BERKSHIRE HATHAWAY INC.
2007 ANNUAL REPORT
TABLE OF CONTENTS
Business Activities........................................................Inside Front Cover
Corporate Performance vs. the S&P 500 ................................................ 2
Chairman’s Letter* ................................................................................. 3
Acquisition Criteria ................................................................................ 23
Selected Financial Data For The
Past Five Years .................................................................................. 23
Management’s Report on Internal Control
Over Financial Reporting ................................................................... 24
Report of Independent Registered Public Accounting Firm................... 24
Consolidated Financial Statements ......................................................... 25
Management’s Discussion ...................................................................... 51
Owner’s Manual ..................................................................................... 70
Common Stock Data............................................................................... 75
Operating Companies ............................................................................. 76
Directors and Officers of the Company .........................Inside Back Cover
*Copyright © 2008 By Warren E. Buffett
All Rights Reserved
Business Activities
Berkshire Hathaway Inc. is a holding company owning subsidiaries that engage in a
number of diverse business activities including property and casualty insurance and reinsurance,
utilities and energy, finance, manufacturing, services and retailing. Included in the group of
subsidiaries that underwrite property and casualty insurance and reinsurance is GEICO, one of the
four largest auto insurers in the United States and two of the largest reinsurers in the world,
General Re and the Berkshire Hathaway Reinsurance Group. Other subsidiaries that underwrite
property and casualty insurance include National Indemnity Company, Medical Protective
Company, Applied Underwriters, U.S. Liability Insurance Company, Central States Indemnity
Company, Kansas Bankers Surety, Cypress Insurance Company, BoatU.S. and several other
subsidiaries referred to as the “Homestate Companies.”
MidAmerican Energy Holdings Company (“MidAmerican”) is an international energy
holding company owning a wide variety of operating companies engaged in the generation,
transmission and distribution of energy. Among MidAmerican’s operating energy companies are
Northern Electric and Yorkshire Electricity; MidAmerican Energy Company; Pacific Power and
Rocky Mountain Power; and Kern River Gas Transmission Company and Northern Natural Gas.
In addition, MidAmerican owns HomeServices of America, a real estate brokerage firm.
Berkshire’s finance and financial products businesses primarily engage in proprietary investing
strategies (BH Finance), commercial and consumer lending (Berkshire Hathaway Credit
Corporation and Clayton Homes) and transportation equipment and furniture leasing (XTRA and
CORT). Shaw Industries is the world’s largest manufacturer of tufted broadloom carpet. McLane
Company is a wholesale distributor of groceries and nonfood items to convenience stores,
wholesale clubs, mass merchandisers, quick service restaurants and others.
Numerous business activities are conducted through Berkshire’s other manufacturing,
services and retailing subsidiaries. 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. Fruit of the Loom, Russell, Vanity Fair, Garan, Fechheimer, H.H. Brown
Shoe Group and Justin Brands manufacture, license and distribute apparel and footwear under a
variety of brand names. FlightSafety International provides training to aircraft and ship operators.
NetJets 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. Borsheims, Helzberg Diamond Shops and Ben Bridge Jeweler are retailers of fine
jewelry.
In addition, other manufacturing, service and retail businesses 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; Scott Fetzer, a diversified manufacturer and
distributor of commercial and industrial products, the principal products are sold under the Kirby
and Campbell Hausfeld brand names; Albecca, a designer, manufacturer, and distributor of high-
quality picture framing products; CTB International, a manufacturer of equipment for the livestock
and agricultural industries; International Dairy Queen, a licensor and service provider to about
6,000 stores that offer prepared dairy treats and food; The Pampered Chef, the premier direct seller
of kitchen tools in the U.S.; Forest River, a leading manufacturer of leisure vehicles in the U.S.;
Business Wire, the leading global distributor of corporate news, multimedia and regulatory filings;
Iscar Metalworking Companies, an industry leader in the metal cutting tools business; TTI, Inc., a
leading distributor of electronic components and Richline Group, a leading jewelry manufacturer.
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
2002
2003
2004
2005
2006
2007
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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)
10.0
21.0
10.5
6.4
18.4
11.0
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)
(22.1)
28.7
10.9
4.9
15.8
5.5
Compounded Annual Gain – 1965-2007
Overall Gain – 1964-2007
21.1%
400,863%
10.3%
6,840%
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
32.1
(7.7)
(.4)
1.5
2.6
5.5
10.8
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 500 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.:
Our gain in net worth during 2007 was $12.3 billion, which increased the per-share book value of
both our Class A and Class B stock by 11%. Over the last 43 years (that is, since present management took
over) book value has grown from $19 to $78,008, a rate of 21.1% compounded annually.*
Overall, our 76 operating businesses did well last year. The few that had problems were primarily
those linked to housing, among them our brick, carpet and real estate brokerage operations. Their setbacks
are minor and temporary. Our competitive position in these businesses remains strong, and we have first-
class CEOs who run them right, in good times or bad.
Some major financial institutions have, however, experienced staggering problems because they
engaged in the “weakened lending practices” I described in last year’s letter. John Stumpf, CEO of Wells
Fargo, aptly dissected the recent behavior of many lenders: “It is interesting that the industry has invented
new ways to lose money when the old ways seemed to work just fine.”
You may recall a 2003 Silicon Valley bumper sticker that implored, “Please, God, Just One More
Bubble.” Unfortunately, this wish was promptly granted, as just about all Americans came to believe that
house prices would forever rise. That conviction made a borrower’s income and cash equity seem
unimportant to lenders, who shoveled out money, confident that HPA – house price appreciation – would
cure all problems. Today, our country is experiencing widespread pain because of that erroneous belief.
As house prices fall, a huge amount of financial folly is being exposed. You only learn who has been
swimming naked when the tide goes out – and what we are witnessing at some of our largest financial
institutions is an ugly sight.
Turning to happier thoughts, we can report that Berkshire’s newest acquisitions of size, TTI and
Iscar, led by their CEOs, Paul Andrews and Jacob Harpaz respectively, performed magnificently in 2007.
Iscar is as impressive a manufacturing operation as I’ve seen, a view I reported last year and that was
confirmed by a visit I made in the fall to its extraordinary plant in Korea.
Finally, our insurance business – the cornerstone of Berkshire – had an excellent year. Part of the
reason is that we have the best collection of insurance managers in the business – more about them later.
But we also were very lucky in 2007, the second year in a row free of major insured catastrophes.
That party is over. It’s a certainty that insurance-industry profit margins, including ours, will fall
significantly in 2008. Prices are down, and exposures inexorably rise. Even if the U.S. has its third
consecutive catastrophe-light year, industry profit margins will probably shrink by four percentage points
or so. If the winds roar or the earth trembles, results could be far worse. So be prepared for lower
insurance earnings during the next few years.
Yardsticks
Berkshire has two major areas of value. The first is our investments: stocks, bonds and cash
equivalents. At yearend these totaled $141 billion (not counting those in our finance or utility operations,
which we assign to our second bucket of value).
*All per-share figures used in this report apply to Berkshire’s A shares. Figures for the B shares
are 1/30th of those shown for the A.
3
Insurance float – money we temporarily hold in our insurance operations that does not belong to
us – funds $59 billion of our investments. This float is “free” as long as insurance underwriting breaks
even, meaning that the premiums we receive equal the losses and expenses we incur. Of course, insurance
underwriting is volatile, swinging erratically between profits and losses. Over our entire history, however,
we’ve been profitable, and I expect we will average breakeven results or better in the future. If we do that,
our investments can be viewed as an unencumbered source of value for Berkshire shareholders.
Berkshire’s second component of value is earnings that come from sources other than investments
and insurance. These earnings are delivered by our 66 non-insurance companies, itemized on page 76. In
our early years, we focused on the investment side. During the past two decades, however, we have put
ever more emphasis on the development of earnings from non-insurance businesses.
The following tables illustrate this shift. In the first we tabulate per-share investments at 14-year
intervals. We exclude those applicable to minority interests.
Year
1965
1979
1993
2007
Per-Share
Investments
$ 4
577
13,961
90,343
Years
Compounded Annual
Gain in Per-Share Investments
1965-1979
1979-1993
1993-2007
42.8%
25.6%
14.3%
For the entire 42 years, our compounded annual gain in per-share investments was 27.1%. But the
trend has been downward as we increasingly used our available funds to buy operating businesses.
Here’s the record on how earnings of our non-insurance businesses have grown, again on a per-
share basis and after applicable minority interests.
Year
1965
1979
1993
2007
Per Share
Pre-Tax Earnings
Years
Compounded Annual Gain in Per-
Share Pre-Tax Earnings
$ 4
18
212
4,093
1965-1979
1979-1993
1993-2007
11.1%
19.1%
23.5%
For the entire period, the compounded annual gain was 17.8%, with gains accelerating as our
focus shifted.
Though these tables may help you gain historical perspective and be useful in valuation, they are
completely misleading in predicting future possibilities. Berkshire’s past record can’t be duplicated or
even approached. Our base of assets and earnings is now far too large for us to make outsized gains in the
future.
Charlie Munger, my partner at Berkshire, and I will continue to measure our progress by the two
yardsticks I have just described and will regularly update you on the results. Though we can’t come close
to duplicating the past, we will do our best to make sure the future is not disappointing.
In our efforts, we will be aided enormously by the managers who have joined Berkshire. This is
an unusual group in several ways. First, most of them have no financial need to work. Many sold us their
businesses for large sums and run them because they love doing so, not because they need the money.
Naturally they wish to be paid fairly, but money alone is not the reason they work hard and productively.
* * * * * * * * * * * *
4
A second, somewhat related, point about these managers is that they have exactly the job they
want for the rest of their working years. At almost any other company, key managers below the top aspire
to keep climbing the pyramid. For them, the subsidiary or division they manage today is a way station – or
so they hope. Indeed, if they are in their present positions five years from now, they may well feel like
failures.
Conversely, our CEOs’ scorecards for success are not whether they obtain my job but instead are
the long-term performances of their businesses. Their decisions flow from a here-today, here-forever
mindset. I think our rare and hard-to-replicate managerial structure gives Berkshire a real advantage.
Acquisitions
Though our managers may be the best, we will need large and sensible acquisitions to get the
growth in operating earnings we wish. Here, we made little progress in 2007 until very late in the year.
Then, on Christmas day, Charlie and I finally earned our paychecks by contracting for the largest cash
purchase in Berkshire’s history.
The seeds of this transaction were planted in 1954. That fall, only three months into a new job, I
was sent by my employers, Ben Graham and Jerry Newman, to a shareholders’ meeting of Rockwood
Chocolate in Brooklyn. A young fellow had recently taken control of this company, a manufacturer of
assorted cocoa-based items. He had then initiated a one-of-a-kind tender, offering 80 pounds of cocoa
beans for each share of Rockwood stock. I described this transaction in a section of the 1988 annual report
that explained arbitrage. I also told you that Jay Pritzker – the young fellow mentioned above – was the
business genius behind this tax-efficient idea, the possibilities for which had escaped all the other experts
who had thought about buying Rockwood, including my bosses, Ben and Jerry.
At the meeting, Jay was friendly and gave me an education on the 1954 tax code. I came away
very impressed. Thereafter, I avidly followed Jay’s business dealings, which were many and brilliant. His
valued partner was his brother, Bob, who for nearly 50 years ran Marmon Group, the home for most of the
Pritzker businesses.
Jay died in 1999, and Bob retired early in 2002. Around then, the Pritzker family decided to
gradually sell or reorganize certain of its holdings, including Marmon, a company operating 125
businesses, managed through nine sectors. Marmon’s largest operation is Union Tank Car, which together
with a Canadian counterpart owns 94,000 rail cars that are leased to various shippers. The original cost of
this fleet is $5.1 billion. All told, Marmon has $7 billion in sales and about 20,000 employees.
We will soon purchase 60% of Marmon and will acquire virtually all of the balance within six
years. Our initial outlay will be $4.5 billion, and the price of our later purchases will be based on a formula
tied to earnings. Prior to our entry into the picture, the Pritzker family received substantial consideration
from Marmon’s distribution of cash, investments and certain businesses.
This deal was done in the way Jay would have liked. We arrived at a price using only Marmon’s
financial statements, employing no advisors and engaging in no nit-picking. I knew that the business
would be exactly as the Pritzkers represented, and they knew that we would close on the dot, however
chaotic financial markets might be. During the past year, many large deals have been renegotiated or killed
entirely. With the Pritzkers, as with Berkshire, a deal is a deal.
Marmon’s CEO, Frank Ptak, works closely with a long-time associate, John Nichols. John was
formerly the highly successful CEO of Illinois Tool Works (ITW), where he teamed with Frank to run a
mix of industrial businesses. Take a look at their ITW record; you’ll be impressed.
5
Byron Trott of Goldman Sachs – whose praises I sang in the 2003 report – facilitated the Marmon
transaction. Byron is the rare investment banker who puts himself in his client’s shoes. Charlie and I trust
him completely.
You’ll like the code name that Goldman Sachs assigned the deal. Marmon entered the auto
business in 1902 and exited it in 1933. Along the way it manufactured the Wasp, a car that won the first
Indianapolis 500 race, held in 1911. So this deal was labeled “Indy 500.”
In May 2006, I spoke at a lunch at Ben Bridge, our Seattle-based jewelry chain. The audience was
a number of its vendors, among them Dennis Ulrich, owner of a company that manufactured gold jewelry.
* * * * * * * * * * * *
In January 2007, Dennis called me, suggesting that with Berkshire’s support he could build a large
jewelry supplier. We soon made a deal for his business, simultaneously purchasing a supplier of about
equal size. The new company, Richline Group, has since made two smaller acquisitions. Even with those,
Richline is far below the earnings threshold we normally require for purchases. I’m willing to bet,
however, that Dennis – with the help of his partner, Dave Meleski – will build a large operation, earning
good returns on capital employed.
Businesses – The Great, the Good and the Gruesome
Let’s take a look at what kind of businesses turn us on. And while we’re at it, let’s also discuss
what we wish to avoid.
Charlie and I look for companies that have a) a business we understand; b) favorable long-term
economics; c) able and trustworthy management; and d) a sensible price tag. We like to buy the whole
business or, if management is our partner, at least 80%. When control-type purchases of quality aren’t
available, though, we are also happy to simply buy small portions of great businesses by way of stock-
market purchases. It’s better to have a part interest in the Hope Diamond than to own all of a rhinestone.
A truly great business must have an enduring “moat” that protects excellent returns on invested
capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business
“castle” that is earning high returns. Therefore a formidable barrier such as a company’s being the low-
cost producer (GEICO, Costco) or possessing a powerful world-wide brand (Coca-Cola, Gillette, American
Express) is essential for sustained success. Business history is filled with “Roman Candles,” companies
whose moats proved illusory and were soon crossed.
Our criterion of “enduring” causes us to rule out companies in industries prone to rapid and
continuous change. Though capitalism’s “creative destruction” is highly beneficial for society, it precludes
investment certainty. A moat that must be continuously rebuilt will eventually be no moat at all.
Additionally, this criterion eliminates the business whose success depends on having a great
manager. Of course, a terrific CEO is a huge asset for any enterprise, and at Berkshire we have an
abundance of these managers. Their abilities have created billions of dollars of value that would never
have materialized if typical CEOs had been running their businesses.
But if a business requires a superstar to produce great results, the business itself cannot be deemed
great. A medical partnership led by your area’s premier brain surgeon may enjoy outsized and growing
earnings, but that tells little about its future. The partnership’s moat will go when the surgeon goes. You
can count, though, on the moat of the Mayo Clinic to endure, even though you can’t name its CEO.
6
Long-term competitive advantage in a stable industry is what we seek in a business. If that comes
with rapid organic growth, great. But even without organic growth, such a business is rewarding. We will
simply take the lush earnings of the business and use them to buy similar businesses elsewhere. There’s no
rule that you have to invest money where you’ve earned it. Indeed, it’s often a mistake to do so: Truly
great businesses, earning huge returns on tangible assets, can’t for any extended period reinvest a large
portion of their earnings internally at high rates of return.
Let’s look at the prototype of a dream business, our own See’s Candy. The boxed-chocolates
industry in which it operates is unexciting: Per-capita consumption in the U.S. is extremely low and doesn’t
grow. Many once-important brands have disappeared, and only three companies have earned more than
token profits over the last forty years. Indeed, I believe that See’s, though it obtains the bulk of its revenues
from only a few states, accounts for nearly half of the entire industry’s earnings.
At See’s, annual sales were 16 million pounds of candy when Blue Chip Stamps purchased the
company in 1972. (Charlie and I controlled Blue Chip at the time and later merged it into Berkshire.) Last
year See’s sold 31 million pounds, a growth rate of only 2% annually. Yet its durable competitive
advantage, built by the See’s family over a 50-year period, and strengthened subsequently by Chuck
Huggins and Brad Kinstler, has produced extraordinary results for Berkshire.
We bought See’s for $25 million when its sales were $30 million and pre-tax earnings were less
than $5 million. The capital then required to conduct the business was $8 million. (Modest seasonal debt
was also needed for a few months each year.) Consequently, the company was earning 60% pre-tax on
invested capital. Two factors helped to minimize the funds required for operations. First, the product was
sold for cash, and that eliminated accounts receivable. Second, the production and distribution cycle was
short, which minimized inventories.
Last year See’s sales were $383 million, and pre-tax profits were $82 million. The capital now
required to run the business is $40 million. This means we have had to reinvest only $32 million since
1972 to handle the modest physical growth – and somewhat immodest financial growth – of the business.
In the meantime pre-tax earnings have totaled $1.35 billion. All of that, except for the $32 million, has
been sent to Berkshire (or, in the early years, to Blue Chip). After paying corporate taxes on the profits, we
have used the rest to buy other attractive businesses. Just as Adam and Eve kick-started an activity that led
to six billion humans, See’s has given birth to multiple new streams of cash for us. (The biblical command
to “be fruitful and multiply” is one we take seriously at Berkshire.)
There aren’t many See’s in Corporate America. Typically, companies that increase their earnings
from $5 million to $82 million require, say, $400 million or so of capital investment to finance their
growth. That’s because growing businesses have both working capital needs that increase in proportion to
sales growth and significant requirements for fixed asset investments.
A company that needs large increases in capital to engender its growth may well prove to be a
satisfactory investment. There is, to follow through on our example, nothing shabby about earning $82
million pre-tax on $400 million of net tangible assets. But that equation for the owner is vastly different
from the See’s situation. It’s far better to have an ever-increasing stream of earnings with virtually no
major capital requirements. Ask Microsoft or Google.
One example of good, but far from sensational, business economics is our own FlightSafety. This
company delivers benefits to its customers that are the equal of those delivered by any business that I know
of. It also possesses a durable competitive advantage: Going to any other flight-training provider than the
best is like taking the low bid on a surgical procedure.
7
Nevertheless, this business requires a significant reinvestment of earnings if it is to grow. When
we purchased FlightSafety in 1996, its pre-tax operating earnings were $111 million, and its net investment
in fixed assets was $570 million. Since our purchase, depreciation charges have totaled $923 million. But
capital expenditures have totaled $1.635 billion, most of that for simulators to match the new airplane
models that are constantly being introduced. (A simulator can cost us more than $12 million, and we have
273 of them.) Our fixed assets, after depreciation, now amount to $1.079 billion. Pre-tax operating
earnings in 2007 were $270 million, a gain of $159 million since 1996. That gain gave us a good, but far
from See’s-like, return on our incremental investment of $509 million.
Consequently, if measured only by economic returns, FlightSafety is an excellent but not
extraordinary business. Its put-up-more-to-earn-more experience is that faced by most corporations. For
example, our large investment in regulated utilities falls squarely in this category. We will earn
considerably more money in this business ten years from now, but we will invest many billions to make it.
Now let’s move to the gruesome. The worst sort of business is one that grows rapidly, requires
significant capital to engender the growth, and then earns little or no money. Think airlines. Here a
durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a
farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by
shooting Orville down.
The airline industry’s demand for capital ever since that first flight has been insatiable. Investors
have poured money into a bottomless pit, attracted by growth when they should have been repelled by it.
And I, to my shame, participated in this foolishness when I had Berkshire buy U.S. Air preferred stock in
1989. As the ink was drying on our check, the company went into a tailspin, and before long our preferred
dividend was no longer being paid. But we then got very lucky. In one of the recurrent, but always
misguided, bursts of optimism for airlines, we were actually able to sell our shares in 1998 for a hefty gain.
In the decade following our sale, the company went bankrupt. Twice.
To sum up, think of three types of “savings accounts.” The great one pays an extraordinarily high
interest rate that will rise as the years pass. The good one pays an attractive rate of interest that will be
earned also on deposits that are added. Finally, the gruesome account both pays an inadequate interest rate
and requires you to keep adding money at those disappointing returns.
And now it’s confession time. It should be noted that no consultant, board of directors or
investment banker pushed me into the mistakes I will describe. In tennis parlance, they were all unforced
errors.
* * * * * * * * * * * *
To begin with, I almost blew the See’s purchase. The seller was asking $30 million, and I was
adamant about not going above $25 million. Fortunately, he caved. Otherwise I would have balked, and
that $1.35 billion would have gone to somebody else.
About the time of the See’s purchase, Tom Murphy, then running Capital Cities Broadcasting,
called and offered me the Dallas-Fort Worth NBC station for $35 million. The station came with the Fort
Worth paper that Capital Cities was buying, and under the “cross-ownership” rules Murph had to divest it.
I knew that TV stations were See’s-like businesses that required virtually no capital investment and had
excellent prospects for growth. They were simple to run and showered cash on their owners.
Moreover, Murph, then as now, was a close friend, a man I admired as an extraordinary manager
and outstanding human being. He knew the television business forward and backward and would not have
called me unless he felt a purchase was certain to work. In effect Murph whispered “buy” into my ear. But
I didn’t listen.
8
In 2006, the station earned $73 million pre-tax, bringing its total earnings since I turned down the
deal to at least $1 billion – almost all available to its owner for other purposes. Moreover, the property now
has a capital value of about $800 million. Why did I say “no”? The only explanation is that my brain had
gone on vacation and forgot to notify me. (My behavior resembled that of a politician Molly Ivins once
described: “If his I.Q. was any lower, you would have to water him twice a day.”)
Finally, I made an even worse mistake when I said “yes” to Dexter, a shoe business I bought in
1993 for $433 million in Berkshire stock (25,203 shares of A). What I had assessed as durable competitive
advantage vanished within a few years. But that’s just the beginning: By using Berkshire stock, I
compounded this error hugely. That move made the cost to Berkshire shareholders not $400 million, but
rather $3.5 billion. In essence, I gave away 1.6% of a wonderful business – one now valued at $220 billion
– to buy a worthless business.
To date, Dexter is the worst deal that I’ve made. But I’ll make more mistakes in the future – you
can bet on that. A line from Bobby Bare’s country song explains what too often happens with acquisitions:
“I’ve never gone to bed with an ugly woman, but I’ve sure woke up with a few.”
Now, let’s examine the four major operating sectors of Berkshire. Each sector has vastly different
balance sheet and income account characteristics. Therefore, lumping them together impedes analysis. So
we’ll present them as four separate businesses, which is how Charlie and I view them.
* * * * * * * * * * * *
Insurance
The best anecdote I’ve heard during the current presidential campaign came from Mitt Romney,
who asked his wife, Ann, “When we were young, did you ever in your wildest dreams think I might be
president?” To which she replied, “Honey, you weren’t in my wildest dreams.”
When we first entered the property/casualty insurance business in 1967, my wildest dreams did
not envision our current operation. Here’s how we did in the first five years after purchasing National
Indemnity:
Year
Underwriting Profit (Loss)
Float
(in millions)
1967
1968
1969
1970
1971
$ 0.4
0.6
0.1
(0.4)
1.4
$18.5
21.3
25.4
39.4
65.6
To put it charitably, we were a slow starter. But things changed. Here’s the record of the last five
years:
Year
Underwriting Profit (Loss)
Float
(in millions)
2003
2004
2005
2006
2007
$1,718
1,551
53
3,838
3,374
$44,220
46,094
49,287
50,887
58,698
This metamorphosis has been accomplished by some extraordinary managers. Let’s look at what
each has achieved.
9
• GEICO possesses the widest moat of any of our insurers, one carefully protected and expanded by
Tony Nicely, its CEO. Last year – again – GEICO had the best growth record among major auto
insurers, increasing its market share to 7.2%. When Berkshire acquired control in 1995, that share
was 2.5%. Not coincidentally, annual ad expenditures by GEICO have increased from $31 million
to $751 million during the same period.
Tony, now 64, joined GEICO at 18. Every day since, he has been passionate about the company –
proud of how it could both save money for its customers and provide growth opportunities for its
associates. Even now, with sales at $12 billion, Tony feels GEICO is just getting started. So do I.
Here’s some evidence. In the last three years, GEICO has increased its share of the motorcycle
market from 2.1% to 6%. We’ve also recently begun writing policies on ATVs and RVs. And in
November we wrote our first commercial auto policy. GEICO and National Indemnity are
working together in the commercial field, and early results are very encouraging.
Even in aggregate, these lines will remain a small fraction of our personal auto volume.
Nevertheless, they should deliver a growing stream of underwriting profits and float.
• General Re, our international reinsurer, is by far our largest source of “home-grown” float – $23
billion at yearend. This operation is now a huge asset for Berkshire. Our ownership, however,
had a shaky start.
For decades, General Re was the Tiffany of reinsurers, admired by all for its underwriting skills
and discipline. This reputation, unfortunately, outlived its factual underpinnings, a flaw that I
completely missed when I made the decision in 1998 to merge with General Re. The General Re
of 1998 was not operated as the General Re of 1968 or 1978.
Now, thanks to Joe Brandon, General Re’s CEO, and his partner, Tad Montross, the luster of the
company has been restored. Joe and Tad have been running the business for six years and have
been doing first-class business in a first-class way, to use the words of J. P. Morgan. They have
restored discipline to underwriting, reserving and the selection of clients.
Their job was made more difficult by costly and time-consuming legacy problems, both in the
U.S. and abroad. Despite that diversion, Joe and Tad have delivered excellent underwriting results
while skillfully repositioning the company for the future.
• Since joining Berkshire in 1986, Ajit Jain has built a truly great specialty reinsurance operation
from scratch. For one-of-a-kind mammoth transactions, the world now turns to him.
Last year I told you in detail about the Equitas transfer of huge, but capped, liabilities to Berkshire
for a single premium of $7.1 billion. At this very early date, our experience has been good. But
this doesn’t tell us much because it’s just one straw in a fifty-year-or-more wind. What we know
for sure, however, is that the London team who joined us, headed by Scott Moser, is first-rate and
has become a valuable asset for our insurance business.
• Finally, we have our smaller operations, which serve specialized segments of the insurance
market. In aggregate, these companies have performed extraordinarily well, earning above-
average underwriting profits and delivering valuable float for investment.
Last year BoatU.S., headed by Bill Oakerson, was added to the group. This company manages an
association of about 650,000 boat owners, providing them services similar to those offered by
AAA auto clubs to drivers. Among the association’s offerings is boat insurance. Learn more
about this operation by visiting its display at the annual meeting.
10
Below we show the record of our four categories of property/casualty insurance.
Insurance Operations
General Re .......................
BH Reinsurance ...............
GEICO .............................
Other Primary...................
Underwriting Profit
Yearend Float
(in millions)
2007
$ 555
1,427
1,113
279
$3,374
2006
$ 526
1,658
1,314
340*
$3,838
2007
$23,009
23,692
7,768
4,229
$58,698
2006
$22,827
16,860
7,171
4,029*
$50,887
* Includes Applied Underwriters from May 19, 2006.
Regulated Utility Business
Berkshire has an 87.4% (diluted) interest in MidAmerican Energy Holdings, which owns a wide
variety of utility operations. The largest of these are (1) Yorkshire Electricity and Northern Electric, whose
3.8 million electric customers make it the third largest distributor of electricity in the U.K.; (2)
MidAmerican Energy, which serves 720,000 electric customers, primarily in Iowa; (3) Pacific Power and
Rocky Mountain Power, serving about 1.7 million electric customers in six western states; and (4) Kern
River and Northern Natural pipelines, which carry about 8% of the natural gas consumed in the U.S.
Our partners in ownership of MidAmerican are Walter Scott, and its two terrific managers, Dave
Sokol and Greg Abel. It’s unimportant how many votes each party has; we make major moves only when
we are unanimous in thinking them wise. Eight years of working with Dave, Greg and Walter have
underscored my original belief: Berkshire couldn’t have better partners.
Somewhat incongruously, MidAmerican also owns the second largest real estate brokerage firm in
the U.S., HomeServices of America. This company operates through 20 locally-branded firms with 18,800
agents. Last year was a slow year for residential sales, and 2008 will probably be slower. We will
continue, however, to acquire quality brokerage operations when they are available at sensible prices.
Here are some key figures on MidAmerican’s operation:
U.K. utilities .......................................................................................................
Iowa utility .........................................................................................................
Western utilities (acquired March 21, 2006) .....................................................
Pipelines .............................................................................................................
HomeServices.....................................................................................................
Other (net) ..........................................................................................................
Earnings before corporate interest and taxes ......................................................
Interest, other than to Berkshire .........................................................................
Interest on Berkshire junior debt ........................................................................
Income tax ..........................................................................................................
Net earnings........................................................................................................
Earnings (in millions)
2006
$ 338
348
356
376
74
245
1,737
(261)
(134)
(426)
$ 916
2007
$ 337
412
692
473
42
130
2,086
(312)
(108)
(477)
$ 1,189
Earnings applicable to Berkshire* ......................................................................
Debt owed to others............................................................................................
Debt owed to Berkshire ......................................................................................
$ 1,114
19,002
821
$ 885
16,946
1,055
*Includes interest earned by Berkshire (net of related income taxes) of $70 in 2007 and $87 in 2006.
11
We agreed to purchase 35,464,337 shares of MidAmerican at $35.05 per share in 1999, a year in
which its per-share earnings were $2.59. Why the odd figure of $35.05? I originally decided the business
was worth $35.00 per share to Berkshire. Now, I’m a “one-price” guy (remember See’s?) and for several
days the investment bankers representing MidAmerican had no luck in getting me to increase Berkshire’s
offer. But, finally, they caught me in a moment of weakness, and I caved, telling them I would go to
$35.05. With that, I explained, they could tell their client they had wrung the last nickel out of me. At the
time, it hurt.
Later on, in 2002, Berkshire purchased 6,700,000 shares at $60 to help finance the acquisition of
one of our pipelines. Lastly, in 2006, when MidAmerican bought PacifiCorp, we purchased 23,268,793
shares at $145 per share.
In 2007, MidAmerican earned $15.78 per share. However, 77¢ of that was non-recurring – a
reduction in deferred tax at our British utility, resulting from a lowering of the U.K. corporate tax rate. So
call normalized earnings $15.01 per share. And yes, I’m glad I wilted and offered the extra nickel.
Manufacturing, Service and Retailing Operations
Our activities in this part of Berkshire cover the waterfront. Let’s look, though, at a summary
balance sheet and earnings statement for the entire group.
Balance Sheet 12/31/07 (in millions)
Assets
Cash and equivalents ..............................
Accounts and notes receivable ...............
Inventory ................................................
Other current assets ................................
Total current assets .................................
Goodwill and other intangibles...............
Fixed assets.............................................
Other assets.............................................
$ 2,080
4,488
5,793
470
12,831
14,201
9,605
1,685
$38,322
Liabilities and Equity
Notes payable ............................
Other current liabilities..............
Total current liabilities ..............
$ 1,278
7,652
8,930
Deferred taxes............................
Term debt and other liabilities...
Equity ........................................
828
3,079
25,485
$38,322
2007
Revenues .................................................................................... $59,100
Operating expenses (including depreciation of $955 in 2007,
Earnings Statement (in millions)
$823 in 2006 and $699 in 2005)..........................................
Interest expense ..........................................................................
Pre-tax earnings..........................................................................
Income taxes and minority interests ........................................... 1,594
Net income ................................................................................. $ 2,353
55,026
127
3,947*
2006
$52,660
2005
$46,896
49,002
132
3,526*
1,395
$ 2,131
44,190
83
2,623*
977
$ 1,646
*Does not include purchase-accounting adjustments.
This motley group, which sells products ranging from lollipops to motor homes, earned a pleasing
23% on average tangible net worth last year. It’s noteworthy also that these operations used only minor
financial leverage in achieving that return. Clearly we own some terrific businesses. We purchased many
of them, however, at large premiums to net worth – a point reflected in the goodwill item shown on the
balance sheet – and that fact reduces the earnings on our average carrying value to 9.8%.
12
Here are a few newsworthy items about companies in this sector:
• Shaw, Acme Brick, Johns Manville and MiTek were all hurt in 2007 by the sharp housing
downturn, with their pre-tax earnings declining 27%, 41%, 38%, and 9% respectively. Overall,
these companies earned $941 million pre-tax compared to $1.296 billion in 2006.
Last year, Shaw, MiTek and Acme contracted for tuck-in acquisitions that will help future
earnings. You can be sure they will be looking for more of these.
•
In a tough year for retailing, our standouts were See’s, Borsheims and Nebraska Furniture Mart.
Two years ago Brad Kinstler was made CEO of See’s. We very seldom move managers from one
industry to another at Berkshire. But we made an exception with Brad, who had previously run
our uniform company, Fechheimer, and Cypress Insurance. The move could not have worked out
better. In his two years, profits at See’s have increased more than 50%.
At Borsheims, sales increased 15.1%, helped by a 27% gain during Shareholder Weekend. Two
years ago, Susan Jacques suggested that we remodel and expand the store. I was skeptical, but
Susan was right.
Susan came to Borsheims 25 years ago as a $4-an-hour saleswoman. Though she lacked a
managerial background, I did not hesitate to make her CEO in 1994. She’s smart, she loves the
business, and she loves her associates. That beats having an MBA degree any time.
(An aside: Charlie and I are not big fans of resumes. Instead, we focus on brains, passion and
integrity. Another of our great managers is Cathy Baron Tamraz, who has significantly increased
Business Wire’s earnings since we purchased it early in 2006. She is an owner’s dream. It is
positively dangerous to stand between Cathy and a business prospect. Cathy, it should be noted,
began her career as a cab driver.)
Finally, at Nebraska Furniture Mart, earnings hit a record as our Omaha and Kansas City stores
each had sales of about $400 million. These, by some margin, are the two top home furnishings
stores in the country. In a disastrous year for many furniture retailers, sales at Kansas City
increased 8%, while in Omaha the gain was 6%.
Credit the remarkable Blumkin brothers, Ron and Irv, for this performance. Both are close
personal friends of mine and great businessmen.
•
Iscar continues its wondrous ways. Its products are small carbide cutting tools that make large and
very expensive machine tools more productive. The raw material for carbide is tungsten, mined in
China. For many decades, Iscar moved tungsten to Israel, where brains turned it into something
far more valuable. Late in 2007, Iscar opened a large plant in Dalian, China. In effect, we’ve now
moved the brains to the tungsten. Major opportunities for growth await Iscar. Its management
team, led by Eitan Wertheimer, Jacob Harpaz, and Danny Goldman, is certain to make the most of
them.
• Flight services set a record in 2007 with pre-tax earnings increasing 49% to $547 million.
Corporate aviation had an extraordinary year worldwide, and both of our companies – as runaway
leaders in their fields – fully participated.
FlightSafety, our pilot training business, gained 14% in revenues and 20% in pre-tax earnings.
We estimate that we train about 58% of U.S. corporate pilots. Bruce Whitman, the company’s
CEO, inherited this leadership position in 2003 from Al Ueltschi, the father of advanced flight
training, and has proved to be a worthy successor.
13
At NetJets, the inventor of fractional-ownership of jets, we also remain the unchallenged leader.
We now operate 487 planes in the U.S. and 135 in Europe, a fleet more than twice the size of that
operated by our three major competitors combined. Because our share of the large-cabin market is
near 90%, our lead in value terms is far greater.
The NetJets brand – with its promise of safety, service and security – grows stronger every year.
Behind this is the passion of one man, Richard Santulli. If you were to pick someone to join you
in a foxhole, you couldn’t do better than Rich. No matter what the obstacles, he just doesn’t stop.
Europe is the best example of how Rich’s tenacity leads to success. For the first ten years we
made little financial progress there, actually running up cumulative losses of $212 million. After
Rich brought Mark Booth on board to run Europe, however, we began to gain traction. Now we
have real momentum, and last year earnings tripled.
In November, our directors met at NetJets headquarters in Columbus and got a look at the
sophisticated operation there. It is responsible for 1,000 or so flights a day in all kinds of weather,
with customers expecting top-notch service. Our directors came away impressed by the facility
and its capabilities – but even more impressed by Rich and his associates.
Finance and Finance Products
Our major operation in this category is Clayton Homes, the largest U.S. manufacturer and
marketer of manufactured homes. Clayton’s market share hit a record 31% last year. But industry volume
continues to shrink: Last year, manufactured home sales were 96,000, down from 131,000 in 2003, the
year we bought Clayton. (At the time, it should be remembered, some commentators criticized its directors
for selling at a cyclical bottom.)
Though Clayton earns money from both manufacturing and retailing its homes, most of its
earnings come from an $11 billion loan portfolio, covering 300,000 borrowers. That’s why we include
Clayton’s operation in this finance section. Despite the many problems that surfaced during 2007 in real
estate finance, the Clayton portfolio is performing well. Delinquencies, foreclosures and losses during the
year were at rates similar to those we experienced in our previous years of ownership.
Clayton’s loan portfolio is financed by Berkshire. For this funding, we charge Clayton one
percentage point over Berkshire’s borrowing cost – a fee that amounted to $85 million last year. Clayton’s
2007 pre-tax earnings of $526 million are after its paying this fee. The flip side of this transaction is that
Berkshire recorded $85 million as income, which is included in “other” in the following table.
Trading – ordinary income.............................
Life and annuity operation ............................
Leasing operations ........................................
Manufactured-housing finance (Clayton).......
Other...............................................................
Income before capital gains............................
Trading – capital gains ..................................
Pre-Tax Earnings
(in millions)
2007
$ 272
(60)
111
526
157
1,006
105
$1,111
2006
$ 274
29
182
513
159
1,157
938
$2,095
The leasing operations tabulated are XTRA, which rents trailers, and CORT, which rents furniture.
Utilization of trailers was down considerably in 2007 and that led to a drop in earnings at XTRA. That
company also borrowed $400 million last year and distributed the proceeds to Berkshire. The resulting
higher interest it is now paying further reduced XTRA’s earnings.
14
Clayton, XTRA and CORT are all good businesses, very ably run by Kevin Clayton, Bill Franz
and Paul Arnold. Each has made tuck-in acquisitions during Berkshire’s ownership. More will come.
Investments
We show below our common stock investments at yearend, itemizing those with a market value of
at least $600 million.
Shares
Company
151,610,700 American Express Company ...................
35,563,200 Anheuser-Busch Companies, Inc.............
60,828,818 Burlington Northern Santa Fe..................
200,000,000
The Coca-Cola Company ........................
17,508,700 Conoco Phillips .......................................
64,271,948
Johnson & Johnson..................................
124,393,800 Kraft Foods Inc........................................
48,000,000 Moody’s Corporation ..............................
POSCO ....................................................
3,486,006
The Procter & Gamble Company ............
101,472,000
Sanofi-Aventis.........................................
17,170,953
227,307,000
Tesco plc..................................................
75,176,026 U.S. Bancorp ...........................................
17,072,192 USG Corp ................................................
19,944,300 Wal-Mart Stores, Inc. ..............................
The Washington Post Company ..............
1,727,765
303,407,068 Wells Fargo & Company.........................
1,724,200 White Mountains Insurance Group Ltd. ..
Others ......................................................
Total Common Stocks .............................
Percentage of
Company Owned
12/31/07
Cost*
Market
(in millions)
13.1
4.8
17.5
8.6
1.1
2.2
8.1
19.1
4.5
3.3
1.3
2.9
4.4
17.2
0.5
18.2
9.2
16.3
$ 1,287
1,718
4,731
1,299
1,039
3,943
4,152
499
572
1,030
1,466
1,326
2,417
536
942
11
6,677
369
5,238
$39,252
$ 7,887
1,861
5,063
12,274
1,546
4,287
4,059
1,714
2,136
7,450
1,575
2,156
2,386
611
948
1,367
9,160
886
7,633
$74,999
*This is our actual purchase price and also our tax basis; GAAP “cost” differs in a few cases
because of write-ups or write-downs that have been required.
Overall, we are delighted by the business performance of our investees. In 2007, American
Express, Coca-Cola and Procter & Gamble, three of our four largest holdings, increased per-share earnings
by 12%, 14% and 14%. The fourth, Wells Fargo, had a small decline in earnings because of the popping of
the real estate bubble. Nevertheless, I believe its intrinsic value increased, even if only by a minor amount.
In the strange world department, note that American Express and Wells Fargo were both
organized by Henry Wells and William Fargo, Amex in 1850 and Wells in 1852. P&G and Coke began
business in 1837 and 1886 respectively. Start-ups are not our game.
I should emphasize that we do not measure the progress of our investments by what their market
prices do during any given year. Rather, we evaluate their performance by the two methods we apply to the
businesses we own. The first test is improvement in earnings, with our making due allowance for industry
conditions. The second test, more subjective, is whether their “moats” – a metaphor for the superiorities
they possess that make life difficult for their competitors – have widened during the year. All of the “big
four” scored positively on that test.
15
We made one large sale last year. In 2002 and 2003 Berkshire bought 1.3% of PetroChina for
$488 million, a price that valued the entire business at about $37 billion. Charlie and I then felt that the
company was worth about $100 billion. By 2007, two factors had materially increased its value: the price
of oil had climbed significantly, and PetroChina’s management had done a great job in building oil and gas
reserves. In the second half of last year, the market value of the company rose to $275 billion, about what
we thought it was worth compared to other giant oil companies. So we sold our holdings for $4 billion.
A footnote: We paid the IRS tax of $1.2 billion on our PetroChina gain. This sum paid all costs of
the U.S. government – defense, social security, you name it – for about four hours.
Last year I told you that Berkshire had 62 derivative contracts that I manage. (We also have a few
left in the General Re runoff book.) Today, we have 94 of these, and they fall into two categories.
* * * * * * * * * * * *
First, we have written 54 contracts that require us to make payments if certain bonds that are
included in various high-yield indices default. These contracts expire at various times from 2009 to 2013.
At yearend we had received $3.2 billion in premiums on these contracts; had paid $472 million in losses;
and in the worst case (though it is extremely unlikely to occur) could be required to pay an additional $4.7
billion.
We are certain to make many more payments. But I believe that on premium revenues alone,
these contracts will prove profitable, leaving aside what we can earn on the large sums we hold. Our
yearend liability for this exposure was recorded at $1.8 billion and is included in “Derivative Contract
Liabilities” on our balance sheet.
The second category of contracts involves various put options we have sold on four stock indices
(the S&P 500 plus three foreign indices). These puts had original terms of either 15 or 20 years and were
struck at the market. We have received premiums of $4.5 billion, and we recorded a liability at yearend of
$4.6 billion. The puts in these contracts are exercisable only at their expiration dates, which occur between
2019 and 2027, and Berkshire will then need to make a payment only if the index in question is quoted at a
level below that existing on the day that the put was written. Again, I believe these contracts, in aggregate,
will be profitable and that we will, in addition, receive substantial income from our investment of the
premiums we hold during the 15- or 20-year period.
Two aspects of our derivative contracts are particularly important. First, in all cases we hold the
money, which means that we have no counterparty risk.
Second, accounting rules for our derivative contracts differ from those applying to our investment
portfolio. In that portfolio, changes in value are applied to the net worth shown on Berkshire’s balance
sheet, but do not affect earnings unless we sell (or write down) a holding. Changes in the value of a
derivative contract, however, must be applied each quarter to earnings.
Thus, our derivative positions will sometimes cause large swings in reported earnings, even
though Charlie and I might believe the intrinsic value of these positions has changed little. He and I will
not be bothered by these swings – even though they could easily amount to $1 billion or more in a quarter –
and we hope you won’t be either. You will recall that in our catastrophe insurance business, we are always
ready to trade increased volatility in reported earnings in the short run for greater gains in net worth in the
long run. That is our philosophy in derivatives as well.
* * * * * * * * * * * *
The U.S. dollar weakened further in 2007 against major currencies, and it’s no mystery why:
Americans like buying products made elsewhere more than the rest of the world likes buying products
made in the U.S. Inevitably, that causes America to ship about $2 billion of IOUs and assets daily to the
rest of the world. And over time, that puts pressure on the dollar.
16
When the dollar falls, it both makes our products cheaper for foreigners to buy and their products
more expensive for U.S. citizens. That’s why a falling currency is supposed to cure a trade deficit. Indeed,
the U.S. deficit has undoubtedly been tempered by the large drop in the dollar. But ponder this: In 2002
when the Euro averaged 94.6¢, our trade deficit with Germany (the fifth largest of our trading partners) was
$36 billion, whereas in 2007, with the Euro averaging $1.37, our deficit with Germany was up to $45
billion. Similarly, the Canadian dollar averaged 64¢ in 2002 and 93¢ in 2007. Yet our trade deficit with
Canada rose as well, from $50 billion in 2002 to $64 billion in 2007. So far, at least, a plunging dollar has
not done much to bring our trade activity into balance.
There’s been much talk recently of sovereign wealth funds and how they are buying large pieces
of American businesses. This is our doing, not some nefarious plot by foreign governments. Our trade
equation guarantees massive foreign investment in the U.S. When we force-feed $2 billion daily to the rest
of the world, they must invest in something here. Why should we complain when they choose stocks over
bonds?
Our country’s weakening currency is not the fault of OPEC, China, etc. Other developed
countries rely on imported oil and compete against Chinese imports just as we do. In developing a sensible
trade policy, the U.S. should not single out countries to punish or industries to protect. Nor should we take
actions likely to evoke retaliatory behavior that will reduce America’s exports, true trade that benefits both
our country and the rest of the world.
Our legislators should recognize, however, that the current imbalances are unsustainable and
should therefore adopt policies that will materially reduce them sooner rather than later. Otherwise our $2
billion daily of force-fed dollars to the rest of the world may produce global indigestion of an unpleasant
sort. (For other comments about the unsustainability of our trade deficits, see Alan Greenspan’s comments
on November 19, 2004, the Federal Open Market Committee’s minutes of June 29, 2004, and Ben
Bernanke’s statement on September 11, 2007.)
* * * * * * * * * * * *
At Berkshire we held only one direct currency position during 2007. That was in – hold your
breath – the Brazilian real. Not long ago, swapping dollars for reals would have been unthinkable. After
all, during the past century five versions of Brazilian currency have, in effect, turned into confetti. As has
been true in many countries whose currencies have periodically withered and died, wealthy Brazilians
sometimes stashed large sums in the U.S. to preserve their wealth.
But any Brazilian who followed this apparently prudent course would have lost half his net worth
over the past five years. Here’s the year-by-year record (indexed) of the real versus the dollar from the end
of 2002 to yearend 2007: 100; 122; 133; 152; 166; 199. Every year the real went up and the dollar fell.
Moreover, during much of this period the Brazilian government was actually holding down the value of the
real and supporting our currency by buying dollars in the market.
Our direct currency positions have yielded $2.3 billion of pre-tax profits over the past five years,
and in addition we have profited by holding bonds of U.S. companies that are denominated in other
currencies. For example, in 2001 and 2002 we purchased €310 million Amazon.com, Inc. 6 7/8 of 2010 at
57% of par. At the time, Amazon bonds were priced as “junk” credits, though they were anything but.
(Yes, Virginia, you can occasionally find markets that are ridiculously inefficient – or at least you can find
them anywhere except at the finance departments of some leading business schools.)
The Euro denomination of the Amazon bonds was a further, and important, attraction for us. The
Euro was at 95¢ when we bought in 2002. Therefore, our cost in dollars came to only $169 million. Now
the bonds sell at 102% of par and the Euro is worth $1.47. In 2005 and 2006 some of our bonds were
called and we received $253 million for them. Our remaining bonds were valued at $162 million at
yearend. Of our $246 million of realized and unrealized gain, about $118 million is attributable to the fall
in the dollar. Currencies do matter.
17
At Berkshire, we will attempt to further increase our stream of direct and indirect foreign earnings.
Even if we are successful, however, our assets and earnings will always be concentrated in the U.S.
Despite our country’s many imperfections and unrelenting problems of one sort or another, America’s rule
of law, market-responsive economic system, and belief in meritocracy are almost certain to produce ever-
growing prosperity for its citizens.
* * * * * * * * * * * *
As I have told you before, we have for some time been well-prepared for CEO succession because
we have three outstanding internal candidates. The board knows exactly whom it would pick if I were to
become unavailable, either because of death or diminishing abilities. And that would still leave the board
with two backups.
Last year I told you that we would also promptly complete a succession plan for the investment
job at Berkshire, and we have indeed now identified four candidates who could succeed me in managing
investments. All manage substantial sums currently, and all have indicated a strong interest in coming to
Berkshire if called. The board knows the strengths of the four and would expect to hire one or more if the
need arises. The candidates are young to middle-aged, well-to-do to rich, and all wish to work for
Berkshire for reasons that go beyond compensation.
(I’ve reluctantly discarded the notion of my continuing to manage the portfolio after my death –
abandoning my hope to give new meaning to the term “thinking outside the box.”)
Fanciful Figures – How Public Companies Juice Earnings
Former Senator Alan Simpson famously said: “Those who travel the high road in Washington
need not fear heavy traffic.” If he had sought truly deserted streets, however, the Senator should have
looked to Corporate America’s accounting.
An important referendum on which road businesses prefer occurred in 1994. America’s CEOs had
just strong-armed the U.S. Senate into ordering the Financial Accounting Standards Board to shut up, by a
vote that was 88-9. Before that rebuke the FASB had shown the audacity – by unanimous agreement, no
less – to tell corporate chieftains that the stock options they were being awarded represented a form of
compensation and that their value should be recorded as an expense.
After the senators voted, the FASB – now educated on accounting principles by the Senate’s 88
closet CPAs – decreed that companies could choose between two methods of reporting on options. The
preferred treatment would be to expense their value, but it would also be allowable for companies to ignore
the expense as long as their options were issued at market value.
A moment of truth had now arrived for America’s CEOs, and their reaction was not a pretty sight.
During the next six years, exactly two of the 500 companies in the S&P chose the preferred route. CEOs of
the rest opted for the low road, thereby ignoring a large and obvious expense in order to report higher
“earnings.” I’m sure some of them also felt that if they opted for expensing, their directors might in future
years think twice before approving the mega-grants the managers longed for.
It turned out that for many CEOs even the low road wasn’t good enough. Under the weakened
rule, there remained earnings consequences if options were issued with a strike price below market value.
No problem. To avoid that bothersome rule, a number of companies surreptitiously backdated options to
falsely indicate that they were granted at current market prices, when in fact they were dished out at prices
well below market.
Decades of option-accounting nonsense have now been put to rest, but other accounting choices
remain – important among these the investment-return assumption a company uses in calculating pension
expense. It will come as no surprise that many companies continue to choose an assumption that allows
them to report less-than-solid “earnings.” For the 363 companies in the S&P that have pension plans, this
assumption in 2006 averaged 8%. Let’s look at the chances of that being achieved.
18
The average holdings of bonds and cash for all pension funds is about 28%, and on these assets
returns can be expected to be no more than 5%. Higher yields, of course, are obtainable but they carry with
them a risk of commensurate (or greater) loss.
This means that the remaining 72% of assets – which are mostly in equities, either held directly or
through vehicles such as hedge funds or private-equity investments – must earn 9.2% in order for the fund
overall to achieve the postulated 8%. And that return must be delivered after all fees, which are now far
higher than they have ever been.
How realistic is this expectation? Let’s revisit some data I mentioned two years ago: During the
20th Century, the Dow advanced from 66 to 11,497. This gain, though it appears huge, shrinks to 5.3%
when compounded annually. An investor who owned the Dow throughout the century would also have
received generous dividends for much of the period, but only about 2% or so in the final years. It was a
wonderful century.
Think now about this century. For investors to merely match that 5.3% market-value gain, the
Dow – recently below 13,000 – would need to close at about 2,000,000 on December 31, 2099. We are
now eight years into this century, and we have racked up less than 2,000 of the 1,988,000 Dow points the
market needed to travel in this hundred years to equal the 5.3% of the last.
It’s amusing that commentators regularly hyperventilate at the prospect of the Dow crossing an
even number of thousands, such as 14,000 or 15,000. If they keep reacting that way, a 5.3% annual gain
for the century will mean they experience at least 1,986 seizures during the next 92 years. While anything
is possible, does anyone really believe this is the most likely outcome?
Dividends continue to run about 2%. Even if stocks were to average the 5.3% annual appreciation
of the 1900s, the equity portion of plan assets – allowing for expenses of .5% – would produce no more
than 7% or so. And .5% may well understate costs, given the presence of layers of consultants and high-
priced managers (“helpers”).
Naturally, everyone expects to be above average. And those helpers – bless their hearts – will
certainly encourage their clients in this belief. But, as a class, the helper-aided group must be below
average. The reason is simple: 1) Investors, overall, will necessarily earn an average return, minus costs
they incur; 2) Passive and index investors, through their very inactivity, will earn that average minus costs
that are very low; 3) With that group earning average returns, so must the remaining group – the active
investors. But this group will incur high transaction, management, and advisory costs. Therefore, the
active investors will have their returns diminished by a far greater percentage than will their inactive
brethren. That means that the passive group – the “know-nothings” – must win.
I should mention that people who expect to earn 10% annually from equities during this century –
envisioning that 2% of that will come from dividends and 8% from price appreciation – are implicitly
forecasting a level of about 24,000,000 on the Dow by 2100. If your adviser talks to you about double-
digit returns from equities, explain this math to him – not that it will faze him. Many helpers are apparently
direct descendants of the queen in Alice in Wonderland, who said: “Why, sometimes I’ve believed as many
as six impossible things before breakfast.” Beware the glib helper who fills your head with fantasies while
he fills his pockets with fees.
Some companies have pension plans in Europe as well as in the U.S. and, in their accounting,
almost all assume that the U.S. plans will earn more than the non-U.S. plans. This discrepancy is puzzling:
Why should these companies not put their U.S. managers in charge of the non-U.S. pension assets and let
them work their magic on these assets as well? I’ve never seen this puzzle explained. But the auditors and
actuaries who are charged with vetting the return assumptions seem to have no problem with it.
19
What is no puzzle, however, is why CEOs opt for a high investment assumption: It lets them
report higher earnings. And if they are wrong, as I believe they are, the chickens won’t come home to roost
until long after they retire.
After decades of pushing the envelope – or worse – in its attempt to report the highest number
possible for current earnings, Corporate America should ease up. It should listen to my partner, Charlie: “If
you’ve hit three balls out of bounds to the left, aim a little to the right on the next swing.”
* * * * * * * * * * * *
Whatever pension-cost surprises are in store for shareholders down the road, these jolts will be
surpassed many times over by those experienced by taxpayers. Public pension promises are huge and, in
many cases, funding is woefully inadequate. Because the fuse on this time bomb is long, politicians flinch
from inflicting tax pain, given that problems will only become apparent long after these officials have
departed. Promises involving very early retirement – sometimes to those in their low 40s – and generous
cost-of-living adjustments are easy for these officials to make. In a world where people are living longer
and inflation is certain, those promises will be anything but easy to keep.
* * * * * * * * * * * *
Having laid out the failures of an “honor system” in American accounting, I need to point out that
this is exactly the system existing at Berkshire for a truly huge balance-sheet item. In every report we
make to you, we must guesstimate the loss reserves for our insurance units. If our estimate is wrong, it
means that both our balance sheet and our earnings statement will be wrong. So naturally we do our best to
make these guesses accurate. Nevertheless, in every report our estimate is sure to be wrong.
At yearend 2007, we show an insurance liability of $56 billion that represents our guess as to what
we will eventually pay for all loss events that occurred before yearend (except for about $3 billion of the
reserve that has been discounted to present value). We know of many thousands of events and have put a
dollar value on each that reflects what we believe we will pay, including the associated costs (such as
attorney’s fees) that we will incur in the payment process. In some cases, among them claims for certain
serious injuries covered by worker’s compensation, payments will be made for 50 years or more.
We also include a large reserve for losses that occurred before yearend but that we have yet to hear
about. Sometimes, the insured itself does not know that a loss has occurred. (Think of an embezzlement
that remains undiscovered for years.) We sometimes hear about losses from policies that covered our
insured many decades ago.
A story I told you some years back illustrates our problem in accurately estimating our loss
liability: A fellow was on an important business trip in Europe when his sister called to tell him that their
dad had died. Her brother explained that he couldn’t get back but said to spare nothing on the funeral,
whose cost he would cover. When he returned, his sister told him that the service had been beautiful and
presented him with bills totaling $8,000. He paid up but a month later received a bill from the mortuary for
$10. He paid that, too – and still another $10 charge he received a month later. When a third $10 invoice
was sent to him the following month, the perplexed man called his sister to ask what was going on. “Oh,”
she replied, “I forgot to tell you. We buried Dad in a rented suit.”
At our insurance companies we have an unknown, but most certainly large, number of “rented
suits” buried around the world. We try to estimate the bill for them accurately. In ten or twenty years, we
will even be able to make a good guess as to how inaccurate our present guess is. But even that guess will
be subject to surprises. I personally believe our stated reserves are adequate, but I’ve been wrong several
times in the past.
20
The Annual Meeting
Our meeting this year will be held on Saturday, May 3rd. As always, the doors will open at the
Qwest Center at 7 a.m., and a new Berkshire movie will be shown at 8:30. At 9:30 we will go directly to
the question-and-answer period, which (with a break for lunch at the Qwest’s stands) will last until 3:00.
Then, after a short recess, Charlie and I will convene the annual meeting at 3:15. If you decide to leave
during the day’s question periods, please do so while Charlie is talking.
The best reason to exit, of course is to shop. We will help you do that by filling the 194,300-
square-foot hall that adjoins the meeting area with the products of Berkshire subsidiaries. Last year, the
27,000 people who came to the meeting did their part, and almost every location racked up record sales.
But you can do better. (If necessary, I’ll lock the doors.)
This year we will again showcase a Clayton home (featuring Acme brick, Shaw carpet, Johns
Manville insulation, MiTek fasteners, Carefree awnings and NFM furniture). You will find that this 1,550-
square-foot home, priced at $69,500, delivers exceptional value. And after you purchase the house,
consider also acquiring the Forest River RV and pontoon boat on display nearby.
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 45 of the 50 jurisdictions in
which we operate. (One supplemental point: The discount is not additive if you qualify for another, such as
that given certain groups.) Bring the details of your existing insurance and check out whether we can save
you money. For at least 50% of you, I believe we can.
On Saturday, at the Omaha airport, we will have the usual array of aircraft from NetJets available
for your inspection. Stop by the NetJets booth at the Qwest to learn about viewing these planes. Come to
Omaha by bus; leave in your new plane. And take all the hair gel and scissors that you wish on board with
you.
Next, if you have any money left, visit the Bookworm, where you will find about 25 books and
DVDs – all discounted – led again by Poor Charlie’s Almanack. Without any advertising or bookstore
placement, Charlie’s book has now remarkably sold nearly 50,000 copies. For those of you who can’t
make the meeting, go to poorcharliesalmanack.com to order a copy.
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. Carol
Pedersen, who handles these matters, does a terrific job for us each year, and I thank her for it. Hotel
rooms can be hard to find, but work with Carol and you will get one.
At Nebraska Furniture Mart, located on a 77-acre site on 72nd Street between Dodge and Pacific,
we will again be having “Berkshire Weekend” discount pricing. We initiated this special event at NFM
eleven years ago, and sales during the “Weekend” grew from $5.3 million in 1997 to $30.9 million in 2007.
This is more volume than most furniture stores register in a year.
To obtain the Berkshire discount, you must make your purchases between Thursday, May 1st and
Monday, May 5th inclusive, 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 which, 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. Monday through Saturday, and 10 a.m.
to 6 p.m. on Sunday. On Saturday this year, from 5:30 p.m. to 8 p.m., NFM is having a Baja Beach Bash
featuring beef and chicken tacos.
21
At Borsheims, we will again have two shareholder-only events. The first will be a cocktail
reception from 6 p.m. to 10 p.m. on Friday, May 2nd. The second, the main gala, will be held on Sunday,
May 4th, from 9 a.m. to 4 p.m. On Saturday, we will be open until 6 p.m.
We will have huge crowds at Borsheims throughout the weekend. For your convenience,
therefore, shareholder prices will be available from Monday, April 28th through Saturday, May 10th.
During that period, please identify yourself as a shareholder by presenting your meeting credentials or a
brokerage statement that shows you are a Berkshire holder.
On Sunday, in a tent outside of Borsheims, a blindfolded Patrick Wolff, twice U.S. chess
champion, will take on all comers – who will have their eyes wide open – in groups of six. Nearby,
Norman Beck, a remarkable magician from Dallas, will bewilder onlookers. Additionally, we will have
Bob Hamman and Sharon Osberg, two of the world’s top bridge experts, available to play bridge with our
shareholders on Sunday afternoon.
Gorat’s will again be open exclusively for Berkshire shareholders on Sunday, May 4th, and will be
serving from 4 p.m. until 10 p.m. Last year Gorat’s, which seats 240, served 915 dinners on Shareholder
Sunday. The three-day total was 2,487 including 656 T-bone steaks, the entrée preferred by the
cognoscenti. Please remember that to come to Gorat’s on that day, you must have a reservation. To make
one, call 402-551-3733 on April 1st (but not before).
We will again have a reception at 4 p.m. on Saturday afternoon for shareholders who have come
from outside of North America. Every year our meeting draws many people from around the globe, and
Charlie and I want to be sure we personally greet those who have come so far. Last year we enjoyed
meeting more than 400 of you from many dozens of countries. Any shareholder who comes from other
than the U.S. or Canada will be given a special credential and instructions for attending this function.
* * * * * * * * * * * *
At 84 and 77, Charlie and I remain lucky beyond our dreams. We were born in America; had
terrific parents who saw that we got good educations; have enjoyed wonderful families and great health;
and came equipped with a “business” gene that allows us to prosper in a manner hugely disproportionate to
that experienced by many people who contribute as much or more to our society’s well-being. Moreover,
we have long had jobs that we love, in which we are helped in countless ways by talented and cheerful
associates. Every day is exciting to us; no wonder we tap-dance to work. But nothing is more fun for us
than getting together with our shareholder-partners at Berkshire’s annual meeting. So join us on May 3rd at
the Qwest for our annual Woodstock for Capitalists. We’ll see you there.
February 2008
Warren E. Buffett
Chairman of the Board
22
We are eager to hear from principals or their representatives about businesses that meet all of the following criteria:
BERKSHIRE HATHAWAY INC.
ACQUISITION CRITERIA
Large purchases (at least $75 million of pre-tax earnings unless the business will fit into one of our existing units),
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. We don’t participate in auctions.
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.”
BERKSHIRE HATHAWAY INC.
and Subsidiaries
Selected Financial Data for the Past Five Years
(dollars in millions except per share data)
2007
2006
2005
2004
2003
Revenues:
Insurance premiums earned (1)................................................ $ 31,783
58,243
Sales and service revenues .....................................................
Revenues of utilities and energy businesses (2).......................
12,628
Interest, dividend and other investment income .....................
4,979
Interest and other revenues of finance and financial
$ 23,964
51,803
10,644
4,382
$ 21,997
46,138
—
3,487
$ 21,085
43,222
—
2,816
$ 21,493
32,098
—
3,098
products businesses .............................................................
Investment and derivative gains/losses (3)...............................
Total revenues ........................................................................
5,103
5,509
5,111
2,635
4,633
5,408
3,788
3,471
3,087
4,083
$118,245
$ 98,539
$ 81,663
$ 74,382
$ 63,859
Earnings:
Net earnings (3) (4).................................................................... $ 13,213
$ 11,015
$ 8,528
$ 7,308
$ 8,151
Net earnings per share ............................................................ $ 8,548
$ 7,144
$ 5,538
$ 4,753
$ 5,309
Year-end data:
Total assets ............................................................................. $273,160
Notes payable and other borrowings:
$248,437
$198,325
$188,874
$180,559
Insurance and other non-finance businesses........................
Utilities and energy businesses (2) .......................................
Finance and financial products businesses..........................
Shareholders’ equity...............................................................
Class A equivalent common shares
2,680
19,002
12,144
120,733
3,698
16,946
11,961
108,419
3,583
—
10,868
91,484
3,450
—
5,387
85,900
4,182
—
4,937
77,596
outstanding, in thousands ....................................................
1,548
1,543
1,541
1,539
1,537
Shareholders’ equity per outstanding
Class A equivalent common share ...................................... $ 78,008
$ 70,281
$ 59,377
$ 55,824
$ 50,498
Insurance premiums earned in 2007 included $7.1 billion from a single reinsurance transaction with Equitas.
(1)
(2) On February 9, 2006, Berkshire Hathaway converted its non-voting preferred stock of MidAmerican Energy Holdings
Company (“MidAmerican”) to common stock and upon conversion, owned approximately 83.4% (80.5% diluted) of the
voting common stock interests. Accordingly, the Consolidated Financial Statements in 2006 and 2007 reflect the
consolidation of the accounts of MidAmerican. In each of the three years ending December 31, 2005, Berkshire’s investment
in MidAmerican was accounted for pursuant to the equity method.
(3) The amount of investment and derivative gains and losses for any given period has no predictive value, and variations in
amount from period to period have no practical analytical value in view of the unrealized appreciation in Berkshire's
investment portfolio. After-tax investment and derivative gains were $3,579 million in 2007, $1,709 million in 2006, $3,530
million in 2005, $2,259 million in 2004 and $2,729 million in 2003. Investment gains in 2005 include a non-cash pre-tax
gain of $5.0 billion ($3.25 billion after-tax) relating to the exchange of Gillette stock for Procter & Gamble stock.
(4) Net earnings for the year ended December 31, 2005 includes a pre-tax underwriting loss of $3.4 billion in connection with
Hurricanes Katrina, Rita and Wilma that struck the Gulf coast and Southeast regions of the United States. Such loss reduced
net earnings by approximately $2.2 billion and earnings per share by $1,446.
23
Management’s Report on Internal Control Over Financial Reporting
Management of Berkshire Hathaway Inc. is responsible for establishing and maintaining adequate internal control over financial reporting,
as such term is defined in the Securities Exchange Act of 1934 Rule 13a-15(f). Under the supervision and with the participation of our
management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of
the Company’s internal control over financial reporting as of December 31, 2007 as required by the Securities Exchange Act of 1934 Rule
13a-15(c). In making this assessment, we used the criteria set forth in the framework in Internal Control – Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal
Control – Integrated Framework, our management concluded that our internal control over financial reporting was effective as of
December 31, 2007.
The effectiveness of our internal control over financial reporting as of December 31, 2007 has been audited by Deloitte & Touche LLP, an
independent registered public accounting firm, as stated in their report which appears below.
Berkshire Hathaway Inc.
February 27, 2008
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Berkshire Hathaway Inc.
We have audited the accompanying consolidated balance sheets of Berkshire Hathaway Inc. and subsidiaries (the “Company”) as of
December 31, 2007 and 2006, and the related consolidated statements of earnings, cash flows and changes in shareholders’ equity and
comprehensive income for each of the three years in the period ended December 31, 2007. We also have audited the Company’s internal
control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these
financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting.
Our responsibility is to express an opinion on these financial statements and an opinion on the effectiveness of the Company’s internal
control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of
the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal
executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors,
management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of
the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also,
projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that
the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
Berkshire Hathaway Inc. and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2007, based on the criteria established in Internal Control — Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission.
As discussed in Note 1(r) to the consolidated financial statements, the Company changed its method of accounting for uncertainty in
income taxes in 2007 and pension and other postretirement benefit plans in 2006.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
February 29, 2008
24
BERKSHIRE HATHAWAY INC.
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(dollars in millions except per share amounts)
ASSETS
Insurance and Other:
Cash and cash equivalents ....................................................................................
Investments:
Fixed maturity securities ...................................................................................
Equity securities................................................................................................
Loans and receivables...........................................................................................
Inventories ............................................................................................................
Property, plant and equipment..............................................................................
Goodwill ...............................................................................................................
Deferred charges reinsurance assumed.................................................................
Other .....................................................................................................................
Utilities and Energy:
Cash and cash equivalents ....................................................................................
Property, plant and equipment..............................................................................
Goodwill ...............................................................................................................
Other .....................................................................................................................
Finance and Financial Products:
Cash and cash equivalents ....................................................................................
Investments in fixed maturity securities ...............................................................
Loans and finance receivables ..............................................................................
Goodwill ...............................................................................................................
Other .....................................................................................................................
LIABILITIES AND SHAREHOLDERS’ EQUITY
Insurance and Other:
Losses and loss adjustment expenses...................................................................
Unearned premiums.............................................................................................
Life and health insurance benefits .......................................................................
Other policyholder liabilities ...............................................................................
Accounts payable, accruals and other liabilities ..................................................
Notes payable and other borrowings ...................................................................
Utilities and Energy:
Accounts payable, accruals and other liabilities ..................................................
Notes payable and other borrowings ...................................................................
Finance and Financial Products:
Accounts payable, accruals and other liabilities ..................................................
Derivative contract liabilities...............................................................................
Notes payable and other borrowings ...................................................................
Income taxes, principally deferred..........................................................................
Total liabilities .................................................................................................
Minority shareholders’ interests .............................................................................
Shareholders’ equity:
Common stock:
Class A, $5 par value; Class B, $0.1667 par value ..........................................
Capital in excess of par value ..............................................................................
Accumulated other comprehensive income .........................................................
Retained earnings.................................................................................................
Total shareholders’ equity..............................................................................
December 31,
2007
2006
$ 37,703
$ 37,977
28,515
74,999
13,157
5,793
9,969
26,306
3,987
7,797
208,226
1,178
26,221
5,543
6,246
39,188
5,448
3,056
12,359
1,013
3,870
25,746
$273,160
$ 56,002
6,680
3,804
4,089
10,672
2,680
83,927
6,043
19,002
25,045
2,931
6,887
12,144
21,962
18,825
149,759
2,668
8
26,952
21,620
72,153
120,733
$273,160
25,300
61,533
12,881
5,257
9,303
25,678
1,964
7,443
187,336
343
24,039
5,548
6,560
36,490
5,423
3,012
11,498
1,012
3,666
24,611
$248,437
$ 47,612
7,058
3,600
3,938
9,654
3,698
75,560
6,693
16,946
23,639
3,543
3,883
11,961
19,387
19,170
137,756
2,262
8
26,522
22,977
58,912
108,419
$248,437
See accompanying Notes to Consolidated Financial Statements
25
BERKSHIRE HATHAWAY INC.
and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(dollars in millions except per share amounts)
Year Ended December 31,
2006
2007
2005
Revenues:
Insurance and Other:
Insurance premiums earned ..............................................................
Sales and service revenues ...............................................................
Interest, dividend and other investment income ...............................
Investment gains/losses ....................................................................
Utilities and Energy:
Operating revenues...........................................................................
Other.................................................................................................
Finance and Financial Products:
Interest income .................................................................................
Investment gains/losses ....................................................................
Derivative gains/losses .....................................................................
Other.................................................................................................
Costs and expenses:
Insurance and Other:
Insurance losses and loss adjustment expenses ................................
Life and health insurance benefits ....................................................
Insurance underwriting expenses......................................................
Cost of sales and services .................................................................
Selling, general and administrative expenses ...................................
Interest expense ................................................................................
Utilities and Energy:
Cost of sales and operating expenses ...............................................
Interest expense ................................................................................
Finance and Financial Products:
Interest expense ................................................................................
Other.................................................................................................
Earnings before income taxes and equity in earnings of
MidAmerican Energy Holdings Company...................................
Equity in earnings of MidAmerican Energy Holdings Company........
$31,783
58,243
4,979
5,405
100,410
$23,964
51,803
4,382
1,697
81,846
$21,997
46,138
3,487
5,728
77,350
12,376
252
12,628
10,301
343
10,644
—
—
—
1,717
193
(89)
3,386
5,207
118,245
1,610
114
824
3,501
6,049
98,539
1,554
468
(788)
3,079
4,313
81,663
21,010
1,786
5,613
47,477
7,098
164
83,148
13,068
1,618
5,440
42,416
5,932
195
68,669
15,482
1,634
4,828
38,288
5,328
144
65,704
9,696
1,158
10,854
8,189
979
9,168
—
—
—
588
3,494
4,082
98,084
550
3,374
3,924
81,761
579
3,112
3,691
69,395
20,161
—
16,778
—
12,268
523
Earnings before income taxes and minority interests ....................
Income taxes.....................................................................................
Minority shareholders’ interests .......................................................
Net earnings .......................................................................................
20,161
6,594
354
$13,213
Average common shares outstanding * ............................................ 1,545,751
$ 8,548
Net earnings per common share *....................................................
16,778
5,505
258
$11,015
1,541,807
$ 7,144
12,791
4,159
104
$ 8,528
1,539,775
$ 5,538
* 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 $285 per share for 2007, $238 per share for 2006 and $185 per share for 2005.
See accompanying Notes to Consolidated Financial Statements
26
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 operating cash flows:
$ 13,213
$ 11,015
$ 8,528
Investment gains ......................................................................................
Depreciation.............................................................................................
Minority interests.....................................................................................
(5,598)
2,407
354
(1,811)
2,066
258
(6,196)
982
104
Year Ended December 31,
2005
2006
2007
Changes in operating assets and liabilities before business acquisitions:
Losses and loss adjustment expenses.......................................................
Deferred charges reinsurance assumed ....................................................
Unearned premiums .................................................................................
Receivables and originated loans.............................................................
Derivative contract assets and liabilities ..................................................
Income taxes ............................................................................................
Other assets and liabilities .......................................................................
Net cash flows from operating activities ....................................................
Cash flows from investing activities:
Purchases of securities with fixed maturities..............................................
Purchases of equity securities.....................................................................
Sales of securities with fixed maturities .....................................................
Redemptions and maturities of securities with fixed maturities .................
Sales of equity securities ............................................................................
Purchases of loans and finance receivables ................................................
Principal collections on loans and finance receivables...............................
Acquisitions of businesses, net of cash acquired........................................
Purchases of property, plant and equipment...............................................
Other...........................................................................................................
Net cash flows from investing activities.....................................................
Cash flows from financing activities:
Proceeds from borrowings of finance businesses .......................................
Proceeds from borrowings of utilities and energy businesses ....................
Proceeds from other borrowings.................................................................
Repayments of borrowings of finance businesses ......................................
Repayments of borrowings of utilities and energy businesses ...................
Repayments of other borrowings................................................................
Changes in short term borrowings..............................................................
Other...........................................................................................................
Net cash flows from financing activities ....................................................
Effect of foreign currency exchange rate changes......................................
Increase (decrease) in cash and cash equivalents .......................................
Cash and cash equivalents at beginning of year ...............................................
Cash and cash equivalents at end of year *..................................................
* Cash and cash equivalents at end of year are comprised of the following:
Insurance and Other...................................................................................
Utilities and Energy....................................................................................
Finance and Financial Products ................................................................
(1,164)
196
(713)
(977)
2,938
553
1,341
12,550
(13,394)
(19,111)
7,821
9,158
8,054
(1,008)
1,229
(1,602)
(5,373)
798
(13,428)
1,153
3,538
121
(1,093)
(1,149)
(995)
(596)
387
1,366
98
586
43,743
$44,329
$37,703
1,178
5,448
$44,329
(2,704)
424
637
(59)
(563)
303
629
10,195
(7,747)
(9,173)
1,818
10,313
3,778
(365)
985
(10,132)
(4,571)
1,017
(14,077)
1,280
2,417
215
(244)
(516)
(991)
245
84
2,490
117
(1,275)
45,018
$43,743
$37,977
343
5,423
$43,743
2,086
339
(239)
(1,849)
3,620
1,602
469
9,446
(13,937)
(8,021)
3,243
7,142
1,629
(1,987)
911
(2,387)
(2,195)
1,761
(13,841)
5,628
—
521
(319)
—
(628)
361
188
5,751
(123)
1,233
43,427
$44,660
$40,471
—
4,189
$44,660
See accompanying Notes to Consolidated Financial Statements
27
BERKSHIRE HATHAWAY INC.
and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
(dollars in millions)
Year Ended December 31,
2006
2007
2005
Class A & B Common Stock
Balance at beginning and end of year ........................................................
$ 8
$ 8 $ 8
Capital in Excess of Par Value
Balance at beginning of year .....................................................................
Issuance of Class A and B shares and SQUARZ warrant premiums .........
$26,522
430
$26,399 $26,268
131
123
Balance at end of year................................................................................
$26,952
$26,522 $26,399
Retained Earnings
Balance at beginning of year .....................................................................
Adoption of new accounting pronouncements...........................................
Net earnings ...............................................................................................
$58,912
28
13,213
$47,717 $39,189
—
8,528
180
11,015
Balance at end of year................................................................................
$72,153
$58,912 $47,717
Accumulated Other Comprehensive Income
Unrealized appreciation of investments.....................................................
Applicable income taxes ......................................................................
$ 2,523
(872)
$ 9,278 $ 2,081
(728)
(3,246)
Reclassification adjustment of investment appreciation
included in net earnings ....................................................................
Applicable income taxes ......................................................................
Foreign currency translation adjustments ..................................................
Applicable income taxes ......................................................................
Prior service cost and actuarial gains/losses of defined benefit plans........
Applicable income taxes ......................................................................
Other, including minority interests ............................................................
Other comprehensive income ....................................................................
Adoption of SFAS 158 ..............................................................................
Accumulated other comprehensive income at beginning of year ..............
(5,494)
1,923
456
(26)
257
(102)
(22)
(1,357)
—
22,977
(1,646)
576
603
1
563
(196)
(13)
5,920
(303)
17,360
(6,261)
2,191
(359)
(26)
(62)
38
51
(3,075)
—
20,435
Accumulated other comprehensive income at end of year ........................
$21,620
$22,977 $17,360
Comprehensive Income
Net earnings...............................................................................................
Other comprehensive income ....................................................................
$13,213
(1,357)
$11,015 $ 8,528
(3,075)
5,920
Total comprehensive income .....................................................................
$11,856
$16,935 $ 5,453
See accompanying Notes to Consolidated Financial Statements
28
BERKSHIRE HATHAWAY INC.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007
(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, including property and casualty insurance and reinsurance, utilities and energy,
finance, manufacturing, service and retailing. Further information regarding these businesses and Berkshire’s
reportable business segments is contained in Note 18. Berkshire consummated a number of business acquisitions
over the past three years which are discussed in Note 2.
The accompanying Consolidated Financial Statements include the accounts of Berkshire consolidated with the accounts
of all of its subsidiaries and affiliates in which Berkshire holds a controlling financial interest as of the financial
statement date. Normally a controlling financial interest reflects ownership of a majority of the voting interests.
Other factors considered in determining whether a controlling financial interest is held include whether Berkshire
possesses the authority to purchase or sell assets or make other operating decisions that significantly affect the
entity’s results of operations and whether Berkshire bears a majority of the financial risks of the entity.
Intercompany accounts and transactions have been eliminated. Certain amounts in prior year presentations have
been reclassified to conform with the current year presentation.
On February 9, 2006, Berkshire converted its investment in non-voting preferred stock of MidAmerican Energy
Holdings Company (“MidAmerican”) into common stock and upon conversion, possessed approximately 83.4%
(80.5% diluted) of the voting rights and economic interests in MidAmerican. Accordingly, the 2006 and 2007
Consolidated Financial Statements reflect the consolidation of the accounts of MidAmerican. In 2005, Berkshire
accounted for its investment in MidAmerican pursuant to the equity method, reflecting Berkshire’s ability to
exercise significant influence on the operations of MidAmerican. Through its investment Berkshire possessed 9.7%
of the voting rights and 83.4% (80.5% diluted) of the economic interests in MidAmerican.
Use of estimates in preparation of financial statements
The preparation of the Consolidated Financial Statements in conformity with accounting principles generally accepted
in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the period. In particular, estimates of unpaid losses and loss adjustment expenses and
related recoverables under reinsurance for property and casualty insurance are subject to considerable estimation
error due to the inherent uncertainty in projecting ultimate claim amounts that will be settled over many years. In
addition, estimates and assumptions associated with the amortization of deferred charges reinsurance assumed,
determinations of fair value of certain financial assets and liabilities and the determinations of goodwill
impairments require considerable judgment by management. Actual results may differ from the estimates used in
preparing the Consolidated Financial Statements.
Cash and cash equivalents
Cash equivalents consist of funds invested in U.S. Treasury Bills, money market accounts and in other investments with
a maturity of three months or less when purchased. Cash and cash equivalents exclude amounts where availability is
restricted by loan agreements or other contractual provisions. Restricted amounts are included in other assets.
Investments
Berkshire’s management determines the appropriate classifications of investments in fixed maturity and equity
securities at the acquisition date and re-evaluates the classifications at each balance sheet date. Held-to-maturity
investments are carried at amortized cost, reflecting the ability and intent to hold the securities to maturity. Trading
investments are carried at fair value and include securities acquired with the intent to sell in the near term. All other
securities are classified as available-for-sale and are carried at fair value with net unrealized gains or losses reported
as a component of accumulated other comprehensive income. Berkshire’s investments in fixed maturity and equity
securities are predominantly classified as available-for-sale.
Investment gains and losses arise when investments are sold (as determined on a specific identification basis) or are
other-than-temporarily impaired. If in management’s judgment a decline in the value of an investment below cost
is other than temporary, the cost of the investment is written down to fair value with a corresponding charge to
earnings. Factors considered in judging whether an impairment is other than temporary include: the financial
condition, business prospects and creditworthiness of the issuer, the length of time that fair value has been less than
cost, the relative amount of the decline and Berkshire’s ability and intent to hold the investment until the fair value
recovers.
(b)
(c)
(d)
29
Notes to Consolidated Financial Statements (Continued)
(1) Significant accounting policies and practices (Continued)
(d)
Investments (Continued)
Berkshire utilizes the equity method of accounting with respect to investments where it exercises significant influence,
but not control, over the operating and financial policies of the investee. A voting interest of more than 20% and
less than 50% is normally a prerequisite for utilizing the equity method. However, Berkshire may apply the equity
method with less than 20% voting interests based upon the facts and circumstances. Berkshire applies the equity
method to investments in common stock and other investments when such other investments possess substantially
identical subordinated interests to common stock.
(e)
(f)
(g)
(h)
In applying the equity method, investments are recorded at cost and subsequently increased or decreased by Berkshire’s
proportionate share of the net earnings or losses and other comprehensive income of the investee. Dividends or
other equity distributions are recorded as reductions in the carrying value of the investment. In the event that net
losses of the investee have reduced the equity method investment to zero, additional net losses may be recorded if
other investments in the investee are at-risk, even if Berkshire has not committed to provide financial support to the
investee. Berkshire bases such additional equity method loss amounts, if any, on the change in its claim on the
investee’s book value.
Loans and finance receivables
Loans and finance receivables consist of commercial and consumer loans originated or purchased. Loans and finance
receivables are stated at amortized cost less allowances for uncollectible accounts based on Berkshire’s ability and
intent to hold such loans and receivables to maturity. Amortized cost represents acquisition cost, plus or minus
origination and commitment costs paid or fees received, which together with acquisition premiums or discounts are
deferred and amortized as yield adjustments over the life of the loan.
Allowances for estimated losses from uncollectible loans are recorded when it is probable that the counterparty will be
unable to pay all amounts due according to the terms of the loan. Allowances are provided on aggregations of
consumer loans with similar characteristics and terms based upon historical loss and recovery experience,
delinquency rates and current economic conditions. Provisions for loan losses are included in the Consolidated
Statements of Earnings.
Derivatives
Derivative contracts are carried at estimated fair value and are classified as assets or liabilities in the accompanying
Consolidated Balance Sheets. Such balances reflect reductions permitted under master netting agreements with
counterparties. The fair values of these instruments generally represent the present value of estimated future cash
flows anticipated under the contracts, which are affected by applicable interest rates, currency rates, security values,
commodity values, counterparty creditworthiness and duration of the contracts. Changes in these factors, or a
combination thereof, may affect the fair value of these instruments. The changes in fair value of derivative
contracts that do not qualify as hedging instruments for financial reporting purposes are included in the
Consolidated Statements of Earnings as derivative gains/losses.
Cash collateral received from or paid to counterparties to secure derivative contract assets or liabilities is included in
liabilities or assets of finance and financial products businesses in the Consolidated Balance Sheets. Securities
received from counterparties as collateral are not recorded as assets and securities delivered to counterparties as
collateral continue to be reflected as assets in the Consolidated Balance Sheets.
Inventories
Inventories consist of manufactured goods and purchased goods acquired for resale. Manufactured inventory costs
include raw materials, direct and indirect labor and factory overhead. Inventories are stated at the lower of cost or
market. As of December 31, 2007, approximately 45% of the total inventory cost was determined using the last-in-
first-out (“LIFO”) method, 34% using the first-in-first-out (“FIFO”) method, with the remainder using the specific
identification method and average cost methods. With respect to inventories carried at LIFO cost, the aggregate
difference in value between LIFO cost and cost determined under FIFO methods was $331 million and $263
million as of December 31, 2007 and 2006, respectively.
Property, plant and equipment
Property, plant and equipment additions are recorded at cost. The cost of major additions and betterments are
capitalized, while replacements, maintenance and repairs that do not improve or extend the useful lives of the
related assets are expensed as incurred. Interest over the construction period is capitalized as a component of cost
of constructed assets. In addition, the cost of constructed assets of certain domestic regulated utility and energy
subsidiaries that are subject to SFAS No. 71, “Accounting for the Effects of Certain Types of Regulation” (“SFAS
71”) includes the capitalization of the estimated cost of capital in addition to interest incurred during the
construction period. Also see Note 1(n).
Depreciation is provided principally on the straight-line method over estimated useful lives. Depreciation of assets of
certain regulated utility and energy subsidiaries is provided over recovery periods based on composite asset class
lives as mandated by regulation.
30
(1) Significant accounting policies and practices (Continued)
(h)
(i)
(j)
Property, plant and equipment (Continued)
Property, plant and equipment assets are evaluated for impairment when events or changes in circumstances indicate
that the carrying value of such assets may not be recoverable or the assets meet the criteria of held for sale. Upon
the occurrence of a triggering event, the asset is reviewed to assess whether the estimated undiscounted cash flows
expected from the use of the asset plus residual value from the ultimate disposal exceeds the carrying value of the
asset. If the carrying value exceeds the estimated recoverable amounts, the asset is written down to the estimated
discounted present value of the expected future cash flows from using the asset. Impairment losses are reflected in
the Consolidated Statements of Earnings, except with respect to impairments of assets of certain domestic regulated
utility and energy subsidiaries where losses are offset by the establishment of a regulatory asset to the extent
recovery in future rates is probable.
Goodwill
Goodwill represents the difference between purchase cost and the fair value of net assets acquired in business
acquisitions. Goodwill is tested for impairment using a variety of methods at least annually and impairments, if
any, are charged to earnings. Key assumptions used in the testing include, but are not limited to, the use of an
appropriate discount rate and estimated future cash flows. In estimating cash flows, the Company considers current
market information as well as historical factors.
Revenue recognition
Insurance premiums for prospective property/casualty insurance and reinsurance and health reinsurance policies are
earned in proportion to the level of protection provided. In most cases, premiums are recognized as revenues
ratably over the term of the contract with unearned premiums computed on a monthly or daily pro rata basis.
Premiums for retroactive reinsurance property/casualty policies are earned at the inception of the contracts.
Premiums for life reinsurance contracts are earned when due. Premiums earned are stated net of amounts ceded to
reinsurers. Premiums are estimated with respect to certain reinsurance contracts where reports from ceding
companies for the period are not contractually due until after the balance sheet date. For contracts containing
experience rating provisions, premiums are based upon estimated loss experience under the contract.
Sales revenues derive from the sales of manufactured products and goods acquired for resale. Revenues from sales are
recognized upon passage of title to the customer, which generally coincides with customer pickup, product delivery
or acceptance, depending on terms of the sales arrangement.
Service revenues derive primarily from pilot training, flight operations and flight management activities. 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. Revenues related to the sales of fractional ownership interests in aircraft are recognized
ratably over the term of the related management services agreement as the transfer of ownership interest in the
aircraft is inseparable from the management services agreement.
Interest income from investments in bonds and loans is earned under the constant yield method and includes accrual of
interest due under terms of the bond or loan agreement as well as amortization of acquisition premiums and
accruable discounts. In determining the constant yield for mortgage-backed securities, anticipated counterparty
prepayments are estimated and evaluated periodically. Dividends from equity securities are earned on the ex-
dividend date.
Operating revenue of utilities and energy businesses resulting from the distribution and sale of natural gas and
electricity to customers is recognized when the service is rendered or the energy is delivered. Amounts recognized
include unbilled as well as billed amounts. Rates charged are generally subject to Federal and state regulation or
established under contractual arrangements. When preliminary rates are permitted to be billed prior to final approval
by the applicable regulator, certain revenue collected may be subject to refund and a provision for estimated refunds
is accrued.
(k)
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 with respect to losses that have occurred as of the balance
sheet date. The liabilities for losses and loss adjustment expenses are recorded at the estimated ultimate payment
amounts, except that amounts arising from certain workers’ compensation reinsurance business are discounted as
discussed below. Estimated ultimate payment amounts are based upon (1) individual case estimates, (2) reports of
losses from policyholders and (3) estimates of incurred but not reported (“IBNR”) losses.
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.
The estimated liabilities of workers’ compensation claims assumed under certain reinsurance contracts are carried in the
Consolidated Balance Sheets at discounted amounts. Discounted amounts are based upon an annual discount rate
of 4.5% for claims arising prior to 2003 and 1% for claims arising after 2002, consistent with discount rates used
under statutory accounting principles. The periodic discount accretion is included in the Consolidated Statements
of Earnings as a component of losses and loss adjustment expenses.
31
Notes to Consolidated Financial Statements (Continued)
(1) Significant accounting policies and practices (Continued)
(l)
(m)
(n)
(p)
(q)
Deferred charges reinsurance assumed
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 claim settlement periods. Changes to the expected timing and estimated amount of loss
payments produce changes in the periodic amortization charge. Such changes in estimates are determined
retrospectively and are included in insurance losses and loss adjustment expense in the period of the change. The
periodic amortization charges are reflected in the accompanying Consolidated Statements of Earnings as losses and
loss adjustment expenses.
Insurance premium acquisition costs
Costs that vary with and are related to the issuance of insurance policies are deferred, subject to ultimate recoverability,
and are charged to underwriting expenses as the related 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 $1,519 million and $1,432 million at December 31, 2007 and
2006, respectively.
Regulated utilities and energy businesses
Certain domestic energy subsidiaries prepare their financial statements in accordance with SFAS 71, reflecting
economic effects deriving from the ability to recover certain costs from customers and the requirement to return
revenues to customers in the future through the regulated rate-setting process. Accordingly, certain costs are
deferred as regulatory assets and obligations are accrued as regulatory liabilities which will be amortized over
various future periods. At December 31, 2007, the Consolidated Balance Sheet includes $1,503 million in
regulatory assets and $1,629 million in regulatory liabilities. At December 31, 2006, the Consolidated Balance
Sheet includes $1,827 million in regulatory assets and $1,839 million in regulatory liabilities. Regulatory assets
and liabilities are components of other assets and other liabilities of utilities and energy businesses.
Management continually assesses whether the regulatory assets are probable of future recovery by considering factors
such as applicable regulatory changes, recent rate orders received by other regulated entities and the status of any
pending or potential deregulation legislation. If future recovery of costs ceases to be probable, the amount no
longer probable of recovery is charged to earnings.
Foreign currency
The accounts of foreign-based subsidiaries are measured in most instances using the local currency as the functional
currency. Revenues and expenses of these businesses are generally 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 accumulated other comprehensive income. Unrealized gains or losses
associated with available-for-sale securities are included 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.
Income taxes
Berkshire and eligible subsidiaries currently file a consolidated Federal income tax return in the United States. In
addition, Berkshire and subsidiaries also file income tax returns in state, local and foreign jurisdictions as
applicable. Provisions for current income tax liabilities are calculated and accrued on income and expense amounts
expected to be included in the income tax returns for the current year.
Deferred income taxes are calculated under the liability method. Deferred income tax assets and liabilities are based on
differences between the financial statement and tax bases of assets and liabilities at the current enacted tax rates.
Changes in deferred income tax assets and liabilities that are associated with components of other comprehensive
income (primarily unrealized investment gains and losses) are charged or credited directly to other comprehensive
income. Otherwise, changes in deferred income tax assets and liabilities are included as a component of income tax
expense. Changes in deferred income tax assets and liabilities attributable to changes in enacted tax rates are
charged or credited to income tax expense in the period of enactment. Valuation allowances have been established
for certain deferred tax assets where realization is not likely.
Assets and liabilities are established for uncertain tax positions taken or positions expected to be taken in income tax
returns when such positions are judged to not meet the “more-likely-than-not” threshold based on the technical
merits of the positions. Estimated interest and penalties related to uncertain tax positions are included as a
component of income tax expense.
(r)
Accounting pronouncements adopted in 2007 and 2006
Berkshire adopted FASB Interpretation No.48 “Accounting for Uncertainty in Income Taxes-an interpretation of FASB
Statement No. 109” (“FIN 48”) as of January 1, 2007. Under FIN 48, a tax position taken is recognized if it is
determined that the position will “more-likely-than-not” be sustained upon examination by a taxing authority. FIN
48 also establishes measurement guidance with respect to positions that have met the recognition threshold. See
Note 13 for additional information.
32
(1) Significant accounting policies and practices (Continued)
(r)
(s)
Accounting pronouncements adopted in 2007 and 2006 (Continued)
Berkshire adopted FASB Staff Position No. AUG AIR-1 “Accounting for Planned Major Maintenance Activities”
(“AUG AIR-1”) as of January 1, 2007. AUG AIR-1 prohibits the use of an accounting method where planned
major maintenance costs are ratably recognized by accruing a liability in periods before the maintenance is
performed. Upon adoption, Berkshire elected to use the direct expense method where maintenance costs are
expensed as incurred. Previously, certain maintenance costs related to the fractional aircraft ownership business
were accrued in advance. As of January 1, 2007, a cumulative effect of this accounting change of $52 million was
recorded as an increase in retained earnings. Berkshire’s Consolidated Financial Statements for prior periods have
not been restated because the net impact of retrospectively adopting AUG AIR-1 was not significant in each of the
prior three years and in the aggregate.
Berkshire adopted FASB Staff Position No. FTB 85-4-1, “Accounting for Life Settlement Contracts by Third-Party
Investors” (“FTB 85-4-1”) as of January 1, 2006. FTB 85-4-1 requires that investors in life settlement contracts
account for such contracts using the investment method or the fair value method. Berkshire elected to use the
investment method whereby the initial transaction price plus all subsequent direct external costs paid to keep the
policy in force are capitalized. Death benefits received are applied against the capitalized costs and the difference is
recorded in earnings. Previously, life settlement contracts were valued at the cash surrender value of the underlying
insurance policy. Upon adoption, the cumulative effect of this accounting change of $180 million was recorded as
an increase in retained earnings.
Berkshire adopted the recognition provisions of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension
and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS 158”) as
of December 31, 2006. SFAS 158 requires recognition in the statement of financial position of the over-funded or
under-funded status of a defined benefit postretirement plan and the recognition in accumulated other
comprehensive income of the actuarial gains and losses and prior service costs and credits that arise during the
period that are not recognized as components of net periodic benefit cost. Upon adoption, Berkshire recognized a
charge to accumulated other comprehensive income of $303 million.
Accounting pronouncements to be adopted in the future
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines
fair value as the price received to transfer an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. SFAS 157 establishes a framework for measuring fair value by
creating a hierarchy for observable independent market inputs and unobservable market assumptions. SFAS 157
further expands disclosures about such fair value measurements. SFAS 157 is generally effective for fiscal years
beginning after November 15, 2007. In February 2008, the FASB delayed for one year the effective date of
adoption with respect to certain non-financial assets and liabilities. Berkshire intends to defer the adoption of SFAS
157 with respect to certain non-financial assets and liabilities as permitted.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities - Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits entities to
elect to measure financial instruments and certain other items at fair value. Upon adoption of SFAS 159, an entity
may elect the fair value option for eligible items that exist at the adoption date. Subsequent to the initial adoption,
the election of the fair value option can only be made at initial recognition of the asset or liability or upon a re-
measurement event that gives rise to new-basis accounting. SFAS 159 is effective for fiscal years beginning after
November 15, 2007.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS
141R changes the accounting model for business combinations from a cost allocation standard to a standard that
provides, with limited exception, for the recognition of all identifiable assets and liabilities of the business acquired
at fair value, regardless of whether the acquirer acquires 100% or a lesser controlling interest of the business. SFAS
141R defines the acquisition date of a business acquisition as the date on which control is achieved (generally the
closing date of the acquisition). SFAS 141R requires recognition of assets and liabilities arising from contractual
contingencies and non-contractual contingencies meeting a “more-likely-than-not” threshold at fair value at the
acquisition date. SFAS 141R also provides for the recognition of acquisition costs as expenses when incurred and
for expanded disclosures. SFAS 141R is effective for business acquisitions with acquisition dates on or after
January 1, 2009. Early adoption is prohibited.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements an
amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for non-
controlling interests in subsidiaries and for the deconsolidation of a subsidiary and also amends certain
consolidation procedures for consistency with SFAS 141R. Under SFAS 160, non-controlling interests in
consolidated subsidiaries (formerly known as “minority interests”) are reported in the consolidated statement of
financial position as a separate component within shareholders’ equity. Net earnings and comprehensive income
attributable to the controlling and non-controlling interests are to be shown separately in the consolidated
statements of earnings and comprehensive income. Any changes in ownership interests of a non-controlling interest
where the parent retains a controlling financial interest in the subsidiary are to be reported as equity transactions.
SFAS 160 is effective for fiscal years beginning on or after December 15, 2008 with earlier adoption prohibited.
When adopted, SFAS 160 is to be applied prospectively at the beginning of the year, except that the presentation
and disclosure requirements are to be applied retrospectively for all periods presented.
33
Notes to Consolidated Financial Statements (Continued)
(1) Significant accounting policies and practices (Continued)
(s)
Accounting pronouncements to be adopted in the future (Continued)
Berkshire is continuing to evaluate the impact that these standards will have on its consolidated financial statements but
currently does not anticipate that the adoption of these accounting pronouncements will have a material effect on its
consolidated financial position.
(2) Significant business acquisitions
Berkshire’s long-held acquisition strategy is to purchase businesses with consistent earning power, good returns on equity and
able and honest management at sensible prices. During the last three years, Berkshire acquired several businesses which are
described in the following paragraphs.
On June 30, 2005, Berkshire acquired Medical Protective Corporation (“MedPro”) from GE Insurance Solutions. MedPro is
one of the nation’s premier professional liability insurers for physicians, dentists and other primary health care providers. On August
31, 2005, Berkshire acquired Forest River, Inc., (“Forest River”) a leading manufacturer of leisure vehicles in the U.S. Forest River
manufactures a complete line of motorized and towable recreational vehicles, utility trailers, buses, boats and manufactured houses.
Consideration paid for all business acquisitions completed during 2005, including smaller acquisitions directed by certain Berkshire
subsidiaries, was $2.4 billion.
On February 28, 2006, Berkshire acquired Business Wire, a leading global distributor of corporate news, multimedia and
regulatory filings. On March 21, 2006, PacifiCorp, a regulated electric utility providing service to customers in six Western states,
was acquired for approximately $5.1 billion in cash. In conjunction with the acquisition of PacifiCorp, Berkshire acquired additional
common stock of MidAmerican for $3.4 billion, which increased its ownership interest in MidAmerican from approximately 83% to
approximately 88%. On May 19, 2006, Berkshire acquired 85% of Applied Underwriters, an industry leader in integrated workers’
compensation solutions. On July 5, 2006, Berkshire acquired 80% of the Iscar Metalworking Companies (“IMC”) for cash in a
transaction that valued IMC at $5 billion. IMC, headquartered in Israel, is an industry leader in the metal cutting tools business. IMC
provides a comprehensive range of tools for the full scope of metalworking applications. IMC’s products are manufactured through a
global network of world-class, technologically advanced manufacturing facilities and are sold worldwide. On August 2, 2006,
Berkshire acquired Russell Corporation, a leading branded athletic apparel and sporting goods company. Consideration paid for all
businesses acquired in 2006 was approximately $10.1 billion.
On March 30, 2007, Berkshire acquired TTI, Inc., a privately held electronic components distributor headquartered in Fort
Worth, Texas. TTI, Inc. is a leading distributor specialist of passive, interconnect and electromechanical components. Effective April
1, 2007, Berkshire acquired the intimate apparel business of VF Corporation. During 2007, Berkshire also acquired several other
relatively smaller businesses. Consideration paid for all businesses acquired in 2007 was approximately $1.6 billion.
The results of operations for each of these businesses are included in Berkshire’s consolidated results from the effective date of
each acquisition. The following table sets forth certain unaudited pro forma consolidated earnings data for 2006, as if each
acquisition occurring during 2006 and 2007 was consummated on the same terms at the beginning of 2006. Pro forma consolidated
revenues and net earnings for 2007 are not materially different from the amounts reported. Amounts are in millions, except earnings
per share.
Total revenues....................................................................................................................................
Net earnings.......................................................................................................................................
Earnings per equivalent Class A common share ................................................................................
2006
$103,698
11,159
7,238
On December 25, 2007, Berkshire and Marmon Holdings, Inc (“Marmon”) announced that Berkshire had entered into an
agreement to acquire 60% of Marmon, a private company owned by trusts for the benefit of members of the Pritzker Family of
Chicago for $4.5 billion. The agreement also provides for Berkshire to acquire the remaining 40% through staged acquisitions over a
five to six year period for consideration to be based on the future earnings of Marmon. The acquisition is subject to customary
closing conditions, including regulatory approvals, and is expected to close in the first quarter of 2008.
Marmon consists of 125 manufacturing and service businesses that operate independently within diverse business sectors.
These sectors are Wire & Cable, serving energy related markets, residential and non-residential construction and other industries;
Transportation Services & Engineered Products, including railroad tank cars and intermodal tank containers; Highway Technologies,
primarily serving the heavy-duty highway transportation industry; Distribution Services for specialty pipe and tubing; Flow Products
for the plumbing, HVAC/R, construction and industrial markets; Industrial Products including metal fasteners, safety products and
metal fabrication; Construction Services, providing the leasing and operation of mobile cranes primarily to the energy, mining and
petrochemical markets; Water Treatment equipment for residential, commercial and industrial applications; and Retail Services,
providing store fixtures, food preparation equipment and related services. Marmon has approximately 20,000 employees and
operates more than 250 manufacturing, distribution and service facilities, primarily in North America, Europe and China.
Consolidated revenues in 2007 were approximately $7 billion.
34
(3) Loans and receivables
Loans and receivables of insurance and other businesses are comprised of the following (in millions).
Insurance premiums receivable......................................................................................
Reinsurance recoverables...............................................................................................
Trade and other receivables ...........................................................................................
Allowances for uncollectible accounts ..........................................................................
2007
$ 4,215
3,171
6,179
(408)
$13,157
2006
$ 4,418
2,961
5,884
(382)
$12,881
Loans and finance receivables of finance and financial products businesses are comprised of the following (in millions).
Consumer installment loans and finance receivables....................................................
Commercial loans and finance receivables....................................................................
Allowances for uncollectible loans................................................................................
2007
$11,506
1,003
(150)
$12,359
2006
$10,325
1,336
(163)
$11,498
Allowances for uncollectible loans primarily relate to consumer installment loans. Provisions for consumer loan losses were
$176 million in 2007 and $210 million in 2006. Loan charge-offs were $197 million in 2007 and $243 million in 2006. Consumer
loan amounts are net of acquisition discounts of $452 million at December 31, 2007 and $484 million at December 31, 2006.
(4)
Investments in fixed maturity securities
Investments in securities with fixed maturities as of December 31, 2007 and 2006 are shown below (in millions).
2007
Insurance and other:
U.S. Treasury, U.S. government corporations and agencies ...........
States, municipalities and political subdivisions .............................
Foreign governments .......................................................................
Corporate bonds and redeemable preferred stocks ..........................
Mortgage-backed securities .............................................................
Finance and financial products:
Corporate bonds...............................................................................
Mortgage-backed securities .............................................................
Mortgage-backed securities, held-to-maturity.................................
2006
Insurance and other:
U.S. Treasury, U.S. government corporations and agencies ...........
States, municipalities and political subdivisions .............................
Foreign governments .......................................................................
Corporate bonds and redeemable preferred stocks ..........................
Mortgage-backed securities .............................................................
Finance and financial products:
Corporate bonds...............................................................................
Mortgage-backed securities .............................................................
Mortgage-backed securities, held-to-maturity.................................
Amortized
Cost
Unrealized
Gains
Unrealized
Losses *
Fair
Value
$ 3,487
2,120
9,529
8,400
3,597
$27,133
$ 420
938
$ 1,358
$ 1,583
$ 59
107
76
1,187
62
$1,491
$ 63
52
$ 115
$ 176
$ —
(3)
(47)
(48)
(11)
$ (109)
$ —
—
$ —
$ (1)
$ 3,546
2,224
9,558
9,539
3,648
$28,515
$ 483
990
$ 1,473
$ 1,758
Amortized
Cost
Unrealized
Gains
Unrealized
Losses *
Fair
Value
$ 4,962
2,967
8,444
5,468
1,955
$23,796
$ 305
1,134
$ 1,439
$ 1,475
$ 12
71
51
1,467
35
$1,636
$ 70
32
$ 102
$ 153
$ (14)
(15)
(79)
(17)
(7)
$ (132)
$ —
(4)
$ (4)
$ (1)
$ 4,960
3,023
8,416
6,918
1,983
$25,300
$ 375
1,162
$ 1,537
$ 1,627
* Includes gross unrealized losses of $60 million at December 31, 2007 and $69 million at December 31, 2006 related to securities
that have been in an unrealized loss position for 12 months or more.
35
Notes to Consolidated Financial Statements (Continued)
(4)
Investments in fixed maturity securities (Continued)
The amortized cost and estimated fair values of securities with fixed maturities at December 31, 2007 are summarized below 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.
Amortized cost ......
Fair value...............
Due 2008
$7,499
7,597
Due 2009 – 2012 Due 2013 – 2017 Due after 2017
$10,496
10,908
$3,862
4,003
$2,099
2,842
(5)
Investments in equity securities
Investments in equity securities are summarized below. Amounts are in millions.
Mortgage-backed
securities
$6,118
6,396
Total
$30,074
31,746
Cost............................................................................................................................................................
Gross unrealized gains ..............................................................................................................................
Gross unrealized losses * ..........................................................................................................................
2007
$44,695
31,289
(985)
Fair value...................................................................................................................................................
$74,999
2006
$28,353
33,217
(37)
$61,533
* Gross unrealized losses at December 31, 2007 included $566 million related to individual purchases of securities in which
Berkshire had gross unrealized gains of $3.2 billion in the same securities. Substantially all of the gross unrealized losses pertain
to security positions that have been held for less than 12 months.
(6)
Investment gains (losses)
Investment gains (losses) are summarized below (in millions).
Fixed maturity securities —
Gross gains from sales and other disposals ...........................................................
Gross losses from sales and other disposals..........................................................
$ 657
(35)
$ 279
(9)
$ 792
(23)
2007
2006
2005
Equity securities —
Gross gains from sales and other disposals ...........................................................
Gross losses from sales..........................................................................................
Losses from other-than-temporary impairments .......................................................
Other..........................................................................................................................
4,880
(7)
—
103
$5,598
1,562
(44)
(142)
165
$1,811
5,612
(6)
(114)
(65)
$6,196
Net gains (losses) are reflected in the Consolidated Statements of Earnings as follows.
Insurance and other ...................................................................................................
Finance and financial products..................................................................................
$5,405
193
$5,598
$1,697
114
$1,811
$5,728
468
$6,196
(7) Goodwill
A reconciliation of the change in the carrying value of goodwill for 2007 and 2006 is as follows (in millions).
Balance at beginning of year .....................................................................................
Goodwill of MidAmerican as of January 1, 2006......................................................
Acquisitions of businesses and other.........................................................................
2007
$32,238
—
624
Balance at end of year ...............................................................................................
$32,862
2006
$23,644
4,156
4,438
$32,238
The MidAmerican goodwill represents the consolidation of Berkshire’s investment in MidAmerican as of January 1, 2006. The
increase in goodwill from business acquisitions and other during 2006 primarily relates to the acquisitions of PacifiCorp and IMC.
(8)
Inventories
Inventories are comprised of the following (in millions):
Raw materials......................................................................................................................
Work in process and other ..................................................................................................
Finished manufactured goods .............................................................................................
Purchased goods..................................................................................................................
2007
$ 897
479
1,781
2,636
$ 5,793
2006
$ 700
402
1,817
2,338
$ 5,257
36
(9) Property, plant and equipment
Property, plant and equipment of insurance and other businesses is comprised of the following (in millions):
Ranges of
estimated useful life
Land.........................................................................................
Buildings and improvements ..................................................
Machinery and equipment.......................................................
Furniture, fixtures and other....................................................
—
3 – 40 years
3 – 25 years
3 – 20 years
Accumulated depreciation ......................................................
2007
$ 607
3,611
9,507
1,670
15,395
(5,426)
$ 9,969
2006
$ 548
3,203
8,470
1,702
13,923
(4,620)
$ 9,303
Property, plant and equipment of utilities and energy businesses is comprised of the following (in millions):
Ranges of
estimated useful life
2007
2006
Utility generation, distribution and transmission system....
Interstate pipeline assets.....................................................
Independent power plants and other assets.........................
Construction in progress ....................................................
5-85 years
3-67 years
3-30 years
—
Accumulated depreciation and amortization ......................
$30,369
5,484
1,330
1,745
38,928
(12,707)
$26,221
$27,687
5,329
1,770
1,969
36,755
(12,716)
$24,039
The utility generation and distribution system and interstate pipeline assets are the regulated assets of public utility and natural
gas pipeline subsidiaries. At December 31, 2007 and December 31, 2006, accumulated depreciation and amortization related to
regulated assets was $12.3 billion and $11.9 billion, respectively. Substantially all of the construction in progress at
December 31, 2007 and December 31, 2006 related to the construction of regulated assets.
(10) Derivatives
A summary of the fair value and gross notional value of open derivative contracts of finance and financial products businesses
follows. Amounts are in millions.
2007
2006
Assets *
Liabilities
Credit default obligations ...................................
Equity index options ..........................................
Interest rate and foreign currency swaps ............
Other ..................................................................
Adjustment for counterparty netting ..................
Derivative contract assets and liabilities ............
$ —
—
626
123
(50)
$ 699
$ 1,838
4,610
434
55
(50)
$ 6,887
* Included in other assets of finance and financial products businesses.
Notional
Value
$ 4,660
35,043
7,887
2,301
Assets *
Liabilities
$ —
—
632
69
(77)
$ 624
$ 952
2,436
473
99
(77)
$ 3,883
Notional
Value
$ 2,510
21,155
10,851
5,477
Berkshire utilizes derivatives in order to manage certain economic business risks as well as to assume specified amounts of
market risk from others. The contracts summarized in the preceding table, with limited exceptions, are not designated as hedges for
financial reporting purposes. Changes in the fair values of derivative assets and derivative liabilities that do not qualify as hedges are
reported in the Consolidated Statements of Earnings as derivative gains/losses. Master netting agreements are utilized to manage
counterparty credit risk, where gains and losses are netted across other contracts with that counterparty.
Under certain circumstances, Berkshire is contractually entitled to receive cash or securities from counterparties as collateral
on derivative contract assets. At December 31, 2007, Berkshire held collateral with a fair value of $328 million to secure derivative
contract assets. Under certain circumstances, including a downgrade of its credit rating below specified levels, Berkshire may be
required to post collateral against derivative liabilities. However, Berkshire is not required to post collateral with respect to most of
its long-dated credit default and equity index option contract liabilities. At December 31, 2007, Berkshire had posted no collateral
with counterparties as security on contract liabilities.
37
Notes to Consolidated Financial Statements (Continued)
(10) Derivatives (Continued)
Berkshire is also exposed to variations in the market prices of natural gas and electricity as a result of its regulated utility
operations and uses derivative instruments, including forward purchases and sales, futures, swaps and options to manage these
commodity price risks. Gains and losses under these contracts are either probable of recovery through rates and therefore are
recorded as a regulatory net asset or liability or are accounted for as cash flow hedges and therefore are recorded as accumulated
other comprehensive income.
(11) Unpaid losses and loss adjustment expenses
The balances of unpaid losses and loss adjustment expenses are based upon estimates of the ultimate claim costs associated
with property and casualty claim occurrences as of the balance sheet dates including estimates for incurred but not reported (“IBNR”)
claims. Considerable judgment is required to evaluate claims and establish estimated claim liabilities.
Supplemental data with respect to unpaid losses and loss adjustment expenses of property/casualty insurance subsidiaries is as
follows (in millions).
Unpaid losses and loss adjustment expenses:
2007
2006
2005
Gross liabilities at beginning of year..............................................................................
Ceded losses and deferred charges at beginning of year ................................................
Net balance at beginning of year ....................................................................................
$47,612
(4,833)
42,779
$48,034
(5,200)
42,834
Incurred losses recorded during the year:
Current accident year......................................................................................................
Prior accident years ........................................................................................................
Total incurred losses.......................................................................................................
22,488
(1,478)
21,010
13,680
(612)
13,068
Payments during the year with respect to:
Current accident year......................................................................................................
Prior accident years ........................................................................................................
Total payments ...............................................................................................................
(6,594)
(8,865)
(15,459)
Unpaid losses and loss adjustment expenses:
Net balance at end of year ..............................................................................................
Ceded losses and deferred charges at end of year ..........................................................
Foreign currency translation adjustment ........................................................................
Acquisitions ....................................................................................................................
Gross liabilities at end of year ...........................................................................................
48,330
7,126
534
12
$56,002
(5,510)
(9,345)
(14,855)
41,047
4,833
608
1,124
$47,612
$45,219
(5,132)
40,087
15,839
(357)
15,482
(5,514)
(7,793)
(13,307)
42,262
5,200
(728)
1,300
$48,034
Incurred losses “prior accident years” reflects the amount of estimation error charged or credited to earnings in each calendar
year with respect to the liabilities established as of the beginning of that year. The beginning of the year net losses and loss
adjustment expenses liability was reduced by $1,793 million in 2007, $1,071 million in 2006 and $743 million in 2005. In each year,
the reductions in loss estimates for occurrences in prior years were primarily due to lower than expected frequencies and severities on
reported and settled claims in the primary private passenger and commercial auto lines and lower than expected reinsurance losses in
various property and casualty lines. Developed frequencies were generally more favorable than originally expected, particularly for
liability coverages, and claim severity increases were generally less than originally estimated. In 2006, prior years’ loss estimates
were reduced for certain casualty reinsurance claims as a result of lower than expected losses reported during the year. Accident year
loss estimates are regularly adjusted to consider emerging loss development patterns of prior years losses, whether favorable or
unfavorable.
Prior accident years incurred losses also include amortization of deferred charges related to retroactive reinsurance contracts
incepting prior to the beginning of the year. Amortization charges included in prior accident years’ losses were $213 million in 2007,
$358 million in 2006 and $294 million in 2005. Certain workers’ compensation loss reserves are discounted. Net discounted
liabilities at December 31, 2007 and 2006 were $2,436 million and $2,705 million, respectively, reflecting net discounts of $2,732
million and $2,793 million, respectively. Periodic accretions of these discounts are also a component of incurred prior accident years
losses. The accretion of discounted liabilities related to prior years’ losses was approximately $102 million in 2007, $101 million in
2006 and $92 million in 2005.
Berkshire’s insurance subsidiaries are exposed 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 and also
reflect reserves for legal and other loss adjustment expenses and IBNR reserves. IBNR reserves are determined based upon
Berkshire’s historic general liability exposure base and policy language, previous environmental 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, asbestos and latent injury claims and claims expenses net of reinsurance recoverables were
approximately $11.2 billion at December 31, 2007 and $5.1 billion at December 31, 2006. These liabilities included approximately
$9.7 billion at December 31, 2007 and $3.8 billion at December 31, 2006, of liabilities assumed under retroactive reinsurance
contracts. The increase during 2007 is primarily as a result of the Equitas agreement (see following paragraphs). Liabilities arising
from retroactive contracts with exposure to claims of this nature are generally subject to aggregate policy limits. Thus, Berkshire’s
38
(11) Unpaid losses and loss adjustment expenses (Continued)
exposure to environmental and latent injury claims under these contracts is, 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 increases in these liabilities.
Such development could be material to Berkshire’s results of operations. It is not possible to reliably estimate the amount of
additional net loss or the range of net loss that is reasonably possible.
In November 2006, the Berkshire Hathaway Reinsurance Group’s lead insurance entity, National Indemnity Company
(“NICO”) and Equitas, a London based entity established to reinsure and manage the 1992 and prior years’ non-life insurance and
reinsurance liabilities of the Names or Underwriters at Lloyd’s of London, entered into an agreement for NICO to initially provide up
to $5.7 billion and potentially provide up to an additional $1.3 billion of reinsurance to Equitas in excess of its undiscounted loss and
allocated loss adjustment expense reserves as of March 31, 2006. The transaction became effective on March 30, 2007. The
agreement requires that NICO pay all claims and related costs that arise from the underlying insurance and reinsurance contracts of
Equitas, subject to the aforementioned excess limit of indemnification. On the effective date, the aggregate limit of indemnification,
which does not include unallocated loss adjustment expenses, was $13.8 billion. A significant amount of loss exposure associated
with Equitas is related to asbestos, environmental and latent injury claims.
NICO received substantially all of Equitas’ assets as consideration under the arrangement. The fair value of such consideration
was $7.1 billion and included approximately $540 million in cash and miscellaneous receivables plus a combination of fixed maturity
and equity securities which were delivered in April 2007. The cash and miscellaneous receivables received are included in the
accompanying Consolidated Statement of Cash Flows for 2007 as components of operating cash flows. The investment securities
received are reported as a non-cash investing activity.
The Equitas agreement was accounted for as reinsurance in accordance with SFAS No. 113 “Accounting for short duration and
long duration reinsurance contracts.” Accordingly, premiums earned of $7.1 billion and losses incurred of $7.1 billion are reflected
in the Consolidated Statement of Earnings. Losses incurred consisted of an estimated liability for unpaid losses and loss adjustment
expenses of $9.3 billion less an asset for unamortized deferred charges reinsurance assumed of $2.2 billion. The deferred charge
asset is being amortized over the expected remaining loss settlement period using the interest method and the periodic amortization is
being charged to earnings as a component of losses and loss adjustment expenses incurred.
(12) Notes payable and other borrowings
Notes payable and other borrowings of Berkshire and its subsidiaries are summarized below. Amounts are in millions.
Insurance and other:
Issued by Berkshire due 2025-2033 ..................................................................................................
Issued by subsidiaries and guaranteed by Berkshire:
Commercial paper and other short-term borrowings...................................................................
Other debt due 2009-2035...........................................................................................................
Issued by subsidiaries and not guaranteed by Berkshire due 2008-2041 ..........................................
2007
2006
$ 250
$ 894
1,192
240
998
$ 2,680
1,355
240
1,209
$ 3,698
Notes payable and other borrowings issued by Berkshire includes several individual investment agreement borrowings under
which Berkshire is required to periodically pay interest over the contract terms. Under certain conditions, principal amounts may be
redeemed without premium prior to the contractual maturity date at the option of the counterparties. Commercial paper and other
short-term borrowings are utilized by certain subsidiaries as part of normal business operations. Weighted average interest rates as of
December 31, 2007 and 2006 were 4.6% and 5.4%, respectively.
Utilities and energy:
Issued by MidAmerican and its subsidiaries and not guaranteed by Berkshire:
MidAmerican senior unsecured debt due 2008-2037...................................................................
Subsidiary and project debt due 2008-2037 .................................................................................
Other ............................................................................................................................................
2007
2006
$ 5,471
13,227
304
$19,002
$ 4,479
12,014
453
$16,946
Subsidiary and project debt of utilities and energy businesses represents amounts issued by subsidiaries of MidAmerican
pursuant to separate project financing agreements. All or substantially all of the assets of certain utility subsidiaries are or may be
pledged or encumbered to support or otherwise provide security. These borrowing arrangements generally contain various covenants
including, but not limited to, leverage ratios, interest coverage ratios and debt service coverage ratios. As of December 31, 2007,
MidAmerican and its subsidiaries were in compliance with all applicable covenants. During 2007, MidAmerican issued $3.55 billion
par amount of bonds and senior notes with maturities ranging from 2012 to 2037. The proceeds were used to repay existing debt or
otherwise are intended to be used to repay debt maturing subsequent to December 31, 2007, to finance planned capital expenditures
or for general corporate purposes. Berkshire has made a commitment until February 28, 2011 that allows MidAmerican to request up
to $3.5 billion of capital to pay its debt obligations or to provide funding to its regulated subsidiaries.
39
Notes to Consolidated Financial Statements (Continued)
(12) Notes payable and other borrowings (Continued)
Finance and financial products:
Issued by Berkshire Hathaway Finance Corporation (“BHFC”) and guaranteed by Berkshire:
Notes due 2007 ............................................................................................................................
Notes due 2008 ............................................................................................................................
Notes due 2010 ............................................................................................................................
Notes due 2012-2015 ...................................................................................................................
Issued by other subsidiaries and guaranteed by Berkshire due 2008-2027 ........................................
Issued by other subsidiaries and not guaranteed by Berkshire due 2008-2030 ..................................
2007
2006
$ —
3,100
1,996
3,790
804
2,454
$12,144
$ 700
3,098
1,994
3,039
398
2,732
$11,961
BHFC, a wholly-owned subsidiary of Berkshire, issued senior notes at various times in recent years. In the third quarter of
2007, BHFC issued $750 million par amount of senior notes due in 2012. BHFC issued $2 billion par amount of senior notes in
January 2008, including $1.5 billion par amount of notes due in 2011 and $500 million par amount of notes due in 2013 and repaid
maturing notes of $1.25 billion par amount. Borrowings by BHFC are used to provide financing for installment loans issued or
acquired by subsidiaries of Clayton Homes. At December 31, 2007, debt issued by other finance subsidiaries and not guaranteed by
Berkshire includes approximately $1.4 billion whereby all principal and interest collected under certain manufactured housing loan
portfolios, together with any repurchased principal on such loans will be used to pay the principal and interest on these borrowings.
During 2007, XTRA Finance Corporation, a wholly owned subsidiary, issued $400 million par amount of senior notes due 2017,
which is included in other subsidiary borrowings guaranteed by Berkshire.
Berkshire subsidiaries in the aggregate have approximately $4.8 billion of available unused lines of credit and commercial
paper capacity to support their short-term borrowing programs and provide additional liquidity. Generally, Berkshire’s guarantee of
a subsidiary’s debt obligation is an absolute, unconditional and irrevocable guarantee for the full and prompt payment when due of all
present and future payment obligations of the issuer.
Principal payments expected during the next five years are as follows (in millions).
Insurance and other........................................................................
Utilities and energy........................................................................
Finance and financial products ......................................................
(13) Income taxes
2008
$1,268
2,096
3,938
$7,302
2009
$ 298
422
198
$ 918
2010
$ 55
140
2,165
$2,360
2011
$ 12
1,138
139
$1,289
2012
$ 21
1,461
1,632
$3,114
The liability for income taxes as of December 31, 2007 and 2006 as reflected in the accompanying Consolidated Balance
Sheets is as follows (in millions).
Payable currently .............................................................................................
Deferred...........................................................................................................
Other................................................................................................................
2007
$ (182)
18,156
851
$18,825
2006
$ 189
18,271
710
$19,170
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at
December 31, 2007 and 2006 are shown below (in millions).
Deferred tax liabilities:
Investments – unrealized appreciation and cost basis differences ................
Deferred charges reinsurance assumed.........................................................
Property, plant and equipment......................................................................
Other ............................................................................................................
$13,501
1,395
4,890
2,743
$14,520
687
4,775
2,591
2007
2006
Deferred tax assets:
Unpaid losses and loss adjustment expenses ................................................
Unearned premiums .....................................................................................
Accrued liabilities ........................................................................................
Other ............................................................................................................
(756)
(425)
(1,259)
(1,933)
(681)
(443)
(1,335)
(1,843)
22,529
22,573
(4,373)
(4,302)
Net deferred tax liability..................................................................................
$18,156
$18,271
40
(13) Income taxes (Continued)
Deferred income taxes have not been established with respect to undistributed earnings of certain foreign subsidiaries.
Earnings expected to remain reinvested indefinitely were approximately $3,028 million as of December 31, 2007. Upon distribution
as dividends or otherwise, such amounts would be subject to taxation in the United States as well as foreign countries. However,
U.S. income tax liabilities could be offset, in whole or in part, by tax credits allowable from taxes paid to foreign jurisdictions.
Determination of the potential net tax due is impracticable due to the complexities of hypothetical calculations involving uncertain
timing and amounts of taxable income and the effects of multiple taxing jurisdictions.
The Consolidated Statements of Earnings reflect charges for income taxes as shown below (in millions).
Federal.............................................................................................................
State.................................................................................................................
Foreign ............................................................................................................
2007
$ 5,740
234
620
2006
$ 4,752
153
600
2005
$ 3,736
129
294
$ 6,594
$ 5,505
$ 4,159
Current.............................................................................................................
Deferred...........................................................................................................
$ 5,708
886
$ 5,030
475
$ 2,057
2,102
$ 6,594
$ 5,505
$ 4,159
Charges for income taxes are reconciled to hypothetical amounts computed at the U.S. Federal statutory rate in the table shown
below (in millions).
Earnings before income taxes................................................................................................
Hypothetical amounts applicable to above
2007
$20,161
2006
$16,778
2005
$12,791
computed at the Federal statutory rate ...............................................................................
$ 7,056
$ 5,872
$ 4,477
Tax effects resulting from:
Tax-exempt interest income ...............................................................................................
Dividends received deduction ............................................................................................
Net earnings of MidAmerican............................................................................................
State income taxes, less Federal income tax benefit..............................................................
Foreign tax rate differences...................................................................................................
Effect of income tax rate changes on deferred income taxes *..............................................
Other differences, net ............................................................................................................
(33)
(306)
—
152
(36)
(90)
(149)
(44)
(224)
—
99
(45)
—
(153)
(65)
(133)
(183)
84
56
—
(77)
Total income taxes ................................................................................................................
$ 6,594
$ 5,505
$ 4,159
* Relates to adjustments made to deferred income tax assets and liabilities upon the enactment of reductions to corporate income tax
rates in the United Kingdom and Germany.
Berkshire and its subsidiaries’ U.S. Federal income tax returns are continuously under audit. Berkshire’s U.S. Federal income
tax return liabilities have been settled with the Internal Revenue Service (“IRS”) through 1998. The IRS has completed its audits of
1999 through 2004 and has proposed adjustments to increase consolidated tax liabilities in 1999 through 2004 tax periods which
remain unsettled. These proposed adjustments are predominantly related to timing of deductions of insurance subsidiaries and the
examinations are currently in the IRS’ appeals process.
Income tax returns of Berkshire subsidiaries are also under examination in numerous state, local and foreign jurisdictions.
While it is reasonably possible that certain of the income tax examinations will be settled within the next twelve months,
management believes the impact will be immaterial to the Consolidated Financial Statements.
Berkshire adopted FIN 48 effective January 1, 2007 and had $857 million of net unrecognized tax benefits. The cumulative net
effect of adopting FIN 48 was a reduction to retained earnings of $24 million. At December 31, 2007, net unrecognized tax benefits
were $851 million which included $635 million that if recognized would have an impact on the effective tax rate. The remaining
unrecognized benefits relate to positions for which ultimate recognition is highly certain but the timing of recognition is uncertain
and for tax benefits related to acquired businesses that if recognized would not be reflected in income tax expense.
(14) Dividend restrictions – Insurance subsidiaries
Payments of dividends by insurance subsidiaries are restricted by insurance statutes and regulations. Without prior regulatory
approval, insurance subsidiaries may declare up to approximately $6.6 billion as ordinary dividends before the end of 2008.
Combined shareholders’ equity of U.S. based property/casualty insurance subsidiaries determined pursuant to statutory
accounting rules (Statutory Surplus as Regards Policyholders) was approximately $62 billion at December 31, 2007 and $59 billion
at December 31, 2006.
41
Notes to Consolidated Financial Statements (Continued)
(14) Dividend restrictions – Insurance subsidiaries (Continued)
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 fixed maturity securities 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 of goodwill
over 10 years, whereas under GAAP, goodwill is not amortized and is subject to periodic tests for impairment.
(15) Fair values of financial instruments
The estimated fair values of Berkshire’s financial instruments as of December 31, 2007 and 2006 are as follows (in millions).
Insurance and other:
Investments in fixed maturity securities.......................................................
Investments in equity securities ...................................................................
Notes payable and other borrowings............................................................
Finance and financial products:
Investments in fixed maturity securities.......................................................
Derivative contract assets (a) .......................................................................
Loans and finance receivables .....................................................................
Notes payable and other borrowings............................................................
Derivative contract liabilities .......................................................................
Utilities and energy:
Derivative contract assets (a) .......................................................................
Notes payable and other borrowings............................................................
Derivative contract liabilities (b)..................................................................
(a)
Included in Other assets
(b)
Included in Accounts payable, accruals and other liabilities
Carrying Value
2007
2006
Fair Value
2007
2006
$28,515
74,999
2,680
$25,300
61,533
3,698
$28,515
74,999
2,709
$25,300
61,533
3,815
3,056
699
12,359
12,144
6,887
397
19,002
765
3,012
624
11,498
11,961
3,883
484
16,946
889
3,231
699
12,612
12,317
6,887
397
19,834
765
3,164
624
11,862
11,787
3,883
484
17,789
889
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. The
pricing services and appraisals reflect the estimated present values of future expected cash flows utilizing current risk adjusted market
rates of similar instruments. The carrying values of cash and cash equivalents, accounts receivable and accounts payable, accruals
and other liabilities are deemed to be reasonable estimates of their fair values.
Considerable judgment is 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) Common stock
Changes in issued and outstanding Berkshire common stock during the three years ended December 31, 2007 are shown in the
table below.
Balance December 31, 2004..............................................
Conversions of Class A common stock
to Class B common stock and other...............................
Balance December 31, 2005..............................................
Conversions of Class A common stock
to Class B common stock and other...............................
Balance December 31, 2006..............................................
Issuance of shares on exercise of SQUARZ warrants .......
Conversions of Class A common stock
to Class B common stock and other...............................
Balance December 31, 2007..............................................
Class A Common, $5 Par Value
(1,650,000 shares authorized)
Shares Issued and
Outstanding
1,268,783
Class B Common, $0.1667 Par Value
(55,000,000 shares authorized)
Shares Issued and
Outstanding
8,099,175
294,908
8,394,083
4,358,348
12,752,431
41,706
1,205,943
14,000,080
(7,863)
1,260,920
(143,352)
1,117,568
2,325
(38,869)
1,081,024
42
(16) Common stock (Continued)
Each share of Class B common stock has dividend and distribution rights equal to one-thirtieth (1/30) of such rights of a Class
A share. Accordingly, on an equivalent Class A common stock basis there are 1,547,693 shares outstanding as of December 31, 2007
and 1,542,649 shares as of December 31, 2006.
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. On July 6, 2006, Berkshire’s Chairman and CEO, Warren E.
Buffett converted 124,998 shares of Class A common stock into 3,749,940 shares of Class B 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.
During 2007, holders of SQUARZ securities exercised the warrant component of the securities and received Class A and Class
B shares. In connection with these exercises, Berkshire received $333 million.
(17) Pension plans
Several Berkshire subsidiaries individually sponsor defined benefit pension plans covering certain 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. The companies generally make contributions to the plans to meet regulatory requirements plus
additional amounts as determined by management based on actuarial valuations.
The components of net periodic pension expense for each of the three years ending December 31, 2007 are as follows (in
millions).
Service cost ...................................................................................................................
Interest cost ...................................................................................................................
Expected return on plan assets.......................................................................................
Net gain/loss amortization, other...................................................................................
Net pension expense......................................................................................................
2007
$ 202
439
(444)
65
$ 262
2006
$ 199
390
(393)
67
$ 263
2005
$ 113
190
(186)
9
$ 126
The accumulated benefit obligation is the actuarial present value of benefits earned based on service and compensation prior to
the valuation date. As of December 31, 2007 and 2006, the accumulated benefit obligation was $6,990 million and $7,056 million,
respectively. The projected benefit obligation is the actuarial present value of benefits earned based upon service and compensation
prior to the valuation date and includes assumptions regarding future compensation levels when benefits are based on those amounts.
Information regarding the projected benefit obligations is shown in the table that follows (in millions).
Projected benefit obligation, beginning of year.....................................................................................
Service cost ...........................................................................................................................................
Interest cost ...........................................................................................................................................
Benefits paid..........................................................................................................................................
Consolidation of MidAmerican .............................................................................................................
Business acquisitions.............................................................................................................................
Actuarial (gain) or loss and other ..........................................................................................................
2007
$7,926
202
439
(476)
—
—
(408)
Projected benefit obligation, end of year ...............................................................................................
$7,683
2006
$3,602
199
390
(370)
2,237
1,519
349
$7,926
Benefit obligations under qualified U.S. defined benefit plans are funded through assets held in trusts and are not included as
assets in Berkshire’s Consolidated Financial Statements. Pension obligations under certain non-U.S. plans and non-qualified U.S.
plans are unfunded. As of December 31, 2007, projected benefit obligations of non-qualified U.S. plans and non-U.S. plans which
are not funded through assets held in trusts were $637 million. A reconciliation of the changes in plan assets and a summary of plan
assets held as of December 31, 2007 and 2006 is presented in the table that follows (in millions).
Plan assets at fair value, beginning of year...........
Employer contributions ........................................
Benefits paid.........................................................
Actual return on plan assets..................................
Consolidation of MidAmerican ............................
Business acquisitions............................................
Other and expenses...............................................
Plan assets at fair value, end of year.....................
2007
$6,792
262
(476)
447
—
—
38
$7,063
2006
$3,101
228
(370)
612
2,238
967
16
$6,792
Cash and equivalents.................
U.S. Government obligations ....
Mortgage-backed securities ......
Corporate obligations................
Equity securities........................
Other .........................................
2007
$ 427
186
390
1,005
4,169
886
$7,063
2006
$ 818
554
602
963
3,440
415
$6,792
Pension plan assets are generally invested with the long-term objective of earning sufficient amounts to cover expected benefit
obligations, while assuming a prudent level of risk. There are no target investment allocation percentages with respect to individual
or categories of investments. Allocations may change as a result of changing market conditions and investment opportunities. The
expected rates of return on plan assets reflect Berkshire’s subjective assessment of expected invested asset returns over a period of
several years. Berkshire generally does not give significant consideration to past investment returns when establishing assumptions
for expected long-term rates of returns on plan assets. Actual experience will differ from the assumed rates.
43
Notes to Consolidated Financial Statements (Continued)
(17) Pension plans (Continued)
The defined benefit plans expect to pay benefits to participants over the next ten years, reflecting expected future service as
appropriate, as follows (in millions): 2008 - $418; 2009 - $415; 2010 - $419; 2011 - $435; 2012 - $459; and 2013 to 2017 - $2,594.
Sponsoring subsidiaries expect to contribute $265 million to defined benefit pension plans in 2008.
As of December 31, 2007 and 2006, the net funded status of the plans is summarized in the table that follows (in millions).
Amounts recognized in the Consolidated Balance Sheets:
Other liabilities ................................................................................................................................
Other assets......................................................................................................................................
Amounts recognized..............................................................................................................................
2007
2006
$ 981
(361)
$ 620
$1,398
(264)
$1,134
A reconciliation of amounts not yet recognized as components of net periodic benefit costs for the years ending December 31,
2007 and 2006 follows (in millions).
Net amount included in accumulated other comprehensive income, beginning of year ........................
Amount included in net periodic pension expense...........................................................................
Gains and losses current period .......................................................................................................
Adoption of SFAS 158.....................................................................................................................
Net amount included in accumulated other comprehensive income, end of year ..................................
$(303)
25
114
—
$(164)
$ (392)
45
322
(278)
$(303)
Amount included in accumulated other comprehensive income as of December 31, 2007 and
expected to be included in net periodic pension expense next year (in millions) .............................
$ 22
Weighted average interest rate assumptions used in determining projected benefit obligations were as follows. These rates are
substantially the same as the weighted average rates used in determining the net periodic pension expense.
Discount rate .......................................................................................................................................................
Expected long-term rate of return on plan assets.................................................................................................
Rate of compensation increase ............................................................................................................................
2007
6.1
6.9
4.4
2006
5.7
6.9
4.4
Several Berkshire subsidiaries also sponsor defined contribution retirement plans, such as 401(k) or profit sharing plans.
Employee contributions to the plans are subject to regulatory limitations and the specific plan provisions. Several of the plans require
that the subsidiary match these contributions up to levels specified in the plans and provide for additional discretionary contributions
as determined by management. The total expenses related to employer contributions for these plans were $506 million, $498 million
and $395 million for the years ended December 31, 2007, 2006 and 2005, respectively.
(18) Business segment data
Berkshire’s reportable business segments are organized in a manner that reflects how management views those business
activities. Certain businesses have been grouped together for segment reporting based upon similar products or product lines,
marketing, selling and distribution characteristics, even though those business units are operated under separate local management.
The tabular information that follows shows data of reportable segments reconciled to amounts reflected in the Consolidated
Financial Statements. Intersegment transactions are not eliminated in instances where management considers those transactions in
assessing the results of the respective segments. Furthermore, Berkshire management does not consider investment and derivative
gains/losses or amortization of purchase accounting adjustments in assessing the performance of reporting units. Collectively, these
items are included in reconciliations of segment amounts to consolidated amounts.
Business Identity
GEICO
General Re
Berkshire Hathaway Reinsurance Group
Berkshire Hathaway Primary Group
BH Finance, Clayton Homes, XTRA, CORT and other
financial services (“Finance and financial products”)
McLane Company
MidAmerican
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
Proprietary investing, manufactured housing and related consumer
financing, transportation equipment leasing, furniture leasing, life
annuities and risk management products
Wholesale distribution of groceries and non-food items
Regulated electric and gas utility, including power generation and
distribution activities in the U.S. and internationally; domestic real
estate brokerage
Manufacturing and distribution of carpet and floor coverings under
a variety of brand names
44
(18) Business segment data (Continued)
Other businesses not specifically identified with reportable business segments consist of a large, diverse group of
manufacturing, service and retailing businesses.
Manufacturing
Service
Retailing
Acme Building Brands, Benjamin Moore, H.H. Brown Shoe
Group, CTB, Fechheimer Brothers, Forest River, Fruit of the
Loom, Garan, IMC, Johns Manville, Justin Brands, Larson-Juhl,
MiTek, Richline, Russell and Scott Fetzer
Buffalo News, Business Wire, FlightSafety, International Dairy
Queen, Pampered Chef, NetJets and TTI
Ben Bridge Jeweler, Borsheims, Helzberg Diamond Shops,
Jordan’s Furniture, Nebraska Furniture Mart, See’s, Star Furniture
and R.C. Willey
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 Group ........................
Investment income ......................................................
Total insurance group.....................................................
Finance and financial products.......................................
McLane Company ..........................................................
MidAmerican .................................................................
Shaw Industries ..............................................................
Other businesses.............................................................
Reconciliation of segments to consolidated amount:
Investment and derivative gains/losses .......................
Equity in earnings of MidAmerican............................
Interest expense, not allocated to segments.................
Eliminations and other ................................................
Operating Businesses:
Insurance group..............................................................
Finance and financial products.......................................
McLane Company..........................................................
MidAmerican .................................................................
Shaw Industries ..............................................................
Other businesses.............................................................
2007
Revenues
2006
2005
Earnings (loss) before taxes
and minority interests
2006
2005
2007
$ 11,806
6,076
11,902
1,999
4,791
36,574
5,119
28,079
12,628
5,373
25,648
113,421
5,509
—
—
(685)
$118,245
$11,055
6,075
4,976
1,858
4,347
28,311
5,124
25,693
10,644
5,834
21,133
96,739
2,635
—
—
(835)
$98,539
$10,101
6,435
3,963
1,498
3,501
25,498
4,559
24,074
—
5,723
17,099
76,953
5,494
—
—
(784)
$81,663
$ 1,113
555
1,427
279
4,758
8,132
1,006
232
1,774
436
3,279
14,859
5,509
—
(52)
(155)
$20,161
$ 1,314
526
1,658
340
4,316
8,154
1,157
229
1,476
594
2,703
14,313
2,635
—
(76)
(94)
$16,778
$ 1,221
(334)
(1,069)
235
3,480
3,533
822
217
—
485
1,921
6,978
5,494
523
(72)
(132)
$12,791
Capital expenditures *
2006
2005
2007
Depreciation
of tangible assets
2006
2007
$ 52
322
175
3,513
144
1,167
$ 5,373
$ 65
334
193
2,423
189
1,367
$ 4,571
$ 60
354
125
—
209
1,447
$ 2,195
$ 69
226
100
1,157
144
711
$ 2,407
$ 64
230
94
949
134
595
$ 2,066
2005
$ 62
221
96
—
113
490
$ 982
* Excludes capital expenditures which were part of business acquisitions.
45
Notes to Consolidated Financial Statements (Continued)
(18) Business segment data (Continued)
Operating Businesses:
Insurance group:
Goodwill
at year-end
2007
2006
Identifiable assets
at year-end
2007
2006
GEICO.............................................................................................
General Re.......................................................................................
Berkshire Hathaway Reinsurance and Primary Groups ...................
Total insurance group .........................................................................
Finance and financial products ...........................................................
McLane Company ..............................................................................
MidAmerican......................................................................................
Shaw Industries...................................................................................
Other businesses .................................................................................
$ 1,372
13,532
546
15,450
1,013
149
5,543
2,339
8,368
$ 1,370
13,532
465
15,367
1,012
158
5,548
2,228
7,925
$ 18,988
32,571
95,379
146,938
24,733
3,329
33,645
2,922
20,579
$ 18,544
31,114
85,972
135,630
23,599
2,986
30,942
2,776
17,571
$32,862
$32,238
232,146
213,504
Reconciliation of segments to consolidated amount:
Corporate and other ........................................................................
Goodwill .........................................................................................
8,152
32,862
2,695
32,238
$273,160
$248,437
Insurance premiums written by geographic region (based upon the domicile of the insured or reinsured) are summarized below.
Dollars are in millions.
United States ................................................................
Western Europe............................................................
All other .......................................................................
Property/Casualty
2006
$19,195
2,576
638
2007
$18,589
9,641
588
2005
$16,228
2,643
760
Life/Health
2006
$1,073
628
667
2007
$1,092
706
681
2005
$1,147
578
578
$28,818
$22,409
$19,631
$2,479
$2,368
$2,303
Insurance premiums written and earned in 2007 included $7.1 billion from a single reinsurance transaction with Equitas. See
Note 11 for additional information. Amounts for Western Europe were primarily in the United Kingdom and Germany.
Consolidated sales and service revenues in 2007, 2006 and 2005 were $58.2 billion, $51.8 billion and $46.1 billion, respectively.
Over 90% of such amounts in each year were in the United States with the remainder primarily in Canada and Europe. In 2007,
consolidated sales and service revenues included $10.5 billion of sales to Wal-Mart Stores, Inc. which were primarily related to
McLane’s wholesale distribution business.
Premiums written and earned by Berkshire’s property/casualty and life/health insurance businesses are summarized below.
Dollars are in millions.
Premiums Written:
Property/Casualty
2006
2007
2005
2007
Life/Health
2006
2005
Direct ........................................................................
Assumed ...................................................................
Ceded ........................................................................
$16,056
13,316
(554)
$15,729
7,224
(544)
$13,582
6,788
(739)
$2,579
(100)
$2,476
(108)
$2,400
(97)
Premiums Earned:
Direct ........................................................................
Assumed ...................................................................
Ceded ........................................................................
$16,076
13,744
(499)
$15,453
6,746
(599)
$13,287
7,114
(699)
$2,564
(102)
$2,471
(107)
$2,387
(92)
$28,818
$22,409
$19,631
$2,479
$2,368
$2,303
$29,321
$21,600
$19,702
$2,462
$2,364
$2,295
46
(19) Contingencies and Commitments
Berkshire and its subsidiaries are parties in a variety of legal actions arising out of the normal course of business. In particular,
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. Berkshire and certain of its subsidiaries are also involved in other
kinds of legal actions, some of which assert or may assert claims or seek to impose fines and penalties in substantial amounts.
a) Governmental Investigations
Berkshire, General Re Corporation (“General Re”) and certain of Berkshire’s insurance subsidiaries, including General
Reinsurance Corporation (“General Reinsurance”) and National Indemnity Company (“NICO”) have been continuing to cooperate
fully with the U.S. Securities and Exchange Commission (“SEC”), the U.S. Department of Justice, the U.S. Attorney for the Eastern
District of Virginia and the New York State Attorney General (“NYAG”) in their ongoing investigations of non-traditional products.
General Re originally received subpoenas from the SEC and NYAG in January 2005. Berkshire, General Re, General Reinsurance
and NICO have been providing information to the government relating to transactions between General Reinsurance or NICO (or
their respective subsidiaries or affiliates) and other insurers in response to the January 2005 subpoenas and related requests and, in
the case of General Reinsurance (or its subsidiaries or affiliates), in response to subpoenas from other U.S. Attorneys conducting
investigations relating to certain of these transactions. In particular, Berkshire and General Re have been responding to requests from
the government for information relating to certain transactions that may have been accounted for incorrectly by counterparties of
General Reinsurance (or its subsidiaries or affiliates). The government has interviewed a number of current and former officers and
employees of General Re and General Reinsurance as well as Berkshire’s Chairman and CEO, Warren E. Buffett, in connection with
these investigations.
In one case, a transaction initially effected with American International Group (“AIG”) in late 2000 (the “AIG Transaction”),
AIG has corrected its prior accounting for the transaction on the grounds, as stated in AIG’s 2004 10-K, that the transaction was done
to accomplish a desired accounting result and did not entail sufficient qualifying risk transfer to support reinsurance accounting.
General Reinsurance has been named in related civil actions brought against AIG. As part of their ongoing investigations,
governmental authorities have also inquired about the accounting by certain of Berkshire’s insurance subsidiaries for certain assumed
and ceded finite reinsurance transactions.
In June 2005, John Houldsworth, the former Chief Executive Officer of Cologne Reinsurance Company (Dublin) Limited
(“CRD”), a subsidiary of General Re, and Richard Napier, a former Senior Vice President of General Re who had served as an
account representative for the AIG account, each pleaded guilty to a federal criminal charge of conspiring with others to misstate
certain AIG financial statements in connection with the AIG Transaction and entered into a partial settlement agreement with the
SEC with respect to such matters.
On February 25, 2008, Ronald Ferguson, General Re’s former Chief Executive Officer, Elizabeth Monrad, General Re’s
former Chief Financial Officer, Christopher Garand, a former General Reinsurance Senior Vice President and Robert Graham, a
former General Reinsurance Senior Vice President and Assistant General Counsel, were each convicted in a trial in the U.S. District
Court for the District of Connecticut on charges of conspiracy, mail fraud, securities fraud and making false statements to the SEC in
connection with the AIG Transaction. These individuals have the right to appeal their convictions. Each of these individuals, who
had previously received a “Wells” notice in 2005 from the SEC, is also the subject of an SEC enforcement action for allegedly aiding
and abetting AIG’s violations of the antifraud provisions and other provisions of the federal securities laws in connection with the
AIG Transaction. The SEC case is presently stayed. Joseph Brandon, the Chief Executive Officer of General Re, also received a
“Wells” notice from the SEC in 2005.
Berkshire understands that the government is evaluating the actions of General Re and its subsidiaries, as well as those of their
counterparties, to determine whether General Re or its subsidiaries conspired with others to misstate counterparty financial
statements or aided and abetted such misstatements by the counterparties. Berkshire believes that government authorities are
continuing to evaluate possible legal actions against General Re and its subsidiaries.
Various state insurance departments have issued subpoenas or otherwise requested that General Reinsurance, NICO and their
affiliates provide documents and information relating to non-traditional products. The Office of the Connecticut Attorney General has
also issued a subpoena to General Reinsurance for information relating to non-traditional products. General Reinsurance, NICO and
their affiliates have been cooperating fully with these subpoenas and requests.
Kolnische Ruckversicherungs-Gesellschaft AG (“Cologne Re”) has also cooperated fully with requests for information and
orders to produce documents from the German Federal Financial Supervisory Authority (“BaFin”) regarding the activities of Cologne
Re relating to “finite reinsurance” and regarding transactions between Cologne Re or its subsidiaries, including CRD, and certain
counterparties. The BaFin has concluded its investigation of Cologne Re concerning these matters.
In April 2005, the Australian Prudential Regulation Authority (“APRA”) announced an investigation involving financial or
finite reinsurance transactions by General Reinsurance Australia Limited (“GRA”), a subsidiary of General Reinsurance. An
inspector was appointed by APRA under section 52 of the Insurance Act 1973 to conduct an investigation of GRA’s financial or
finite reinsurance business. GRA and General Reinsurance cooperated fully with this investigation. On June 28, 2007, APRA
announced that it had concluded its investigation and imposed a condition on GRA’s license that requires it to maintain a majority of
independent directors on its local board.
CRD is also providing information to and cooperating fully with the Irish Financial Services Regulatory Authority in its
inquiries regarding the activities of CRD. The Office of the Director of Corporate Enforcement in Ireland is conducting a preliminary
evaluation in relation to CRD concerning, in particular, transactions between CRD and AIG. CRD is cooperating fully with this
preliminary evaluation.
47
Notes to Consolidated Financial Statements (Continued)
(19) Contingencies and Commitments (Continued)
Berkshire cannot at this time predict the outcome of these matters and is unable to estimate a range of possible loss and cannot
predict whether or not the outcomes will have a material adverse effect on Berkshire’s business or results of operations for at least the
quarterly period when these matters are completed or otherwise resolved.
b) Civil Litigation
Litigation Related to ROA
General Reinsurance and several current and former employees, along with numerous other defendants, have been sued in
thirteen federal lawsuits involving Reciprocal of America (“ROA”) and related entities. ROA was a Virginia-based reciprocal insurer
and reinsurer of physician, hospital and lawyer professional liability risks. Nine are putative class actions initiated by doctors,
hospitals and lawyers that purchased insurance through ROA or certain of its Tennessee-based risk retention groups. These
complaints seek compensatory, treble, and punitive damages in an amount plaintiffs contend is just and reasonable.
General Reinsurance is also subject to actions brought by the Virginia Commissioner of Insurance, as Deputy Receiver of
ROA, the Tennessee Commissioner of Insurance, as Receiver for purposes of liquidating three Tennessee risk retention groups, a
state lawsuit filed by a Missouri-based hospital group that was removed to federal court and another state lawsuit filed by an
Alabama doctor that was also removed to federal court. The first of these actions was filed in March 2003 and additional actions
were filed in April 2003 through June 2006. In the action filed by the Virginia Commissioner of Insurance, the Commissioner asserts
in several of its claims that the alleged damages are believed to exceed $200 million in the aggregate as against all defendants.
All of these cases are collectively assigned to the U.S. District Court for the Western District of Tennessee for pretrial
proceedings. General Reinsurance filed motions to dismiss all of the claims against it in these cases and, in June 2006, the court
granted General Reinsurance’s motion to dismiss the complaints of the Virginia and Tennessee receivers. The court granted the
Tennessee receiver leave to amend her complaint, and the Tennessee receiver filed her amended complaint on August 7, 2006.
General Reinsurance has filed a motion to dismiss the amended complaint in its entirety and that motion was granted, with the court
dismissing the claim based on an alleged violation of RICO with prejudice and dismissing the state law claims without prejudice.
One of the other defendants filed a motion for the court to reconsider the dismissal of the state law claims, requesting that the court
retain jurisdiction over them. That motion is pending.
The Tennessee Receiver subsequently filed three Tennessee state court actions against General Reinsurance, essentially
asserting the same state law claims that had been dismissed without prejudice by the Federal court. General Reinsurance removed
those actions to Federal court, and the Tennessee Receiver filed a motion to remand to state court. That motion is the subject of
briefing. General Reinsurance has filed a motion with the Judicial Panel on Multi-District Litigation to transfer the three Tennessee
state court actions now pending in the Middle District of Tennessee to the U.S. District Court for the Western District of Tennessee.
The Virginia receiver has moved for reconsideration of the dismissal and for leave to amend his complaint, which was opposed
by General Reinsurance. The court affirmed its original ruling but has given the Virginia receiver leave to amend. In September
2006, the court also dismissed the complaint filed by the Missouri-based hospital group. The Missouri-based hospital group has filed
a motion for reconsideration of the dismissal and for leave to file an amended complaint. General Reinsurance has filed its
opposition to that motion and awaits a ruling by the court. The court has also not yet ruled on General Reinsurance’s motions to
dismiss the complaints of the other plaintiffs. The parties have commenced discovery.
General Reinsurance filed a Complaint and a motion in federal court to compel the Tennessee and Virginia receivers to
arbitrate their claims against General Reinsurance. The receivers filed motions to dismiss the Complaint. These motions are
pending.
Actions related to AIG
General Reinsurance is a defendant in In re American International Group Securities Litigation, Case No. 04-CV-8141-(LTS),
United States District Court, Southern District of New York, a putative class action asserted on behalf of investors who purchased
publicly-traded securities of AIG between October 1999 and March 2005. The complaint, originally filed in April 2005, asserts
various claims against AIG and certain of its officers, directors, investment banks and other parties, including Messrs. Ferguson,
Napier and Houldsworth (whom the Complaint defines, together with General Reinsurance, as the “General Re Defendants”). The
Complaint alleges that the General Re Defendants violated Section 10(b) of the Securities Exchange Act and Rule 10b-5 in
connection with the AIG Transaction. The Complaint seeks damages and other relief in unspecified amounts. General Reinsurance
has answered the Complaint, denying liability and asserting various affirmative defenses. Document production has begun, but no
other discovery has taken place. No trial date has been scheduled.
A member of the putative class in the litigation described in the preceding paragraph has asserted similar claims against
General Re and Mr. Ferguson in a separate complaint, Florida State Board of Administration v. General Re Corporation, et al., Case
No. 06-CV-3967, United States District Court, Southern District of New York. The claims against General Re and Mr. Ferguson
closely resemble those asserted in the class action. The complaint does not specify the amount of damages sought. General Re has
answered the Complaint, denying liability and asserting various affirmative defenses. No trial date has been established. The parties
are coordinating discovery and other proceedings among this action, a similar action filed by the same plaintiff against AIG and
others, the class action described in the preceding paragraph, and the shareholder derivative actions described in the next paragraph.
On July 27, 2005, General Reinsurance received a Summons and a Verified and Amended Shareholder Derivative Complaint
in In re American International Group, Inc. Derivative Litigation, Case No. 04-CV-08406, United States District Court, Southern
District of New York. The complaint, brought by several alleged shareholders of AIG, seeks damages, injunctive and declaratory
relief against various officers and directors of AIG as well as a variety of individuals and entities with whom AIG did business,
48
(19) Contingencies and Commitments (Continued)
relating to a wide variety of allegedly wrongful practices by AIG. The allegations relating to General Reinsurance focus on the AIG
Transaction, and the complaint purports to assert causes of action in connection with that transaction for aiding and abetting other
defendants’ breaches of fiduciary duty and for unjust enrichment. The complaint does not specify the amount of damages or the
nature of any other relief sought. Subsequently, the New York Derivative Litigation was stayed by stipulation between the plaintiffs
and AIG. That stay remains in place.
In August 2005, General Reinsurance received a Summons and First Amended Consolidated Shareholders’ Derivative
Complaint in In re American International Group, Inc. Consolidated Derivative Litigation, Case No. 769-N, Delaware Chancery
Court. In June 2007, AIG filed an Amended Complaint in the Delaware Derivative Litigation asserting claims against two of its
former officers, but not against General Reinsurance. On September 28, 2007, AIG and the shareholder plaintiffs filed a Second
Combined Amended Complaint, in which AIG asserted claims against certain of its former officers and the shareholder plaintiffs
asserted claims against a number of other defendants, including General Reinsurance and General Re. The claims asserted in the
Delaware complaint are substantially similar to those asserted in the New York derivative complaint, except that the Delaware
complaint makes clear that the plaintiffs are asserting claims against both General Reinsurance and General Re. General Reinsurance
and General Re filed a motion to dismiss on November 30, 2007. Various parties moved to stay discovery and/or all proceedings in
the Delaware Derivative Litigation. At a hearing held on February 12, 2008, the Court ruled that discovery would be stayed pending
the resolution of the claims asserted against AIG in the AIG Securities Litigation. The parties are currently formulating the text of a
stipulation implementing the Court’s ruling and establishing a briefing schedule on the motions to dismiss.
FAI/HIH Matter
In December 2003, the Liquidators of both FAI Insurance Limited (“FAI”) and HIH Insurance Limited (“HIH”) advised GRA
and Cologne Re that they intended to assert claims arising from insurance transactions GRA entered into with FAI in May and June
1998. In August 2004, the Liquidators filed claims in the Supreme Court of New South Wales in order to avoid the expiration of a
statute of limitations for certain plaintiffs. The focus of the Liquidators’ allegations against GRA and Cologne Re are the 1998
transactions GRA entered into with FAI (which was acquired by HIH in 1999). The Liquidators contend, among other things, that
GRA and Cologne Re engaged in deceptive conduct that assisted FAI in improperly accounting for such transactions as reinsurance,
and that such deception led to HIH’s acquisition of FAI and caused various losses to FAI and HIH. The Liquidator of HIH served its
Complaint on GRA and Cologne Re in June 2006 and discovery is ongoing. The FAI Liquidator dismissed his complaint against
GRA and Cologne Re.
Berkshire has established reserves for certain of the legal proceedings discussed above where it has concluded that the
likelihood of an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. For other legal
proceedings discussed above, either Berkshire has determined that an unfavorable outcome is reasonably possible but it is unable to
estimate a range of possible losses or it is unable to predict the outcome of the matter. Management believes that any liability to the
Company that may arise as a result of current pending civil litigation, including the matters discussed above, will not have a material
effect on Berkshire’s financial condition or results of operations.
c) Commitments
Berkshire subsidiaries lease certain manufacturing, warehouse, retail and office facilities as well as certain equipment. Rent
expense for all leases was $648 million in 2007, $578 million in 2006 and $432 million in 2005. Minimum rental payments for
operating leases having initial or remaining non-cancelable terms in excess of one year are as follows. Amounts are in millions.
2008
$541
2009
$457
2010
$351
2011
$272
2012
$214
After
2012
$661
Total
$2,496
Several of Berkshire’s subsidiaries have made long-term commitments to purchase goods and services used in their businesses.
The most significant of these relate to NetJets’ commitments to purchase up to 541 aircraft through 2015 and MidAmerican’s
commitments to purchase coal, electricity and natural gas. Commitments under all such subsidiary arrangements are approximately
$7.3 billion in 2008, $3.9 billion in 2009, $3.6 billion in 2010, $2.6 billion in 2011, $1.7 billion in 2012 and $6.9 billion after 2012.
As of December 31, 2007 Berkshire is contractually obligated to acquire 60% of Marmon Holdings, Inc. (“Marmon”) for $4.5
billion in cash. Once the initial acquisition is completed, Berkshire will then become obligated to acquire the remaining minority
shareholders’ interests (40%) in stages between 2011 and 2014. Based upon the initial purchase price, the cost to Berkshire of the
minority shareholders’ interest would be $3.0 billion. However, the consideration payable for the minority shareholders’ interest is
contingent upon future operating results of Marmon and the per share cost could be greater than or less than the initial per share price.
(For additional information see Note 2).
Berkshire is also obligated under certain conditions to acquire minority ownership interests of certain consolidated, but not
wholly-owned subsidiaries, pursuant to the terms of certain shareholder agreements with the minority shareholders. The
consideration payable for such interests is generally based on the fair value of the subsidiary. Were Berkshire to have acquired all
such outstanding minority ownership interest holdings as of December 31, 2007, the cost to Berkshire would have been
approximately $4 billion. However, the timing and the amount of any such future payments that might be required are contingent on
future actions of the minority owners and future operating results of the related subsidiaries.
49
Notes to Consolidated Financial Statements (Continued)
(20) Supplemental cash flow information
A summary of supplemental cash flow information for each of the three years ending December 31, 2007 is presented in the
following table (in millions).
Cash paid during the year for:
2007
2006
2005
Income taxes .............................................................................................................................
Interest of finance and financial products businesses................................................................
Interest of utilities and energy businesses .................................................................................
Interest of insurance and other businesses ................................................................................
$5,895
569
1,118
182
$4,959
514
937
195
$2,695
484
—
149
Non-cash investing and financing activities:
Investments received in connection with the Equitas reinsurance transaction ..........................
Liabilities assumed in connection with acquisitions of businesses ...........................................
Fixed maturity securities sold or redeemed offset by decrease in directly related repurchase
6,529
612
—
12,727
agreements .........................................................................................................................
Value of equity securities and warrants exchanged for other equity securities .........................
599
258
460
—
—
2,163
4,693
5,877
(21) 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.
2007
Revenues..............................................................................................................
Net earnings * ......................................................................................................
Net earnings per equivalent Class A common share ............................................
1st
Quarter
$32,918
2,595
1,682
2nd
Quarter
$27,347
3,118
2,018
3rd
Quarter
$29,937
4,553
2,942
4th
Quarter
$28,043
2,947
1,904
2006
Revenues.............................................................................................................. $22,763
2,313
Net earnings * ......................................................................................................
1,501
Net earnings per equivalent Class A common share ............................................
$24,185
2,347
1,522
$25,360
2,772
1,797
$26,231
3,583
2,323
*
Includes investment gains/losses, which, for any given period have no predictive value and variations in amount from period to
period have no practical analytical value in view of the unrealized appreciation in Berkshire’s investment portfolio and includes
derivative contract gains/losses, which may include significant amounts related to non-cash fair value changes to long-term
contracts arising from short-term changes in equity prices, interest rate and foreign currency rates, among other factors.
Derivative contract gains/losses therefore have little predictive value and minimal analytical value in relation to reported
earnings. After-tax investment and derivative gains/losses for the periods presented above are as follows (in millions):
Investment and derivative gains/losses – 2007....................................................
Investment and derivative gains/losses – 2006....................................................
1st
2nd
Quarter Quarter
$608
294
$382
526
3rd
Quarter
$1,992
174
4th
Quarter
$597
715
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, hurricane or an act
of terrorism 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.
50
BERKSHIRE HATHAWAY INC.
and Subsidiaries
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
income taxes and minority interests and are in millions.
2007
2006
2005
Insurance – underwriting...............................................................................................
Insurance – investment income .....................................................................................
Utilities and energy .......................................................................................................
Manufacturing, service and retailing.............................................................................
Finance and financial products......................................................................................
Other .............................................................................................................................
Investment and derivative gains/losses .........................................................................
$ 2,184
3,510
1,114
2,353
632
(159)
3,579
$ 2,485
3,120
885
2,131
732
(47)
1,709
$ 27
2,412
523
1,646
514
(124)
3,530
Net earnings......................................................................................................
$13,213
$11,015
$8,528
Berkshire’s operating businesses are managed on an unusually decentralized basis. There are essentially no centralized
or integrated business functions (such as sales, marketing, purchasing, legal or human resources) and there is minimal
involvement by Berkshire’s corporate headquarters in the day-to-day business activities of the operating businesses. Berkshire’s
corporate office management participates in and is ultimately responsible for significant capital allocation decisions, investment
activities and the selection of the Chief Executive to head each of the operating businesses. The business segment data (Note 18
to the 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. Amounts
are in millions.
Underwriting gain (loss) attributable to:
GEICO ....................................................................................................................
General Re ..............................................................................................................
Berkshire Hathaway Reinsurance Group................................................................
Berkshire Hathaway Primary Group.......................................................................
Pre-tax underwriting gain..............................................................................................
Income taxes and minority interests..............................................................................
$ 1,113
555
1,427
279
3,374
1,190
$ 1,314
526
1,658
340
3,838
1,353
$ 1,221
(334)
(1,069)
235
53
26
2007
2006
2005
Net underwriting gain.......................................................................................
$ 2,184
$ 2,485
$ 27
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 and reinsurance businesses are: (1) GEICO, (2) General Re, (3)
Berkshire Hathaway Reinsurance Group and (4) Berkshire Hathaway Primary Group.
Berkshire’s management views insurance businesses as possessing two distinct operations – underwriting and
investing. Underwriting decisions are the responsibility of the unit managers; investing, with limited exceptions at GEICO and
General Re’s international operations, is the responsibility of Berkshire’s Chairman and CEO, Warren E. Buffett. Accordingly,
Berkshire evaluates performance of underwriting operations without any allocation of investment income.
Periodic underwriting results can be affected significantly by changes in estimates for unpaid losses and loss
adjustment expenses, including amounts established for occurrences in prior years. See the Critical Accounting Policies section
of this discussion for information concerning the loss reserve estimation process. In addition, the timing and amount of
catastrophe losses produce significant volatility in periodic underwriting results. During the third quarter of 2005, Hurricanes
Katrina and Rita struck the Gulf Coast region of the United States producing the largest catastrophe losses for any quarter in the
history of the property/casualty insurance industry. In the fourth quarter of 2005, Hurricane Wilma struck the Southeast U.S.
Estimated pre-tax losses from these events of $3.4 billion were recorded in 2005. In contrast, there were no significant losses
from major catastrophe events in 2006 or 2007.
51
Management’s Discussion (Continued)
Insurance — Underwriting (Continued)
A key marketing strategy followed by all of these businesses is the maintenance of extraordinary capital strength.
Statutory surplus of Berkshire’s insurance businesses was approximately $62 billion at December 31, 2007. This superior capital
strength creates opportunities, especially with respect to reinsurance activities, to negotiate and enter into insurance and
reinsurance contracts specially designed to meet the unique needs of 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 49 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 via the Internet, over the telephone or through the mail. This is a significant element in GEICO’s strategy to be a
low-cost insurer. In addition, GEICO strives to provide excellent service to customers, with the goal of establishing long-term
customer relationships.
GEICO’s underwriting results for the past three years are summarized below. Dollars are in millions.
Premiums written ...............................................................
2007
Amount
$11,931
%
2006
Amount
$11,303
Premiums earned................................................................
Losses and loss adjustment expenses .................................
Underwriting expenses.......................................................
Total losses and expenses...................................................
Pre-tax underwriting gain...................................................
$11,806
8,523
2,170
10,693
$ 1,113
100.0
72.2
18.4
90.6
$11,055
7,749
1,992
9,741
$ 1,314
%
100.0
70.1
18.0
88.1
2005
Amount
$10,285
%
$10,101
7,128
1,752
8,880
$ 1,221*
100.0
70.6
17.3
87.9
* Net of losses of $200 million from Hurricanes Katrina, Rita and Wilma.
Premiums earned in 2007 and 2006 increased 6.8% and 9.4%, respectively, over the corresponding prior year amounts.
The growth in premiums earned for voluntary auto in 2007 was 6.6%, which was less than the 8.8% increase in policies-in-force
during the past year as average premiums per policy continue to slowly decline. Average premiums per policy in 2008 are
expected to be relatively unchanged from 2007. Policies-in-force also increased over the last twelve months in the preferred risk
markets (8.4%) and in the standard and nonstandard markets (10.0%). Voluntary auto new business sales increased 5.0% in
2007 as compared to the prior year. Voluntary auto policies-in-force at December 31, 2007 were 656,000 higher than at
December 31, 2006.
Losses and loss adjustment expenses in 2007 were $8,523 million, an increase of 10.0% over 2006. The loss ratio
increased to 72.2% in 2007 compared to 70.1% in 2006 and 70.6% in 2005. The increase in the loss ratio in 2007 in part reflects
the aforementioned decline in average premiums per policy attributable to rate decreases. In 2007, claims frequencies for
physical damage coverages increased in the two to four percent range over 2006 while frequencies for injury coverages
decreased in the three to five percent range. Physical damage severities increased in the second half of 2007 at an annualized rate
of two to four percent. Injury severities also began to increase in the latter part of 2007 at an annualized rate of three to six percent.
Incurred losses from catastrophe events were approximately $34 million in 2007, $54 million in 2006 and $227 million in 2005
(primarily from the hurricanes in the third and fourth quarters).
Underwriting expenses in 2007 were $2,170 million, an increase of 8.9% over 2006, which increased 13.7% over 2005.
The increases in expenses in both years primarily reflected higher advertising costs as well as increased personnel costs to
service the growth of policies-in-force.
General Re
General Re conducts a reinsurance business offering property and casualty and life and health coverages to clients
worldwide. Property and casualty reinsurance is written in North America on a direct basis through General Reinsurance
Corporation and internationally through 95% owned Cologne Re (based in Germany) and other wholly-owned affiliates.
Property and casualty reinsurance is also written through brokers with respect to Faraday in London. Life and health reinsurance
is written worldwide through Cologne Re. General Re strives to generate underwriting gains in essentially all of its product
lines. Underwriting performance is not evaluated based upon market share and underwriters are instructed to reject inadequately
priced risks. General Re’s underwriting results are summarized for the past three years in the following table. Amounts are in
millions.
Property/casualty.............
Life/health .......................
Premiums written
2006
$3,581
2,368
$5,949
2007
$3,478
2,479
$5,957
2005
$3,852
2,303
$6,155
Premiums earned
2006
$3,711
2,364
$6,075
2007
$3,614
2,462
$6,076
2005
$4,140
2,295
$6,435
Pre-tax underwriting
gain (loss)
2006
$ 373
153
$ 526
2005
$ (445)*
111
$ (334)
2007
$ 475
80
$ 555
*
Includes losses of $685 million from Hurricanes Katrina, Rita and Wilma.
52
Insurance — Underwriting (Continued)
Property/casualty
Premiums written in 2007 declined 2.9% from amounts written in 2006 which declined 7.0% from amounts written in
2005. Premiums written in 2007 included $114 million with respect to a reinsurance to close transaction that increased General
Re’s economic interest in the runoff of the Lloyd’s Syndicate 435’s 2001 year of account from 60% to 100%. There was no
similar transaction in 2006 or 2005. Excluding the effect of the reinsurance to close transaction and the effects of foreign
currency translation, premiums written declined 10.9% when compared to 2006 which decreased 5.7% when compared to 2005.
Premiums earned in 2007 declined 2.6% from amounts earned in 2006 which declined 10.4% from amounts earned in 2005.
Excluding the effects of the reinsurance to close transaction discussed above and the effects of foreign currency translation,
premiums earned declined 10.1% in 2007 as compared to 2006 and 11.3% in 2006 as compared to 2005. The overall
comparative declines in written and earned premiums in the past three years reflected continued underwriting discipline by
rejecting transactions where pricing is deemed inadequate with respect to the risk as well as significant decreases in finite risk
business. Competition within the industry could lead to further declines in 2008.
Pre-tax underwriting results in 2007 included $519 million in underwriting gains from property business partially
offset by $44 million in underwriting losses from casualty/workers’ compensation business. The property business produced
underwriting gains of $90 million for the 2007 accident year and $429 million from favorable run-off of prior years’ property
losses. Although the current accident year results included $192 million of catastrophe losses, property results generally
reflected relatively low loss levels. The timing and magnitude of catastrophe and large individual losses produces significant
volatility in periodic underwriting results. The pre-tax underwriting losses from casualty business in 2007 included $120 million
of workers’ compensation accretion of discount and deferred charge amortization, as well as legal costs associated with various
ongoing finite reinsurance investigations. These charges were largely offset by underwriting gains in other casualty business.
Pre-tax underwriting results in 2006 included $708 million in underwriting gains from property business partially
offset by $335 million in underwriting losses from casualty/workers’ compensation business and legal and estimated settlement
costs associated with the finite reinsurance investigations. The property business produced underwriting gains of $317 million
for the 2006 accident year and $391 million from favorable run-off of prior years’ losses. The 2006 accident year results also
benefited from a lack of catastrophe losses. The underwriting losses from casualty business in 2006 included $137 million in
discount accretion and deferred charge amortization, increases in prior years’ workers’ compensation reserves of $103 million
arising from the continuing escalation of medical utilization and cost inflation as well as increases in asbestos and environmental
reserves which were somewhat offset by net decreases in prior years’ reserves for other casualty coverages.
The 2005 pre-tax underwriting loss of $445 million included approximately $685 million in losses from three major
hurricanes in 2005 (Katrina, Rita and Wilma). Otherwise, underwriting results for the 2005 accident year generally benefited
from re-pricing efforts and improved coverage terms and conditions put into place over the preceding few years as well as
favorable aviation and non-catastrophe property business. Underwriting results in 2005 also included losses attributable to prior
accident years consisting of net reserve increases on workers’ compensation of $228 million, asbestos and environmental mass
tort exposures of $102 million and $136 million in discount accretion and deferred charge amortization. Offsetting these prior
years’ losses were $527 million in gains from net reserve decreases in other casualty lines and property lines.
Life/health
Premiums earned in 2007 increased 4.1% over 2006 which increased 3.0% over 2005. Adjusting for the effects of
foreign currency translation, premiums earned were relatively unchanged in 2007 and increased 2.3% in 2006 when compared to
2005. The increase in premiums earned in 2006 was primarily from life business in Europe.
Underwriting results for the global life/health operations produced pre-tax underwriting gains of $80 million in 2007,
$153 million in 2006 and $111 million in 2005. Results for continuing operations were profitable in each of the past three years
primarily due to favorable mortality with respect to life business. Included in the underwriting results for 2007, 2006 and 2005
were $105 million, $31 million and $66 million, respectively, of net losses attributable to reserve increases on certain U.S. health
coverages related to workers’ compensation and long-term-care business that has been in run-off for several years.
53
Management’s Discussion (Continued)
Insurance — Underwriting (Continued)
Berkshire Hathaway Reinsurance Group
The Berkshire Hathaway Reinsurance Group (“BHRG”) underwrites excess-of-loss reinsurance and quota-share
coverages for insurers and reinsurers worldwide. BHRG’s business includes catastrophe excess-of-loss reinsurance and excess
direct and facultative reinsurance for large or otherwise unusual discrete property risks referred to as individual risk. Retroactive
reinsurance policies provide indemnification of losses and loss adjustment expenses with respect to past loss events. Other
multi-line refers to other business written on both a quota-share and excess basis, participations in and contracts with Lloyd’s
syndicates as well as property, aviation and workers’ compensation programs. The timing and amount of catastrophe losses can
produce extraordinary volatility in BHRG’s periodic underwriting results. BHRG’s underwriting results are summarized below.
Amounts are in millions.
Catastrophe and individual risk .............................. $ 1,577
7,708
Retroactive reinsurance ..........................................
Other multi-line ......................................................
2,617
$11,902
2007
Premiums earned
2006
$2,196
146
2,634
$4,976
2005
$1,663
10
2,290
$3,963
Pre-tax underwriting gain (loss)
2005
2006
2007
$(1,178)
$1,588
$1,477
(214)
(173)
(375)
325
$1,427
243
$1,658
323
$(1,069)*
*
Includes losses of $2.5 billion from Hurricanes Katrina, Rita and Wilma.
Catastrophe and individual risk contracts may provide exceptionally large limits of indemnification, often several
hundred million dollars and occasionally in excess of $1 billion, and cover catastrophe risks (such as hurricanes, earthquakes or
other natural disasters) or other property risks (such as aviation and aerospace, commercial multi-peril or terrorism). Premiums
earned from catastrophe and individual risk contracts in 2007 declined 28% from 2006 which increased 32% over 2005.
Catastrophe and individual risk premiums written were approximately $1.2 billion in 2007, $2.4 billion in 2006 and $1.8 billion
in 2005. The decrease in written and earned premiums in 2007 was principally attributable to increased industry capacity for
catastrophe reinsurance which has produced increased price competition and fewer opportunities to write business. The level of
catastrophe and individual risk business written in a given period will vary significantly based upon market conditions and
management’s assessment of the adequacy of premium rates.
The underwriting results from catastrophe and individual risk business in 2007 and 2006 reflected no significant losses
from catastrophe events during those years. In 2006, BHRG incurred losses of approximately $200 million attributable to prior
years’ events, primarily Hurricane Wilma which occurred in the fourth quarter of 2005. The underwriting results in 2005
included estimated losses of approximately $2.4 billion from Hurricanes Katrina, Rita and Wilma. The timing and magnitude of
losses produce extraordinary volatility in periodic underwriting results of BHRG’s catastrophe and individual risk business.
BHRG does not cede catastrophe and individual risks to mitigate the volatility. Management accepts such potential volatility
provided that the long-term prospect of achieving underwriting profits is reasonable.
Retroactive policies normally provide very large, but limited, indemnification of unpaid losses and loss adjustment
expenses with respect to past loss events that are expected to be paid over long periods of time. The underwriting losses from
retroactive reinsurance are primarily attributable to the amortization of deferred charges established on the contracts. At the
inception of the contract, deferred charges represent the difference between the premium received and the estimated ultimate loss
reserves payable. Deferred charges are amortized over the estimated claims payment period using the interest method. The
amortization charges are based on the estimated timing and amount of loss payments and are recorded as a component of losses
and loss adjustment expenses.
Premiums earned from retroactive reinsurance in 2007 included $7.1 billion from the Equitas reinsurance agreement
which became effective on March 30, 2007. See Note 11 to the accompanying Consolidated Financial Statements. At the
inception of the Equitas contract, estimated liabilities for losses and loss adjustment expenses of $9.3 billion and an asset for
deferred charges reinsurance assumed of $2.2 billion were recorded. At December 31, 2007, unamortized deferred charges for
all of BHRG’s retroactive contracts (including the Equitas contract) were approximately $3.8 billion and gross unpaid losses
were approximately $17.3 billion.
The underwriting loss from retroactive policies in 2007 included deferred charge amortization of $156 million on
contracts written in 2007 (primarily the Equitas contract). There were no significant reserve changes in 2007 related to pre-2007
contracts. Underwriting losses from retroactive reinsurance in 2006 are net of gains of approximately $145 million which
primarily derived from contracts that were commuted or amended during the last half of 2006. Underwriting losses in 2005 from
retroactive reinsurance are net of a gain of approximately $46 million related to the commutation of a contract.
Other multi-line premiums earned in 2007 reflect significant increases in property business and significant decreases in
casualty excess reinsurance. In addition, the management of certain workers’ compensation business was transferred to the
Berkshire Hathaway Primary Group and the results for this business are now included in that group’s results. Premiums earned
from other multi-line business increased in 2006 as compared to 2005 due to growth in workers’ compensation business. Multi-
line business produced a pre-tax underwriting gain of $325 million in 2007 and $243 million in 2006 reflecting relatively low
loss ratios on property business and favorable loss experience on workers’ compensation business. Underwriting results in 2005
included estimated losses of approximately $100 million from Hurricanes Katrina, Rita and Wilma.
54
Insurance — Underwriting (Continued)
Berkshire Hathaway Reinsurance Group (Continued)
Effective January 1, 2008, BHRG entered into a reinsurance agreement with Swiss Reinsurance Company and its
property-casualty affiliates (“Swiss Re”). Under the agreement, BHRG will assume a 20% quota-share of the premiums and
related losses and expenses on all property-casualty risks of Swiss Re incepting over the five year period ending December 31,
2012. If recent years’ volumes were to continue over the next five years, the annual written premium assumed under this
agreement would be in the $3 billion range, however actual premiums assumed over the five year period could vary significantly
depending on market conditions and opportunities.
Berkshire Hathaway Primary Group
Berkshire’s primary insurance group consists 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; U.S. Investment Corporation, 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. Also included are Medical Protective Corporation (“MedPro”), a
provider of professional liability insurance to physicians, dentists and other healthcare providers acquired on June 30, 2005 and
Applied Underwriters, a provider of integrated workers’ compensation solutions acquired on May 19, 2006. Underwriting results
for these two businesses are included in the Berkshire Hathaway Primary Group results beginning on their respective acquisition
dates.
Collectively, Berkshire’s primary insurance businesses produced earned premiums of $1,999 million in 2007, $1,858
million in 2006 and $1,498 million in 2005. The significant increase in premiums earned in 2006 was primarily attributable to
the impact of the MedPro and Applied Underwriters acquisitions partially offset by a decline in volume of the NICO Primary
Group. Pre-tax underwriting gains as percentages of premiums earned were approximately 14% in 2007, 18% in 2006 and 16%
in 2005. Underwriting gains were achieved by all significant primary insurance businesses.
Insurance — Investment Income
A summary of the net investment income of Berkshire’s insurance operations for the past three years follows. Amounts
are in millions.
Investment income before taxes......................................................................................
Income taxes and minority interests................................................................................
Investment income after taxes and minority interests .....................................................
2007
$4,758
1,248
$3,510
2006
$4,316
1,196
$3,120
2005
$3,480
1,068
$2,412
Investment income consists of interest and dividends earned on cash equivalents and fixed maturity and equity
investments of Berkshire’s insurance businesses. Pre-tax investment income earned in 2007 by Berkshire’s insurance businesses
increased $442 million (10%) over 2006 which increased $836 million (24%) over 2005. The increases in 2007 and 2006 over
the preceding year reflect increased invested assets, higher short-term interest rates in the United States and increased dividend
rates on certain equity investments.
A summary of cash and investments held in Berkshire’s insurance businesses follows. Amounts are in millions.
Cash and cash equivalents...............................................................................................
Equity securities ..............................................................................................................
Fixed maturity securities .................................................................................................
2007
$ 28,257
74,681
27,922
$130,860
2006
$ 34,590
61,168
25,272
$121,030
2005
$ 38,814
46,412
27,385
$112,611
Fixed maturity investments as of December 31, 2007 were as follows. Amounts are in millions.
U.S. Treasury, government corporations and agencies .................................................
States, municipalities and political subdivisions ...........................................................
Foreign governments.....................................................................................................
Corporate bonds and redeemable preferred stocks, investment grade...........................
Corporate bonds and redeemable preferred stocks, non-investment grade....................
Mortgage-backed securities...........................................................................................
Amortized
cost
$ 3,487
2,120
9,529
4,223
3,589
3,592
$26,540
Unrealized
gains/losses
$ 59
104
29
64
1,075
51
$ 1,382
Fair value
$ 3,546
2,224
9,558
4,287
4,664
3,643
$27,922
All U.S. government obligations are rated AAA by the major rating agencies and approximately 96% of all state,
municipal and political subdivisions, foreign government obligations and mortgage-backed securities were rated AA or higher.
Non-investment grade securities represent securities that are rated below BBB- or Baa3.
55
Management’s Discussion (Continued)
Insurance — Investment Income (Continued)
Invested assets derive from shareholder capital and reinvested earnings as well as net liabilities assumed under
insurance contracts or “float.” The major components of float are unpaid losses, unearned premiums and other liabilities to
policyholders less premiums and reinsurance receivables, deferred charges assumed under retroactive reinsurance contracts and
deferred policy acquisition costs. Float approximated $59 billion at December 31, 2007, $51 billion at December 31, 2006 and
$49 billion at December 31, 2005. The increase in float in 2007 was principally due to the Equitas reinsurance transaction. The
cost of float, as represented by the ratio of underwriting gain or loss to average float, was negative for the last three years, as
Berkshire’s insurance businesses generated underwriting gains in each year.
Utilities and Energy (“MidAmerican”)
Revenues and earnings of MidAmerican for each of the past three years are summarized below. Amounts are in
millions.
MidAmerican Energy Company ...............................
PacifiCorp ..................................................................
Natural gas pipelines..................................................
U.K. utilities...............................................................
Real estate brokerage.................................................
Other ..........................................................................
Earnings before corporate interest and taxes.............
Interest, other than to Berkshire ................................
Interest on Berkshire junior debt ...............................
Income taxes and minority interests **.....................
Net earnings ...................................................
Earnings applicable to Berkshire *............................
Debt owed to others at December 31 ........................
Debt owed to Berkshire at December 31 ..................
2007
$ 4,325
4,319
1,088
1,114
1,511
271
$12,628
Revenues
2006
$ 3,519
2,971
972
961
1,724
497
$10,644
2005
$3,200
—
909
921
1,894
356
$7,280
2007
$ 412
692
473
337
42
130
2,086
(312)
(108)
(477)
$ 1,189
$ 1,114
19,002
821
Earnings
2006
$ 348
356
376
338
74
245
1,737
(261)
(134)
(426)
$ 916
$ 885
16,946
1,055
2005
$ 288
—
309
308
148
124
1,177
(200)
(157)
(257)
$ 563
$ 523
10,296
1,289
* Net of minority interests and includes interest earned by Berkshire (net of related income taxes).
** Net of $58 million deferred income tax benefit in 2007 as a result of the reduction in the United Kingdom corporate income
tax rate from 30% to 28% which was enacted during the third quarter of 2007 and will be effective in 2008. Includes
additional income tax charges of $49 million in 2005 related to Berkshire’s accounting for MidAmerican under the equity
method.
Revenues in 2007 from MidAmerican Energy Company (“MEC”) increased $806 million (23%) over 2006. MEC’s
non-regulated energy sales in 2007 exceeded 2006 by $597 million primarily due to increased electric sales volume and prices
driven by improved market opportunities. MEC’s regulated retail and wholesale electricity sales in 2007 exceeded 2006 by $155
million, which reflected the impact of new generating assets in 2007 and improved market opportunities in wholesale markets as
well as higher unit sales attributable to warmer summer temperatures and increases in the average number of retail customers.
Earnings before corporate interest and taxes (“EBIT”) of MEC in 2007 increased $64 million (18%), reflecting the margins on
the increases in regulated and nonregulated energy sales, partially offset by higher facilities operating and maintenance costs.
Revenues in 2007 from PacifiCorp increased $1,348 million (45%) versus 2006. Revenues and EBIT of PacifiCorp for
2006 in the preceding table are included beginning as of the acquisition date (March 21, 2006). EBIT of PacifiCorp in 2007
increased $336 million (94%) versus 2006. In 2007, PacifiCorp’s revenues and EBIT were favorably impacted by regulatory-
approved rate increases and higher customer usage in retail markets, as well as increased margins on wholesale electricity sales,
partially offset by higher fuel and purchased power costs. Fuel costs increased due to the higher volumes and because of higher
average unit costs.
Revenues in 2007 from natural gas pipelines increased $116 million (12%) over 2006 due primarily to higher demand
and rates resulting from favorable market conditions and because revenues in 2006 reflected the impact of estimated rate case
refunds to customers with respect to an order by the Federal Energy Regulatory Commission. EBIT in 2007 from natural gas
pipelines increased $97 million (26%) over 2006 mainly due to comparatively higher revenue and lower depreciation due to
expected changes in depreciation rates in connection with a current rate proceeding.
Revenues from U.K. utilities in 2007 increased over the comparable 2006 period primarily attributable to the
strengthening of the Pound Sterling versus the U.S. dollar as well as higher gas production and electricity distribution revenues.
EBIT from the U.K. utilities in 2007 was essentially unchanged compared to 2006 as higher maintenance and depreciation costs
and the write-off of unsuccessful gas exploration costs offset the impact of higher revenues.
Revenues and EBIT from real estate brokerage declined 12% and 43%, respectively, compared to 2006, primarily due
to significantly lower transaction volume as a result of the slowdown in U.S. residential real estate activity. Revenues and EBIT
from other activities in 2006 included pre-tax gains of $117 million which was primarily from the disposal of equity securities.
There were no significant securities gains in 2007.
56
Manufacturing, Service and Retailing
Revenues and pre-tax earnings of the manufacturing, service and retailing businesses for each of the past three years
follows. Amounts are in millions.
McLane Company..........................................................
Shaw Industries ..............................................................
Other manufacturing ......................................................
Other service * ...............................................................
Retailing.........................................................................
Pre-tax earnings..............................................................
Income taxes and minority interests...............................
2007
$28,079
5,373
14,459
7,792
3,397
$59,100
Revenues
2006
$25,693
5,834
11,988
5,811
3,334
$52,660
2005
2007
$24,074 $ 232
5,723
436
9,260 2,037
968
4,728
274
3,111
$46,896
Earnings
2006
$ 229
594
1,756
658
289
2005
$ 217
485
1,335
329
257
$3,947
1,594
$2,353
$3,526
1,395
$2,131
$2,623
977
$1,646
* Management evaluates the results of NetJets using accounting standards for recognition of revenue and planned major
maintenance expenses that were generally accepted when Berkshire acquired NetJets but are no longer acceptable due to
subsequent changes in accounting standards adopted by the FASB. Revenues and pre-tax earnings for the other services
businesses shown above reflect these prior revenue and expense recognition methods. Revenues shown in this table are greater
than the amounts reported in Berkshire’s consolidated financial statements by $709 million in 2007, $781 million in 2006 and
$704 million in 2005. Pre-tax earnings included in this table for 2007, 2006 and 2005 exceed the amounts included in the
consolidated financial statements by $48 million, $79 million and $63 million, respectively.
McLane Company
McLane Company, Inc., (“McLane”) is a wholesale distributor of grocery and non-food products to retailers,
convenience stores and restaurants. McLane’s business is marked by high sales volume and very low profit margins. McLane’s
revenues in 2007 increased $2,386 million (9%) as compared to 2006 which increased $1,619 million (7%) as compared to 2005.
The comparative revenue increases reflect additional grocery and foodservice customers as well as manufacturer price increases
and state excise tax increases which are passed on to customers.
Pre-tax earnings in 2007 increased $3 million over 2006 which increased $12 million over 2005. The increases reflect
the increase in sales volume, partially offset by lower gross margins. The gross margin rate in 2007 was 5.79% versus 5.85% in
2006 and 5.98% in 2005. In 2007, the gross margin rate was negatively impacted by excise tax increases as well as the effects of
increased competition. The impact of the reduced gross margin rate was partially offset by a decline in other operating expenses
as a percentage of revenues. Pre-tax earnings in 2007 also included a $10 million gain from a litigation settlement, which was
offset by an asset write down at a small novelty items distribution subsidiary. Approximately 33% of McLane’s annual revenues
are from sales to Wal-Mart. A curtailment of purchasing by Wal-Mart could have a material adverse impact on the earnings of
McLane.
Shaw Industries
Shaw Industries (“Shaw”) is the world’s largest manufacturer of tufted broadloom carpets and is a full-service flooring
company. Revenues of $5,373 million in 2007 declined $461 million (8%) from 2006. In 2007, carpet volume decreased 10%
versus 2006 due to lower sales in residential markets, partially offset by a modest increase in commercial market volume. The
continued slowdown in new housing construction is the primary driver behind lower residential market sales. In 2007, pre-tax
earnings decreased $158 million (27%) compared to 2006. The decline reflects the aforementioned lower sales volume and
higher product costs due primarily to comparatively higher raw material prices and lower manufacturing efficiencies as a result
of decreased production. These factors combined to produce declines in gross margin dollars in 2007 of approximately 17%
versus 2006. Selling, general and administrative costs in 2007 declined approximately 6% compared with 2006, reflecting lower
sales volume and expense control efforts. Residential housing construction activity is expected to remain slow during 2008 and
as a result, revenues and earnings will likely decline further.
In 2006, revenues increased $111 million (2%) and pre-tax earnings of $594 million increased $109 million (22%) as
compared to 2005. The increase in revenues reflected a 7% increase in the average square yard selling price for carpet, partially
offset by a 6% reduction in square yards sold. The comparative decline in 2006 square yards sold versus 2005 accelerated
during the third and fourth quarters which was attributable to the slowing of single-family housing construction and the effects of
accelerated customer purchases during the second half of 2005 in anticipation of price increases. The increase in pre-tax
earnings in 2006 over 2005 was primarily generated in the first six months of the year and was mainly attributable to a reduction
in manufacturing cost per unit deriving from the integration of carpet backing and nylon-fiber manufacturing operations acquired
by Shaw in the fourth quarter of 2005.
Other manufacturing
Berkshire’s other manufacturing businesses include a wide array of businesses. Included in this group are several
manufacturers of building products (Acme Building Brands, Benjamin Moore, Johns Manville and MiTek) and apparel (Fruit of
the Loom (includes the Russell athletic apparel and sporting goods business acquired in August 2006 and the women’s intimate
apparel business acquired from VF Corporation in April 2007), Garan, Fechheimers, Justin Brands and the H.H. Brown Shoe
Group). Also included in this group are Forest River, a leading manufacturer of leisure vehicles and the ISCAR Metalworking
57
Management’s Discussion (Continued)
Manufacturing, Service and Retailing (Continued)
Other manufacturing (Continued)
Companies (“IMC”), an industry leader in the metal cutting tools business with operations worldwide that was acquired in July
2006. In July 2007, Berkshire acquired two leading jewelry manufacturing and distribution companies (“Richline”) that design,
manufacture and distribute karat gold, silver and gem set jewelry to mass merchandisers, large jewelry chains, department stores
and home shopping networks. There are numerous other manufacturers of consumer and commercial products in this diverse
group.
Revenues in 2007 from other manufacturing activities were $14,459 million, an increase of $2,471 million (21%) over
2006. The comparative increase was primarily attributable to the businesses acquired since mid-2006 as well as a significant
increase from CTB, a manufacturer of equipment for the livestock and agricultural industries. Revenues from the building
products businesses declined $292 million in 2007 as demand for their products was negatively affected by the general
slowdown in housing construction activity.
Pre-tax earnings of the other manufacturing businesses were $2,037 million in 2007, an increase of $281 million (16%)
over 2006. The increases were primarily due to full-year inclusion in 2007 of IMC and increased earnings of CTB, partially
offset by a 22% decline in earnings of the building products businesses. Revenues and earnings from the building products
businesses will likely decline further in 2008 as a result of the continued weakness in residential housing construction.
Additionally, pre-tax earnings of Fruit of the Loom declined in 2007 as a result of operating losses from the newly acquired
women’s intimate apparel operations.
Revenues of the other manufacturing businesses in 2006 increased $2,728 million (29%) and pre-tax earnings
increased $421 million (32%) as compared to 2005. The acquisitions of Forest River (acquired August 2005), IMC and Russell
Corporation account for a substantial portion of these increases. Additionally, the building products group of businesses reported
increases in revenues and pre-tax earnings in 2006 as compared to the prior year.
Other service
Berkshire’s other service businesses include NetJets, the world’s leading provider of fractional ownership programs for
general aviation aircraft and FlightSafety, a provider of high technology training to operators of aircraft and ships. Among other
businesses included in this group are: TTI, a leading electronic components distributor (acquired March 2007); Business Wire, a
leading distributor of corporate news, multimedia and regulatory filings (acquired February 2006); The Pampered Chef, a direct
seller of high quality kitchen tools; International Dairy Queen, a licensor and service provider to about 6,000 stores that offer
prepared dairy treats and food; The Buffalo News, a publisher of a daily and Sunday newspaper; and businesses that provide
management and other services to insurance companies.
Revenues from the other service businesses in 2007 increased $1,981 million (34%) and pre-tax earnings increased
$310 million (47%) as compared to 2006. The increase in revenues and pre-tax earnings in 2007 versus 2006 was attributable to
the impact of business acquisitions (primarily TTI and Business Wire) as well as increased revenues and pre-tax earnings from
FlightSafety and NetJets. Both of these businesses benefited in 2007 from higher equipment (simulators and aircraft) utilization
rates and from increased customer demand.
Revenues from the other service businesses in 2006 increased $1,083 million (23%) and pre-tax earnings increased
$329 million (100%) as compared to 2005. These increases derived from significantly improved operating results of NetJets, as
well as increases in revenues and earnings for FlightSafety and the inclusion of the results of Business Wire. NetJets’ revenues
in 2006 increased $759 million as compared to 2005 and pre-tax earnings in 2006 were $143 million compared to a pre-tax loss
of $80 million in 2005. In 2006, occupied flight hours increased 19% and average hourly rates increased as well. The
improvement in operating results at NetJets also reflected a substantial decline in the cost of subcontracted flights that were
necessary to meet peak customer demand.
Retailing
Berkshire’s retailing operations consist of several home furnishings (Nebraska Furniture Mart, R.C. Willey, Star
Furniture and Jordan’s) and jewelry (Borsheims, Helzberg and Ben Bridge) retailers. Also included in this group is See’s
Candies. Revenues of $3.4 billion in 2007 increased $63 million (2%) versus 2006. Pre-tax earnings in 2007 of the retailing
businesses decreased $15 million (5%) compared to 2006 and was primarily attributable to lower revenues and earnings from
jewelry stores.
Revenues of the retail group in 2006 were $3.3 billion, an increase of $223 million (7%) versus 2005. Pre-tax earnings
in 2006 were $289 million, an increase of $32 million (12%) over 2005. Home furnishings revenues in 2006 included sales from
two new R.C. Willey stores of $77 million. In addition, same store home furnishings sales in 2006 increased approximately 6%
compared to 2005. A significant portion of the increase in pre-tax earnings was due to a $27 million increase at See’s Candies.
58
Finance and Financial Products
A summary of revenues and pre-tax earnings from Berkshire’s finance and financial products businesses follows.
Amounts are in millions.
Manufactured housing and finance.............................
Furniture/transportation equipment leasing................
Other...........................................................................
Pre-tax earnings .............................................................
Income taxes and minority interests..............................
2007
$3,665
810
644
$5,119
Revenues
2006
$3,570
880
674
$5,124
2005
$3,175
856
528
$4,559
2007
$ 526
111
369
1,006
374
$ 632
Earnings
2006
$ 513
182
462
1,157
425
$ 732
2005
$ 416
173
233
822
308
$ 514
Revenues from manufactured housing and finance activities (Clayton Homes) increased $95 million (3%) as compared
to 2006. In 2007, interest income from financing activities increased $70 million (7%) over 2006 reflecting higher average
installment loan balances. Installment loan balances outstanding as of December 31, 2007 were approximately $11.1 billion
compared to $9.9 billion and $9.5 billion at the end of 2006 and 2005. Pre-tax earnings of Clayton Homes increased $13 million
(3%) over 2006 reflecting a $30 million increase in net interest earned and lower credit losses partially offset by an overall 5%
decline in sales of manufactured homes. Installment loans originated or acquired by subsidiaries of Clayton Homes are financed
primarily with proceeds from debt issued by Berkshire Hathaway Finance Corporation (“BHFC”). In September 2007 and
January 2008, BHFC issued an aggregate of $2.75 billion par amount of new notes at interest rates that are on average
approximately 72 basis points higher than notes that matured in the second half of 2007 and January 2008. Accordingly, net
interest earned from financing activities may decline in 2008.
The increase in revenues in 2006 as compared to 2005 from Clayton Homes was primarily attributable to increased
sales of manufactured homes of $302 million due to increased sales of higher priced homes as well as an increase in total units
sold. Pre-tax earnings from Clayton Homes in 2006 increased $97 million (23%) as compared to 2005 which was due to
increased interest income from higher average installment loan balances as a result of loan portfolio acquisitions in 2005.
Revenues and pre-tax earnings from furniture/transportation equipment leasing activities for 2007 decreased $70
million (8%) and $71 million (39%), respectively, as compared to 2006. The declines primarily reflect lower rental income
driven by lower utilization rates for the over-the-road trailer and storage units. Due to significant cost components of this
business being fixed (depreciation and facility expenses), pre-tax earnings declined disproportionately to revenues.
Revenues of other finance business activities consist primarily of interest income earned on short-term and other fixed
maturity investments. Pre-tax earnings in 2007 reflected a charge of approximately $67 million from the adverse effects of
changes in mortality assumptions on certain life annuity contract liabilities. In 2006, pre-tax earnings included income of $67
million from an equity commitment fee and in 2005 pre-tax earnings included losses of $137 million from the General Re
derivatives business, which has now completed a major portion of its run-off, and Berkshire’s investment in Value Capital, a
partnership interest that was liquidated as of June 30, 2006.
Investment and Derivative Gains/Losses
A summary of investment and derivative gains and losses follows. Amounts are in millions.
Investment gains/losses from -
Sales and other disposals of investments -
Insurance and other ......................................................................................
Finance and financial products ....................................................................
Other-than-temporary impairments....................................................................
Other ..................................................................................................................
Derivative gains/losses from -
Foreign currency forward contracts ...................................................................
Other derivative contracts ..................................................................................
Gains/losses before income taxes and minority interests ........................................
Income taxes and minority interests.............................................................
Net gains/losses .......................................................................................................
2007
2006
2005
$5,308
187
—
103
5,598
62
(151)
(89)
5,509
1,930
$3,579
$1,782
6
(142)
165
1,811
186
638
824
2,635
926
$1,709
$5,831
544
(114)
(65)
6,196
(955)
253
(702)
5,494
1,964
$3,530
Investment gains or losses are recognized upon the sales of investments or as otherwise required under GAAP. The
timing of realized gains or losses from sales can have a material effect on periodic earnings. However, such gains or losses
usually have little, if any, impact on total shareholders’ equity because most equity and fixed maturity investments are carried at
fair value, with the unrealized gain or loss included as a component of other comprehensive income. Other-than-temporary
impairments represent the adjustment of cost to fair value when management concludes that an investment’s decline in value
below cost is other than temporary. The impairment loss represents a non-cash charge to earnings.
59
Management’s Discussion (Continued)
Investment and Derivative Gains/Losses (Continued)
In each of the past three years, pre-tax investment gains from sales and other disposals primarily derived from equity
securities. In 2005, pre-tax investment gains from sales and other disposals included a non-cash pre-tax gain of approximately
$5 billion from Berkshire’s exchange of common stock of The Gillette Company (“Gillette”), which Berkshire held for many
years, for shares of The Procter & Gamble Company (“PG”), which PG issued in its acquisition of Gillette. Berkshire’s
management does not regard the gain recorded, as required under GAAP, as meaningful. The gain recognized for financial
reporting purposes is deferred for income tax purposes. The transaction essentially had no effect on Berkshire’s consolidated
shareholders’ equity because the gain was accompanied by a corresponding reduction of unrealized investment gains included in
accumulated other comprehensive income.
Derivative gains and losses from foreign currency forward contracts arise as the value of the U.S. dollar changes
against certain foreign currencies. The notional value of open foreign currency forward contracts was approximately $14 billion
as of December 31, 2005 but has declined to an immaterial amount at December 31, 2007. During 2005, the value of most
foreign currencies decreased relative to the U.S. dollar and these contracts produced losses.
Other derivative contracts primarily pertain to credit default risks of other U.S. entities as well as equity price risks
associated with major worldwide equity indices. Such contracts are carried at estimated fair value and changes in estimated fair
value are included in earnings in the period of the change. The gains/losses from such contracts are principally attributable to
non-cash changes in the fair values of the related contracts and reflect changes in applicable underlying credit standing, equity
index values, interest rates, foreign currency exchange rates and other factors. These contracts generally may not be settled
before the expiration date (up to 20 years in the future with respect to equity index contracts) and therefore the amount of cash
basis gains or losses will not be known for years. Nevertheless, the fair values on any given reporting date and the resulting
gains and losses reflected in earnings will likely be volatile, reflecting the volatility of equity and credit markets.
The estimated fair value of equity index and credit default derivative contracts at December 31, 2007 was
approximately $6.4 billion, an increase of approximately $3.1 billion from December 31, 2006. The increase was primarily due
to new contracts entered into during the year for which Berkshire received premiums of approximately $2.9 billion. As of
December 31, 2007, Berkshire’s maximum exposure under these contracts was approximately $40 billion, an increase of
approximately $16 billion from December 31, 2006.
Financial Condition
Berkshire’s balance sheet continues to reflect significant liquidity and a strong capital base. Consolidated
shareholders’ equity at December 31, 2007 was $120.7 billion. Consolidated cash and invested assets, excluding assets of
finance and financial products businesses, was approximately $142.4 billion at December 31, 2007 (including cash and cash
equivalents of $38.9 billion) and $125.2 billion at December 31, 2006 (including cash and cash equivalents of $38.3 billion).
Berkshire’s invested assets are held predominantly in its insurance businesses. A large amount of capital is maintained in the
insurance subsidiaries for strategic and marketing purposes and in support of reserves for unpaid losses. In the United States, in
particular, dividend payments by insurance companies are subject to prior approval by state regulators. For the year ending
December 31, 2007, Berkshire’s insurance subsidiaries paid dividends of $4.9 billion.
During 2007, Berkshire made several relatively small business acquisitions for aggregate cash consideration of $1.6
billion. Additionally, Berkshire agreed in December 2007 to acquire a 60% interest in Marmon Holdings, Inc. (“Marmon”) for
$4.5 billion. This acquisition is subject to customary closing conditions, including regulatory approvals, and is expected to close
in March 2008. See Note 2 to the Consolidated Financial Statements for more information concerning the business acquisitions.
Berkshire believes that it currently maintains sufficient liquidity to cover its contractual obligations and provide for contingent
liquidity.
Notes payable and other borrowings of the insurance and other businesses were $2.7 billion (includes about $1.7
billion issued or guaranteed by Berkshire Hathaway Inc.) at December 31, 2007, a decrease of $1 billion from December 31,
2006, reflecting maturities and prepayments of $644 million of parent company debt, reductions in commercial paper
(principally NetJets) and repayments of other borrowings of subsidiaries. Berkshire issued 3,715 Class A equivalent shares of
common stock during 2007 in connection with the SQUARZ warrant exercises in exchange for $333 million.
Capital expenditures of the utilities and energy businesses were approximately $3.5 billion in 2007 and are forecasted
to be approximately $3.9 billion in 2008. MidAmerican expects to fund these capital expenditures with cash flows from
operations and debt proceeds. Certain of its borrowings are secured by certain assets of its regulated utility subsidiaries. During
2007, MidAmerican issued $3.55 billion par amount of new term debt and repaid $1.57 billion of previously issued debt
including net repayments of short-term borrowings. Term debt of MidAmerican maturing in 2008 is $1.97 billion with an
additional $3.16 billion due before 2013. Berkshire has committed until February 28, 2011 to provide up to $3.5 billion of
additional capital to MidAmerican to permit the repayment of its debt obligations or to fund its regulated utility subsidiaries.
Berkshire has not and does not intend to guarantee the repayment of debt by MidAmerican or any of its subsidiaries.
Assets of the finance and financial products businesses were $25.7 billion as of December 31, 2007 and $24.6 billion at
December 31, 2006, which consisted primarily of loans and finance receivables, fixed maturity securities and cash and cash
equivalents. Liabilities were $22.0 billion as of December 31, 2007 and $19.4 billion at December 31, 2006. As of December
31, 2007, notes payable and other borrowings of $12.1 billion included $8.9 billion par amount of medium-term notes issued by
BHFC. In 2007, BHFC issued $750 million par amount of notes due in 2012 and repaid $700 million par amount of notes that
matured. In 2008, an additional $3.1 billion par amount of notes will mature, including $1.25 billion that matured in January
2008. BHFC issued an additional $2.0 billion par amount of medium-term notes in January 2008. BHFC notes are unsecured
and mature at various dates extending through 2015. The proceeds from these notes are being used to finance originated and
60
Financial Condition (Continued)
acquired loans of Clayton Homes, which as of December 31, 2007 had a carrying value of $11 billion. Full and timely payment
of principal and interest on the notes issued by BHFC is guaranteed by Berkshire. In addition, Clayton Homes had outstanding
borrowings of $1.4 billion which are secured by portfolios of manufactured housing loans and are not guaranteed by Berkshire.
These borrowings are repaid as the underlying collateralized loans are repaid.
Contractual Obligations
Berkshire and its subsidiaries are parties to contracts associated with ongoing business and financing activities, which
will result in cash payments to counterparties in future periods. Notes payable are reflected in the Consolidated Financial
Statements along with accrued but unpaid interest as of the balance sheet date. In addition, Berkshire is obligated to pay interest
under debt obligations for periods subsequent to the balance sheet date. Although certain principal balances may be prepaid in
advance of the maturity date, thus reducing future interest obligations, it is assumed that no principal prepayments will occur for
purposes of this disclosure. Also, short-term borrowings and repurchase agreements are generally expected to be renewed as
they mature, however such amounts are not assumed to renew for purposes of this disclosure.
Berkshire and subsidiaries are also parties to long-term contracts to acquire goods or services in the future, which are
not currently reflected in the financial statements. Such obligations, including future minimum rentals under operating leases,
will be reflected in future periods as the goods are delivered or services provided. Amounts due as of the balance sheet date for
purchases where the goods and services have been received and a liability incurred are not included to the extent that such
amounts are due within one year of the balance sheet date.
Contractual obligations for unpaid losses and loss adjustment expenses arising under property and casualty insurance
contracts are estimates. The timing and amount of such payments are contingent upon the ultimate outcome of claim settlements
that will occur over many years. The amounts presented in the following table have been estimated based upon past claim
settlement activities. The timing and amount of such payments are subject to significant estimation error. The factors affecting
the ultimate amount of claims are discussed in the following section regarding Berkshire’s critical accounting policies. In
addition, certain losses and loss adjustment expenses for property and casualty loss reserves are ceded to others under
reinsurance contracts and therefore are recoverable. Such recoverables are not reflected in the table. Accordingly, the actual
timing and amount of payments may differ materially from the amounts shown in the table.
A summary of contractual obligations as of December 31, 2007 follows. Amounts represent estimates of gross
undiscounted amounts payable over time. Amounts are in millions.
Notes payable and other borrowings (1)..........
Operating leases .............................................
Purchase obligations (2) ..................................
Unpaid losses and loss expenses (3) ................
Other long-term policyholder liabilities.........
Other (4) ..........................................................
Total ...............................................................
Total
$ 56,638
2,496
25,995
58,734
4,247
22,313
$170,423
Estimated payments due by period
2009-2010
$ 6,079
808
7,495
14,038
443
1,489
$30,352
2008
$ 8,953
541
7,262
13,264
190
5,385
$35,595
2011-2012
$ 6,899
486
4,349
8,349
96
3,039
$23,218
After 2012
$34,707
661
6,889
23,083
3,518
12,400
$81,258
(1) Includes interest.
(2) Principally relates to future aircraft, coal, electricity and natural gas purchases.
(3) Before reserve discounts of $2,732 million.
(4) Principally annuity reserves, employee benefits and derivative contract liabilities. Also includes $4.5 billion in 2008 related
to the pending acquisition of 60% of Marmon and estimates for the acquisition of the remaining 40% of Marmon between
2011 and 2014.
Critical Accounting Policies
Certain accounting policies require management to make estimates and judgments concerning transactions that will be
settled several years in the future. Amounts recognized in the financial statements from such estimates are necessarily based on
numerous assumptions involving varying and potentially significant degrees of judgment and uncertainty. Accordingly, the
amounts currently reflected in the financial statements will likely increase or decrease in the future as additional information
becomes available.
Property and casualty losses
A summary of Berkshire’s consolidated liabilities for unpaid property and casualty losses is presented in the table
below. Except for certain workers’ compensation reserves, liabilities for unpaid property and casualty losses (referred to in this
section as “gross unpaid losses”) are reflected in the Consolidated Balance Sheets without discounting for time value, regardless
of the length of the claim-tail. Amounts are in millions.
GEICO..........................................................
General Re....................................................
BHRG...........................................................
Berkshire Hathaway Primary Group ............
Total .............................................................
Gross unpaid losses
Net unpaid losses*
Dec. 31, 2007
$ 6,642
19,831
24,894
4,635
$56,002
Dec. 31, 2006
$ 6,095
20,444
16,832
4,241
$47,612
Dec. 31, 2007
$ 6,341
17,651
20,223
4,127
$48,342
Dec. 31, 2006
$ 5,814
18,361
14,255
3,741
$42,171
* Net of reinsurance recoverable and deferred charges reinsurance assumed and before foreign currency translation effects.
61
Management’s Discussion (Continued)
Property and casualty losses (Continued)
Berkshire records liabilities for unpaid losses and loss adjustment expenses under property and casualty insurance and
reinsurance contracts based upon estimates of the ultimate amounts payable under the contracts with respect to losses occurring
on or before the balance sheet date. Depending on the type of loss, the timing and amount of loss payments are subject to a great
degree of variability and are contingent upon, among other things, the timing of claim reporting from insureds and cedants and
the determination and payment of the ultimate loss amount through the loss adjustment process. A variety of techniques are used
to establish and review the liabilities for unpaid losses recorded as of the balance sheet date. While techniques may vary,
significant judgments and assumptions are necessary in projecting the ultimate amount payable in the future with respect to loss
events that have occurred. As a result, uncertainties are imbedded in and permeate the actuarial loss reserving techniques and
processes for all of Berkshire’s property and casualty insurance and reinsurance businesses.
As of any balance sheet date, claims that have occurred have not all been reported and if reported may not have been
settled. Loss and loss adjustment expense reserves include provisions for reported claims (referred to as “case reserves”) and for
claims that have not been reported, referred to as incurred but not yet reported (“IBNR”) reserves. The time period between the
occurrence date and payment date of a loss is referred to as the “claim-tail.” Property claims usually have fairly short claim-tails
and, absent litigation, are reported and settled within no more than a few years after occurrence. Casualty losses usually have
very long claim-tails, occasionally extending for decades. Casualty claims are more susceptible to litigation and can be
significantly affected by changing contract interpretations and the legal environment which further contributes to the extended
claim-tails.
Receivables recorded with respect to insurance losses ceded to other reinsurers under reinsurance contracts are
estimated in a manner similar to liabilities for insurance losses and, therefore, are also subject to estimation error. In addition to
the factors cited above, reinsurance recoverables may ultimately prove to be uncollectible if the reinsurer is unable to perform
under the contract. Reinsurance contracts do not relieve the ceding company of its obligations to indemnify its own
policyholders.
Each of Berkshire’s insurance businesses utilizes loss reserving techniques that are believed to best fit its business.
Additional information regarding reserves established by each of the significant businesses (GEICO, General Re and BHRG)
follows.
GEICO
GEICO’s gross unpaid losses and loss adjustment expense reserves as of December 31, 2007 were $6,642 million. As
of December 31, 2007, gross reserves included $4,735 million of reported average, case and case development reserves and
$1,907 million of IBNR reserves.
GEICO predominantly writes private passenger auto insurance which has a relatively short claim-tail. The key
assumptions affecting GEICO’s reserves include projections of ultimate claim counts (“frequency”) and average loss per claim
(“severity”), which includes loss adjustment expenses.
GEICO’s reserving methodologies produce reserve estimates based upon the individual claims (or a “ground-up”
approach), which in the aggregate yields a point estimate of the ultimate losses and loss adjustment expenses. Ranges of loss
estimates are not determined in the aggregate. A detailed discussion of the process and significant factors considered in
establishing reserves follows.
Actuaries establish and evaluate unpaid loss reserves using recognized standard actuarial loss development methods
and techniques. The significant reserve components (and percentage of gross reserves) are: (1) average reserves (20%), (2) case
and case development reserves (50%) and (3) IBNR reserves (30%). Each component of loss reserves is affected by the
expected frequencies and average severities of claims. Such amounts are analyzed using actuarial techniques on historical claims
data and adjusted when appropriate to reflect perceived changes in loss patterns. Data is analyzed by policy coverage, rated
state, reporting date and occurrence date, among other factors. A brief discussion of each component follows.
Average reserve amounts are established for reported auto damage claims and new liability claims prior to the
development of an individual case reserve. The average reserves are established as a reasonable estimate for incurred claims for
which claims adjusters have insufficient time and information to make specific claim estimates and for a large number of minor
physical damage claims that are paid within a relatively short time after being reported. Average reserve amounts are driven by
the estimated average severity per claim and the number of new claims opened. The average severity per claim amount is
developed by projecting the ultimate severities for each accident quarter and weighting with both reported claims and estimated
unreported claims.
Claims adjusters generally establish individual liability claim case loss and loss adjustment expense reserve estimates
as soon as the specific facts and merits of each claim can be evaluated. Case reserves represent the amounts that in the judgment
of the adjusters are reasonably expected to be paid in the future to completely settle the claim, including expenses. Individual
case reserves are subsequently revised as more information becomes known.
For most liability coverages, case reserves alone are an insufficient measure of the ultimate cost due in part to the
longer claim-tail, the greater chance of protracted litigation and the incompleteness of facts available at the time the case reserve
is established. Therefore, additional case development reserve estimates are established, usually as a percentage of the case
reserve. As of December 31, 2007, case development reserves averaged approximately 20% of total established case reserves.
In general, case development factors are selected by a retrospective analysis of the overall adequacy of historical case reserves.
Case development factors are reviewed and revised periodically.
62
Property and casualty losses (Continued)
GEICO (Continued)
For unreported claims, IBNR reserve estimates are calculated by first projecting the ultimate number of claims
expected (reported and unreported) for each significant coverage by using historical quarterly and monthly claim counts to
develop age-to-age projections of the ultimate counts by accident quarter. Reported claims are subtracted from the ultimate
claim projections to produce an estimate of the number of unreported claims. The number of unreported claims is multiplied by
an estimate of the average cost per unreported claim to produce the IBNR reserve amount. Actuarial techniques are difficult to
apply reliably in certain situations, such as to new legal precedents, class action suits or recent catastrophes. Consequently,
supplemental IBNR reserves for these types of events may be established through the collaborative effort of actuarial, claims and
other management.
For each of its major coverages, GEICO tests the adequacy of the total loss reserves using one or more actuarial
projections based on claim closure models, paid loss triangles and incurred loss triangles. Each type of projection analyzes loss
occurrence data for claims occurring in a given period and projects the ultimate cost.
In 2007, claim frequencies were generally lower than expected and severity increases were generally not as great as
originally projected during the first part of the year. Loss reserve estimates recorded at the end of 2006 developed downward by
approximately $375 million when reevaluated at December 31, 2007 producing a corresponding increase to pre-tax earnings in
2007. These downward reserve developments represented approximately 3% of earned premiums in 2007 and approximately 6%
of the prior year-end reserve amount. Reserving assumptions at December 31, 2007 were modified appropriately to reflect the
most recent frequency and severity results. Future reserve development will depend on whether frequency and severity turn out
to be more or less than anticipated. Within the automobile line of business the reserves with the most uncertainty are for
automobile liability, due to the longer claim-tails for most of these coverages. Approximately 90% of GEICO’s reserves as of
December 31, 2007 were for automobile liability, of which bodily injury (“BI”) coverage accounted for nearly 60%.
Management believes it is reasonably possible that the average BI severity will change by at least one percentage point from the
severity used. If actual BI severity changes one percentage point from what was used in establishing the reserves, the reserves
would develop up or down by approximately $99 million resulting in a corresponding decrease or increase in pre-tax earnings.
Many of the same economic forces that would likely cause BI severity to be different from expected would likely also cause
severities for other injury coverages to differ in the same direction.
GEICO’s exposure to highly uncertain losses is believed to be limited to certain commercial excess umbrella policies
written during a period from 1981 to 1984. Remaining reserves associated with such exposure are currently a relatively
insignificant component of GEICO’s total reserves (less than 3%) and there is little apparent asbestos or environmental liability
exposure. Related claim activity over the past year was insignificant.
General Re and BHRG
General Re’s and BHRG’s property and casualty loss reserves derive primarily from assumed reinsurance. Additional
uncertainties unique to loss reserving processes for reinsurance are described below. The nature, extent, timing and perceived
reliability of information received from ceding companies varies widely depending on the type of coverage, the contractual
reporting terms (which are affected by market conditions and practices) and other factors. Due to the lack of standardization of
the terms and conditions of reinsurance contracts, the wide variability of coverage needs of individual clients and the tendency
for those needs to change rapidly in response to market conditions, the ongoing economic impact of such uncertainties, in and of
themselves, cannot be reliably measured.
The nature and extent of loss information provided under many facultative, per occurrence excess contracts or
retroactive contracts where company personnel either work closely with the ceding company in settling individual claims or
manage the claims themselves may not differ significantly from the information received under a primary insurance contract.
Loss information from aggregate excess of loss contracts, including catastrophe losses and quota-share treaties, is often less
detailed. Occasionally such information is reported in summary format rather than on an individual claim basis. Loss data is
provided through periodic reports and may include the amount of ceded losses paid where reimbursement is sought as well as
case loss reserve estimates. Ceding companies infrequently provide IBNR estimates to reinsurers.
Each of Berkshire’s reinsurance businesses has established practices to identify and gather needed information from
clients. These practices include, for example, comparison of expected premiums to reported premiums to help identify
delinquent client periodic reports and claim reviews to facilitate loss reporting and identify inaccurate or incomplete claim
reporting. These practices are periodically evaluated and changed as conditions, risk factors and unanticipated areas of
exposures are identified.
The timing of claim reporting to reinsurers is delayed in comparison with primary insurance. In some instances there
are multiple reinsurers assuming and ceding parts of an underlying risk causing multiple contractual intermediaries between
General Re or BHRG and the primary insured. In these instances, the delays in reporting can be compounded. The relative
impact of reporting delays on the reinsurer varies depending on the type of coverage, contractual reporting terms and other
factors. Contracts covering casualty losses on a per occurrence excess basis may experience longer delays in reporting due to the
length of the claim-tail as regards to the underlying claim. In addition, ceding companies may not report claims to the reinsurer
until they believe it is reasonably possible that the reinsurer will be affected, usually determined as a function of its estimate of
the claim amount as a percentage of the reinsurance contract retention. On the other hand, the timing of reporting large per
occurrence excess property losses or property catastrophe losses may not vary significantly from primary insurance.
63
Management’s Discussion (Continued)
Property and casualty losses (Continued)
General Re and BHRG (Continued)
Under contracts where periodic premium and claims reports are required from ceding companies, such reports are
generally required at quarterly intervals which in the U.S. range from 30 to 90 days after the end of the accounting period. In
continental Europe, reinsurance reporting practices vary since fewer clients report premiums, losses and case reserves on a
quarterly basis. In certain countries, clients report on an annual basis and generally not until 90 to 180 days after the end of the
annual period. Estimates of premiums and losses are accrued based on expected results supplemented when necessary for
estimates of significant known events occurring in the interim. To monitor the timing and receipt of information due, client
reporting requirements are tracked. When clients miss reporting deadlines, the clients are contacted.
Premium and loss data is provided through at least one intermediary (the primary insurer), so there is a greater risk that
the loss data provided is incomplete, inaccurate or outside the coverage terms. Information provided by ceding companies is
reviewed for completeness and compliance with the contract terms. Reinsurance contracts generally allow for Berkshire’s
reinsurance subsidiaries to have access to the cedant’s books and records with respect to the subject business and provide them
the ability to conduct audits to determine the accuracy and completeness of information. Such audits are conducted when
management deems it appropriate.
In the regular course of business, disputes with clients may arise concerning whether certain claims are covered under
the reinsurance policies. Most disputes are resolved by the claims departments by discussing coverage aspects with the
appropriate client personnel or by independent outside counsel review and determination. If disputes cannot be resolved,
contracts generally specify whether arbitration, litigation, or alternative dispute resolution will be invoked. There are no
coverage disputes at this time for which an adverse resolution would likely have a material impact on Berkshire’s results of
operations or financial condition.
In summary, the scope, number and potential variability of assumptions required in estimating ultimate losses from
reinsurance contracts of General Re and BHRG are more uncertain than primary property and casualty insurers due to the factors
previously discussed. Additional information concerning General Re and BHRG follows.
General Re
General Re’s gross and net unpaid losses and loss adjustment expenses and gross reserves by major line of business as
of December 31, 2007 are summarized below. Amounts are in millions.
Type
Reported case reserves ...............................
IBNR reserves ............................................
Gross reserves ............................................
Ceded reserves and deferred charges..........
Net reserves................................................
$10,957
8,874
19,831
(2,180)
$17,651
Line of business
Workers’ compensation (1) .........................
Professional liability (2) ..............................
Mass tort–asbestos/environmental .............
Auto liability..............................................
Other casualty (3)........................................
Other general liability ................................
Property .....................................................
Total .............................................
$ 3,284
1,646
1,841
3,004
4,099
3,127
2,830
$19,831
(1) Net of discounts of $2,732 million.
(2) Includes directors and officers and errors and omissions coverage.
(3) Includes medical malpractice and umbrella coverage.
General Re’s process of establishing loss reserve estimates is based upon a ground-up approach, beginning with case
estimates and supplemented by additional case reserves (“ACRs”) and IBNR reserves. Critical judgments in the establishment of
these loss reserves may involve the establishment of ACRs by claim examiners, the expectation of ultimate loss ratios which
drive IBNR reserve amounts and the case reserve reporting trends compared to the expected loss reporting patterns. Recorded
reserve amounts are subject to “tail risk” where reported losses develop beyond the maximum expected loss emergence pattern
time period.
General Re does not routinely determine loss reserve ranges because it believes that the techniques necessary have not
sufficiently developed and the myriad of assumptions required render such resulting ranges to be unreliable. In addition, counts
of claims or average amounts per claim are not utilized because clients do not consistently provide reliable data in sufficient
detail.
Upon notification of a reinsurance claim from a ceding company, claim examiners make independent evaluations of
loss amounts. In some cases, examiners’ estimates differ from amounts reported by ceding companies. If the examiners’
estimates are significantly greater than the ceding company’s estimates, the claims are further investigated. If deemed
appropriate, ACRs are established above the amount reported by the ceding company. As of December 31, 2007, ACRs of
$3.3 billion before discounts were concentrated in workers’ compensation and to a lesser extent in professional liability reserves.
Examiners also periodically conduct claim reviews at client companies and case reserves are often increased as a result. In 2007,
claim examiners conducted about 400 claim reviews.
Actuaries classify all loss and premium data into segments (“reserve cells”) primarily based on product (e.g., treaty,
facultative and program) and line of business (e.g., auto liability, property, etc.). For each reserve cell, losses are aggregated by
accident year and analyzed over time. Depending on client reporting practices, some losses and premiums are aggregated by
policy year or underwriting year. These loss aggregations are internally called loss triangles which serve as the primary basis for
IBNR reserve calculations. Over 300 reserve cells are reviewed for North American business and approximately 900 reserve
cells are reviewed with respect to international business.
64
Property and casualty losses (Continued)
General Re (Continued)
Loss triangles are used to determine the expected case loss emergence patterns for most coverages and, in conjunction
with expected loss ratios by accident year, are further used to determine IBNR reserves. Additional calculations form the basis
for estimating the expected loss emergence pattern. The determination of the expected loss emergence pattern is not strictly a
mechanical process. In instances where the historical loss data is insufficient, estimation formulas are used along with reliance
on other loss triangles and judgment. Factors affecting loss development triangles include but are not limited to the following:
changes in client claims practices, changes in claim examiners’ use of ACRs or the frequency of client company claim reviews,
changes in policy terms and coverage (such as client loss retention levels and occurrence and aggregate policy limits), changes in
loss trends and changes in legal trends that result in unanticipated losses, as well as other sources of statistical variability. These
items influence the selection of the expected loss emergence patterns.
Expected loss ratios are selected by reserve cell, by accident year, based upon reviewing forecasted losses and
indicated ultimate loss ratios predicted from aggregated pricing statistics. Indicated ultimate loss ratios are calculated using the
selected loss emergence pattern, reported losses and earned premium. If the selected emergence pattern is not accurate, then the
indicated ultimate loss ratios will not be accurate and this can affect the selected loss ratios and hence the IBNR reserve. As with
selected loss emergence patterns, selecting expected loss ratios is not a strictly mechanical process and judgment is used in the
analysis of indicated ultimate loss ratios and department pricing loss ratios.
IBNR reserves are estimated by reserve cell, by accident year, using the expected loss emergence patterns and the
expected loss ratios. The expected loss emergence patterns and expected loss ratios are the critical IBNR reserving assumptions
and are updated annually. Once the annual IBNR reserves are determined, actuaries calculate expected case loss emergence for
the upcoming calendar year. This calculation does not involve new assumptions and uses the prior year-end expected loss
emergence patterns and expected loss ratios. The expected losses are then allocated into interim estimates that are compared to
actual reported losses in the subsequent year. This comparison provides a test of the adequacy of prior year-end IBNR reserves
and forms the basis for possibly changing IBNR reserve assumptions during the course of the year.
In 2007, for prior years’ workers’ compensation losses, reported claims were less than expected claims by about $74
million. However, further analysis of the workers’ compensation reserve cells by segment indicated the need for additional
IBNR. These developments precipitated about $218 million of a net increase in nominal IBNR reserve estimates for unreported
occurrences. After deducting $20 million for the change in net reserve discounts during the year, workers’ compensation losses
from prior years reduced pre-tax earnings in 2007 by $164 million. To illustrate the sensitivity of changes in expected loss
emergence patterns and expected loss ratios for General Re’s significant excess of loss workers’ compensation reserve cells, an
increase of ten points in the tail of the expected emergence pattern and an increase of ten percent in the expected loss ratios
would produce a net increase in nominal IBNR reserves of approximately $587 million and $334 million on a discounted basis as
of December 31, 2007. The increase in discounted reserves would produce a corresponding decrease in pre-tax earnings.
Management believes it is reasonably possible for the tail of the expected loss emergence patterns and expected loss ratios to
increase at these rates.
Other casualty and general liability reported losses (excluding mass tort losses) were favorable in 2007 relative to
expectations. Casualty losses tend to be long-tail and it should not be assumed that favorable loss experience in a year means
that loss reserve amounts currently established will continue to develop favorably. For General Re’s significant other casualty
and general liability reserve cells (including medical malpractice, umbrella, auto and general liability), an increase of five points
in the tails of the expected emergence patterns and an increase of five percent in expected loss ratios (one percent for large
international proportional reserve cells) would produce a net increase in nominal IBNR reserves and a corresponding reduction in
pre-tax earnings of approximately $720 million. Management believes it is reasonably possible for the tail of the expected loss
emergence patterns and expected loss ratios to increase at these rates in any of the individual aforementioned reserve cells.
However, given the diversification in worldwide business, more likely outcomes are believed to be less than $720 million.
Property losses were lower than expected in 2007 but the nature of property loss experience tends to be more volatile
because of the effect of catastrophes and large individual property losses. In response to favorable claim developments and
another year of information, estimated remaining World Trade Center losses and estimated losses from the hurricanes in 2005
were reduced by $93 million.
In certain reserve cells within excess directors and officers and errors and omissions (“D&O and E&O”) coverages,
IBNR reserves are based on estimated ultimate losses without consideration of expected emergence patterns. These cells often
involve a spike in loss activity arising from recent industry developments making it difficult to select an expected loss emergence
pattern. For example, the number of recent corporate scandals has caused an increase in reported losses. For General Re’s large
D&O and E&O reserve cells an increase of ten points in the tail of the expected emergence pattern (for those cells where
emergence patterns are considered) and an increase of ten percent in the expected loss ratios would produce a net increase in
nominal IBNR reserves and a corresponding reduction in pre-tax earnings of approximately $210 million. Management believes
it is reasonably possible for the tail of the expected loss emergence patterns and expected loss ratios to increase at these rates.
Overall industry-wide loss experience data and informed judgment are used when internal loss data is of limited
reliability, such as in setting the estimates for mass tort, asbestos and hazardous waste (collectively, “mass tort”) claims. Unpaid
mass tort reserves at December 31, 2007 were approximately $1.8 billion gross and $1.2 billion net of reinsurance. Such
65
Management’s Discussion (Continued)
Property and casualty losses (Continued)
General Re (Continued)
reserves were approximately $1.9 billion gross and $1.2 billion net of reinsurance as of December 31, 2006. Claims paid
attributable to such losses were about $75 million in 2007. In 2007, IBNR reserve estimates for asbestos and environmental
claims were increased by $48 million. In addition to the previously described methodologies, General Re considers “survival
ratios” based on net claim payments in recent years versus net unpaid losses as a rough guide to reserve adequacy. The survival
ratio was approximately thirteen years as of December 31, 2007. The insurance industry’s comparable survival ratio for asbestos
and pollution reserves was approximately eight years. Estimating mass tort losses is very difficult due to the changing legal
environment. Although such reserves are believed to be adequate, significant reserve increases may be required in the future if
new exposures or claimants are identified, new claims are reported or new theories of liability emerge.
BHRG
BHRG’s unpaid losses and loss adjustment expenses as of December 31, 2007 are summarized as follows. Amounts
are in millions.
Reported case reserves ......................................................
IBNR reserves ...................................................................
Retroactive ........................................................................
Gross reserves ...................................................................
Deferred charges and ceded reserves.................................
Net reserves.......................................................................
Property
$ 1,654
1,180
—
$ 2,834
Casualty
$ 2,143
2,660
17,257
$22,060
Total
$ 3,797
3,840
17,257
24,894
(4,671)
$20,223
In general, the methodologies used to establish loss reserves vary widely and encompass many of the common
methodologies employed in the actuarial field today. Certain traditional methodologies such as paid and incurred loss
development techniques, incurred and paid loss Bornhuetter-Ferguson techniques and frequency and severity techniques are
utilized as well as ground-up techniques where appropriate. Additional judgments must also be employed to consider changes in
contract conditions and terms as well as the incidence of litigation or legal and regulatory change.
As of December 31, 2007, BHRG’s gross loss reserves related to retroactive reinsurance policies were predominantly
casualty losses. Retroactive policies include excess-of-loss contracts, in which losses (relating to loss events occurring before a
specified date on or before the contract date) above a contractual retention are indemnified or contracts that indemnify all losses
paid by the counterparty after the policy effective date. Retroactive losses paid in 2007 were $894 million. The classification
“reported case reserves” has no practical analytical value with respect to retroactive policies since the amount is often derived
from reports in bulk from ceding companies, who may have inconsistent definitions of “case reserves.” Reserves are reviewed
and established in the aggregate by contract including provisions for IBNR reserves.
In establishing retroactive reinsurance reserves, historical aggregate loss payment patterns are often analyzed and
projected into the future under various scenarios. The claim-tail is expected to be very long for many policies and may last
several decades. Management assigns judgmental probability factors to these aggregate loss payment scenarios and an
expectancy outcome is determined. Management monitors claim payment activity and reviews ceding company reports or other
information concerning the underlying losses. Since the claim-tail is expected to be very long for such contracts, management
reassesses expected ultimate losses as significant events related to the underlying losses are reported or revealed during the
monitoring and review process. During 2007, retroactive reserves developed downward by approximately $37 million.
BHRG’s liabilities for environmental, asbestos, and latent injury losses and loss adjustment expenses are presently
concentrated within retroactive reinsurance contracts. Reserves for such losses were approximately $9.7 billion at December 31,
2007 and $3.8 billion at December 31, 2006. The increase during 2007 was due to the Equitas reinsurance agreement which
became effective on March 30, 2007. See Note 11 to the accompanying Consolidated Financial Statements. Losses paid in 2007
attributable to these exposures were approximately $500 million. BHRG, as a reinsurer, does not regularly receive reliable
information regarding numbers of asbestos, environmental and latent injury claims from all ceding companies on a consistent
basis, particularly with respect to multi-line treaty or aggregate excess of loss policies. Periodically, a ground-up analysis of the
underlying loss data of the reinsured is conducted to make an estimate of ultimate reinsured losses. When detailed loss
information is unavailable, estimates can only be developed by applying recent industry trends and projections to aggregate
client data. Judgments in these areas necessarily include the stability of the legal and regulatory environment under which these
claims will be adjudicated. Potential legal reform and legislation could also have a significant impact on establishing loss
reserves for mass tort claims in the future.
The maximum losses payable by BHRG under retroactive policies are not expected to exceed approximately $24.8
billion as of December 31, 2007. Absent significant judicial or legislative changes affecting asbestos, environmental or latent
injury exposures, management currently believes it unlikely that unpaid losses as of December 31, 2007 ($17.3 billion) will
develop upward to the maximum loss payable or downward by more than 15%.
A significant number of recent reinsurance contracts are expected to have a low frequency of claim occurrence combined
with a potential for high severity of claims. These include property losses from catastrophes, terrorism and aviation risks under
catastrophe and individual risk contracts. Loss reserves related to catastrophe and individual risk contracts decreased from
approximately $2.2 billion at year end 2006 to approximately $1.3 billion at year end 2007. The decrease in reserves reflected
loss payments in 2007 of approximately $900 million that were primarily attributable to the major hurricanes that occurred in
66
Property and casualty losses (Continued)
BHRG (Continued)
2005. Loss reserves for pre-2007 events declined by approximately $200 million which produced a corresponding increase to
pre-tax earnings in 2007. Reserving techniques for catastrophe and individual risk contracts generally rely more on a per-policy
assessment of the ultimate cost associated with the individual loss event rather than with an analysis of the historical
development patterns of past losses. Catastrophe loss reserves are provided when it is probable that an insured loss has occurred
and the amount can be reasonably estimated. Absent litigation affecting the interpretation of coverage terms, the expected claim-
tail is relatively short and thus the estimation error in the initial reserve estimates usually emerges within 24 months after the loss
event.
Other reinsurance reserve amounts are generally based upon loss estimates reported by ceding companies and IBNR
reserves that are primarily a function of reported losses from ceding companies and anticipated loss ratios established on an
individual contract basis, supplemented by management’s judgment of the impact on each contract of major catastrophe events
as they become known. Anticipated loss ratios are based upon management’s judgment considering the type of business
covered, analysis of each ceding company’s loss history and evaluation of that portion of the underlying contracts underwritten
by each ceding company, which are in turn ceded to BHRG. A range of reserve amounts as a result of changes in underlying
assumptions is not prepared.
Other Critical Accounting Policies
Berkshire records as assets deferred charges with respect to liabilities assumed under retroactive reinsurance contracts.
At the inception of these contracts, the deferred charges represent the difference between the consideration received and the
estimated ultimate liability for unpaid losses. Deferred charges are amortized using the interest method over an estimate of the
ultimate claim payment period with the periodic amortization reflected in earnings as a component of losses and loss expenses.
The deferred charge balances are adjusted periodically to reflect new projections of the amount and timing of loss payments.
Adjustments to these assumptions are applied retrospectively from the inception of the contract. Unamortized deferred charges
were $4.0 billion at December 31, 2007. Significant changes in the estimated amount and payment timing of unpaid losses may
have a significant effect on unamortized deferred charges and the amount of periodic amortization.
Berkshire’s Consolidated Balance Sheet as of December 31, 2007 includes goodwill of acquired businesses of
approximately $32.9 billion. A significant amount of judgment is required in performing goodwill impairment tests. Such tests
include periodically determining or reviewing the estimated fair value of Berkshire’s reporting units. There are several methods
of estimating a reporting unit’s fair value, including market quotations, asset and liability fair values and other valuation
techniques, such as discounted projected future net earnings or net cash flows and multiples of earnings. If the carrying amount
of a reporting unit, including goodwill, exceeds the estimated fair value, then individual assets, including identifiable intangible
assets, and liabilities of the reporting unit are estimated at fair value. The excess of the estimated fair value of the reporting unit
over the estimated fair value of net assets would establish the implied value of goodwill. The excess of the recorded amount of
goodwill over the implied value is then charged to earnings as an impairment loss.
Berkshire’s consolidated financial position reflects very significant amounts of invested assets. A substantial portion
of these assets are carried at fair values based upon current market quotations and, when not available, based upon fair value of
similar instruments or valuation models reflecting the present value of estimated future cash flows. Further, Berkshire’s finance
businesses maintain significant balances of finance receivables, which are carried at amortized cost. Considerable judgment is
required in determining the assumptions used in certain valuation models, including interest rate, loan prepayment speed, credit
risk and liquidity risk assumptions. Significant changes in these assumptions can have a significant effect on carrying values.
Information concerning recently issued accounting pronouncements which are not yet effective is included in Note 1(s)
to the Consolidated Financial Statements. Berkshire does not expect that the adoption of any of the recently issued accounting
pronouncements will have a material effect on its financial condition.
Market Risk Disclosures
Berkshire’s Consolidated Balance Sheets include 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, equity prices, foreign
currency exchange rates and commodity prices. The following sections address the significant market risks associated with
Berkshire’s business activities.
Interest Rate Risk
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,
loans 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 strives to maintain
high credit ratings so that the cost of debt is minimized. Berkshire utilizes derivative products, such as interest rate swaps, to
manage interest rate risks on a limited basis.
The fair values of Berkshire’s fixed maturity investments and notes payable and other borrowings 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 creditworthiness of the issuer, prepayment options, relative values of alternative investments, the liquidity of the
instrument and other general market conditions. Fixed interest rate investments may be more sensitive to interest rate changes
than variable rate investments.
67
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 risk. 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.
Dollars are in millions.
Estimated Fair Value after
Hypothetical Change in Interest Rates
(bp=basis points)
Fair Value
100 bp
decrease
100 bp
increase
200 bp
increase
300 bp
increase
December 31, 2007
Insurance and other businesses:
Investments in fixed maturity securities ..................
Notes payable and other borrowings........................
$28,515
2,709
$29,179
2,757
$27,689
2,666
$26,967
2,628
$26,318
2,593
Finance and financial products businesses:
Investments in fixed maturity securities
and loans and finance receivables........................
Notes payable and other borrowings........................
15,843
12,321
16,860
12,725
14,766
11,921
13,806
11,563
12,934
11,229
Utilities and energy businesses:
Notes payable and other borrowings........................
19,834
21,640
18,305
17,006
15,890
December 31, 2006
Insurance and other businesses:
Investments in fixed maturity securities ..................
Notes payable and other borrowings........................
$25,300
3,815
$25,939
3,872
$24,663
3,765
$24,079
3,720
$23,558
3,679
Finance and financial products businesses:
Investments in fixed maturity securities
and loans and finance receivables........................
Notes payable and other borrowings........................
15,026
12,362
16,033
12,775
14,025
11,937
13,101
11,565
12,263
11,218
Utilities and energy businesses:
Notes payable and other borrowings........................
17,789
19,256
16,548
15,486
14,569
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.
Historically, Berkshire’s equity investments are generally concentrated in relatively few investees. At December 31, 2007, 49%
of the total fair value of equity investments was concentrated in four investees.
Berkshire’s preferred strategy is to hold equity investments for very long periods of time. Thus, Berkshire’s
management is not troubled by short-term equity 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 risk are, in almost all instances, based on quoted market
prices 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.
The table which follows summarizes Berkshire’s equity price risk as of December 31, 2007 and 2006 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
December 31, 2007 ................................
$74,999
December 31, 2006 ................................
$61,533
Estimated
Fair Value after
Hypothetical
Change in Prices
Hypothetical
Percentage
Increase (Decrease) in
Shareholders’ Equity
$97,499
52,499
$79,993
43,073
12.1
(12.1)
11.0
(11.0)
Hypothetical
Price Change
30% increase
30% decrease
30% increase
30% decrease
68
Equity Price Risk (Continued)
Berkshire is also subject to equity price risk with respect to certain long duration equity index option contracts.
Berkshire’s maximum exposure with respect to such contracts was approximately $35 billion and $21 billion at December 31,
2007 and 2006, respectively. These contracts generally expire 15 to 20 years from inception and they may not be settled before
their respective expiration dates. The contracts have been written on four major equity indexes including three that are based on
foreign markets. While Berkshire’s ultimate potential loss with respect to these contracts is directly correlated to the movement
of the underlying stock index between contract inception date and expiration, the change in fair value from current changes in the
indexes do not produce a proportional change in the estimated fair value of the contracts. Other factors (such as interest rates,
expected dividend rates and the remaining duration of the contract as well as general market assumptions) affect the estimates of
fair value reflected in the financial statements. The carrying amount of these liabilities was $4.6 billion at December 31, 2007
and $2.4 billion at December 31, 2006. If the underlying indexes declined 30% immediately, and absent changes in other factors
required to estimate fair value, Berkshire estimates that it could incur a non-cash pre-tax loss of approximately $2.3 billion.
Foreign Currency Risk
Market risks associated with changes in foreign currency exchange rates are currently concentrated in long duration
equity index option contracts on foreign equity indexes. The following table summarizes the outstanding derivatives contracts as
of December 31, 2007 and 2006 with foreign currency risk and shows the estimated changes in values of the contracts assuming
changes in the underlying exchange rates applied immediately and uniformly across all currencies. The changes in value do not
necessarily reflect the best or worst case scenarios and actual results may differ. Dollars are in millions.
December 31, 2007.........................
December 31, 2006.........................
Commodity Price Risk
Fair Value
net assets
(liabilities)
$(4,070)
(2,041)
(20%)
$(3,293)
(1,819)
Estimated Fair Value Assuming a Hypothetical
Percentage Increase (Decrease) in the Value of
Foreign Currencies Versus the U.S. Dollar
10%
(10%)
$(4,464)
$(3,681)
(2,131)
(1,936)
(1%)
$(4,031)
(2,031)
1%
$(4,110)
(2,051)
20%
$(4,862)
(2,200)
Berkshire, through its ownership of MidAmerican, is subject to commodity price risk. Exposures include variations in
the price of wholesale electricity that is purchased and sold, fuel costs to generate electricity and natural gas supply for regulated
retail gas customers. Electricity and natural gas prices are subject to wide price swings as demand responds to, among many
other items, changing weather, limited storage, transmission and transportation constraints, and lack of alternative supplies from
other areas. To mitigate a portion of the risk, MidAmerican uses derivative instruments, including forwards, futures, options,
swaps and other over-the-counter agreements, to effectively secure future supply or sell future production at fixed prices. The
settled cost of these contracts is generally recovered from customers in regulated rates. Accordingly, the net unrealized gains
and losses associated with interim price movements on such contracts are recorded as regulatory assets or liabilities. Financial
results may be negatively impacted if the costs of wholesale electricity, fuel or natural gas are higher than what is permitted to be
recovered in rates. MidAmerican also uses futures, options and swap agreements to economically hedge gas and electric
commodity prices for physical delivery to non-regulated customers. MidAmerican does not engage in a material amount of
proprietary trading activities.
The table that follows summarizes Berkshire’s commodity price risk on energy derivative contracts of MidAmerican as
of December 31, 2007 and 2006 and shows the effects of a hypothetical 10% increase and a 10% decrease in forward market
prices by the expected volumes for these contracts as of that date. The selected hypothetical change does not reflect what could
be considered the best or worst case scenarios. Dollars are in millions.
December 31, 2007
December 31, 2006
Fair Value
net assets
(liabilities)
$(263)
(273)
Hypothetical Price
Change
10% increase
10% decrease
10% increase
10% decrease
Estimated Fair Value after
Hypothetical Change in
Price
$(208)
(318)
(220)
(326)
NEW YORK STOCK EXCHANGE CORPORATE GOVERNANCE MATTERS
As a listed Company with the New York Stock Exchange (“NYSE”), Berkshire is subject to certain Corporate
Governance standards as required by the NYSE and/or the Securities and Exchange Commission (“SEC”). Among other
requirements, Berkshire’s CEO, as required by Section 303A.12(a) of the NYSE Listing Company Manual, must certify to the
NYSE each year whether or not he is aware of any violations by the Company of NYSE Corporate Governance listing standards
as of the date of the certification. On May 14, 2007, Berkshire’s CEO Warren E. Buffett, submitted such a certification to the
NYSE which stated that he was not aware of any violation by Berkshire of the NYSE Corporate Governance listing standards.
On February 29, 2008, Berkshire filed its 2007 Form 10-K with the SEC. The Form 10-K included as Exhibits 31.1
and 31.2 the required CEO and CFO Sarbanes-Oxley Act Section 302 certifications.
69
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. An updated version is reproduced on this and the following four pages.
____________________________________________________________________
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.
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 American Express 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.
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.
Charlie’s family has 90% or more of its net worth in Berkshire shares; I have about 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.
3.
4.
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.
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.
*Copyright © 1996 By Warren E. Buffett
All Rights Reserved
70
In recent years we have made a number of acquisitions. Though there will be dry years, we expect to make many more
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.
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, the large majority of our businesses have exceeded our expectations. But sometimes 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.
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 $69 billion.
5.
6.
7.
71
8.
9.
10.
11.
12.
Better yet, this funding to date has often been cost-free. Deferred tax liabilities bear no interest. And as long as we
can break even in our insurance underwriting 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.
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.
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.
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.
72
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 the quarterly reports we post on the internet, 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.
TWO ADDED PRINCIPLES
14. 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.
15. We regularly compare the gain in Berkshire’s per-share book value to the performance of the S&P 500. Over time, we hope
to outpace this yardstick. Otherwise, why do our investors need us? The measurement, however, has certain shortcomings
that are described in the next section. Moreover, it now is less meaningful on a year-to-year basis than was formerly the
case. That is because our equity holdings, whose value tends to move with the S&P 500, are a far smaller portion of our net
worth than they were in earlier years. Additionally, gains in the S&P stocks are counted in full in calculating that index,
whereas gains in Berkshire’s equity holdings are counted at 65% because of the federal tax we incur. We, therefore, expect
to outperform the S&P in lackluster years for the stock market and underperform when the market has a strong year.
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.
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.
73
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 233,000 employees,
only 19 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.
On my death, Berkshire’s ownership picture will change but not in a disruptive way: None of my stock will have to be sold to
take care of the cash bequests I have made or for taxes. Other assets of mine will take care of these requirements. All Berkshire shares
will be left to foundations that will likely receive the stock in roughly equal installments over a dozen or so years.
At my death, the Buffett family will not be involved in managing the business but, as very substantial shareholders, will help 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. One executive will become CEO and
responsible for operations. The responsibility for investments will be given to one or more executives. If the acquisition of new
businesses is in prospect, these executives will cooperate in making the decisions needed, subject, of course, to board approval. We will
continue to have an extraordinarily shareholder-minded board, one whose interests are solidly aligned with yours.
Were we to need the management structure I have just described on an immediate basis, our directors know my
recommendations for both posts. All candidates currently work for or are available to Berkshire and are people in whom I have total
confidence.
I will continue to keep the directors 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 various foundations for a considerable period after my death, you can be sure that the
directors and I have thought through the succession question carefully and that we are well prepared. 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 and that our unusually
strong and well-defined culture will remain intact.
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
74
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, N.A., P. O. Box 64854, St. Paul, MN 55164-0854 serves as Transfer Agent and Registrar for the
indicated or at
Company’s common stock.
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.
Correspondence may be directed
to Wells Fargo at
the address
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 4,600 record holders of its Class A Common Stock and 13,900 record holders of its Class B
Common Stock at February 15, 2008. Record owners included nominees holding at least 550,000 shares of Class A Common Stock
and 13,800,000 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:
2007
Class A
High
Low
First Quarter.......................... $110,700 $103,800
107,200
Second Quarter ..................... 110,490
108,600
Third Quarter ........................ 120,800
118,400
Fourth Quarter ...................... 151,650
2006
Class B
Class A
Class B
High
$3,690
3,679
4,000
5,059
Low
$3,460
3,538
3,558
3,949
High
$90,600
93,100
97,100
114,500
Low
$86,200
85,400
89,400
95,200
High
$3,013
3,099
3,238
3,825
Low
$2,860
2,839
2,978
3,165
Dividends
Berkshire has not declared a cash dividend since 1967.
Stock Performance Graph
The following chart compares the subsequent value of $100 invested in Berkshire common stock on December 31, 2002 with a
similar investment in the Standard and Poor’s 500 Stock Index and in the Standard and Poor’s Property - Casualty Insurance
Index.**
Comparison of Five Year Cumulative Return*
*
Cumulative return for the Standard and Poor’s indices based on reinvestment of dividends.
**
It would be difficult to develop a peer group of companies similar to Berkshire. The Corporation owns subsidiaries engaged in a number of
diverse business activities of which the most important is the property and casualty insurance business and, accordingly, management has used
the Standard and Poor’s Property - Casualty Insurance Index for comparative purposes.
75
BERKSHIRE HATHAWAY INC.
OPERATING COMPANIES
INSURANCE BUSINESSES
Company
Employees
Company
Berkshire Hathaway Homestate Companies
Berkshire Hathaway Reinsurance Group
Boat America Corporation
Central States Indemnity Co.
GEICO
650
633
415
426
22,354
General Re Corporation
Kansas Bankers Surety Company
Medical Protective Corporation
National Indemnity Primary Group
United States Liability Insurance Group
Insurance total
Company
Employees
Company
NON-INSURANCE BUSINESSES
Acme Building Brands
Adalet (1)
Altaquip (1)
Applied Underwriters, Inc.
Ben Bridge Jeweler
Benjamin Moore
Borsheim’s Jewelry
The Buffalo News
Business Wire
CalEnergy (2)
Campbell Hausfeld (1)
Carefree of Colorado (1)
Clayton Homes, Inc.
Cleveland Wood Products (1)
CORT Business Services
CTB International
Dairy Queen
Douglas/Quikut (1)
Fechheimer Brothers
FlightSafety International
Forest River, Inc.
France (1)
Fruit of the Loom
Garan
H. H. Brown Shoe Group
Halex (1)
Helzberg’s Diamond Shops
HomeServices of America (2)
Iscar
Johns Manville
Jordan’s Furniture
Justin Brands
Kern River Gas Transmission Company (2)
(1) A Scott Fetzer Company
(2) A MidAmerican Energy Holdings Company
2,521
248
338
456
763
2,625
204
822
506
323
565
249
14,288
88
2,494
1,450
2,379
64
911
4,218
5,282
117
26,643
4,403
1,073
118
2,170
3,194
7,198
6,437
1,267
911
163
Kingston (1)
Kirby (1)
Larson-Juhl
McLane Company
MidAmerican Energy Company (2)
MidAmerican Energy Holdings Company (2)
MiTek Inc.
Nebraska Furniture Mart
NetJets
Northern Natural Gas (2)
Northern and Yorkshire Electric (2)
Northland (1)
PacifiCorp (2)
Pacific Power (2)
The Pampered Chef
Precision Steel Warehouse
Richline Group
Rocky Mountain Power (2)
Russell Corporation
Other Scott Fetzer Companies (1)
See’s Candies
Shaw Industries
Stahl (1)
Star Furniture
TTI, Inc.
United Consumer Finance Company (1)
Vanity Fair Brands, Inc.
Wayne Water Systems (1)
Wesco Financial Corp.
Western Enterprises (1)
R. C. Willey Home Furnishings
World Book (1)
XTRA
Non-insurance total
Corporate Office
Employees
2,647
18
414
389
484
28,430
Employees
194
646
1,862
16,356
3,156
653
1,575
2,571
7,297
889
2,398
132
3,203
1,171
808
197
2,221
2,096
13,694
150
3,000
30,874
271
742
2,576
211
6,679
148
13
385
2,841
195
640
204,332
19
232,781
76
BERKSHIRE HATHAWAY INC.
DIRECTORS
WARREN E. BUFFETT,
Chairman and CEO of Berkshire
CHARLES T. MUNGER,
Vice Chairman of Berkshire
HOWARD G. BUFFETT,
President of Buffett Farms
SUSAN L. DECKER,
President of Yahoo! Inc., a global Internet brand.
WILLIAM H. GATES III,
Chairman of the Board of Directors of Microsoft Corp,
a software company.
DAVID S. GOTTESMAN,
Senior Managing Director of First Manhattan Company, an
investment advisory firm.
CHARLOTTE GUYMAN,
Chairman of the Finance Committee of the Board of Directors
of UW Medicine, an academic medical center.
DONALD R. KEOUGH,
Chairman of Allen and Company Incorporated, an investment
banking firm.
THOMAS S. MURPHY,
Former Chairman of the Board and CEO of Capital
Cities/ABC
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
MARK D. MILLARD,
Director of Financial Assets
JO ELLEN RIECK,
Director of Taxes
Letters from Annual Reports (1977 through 2007), quarterly reports, press releases and other information
about Berkshire may be obtained on the Internet at www.berkshirehathaway.com.