cost of the investments and is being amortized over the estimated remaining
lives of the assets. The unamortized excess remaining in the cost of fixed maturity investments was $565 million at
December 31, 2001, $680 million at December 31, 2000 and $940 million at December 31, 1999.
Realized Investment Gain
Realized investment gain has been a recurring element in Berkshire's net earnings for many years. The
amount — recorded when investments are sold, other-than-temporarily impaired or in certain situations, as required
by GAAP, when investments are marked-to-market with the corresponding gain or loss included in earnings — may
fluctuate significantly from period to period, with a meaningful effect upon Berkshire's consolidated net earnings.
However, the amount of realized investment gain or loss for any given period has no predictive value, and
variations in amount from period to period have no practical analytical value, particularly in view of the net
unrealized price appreciation now existing in Berkshire's consolidated investment portfolio.
While the effects of realized gains are often material to the Consolidated Statements of Earnings, such
gains often produce a minimal impact on Berkshire's total shareholders' equity. This is due to the fact that
Berkshire's investments are carried in prior periods' Consolidated Financial Statements at market value with
unrealized gains, net of tax, reported as a separate component of shareholders' equity.
Market Risk Disclosures
Berkshire's Consolidated Balance Sheet includes a substantial amount of assets and liabilities whose fair
values are subject to market risks. Berkshire’s significant market risks are primarily associated with interest rates
and equity prices and to a lesser degree financial products. The following sections address the significant market
risks associated with Berkshire's business activities.
Interest Rate Risk
This section discusses interest rate risks associated with Berkshire’s financial assets and liabilities.
Berkshire's management prefers to invest in equity securities or to acquire entire businesses based upon the
principles discussed in the following section on equity price risk. When unable to do so, management may
alternatively invest in bonds or other interest rate sensitive instruments. Berkshire's strategy is to acquire securities
that are attractively priced in relation to the perceived credit risk. Management recognizes and accepts that losses
may occur. Berkshire has historically utilized a modest level of corporate borrowings and debt. Further, Berkshire
strives to maintain the highest credit ratings so that the cost of debt is minimized. Berkshire utilizes derivative
products to manage interest rate risks to a very limited degree.
The fair values of Berkshire's fixed maturity investments and borrowings under investment agreements,
notes payable and other debt will fluctuate in response to changes in market interest rates. Increases and decreases
in prevailing interest rates generally translate into decreases and increases in fair values of those instruments.
Additionally, fair values of interest rate sensitive instruments may be affected by the credit worthiness of the issuer,
prepayment options, relative values of alternative investments, the liquidity of the instrument and other general
market conditions.
57
Management's Discussion (Continued)
Interest Rate Risk (Continued)
The following table summarizes the estimated effects of hypothetical increases and decreases in interest
rates on assets and liabilities that are subject to interest rate risk. It is assumed that the changes occur immediately
and uniformly to each category of instrument containing interest rate risks. The hypothetical changes in market
interest rates do not reflect what could be deemed best or worst case scenarios. Variations in market interest rates
could produce significant changes in the timing of repayments due to prepayment options available. For these
reasons, actual results might differ from those reflected in the table which follows. Dollars are in millions.
Non-finance businesses
As of December 31, 2001
Investments in securities with fixed maturities .....
Borrowings under investment agreements and
Estimated Fair Value after
Hypothetical Change in Interest Rates
(bp=basis points)
200 bp
increase
100 bp
increase
300 bp
increase
100 bp
decrease
Fair Value
$36,603
$38,937
$34,333
$32,154
$30,148
other debt............................................................
3,624
3,708
3,545
3,474
3,407
As of December 31, 2000
Investments in securities with fixed maturities .....
Borrowings under investment agreements and
$32,567
$33,466
$31,346
$30,005
$28,690
other debt............................................................
2,470
2,540
2,404
2,336
2,274
Finance and financial products businesses *
As of December 31, 2001
Investments in securities with fixed maturities
and loans and other receivables..........................
Notes payable and other borrowings **................
$28,126
26,373
$28,545
26,451
$27,221
26,307
$26,140
26,244
$25,025
26,186
As of December 31, 2000
Investments in securities with fixed maturities
and loans and other receivables..........................
Notes payable and other borrowings **................
$6,460
4,285
$6,752
4,339
$6,125
4,252
$5,700
4,215
$5,304
4,182
* Excludes General Re Securities – See Financial Products Risk section for discussion of risks associated with this business.
** Includes securities sold under agreements to repurchase with a carrying value of $20,430 million at December 31, 2001 and
$2,887 million at December 31, 2000.
Equity Price Risk
Strategically, Berkshire strives to invest in businesses that possess excellent economics, with able and
honest management and at sensible prices. Berkshire's management prefers to invest a meaningful amount in each
investee. Accordingly, Berkshire's equity investments are concentrated in relatively few investees. At year-end
2001 and 2000, over 70% of the total fair value of investments in equity securities was concentrated in four
investees.
Berkshire's preferred strategy is to hold equity investments for very long periods of time. Thus, Berkshire
management is not necessarily troubled by short term price volatility with respect to its investments provided that
the underlying business, economic and management characteristics of the investees remain favorable. Berkshire
strives to maintain above average levels of shareholder capital to provide a margin of safety against short term
equity price volatility.
The carrying values of investments subject to equity price risks are based on quoted market prices or
management's estimates of fair value as of the balance sheet dates. Market prices are subject to fluctuation and,
consequently, the amount realized in the subsequent sale of an investment may significantly differ from the reported
market value. Fluctuation in the market price of a security may result from perceived changes in the underlying
economic characteristics of the investee, the relative price of alternative investments and general market conditions.
Furthermore, amounts realized in the sale of a particular security may be affected by the relative quantity of the
security being sold.
58
Equity Price Risk (Continued)
The table below summarizes Berkshire's equity price risks as of December 31, 2001 and 2000 and shows
the effects of a hypothetical 30% increase and a 30% decrease in market prices as of those dates. The selected
hypothetical change does not reflect what could be considered the best or worst case scenarios. Indeed, results could
be far worse due both to the nature of equity markets and the aforementioned concentrations existing in Berkshire's
equity investment portfolio. Dollars are in millions.
Fair Value
Hypothetical
Price Change
Estimated
Fair Value after
Hypothetical
Change in Prices
Hypothetical
Percentage
Increase (Decrease) in
Shareholders’ Equity
As of December 31, 2001.................
$28,675
As of December 31, 2000.................
$37,384
Financial Products Risk
30% increase
30% decrease
$37,277
20,072
30% increase
30% decrease
$48,599
26,170
9.6
(9.6)
11.7
(11.7)
Gen Re Securities Holdings Limited (“GRS”) operates as a dealer in various types of derivative
instruments in conjunction with offering risk management products to its clients. As previously noted, in January
2002, General Re announced that it would commence a long-term run off of GRS’s business. It is expected that the
orderly run-off will take several years to complete. GRS monitors its market risk on a daily basis across all swap
and option products by estimating the effect on operating results of potential changes in market variables over a one
week period, based on historical market volatility, correlation data and informed judgment. This evaluation is
performed on an individual trading book basis, against limits set by individual book, to a 99% probability level.
GRS sets market risk limits for each type of risk, and for an aggregate measure of risk across all trading books,
based on a 99% probability that movements in market rates will not affect the results from operations in excess of
the risk limit over a one week period. GRS’s weekly aggregate market risk limit was $22 million in 2001. In 2001,
there were no days where the actual losses exceeded the estimated value at risk and no days where the value at risk
exceeded the aggregate limit. In addition to these daily and weekly assessments of risk, GRS prepares periodic
stress tests to assess its exposure to extreme movements in various market risk factors.
The table below shows the highest, lowest and average value at risk, as calculated using the above
methodology, by broad category of market risk to which GRS is exposed over one week intervals. Dollars are in
millions.
Highest .............................
Lowest..............................
Average ............................
2001
Interest Rate
$18
10
13
Foreign
Exchange Rate
$8
3
4
Equity
$5
2
3
Credit
$3
1
1
All Risks
$14
3
7
2000
All Risks
$14
1
4
GRS evaluates and records a fair-value adjustment to recognize counterparty credit exposure and future
costs associated with administering each contract. The expected credit exposure for each trade is initially
established on the trade date and is determined through the use of a proprietary credit exposure model that is based
on historical default probabilities, market volatilities and, if applicable, the legal right of setoff. These exposures
are continually monitored and adjusted due to changes in the credit quality of the counterparty, changes in interest
and currency rates or changes in other factors affecting credit exposure.
Liquidity and Capital Resources
Berkshire’s balance sheet continues to reflect significant liquidity and a strong capital base. Consolidated
shareholders’ equity at December 31, 2001 totaled $58.0 billion. Consolidated cash and invested assets, excluding
assets of finance and financial products businesses totaled approximately $72.5 billion at December 31, 2001
compared to $77.1 billion at December 31, 2000, including approximately $5.3 billion in cash and cash equivalents
at the end of each year. During 2001 Berkshire deployed about $4.7 billion in cash for business acquisitions. Cash
utilized in these acquisitions was generated internally. Also contributing to the decline in invested assets was a $7.0
billion reduction in unrealized gains in Berkshire’s investments in equity securities. Partially offsetting these
declines was cash flows generated from operations of approximately $6.6 billion, primarily from insurance
operations.
59
Management's Discussion (Continued)
Liquidity and Capital Resources (Continued)
Berkshire’s consolidated borrowings under investment agreements and other debt, excluding finance
businesses, totaled $3,485 million at December 31, 2001 compared to $2,663 million at December 31, 2000. The
increase in borrowings during 2001 relates primarily to pre-acquisition debt of Shaw and Johns Manville, as well as
an increase in borrowings by Executive Jet to finance aircraft inventory and core fleet acquisitions. During the
second quarter of 2001, Berkshire filed a shelf registration to issue up to $700 million in new debt securities at a
future date. The intended purpose of the future issuance of debt is to fund the repayment of currently outstanding
borrowings of certain Berkshire subsidiaries. The timing and amount of the debt to be issued under the shelf
registration has not yet been determined.
As of December 31, 2001, Berkshire’s borrowings under investment agreements and other debt, excluding
finance businesses, included commercial paper and other short-term borrowings totaling $1.8 billion. Most of these
borrowings were by Executive Jet and Shaw for operating needs. Berkshire is also contingently liable for the
unpaid debt of Berkadia LLC through a primary guaranty of 90% of the debt and a secondary guaranty of the
remaining 10% of the loan. At December 31, 2001, Berkadia’s unpaid loan balance was $4.9 billion, of which $1.0
billion has been prepaid subsequent to the end of 2001. See Note 9 to the Consolidated Financial Statements for
additional information. Most of Berkshire’s borrowings under investment agreements contain contractual
provisions that could require Berkshire to collateralize or prepay the outstanding obligations upon a downgrade in
Berkshire’s senior debt ratings.
Invested assets of the finance and financial products businesses totaled $41.6 billion at December 31, 2001
compared to $16.8 billion at December 31, 2000. Most of the increase was due to increased investments in U.S.
Treasury securities and obligations of U.S. government-sponsored enterprises. These investments were primarily
financed through repurchase agreements. The repurchase agreements require that fair value of the pledged
collateral exceed the amount borrowed. A decline in the value of the investments pledged would require pledges of
cash or additional collateral. Under the contractual terms with counterparties to its derivatives trading activities,
General Re Securities (“GRS”) may be required to post collateral against trading account liabilities.
Notes payable and other borrowings of Berkshire’s finance and financial products businesses totaled $9.0
billion at December 31, 2001 and $2.1 billion at December 31, 2000. The balance at December 31, 2001 includes
Berkadia’s outstanding term loan of $4.9 billion (see Note 9 to the Consolidated Financial Statements) and $613
million of debt of XTRA Corporation, which Berkshire acquired on September 20, 2001. The remaining increase
was due to increased commercial paper borrowings by GRS to fund short-term liquidity needs.
Berkshire believes that it currently maintains sufficient liquidity to cover its existing liquidity requirements
and provide for contingent liquidity needs.
Forward-Looking Statements
Investors are cautioned that certain statements contained in this document, as well as some statements by
the Company in periodic press releases and some oral statements of Company officials during presentations about
the Company, are "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Act"). Forward-looking statements include statements which are predictive in nature, which depend
upon or refer to future events or conditions, which include words such as "expects," "anticipates," "intends,"
"plans," "believes," "estimates," or similar expressions. In addition, any statements concerning future financial
performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects, and
possible future Company actions, which may be provided by management are also forward-looking statements as
defined by the Act. Forward-looking statements are based on current expectations and projections about future
events and are subject to risks, uncertainties, and assumptions about the Company, economic and market factors and
the industries in which the Company does business, among other things. These statements are not guaranties of
future performance and the Company has no specific intention to update these statements.
Actual events and results may differ materially from those expressed or forecasted in forward-looking
statements due to a number of factors. The principal important risk factors that could cause the Company's actual
performance and future events and actions to differ materially from such forward-looking statements, include, but
are not limited to, changes in market prices of Berkshire's significant equity investees, the occurrence of one or
more catastrophic events, such as an earthquake or hurricane that causes losses insured by Berkshire's insurance
subsidiaries, changes in insurance laws or regulations, changes in Federal income tax laws, and changes in general
economic and market factors that affect the prices of securities or the industries in which Berkshire and its affiliates
do business, especially those affecting the property and casualty insurance industry.
60
Shortly after the September 11th terrorist attack, Berkshire’s Chairman, Warren E. Buffett, sent a letter to
the CEO of each of Berkshire’s operating businesses. The letter is reproduced below.
____________________________________________________________________
MEMO
TO: Berkshire Hathaway Managers (“The All-Stars”)
FROM: Warren E. Buffett
DATE: September 26, 2001
The last few weeks have been tough times for all of us in our personal lives and for many of us in our
business activities.
At Berkshire we have estimated our September 11 insurance loss was $2.2 billion. We’ve labeled this a
“guess” because that’s all it is. It will be many years before we can tell the world within a narrow range what the
true figure was.
A very high percentage of the loss occurred in our U.S. insurance companies, with the balance in German
and U.K. entities. Because we have regularly paid very large amounts of U.S. income taxes, we will bear 65% of
the cost applicable to the U.S. operations; the government will bear 35%. Many insurers will not have their loss
mitigated in this manner and some may not survive. Though much of our loss will be paid very soon, significant
payments in the liability area will take a considerable time to settle.
Even with tax recoveries, our loss is huge. Nevertheless, it’s one Berkshire can easily bear. We have long
been in the super-cat business and we have been prepared, both financially and psychologically, to handle them
when they occur. This won’t be our last hit, though we fervently hope disasters in the future arise from natural
causes, rather than be man-made. (We also would hope they would be of lesser magnitude.)
What should you be doing in running your business? Just what you always do: Widen the moat, build
enduring competitive advantage, delight your customers, and relentlessly fight costs. With the exception of
insurance pricing and coverages, almost all operating decisions that made sense a month ago make sense today.
For my part, I’ll keep looking for sensible acquisitions and continue to manage our resources so that
Berkshire remains a financial Rock of Gibraltar. I’m sure we are in a recession, probably a relatively deep and
extended one, but they are part of business life and we are prepared.
In short, you do the managing and I’ll do the worrying. That’s a division of labor that’s worked for us in
the past, and it will continue to work well in the future.
Thanks, as always, for the great job all of you do that, in turn, makes my job so easy.
P.S. If you wish, share this message with any of your associates.
Warren
61
In June 1996, Berkshire's Chairman, Warren E. Buffett, issued a booklet entitled "An Owner's Manual"
to Berkshire's Class A and Class B shareholders. The purpose of the manual was to explain Berkshire's broad
economic principles of operation. The Owner's Manual is reproduced on this and the following six pages.
____________________________________________________________________
INTRODUCTION
Augmented by the General Re merger, Berkshire’s shareholder count has doubled in the past year to about
250,000. Charlie Munger, Berkshire's Vice Chairman and my partner, and I welcome each of you. As a further
greeting, we have prepared a second printing of this booklet to help you understand our business, goals, philosophy
and limitations.
These pages are aimed at explaining our broad principles of operation, not at giving you detail about
Berkshire's many businesses. For more detail and a continuing update on our progress, you should look to our
annual reports. We will be happy to send a copy of our 1997 report to any shareholder requesting it. A great deal of
additional
Internet site:
www.berkshirehathaway.com.
including our 1977-1996 annual
is available at our
information,
letters,
OWNER-RELATED BUSINESS PRINCIPLES
At the time of the Blue Chip merger in 1983, I set down 13 owner-related business principles that I thought
would help new shareholders understand our managerial approach. As is appropriate for "principles," all 13 remain
alive and well today, and they are stated here in italics. A few words have been changed to bring them up-to-date
and to each I've added a short commentary.
1.
Although our form is corporate, our attitude is partnership. Charlie Munger and I think of our
shareholders as owner-partners, and of ourselves as managing partners. (Because of the size of our
shareholdings we are also, for better or worse, controlling partners.) We do not view the company itself as
the ultimate owner of our business assets but instead view the company as a conduit through which our
shareholders own the assets.
Charlie and I hope that you do not think of yourself as merely owning a piece of paper whose price wiggles
around daily and that is a candidate for sale when some economic or political event makes you nervous.
We hope you instead visualize yourself as a part owner of a business that you expect to stay with
indefinitely, much as you might if you owned a farm or apartment house in partnership with members of
your family. For our part, we do not view Berkshire shareholders as faceless members of an ever-shifting
crowd, but rather as co-venturers who have entrusted their funds to us for what may well turn out to be the
remainder of their lives.
The evidence suggests that most Berkshire shareholders have indeed embraced this long-term partnership
concept. The annual percentage turnover in Berkshire's shares is a small fraction of that occurring in the
stocks of other major American corporations, even when the shares I own are excluded from the
calculation.
In effect, our shareholders behave in respect to their Berkshire stock much as Berkshire itself behaves in
respect to companies in which it has an investment. As owners of, say, Coca-Cola or Gillette shares, we
think of Berkshire as being a non-managing partner in two extraordinary businesses, in which we measure
our success by the long-term progress of the companies rather than by the month-to-month movements of
their stocks. In fact, we would not care in the least if several years went by in which there was no trading,
or quotation of prices, in the stocks of those companies. If we have good long-term expectations, short-
term price changes are meaningless for us except to the extent they offer us an opportunity to increase our
ownership at an attractive price.
*Copyright © 1996 By Warren E. Buffett
All Rights Reserved
62
2.
In line with Berkshire's owner-orientation, most of our directors have a major portion of their net worth
invested in the company. We eat our own cooking.
3.
4.
Charlie's family has 90% or more of its net worth in Berkshire shares; my wife, Susie, and I have more
than 99%. In addition, many of my relatives — my sisters and cousins, for example — keep a huge portion
of their net worth in Berkshire stock.
Charlie and I feel totally comfortable with this eggs-in-one-basket situation because Berkshire itself owns a
wide variety of truly extraordinary businesses. Indeed, we believe that Berkshire is close to being unique in
the quality and diversity of the businesses in which it owns either a controlling interest or a minority
interest of significance.
Charlie and I cannot promise you results. But we can guarantee that your financial fortunes will move in
lockstep with ours for whatever period of time you elect to be our partner. We have no interest in large
salaries or options or other means of gaining an "edge" over you. We want to make money only when our
partners do and in exactly the same proportion. Moreover, when I do something dumb, I want you to be
able to derive some solace from the fact that my financial suffering is proportional to yours.
Our long-term economic goal (subject to some qualifications mentioned later) is to maximize Berkshire's
average annual rate of gain in intrinsic business value on a per-share basis. We do not measure the
economic significance or performance of Berkshire by its size; we measure by per-share progress. We are
certain that the rate of per-share progress will diminish in the future — a greatly enlarged capital base
will see to that. But we will be disappointed if our rate does not exceed that of the average large American
corporation.
Since that was written at yearend 1983, our intrinsic value (a topic I'll discuss a bit later) has increased at
an annual rate of more than 25%, a pace that has definitely surprised both Charlie and me. Nevertheless the
principle just stated remains valid: Operating with large amounts of capital as we do today, we cannot
come close to performing as well as we once did with much smaller sums. The best rate of gain in intrinsic
value we can even hope for is an average of 15% per annum, and we may well fall far short of that target.
Indeed, we think very few large businesses have a chance of compounding intrinsic value at 15% per
annum over an extended period of time. So it may be that we will end up meeting our stated goal — being
above average — with gains that fall significantly short of 15%.
Our preference would be to reach our goal by directly owning a diversified group of businesses that
generate cash and consistently earn above-average returns on capital. Our second choice is to own parts
of similar businesses, attained primarily through purchases of marketable common stocks by our insurance
subsidiaries. The price and availability of businesses and the need for insurance capital determine any
given year's capital allocation.
As has usually been the case, it is easier today to buy small pieces of outstanding businesses via the stock
market than to buy similar businesses in their entirety on a negotiated basis. Nevertheless, we continue to
prefer the 100% purchase, and in some years we get lucky: In the last three years in fact, we made seven
acquisitions. Though there will be dry years also, we expect to make a number of acquisitions in the
decades to come, and our hope is that they will be large. If these purchases approach the quality of those
we have made in the past, Berkshire will be well served.
The challenge for us is to generate ideas as rapidly as we generate cash. In this respect, a depressed stock
market is likely to present us with significant advantages. For one thing, it tends to reduce the prices at
which entire companies become available for purchase. Second, a depressed market makes it easier for our
insurance companies to buy small pieces of wonderful businesses — including additional pieces of
businesses we already own — at attractive prices. And third, some of those same wonderful businesses,
such as Coca-Cola, are consistent buyers of their own shares, which means that they, and we, gain from the
cheaper prices at which they can buy.
Overall, Berkshire and its long-term shareholders benefit from a sinking stock market much as a regular
purchaser of food benefits from declining food prices. So when the market plummets — as it will from
time to time — neither panic nor mourn. It's good news for Berkshire.
63
5.
6.
7.
Because of our two-pronged approach to business ownership and because of the limitations of
conventional accounting, consolidated reported earnings may reveal relatively little about our true
economic performance. Charlie and I, both as owners and managers, virtually ignore such consolidated
numbers. However, we will also report to you the earnings of each major business we control, numbers we
consider of great importance. These figures, along with other information we will supply about the
individual businesses, should generally aid you in making judgments about them.
To state things simply, we try to give you in the annual report the numbers and other information that
really matter. Charlie and I pay a great deal of attention to how well our businesses are doing, and we also
work to understand the environment in which each business is operating. For example, is one of our
businesses enjoying an industry tailwind or is it facing a headwind? Charlie and I need to know exactly
which situation prevails and to adjust our expectations accordingly. We will also pass along our
conclusions to you.
Over time, practically all of our businesses have exceeded our expectations. But occasionally we have
disappointments, and we will try to be as candid in informing you about those as we are in describing the
happier experiences. When we use unconventional measures to chart our progress — for instance, you will
be reading in our annual reports about insurance "float" — we will try to explain these concepts and why
we regard them as important. In other words, we believe in telling you how we think so that you can
evaluate not only Berkshire's businesses but also assess our approach to management and capital allocation.
Accounting consequences do not influence our operating or capital-allocation decisions. When acquisition
costs are similar, we much prefer to purchase $2 of earnings that is not reportable by us under standard
accounting principles than to purchase $1 of earnings that is reportable. This is precisely the choice that
often faces us since entire businesses (whose earnings will be fully reportable) frequently sell for double
the pro-rata price of small portions (whose earnings will be largely unreportable). In aggregate and over
time, we expect the unreported earnings to be fully reflected in our intrinsic business value through capital
gains.
We have found over time that the undistributed earnings of our investees, in aggregate, have been fully as
beneficial to Berkshire as if they had been distributed to us (and therefore had been included in the
earnings we officially report). This pleasant result has occurred because most of our investees are engaged
in truly outstanding businesses that can often employ incremental capital to great advantage, either by
putting it to work in their businesses or by repurchasing their shares. Obviously, every capital decision that
our investees have made has not benefitted us as shareholders, but overall we have garnered far more than
a dollar of value for each dollar they have retained. We consequently regard look-through earnings as
realistically portraying our yearly gain from operations.
In 1992, our look-through earnings were $604 million, and in that same year we set a goal of raising them
by an average of 15% per annum to $1.8 billion in the year 2000. Since that time, however, we have issued
additional shares — including a significant number in the 1998 merger with General Re — so that we now
need look-through earnings of $2.4 billion in 2000 to match the per-share goal we originally were shooting
for. This is a target we still hope to hit.
We use debt sparingly and, when we do borrow, we attempt to structure our loans on a long-term fixed-
rate basis. We will reject interesting opportunities rather than over-leverage our balance sheet. This
conservatism has penalized our results but it is the only behavior that leaves us comfortable, considering
our fiduciary obligations to policyholders, lenders and the many equity holders who have committed
unusually large portions of their net worth to our care. (As one of the Indianapolis "500" winners said:
"To finish first, you must first finish.")
The financial calculus that Charlie and I employ would never permit our trading a good night's sleep for a
shot at a few extra percentage points of return. I've never believed in risking what my family and friends
have and need in order to pursue what they don't have and don't need.
Besides, Berkshire has access to two low-cost, non-perilous sources of leverage that allow us to safely own
far more assets than our equity capital alone would permit: deferred taxes and "float," the funds of others
that our insurance business holds because it receives premiums before needing to pay out losses. Both of
these funding sources have grown rapidly and now total about $32 billion.
64
Better yet, this funding to date has been cost-free. Deferred tax liabilities bear no interest. And as long as
we can break even in our insurance underwriting — which we have done, on the average, during our 32
years in the business — the cost of the float developed from that operation is zero. Neither item, of course,
is equity; these are real liabilities. But they are liabilities without covenants or due dates attached to them.
In effect, they give us the benefit of debt — an ability to have more assets working for us — but saddle us
with none of its drawbacks.
Of course, there is no guarantee that we can obtain our float in the future at no cost. But we feel our
chances of attaining that goal are as good as those of anyone in the insurance business. Not only have we
reached the goal in the past (despite a number of important mistakes by your Chairman), our 1996
acquisition of GEICO, materially improved our prospects for getting there in the future.
A managerial "wish list" will not be filled at shareholder expense. We will not diversify by purchasing
entire businesses at control prices that ignore long-term economic consequences to our shareholders. We
will only do with your money what we would do with our own, weighing fully the values you can obtain by
diversifying your own portfolios through direct purchases in the stock market.
Charlie and I are interested only in acquisitions that we believe will raise the per-share intrinsic value of
Berkshire's stock. The size of our paychecks or our offices will never be related to the size of Berkshire's
balance sheet.
We feel noble intentions should be checked periodically against results. We test the wisdom of retaining
earnings by assessing whether retention, over time, delivers shareholders at least $1 of market value for
each $1 retained. To date, this test has been met. We will continue to apply it on a five-year rolling basis.
As our net worth grows, it is more difficult to use retained earnings wisely.
We continue to pass the test, but the challenges of doing so have grown more difficult. If we reach the
point that we can't create extra value by retaining earnings, we will pay them out and let our shareholders
deploy the funds.
8.
9.
10.
We will issue common stock only when we receive as much in business value as we give. This rule applies
to all forms of issuance — not only mergers or public stock offerings, but stock-for-debt swaps, stock
options, and convertible securities as well. We will not sell small portions of your company — and that is
what the issuance of shares amounts to — on a basis inconsistent with the value of the entire enterprise.
11.
When we sold the Class B shares in 1996, we stated that Berkshire stock was not undervalued — and some
people found that shocking. That reaction was not well-founded. Shock should have registered instead had
we issued shares when our stock was undervalued. Managements that say or imply during a public offering
that their stock is undervalued are usually being economical with the truth or uneconomical with their
existing shareholders' money: Owners unfairly lose if their managers deliberately sell assets for 80¢ that in
fact are worth $1. We didn't commit that kind of crime in our offering of Class B shares and we never will.
(We did not, however, say at the time of the sale that our stock was overvalued, though many media have
reported that we did.)
You should be fully aware of one attitude Charlie and I share that hurts our financial performance:
Regardless of price, we have no interest at all in selling any good businesses that Berkshire owns. We are
also very reluctant to sell sub-par businesses as long as we expect them to generate at least some cash and
as long as we feel good about their managers and labor relations. We hope not to repeat the capital-
allocation mistakes that led us into such sub-par businesses. And we react with great caution to
suggestions that our poor businesses can be restored to satisfactory profitability by major capital
expenditures. (The projections will be dazzling and the advocates sincere, but, in the end, major additional
investment in a terrible industry usually is about as rewarding as struggling in quicksand.) Nevertheless,
gin rummy managerial behavior (discard your least promising business at each turn) is not our style. We
would rather have our overall results penalized a bit than engage in that kind of behavior.
We continue to avoid gin rummy behavior. True, we closed our textile business in the mid-1980's after 20
years of struggling with it, but only because we felt it was doomed to run never-ending operating losses.
We have not, however, given thought to selling operations that would command very fancy prices nor have
we dumped our laggards, though we focus hard on curing the problems that cause them to lag.
65
12.
We will be candid in our reporting to you, emphasizing the pluses and minuses important in appraising
business value. Our guideline is to tell you the business facts that we would want to know if our positions
were reversed. We owe you no less. Moreover, as a company with a major communications business, it
would be inexcusable for us to apply lesser standards of accuracy, balance and incisiveness when
reporting on ourselves than we would expect our news people to apply when reporting on others. We also
believe candor benefits us as managers: The CEO who misleads others in public may eventually mislead
himself in private.
At Berkshire you will find no "big bath" accounting maneuvers or restructurings nor any "smoothing" of
quarterly or annual results. We will always tell you how many strokes we have taken on each hole and
never play around with the scorecard. When the numbers are a very rough "guesstimate," as they
necessarily must be in insurance reserving, we will try to be both consistent and conservative in our
approach.
We will be communicating with you in several ways. Through the annual report, I try to give all
shareholders as much value-defining information as can be conveyed in a document kept to reasonable
length. We also try to convey a liberal quantity of condensed but important information in our quarterly
reports, though I don't write those (one recital a year is enough). Still another important occasion for
communication is our Annual Meeting, at which Charlie and I are delighted to spend five hours or more
answering questions about Berkshire. But there is one way we can't communicate: on a one-on-one basis.
That isn't feasible given Berkshire's many thousands of owners.
In all of our communications, we try to make sure that no single shareholder gets an edge: We do not
follow the usual practice of giving earnings "guidance" or other information of value to analysts or large
shareholders. Our goal is to have all of our owners updated at the same time.
13.
Despite our policy of candor, we will discuss our activities in marketable securities only to the extent
legally required. Good investment ideas are rare, valuable and subject to competitive appropriation just as
good product or business acquisition ideas are. Therefore we normally will not talk about our investment
ideas. This ban extends even to securities we have sold (because we may purchase them again) and to
stocks we are incorrectly rumored to be buying. If we deny those reports but say "no comment" on other
occasions, the no-comments become confirmation.
Though we continue to be unwilling to talk about specific stocks, we freely discuss our business and
investment philosophy. I benefitted enormously from the intellectual generosity of Ben Graham, the
greatest teacher in the history of finance, and I believe it appropriate to pass along what I learned from him,
even if that creates new and able investment competitors for Berkshire just as Ben's teachings did for him.
AN ADDED PRINCIPLE
To the extent possible, we would like each Berkshire shareholder to record a gain or loss in market value during his
period of ownership that is proportional to the gain or loss in per-share intrinsic value recorded by the company
during that holding period. For this to come about, the relationship between the intrinsic value and the market price
of a Berkshire share would need to remain constant, and by our preferences at 1-to-1. As that implies, we would
rather see Berkshire's stock price at a fair level than a high level. Obviously, Charlie and I can't control Berkshire's
price. But by our policies and communications, we can encourage informed, rational behavior by owners that, in
turn, will tend to produce a stock price that is also rational. Our it's-as-bad-to-be-overvalued-as-to-be-undervalued
approach may disappoint some shareholders. We believe, however, that it affords Berkshire the best prospect of
attracting long-term investors who seek to profit from the progress of the company rather than from the investment
mistakes of their partners.
INTRINSIC VALUE
Now let's focus on a term that I mentioned earlier and that you will encounter in future annual reports.
Intrinsic value is an all-important concept that offers the only logical approach to evaluating the relative
attractiveness of investments and businesses. Intrinsic value can be defined simply: It is the discounted value of the cash that
can be taken out of a business during its remaining life.
66
The calculation of intrinsic value, though, is not so simple. As our definition suggests, intrinsic value is an estimate
rather than a precise figure, and it is additionally an estimate that must be changed if interest rates move or forecasts of future
cash flows are revised. Two people looking at the same set of facts, moreover — and this would apply even to Charlie and
me — will almost inevitably come up with at least slightly different intrinsic value figures. That is one reason we never give
you our estimates of intrinsic value. What our annual reports do supply, though, are the facts that we ourselves use to
calculate this value.
Meanwhile, we regularly report our per-share book value, an easily calculable number, though one of limited use.
The limitations do not arise from our holdings of marketable securities, which are carried on our books at their current prices.
Rather the inadequacies of book value have to do with the companies we control, whose values as stated on our books may
be far different from their intrinsic values.
The disparity can go in either direction. For example, in 1964 we could state with certitude that Berkshire's per-
share book value was $19.46. However, that figure considerably overstated the company's intrinsic value, since all of the
company's resources were tied up in a sub-profitable textile business. Our textile assets had neither going-concern nor
liquidation values equal to their carrying values. Today, however, Berkshire's situation is reversed: Now, our book value far
understates Berkshire's intrinsic value, a point true because many of the businesses we control are worth much more than
their carrying value.
Inadequate though they are in telling the story, we give you Berkshire's book-value figures because they today serve
as a rough, albeit significantly understated, tracking measure for Berkshire's intrinsic value. In other words, the percentage
change in book value in any given year is likely to be reasonably close to that year's change in intrinsic value.
You can gain some insight into the differences between book value and intrinsic value by looking at one form of
investment, a college education. Think of the education's cost as its "book value." If this cost is to be accurate, it should
include the earnings that were foregone by the student because he chose college rather than a job.
For this exercise, we will ignore the important non-economic benefits of an education and focus strictly on its
economic value. First, we must estimate the earnings that the graduate will receive over his lifetime and subtract from that
figure an estimate of what he would have earned had he lacked his education. That gives us an excess earnings figure, which
must then be discounted, at an appropriate interest rate, back to graduation day. The dollar result equals the intrinsic
economic value of the education.
Some graduates will find that the book value of their education exceeds its intrinsic value, which means that
whoever paid for the education didn't get his money's worth. In other cases, the intrinsic value of an education will far exceed
its book value, a result that proves capital was wisely deployed. In all cases, what is clear is that book value is meaningless as
an indicator of intrinsic value.
THE MANAGING OF BERKSHIRE
I think it's appropriate that I conclude with a discussion of Berkshire's management, today and in the future. As our
first owner-related principle tells you, Charlie and I are the managing partners of Berkshire. But we subcontract all of the
heavy lifting in this business to the managers of our subsidiaries. In fact, we delegate almost to the point of abdication:
Though Berkshire has about 45,000 employees, only 12 of these are at headquarters.
Charlie and I mainly attend to capital allocation and the care and feeding of our key managers. Most of these
managers are happiest when they are left alone to run their businesses, and that is customarily just how we leave them. That
puts them in charge of all operating decisions and of dispatching the excess cash they generate to headquarters. By sending it
to us, they don't get diverted by the various enticements that would come their way were they responsible for deploying the
cash their businesses throw off. Furthermore, Charlie and I are exposed to a much wider range of possibilities for investing
these funds than any of our managers could find in his or her own industry.
Most of our managers are independently wealthy, and it's therefore up to us to create a climate that encourages them
to choose working with Berkshire over golfing or fishing. This leaves us needing to treat them fairly and in the manner that
we would wish to be treated if our positions were reversed.
As for the allocation of capital, that's an activity both Charlie and I enjoy and in which we have acquired some
useful experience. In a general sense, grey hair doesn't hurt on this playing field: You don't need good hand-eye
coordination or well-toned muscles to push money around (thank heavens). As long as our minds continue to function
effectively, Charlie and I can keep on doing our jobs pretty much as we have in the past.
67
On my death, Berkshire's ownership picture will change but not in a disruptive way: First, only about 1% of my
stock will have to be sold to take care of bequests and taxes; second, the balance of my stock will go to my wife, Susan, if
she survives me, or to a family foundation if she doesn't. In either event, Berkshire will possess a controlling shareholder
guided by the same philosophy and objectives that now set our course.
At that juncture, the Buffett family will not be involved in managing the business, only in picking and overseeing
the managers who do. Just who those managers will be, of course, depends on the date of my death. But I can anticipate what
the management structure will be: Essentially my job will be split into two parts, with one executive becoming responsible
for investments and another for operations. If the acquisition of new businesses is in prospect, the two will cooperate in
making the decisions needed. Both executives will report to a board of directors who will be responsive to the controlling
shareholder, whose interests will in turn be aligned with yours.
Were we to need the management structure I have just described on an immediate basis, my family and a few key
individuals know who I would pick to fill both posts. Both currently work for Berkshire and are people in whom I have total
confidence.
I will continue to keep my family posted on the succession issue. Since Berkshire stock will make up virtually my
entire estate and will account for a similar portion of the assets of either my wife or the foundation for a considerable period
after my death, you can be sure that I have thought through the succession question carefully. You can be equally sure that
the principles we have employed to date in running Berkshire will continue to guide the managers who succeed me.
Lest we end on a morbid note, I also want to assure you that I have never felt better. I love running Berkshire, and if
enjoying life promotes longevity, Methuselah's record is in jeopardy.
Warren E. Buffett
Chairman
68
BERKSHIRE HATHAWAY INC.
SHAREHOLDER-DESIGNATED CONTRIBUTIONS
The Company has conducted this program of corporate giving during each of the past twenty-one years. On
October 14, 1981, the Chairman sent to the shareholders a letter* explaining the program. Portions of that letter follow:
"On September 30, 1981 Berkshire received a tax ruling from the U.S. Treasury Department that, in
most years, should produce a significant benefit for charities of your choice.
"Each Berkshire shareholder — on a basis proportional to the number of shares of Berkshire that he
owns — will be able to designate recipients of charitable contributions by our company. You'll name the
charity; Berkshire will write the check. The ruling states that there will be no personal tax consequences
to our shareholders from making such designations.
"Thus, our approximately 1500 owners now can exercise a perquisite that, although routinely
exercised by the owners in closely-held businesses, is almost exclusively exercised by the managers in
more widely-held businesses.
"In a widely-held corporation the executives ordinarily arrange all charitable donations, with no
input at all from shareholders, in two main categories:
(1) Donations considered to benefit the corporation directly in an amount
roughly commensurate with the cost of the donation; and
(2) Donations considered to benefit the corporation indirectly through hard-to-
measure, long-delayed feedback effects of various kinds.
"I and other Berkshire executives have arranged in the past, as we will arrange in the future, all
charitable donations in the first category. However, the aggregate level of giving in such category has
been quite low, and very likely will remain quite low, because not many gifts can be shown to produce
roughly commensurate direct benefits to Berkshire.
"In the second category, Berkshire's charitable gifts have been virtually nil, because I am not
comfortable with ordinary corporate practice and had no better practice to substitute. What bothers me
about ordinary corporate practice is the way gifts tend to be made based more on who does the asking and
how corporate peers are responding than on an objective evaluation of the donee's activities.
Conventionality often overpowers rationality.
"A common result is the use of the stockholder's money to implement the charitable inclinations of
the corporate manager, who usually is heavily influenced by specific social pressures on him. Frequently
there is an added incongruity; many corporate managers deplore governmental allocation of the
taxpayer's dollar but embrace enthusiastically their own allocation of the shareholder's dollar.
"For Berkshire, a different model seems appropriate. Just as I wouldn't want you to implement your
personal judgments by writing checks on my bank account for charities of your choice, I feel it
inappropriate to write checks on your corporate "bank account" for charities of my choice. Your
charitable preferences are as good as mine and, for both you and me, funds available to foster charitable
interests in a tax-deductible manner reside largely at the corporate level rather than in our own hands.
"Under such circumstances, I believe Berkshire should imitate more closely-held companies, not
larger public companies. If you and I each own 50% of a corporation, our charitable decision making
would be simple. Charities very directly related to the operations of the business would have first claim
on our available charitable funds. Any balance available after the "operations-related" contributions
would be divided among various charitable interests of the two of us, on a basis roughly proportional to
our ownership interest. If the manager of our company had some suggestions, we would listen carefully
— but the final decision would be ours. Despite our corporate form, in this aspect of the business we
probably would behave as if we were a partnership.
*Copyright © 1981 By Warren E. Buffett
All Rights Reserved
69
"Wherever feasible, I believe in maintaining such a partnership frame of mind, even though we
operate through a large, fairly widely-held corporation. Our Treasury ruling will allow such partnership-
like behavior in this area . . .
"I am pleased that Berkshire donations can become owner-directed. It is ironic, but understandable,
that a large and growing number of major corporations have charitable policies pursuant to which they will
match gifts made by their employees (and — brace yourself for this one — many even match gifts made by
directors) but none, to my knowledge, has a plan matching charitable gifts by owners. I say "understandable"
because much of the stock of many large corporations is owned on a "revolving door" basis by institutions
that have short-term investment horizons, and that lack a long-term owner's perspective . . .
"Our own shareholders are a different breed. As I mentioned in the 1979 annual report, at the end of
each year more than 98% of our shares are owned by people who were shareholders at the beginning of the
year. This long-term commitment to the business reflects an owner mentality which, as your manager, I
intend to acknowledge in all feasible ways. The designated contributions policy is an example of that intent."
The history of contributions made pursuant to this program since its inception follows:
* * *
Specified Amount
Per share
Percent of
Eligible* Shares
Participating
$2
$1
$3
$3
$4
$4
$5
$5
$6
$6
$7
$8
$10
$11
$12
$14
$16
$18
$18
$18
$18
95.6%
95.8%
96.4%
97.2%
96.8%
97.1%
97.2%
97.4%
96.9%
97.3%
97.7%
97.0%
97.3%
95.7%
96.3%
97.2%
97.7%
97.5%
97.3%
97.0%
97.8%
Year
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Amount
Contributed
$ 1,783,655
$ 890,948
$ 3,066,501
$ 3,179,049
$ 4,006,260
$ 3,996,820
$ 4,937,574
$ 4,965,665
$ 5,867,254
$ 5,823,672
$ 6,772,024
$ 7,634,784
$ 9,448,370
$10,419,497
$11,558,616
$13,309,044
$15,424,480
$16,931,538
$17,174,158
$16,894,872
$16,672,992
No. of
Charities
675
704
1,353
1,519
1,724
1,934
2,050
2,319
2,550
2,600
2,630
2,810
3,110
3,330
3,600
3,910
3,830
3,880
3,850
3,660
3,550
* Shares registered in street name are not eligible to participate.
In addition to the shareholder-designated contributions summarized above, Berkshire and its subsidiaries have
made certain contributions pursuant to local level decisions of operating managers of the businesses.
* * *
The program may not be conducted in the occasional year, if any, when the contributions would produce
substandard or no tax deductions. In other years Berkshire expects to inform shareholders of the amount per share that
may be designated, and a reply form will accompany the notice allowing shareholders to respond with their
designations. If the program is conducted in 2002, the notice will be mailed on or about September 15 to Class A
shareholders of record reflected in our Registrar's records as of the close of business August 31, 2002, and
shareholders will be given until November 15 to respond.
Shareholders should note the fact that Class A shares held in street name are not eligible to participate in the
program. To qualify, shares must be registered with our Registrar on August 31 in the owner's individual name(s) or
the name of an owning trust, corporation, partnership or estate, as applicable. Also, shareholders should note that
Class B shares are not eligible to participate in the program.
70
BERKSHIRE HATHAWAY INC.
COMMON STOCK
General
Berkshire has two classes of common stock designated Class A Common Stock and Class B Common Stock.
Each share of Class A Common Stock is convertible, at the option of the holder, into 30 shares of Class B Common
Stock. Shares of Class B Common Stock are not convertible into shares of Class A Common Stock.
Stock Transfer Agent
Wells Fargo Bank Minnesota, N.A., P. O. Box 64854, St. Paul, MN 55164-0854 serves as Transfer Agent and
Registrar for the Company’s common stock. Correspondence may be directed to Wells Fargo at the address indicated
or at www.wellsfargo.com/shareownerservices. Telephone inquiries should be directed to the Shareowner Relations
Department at 1-877-602-7411 between 7:00 A.M. and 7:00 P.M. Central Time. Certificates for re-issue or transfer
should be directed to the Transfer Department at the address indicated.
Shareholders of record wishing to convert Class A Common Stock into Class B Common Stock may contact
Wells Fargo in writing. Along with the underlying stock certificate, shareholders should provide Wells Fargo with
specific written instructions regarding the number of shares to be converted and the manner in which the Class B shares
are to be registered. We recommend that you use certified or registered mail when delivering the stock certificates and
written instructions.
If Class A shares are held in "street name,” shareholders wishing to convert all or a portion of their holding
should contact their broker or bank nominee. It will be necessary for the nominee to make the request for conversion.
Shareholders
Berkshire had approximately 8,500 record holders of its Class A Common Stock and 14,000 record holders of its
Class B Common Stock at March 6, 2002. Record owners included nominees holding at least 400,000 shares of Class
A Common Stock and 5,500,000 shares of Class B Common Stock on behalf of beneficial-but-not-of-record owners.
Price Range of Common Stock
Berkshire’s Class A and Class B Common Stock are listed for trading on the New York Stock Exchange, trading
symbol: BRK.A and BRK.B. The following table sets forth the high and low sales prices per share, as reported on the
New York Stock Exchange Composite List during the periods indicated:
2001
2000
Class A
Class B
Class A
Class B
High
$74,600
69,800
70,900
75,600
Low
$63,000
62,800
59,000
66,600
High
$2,475
2,330
2,367
2,525
Low
$2,085
2,075
1,977
2,210
High
$58,000
60,800
64,400
71,300
Low
$40,800
51,800
51,600
53,500
High
$1,888
1,975
2,086
2,375
Low
$1,351
1,660
1,706
1,761
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Dividends
Berkshire has not declared a cash dividend since 1967.
71
BERKSHIRE HATHAWAY INC. SUBSIDIARY LISTING
Acme Building Brands
2821 West 7th Street
Fort Worth, TX 76107-2219
(817) 390-2409
www.brick.com
Ben Bridge Corporation
2901 Third Avenue
Seattle, WA 98121
(206) 448-8800
www.benbridge.com
Benjamin Moore
51 Chestnut Ridge Rd.
Montvale, NJ 07645
(800) 344-0400
www.benjaminmoore.com
Berkshire Hathaway Credit Corp.
1440 Kiewit Plaza
Omaha, NE 68131
(402) 346-1400
Executive Jet
581 Main Street
Woodbridge, NJ 07095
(732) 326-3700
www.netjets.com
Fechheimer Brothers Co.
4545 Malsbary Road
Cincinnati, OH 45242
(513) 793-5400
www.fechheimer.com
FlightSafety International Inc.
La Guardia Airport
Flushing, NY 11371-1061
(718) 565-4100
www.flightsafety.com
GEICO
One GEICO Plaza
Washington, DC 20076-0001
(301) 986-3000
www.geico.com
MiTek Inc.
14515 North Outer Forty Dr.
Chesterfield, MO 63017-5746
(314) 434-1200
www.mitekinc.com
National Indemnity Co.
3024 Harney Street
Omaha, NE 68131
(402) 536-3000
www.nationalindemnity.com
Nebraska Furniture Mart
700 South 72nd Street
Omaha, NE 68114
(402) 397-6100
www.nfm.com
Precision Steel Warehouse
3500 North Wolf Road
Franklin Park, IL 60131
(847) 455-7000
www.precisionsteel.com
Berkshire Hathaway Homestate Companies
9290 West Dodge Road
Omaha, NE 68114
(402) 393-7255
www.bh-hc.com
General Re Corporation
695 East Main Street
Stamford, CT 06904-2351
(203) 328-5000
www.gcr.com
Scott Fetzer Companies
28800 Clemens Rd.
Westlake, OH 44145-1197
(440) 892-3000
www.carefreecolorado.com; www.chpower.com
www.kirby.com; www.quikut.com
www.waynepumps.com; www.worldbook.com
Berkshire Hathaway Reinsurance Division
100 First Stamford Place
Stamford, CT 06902-6745
(203) 363-5200
www.brkdirect.com
Helzberg’s Diamond Shops
1825 Swift
North Kansas City, MO 64116-3671
(816) 842-7780
www.helzberg.com
See’s Candies, Inc.
210 El Camino Real
South San Francisco, CA 94080
(650) 761-2490
www.sees.com
Borsheim’s Jewelry
120 Regency Parkway
Omaha, NE 68114
(402) 391-0400
www.borsheims.com
H. H. Brown Shoe Co., Inc.
124 West Putnam Avenue
Greenwich, CT 06830
(203) 661-2424
www.hhbrown.com; www.dextershoe.com
The Buffalo News
One News Plaza
Buffalo, NY 14240
(716) 849-3434
www.buffnews.com
Central States Indemnity Co.
1212 No. 96 Street
Omaha, NE 68114-2274
(402) 397-1111
www.csi-omaha.com
Johns Manville Corporation
717 17th Street
Denver, CO 80202
(303) 978-2000
www.jm.com
Jordan’s Furniture
100 Stockwell Drive
Avon, MA 02322
(508) 580-4600
www.jordansfurniture.com
Justin Brands Inc.
610 West Daggett
Fort Worth, TX 76104
(800) 358-7846
www.justinbrands.com
Shaw Industries
616 E. Walnut Ave.
Dalton, GA 30720
(706) 278-3812
www.shawinc.com
Star Furniture
16666 Barker Springs Road
Houston, TX 77218
(281) 492-6661
www.starfurniture.com
United States Liability Insurance Group
190 South Warner Road
Wayne, PA 19087
(610) 688-2535
www.usli.com
Kansas Bankers Surety Company
1220 S.W. Executive Drive
Topeka, KS 66615
(785) 228-0000
Wesco Financial Corp.
301 East Colorado Blvd.
Pasadena, CA 91101-1901
(626) 585-6700
CORT Business Services Corporation
11250 Waples Mill Road
Fairfax, VA 22030
(703) 968-8500
www.cort1.com
Larson-Juhl
3900 Steve Reynolds Blvd.
Norcross, GA 30093
(770) 279-5200
www.larsonjuhl.com
R. C. Willey Home Furnishings
2301 South 300 West
Salt Lake City, UT 84115
(801) 461-3900
www.shoprcwilley.com
Dairy Queen
7505 Metro Boulevard
Edina, MN 55439
(952) 830-0200
www.dairyqueen.com
MidAmerican Energy Holdings Co.
666 Grand Ave.
Des Moines, IA 50390
(515) 242-4300
www.midamerican.com
XTRA Corporation
200 Nyala Farms Road
Westport, CT 06880
(203) 221-1005
www.xtracorp.com
72
BERKSHIRE HATHAWAY INC.
DIRECTORS
WARREN E. BUFFETT, Chairman
Chief Executive Officer of Berkshire
CHARLES T. MUNGER, Vice Chairman of Berkshire
SUSAN T. BUFFETT
HOWARD G. BUFFETT,
President of Buffett Farms and BioImages, a photography
and publishing company.
MALCOLM G. CHACE,
Chairman of the Board of Directors of BankRI,
a community bank located in the State
of Rhode Island.
RONALD L. OLSON,
Partner of the law firm of
Munger Tolles & Olson, LLP.
WALTER SCOTT, JR.,
Chairman of Level 3 Communications, a successor to certain
businesses of Peter Kiewit Sons’ Inc. which is engaged in
telecommunications and computer outsourcing.
OFFICERS
WARREN E. BUFFETT, Chairman and CEO
CHARLES T. MUNGER, Vice Chairman
MARC D. HAMBURG, Vice President, Treasurer
DANIEL J. JAKSICH, Controller
FORREST N. KRUTTER, Secretary
REBECCA K. AMICK,
Director of Internal Auditing
JERRY W. HUFTON,
Director of Taxes
MARK D. MILLARD,
Director of Financial Assets
Letters from Annual Reports (1977 through 2001), quarterly reports, press releases and
other information about Berkshire may be obtained on the Internet at berkshirehathaway.com.
Berkshire’s 2002 quarterly reports are scheduled to be posted on the Internet on May 11, August
10 and November 9. Berkshire’s 2002 Annual Report is scheduled to be posted on the Internet on
Saturday March 8, 2003.
A three volume set of compilations of letters (1977 through 2000) is available upon written
request accompanied by a payment of $35.00 to cover production, postage and handling costs.
Requests should be submitted to the Company at 3555 Farnam St., Suite 1440, Omaha, NE 68131.