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1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED December 31, 2000
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COMMISSION FILE NUMBER 001-14905
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BERKSHIRE HATHAWAY INC.
(Exact name of Registrant as specified in its charter)
Delaware 47-0813844
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification number)
1440 Kiewit Plaza, Omaha, Nebraska 68131
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (402) 346-1400
Securities registered pursuant to Section 12(b) of the Act*:
Title of each class Name of each exchange on which registered
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Class A Common Stock, $5.00 Par Value New York Stock Exchange
Class B Common Stock, $0.1667 Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to the filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant - $64,785,516,000**
Indicate number of shares outstanding of each of the Registrant's classes of
common stock:
March 19, 2001 -- Class A Common Stock, $5 par value ................... 1,342,950 shares
March 19, 2001 -- Class B Common Stock, $0.1667 par value .............. 5,512,163 shares
DOCUMENTS INCORPORATED BY REFERENCE
Document Incorporated In
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Proxy Statement for Registrant's
Annual Meeting to be held April 28, 2001 Part III
* OBH Inc., a wholly-owned subsidiary of the Registrant, issued 1% Senior
Exchangeable Notes due December 2, 2001, which are registered on the New
York Stock Exchange.
** This aggregate value is computed at the last sale price of the common
stock on March 19, 2001. It does not include the value of Class A Common
Stock (530,743 shares) and Class B Common Stock (437 shares) held by
Directors and Executive Officers of the Registrant and members of their
immediate families, some of whom may not constitute "affiliates" for
purpose of the Securities Exchange Act of 1934.
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Part I
ITEM 1. BUSINESS
Berkshire Hathaway Inc. ("Berkshire", "Company" or "Registrant") is a
holding company owning subsidiaries engaged in a number of diverse business
activities. The most important of these are insurance businesses conducted
nationwide on a primary basis and worldwide on a reinsurance basis. Berkshire
also owns and operates a number of other businesses engaged in a variety of
activities, as identified herein.
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.
INSURANCE AND REINSURANCE BUSINESSES
Berkshire's insurance and reinsurance business activities are conducted
through 36 domestic and 16 foreign-based insurance companies. Over the last five
years, Berkshire's insurance operations have expanded significantly as a result
of the January 1996 acquisition of GEICO Corporation ("GEICO Corp.") and the
December 1998 acquisition of General Re Corporation ("General Re").
Historically, Berkshire's insurance businesses provided insurance and
reinsurance of property and casualty risks primarily in the United States. As a
result of the General Re acquisition, Berkshire's insurance operations also
include worldwide life, accident and health reinsurers, as well as
internationally-based property and casualty reinsurers.
In primary (or direct) insurance activities, the insurer assumes the risk
of loss from persons or organizations that are directly subject to the risks.
Such risks may relate to property, casualty (or liability), life, accident,
health, financial or other perils that may arise from an insurable event. In
reinsurance activities, the reinsurer assumes defined portions of similar or
dissimilar risks that other primary insurers or reinsurers have assumed in their
own insuring activities.
Reinsurance contracts are normally classified as treaty or facultative
contracts. Treaty reinsurance refers to automatic reinsurance coverage for all
or a portion of a specified class of risks ceded by the primary insurer, while
facultative reinsurance involves underwriting of individual risks. Coverage of
risks assumed under reinsurance contracts may be classified as quota-share or
excess. Under quota-share (proportional or pro-rata) reinsurance, the reinsurer
shares proportionally in the original premiums, losses, and expenses of the
primary insurer or reinsurer. Excess (or non-proportional) reinsurance provides
for the indemnification of the primary insurer or reinsurer for all or a portion
of the loss in excess of an agreed upon amount or "retention". Both quota-share
and excess reinsurance may provide for aggregate limits of indemnification.
Except for regulatory considerations, there are virtually no barriers to
entry into the insurance and reinsurance industry. Competitors may be domestic
or foreign, as well as licensed or unlicensed. The number of competitors within
the industry is not known. Insurers and reinsurers compete on the basis of
reliability, financial strength and stability, ratings, underwriting
consistency, service, business ethics, price, performance, capacity, policy
terms and coverage conditions.
Insurers and reinsurers based in the United States are subject to
regulation by their states of domicile and by those states in which they are
licensed. The primary focus of regulation is to assure that insurers are
financially solvent and that policyholder interests are otherwise protected.
States establish minimum capital levels for insurance companies and establish
guidelines for permissible business and investment activities. States have the
authority to suspend or revoke a company's authority to do business, as
conditions warrant.
Most primary insurers are required to obtain regulatory approval of the
policy forms issued and premium rates charged to policyholders. Reinsurers are
normally not required to obtain such approvals. States regulate the payment of
dividends by insurance companies to their shareholders. Dividends of
extraordinary amounts are subject to prior regulatory approval.
The insurance regulators of every state participate in the National
Association of Insurance Commissioners ("NAIC"). The NAIC adopts forms,
instructions and accounting procedures for use by U.S. insurers and reinsurers
in preparing and filing annual statutory financial statements. However, an
insurer's state of domicile has ultimate authority over accounting practices.
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ITEM 1. BUSINESS (CONTINUED)
INSURANCE AND REINSURANCE BUSINESSES (CONTINUED)
In 1998, the NAIC adopted statutory accounting principles ("SAP")
developed under its Codification Project, which was intended to bring greater
uniformity in accounting practices throughout the United States. The
codification guidance became effective January 1, 2001. While the codification
is not expected to have significant effect on Berkshire's insurance businesses,
the amount of reported regulatory capital, also known as statutory surplus, will
decline due to the recognition of deferred income taxes, including tax
liabilities on unrealized appreciation of investments. Previously, such
liabilities were not recognized under SAP.
In addition to its activities relating to the annual statement and SAP,
the NAIC develops or adopts model laws, regulations and programs for use by its
members. Such matters deal with regulatory oversight of solvency, compliance
with financial regulation standards, and risk-based capital reporting
requirements.
In general, regulation of the reinsurance industry outside of the United
States is subject to the differing laws and regulations of each country in which
the reinsurer has operations or writes premiums. Some jurisdictions, such as the
United Kingdom, impose complex regulatory requirements on reinsurance companies,
while other jurisdictions, such as Germany, impose fewer requirements. Local
reinsurance business conducted by General Re's subsidiaries in some countries
requires licenses issued by governmental authorities. These licenses may be
subject to modification, suspension or revocation dependent on such factors as
amount and types of reserves and minimum capital and solvency tests. The
violation of regulatory requirements may result in fines, censures and/or
criminal sanctions in various jurisdictions.
Berkshire's insurance companies maintain capital strength at unparalleled
levels, significantly higher than normal in the industry. This strength
differentiates Berkshire's insurance companies from their competitors.
Collectively, the aggregate statutory surplus of Berkshire's U.S. based insurers
has grown from $19.5 billion at December 31, 1995 to approximately $41.5 billion
at December 31, 2000. As a result of the adoption of the statutory accounting
codification discussed above, the aggregate statutory surplus is expected to
decline to about $33 billion as of January 1, 2001. All of Berkshire's major
insurance subsidiaries are rated AAA by Standard & Poor's Corporation, the
highest Financial Strength Rating assigned by Standard & Poor's, and are rated
A++ (superior) by A.M. Best with respect to their financial condition and
operating performance.
Berkshire's insurance and reinsurance operations are not significantly
affected by seasonal variances. However, periodic underwriting results from
Berkshire's property/casualty insurance and reinsurance operations can be
volatile. Underwriting results can be significantly affected by the timing and
magnitude of catastrophe losses incurred, especially with respect to reinsurance
assumed business.
Insurance underwriting operations are comprised of the following
sub-groups: (1) GEICO Corp. and its subsidiaries, (2) Berkshire Hathaway
Reinsurance Group, (3) Berkshire Hathaway Direct Insurance Group, and (4)
General Re and its subsidiaries. Additional information related to each of these
four underwriting units follows.
GEICO CORP. -- GEICO Corp. is headquartered in Chevy Chase, Maryland and
its principal insurance subsidiaries include: Government Employees Insurance
Company ("GEICO"), GEICO General Insurance Company ("GEICO General"), GEICO
Indemnity Company ("GI"), and GEICO Casualty Company ("GEICO Casualty"). These
companies offer primarily private passenger automobile insurance to individuals
in 48 states and the District of Columbia. Since being acquired by Berkshire,
premium volume has grown as a result of significantly higher advertising
expenditures and competitive premium rates. As a consequence, voluntary
automobile policies in-force have grown by approximately 100% since 1995. To
facilitate servicing in-force policy growth, GEICO opened sales and claims
service centers in several new locations during 1998 and 1999. Collectively,
GEICO Corp. companies are currently the sixth largest auto insurer, in terms of
premium volume, in the United States.
GEICO, founded in 1936, is a multiple-line property and casualty insurer
engaged primarily in writing private passenger automobile insurance for
preferred-risk government employees and military personnel. Prior to 1996, GEICO
also wrote homeowners, fire and boat owners insurance. Since then, GEICO
substantially exited these markets. GEICO also writes small amounts of personal
umbrella insurance for qualified applicants. GEICO General writes private
passenger automobile insurance for preferred-risk drivers not associated with
the government or military. GI writes standard-risk private passenger automobile
and motorcycle insurance. GEICO Casualty writes non-standard risk private
passenger automobile insurance. Each of these companies market their policies
primarily through direct response methods, in which applications for insurance
are submitted directly to the companies by telephone, through the mail, or via
the Internet.
Seasonal variations in GEICO Corp.'s insurance business are not
significant. However, extraordinary weather conditions or other factors may have
a significant effect upon the frequency or severity of automobile claims and, to
a diminishing degree, homeowners claims.
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ITEM 1. BUSINESS (CONTINUED)
INSURANCE AND REINSURANCE BUSINESSES (CONTINUED)
GEICO CORPORATION (CONTINUED)
GEICO Corp. companies compete for private passenger auto insurance
customers with other companies that sell directly to the customer, as well as
with companies that use a traditional agency sales force. Private passenger
automobile insurance business is highly competitive in the areas of price and
service. Some insurance companies exacerbate price competition by selling their
products for a period of time at less than adequate rates, because they
underestimate ultimate claim costs and/or overestimate the amount of investment
income expected to be earned from the cash flow generated as a result of
premiums being received before claims are paid. GEICO Corp. companies will not
knowingly follow that strategy.
Private passenger auto insurance is stringently regulated by state
insurance departments. As a result, it is difficult for insurance companies to
differentiate their products to consumers. Competition for preferred-risk
private passenger automobile insurance, which is substantial, tends to focus on
price and level of customer service provided, whereas price tends to be the
primary focus for other risks. GEICO Corp. companies place great emphasis on
customer satisfaction. GEICO Corp. companies' cost efficient direct response
marketing methods and emphasis on customer satisfaction enable it to offer
competitive rates and value to customers.
Management believes that the name and reputation of the GEICO Corp.
companies is a material asset and protects its name and other service marks
through appropriate registrations.
BERKSHIRE HATHAWAY REINSURANCE GROUP -- The Berkshire Hathaway Reinsurance
Group ("BHRG") operates from offices located in Stamford, Connecticut. National
Indemnity Company, the legal entity through which most of BHRG's reinsurance is
underwritten, provides principally excess and, to a lesser degree, quota-share
reinsurance to other property and casualty insurers and reinsurers. BHRG's
clients and risks assumed are located throughout the world, but are primarily
located within the United States. Minimal organizational, but huge financial,
resources are currently devoted to this business.
During the past five years, the BHRG has written a considerable number of
catastrophe excess contracts. A catastrophe excess policy provides protection to
the counterparty from the accumulation of primarily property losses arising from
a single loss event or series of events. These policies may provide significant
amounts of indemnification per contract and a single loss event may produce
losses under a number of contracts.
BHRG does not generally cede any of the risks assumed under catastrophe
excess reinsurance contracts, due to perceived uncertainties in recovering
amounts from other reinsurers that are financially weaker. As a result, the
catastrophe excess reinsurance business can produce extreme volatility in
periodic underwriting results. Accounting consequences, however, do not
influence decisions of Berkshire's management with respect to this or any other
business. This factor along with its extraordinary financial strength, are
believed to be the primary reasons why the BHRG has become a major provider of
such coverages.
In recent years, the amount of capital (i.e. capacity) devoted to the
catastrophe excess reinsurance business by the industry has increased as a
result of additional capital raised by newly-formed entities and the
introduction in the financial markets of new types of catastrophe risk
management products. The effect of such increased insuring capacity has been a
reduction in opportunities to write this business at acceptable prices. However,
the occasional acceptance of catastrophe excess reinsurance contracts can
produce considerable premiums.
In recent years, BHRG's non-catastrophe reinsurance business has derived
primarily from a relatively small number of excess policies written for major
U.S. insurers and reinsurers. For instance, BHRG has entered into several
retroactive reinsurance contracts over the past three years. In 2000,
retroactive reinsurance accounted for 84% of the total premium volume generated
by BHRG. Coverage under such contracts is usually provided on an excess basis
and amounts of indemnification are subject to an aggregate limit, which is
usually substantial. Retroactive reinsurance contracts afford protection to
ceding companies against the adverse development of claims arising under
policies issued in prior years. Significant amounts of environmental and latent
injury claims may arise under the contracts.
Under the terms of other non-catastrophe contracts, limits of
indemnification also may be subject to minimum and maximum payment amounts.
Minimum amounts may arise from profit-sharing or commutation clauses under the
contracts.
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5
ITEM 1. BUSINESS (CONTINUED)
INSURANCE AND REINSURANCE BUSINESSES (CONTINUED)
BERKSHIRE HATHAWAY REINSURANCE GROUP (CONTINUED)
In BHRG's non-catastrophe reinsurance business, the concept of
time-value-of-money is often an important element in establishing prices and
contract terms, since the payment of losses under the agreements are often
expected to occur over lengthy periods of time. Losses payable under the
contracts are normally expected to exceed premiums and therefore, produce
underwriting losses. This business is accepted, in part, because of the large
amounts of policyholder funds ("float") generated for investment, the economic
benefit of which will occur through increased investment income in future
periods.
BERKSHIRE HATHAWAY DIRECT INSURANCE GROUP -- The Berkshire Hathaway Direct
Insurance Group is a collection of smaller primary insurance operations that
provide a wide variety of insurance coverages to insureds principally in the
U.S. National Indemnity and certain affiliates underwrite motor vehicle
insurance to commercial enterprises. This business is written nationwide
primarily through insurance agents and brokers and is based in Omaha, Nebraska.
National Indemnity and certain other affiliates also solicit and underwrite
various unusual or especially large property and casualty risks.
Other insurance operations include: several companies referred to as the
"Homestate Companies", based in Colorado and Nebraska and with branch offices in
several other states, which market various commercial coverages for standard
risks to insureds in their state of domicile and an increasing number of other
states; Central States Indemnity Company of Omaha, 86.9% owned by Berkshire and
located in Omaha, Nebraska, which provides credit card credit insurance marketed
primarily through credit card issuers nationwide and 80.1% owned Kansas Bankers
Surety Company, based in Kansas, an insurer of primarily crime, fidelity, errors
and omissions, officers and directors liability and related insurance coverages
directed toward small and medium-sized banks throughout the midwestern United
States.
On August 8, 2000, Berkshire acquired U.S. Investment Corporation
("USIC"). USIC, through its three subsidiaries led by United States Liability
Insurance Company, underwrites primarily excess-and-surplus liability coverage.
USIC companies are licensed in a total of 48 states and the District of
Columbia.
GENERAL RE -- General Re was established in 1980 to serve as the holding
company of General Reinsurance Corporation ("GRC", incorporated in 1921) and its
affiliates. General Re affiliates include Kolnische Ruckversicherungs
Gesellschaft AG ("Cologne Re"), a major international reinsurer based in
Germany. General Re, directly and indirectly through a joint venture
arrangement, held an 88% economic interest in Cologne Re as of December 31,
2000.
General Re subsidiaries currently conduct global reinsurance businesses in
71 cities throughout the world and provide reinsurance coverage in 130
countries. General Re operates three principal reinsurance businesses: North
American property/casualty reinsurance, International property/casualty
reinsurance, and Global life/health reinsurance. General Re's reinsurance
operations are primarily based in Stamford, Connecticut and Cologne, Germany.
Collectively, General Re and subsidiaries are among the four largest reinsurers
in the world based on net premiums written and capital.
NORTH AMERICAN PROPERTY/CASUALTY REINSURANCE
General Re's North American property/casualty business is principally
treaty and facultative reinsurance that is marketed directly to clients without
involving a broker or intermediary. General Re companies underwrite
predominantly excess coverages for clients located throughout the United States
and Canada. North American reinsurance operations are conducted primarily
through GRC and National Reinsurance Company ("NRC"), both based in Stamford,
Connecticut. GRC is domiciled in Delaware and licensed in the District of
Columbia and all states but Hawaii, where it is an accredited reinsurer. North
American property/casualty business also includes a few smaller specialty
insurers.
North American property/casualty reinsurance operations generated $3,517
million in net written premiums in 2000. Casualty reinsurance represented
approximately 67% of North American property/casualty net premiums written and
property reinsurance represented approximately 26%.
General Re's specialty insurers include the General Star companies, which
underwrite excess and surplus lines and are domiciled in Connecticut and Ohio.
Also, the Genesis companies underwrite excess insurance for self-insured
programs and are domiciled in Connecticut and North Dakota. Fairfield Insurance
Company, a subsidiary of NRC engaged in property and casualty insurance
services, is domiciled in Connecticut, and is licensed in 48 states and the
District of Columbia. These businesses together represented approximately 7%
of General Re's North American property/casualty net premiums written in
2000.
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6
ITEM 1. BUSINESS (CONTINUED)
INSURANCE AND REINSURANCE BUSINESSES (CONTINUED)
INTERNATIONAL PROPERTY/CASUALTY REINSURANCE
In total, General Re operates its International property/casualty
reinsurance business in 28 countries and provides reinsurance coverage in 130
countries throughout the world. In 2000, the International property/casualty
operations principally wrote reinsurance in the form of treaties with lesser
amounts written on a facultative basis. Approximately 73% of International
property/casualty reinsurance business is written through Cologne Re. In
addition, international reinsurance business is written through a number of
wholly-owned subsidiaries of General Re. At the end of 1998, General Re acquired
D.P. Mann Holdings Limited ("DP Mann"). DP Mann owns both the managing agent of
Syndicate 435 at Lloyd's of London and DP Mann Corporate Name Limited, which
provides capacity and participates in the results of Syndicate 435 (39.7% in
2000 and 31.6% in 1999).
In 2000, General Re's International property/casualty operations produced
net written premiums totaling $3,036 million. Approximately 81% of international
premiums written related to quota-share coverages and 19% were excess coverages.
Property premiums written were approximately 58% of total International
property/casualty premiums and casualty premiums were approximately 42%.
Approximately 70% of International property/casualty written premiums are
attributed to Germany and Western Europe.
GLOBAL LIFE/HEALTH REINSURANCE
This business includes the North American and International life/health
operations of Cologne Re. Life/health net premiums written in 2000 were $2,264
million. Approximately 28% of life/health net premiums were written in Western
Europe, another 57% were written in the United States and the remaining 15% were
written throughout the rest of the world. The life/health operations provide
individual life, group life, group health, long-term care, individual health and
finite risk reinsurance. Most of the life reinsurance business is written on a
proportional treaty basis, with smaller amounts written on a facultative basis,
while health business is predominantly written on an excess treaty basis. The
life/health business is marketed primarily on a direct basis with the exception
of group health, which is marketed primarily through brokers.
INVESTMENTS -- The levels of reinsurance assumed business in recent years,
plus the acquisitions of GEICO Corp. and General Re, have produced an
exceptional increase in the amount of "float" held by Berkshire's insurance
businesses. "Float" is an approximation of the amount of net policyholder funds
available for investment. That term denotes the sum of unpaid losses and loss
adjustment expenses, unearned premiums and other policyholder liabilities, less
the aggregate amount of premium balances receivable, losses recoverable from
reinsurance ceded, deferred policy acquisition costs, deferred charges -
reinsurance assumed, and related prepaid income taxes. The amount of float has
grown from about $3.8 billion at the end of 1995 to about $27.9 billion at the
end of 2000. Float increased by about $2.6 billion upon Berkshire's acquisition
of GEICO in January 1996 and another $14.9 billion upon Berkshire's acquisition
of General Re in December 1998. The increases in the amounts of float plus the
substantial amounts of shareholder capital devoted to insurance and reinsurance
activities has generated meaningful increases in the levels of investments and
investment income.
Investment portfolios of insurance subsidiaries include equity ownership
percentages of other publicly traded companies. Investments with a market value
in excess of $1 billion at the end of 2000 include approximately 11% of the
outstanding capital stock of American Express Company, approximately 8% of the
capital stock of The Coca-Cola Company, approximately 9% of the capital stock of
The Gillette Company, approximately 18% of the capital stock of The Washington
Post Company and approximately 3% of the capital stock of Wells Fargo and
Company. Much information about these publicly-owned companies is available,
including information released from time to time by the companies themselves.
NON-INSURANCE BUSINESSES OF BERKSHIRE
The descriptions of the Registrant's numerous and diverse non-insurance
businesses are described below.
FLIGHT SERVICES -- At the end of 1996, Berkshire acquired FlightSafety
International Inc. ("FSI"). FSI's corporate headquarters is located at LaGuardia
Airport in Flushing, New York.
FSI and its subsidiaries engage primarily in the business of providing
high technology training to operators of aircraft and ships. FSI's training
activities include: advanced pilot training in the operation of aircraft and air
traffic control procedures; aircrew training for military and other government
personnel; aircraft maintenance technician training; ab-initio (primary) pilot
training to qualify individuals for private and commercial pilots' licenses; and
ship handling and related training services. FSI also develops classroom
instructional systems and materials for use in its training business and for
sale to others.
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ITEM 1. BUSINESS (CONTINUED)
NON-INSURANCE BUSINESSES OF BERKSHIRE (CONTINUED)
A significant part of FSI's training programs derives from the use of
simulators, which incorporate computer-based technology to replicate the
operation of particular aircraft or ocean-going vessels. Simulators reproduce,
with a high degree of accuracy, certain sights, movements, and aircraft or
vessel control responses experienced by the operator of the aircraft or ship.
FSI utilizes approximately 295 training devices, including 254 civil aviation
simulators. FSI's training businesses are conducted primarily in the United
States, with facilities located in 20 states. FSI also operates training
facilities in Australia, Canada, France and the United Kingdom. During 1997, FSI
and The Boeing Company, a leading airplane manufacturer, established a joint
venture to provide pilot and aircrew training for airline customers around the
world.
FSI also designs and manufactures full motion flight simulators, visual
displays, and other training equipment for use in its training business and for
sale to others. Manufacturing facilities are located in Oklahoma and Missouri.
Berkshire added to its flight services business upon the acquisition of
Executive Jet, Inc. ("EJ"), in August, 1998. EJ is the world's leading provider
of fractional ownership programs for general aviation aircraft. The fractional
ownership of aircraft concept permits customers to acquire a specific percentage
of a certain aircraft type and allows them to utilize the aircraft for a
specified number of flight hours per annum. In addition, EJ provides management,
ground support and flight operation services to customers after the sale. EJ's
revenues derive from both the sale of fractional interests as well as management
and usage fees charged to clients in connection with flight operations.
The fractional ownership concept is designed to meet the needs of
customers who cannot justify the purchase of an entire aircraft based upon
expected usage. In addition, fractional ownership programs are available for
corporate flight departments seeking to outsource their general aviation needs
or looking for additional capacity for peak periods and for others that
previously chartered aircraft. EJ places great emphasis on customer service. Its
programs are designed to offer customers guaranteed availability of aircraft,
lower and predictable operating costs and liquidity.
In 1986, EJ created the fractional ownership of aircraft concept and
introduced its NetJets(R) program in the U.S. with one aircraft type. The
NetJets(R) program currently offers eleven aircraft types. EJ plans to introduce
several new models in the next few years. In late 1996, EJ expanded its
fractional ownership programs to Europe via a joint venture arrangement, which
is 91% owned by EJ.
EJ is currently believed to be the world's largest purchaser of general
aviation aircraft. The company maintained 269 aircraft in its fleet as of
December 31, 2000. EJ management believes that the market for fractional
ownership of aircraft programs is large and growing and will contribute to EJ's
continued growth over the foreseeable future. EJ's executive offices are located
in New Jersey, while most of its logistical and flight operations are based at
Port Columbus International Airport in Columbus, Ohio. EJ's European operations
are based in Lisbon, Portugal.
RETAIL BUSINESSES - Berkshire's retail businesses consist of several
independently managed home furnishings and jewelry retail operations.
Information regarding each of these operations follows.
The retail furniture businesses are the Nebraska Furniture Mart ("NFM"),
R.C. Willey Home Furnishings ("R.C. Willey"), Star Furniture Company ("Star"),
and Jordan's Furniture, Inc. ("Jordan's"). NFM is 80% owned by Berkshire,
whereas R.C. Willey, Star and Jordan's are 100% owned by Berkshire. Berkshire
has owned its interest in NFM since 1983, acquired R.C. Willey in 1995, Star in
1997 and Jordan's was acquired in November, 1999.
NFM, R.C. Willey, Star and Jordan's each offer a wide selection of
furniture and accessories. In addition, NFM and R.C. Willey sell a full line of
major household appliances, electronics, computers and other home furnishings.
NFM, R.C. Willey, Star and Jordan's also offer customer financing to complement
their retail operations. An important feature of each of these businesses is
their ability to control costs and to produce high business volume from
offerings of significant value to its customers.
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ITEM 1. BUSINESS (CONTINUED)
NON-INSURANCE BUSINESSES OF BERKSHIRE (CONTINUED)
NFM operates its business from a very large - approximately 525,000 square
feet - retail complex and sizable warehouse and administrative facilities in
Omaha, Nebraska. NFM's customers are drawn from a radius around Omaha of
approximately 300 miles and it is the largest furniture retailer in the area. In
2000, NFM acquired Homemakers Furniture located in Des Moines, Iowa. Homemakers
has two facilities that include approximately 235,000 square feet of retail
space. The acquisition also included WoodMarc Corporation, a manufacturer of
wood furniture products with a 260,000 square foot facility in Winterset, Iowa.
R.C. Willey, founded in 1932 and based in Salt Lake City, is the dominant
home furnishings retailer in Utah. R.C. Willey operates seven full retail
stores, including a store that was opened in August of 1999 in Meridian, Idaho,
a distribution center and three clearance facilities. These facilities -- which
include more than 760,000 square feet of retail space -- are strategically
located throughout northern Utah and in Meridian, Idaho. A new store is
scheduled to open in Las Vegas, Nevada in late 2001. R.C. Willey serves
customers in four western states.
Star's retail, office and warehouse facilities, include about 540,000
square feet of retail space in nine locations. Six retail locations are in
Houston, Texas where Star is a major furniture retailer in that market.
Jordan's operates a furniture retail business from three locations in
Massachusetts and one in New Hampshire. Jordan's is believed to be the largest
furniture retailer, as measured by sales, in the Massachusetts and New Hampshire
areas. Jordan's is well known in its markets for its unique store arrangements
and advertising campaigns.
Since 1989, Berkshire has owned an interest (currently 88%) in Borsheim's
Jewelry Company ("Borsheim's"). From its single store located in Omaha,
Nebraska, Borsheim's is a high volume retailer of fine jewelry, watches,
crystal, china, stemware, flatware, gifts and collectibles. In 1995, Berkshire
acquired Helzberg's Diamond Shops, Inc. ("Helzberg's"). Helzberg's, based in
North Kansas City, Missouri, operates a chain of 223 retail jewelry stores in
thirty-three states. Most of Helzberg's stores are located in malls or power
strip centers, and operate under the name Helzberg Diamonds. On July 1, 2000,
Berkshire's retail business grew again as a result of the acquisition of The Ben
Bridge Corporation ("Ben Bridge Jeweler"). Ben Bridge Jeweler, based in Seattle,
Washington, operates a chain of 65 upscale retail jewelry stores in 11 states,
primarily in the Western United States, and including Hawaii and Alaska. Ben
Bridge Jeweler stores are located primarily in major shopping malls.
SCOTT FETZER COMPANIES -- The Scott Fetzer Companies are a diversified
group of 21 businesses that manufacture and distribute a wide variety of
products for residential, industrial and institutional use. The two most
significant of these businesses are Kirby home cleaning systems and Campbell
Hausfeld.
Kirby's home cleaning systems are sold to approximately 830 independent
authorized factory distributors in the United States and foreign countries.
Sales are made through in-the-home demonstrations by independent salespeople.
The distributors independently establish the prices at which they offer Kirby
products. Kirby and its distributors believe they offer a premium product, and
it is believed that prices are generally higher than most of its major
competitors. Additionally, a wholly-owned subsidiary purchases consumer finance
contracts from about 580 Kirby authorized factory distributors in the United
States.
Campbell Hausfeld manufactures a variety of products including air
compressors, air tools, painting systems, pressure washers, welders and
generators which are marketed primarily to retailers and industrial products
distributors. Scott Fetzer management believes that Campbell Hausfeld offers
products that are a superior value to the consumer in comparison to its
competitors.
OTHER NON-INSURANCE BUSINESSES -- Berkshire's other non-insurance
businesses consist of a wide array of businesses that engage in a variety of
business activities. Additional information related to these businesses is as
follows.
The BUFFALO NEWS publishes a Sunday edition and nine editions each weekday
from its headquarters in Buffalo, New York. It is the only metropolitan
newspaper published daily within a ten county upstate New York distribution area
that comprises one of the 50 largest primary market areas in the United States.
SEE'S CANDIES produces boxed chocolates and other confectionery products
with an emphasis on quality in two large kitchens in California. See's
distributes its candies through its own retail stores - nearly 200 in number,
located in 10 western and midwestern states, including Hawaii - and by mail
order. A large volume of candy business is also recorded from direct shipments
made nationwide from its California based quantity order distribution centers.
7
9
ITEM 1. BUSINESS (CONTINUED)
NON-INSURANCE BUSINESSES OF BERKSHIRE (CONTINUED)
INTERNATIONAL DAIRY QUEEN ("IDQ") was acquired by Berkshire at the
beginning of 1998. IDQ services a system of over 6,000 stores operating under
the names Dairy Queen, Orange Julius and Karmelkorn that offer various dairy
desserts, beverages, prepared foods, blended fruit drinks, popcorn and other
snack foods. IDQ predominantly franchises its stores to individual owners or to
territorial operators, who, in turn, franchise to individual owners. IDQ
supports and promotes franchisees through product development, market testing,
advertising, training and advisory services. IDQ also creates and enforces
quality control standards for its stores. Additionally, IDQ sells equipment and
other products used in Dairy Queen stores, either directly to the stores or to
independent distributors that sell to the stores. IDQ stores are currently
located in 49 states, Canada, Japan and other countries.
Berkshire owns several shoe businesses including H.H. BROWN SHOE COMPANY
(acquired in 1991), LOWELL SHOE COMPANY (acquired in 1992), DEXTER SHOE COMPANY
(acquired in 1993), and JUSTIN BRANDS (acquired in August 2000). Collectively,
these businesses purchase, manufacture and distribute work shoes, western-style
boots, men's and women's athletic footwear as well as other functional footwear
products under a number of brand names, including H.H. Brown, Born, Double-H
Boot, Carolina, Dexter, Soft Spots, Nocona, Tony Lama and Chippewa. Shoes are
primarily marketed in the United States through a variety of large and small
independent retailers. In recent years, intensifying competition from importers
has caused Berkshire's domestic manufacturing operations to become less
competitive. At Dexter, for instance, operating losses have resulted in each of
the past two years. As a result, certain domestic manufacturing facilities were
closed in 2000 and others are expected to close in 2001. Future production of
shoes and shoe components will increasingly derive from off-shore sources.
CORT BUSINESS SERVICES CORPORATION ("CORT") was acquired in February 2000
by an 80.1% owned subsidiary of Berkshire. CORT is the leading national provider
of rental furniture, accessories and related services in the growing and
fragmented "rent-to-rent" segment of the furniture rental industry. The
"rent-to-rent" segment of the furniture rental industry serves both corporate
and individual customers who generally have immediate, temporary needs for
office or residential merchandise. However, unlike customers in the
"rent-to-own" segment, "rent-to-rent" customers typically do not seek to own
such merchandise.
CORT focuses on corporate customers by offering office and residential
furniture and related accessories through a direct sales force of approximately
900 salespeople and a network of 117 showrooms in 35 states and the District of
Columbia. CORT maintains the showroom quality condition of its merchandise
available for rent by selling its previously rented merchandise through a
network of 86 company-operated clearance centers, thereby enabling the company
to regularly update its inventory with new styles and new merchandise.
On August 1, 2000, Berkshire's non-insurance business activities expanded
through the acquisition of Justin Industries Inc. ("Justin"). Justin operates
two businesses, ACME BUILDING BRANDS ("Acme") and JUSTIN BRANDS. Justin Brands
was discussed previously.
Acme, headquartered in Fort Worth, Texas, manufactures and distributes
clay bricks (Acme Brick), concrete block (Featherlite) and cut limestone (Texas
Quarries). In addition, Acme distributes a number of other building products of
other manufacturers, including glass block, brick, floor and wall tile and other
masonry products. Acme also sells ceramic floor and wall tile, as well as
marble, granite and other stones through its subsidiary, American Tile. Products
are sold primarily in the Central and Southwest United States through company
operated sales offices. Acme distributes products primarily to home builders and
masonry and general contractors. Acme operates 22 brick manufacturing facilities
located in 5 states and operates 12 tile distribution and 8 concrete block
facilities. The demand for Acme's products is seasonal, with higher sales in the
warmer weather months, and is subject to the level of construction, which can be
cyclical. Acme also owns and leases properties and mineral rights that supply
raw materials used in many of its manufactured products.
8
10
ITEM 1. BUSINESS (CONTINUED)
NON-INSURANCE BUSINESSES OF BERKSHIRE (CONTINUED)
Berkshire acquired BENJAMIN MOORE & CO. ("Benjamin Moore") on December 18,
2000. For the year ending December 31, 2000, Benjamin Moore had net sales of
approximately $820 million.
Benjamin Moore, headquartered in Montvale, New Jersey, is a leading
formulator, manufacturer and retailer of a broad range of architectural and
industrial coatings, available principally in the United States and Canada.
Products include a broad line of coatings that include water-thinnable and
solvent-thinnable general purpose coatings (paints, stains and clear finishes)
for use by the general public, contractors and industrial and commercial users.
Products are marketed under about two dozen registered brand names, including
Regal, Moorcraft and MoorGard.
In addition, Benjamin Moore produces coatings designed to conform to the
specific requirements of manufacturers, who utilize such coatings in the
manufacturing process, such as various types of flexible packages, beverage and
food containers, tanks, roof decking, coils, furniture and shelving, window
blinds and flatwood products.
Benjamin Moore owns and manages several multiple-outlet dealerships and
stand-alone stores in various parts of the U.S. serving primarily contractors
and general consumers. At December 31, 2000, there were 97 Benjamin Moore-owned
stores positioned in the market as independent dealers that offer a broad array
of products including Benjamin Moore brands and other competitor coatings,
wallcoverings, window treatments and sundries.
Benjamin Moore substantially relies on independent dealers for
distribution of its products, which provide the majority of Benjamin Moore's
revenue and profits. The network consists of over 3,700 retailers with over
4,700 storefronts in the U.S. and Canada.
The coatings industry is highly competitive and has historically been
subject to intense price competition. It is estimated that there are
approximately 800 coatings manufacturers in the United States, many of which are
small companies, which compete regionally and locally, especially with respect
to lower priced coatings and custom made specialty items. Other manufacturers
are large corporations, which compete on a nationwide basis.
Berkshire's non-insurance businesses include a group of finance and
financial products businesses. Included in these business activities is GEN RE
SECURITIES HOLDINGS LIMITED and affiliates ("GRS"). GRS is a dealer in
derivative products offering a full line of interest rate, currency, and equity
swap and option products, as well as structured finance products. Berkshire's
other finance businesses include BH FINANCE LLC, BERKSHIRE HATHAWAY CREDIT CORP,
BERKSHIRE HATHAWAY LIFE INSURANCE and SCOTT FETZER FINANCIAL GROUP, INC.
Berkshire's other finance and financial products businesses engage in commercial
real estate financing, as well as other commercial lending activities, consumer
receivable financing in connection with sales of Kirby and sales of annuity
contracts. The businesses also invest on a leveraged basis in financial
instruments pursuant to proprietary trading strategies.
On March 14, 2000, Berkshire invested approximately $1.24 billion cash in
common stock and convertible preferred stock of a newly-formed entity that
merged with and into MIDAMERICAN ENERGY HOLDINGS COMPANY ("MidAmerican"). These
securities possess 9.7% of the voting interest and 76% of the economic interest
on a fully-diluted basis in MidAmerican. In addition, Berkshire subsidiaries
acquired $455 million of 11% non-transferable trust preferred securities of
MidAmerican. Additional information concerning these investments and
MidAmerican's business activities is provided in Note 3 to the Registrant's
Consolidated Financial Statements.
NON-INSURANCE BUSINESSES ACQUIRED IN 2001
In 2001, Berkshire consummated two additional business acquisitions.
Berkshire acquired an approximately 87.3% interest in SHAW INDUSTRIES, INC.
("Shaw") on January 7, 2001 for cash of approximately $2.1 billion. Berkshire
acquired JOHNS MANVILLE ("JM") on February 26, 2001 for cash of approximately
$1.8 billion. Shaw and JM's results of operations will be included in
Berkshire's consolidated results beginning as of the respective acquisition
dates. Additional information related to each of these companies is provided
below.
9
11
ITEM 1. BUSINESS (CONTINUED)
NON-INSURANCE BUSINESSES ACQUIRED IN 2001 (CONTINUED)
Shaw, headquartered in Dalton, Georgia, is the world's largest carpet
manufacturer based on both revenue and volume of production. Shaw designs and
manufactures approximately 1,800 styles of tufted and woven carpet for
residential and commercial use under about 20 brand and trade names and under
certain private labels. Shaw's manufacturing operations are fully integrated
from the processing of yarns through the finishing of carpet. Shaw's carpet is
sold in a broad range of prices, patterns, colors and textures. For the year
ending December 31, 2000, Shaw had net sales of approximately $4.2 billion.
Shaw sells its wholesale products to over 53,000 retailers, distributors
and commercial users throughout the United States, Canada, Mexico and Australia;
through its own residential and commercial contract distribution channels to
various residential and commercial end-users in the United States; and to a
lesser degree, exports to additional overseas markets. Shaw also provides
installation services and sells laminate flooring, ceramic tile and beginning in
2000, hardwood flooring.
Substantially all carpet manufactured by Shaw is tufted carpet made from
nylon, polypropylene, polyester and wool. In the tufting process, yarn is
inserted by multiple needles into a synthetic backing, forming loops which may
be cut or left uncut, depending on the desired texture or construction. During
2000, Shaw processed approximately 97% of its requirements for carpet yarn in
its own yarn processing facilities.
Shaw's wholesale products are marketed domestically by approximately 1,400
salaried and commissioned sales personnel in its various marketing divisions
directly to retailers and distributors and to large national accounts. Shaw's 11
regional warehouse facilities and 13 redistribution centers, along with its
centralized management information system, enable it to provide prompt delivery
of its products to both its retail customers and wholesale distributors.
The floor covering industry is highly competitive with more than 200
companies engaged in the manufacture and sale of carpet in the United States and
numerous manufacturers engaged in hard surface floor covering production and
sales. According to industry estimates, carpet accounts for approximately 70% of
the total United States production of all flooring types. The principal methods
of competition within the floor covering industry are quality, style, price and
service.
JM is a leading manufacturer of insulation and building products, with
worldwide net sales in 2000 of approximately $2.3 billion. JM manufactures and
markets products for building and equipment insulation, commercial and
industrial roofing systems, high-efficiency filtration media, and fibers and
nonwoven mats used as reinforcements in building and industrial applications. JM
operates manufacturing facilities in North America, Europe and China. JM is
headquartered in Denver, Colorado and has manufacturing and development
facilities in locations around the United States and Canada, as well as
locations in China, Germany and other locations in Europe.
Demand for JM's products are primarily driven by new residential and
commercial construction activity, as well as activity in the repair, remodel and
retrofit markets. Products are distributed through builders, contractors,
retailers, wholesale distributors and fabricators. JM competes primarily on the
basis of price, quality, breadth of product line, service and strength of
fabricator and distributor networks.
Berkshire Hathaway Inc., and its subsidiaries, including Shaw and JM,
employed approximately 112,000 persons on a full-time equivalent basis at
December 31, 2000.
ADDITIONAL INFORMATION WITH RESPECT TO BERKSHIRE'S BUSINESSES
The amounts of revenue, operating profit and identifiable assets
attributable to the aforementioned business segments are included in Note 16 to
Registrant's Consolidated Financial Statements contained in Item 8, Financial
Statements and Supplementary Data. Additional information regarding Registrant's
investments in fixed maturity and marketable equity securities is included in
Notes 4 and 5 to Registrant's Consolidated Financial Statements.
10
12
ITEM 2. PROPERTIES
The physical properties used by the Registrant and its significant
business segments are summarized below:
Approx.
Owned/ Square
Business Location Type of Property Leased Footage
- -------- -------- ---------------- ------ -------
Berkshire Omaha, NE Corporate Offices Leased 7,000
GEICO Chevy Chase, MD, and other Offices Owned 2,800,000
locations in New York,
Georgia, Texas,
California, Florida &
Virginia
Various locations throughout Offices and drive-in Leased 250,000
the United States claims facilities
Berkshire Hathaway Stamford, CT and 6 other Offices Leased 58,000
Reinsurance Group locations in the U.S.
and United Kingdom
Berkshire Hathaway Omaha, NE Offices Owned 73,000
Direct Insurance Group Omaha, NE & Wayne, PA and Offices Leased 171,000
11 other various locations
throughout the United States
& England
General Re Cologne, Germany and Offices Owned 170,000
various non-U.S. locations
Stamford, CT, various U.S. Offices Leased 1,403,000
and non-U.S. locations
Flight Services 27 U.S. States, Canada, Offices/Training Owned 1,807,000
France, Switzerland, Facilities/Hangars Leased 699,000
Portugal and the United
Kingdom
Oklahoma and Missouri Mfg. plant Owned 153,000
Leased 120,000
Retail businesses
Furniture Omaha, NE, Salt Lake City, UT, Furniture Stores Owned 1,742,000
Houston, TX, Avon, MA & 3 Furniture Stores Leased 612,000
other U.S. States (27 Offices/Warehouses Owned 2,180,000
locations) Offices/Warehouses Leased 785,000
Iowa Mfg. plant Owned 260,000
Jewelry Omaha, NE, Kansas City, MO, Jewelry Stores Leased 753,000
Seattle WA and 32 other U.S. Offices Owned 65,000
States (305 locations)
Scott Fetzer Companies Cleveland, OH, & other Mfg. plants/ Owned 2,349,000
locations in 12 U.S. states Warehouses/
(52 locations) Offices
Warehouses/Offices Leased 962,000
Australia, Canada, England,
Taiwan & Mexico Warehouses/Offices Leased 93,000
All other businesses Various locations Mfg. plants/offices/
primarily in the U.S. warehouses Owned 9,992,000
Mfg. plants/offices/
warehouses Leased 5,274,000
Approximately 480 locations Restaurants/Stores Owned 382,000
primarily in the U.S. Restaurants/Stores Leased 1,503,000
11
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ITEM 3. LEGAL PROCEEDINGS
Litigation pending against the Company and its subsidiaries is not
considered material or is ordinary routine litigation incidental to the
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
EXECUTIVE OFFICERS OF THE REGISTRANT
Following is a list of the Registrant's executive officers:
Name Age Position with Registrant Since
- ---- --- ------------------------ -----
Warren E. Buffett 70 Chairman of the Board 1970
Marc D. Hamburg 51 Vice President 1992
Charles T. Munger 77 Vice Chairman of the Board 1978
Each executive officer serves, in accordance with the by-laws of the
Registrant, until the first meeting of the Board of Directors following the next
annual meeting of shareholders and until his respective successor is chosen and
qualified or until he sooner dies, resigns, is removed or becomes disqualified.
Mr. Buffett and Mr. Munger also serve as directors of the Registrant.
Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
MARKET INFORMATION
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:
2000 1999
-------------------------------- --------------------------------
Class A Class B Class A Class B
---------------- -------------- ---------------- --------------
High Low High Low High Low High Low
------- ------- ------ ------ ------- ------- ------ ------
First Quarter........ $58,000 $40,800 $1,888 $1,351 $81,100 $61,900 $2,713 $2,048
Second Quarter....... 60,800 51,800 1,975 1,660 78,600 68,300 2,540 2,211
Third Quarter........ 64,400 51,600 2,086 1,706 73,000 54,600 2,333 1,802
Fourth Quarter....... 71,300 53,500 2,375 1,761 66,900 52,000 2,219 1,700 1/2
SHAREHOLDERS
Berkshire had approximately 8,800 record holders of its Class A Common
Stock and 14,000 record holders of its Class B Common Stock at March 2, 2001.
Record owners included nominees holding at least 410,000 shares of Class A
Common Stock and 5,200,000 shares of Class B Common Stock on behalf of
beneficial-but-not-of-record owners.
DIVIDENDS
Berkshire has not declared a cash dividend since 1967.
12
14
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA FOR THE PAST FIVE YEARS
(dollars in millions, except per share data)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
REVENUES:
Insurance premiums earned ................ $ 19,343 $ 14,306 $ 5,481 $ 4,761 $ 4,118
Sales and service revenues ............... 7,331 5,918 4,675 3,615 3,095
Interest, dividend and other investment
income ................................. 2,791 2,314 1,049 916 778
Income from finance and financial products
businesses ............................. 556 125 212 32 25
Realized investment gain (1) ............. 3,955 1,365 2,415 1,106 2,484
-------- -------- -------- ------- -------
Total revenues ........................... $ 33,976 $ 24,028 $ 13,832 $10,430 $10,500
======== ======== ======== ======= =======
EARNINGS:
Before realized investment gain .......... $ 936 $ 671 $ 1,277 $ 1,197 $ 884
Realized investment gain (1) ............. 2,392 886 1,553 704 1,605
-------- -------- -------- ------- -------
Net earnings ............................. $ 3,328 $ 1,557 $ 2,830 $ 1,901 $ 2,489
======== ======== ======== ======= =======
EARNINGS PER SHARE:
Before realized investment gain .......... $ 614 $ 442 $ 1,021 $ 971 $ 733
Realized investment gain (1) ............. 1,571 583 1,241 571 1,332
-------- -------- -------- ------- -------
Net earnings ............................. $ 2,185 $ 1,025 $ 2,262 $ 1,542 $ 2,065
======== ======== ======== ======= =======
YEAR-END DATA (2):
Total assets ............................. $135,792 $131,416 $122,237 $56,111 $43,409
Borrowings under investment agreements
and other debt (3) ..................... 2,663 2,465 2,385 2,267 1,944
Shareholders' equity ..................... 61,724 57,761 57,403 31,455 23,427
Class A equivalent common shares
outstanding, in thousands .............. 1,526 1,521 1,519 1,234 1,232
Shareholders' equity per outstanding
Class A equivalent share ............... $ 40,442 $ 37,987 $ 37,801 $25,488 $19,011
======== ======== ======== ======= =======
- -----------------
(1) The amount of realized investment gain/loss for any given period has no
predictive value, and variations in amount from period to period have no
practical analytical value, particularly in view of the unrealized
appreciation now existing in Berkshire's consolidated investment
portfolio.
(2) Year-end data for 1998 includes General Re Corporation acquired by
Berkshire on December 21, 1998.
(3) Excludes borrowings of finance businesses.
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15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Net earnings for each of the past three years are disaggregated in the
table that follows. Amounts are after deducting minority interests and taxes.
(dollars in millions)
--------------------------
2000 1999 1998
---- ---- ----
Insurance - underwriting ......................................... $(1,021) $ (897) $ 171
Insurance - investment income .................................... 1,955 1,764 731
Non-Insurance businesses ......................................... 804 518 538
Interest expense ................................................. (61) (70) (63)
Goodwill amortization and other purchase-accounting adjustments .. (818) (648) (118)
Other ............................................................ 77 4 18
------- ------ ------
Earnings before realized investment gain ................... 936 671 1,277
Realized investment gain ......................................... 2,392 886 1,553
------- ------ ------
Net earnings ............................................... $ 3,328 $1,557 $2,830
======= ====== ======
The business segment data (Note 16 to Consolidated Financial Statements)
should be read in conjunction with this discussion.
INSURANCE -- UNDERWRITING
A summary follows of underwriting results from Berkshire's insurance
businesses for the past three years.
(dollars in millions)
-------------------------
2000 1999 1998
---- ---- ----
Underwriting gain (loss) attributable to:
GEICO ................................................. $ (224) $ 24 $269
General Re ............................................ (1,224) (1,184) --
Berkshire Hathaway Reinsurance Group .................. (175) (256) (21)
Berkshire Hathaway Direct Insurance Group ............. 38 22 17
------- ------- ----
Underwriting gain (loss) -- pre-tax ...................... (1,585) (1,394) 265
Income taxes and minority interest ....................... (564) (497) 94
------- ------- ----
Net underwriting gain (loss) ....................... $(1,021) $ (897) $171
======= ======= ====
Berkshire engages in both primary insurance and reinsurance of property
and casualty risks. Through General Re, Berkshire also reinsures life and health
risks. In primary insurance activities, Berkshire subsidiaries assume defined
portions of the risks of loss from persons or organizations that are directly
subject to the risks. In reinsurance activities, Berkshire subsidiaries assume
defined portions of similar or dissimilar risks that other insurers or
reinsurers have subjected themselves to in their own insuring activities.
Berkshire's principal insurance businesses are: (1) GEICO, the sixth largest
auto insurer in the United States, (2) General Re, one of the four largest
reinsurers in the world, (3) Berkshire Hathaway Reinsurance Group ("BHRG") and
(4) Berkshire Hathaway Direct Insurance Group.
A significant marketing strategy followed by all these businesses is the
maintenance of extraordinary capital strength. Statutory surplus as regards
policyholders of Berkshire's insurance businesses totaled approximately $41.5
billion at December 31, 2000. This superior capital strength creates
opportunities, especially with respect to reinsurance activities, to negotiate
and enter into contracts of insurance specially designed to meet unique needs of
sophisticated insurance and reinsurance buyers. Additional information regarding
Berkshire's insurance and reinsurance operations is presented on the following
pages.
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16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
INSURANCE -- UNDERWRITING (Continued)
GEICO
GEICO provides primarily private passenger automobile coverages to
insureds in 48 states and the District of Columbia. GEICO policies are marketed
mainly by direct response methods in which customers apply for coverage directly
to the company over the telephone, through the mail or via the Internet. This is
a significant element in GEICO's strategy to be a low cost insurer and, yet,
provide high value to policyholders.
GEICO's underwriting results for the past three years are summarized
below.
(dollars are in millions)
-------------------------------------------------------
2000 1999 1998
----------------- ---------------- ----------------
Amount % Amount % Amount %
------ ----- ------ ----- ------ -----
Premiums written ..................... $5,778 $4,953 $4,182
====== ====== ======
Premiums earned ...................... $5,610 100.0 $4,757 100.0 $4,033 100.0
------ ----- ------ ----- ------ -----
Losses and loss expenses ............. 4,809 85.7 3,815 80.2 2,978 73.8
Underwriting expenses ................ 1,025 18.3 918 19.3 786 19.5
------ ----- ------ ----- ------ -----
Total losses and expenses ............ 5,834 104.0 4,733 99.5 3,764 93.3
------ ===== ------ ===== ------ =====
Underwriting gain (loss) -- pre-tax .. $ (224) $ 24 $ 269
====== ====== ======
Premiums earned by GEICO in 2000 totaled $5,610 million, an increase of
17.9% over 1999, which, in turn exceeded premiums earned in 1998 by 17.9%. The
growth in premiums earned in 2000 for voluntary auto was 18.3% reflecting an
8.5% increase in policies-in-force during the past year and increased premium
rates. During 2000, in response to increased losses, GEICO implemented rate
increases in many states and tightened underwriting standards. Additional rate
increases will be taken, as necessary, to align rates with pricing targets. It
takes six to twelve months for the full effect of a rate change to be reflected
in premiums earned.
While policies-in-force grew over the last twelve months (8.2% in the
preferred-risk auto market and 9.5% in the standard and nonstandard auto lines),
total policies-in-force were relatively unchanged during the second half of
2000. Voluntary auto new business sales in 2000 decreased 10.6% compared to 1999
due to decreased response to advertising, increased premium rates and tightened
underwriting standards. The decline in new business sales over the last half of
2000 was significant. It is currently believed that policies-in-force in the
preferred-risk auto line will increase in 2001. However, policies-in-force may
decline in the standard and nonstandard auto lines.
Losses and loss adjustment expenses incurred increased 26.1% to $4,809
million in 2000. GEICO's loss ratio, which measures the portion of premiums
earned that is paid or reserved for losses and related claims handling expenses,
was 85.7% in 2000 compared to 80.2% in 1999 and 73.8% in 1998. The increased
ratio in 2000 reflects higher severity of losses related to personal injury
protection coverages and increasing cost trends for medical payments and
automobile repair costs. The increases in severity were greater than anticipated
resulting in larger than expected underwriting losses. As mentioned previously,
GEICO has filed for rate increases to reflect the increased average severity of
claims.
The levels of catastrophe losses incurred in each of the past three
years were relatively minor. Catastrophe losses added approximately one
percentage point to the loss ratio in each of the past three years.
GEICO's insurance subsidiaries are defendants in several class action
lawsuits related to the use of collision repair parts not produced by the
original auto manufacturers. Management intends to vigorously defend GEICO's
position over the use of these after-market parts. However, these lawsuits are
in early stages of development and the ultimate outcome cannot be reasonably
determined.
GEICO's underwriting expenses in 2000 increased $107 million (11.7%)
over 1999, following an increase of $132 million (16.8%) in 1999 over 1998. The
increases in underwriting expenses reflect increased advertising and costs
related to new business growth. In 2000, these increases were somewhat offset by
significantly lower employee profit sharing expense. The unit cost of acquiring
new business has continued to increase significantly in 2000 reflecting higher
aggregate media spending and a lower ratio of new policies generated to new
policies quoted. In response to higher unit costs, GEICO expects to reduce
advertising expenditures in 2001. It is anticipated that the reduction in
advertising expenditures combined with the expected impact of the previously
noted underwriting actions will result in underwriting results slowly improving
over the next twelve months.
15
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
INSURANCE -- UNDERWRITING (Continued)
General Re
General Re was acquired by Berkshire effective December 21, 1998.
General Re's results of operations are included in Berkshire's consolidated
results beginning as of that date. The historical results for all of 1998 are
presented for comparative purposes, although the full-year results are not
included in Berkshire's 1998 consolidated results.
General Re and its affiliates conduct a global reinsurance business,
which provides reinsurance coverage in the United States and 129 other countries
around the world. General Re's principal reinsurance operations are: (1) North
American property/casualty, (2) International property/casualty, and (3) Global
life/health. The International property/casualty operations are conducted
primarily through Germany-based Cologne Re and its subsidiaries. At December 31,
2000, General Re had an 88% economic ownership interest in Cologne Re.
General Re's consolidated underwriting results for the past three years
are summarized below. Dollar amounts are in millions.
2000(1) 1999 1998
------- ------- ------
Amount Amount Amount
------- ------- ------
Premiums earned....................................... $ 8,696 $ 6,905 $6,095
------- ------- ------
Underwriting loss -- pre-tax.......................... $(1,224) $(1,184) $ (370)
======= ======= ======
(1) During the fourth quarter of 2000, the International property/casualty and
Global life/health operations discontinued reporting their results on a
one-quarter lag. Consequently, General Re's 2000 results include one
additional quarter for these businesses. See Note 1(a) to the accompanying
Consolidated Financial Statements for additional information.
Generally, underwriting conditions within the reinsurance industry
during 2000 remained difficult. General Re's overall underwriting results during
2000 and 1999 were unsatisfactory in both the property/casualty and life/health
reinsurance businesses. General Re management continues to take underwriting
actions to address these matters with the objective of returning underwriting
results to acceptable levels. Although the underwriting losses for 2000 were
considerable, $239 million of the loss was attributed to a single large
aggregate excess contract written in 2000. Additional information regarding this
arrangement is provided in the North American property/casualty discussion.
Otherwise, General Re's results for 2000 were improved over 1999. The
improvement is believed to be a result of the actions already taken both in the
North American and international businesses, as well as signs of improvement in
certain segments of the reinsurance market. However, the impact of underwriting
initiatives on international business may take longer to become effective than
on U.S. business. Absent large property/catastrophe losses or adverse
development with respect to existing loss reserves, Berkshire expects that
General Re's underwriting results will continue to improve in 2001. Additional
information and analysis with respect to each of General Re's underwriting units
is presented below. In the tables that follow, dollar amounts are in millions.
General Re's North American property/casualty underwriting results for
the years ending December 31, 2000, 1999 and 1998 are summarized below.
2000 1999 1998
------------- ------------- -------------
Amount % Amount % Amount %
------ ----- ------ ----- ------ -----
Premiums written ....................... $3,517 $2,801 $2,707
====== ====== ======
Premiums earned ........................ $3,389 100.0 $2,837 100.0 $2,708 100.0
------ ----- ------ ----- ------ -----
Losses and loss expenses ............... 3,161 93.3 2,547 89.8 1,830 67.6
Underwriting expenses .................. 854 25.2 874 30.8 857 31.6
------ ----- ------ ----- ------ -----
Total losses and expenses .............. 4,015 118.5 3,421 120.6 2,687 99.2
------ ===== ------ ===== ------ =====
Underwriting gain (loss) -- pre-tax .... $ (626) $ (584) $ 21
====== ====== ======
16
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
INSURANCE -- UNDERWRITING (Continued)
General Re (Continued)
General Re's North American property/casualty operations underwrite
predominantly excess reinsurance across multiple lines of business. Premiums
earned in 2000 exceeded premiums earned in 1999 by $552 million or 19.5%.
Premiums earned in 1999 increased over 1998 levels by $129 million or 4.8%. A
single large aggregate excess reinsurance contract affected premiums earned in
the past two years. This reinsurance contract accounted for earned premiums of
$404 million in 2000 and $154 million in 1999. The contract was not renewed in
2001. Excluding the effects of this contract, the growth in North American
premiums during 2000 was primarily due to net increases in the national
accounts, excess and surplus reinsurance lines and individual risk businesses.
This net growth resulted from a combination of new business, the effects of rate
increases on existing business, and was partially offset by the non-renewal of
significantly under-performing business. In addition, the net increase in
premiums in 2000 was partially due to reductions in reinsurance premiums ceded
to the Berkshire Hathaway Reinsurance Group.
Underwriting results from North American property/casualty operations
for 2000 and 1999 produced underwriting losses of $626 million and $584 million,
respectively. Underwriting results for 2000 include $239 million of net
underwriting loss from assumption of the aggregate excess reinsurance contract
referenced above. The effect of this aggregate excess reinsurance agreement on
the 1999 net underwriting results was not significant due to a retrocession to
the Berkshire Hathaway Reinsurance Group. Although, this contract produced a
sizable net loss, it is expected to provide more than commensurate investment
benefits in future years due to the large amount of float generated.
Notwithstanding, this large excess contract added 5.5 points to the combined
loss and expense ratio in 2000.
When the effects of the aforementioned large aggregate excess contract
are excluded, General Re's North American property/casualty underwriting results
improved in 2000 as compared to the results for 1999. The underwriting loss
ratio declined from 121.8% in 1999 to 113.0% in 2000. The improved results in
2000 were primarily due to the initial effects of underwriting actions on both
property and casualty lines. In addition, catastrophe and large property losses
were less in 2000 than in 1999. Losses arising from catastrophic events and
other large property losses added 3.5 points to the North American
property/casualty loss and loss expense ratio for 2000, as compared to 9.4
points for 1999 and 4.1 points for 1998. While the potential for catastrophe and
large property losses are factors normally considered in underwriting decisions,
the timing and magnitude of such losses can cause significant volatility in
periodic underwriting results.
The improvement in property lines in 2000 was partially offset by
adverse development of reserves established for prior years' claims. The adverse
loss development in 2000 arose primarily in the medical malpractice, commercial
umbrella and casualty treaty reinsurance lines. In 1999 and 1998, General Re's
North American property/casualty loss reserves experienced favorable reserve
development, although the amount of favorable development in 1999 was
considerably less than in 1998.
General Re's International property/casualty underwriting results for
the years ending December 31, 2000, 1999 and 1998 are summarized below.
2000(1) 2000(2) 1999 1998
-------------- -------------- ------------- --------------
Amount % Amount % Amount % Amount %
------ ----- ------ ----- ------ ----- ------ -----
Premiums written .............. $3,036 $2,505 $2,506 $2,072
====== ====== ====== ======
Premiums earned ............... $3,046 100.0 $2,478 100.0 $2,343 100.0 $2,095 100.0
------ ----- ------ ----- ------ ----- ------ -----
Losses and loss expenses ...... 2,577 84.6 2,091 84.4 2,041 87.1 1,514 72.3
Underwriting expenses ......... 987 32.4 803 32.4 775 33.1 682 32.5
------ ----- ------ ----- ------ ----- ------ -----
Total losses and expenses ..... 3,564 117.0 2,894 116.8 2,816 120.2 2,196 104.8
------ ===== ------ ===== ------ ===== ------ =====
Underwriting loss -- pre-tax ... $ (518) $ (416) $ (473) $ (101)
====== ====== ====== ======
(1) Column includes 15 months of data due to elimination of one-quarter lag
reporting in 2000.
(2) Column includes 12 months reported on a one-quarter lag and is shown for
comparability with 1999 and 1998.
17
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
INSURANCE -- UNDERWRITING (Continued)
General Re (Continued)
The International property/casualty operations write quota-share and
excess reinsurance on risks around the world. In recent years, the largest
international markets have been in Germany and Western Europe. As previously
noted, the International property/casualty operations discontinued reporting
their results on a one-quarter lag during the fourth quarter of 2000. Results
for the 2000 period contain fifteen months, or one additional quarter of
information. The preceding table shows underwriting results for both the twelve
month and fifteen month periods. The comparative analysis that follows excludes
the additional quarter, with results for the additional three month period of
2000 discussed separately afterward.
Premiums earned in the twelve months of 2000 exceeded 1999 amounts by
5.8%, whereas 1999 premiums earned exceeded 1998 levels by 11.8%. Adjusting for
the effects of overall declining foreign exchange rates, earned premiums in
local currencies grew 16.7% during 2000 and 12.0% during 1999. The growth in
2000 earned premiums was primarily due to increased premiums in European markets
outside Germany, premiums which became due in 2000 to reinstate coverage as a
result of fourth quarter 1999 European winter storm losses, new business in
South America, and the effect of increased volume and participation in DP Mann's
Syndicate 435 at Lloyd's of London. This growth was partially offset by the
cancellation of some significant quota-share treaties.
Underwriting results for General Re's International property/casualty
segment for 2000 remained very bad. Loss and loss expense ratios for the twelve
months of 2000 were 84.4% as compared to 87.1% for 1999 and 72.3% for 1998. The
decrease in the loss ratio from 1999 was primarily due to lower levels of
catastrophe and other large losses in 2000. The effect of catastrophes and other
large property losses represented 5.9 points of the loss and loss expense ratio
for 2000, compared to 5.4 points for 1999. The loss and loss expense ratio for
1999 also included approximately 4.0 points related to coverages for the motion
picture business, which has since been discontinued. In 1998, catastrophe losses
represented 1.3 points. Due to the large amount of property business written in
the International property/casualty operations, periodic underwriting results
can be volatile.
The International property/casualty business generated an underwriting
loss of $102 million during the additional quarter being reported in the 2000
financial statements (three month period ended December 31, 2000). The results
were adversely affected by two catastrophes involving flood losses in the United
Kingdom and Italy, totaling $25 million.
General Re's Global life/health underwriting results for the years
ending December 31, 2000, 1999 and 1998 are summarized below.
2000(1) 2000(2) 1999 1998
-------------- ------------- ------------- -------------
Amount % Amount % Amount % Amount %
------ ----- ------ ----- ------ ----- ------ -----
Premiums written ................ $2,263 $1,781 $1,736 $1,305
====== ====== ====== ======
Premiums earned ................. $2,261 100.0 $1,773 100.0 $1,725 100.0 $1,292 100.0
------ ----- ------ ----- ------ ----- ------ -----
Losses and loss expenses ........ 1,869 82.6 1,473 83.1 1,434 83.2 1,263 97.8
Underwriting expenses ........... 472 20.9 384 21.6 418 24.2 319 24.6
------ ----- ------ ----- ------ ----- ------ -----
Total losses and expenses ....... 2,341 103.5 1,857 104.7 1,852 107.4 1,582 122.4
------ ===== ------ ===== ------ ===== ------ =====
Underwriting loss -- pre tax .... $ (80) $ (84) $ (127) $ (290)
====== ====== ====== ======
(1) Column includes 15 months of data due to elimination of one-quarter lag
reporting in 2000.
(2) Column includes 12 months reported on a one-quarter lag and is shown for
comparability with 1999 and 1998.
General Re's Global life/health affiliates reinsure such risks
worldwide. Global life/health operations previously reported their results on a
one-quarter lag. As previously noted, the Global life/health operations
discontinued reporting results on a one-quarter lag during the fourth quarter of
2000. Reported results for 2000 contain fifteen months. The table above shows
underwriting results for both the twelve month and fifteen month periods. The
analysis that follows excludes this additional quarter, with results for that
period discussed separately afterward.
18
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
INSURANCE -- UNDERWRITING (Continued)
General Re (Continued)
Global life/health premiums earned in 2000 increased 2.8% over 1999
amounts. Premiums earned in 1999 increased 33.5% over 1998 levels. Adjusting
both the 2000 and 1999 periods for the effects of run-off business written by a
former London-based managing underwriter, Global life/health earned premiums
increased 9.8% in 2000 and 20.3% in 1999. The increase in earned premiums in
2000 is primarily due to increases in the U.S. individual health segment and
reduced retrocessions of business.
The Global life/health operations produced improved but still
unsatisfactory underwriting results for 2000. Underwriting results weakened in
the international life/health business, while the U.S. life/health operations
continued to show improvement. Of the $84 million Global life/health
underwriting loss in 2000, $23 million was attributable to the U.S. operations
and $61 million was incurred in the international operations. The U.S. life
segment produced modest underwriting profits in 2000 and a significantly reduced
loss in its health operations. Results in the international life operations
deteriorated from 1999, primarily due to losses on personal accident and pension
lines of business.
Underwriting results for the additional quarter of 2000 produced a small
profit of $4 million. While all segments showed improvement, the U.S. individual
life and international health segments both produced underwriting profits during
the quarter. The improvement in the U.S. individual life segment was primarily
due to reduced mortality and better persistency.
Berkshire Hathaway Reinsurance Group
The Berkshire Hathaway Reinsurance Group ("BHRG") underwrites
principally excess-of-loss reinsurance coverages for insurers and reinsurers
around the world. BHRG is believed to be one of the leaders in providing
catastrophe excess-of-loss reinsurance. In addition, over the past three years,
BHRG has generated significant premium volume from a few very sizable
retroactive reinsurance contracts.
Underwriting results for the past three years are summarized in the
following table. Dollar amounts are in millions.
2000 1999 1998
-------------- -------------- ------------
Amount % Amount % Amount %
------ ----- ------ ----- ------ -----
Premiums written ......................... $4,724 $2,410 $986
====== ====== ====
Premiums earned .......................... $4,705 100.0 $2,382 100.0 $939 100.0
------ ----- ------ ----- ---- -----
Losses and loss expenses ................. 4,766 101.3 2,573 108.0 765 81.5
Underwriting expenses .................... 114 2.4 65 2.7 195 20.7
------ ----- ------ ----- ---- -----
Total losses and expenses ................ 4,880 103.7 2,638 110.7 960 102.2
----- ===== ----- ===== --- =====
Underwriting loss -- pre-tax ............. $ (175) $ (256) $(21)
====== ====== ====
Premiums earned from retroactive reinsurance contracts were $3,944
million in 2000, $1,508 million in 1999 and $343 million in 1998. In 2000,
premiums of $2,438 million were derived from a single contract. Generally,
retroactive reinsurance contracts indemnify the ceding company, subject to
aggregate loss limits, with respect to insured loss events that are attributed
to insurance contracts written in the past, usually many years ago. Many of
these contracts may give rise to considerable amounts of environmental and
latent injury claims.
It is generally expected that losses ultimately paid under retroactive
contracts will exceed the premiums received, in some cases by a wide margin.
Premiums are based in part on time-value-of-money concepts because loss payments
may occur over lengthy time periods. However, retroactive contracts do not
significantly impact reported earnings in the year of inception. Consistent with
Berkshire's accounting policy, the excess of the estimated ultimate losses
payable over the premiums received is established as a deferred charge and
amortized against income over the estimated future claim settlement periods.
Although Berkshire expects that these contracts will produce significant
underwriting losses over time, the business is accepted due to the exceptional
levels of policyholder float generated.
19
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
INSURANCE -- UNDERWRITING (Continued)
Berkshire Hathaway Reinsurance Group (Continued)
Net underwriting losses with respect to retroactive reinsurance
contracts were $191 million in 2000, $97 million in 1999 and $90 million in
1998. The net underwriting losses from this business reflect the amortization of
deferred charges on retroactive reinsurance as well as the accretion of
discounted structured settlement liabilities. The amortization and accretion
charges are reported as losses incurred and, because there are no offsetting
premiums, as underwriting losses. Due to the magnitude of the retroactive
reinsurance contracts entered into during the past two years, deferred charges
increased significantly. Consequently, as a result of the periodic amortization
of deferred charges, underwriting losses are expected to increase in future
periods.
Premiums earned from non-catastrophe reinsurance contracts totaled $447
million in 2000, $560 million in 1999 and $310 million in 1998. In each of the
last three years, the premiums earned from this business were derived
predominantly from a small number of sizable contracts. Premiums earned in 2000
and 1999 included $58 million and $113 million, respectively, from contracts
with General Re's North American property/casualty operations.
Net underwriting losses from the non-catastrophe reinsurance business
were $167 million in 2000, $355 million in 1999 and $86 million in 1998. BHRG
incurred a net loss of approximately $186 million from a single aggregate excess
contract during the fourth quarter of 2000. In 1999, BHRG had net underwriting
losses of $220 million from a similar single excess contract. As with
retroactive reinsurance contracts, the premiums established for non-catastrophe
reinsurance contracts are based on time-value-of-money concepts because loss
payments are expected to occur over lengthy time periods. Loss reserves for this
business are established without such time discounting but, unlike retroactive
reinsurance contracts, no deferred charges are established. Consequently,
significant underwriting losses can result. This business is accepted because of
the large amounts of float that is produced. It is anticipated that Berkshire
will derive significant economic benefits over the lengthy period of time that
the float is available for investment.
Premiums earned from catastrophe excess contracts were $314 million in
2000 and 1999 and $286 million in 1998. Competition within the catastrophe
reinsurance markets remains intense, which in many instances, makes premium
rates inadequate or coverage conditions unacceptable. As a result, BHRG has
accepted relatively few new arrangements. However, it is expected that this
business will still produce meaningful amounts of earned premiums during 2001.
Net underwriting gains from catastrophe reinsurance were $183 million in
2000, $196 million in 1999 and $155 million in 1998. Catastrophe losses incurred
in each of the past three years were relatively minor. Significant exposure to
losses remains with respect to contracts that are in-force at year-end 2000,
especially with respect to a major earthquake in California or a major hurricane
affecting the U.S. Future periodic underwriting results of this business are
subject to extreme volatility. However, Berkshire's management is willing to
accept volatility in reported results, provided there is a reasonable prospect
of long-term profitability.
Berkshire Hathaway Direct Insurance Group
The Berkshire Hathaway Direct Insurance Group is comprised of a wide
variety of smaller property/casualty businesses. These businesses include:
National Indemnity Company's traditional commercial motor vehicle and specialty
risk operations ("NICO"); several companies collectively referred to as the
"homestate" operations, which provide primarily standard commercial coverages to
insureds and Central States Indemnity Company ("CSI"), a provider of credit card
credit insurance to individuals nationwide through financial institutions. In
August 2000, this group of businesses was expanded as a result of Berkshire's
acquisition of United States Investment Corporation ("USIC"), whose insurance
subsidiaries underwrite specialty insurance coverage in the United States.
Collectively, direct insurance businesses produced earned premiums of
$332 million in 2000, $262 million in 1999 and $328 million in 1998. In 2000,
premiums earned increased primarily due to the inclusion of USIC and to
comparatively greater amounts earned by CSI. The decrease in premiums earned in
1999 compared to 1998 was principally attributed to lower premiums at CSI. Net
underwriting gains of the direct businesses totaled $38 million in 2000, $22
million in 1999 and $17 million in 1998. The increase in underwriting profits in
2000 over 1999 was primarily due to underwriting gains from USIC and an increase
in underwriting gains at NICO.
20
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
INSURANCE -- INVESTMENT INCOME
Following is a summary of the net investment income of insurance
operations for the past three years.
(dollars in millions)
------------------------
2000 1999 1998
------ ------ ----
Investment income before taxes................................... $2,787 $2,482 $974
Applicable income taxes and minority interest.................... 832 718 243
------ ------ ----
Investment income after taxes and minority interest.............. $1,955 $1,764 $731
====== ====== ====
Investment income before taxes from the insurance operations increased
in 2000 by $305 million (12.3%) over 1999. The increase in investment income in
2000 as compared to 1999 is due to greater amounts of taxable interest and
dividend income, partially offset by reduced tax exempt interest. Approximately
one-third of the total increase in pre-tax investment income in 2000 was
attributed to the inclusion of the fifth quarter of General Re's International
property/casualty and Global life/health operations, as previously discussed.
Investment income in 1999 includes income of General Re's insurance operations,
which were acquired by Berkshire in December 1998.
At December 31, 2000, cash and invested assets totaled approximately
$76.5 billion, an increase of approximately $4.1 billion from December 31, 1999.
Insurance invested assets grew by about $25 billion in 1998 as a result of the
General Re acquisition.
Berkshire's insurance businesses generate large amounts of investment
income derived from shareholder capital, as well as policyholder float. Float
represents an estimate of the amount of funds ultimately payable to
policyholders that is available for investment. Float denotes the sum of net
loss and loss adjustment expense reserves, unearned premiums, and funds held
under reinsurance agreements, less premiums receivable, deferred acquisition
costs, deferred charges on retroactive reinsurance and prepaid income taxes. The
aggregate float was approximately $27.9 billion at December 31, 2000 and $25.3
billion at December 31, 1999. Most of the increase in float during 2000 was
generated by BHRG.
Income taxes and minority interest as a percentage of investment income
before taxes were 29.9% for 2000, 28.9% for 1999 and 24.9% for 1998. The
increase in the rates reflects an increase in the proportion of taxable interest
income relative to the amounts of dividend and tax exempt interest, which are
effectively taxed at lower rates.
NON-INSURANCE BUSINESSES
A summary follows of results from Berkshire's non-insurance businesses
for the past three years.
(dollars in millions)
--------------------------------------------
2000 1999 1998
------------ ------------- -------------
Amount % Amount % Amount %
------ --- ------ --- ------ ---
Revenues ................................... $7,886 100 $6,042 100 $4,865 100
Cost and expenses .......................... 6,595 84 5,205 86 4,005 82
------ --- ------ --- ------ ---
Operating profit ........................... 1,291 16 837 14 860 18
Income taxes and minority interest ......... 487 6 319 5 322 7
------ --- ------ --- ------ ---
Contribution to net earnings ............... $ 804 10 $ 518 9 $ 538 11
====== === ====== === ====== ===
A comparison of revenues and operating profits between 2000, 1999 and
1998 for the non-insurance businesses follows.
(dollars in millions)
---------------------------------------------- Operating Profit
Revenues Operating Profits as a % of Revenues
---------------------- ---------------------- ------------------
Non-Insurance Businesses 2000 1999 1998 2000 1999 1998 2000 1999 1998
- ------------------------ ------ ------ ------ ------ ---- ---- ---- ---- ----
Flight Services .......... 2,279 1,856 858 213 225 181 9 12 21
Retail businesses ........ 1,864 1,402 1,213 175 130 110 9 9 9
Scott Fetzer Companies ... 963 1,021 1,002 122 147 137 13 14 14
Other businesses ......... 2,780 1,763 1,792 781 335 432 28 19 24
----- ----- ----- --- --- ---
$7,886 $6,042 $4,865 $1,291 $837 $860
====== ====== ====== ====== ==== ====
21
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
NON-INSURANCE BUSINESSES (Continued)
2000 compared to 1999
Revenues from Berkshire's numerous and diverse non-insurance businesses
of $7,886 million in 2000 increased $1,844 million (30.5%) from the prior year.
The aggregate operating profits from these businesses of $1,291 million in 2000
increased $454 million (54.2%). Revenues and operating results for Berkshire's
non-insurance business activities will change considerably in 2001. Just prior
to the end of 2000, Berkshire acquired Benjamin Moore, a leading formulator and
manufacturer of architectural and industrial coatings. Additionally, during the
first two months of 2001, Berkshire acquired 87.3% of Shaw Industries, the
world's largest producer of tufted broadloom carpet and rugs and Johns Manville,
a leading producer of insulation and building products. These three businesses
generated approximately $7 billion in sales revenues in 2000.
The following is a discussion of significant matters impacting
comparative results for the non-insurance businesses.
Flight Services
This segment includes FlightSafety and Executive Jet. FlightSafety
provides high technology training to operators of aircraft and ships.
FlightSafety's worldwide clients include corporations, the military and
government agencies. Executive Jet is the world's leading provider of fractional
ownership programs for general aviation aircraft. Revenues from flight services
in 2000 increased $423 million (22.8%) over 1999. Most of the increase in
revenues was attributed to Executive Jet, which produced significant increases
in revenues from both flight operations and aircraft sales. Revenues from
FlightSafety also increased approximately 10% in 2000 as compared to 1999,
reflecting both increased training revenues and product sales. Operating profits
in 2000 decreased $12 million (5.3%) as compared to 1999. Increased operating
profits at FlightSafety were more than offset by reduced operating profits at
Executive Jet. Executive Jet's results in 2000 and 1999 reflect operating losses
related to expansion into Europe as well as significantly higher operating costs
incurred to generate future domestic growth.
Retail Businesses
These businesses include four independently managed retailers of home
furnishings (Nebraska Furniture Mart, R.C. Willey Home Furnishings, Star
Furniture and Jordan's Furniture) and three independently managed retailers of
fine jewelry (Borsheim's, Helzberg's Diamond Shops and Ben Bridge Jeweler). Two
of these businesses were acquired during the past two years (Jordan's Furniture
- - November, 1999 and Ben Bridge Jeweler - July, 2000). Revenues of these
businesses in 2000 increased $462 million (33.0%) as compared to 1999 and
operating profits in 2000 increased $45 million (34.6%) as compared to 1999.
Approximately 70% of the increase in revenues and 80% of the increase in
operating profits in 2000 was due to the inclusion of the results of Jordan's
for the full year in 2000 and to the inclusion of Ben Bridge from the date of
its acquisition.
Scott Fetzer Companies
The Scott Fetzer companies are a group of about twenty diverse
manufacturing and distribution businesses under common management. Principal
businesses in this group of companies sell products under the Kirby (home
cleaning systems), Campbell Hausfeld (air compressors, paint sprayers,
generators and pressure washers) and World Book (encyclopedias and other
educational products) names. These three businesses normally produce
approximately 60% of the revenues and 65% of the operating profits of Scott
Fetzer. Revenues in 2000 from Scott Fetzer's businesses decreased $58 million
(5.7%) as compared to 1999. Operating profits in 2000 declined $25 million
(17.0%) as compared to 1999. The decline in revenues was due primarily to lower
sales of power generators at Campbell Hausfeld and lower unit sales at Kirby. In
1999, sales of generators were unusually high due in part to Year 2000 concerns.
In addition to the impact on operating profits from the aforementioned revenue
declines, the decline in operating profits was also due in part to reduced
profits at World Book.
Other Businesses
Other businesses conduct a broad range of activities. A brief
description of the most significant of the activities conducted by this diverse
group of non-insurance businesses is provided in Note 16 to the accompanying
Consolidated Financial Statements. During 2000, Berkshire acquired three
businesses that are currently included in this group (CORT Business Services,
acquired in February, 2000; Justin Brands and Acme Building Brands, acquired in
August, 2000; and Benjamin Moore, acquired in December, 2000).
22
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
NON-INSURANCE BUSINESSES (Continued)
Other Businesses (Continued)
Revenues in 2000 of this group of businesses increased approximately
$1,017 million (57.7%) over 1999. Operating profits of these businesses in 2000
exceeded 1999 by $446 million (133%). Approximately $600 million of the increase
in revenues and $85 million of the increase in operating profits was attributed
to the aforementioned business acquisitions. In addition, a significant increase
in net revenues and operating profits was generated by Berkshire's finance and
financial products businesses. The increase in operating profits of the finance
and financial products businesses in 2000 was produced primarily from realized
gains on a large portfolio of fixed maturity securities acquired in 1999
pursuant to a proprietary trading strategy. These securities were disposed of
during 2000. Partially offsetting the realized gains on trading securities in
2000 were operating losses at GRS.
1999 compared to 1998
Revenues from the non-insurance businesses increased $1,177 million
(24.2%) in 1999 as compared to 1998. Operating profits of $837 million during
1999 decreased $23 million (2.7%) from the comparable 1998 amount. The most
significant factor giving rise to the revenue increase was the inclusion of
Executive Jet for a full year in 1999 versus just under five months during 1998.
Operating profits increased at Berkshire's Flight Services, Retail and Scott
Fetzer business segments. However, more than offsetting these increases was a
decline of $87 million in operating profits from Berkshire's finance and
financial products businesses.
GOODWILL AMORTIZATION AND OTHER PURCHASE-ACCOUNTING ADJUSTMENTS
Goodwill amortization and other purchase-accounting adjustments reflect
the after-tax effect on net earnings with respect to the amortization of
goodwill of acquired businesses and the amortization of fair value adjustments
to certain assets and liabilities which were recorded at the business
acquisition dates. The increase in 2000 as compared to 1999 is primarily due to
the inclusion of a charge of $219 million related to the write-off of goodwill
related to Dexter Shoe (see Note 1(g) to the Consolidated Financial Statements).
The significant increase in such charges during 1999 as compared to 1998 periods
is primarily due to the acquisition of General Re at the end of 1998.
Other purchase-accounting adjustments consist primarily of the
amortization of the excess market value over the historical cost of fixed
maturity investments that existed as of the date of certain business
acquisitions, principally GEICO and General Re. Such excess is included in
Berkshire's cost of the investments and is being amortized over the estimated
remaining lives of the assets. The unamortized excess remaining in the cost of
fixed maturity investments was $680 million at December 31, 2000, $940 million
at December 31, 1999 and $1.2 billion at December 31, 1998.
REALIZED INVESTMENT GAIN
Realized investment gain has been a recurring element in Berkshire's net
earnings for many years. The amount -- recorded when investments are sold,
other-than-temporarily impaired or in certain situations, as required by GAAP,
when investments are marked-to-market with the corresponding gain or loss
included in earnings -- may fluctuate significantly from period to period, with
a meaningful effect upon Berkshire's consolidated net earnings. However, the
amount of realized investment gain or loss for any given period has no
predictive value, and variations in amount from period to period have no
practical analytical value, particularly in view of the net unrealized price
appreciation now existing in Berkshire's consolidated investment portfolio.
While the effects of realized gains are often material to the
Consolidated Statements of Earnings, such gains often produce a minimal impact
on Berkshire's total shareholders' equity. This is due to the fact that
Berkshire's investments are carried in prior periods' consolidated financial
statements at market value with unrealized gains, net of tax, reported as a
separate component of shareholders' equity.
MARKET RISK DISCLOSURES
Berkshire's Consolidated Balance Sheet includes a substantial amount of
assets and liabilities whose fair values are subject to market risks.
Berkshire's significant market risks are primarily associated with equity prices
and interest rates and to a lesser degree financial products. The following
sections address the significant market risks associated with Berkshire's
business activities.
23
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
EQUITY PRICE RISK
Strategically, Berkshire strives to invest in businesses that possess
excellent economics, with able and honest management and at sensible prices.
Berkshire's management prefers to invest a meaningful amount in each investee.
Accordingly, Berkshire's equity investments are concentrated in relatively few
investees. At year-end 2000 and 1999, approximately 70% of the total fair value
of investments in equity securities was concentrated in four investees.
Berkshire's preferred strategy is to hold equity investments for very
long periods of time. Thus, Berkshire management is not necessarily troubled by
short term price volatility with respect to its investments provided that the
underlying business, economic and management characteristics of the investees
remain favorable. Berkshire strives to maintain above average levels of
shareholder capital to provide a margin of safety against short term equity
price volatility.
The carrying values of investments subject to equity price risks are
based on quoted market prices or management's estimates of fair value as of the
balance sheet dates. Market prices are subject to fluctuation and, consequently,
the amount realized in the subsequent sale of an investment may significantly
differ from the reported market value. Fluctuation in the market price of a
security may result from perceived changes in the underlying economic
characteristics of the investee, the relative price of alternative investments
and general market conditions. Furthermore, amounts realized in the sale of a
particular security may be affected by the relative quantity of the security
being sold.
In addition to its equity investments, Berkshire's obligations with
respect to the 1% Senior Exchangeable Notes are subject to equity price risks.
See Note 10 to the Consolidated Financial Statements for information regarding
the Exchange Notes. The Exchange Notes had a carrying value of $235 million at
December 31, 2000 and $449 million at December 31, 1999. For purposes of this
discussion, these amounts have been deducted from the fair value of equity
securities.
The table below summarizes Berkshire's equity price risks as of December
31, 2000 and 1999 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.
Estimated Hypothetical
Fair Value Percentage
after Increase
Hypothetical (Decrease) in
Fair Hypothetical Change in Shareholders'
Value Price Change Prices Equity
----- ------------ ------------ -------------
As of December 31, 2000 ....... $37,384 30% increase $48,599 11.7
30% decrease 26,170 (11.7)
As of December 31, 1999 ....... $37,323 30% increase $48,520 12.4
30% decrease 26,126 (12.4)
INTEREST RATE RISK
This section discusses interest rate risks associated with Berkshire's
financial assets and liabilities, other than those of its finance and financial
products businesses, which are discussed later. Berkshire's management prefers
to invest in equity securities or to acquire entire businesses based upon the
principles discussed in the preceding section on equity price risk. When unable
to do so, management may alternatively invest in bonds or other interest rate
sensitive instruments. Berkshire's strategy is to acquire securities that are
attractively priced in relation to the perceived credit risk. Management
recognizes and accepts that losses may occur. Berkshire has historically
utilized a modest level of corporate borrowings and debt. Further, Berkshire
strives to maintain the highest credit ratings so that the cost of debt is
minimized. Berkshire utilizes derivative products to manage interest rate risks
to a very limited degree.
24
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
INTEREST RATE RISK (Continued)
The fair values of Berkshire's fixed maturity investments and borrowings
under investment agreements and other debt will fluctuate in response to changes
in market interest rates. Increases and decreases in prevailing interest rates
generally translate into decreases and increases in fair values of those
instruments. Additionally, fair values of interest rate sensitive instruments
may be affected by the credit worthiness of the issuer, prepayment options,
relative values of alternative investments, the liquidity of the instrument and
other general market conditions.
The following table summarizes the estimated effects of hypothetical
increases and decreases in interest rates on assets and liabilities that are
subject to interest rate risk. It is assumed that the changes occur immediately
and uniformly to each category of instrument containing interest rate risks. The
hypothetical changes in market interest rates do not reflect what could be
deemed best or worst case scenarios. Variations in market interest rates could
produce significant changes in the timing of repayments due to prepayment
options available. For these reasons, actual results might differ from those
reflected in the table which follows. Dollars are in millions.
Estimated Fair Value after
Hypothetical Change in Interest Rates
------------------------------------------------
(bp=basis points)
------------------------------------------------
Fair 100 bp 100 bp 200 bp 300 bp
Value decrease increase increase increase
------- -------- -------- -------- --------
As of December 31, 2000
Investments in securities with fixed
maturities ............................... $32,567 $33,466 $31,346 $30,005 $28,690
Borrowings under investment agreements and
other debt ............................... 2,470 2,540 2,404 2,336 2,274
As of December 31, 1999
Investments in securities with fixed
maturities ............................... $30,222 $31,942 $28,483 $26,852 $25,413
Borrowings under investment agreements and
other debt ............................... 1,971 2,059 1,891 1,819 1,753
FINANCIAL PRODUCTS RISK
The finance and financial products operations are subject to market risk
principally through Gen Re Securities Holdings Limited ("GRS"). GRS monitors its
market risk on a daily basis across all swap and option products by calculating
the effect on operating results of potential changes in market variables over a
one week period, based on historical market volatility, correlation data and
informed judgment. This evaluation is done on an individual trading book basis,
against limits set by individual book, to a 99% probability level. GRS sets
market risk limits for each type of risk, and for an aggregate measure of risk,
based on a 99% probability that movements in market rates will not affect the
results from operations in excess of the risk limit over a one week period.
GRS's weekly aggregate market risk limit was $22 million in 2000 and $15 million
in 1999. During 1999, the actual losses exceeded the market risk limit on one
occasion. In addition to these daily and weekly assessments of risk, GRS
prepares periodic stress tests to assess its exposure to extreme movements in
various market risk factors.
The table below shows the highest, lowest and average value at risk, as
calculated using the above methodology, by broad category of market risk to
which GRS is exposed. Dollars are in millions.
2000
------------------------------------------------------- 1999
Foreign ---------
Interest Exchange Rate Equity Credit All Risks All Risks
--------- ------------- ------ ------ --------- ---------
Highest .................. $7 $6 $4 $3 $14 $10
Lowest ................... 3 3 -- 1 1 4
Average .................. 5 4 1 1 4 8
25
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
FINANCIAL PRODUCTS RISK (Continued)
GRS evaluates and records a fair-value adjustment to recognize
counterparty credit exposure and future costs associated with administering each
contract. The expected credit exposure for each trade is initially established
on the trade date and is determined through the use of a proprietary credit
exposure model that is based on historical default probabilities, market
volatilities and, if applicable, the legal right of setoff. These exposures are
continually monitored and adjusted due to changes in the credit quality of the
counterparty, changes in interest and currency rates or changes in other factors
affecting credit exposure. Since inception, GRS has not experienced any credit
losses.
LIQUIDITY AND CAPITAL RESOURCES
Berkshire's balance sheet continues to reflect significant liquidity and
a strong capital base. Consolidated shareholders' equity at December 31, 2000
totaled $61.7 billion. Consolidated cash and invested assets, excluding assets
of finance and financial products businesses totaled approximately $77.1 billion
at December 31, 2000. Berkshire has deployed about $7.7 billion in cash for
business acquisitions and investments in MidAmerican during 2000 and the first
two months of 2001. Cash utilized in these acquisitions was generated
internally.
The net amount of borrowings under investment agreements and other debt
increased $198 million during 2000. The increase was due to the inclusion of
debt of subsidiaries assumed in connection with business acquisitions during
2000 and an increase in borrowings of certain Berkshire subsidiaries, partially
offset by a decline in corporate debt.
FORWARD-LOOKING STATEMENTS
Investors are cautioned that certain statements contained in this
document, as well as some statements by the Company in periodic press releases
and some oral statements of Company officials during presentations about the
Company, are "forward-looking" statements within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Act"). Forward-looking statements
include statements which are predictive in nature, which depend upon or refer to
future events or conditions, which include words such as "expects,"
"anticipates," "intends," "plans," "believes," "estimates," or similar
expressions. In addition, any statements concerning future financial performance
(including future revenues, earnings or growth rates), ongoing business
strategies or prospects, and possible future Company actions, which may be
provided by management are also forward-looking statements as defined by the
Act. Forward-looking statements are based on current expectations and
projections about future events and are subject to risks, uncertainties, and
assumptions about the Company, economic and market factors and the industries in
which the Company does business, among other things. These statements are not
guaranties of future performance and the Company has no specific intention to
update these statements.
Actual events and results may differ materially from those expressed or
forecasted in forward-looking statements due to a number of factors. The
principal important risk factors that could cause the Company's actual
performance and future events and actions to differ materially from such
forward-looking statements, include, but are not limited to, changes in market
prices of Berkshire's significant equity investees, the occurrence of one or
more catastrophic events, such as an earthquake or hurricane that causes losses
insured by Berkshire's insurance subsidiaries, changes in insurance laws or
regulations, changes in Federal income tax laws, and changes in general economic
and market factors that affect the prices of securities or the industries in
which Berkshire and its affiliates do business, especially those affecting the
property and casualty insurance industry.
26
28
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Market Risk Disclosures" contained in Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Berkshire Hathaway Inc.
We have audited the accompanying consolidated balance sheets of Berkshire
Hathaway Inc. and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of earnings, cash flows and changes in shareholders'
equity for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Berkshire Hathaway Inc. and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America.
DELOITTE & TOUCHE LLP
March 5, 2001
Omaha, Nebraska
27
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in millions except per share amounts)
DECEMBER 31,
----------------------
2000 1999
-------- --------
ASSETS
Cash and cash equivalents .................................... $ 5,263 $ 3,835
Investments:
Securities with fixed maturities ........................... 32,567 30,222
Equity securities .......................................... 37,619 37,772
Other ...................................................... 1,637 1,736
Receivables .................................................. 11,764 8,558
Inventories .................................................. 1,275 844
Investments in MidAmerican Energy Holdings Company ........... 1,719 --
Assets of finance and financial products businesses .......... 16,829 24,229
Property, plant and equipment ................................ 2,699 1,903
Goodwill of acquired businesses .............................. 18,875 18,281
Other assets ................................................. 5,545 4,036
-------- --------
$135,792 $131,416
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and loss adjustment expenses .......................... $ 33,022 $ 26,802
Unearned premiums ............................................ 3,885 3,718
Accounts payable, accruals and other liabilities ............. 8,374 7,458
Income taxes, principally deferred ........................... 10,125 9,566
Borrowings under investment agreements and other debt ........ 2,663 2,465
Liabilities of finance and financial products businesses ..... 14,730 22,223
-------- --------
72,799 72,232
-------- --------
Minority shareholders' interests ............................. 1,269 1,423
-------- --------
Shareholders' equity:
Common Stock:*
Class A Common Stock, $5 par value
and Class B Common Stock, $0.1667 par value ............. 8 8
Capital in excess of par value ............................. 25,524 25,209
Accumulated other comprehensive income ..................... 17,543 17,223
Retained earnings .......................................... 18,649 15,321
-------- --------
Total shareholders' equity .............................. 61,724 57,761
-------- --------
$135,792 $131,416
======== ========
* Class B Common Stock has economic rights equal to one-thirtieth (1/30) of
the economic rights of Class A Common Stock. Accordingly, on an equivalent
Class A Common Stock basis, there are 1,526,230 shares outstanding at
December 31, 2000 versus 1,520,562 shares outstanding at December 31, 1999.
See accompanying Notes to Consolidated Financial Statements
28
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(dollars in millions except per share amounts)
YEAR ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
---------- ---------- ----------
REVENUES:
Insurance premiums earned .................................. $ 19,343 $ 14,306 $ 5,481
Sales and service revenues ................................. 7,331 5,918 4,675
Interest, dividend and other investment income ............. 2,686 2,314 1,049
Income from MidAmerican Energy Holdings Company ............ 105 -- --
Income from finance and financial products businesses ...... 556 125 212
Realized investment gain ................................... 3,955 1,365 2,415
---------- ---------- ----------
33,976 24,028 13,832
---------- ---------- ----------
COST AND EXPENSES:
Insurance losses and loss adjustment expenses .............. 17,332 12,518 4,040
Insurance underwriting expenses ............................ 3,602 3,220 1,184
Cost of products and services sold ......................... 4,893 4,065 3,018
Selling, general and administrative expenses ............... 1,703 1,164 1,056
Goodwill amortization ...................................... 715 477 111
Interest expense ........................................... 144 134 109
---------- ---------- ----------
28,389 21,578 9,518
---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST ........... 5,587 2,450 4,314
Income taxes ............................................... 2,018 852 1,457
Minority interest .......................................... 241 41 27
---------- ---------- ----------
NET EARNINGS ................................................. $ 3,328 $ 1,557 $ 2,830
========== ========== ==========
Average common shares outstanding * ........................ 1,522,933 1,519,703 1,251,363
NET EARNINGS PER COMMON SHARE * .............................. $ 2,185 $ 1,025 $ 2,262
========== ========== ==========
* 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 $73 per
share for 2000, $34 per share for 1999, and $75 per share for 1998.
See accompanying Notes to Consolidated Financial Statements
29
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
YEAR ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings ................................................. $ 3,328 $ 1,557 $ 2,830
Adjustments to reconcile net earnings to cash flows
from operating activities:
Realized investment gain .................................... (3,955) (1,365) (2,415)
Depreciation and amortization ............................... 997 688 265
Changes in assets and liabilities before effects from
business acquisitions:
Losses and loss adjustment expenses ......................... 5,976 3,790 347
Deferred charges -- reinsurance assumed ..................... (1,075) (958) (80)
Unearned premiums ........................................... 97 394 179
Receivables ................................................. (3,062) (834) (56)
Accounts payable, accruals and other liabilities ............ 660 (5) 4
Finance businesses trading activities ....................... (1,126) 473 52
Income taxes ................................................ 757 (1,395) (329)
Other ....................................................... 350 (145) (140)
-------- -------- --------
Net cash flows from operating activities .................... 2,947 2,200 657
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities with fixed maturities ................ (16,550) (18,380) (2,697)
Purchases of equity securities ............................... (4,145) (3,664) (1,865)
Proceeds from sales of securities with fixed maturities ...... 13,119 4,509 6,339
Proceeds from redemptions and maturities of securities
with fixed maturities ....................................... 2,530 2,833 2,132
Proceeds from sales of equity securities ..................... 6,870 4,355 4,868
Loans and investments originated in finance businesses ....... (857) (2,526) (1,028)
Principal collection on loans and investments
originated in finance businesses ............................ 1,142 845 295
Acquisitions of businesses, net of cash acquired ............. (3,798) (153) 4,971
Other ........................................................ (582) (417) (302)
-------- -------- --------
Net cash flows from investing activities .................... (2,271) (12,598) 12,713
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings of finance businesses ............... 120 736 120
Proceeds from other borrowings ............................... 681 1,118 1,266
Repayments of borrowings of finance businesses ............... (274) (46) (83)
Repayments of other borrowings ............................... (806) (1,333) (1,225)
Change in short term borrowings of finance businesses ........ 500 (311) --
Changes in other short term borrowings ....................... 324 340 (20)
Other ........................................................ (75) (137) 3
-------- -------- --------
Net cash flows from financing activities .................... 470 367 61
-------- -------- --------
Increase (decrease) in cash and cash equivalents ............ 1,146 (10,031) 13,431
Cash and cash equivalents at beginning of year ................. 4,458 14,489 1,058
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR * ..................... $ 5,604 $ 4,458 $ 14,489
======== ======== ========
* Cash and cash equivalents at end of year are comprised of
the following:
Finance and financial products businesses ................... $ 341 $ 623 $ 907
Other ....................................................... 5,263 3,835 13,582
-------- -------- --------
$ 5,604 $ 4,458 $ 14,489
======== ======== ========
See accompanying Notes to Consolidated Financial Statements
30
32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(dollars in millions)
Accumulated
Class A & Capital in Other
B Common Excess of Retained Comprehensive Comprehensive
Stock Par Value Earnings Income Income
--------- ---------- -------- ------------- -------------
BALANCE DECEMBER 31, 1997 ................ $ 7 $ 2,316 $ 10,934 $ 18,198
Common stock issued in
connection with acquisitions of
businesses ............................... 1 22,805
Net earnings ............................. 2,830 $ 2,830
--------
Other comprehensive income items:
Unrealized appreciation of
investments .............................. 3,011 3,011
Reclassification adjustment for
appreciation included in net
earnings ................................. (2,415) (2,415)
Income taxes and minority
interests ................................ (284) (284)
--------
Other comprehensive income ............... 312
--------
Total comprehensive income ............... $ 3,142
-------- -------- -------- -------- ========
BALANCE DECEMBER 31, 1998 ................ $ 8 $ 25,121 $ 13,764 $ 18,510
Net earnings ............................. 1,557 $ 1,557
--------
Exercise of stock options issued in
connection with business
acquisitions .............................
Other comprehensive income items: 88
Unrealized appreciation of
investments .............................. (795) (795)
Reclassification adjustment for
appreciation included in net
earnings ................................. (1,365) (1,365)
Foreign currency translation
losses ................................... (16) (16)
Income taxes and minority
interests ................................ 889 889
--------
Other comprehensive income ............... (1,287)
--------
Total comprehensive income ............... $ 270
-------- -------- -------- -------- ========
BALANCE DECEMBER 31, 1999 ................ $ 8 $ 25,209 $ 15,321 $ 17,223
Common stock issued in
connection with acquisitions of
businesses ............................... 224
Net earnings ............................. 3,328 $ 3,328
--------
Exercise of stock options issued
in connection with business
acquisitions ............................. 91
Other comprehensive income items:
Unrealized appreciation of
investments .............................. 4,410 $ 4,410
Reclassification adjustment for
appreciation included in net
earnings ................................. (3,955) (3,955)
Foreign currency translation
losses ................................... (161) (161)
Income taxes and minority
interests ................................ 26 26
--------
Other comprehensive income ............... 320
--------
Total comprehensive income ............... $ 3,648
-------- -------- -------- -------- ========
BALANCE DECEMBER 31, 2000 ................ $ 8 $ 25,524 $ 18,649 $ 17,543
======== ======== ======== ========
See accompanying Notes to Consolidated Financial Statements
31
33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
(1) SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(a) Nature of operations and basis of consolidation
Berkshire Hathaway Inc. ("Berkshire" or "Company") is a holding
company owning subsidiaries engaged in a number of diverse business
activities. The most important of these are property and casualty
insurance businesses conducted on both a direct and reinsurance
basis. Further information regarding these businesses and
Berkshire's other reportable business segments is contained in Note
16. Berkshire initiated and/or consummated several business
acquisitions over the past three years. The significant business
acquisitions are described more fully in Note 2. The accompanying
consolidated financial statements include the accounts of Berkshire
consolidated with accounts of all its subsidiaries. Intercompany
accounts and transactions have been eliminated.
Since acquired in December 1998, the International property/casualty
and Global life/health reinsurance activities of General Re have
been reported in Berkshire's financial statements based on a
one-quarter lag to facilitate the timely completion of the
consolidated financial statements. During the fourth quarter of
2000, General Re implemented a number of procedural changes and
improvements that now permit reporting of these businesses without
the one-quarter lag. Accordingly, Berkshire's consolidated
statements of earnings and cash flows for the year ended December
31, 2000 include five quarters of results of operations and cash
flows of these operations. The effect of eliminating the
one-quarter lag in reporting was not significant to Berkshire's
consolidated statement of earnings for the year ending December 31,
2000.
(b) Use of estimates in preparation of financial statements
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles ("GAAP") requires
management to make estimates and assumptions that affect the
reported amount of assets and liabilities at the date of the
financial statements and the reported amount of revenues and
expenses during the period. Actual results may differ from the
estimates and assumptions used in preparing the consolidated
financial statements.
(c) Cash equivalents
Cash equivalents consist of funds invested in money market accounts
and in investments with a maturity of three months or less when
purchased.
(d) Investments
Berkshire's management determines the appropriate classifications of
investments at the time of acquisition and re-evaluates the
classifications at each balance sheet date. Investments may be
classified as held-for-trading, held-to-maturity, or, when neither
of those classifications is appropriate, as available-for-sale.
Berkshire's investments in fixed maturity and equity securities are
classified as available-for-sale. Available-for-sale securities are
stated at fair value with unrealized gains or losses, net of taxes
and minority interest, reported as a separate component in
shareholders' equity. Realized gains and losses, which arise when
available-for-sale investments are sold (as determined on a
specific identification basis) or other than temporarily impaired
are included in the Consolidated Statements of Earnings.
Other investments include investments in limited partnerships and
commodities which are carried at fair value in the accompanying
balance sheets. The realized and unrealized gains and losses
associated with these investments are included in the Consolidated
Statements of Earnings as a component of realized investment gain.
Accounting policies and practices for investments held by finance and
financial products businesses are described in Note 7.
32
34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(1) SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (Continued)
(e) Inventories
Inventories are stated at the lower of cost or market. Cost with
respect to manufactured goods includes raw materials, direct and
indirect labor and factory overhead. Approximately 54% of the total
inventory cost was determined using the first-in-first-out (FIFO)
method with the remainder valued using the last-in-first-out (LIFO)
method. With respect to inventories carried at LIFO cost, the
aggregate difference in value between LIFO cost and cost determined
under FIFO methods was not material as of December 31, 2000 and
December 31, 1999.
(f) Property, plant and equipment
Property, plant and equipment is recorded at cost. Renewals and
betterments are capitalized; maintenance and repairs are charged to
expense as incurred. Depreciation is provided principally on the
straight-line method over estimated useful lives as follows:
aircraft, simulators, training equipment and spare parts, 4 to 20
years; buildings and improvements, 10 to 40 years; machinery,
equipment, furniture and fixtures, 3 to 10 years. Leasehold
improvements are amortized over the life of the lease or the life
of the improvement, whichever is shorter. Interest is capitalized
as an integral component of cost during the construction period of
simulators and facilities and is amortized over the life of the
related assets.
(g) Goodwill of acquired businesses
Goodwill of acquired businesses represents the difference between
purchase cost and the fair value of the net assets of acquired
businesses and is being amortized on a straight line basis
generally over 40 years. The Company periodically reviews the
recoverability of the carrying value of goodwill of acquired
businesses to ensure it is appropriately valued. In the event that
a condition is identified which may indicate an impairment issue
exists, an assessment is performed using a variety of
methodologies.
During the fourth quarter of 2000, Berkshire management concluded that
an impairment of goodwill existed with respect to the investment in
Dexter Shoe. For the years ended December 31, 2000 and 1999, as a
result of intense competition from importers, Dexter Shoe has
incurred operating losses. During 2000, certain manufacturing
facilities were closed and certain other facilities are expected to
close in 2001. Goodwill amortization shown in the accompanying
Consolidated Statements of Earnings for 2000 includes a charge of
$219 million related to the impairment.
(h) Revenue recognition
Insurance premiums for prospective property/casualty insurance and
reinsurance and health reinsurance policies are earned in
proportion to the level of insurance protection provided. In most
cases, premiums are recognized as revenues ratably over their terms
with unearned premiums computed on a monthly or daily pro rata
basis. Premium adjustments on contracts and audit premiums are
based on estimates over the contract period. Consideration received
for retroactive reinsurance policies, including structured
settlements, is recognized as premiums earned at the inception of
the contracts. Premiums for life contracts are earned when due.
Premiums earned are stated net of amounts ceded to reinsurers.
Revenues from product or merchandise sales are recognized upon passage
of title to the customer, which coincides with customer pickup,
product shipment, delivery or acceptance, depending on terms of the
sales arrangement. Service revenues are generally 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.
(i) Insurance premium acquisition costs
Certain costs of acquiring insurance premiums are deferred, subject to
ultimate recoverability, and charged to income as the premiums are
earned. The recoverability of premium acquisition costs of direct
insurance businesses is determined without regard to investment
income. The recoverability of premium acquisition costs from
reinsurance assumed businesses, generally, reflects anticipation of
investment income. The unamortized balances of deferred premium
acquisition costs are included in other assets and were $916
million and $791 million at December 31, 2000 and 1999,
respectively.
33
35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(1) SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (Continued)
(j) Losses and loss adjustment expenses
Liabilities for unpaid losses and loss adjustment expenses represent
estimated claim and claim settlement costs of property/casualty
insurance and reinsurance contracts. The liabilities for losses and
loss adjustment expenses are recorded at the estimated ultimate
payment amounts, except amounts arising from certain reinsurance
assumed businesses are discounted. Estimated ultimate payment
amounts are based upon (1) individual case estimates, (2) estimates
of incurred-but-not-reported losses, based upon past experience and
(3) reports of losses from ceding insurers.
The estimated liabilities of certain workers' compensation claims
assumed under reinsurance contracts and liabilities assumed under
structured settlement reinsurance contracts are carried in the
Consolidated Balance Sheets at discounted amounts. Discounted
amounts pertaining to reinsurance of certain workers' compensation
risks are based upon an annual discount rate of 4.5%. The
discounted amounts for structured settlement reinsurance contracts
are based upon the prevailing market discount rates when the
contracts were written and range from 5% to 13%. The periodic
accretion of discounts is included in the Consolidated Statements
of Earnings as a component of losses and loss adjustment expenses.
Net discounted liabilities were $1,531 million at December 31, 2000
and $1,529 million at December 31, 1999.
(k) 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 settlement periods of
the claim liabilities. The periodic amortization charges are
reflected in the accompanying Consolidated Statements of Earnings
as losses and loss adjustment expenses. The unamortized balance of
deferred charges is included in other assets and was $2,593 million
at December 31, 2000 and $1,518 million at December 31, 1999.
(l) Reinsurance
Provisions for losses and loss adjustment expenses are reported in the
accompanying Consolidated Statements of Earnings after deducting
amounts recovered and estimates of amounts that will be ultimately
recoverable under reinsurance contracts. Reinsurance contracts do
not relieve the ceding company of its obligations to indemnify
policyholders with respect to the underlying insurance and
reinsurance contracts. Estimated losses and loss adjustment
expenses recoverable under reinsurance contracts are included in
receivables and totaled $2,997 million and $2,331 million at
December 31, 2000 and 1999, respectively.
(m) Foreign currency
The accounts of several foreign-based subsidiaries are measured using
the local currency as the functional currency. Revenues and
expenses of these businesses are translated into U.S. dollars at
the average exchange rate for the period. Assets and liabilities
are translated at the exchange rate as of the end of the reporting
period. Gains or losses from translating the financial statements
of foreign-based operations are included in shareholders' equity as
a component of other comprehensive income. Gains and losses arising
from other transactions denominated in a foreign currency are
included in the Consolidated Statements of Earnings.
(n) Accounting pronouncements to be adopted subsequent to December 31,
2000
In 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities." In
June 1999, the FASB issued SFAS No. 137, which delayed the
effective date for implementing SFAS No. 133 until the beginning of
2001. In June 2000, the FASB issued SFAS No. 138, which amended
certain provisions of SFAS No. 133 with the objective of easing the
implementation difficulties expected to arise. Berkshire adopted
SFAS No. 133 as amended by SFAS No. 138 as of the beginning of 2001
and does not anticipate that the adoption of these new standards
will have a material effect on its financial position or results of
operations.
34
36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(2) SIGNIFICANT BUSINESS ACQUISITIONS
During 2000, Berkshire initiated and/or consummated eight significant
business acquisitions. Six of the acquisitions were completed in 2000 and the
other two were completed in early 2001. Information concerning seven of these
acquisitions follows. Information concerning the other acquisition is contained
in Note 3 (Investment in MidAmerican Energy Holdings Company).
CORT Business Services Corporation ("CORT")
Effective February 18, 2000, Wesco Financial Corporation, an indirect 80.1%
owned subsidiary of Berkshire, acquired CORT. CORT is a leading national
provider of rental furniture, accessories and related services in the
"rent-to-rent" segment of the furniture industry.
Ben Bridge Jeweler ("Ben Bridge")
Effective July 3, 2000, Berkshire acquired all of the outstanding shares of
Ben Bridge common stock. Ben Bridge is the leading operator of upscale jewelry
stores based in major shopping malls in the Western United States.
Justin Industries, Inc. ("Justin")
Effective August 1, 2000, Berkshire acquired 100% of the outstanding shares
of Justin. Principal businesses of Justin include: Acme Building Brands, a
leading manufacturer and producer of face brick, concrete masonry products and
ceramic and marble floor and wall tile and Justin Brands, a leading manufacturer
of Western footwear under a number of brand names.
U.S. Investment Corporation ("USIC")
Effective August 8, 2000, Berkshire acquired all of the outstanding shares
of USIC common stock. USIC is the parent of the United States Liability
Insurance Group, one of the premier U.S. writers of specialty insurance.
Benjamin Moore & Co. ("Benjamin Moore")
Effective December 18, 2000, Berkshire acquired Benjamin Moore. Benjamin
Moore is a formulator, manufacturer and retailer of a broad range of
architectural and industrial coatings, available principally in the United
States and Canada.
Aggregate consideration paid for the five business acquisitions consummated
in 2000 totaled $2,370 million, consisting of $2,146 million in cash and the
remainder in Berkshire Class A and Class B common stock.
Shaw Industries, Inc. ("Shaw")
On October 20, 2000, Berkshire announced that it had formally entered into
a merger agreement whereby it would acquire approximately 87.3% of the common
stock of Shaw for $19 per share. The transaction was completed on January 8,
2001. An investment group consisting of Robert E. Shaw, Chairman and CEO of
Shaw, Julian D. Saul, President of Shaw, certain family members and related
family interests of Messrs. Shaw and Saul, and certain other directors and
members of management acquired the remaining 12.7% of Shaw.
Shaw is the world's largest manufacturer of tufted broadloom carpet and
rugs for residential and commercial applications throughout the United States
and exports to most markets worldwide. Shaw markets its residential and
commercial products under a variety of brand names.
Johns Manville Corporation ("Johns Manville")
On December 19, 2000, Berkshire entered into an Agreement and Plan of
Merger whereby Berkshire would acquire Johns Manville. Under the terms of the
Merger Agreement, among other things, Berkshire commenced a tender offer to
purchase all of the outstanding shares of Johns Manville common stock for $13
per share. The acquisition was completed on February 27, 2001.
Johns Manville is a leading manufacturer of insulation and building
products. Johns Manville manufactures and markets products for building and
equipment insulation, commercial and industrial roofing systems, high-efficiency
filtration media, and fibers and non-woven mats used as reinforcements in
building and industrial applications. Johns Manville operates manufacturing
facilities in North America, Europe and China.
Berkshire paid approximately $3,830 million in cash to shareholders of Shaw
and Johns Manville in connection with the acquisitions.
35
37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(2) SIGNIFICANT BUSINESS ACQUISITIONS (Continued)
The results of operations for each of these entities are or will be
included in Berkshire's consolidated results of operations from the effective
date of each merger. The following table sets forth certain unaudited
consolidated earnings data for the years ended December 31, 2000 and 1999, as if
each of the seven acquisitions discussed above were consummated on the same
terms at the beginning of 1999. Dollars in millions except per share amounts.
2000 1999
-------- --------
Total revenues ..................................... $ 41,396 $ 32,014
Net earnings ....................................... 3,347 1,812
Earnings per equivalent Class A Common Share ....... 2,195 1,189
During 1998 and 1999, Berkshire completed four significant business
acquisitions. Information concerning these acquisitions follows. Effective
January 7, 1998, Berkshire acquired 100% of the outstanding common stock of
International Dairy Queen, Inc. ("Dairy Queen"). Dairy Queen develops, licenses
and services a system of over 6,000 Dairy Queen, Orange Julius and Karmelkorn
stores located throughout the United States, Canada, and other foreign
countries, which feature various dairy desserts, beverages, blended fruit
drinks, prepared foods, popcorn and snacks.
Effective August 7, 1998, Berkshire acquired all of the outstanding common
shares of Executive Jet, Inc. ("Executive Jet"). Executive Jet is the world's
leading provider of fractional ownership programs for general aviation aircraft.
Executive Jet currently operates its fractional ownership programs in the United
States and Europe.
Effective December 21, 1998, Berkshire acquired all of the outstanding
common stock of General Re Corporation ("General Re"). Through its subsidiaries,
General Re conducts global reinsurance and related risk management operations.
General Re's principal U.S. subsidiary, General Reinsurance Corporation, which
together with its affiliates, comprise the largest professional property and
casualty reinsurance group domiciled in the United States. General Re also owns
a controlling interest in Kolnische Ruckversicherungs-Gesellschaft AG ("Cologne
Re"), a major international reinsurer. General Re operates in 28 countries and
provides reinsurance coverage in 130 countries around the world.
In addition, General Re affiliates write excess and surplus lines
insurance, provide reinsurance brokerage services, manage aviation insurance
risks, act as business development consultants and reinsurance intermediaries
and provide specialized investment services to the insurance industry. General
Re also operates as a dealer in the swap and derivatives market through Gen Re
Securities Holdings Limited (formerly General Re Financial Products
Corporation).
In November 1999, Berkshire acquired Jordan's Furniture, Inc. ("Jordan's").
Jordan's operates a furniture retail business from four locations and is
believed to be the largest furniture retailer in the Massachusetts and New
Hampshire areas.
Each of the business acquisitions described above was accounted for under
the purchase method. The excess of the purchase cost of the business over the
fair value of net assets acquired was recorded as goodwill of acquired
businesses.
(3) INVESTMENT IN MIDAMERICAN ENERGY HOLDINGS COMPANY
On October 24, 1999, Berkshire entered into an agreement along with Walter
Scott, Jr. and David L. Sokol, to acquire MidAmerican Energy Holdings Company
("MidAmerican"). The transaction closed on March 14, 2000. Pursuant to the terms
of the agreement, Berkshire invested approximately $1.24 billion in common stock
and a non-dividend paying convertible preferred stock of a newly formed entity
that merged with and into MidAmerican, with MidAmerican continuing as the
surviving corporation. Such investment gives Berkshire about a 9.7% voting
interest and a 76% economic interest in MidAmerican on a fully-diluted basis.
Berkshire subsidiaries also acquired approximately $455 million of an 11%
non-transferable trust preferred security. Under certain conditions, for a
period of up to seven years subsequent to the closing, Berkshire may be required
to purchase up to $345 million of additional trust preferred securities. Mr.
Scott, a member of Berkshire's Board of Directors, controls approximately 86% of
the voting interest in MidAmerican. Mr. Sokol is the CEO of MidAmerican.
Through its retail utility subsidiaries, MidAmerican Energy in the U.S. and
Northern Electric in the U.K., MidAmerican provides electric service to
approximately 1.8 million customers and natural gas service to 1.1 million
customers worldwide. MidAmerican owns interests in over 10,000 net megawatts of
diversified power generation facilities in operation, construction and
development.
36
38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(3) INVESTMENT IN MIDAMERICAN ENERGY HOLDINGS COMPANY (Continued)
Berkshire's aggregate investments in MidAmerican are included in the
Consolidated Balance Sheet as Investments in MidAmerican Energy Holdings
Company. Berkshire is accounting for the common and non-dividend paying
convertible preferred stock pursuant to the equity method. The carrying value of
these equity method investments totaled $1,264 million at December 31, 2000.
The Consolidated Statements of Earnings reflect, as income from MidAmerican
Energy Holdings Company, Berkshire's proportionate share of MidAmerican's net
income with respect to the investments accounted for pursuant to the equity
method, as well as interest earned on the 11% trust preferred security. Income
derived from equity method investments totaled $66 million for the period from
March 14, 2000 through December 31, 2000.
(4) INVESTMENTS IN SECURITIES WITH FIXED MATURITIES
The amortized cost and estimated fair values of investments in securities
with fixed maturities as of December 31, 2000 and 1999 are as follows (in
millions):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost(2) Gains Losses Value
--------- ---------- ---------- ---------
December 31, 2000(1)
Bonds:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies ....... $ 3,662 $ 26 $ (9) $ 3,679
Obligations of states, municipalities
and political subdivisions ...................... 8,185 45 (57) 8,173
Obligations of foreign governments ............... 1,944 19 (20) 1,943
Corporate bonds .................................. 5,918 147 (209) 5,856
Redeemable preferred stocks ........................ 102 -- (5) 97
Mortgage-backed securities ......................... 12,609 275 (65) 12,819
-------- -------- -------- --------
$ 32,420 $ 512 $ (365) $ 32,567
======== ======== ======== ========
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost(2) Gains Losses Value
--------- ---------- ---------- ---------
December 31, 1999(1)
Bonds:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies ....... $ 4,001 $ 3 $ (189) $ 3,815
Obligations of states, municipalities
and political subdivisions ...................... 9,029 13 (436) 8,606
Obligations of foreign governments ............... 2,208 6 (49) 2,165
Corporate bonds .................................. 5,901 21 (237) 5,685
Redeemable preferred stocks ........................ 133 1 (5) 129
Mortgage-backed securities ......................... 10,157 7 (342) 9,822
-------- -------- -------- --------
$ 31,429 $ 51 $ (1,258) $ 30,222
======== ======== ======== ========
(1) Amounts above exclude securities with fixed maturities held by finance
and financial products businesses. See Note 7.
(2) In connection with the acquisition of General Re on December 21, 1998,
fixed maturity securities with a fair value of $17.6 billion were acquired.
Such amount was approximately $1.2 billion in excess of General Re's
historical amortized cost. The unamortized excess amount was $680 million
at December 31, 2000 and $940 million at December 31, 1999.
37
39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(4) INVESTMENTS IN SECURITIES WITH FIXED MATURITIES (Continued)
Shown below are the amortized cost and estimated fair values of securities
with fixed maturities at December 31, 2000, 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.
Estimated
Amortized Fair
Cost Value
--------- ---------
Due in one year or less ..................... $ 4,557 $ 4,616
Due after one year through five years ....... 5,665 5,613
Due after five years through ten years ...... 4,343 4,313
Due after ten years ......................... 5,246 5,206
------- -------
19,811 19,748
Mortgage-backed securities .................. 12,609 12,819
------- -------
$32,420 $32,567
======= =======
(5) INVESTMENTS IN EQUITY SECURITIES
Data with respect to the consolidated investments in equity securities are
shown below. Amounts are in millions.
Unrealized Fair
Cost Gains Value
------- ---------- -------
December 31, 2000
Common stock of:
American Express Company * ........ $ 1,470 $ 6,859 $ 8,329
The Coca-Cola Company ............. 1,299 10,889 12,188
The Gillette Company .............. 600 2,868 3,468
Wells Fargo & Company ............. 319 2,748 3,067
Other equity securities ............. 6,714 3,853 10,567
------- ------- -------
$10,402 $27,217** $37,619
======= ======= =======
Unrealized Fair
Cost Gains Value
------- ---------- -------
December 31, 1999
Common stock of:
American Express Company * ........ $ 1,470 $ 6,932 $ 8,402
The Coca-Cola Company ............. 1,299 10,351 11,650
The Gillette Company .............. 600 3,354 3,954
Wells Fargo & Company ............. 349 2,042 2,391
Other equity securities ............. 5,956 5,419 11,375
------- ------- -------
$ 9,674 $28,098** $37,772
======= ======= =======
* Common shares of American Express Company ("AXP") owned by Berkshire and
its subsidiaries possessed approximately 11% of the voting rights of all AXP
shares outstanding at December 31, 2000. The shares are held subject to various
agreements with certain insurance and banking regulators which, among other
things, prohibit Berkshire from (i) seeking representation on the Board of
Directors of AXP (Berkshire may agree, if it so desires, at the request of
management or the Board of Directors of AXP to have no more than one
representative stand for election to the Board of Directors of AXP) and (ii)
acquiring or retaining shares that would cause its ownership of AXP voting
securities to equal or exceed 17% of the amount outstanding (should Berkshire
have a representative on the Board of Directors, such amount is limited to 15%).
In connection therewith, Berkshire has entered into an agreement with AXP which
became effective when Berkshire's ownership interest in AXP voting securities
reached 10% and will remain effective so long as Berkshire owns 5% or more of
AXP's voting securities. The agreement obligates Berkshire, so long as Kenneth
Chenault is chief executive officer of AXP, to vote its shares in accordance
with the recommendations of AXP's Board of Directors. Additionally, subject to
certain exceptions, Berkshire has agreed not to sell AXP common shares to any
person who owns 5% or more of AXP voting securities or seeks to control AXP,
without the consent of AXP.
** Net of unrealized losses of $77 million and $131 million as of December
31, 2000 and 1999, respectively.
38
40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(6) REALIZED INVESTMENT GAINS (LOSSES)
Realized gains (losses) from sales and redemptions of investments are
summarized below (in millions):
2000 1999 1998
------- ------- -------
Equity securities and other investments --
Gross realized gains ................... $ 4,467 $ 1,507 $ 2,087
Gross realized losses .................. (317) (77) (272)
Securities with fixed maturities --
Gross realized gains ................... 153 39 602
Gross realized losses .................. (348) (104) (2)
------- ------- -------
$ 3,955 $ 1,365 $ 2,415
======= ======= =======
(7) FINANCE AND FINANCIAL PRODUCTS BUSINESSES
Assets and liabilities of Berkshire's finance and financial products
businesses are summarized below (in millions).
Dec. 31, Dec. 31,
2000 1999
-------- --------
ASSETS
Cash and cash equivalents ................................................... $ 341 $ 623
Investments in securities with fixed maturities:
Held-to-maturity, at cost (fair value $1,897 in 2000; $1,930 in 1999) ..... 1,826 2,002
Trading, at fair value (cost $5,277 in 2000; $11,330 in 1999) ............. 5,327 11,277
Available-for-sale, at fair value (cost $880 in 2000; $997 in 1999) ....... 880 999
Trading account assets ...................................................... 5,429 5,881
Securities purchased under agreements to resell ............................. 680 1,171
Other ....................................................................... 2,346 2,276
-------- --------
$ 16,829 $ 24,229
======== ========
LIABILITIES
Securities sold under agreements to repurchase .............................. $ 3,386 $ 10,216
Securities sold but not yet purchased ....................................... 715 1,174
Trading account liabilities ................................................. 4,974 5,930
Notes payable and other borrowings* ......................................... 2,116 1,998
Annuity reserves and policyholder liabilities ............................... 868 843
Other ....................................................................... 2,671 2,062
-------- --------
$ 14,730 $ 22,223
======== ========
* Payments of principal amounts of notes payable and other borrowings during the
next five years are as follows (in millions):
2001 2002 2003 2004 2005
---- ---- ---- ---- ----
$629 $242 $651 $184 $1
Berkshire's finance and financial products businesses consist primarily of
the financial products businesses of General Re, the consumer finance business
of Scott Fetzer Financial Group, the real estate finance business of Berkshire
Hathaway Credit Corporation, the financial instrument trading business of BH
Finance and a life insurance subsidiary in the business of selling annuities.
General Re's financial products businesses consist of the Gen Re Securities
Holdings Limited ("GRS") group. Significant accounting policies and disclosures
for these businesses are discussed below.
Investment securities (principally fixed maturity and equity investments)
that are acquired for purposes of selling them in the near term are classified
as trading securities. Such assets are carried at fair value. Realized and
unrealized gains and losses from trading activities are included in income from
finance and financial products businesses. Trading account assets and
liabilities are marked-to-market on a daily basis and represent the estimated
fair values of derivatives in net gain positions (assets) and in net loss
positions (liabilities). The net gains and losses reflect reductions permitted
under master netting agreements with counterparties.
39
41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(7) FINANCE AND FINANCIAL PRODUCTS BUSINESSES (Continued)
Securities purchased under agreements to resell (assets) and securities
sold under agreements to repurchase (liabilities) are accounted for as
collateralized investments and borrowings and are recorded at the contractual
resale or repurchase amounts plus accrued interest. Other investment securities
owned and liabilities associated with investment securities sold but not yet
purchased are carried at fair value.
GRS is engaged as a dealer in various types of derivative instruments,
including interest rate, currency and equity swaps and options, as well as
structured finance products. These instruments are carried at their current
estimates of fair value, which is a function of underlying interest rates,
currency rates, security values, volatilities and the creditworthiness of
counterparties. Future changes in these factors or a combination thereof may
affect the fair value of these instruments with any resulting adjustment to be
included currently in the Consolidated Statements of Earnings.
Interest rate, currency and equity swaps are agreements between two parties
to exchange, at particular intervals, payment streams calculated on a specified
notional amount. Interest rate, currency and equity options grant the purchaser
the right, but not the obligation, to either purchase from or sell to the writer
a specified financial instrument under agreed terms. Interest rate caps and
floors require the writer to pay the purchaser at specified future dates the
amount, if any, by which the option's underlying market interest rate exceeds
the fixed cap or falls below the fixed floor, applied to a notional amount.
Futures contracts are commitments to either purchase or sell a financial
instrument at a future date for a specified price and are generally settled in
cash. Forward-rate agreements are financial instruments that settle in cash at a
specified future date based on the differential between agreed interest rates
applied to a notional amount. Foreign exchange contracts generally involve the
exchange of two currencies at agreed rates on a specified date; spot contracts
usually require the exchange to occur within two business days of the contract
date.
A summary of notional amounts of derivative contracts at December 31, 2000
and 1999 is included in the table below. For these transactions, the notional
amount represents the principal volume, which is referenced by the
counterparties in computing payments to be exchanged, and are not indicative of
the Company's exposure to market or credit risk, future cash requirements or
receipts from such transactions.
December 31, December 31,
2000 1999
(in millions) (in millions)
------------- -------------
Interest rate and currency swap agreements ...... $651,913 $531,645
Options written ................................. 91,655 121,683
Options purchased ............................... 102,743 151,006
Financial futures contracts:
Commitments to purchase ....................... 9,535 32,377
Commitments to sell ........................... 17,069 11,368
Forward - rate agreements ....................... 7,070 5,164
Foreign exchange spot and forward contracts ..... 6,163 10,430
The following tables disclose the net fair value or carrying amount at
December 31, 2000 and 1999 as well as the average fair value during 2000 and
1999 for each class of derivative financial contract held or issued by GRS.
December 31, 2000 December 31, 1999
------------------------ ------------------------
Asset Liability Asset Liability
-------- --------- -------- ---------
(in millions) (in millions)
Interest rate and foreign currency swaps ....... $ 16,840 $ 16,312 $ 22,593 $ 22,819
Interest rate and foreign currency options ..... 2,864 2,919 5,980 5,714
-------- -------- -------- --------
Gross fair value ............................... 19,704 19,231 28,573 28,533
Adjustment for counterparty netting ............ (14,275) (14,275) (22,692) (22,692)
-------- -------- -------- --------
Net fair value ................................. 5,429 4,956 5,881 5,841
Security receivables/payables .................. -- 18 -- 89
-------- -------- -------- --------
Trading account assets/liabilities ............. $ 5,429 $ 4,974 $ 5,881 $ 5,930
======== ======== ======== ========
40
42
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(7) FINANCE AND FINANCIAL PRODUCTS BUSINESSES (Continued)
Average 2000 Average 1999
------------------------ ------------------------
Asset Liability Asset Liability
-------- --------- -------- ---------
(in millions) (in millions)
Interest rate and foreign currency swaps ....... $ 20,431 $ 20,533 $ 23,213 $ 23,071
Interest rate and foreign currency options ..... 3,147 3,174 4,657 4,687
-------- -------- -------- --------
Gross fair value ............................... 23,578 23,707 27,870 27,758
Adjustment for counterparty netting ............ (17,960) (17,960) (22,579) (22,579)
-------- -------- -------- --------
Net fair value ................................. 5,618 5,747 5,291 5,179
Security receivables/payables .................. 98 40 85 111
-------- -------- -------- --------
Trading account assets/liabilities ............. $ 5,716 $ 5,787 $ 5,376 $ 5,290
======== ======== ======== ========
The derivative financial instruments involve, to varying degrees, elements
of market, credit, and legal risks. Market risk is the possibility that future
changes in market conditions may make the derivative financial instrument less
valuable. Credit risk is defined as the possibility that a loss may occur from
the failure of another party to perform in accordance with the terms of the
contract which exceeds the value of existing collateral, if any. The
derivative's risk of credit loss is generally a small fraction of notional value
of the instrument and is represented by the fair value of the derivative
financial instrument. Legal risk arises from the uncertainty of the
enforceability of the obligations of another party, including contractual
provisions intended to reduce credit exposure by providing for the offsetting or
netting of mutual obligations.
With respect to Berkshire's life insurance business, annuity reserves and
policyholder liabilities are carried at the present value of the actuarially
determined ultimate payment amounts discounted at market interest rates existing
at the inception of the contracts. Such interest rates range from 5% to 8%.
Periodic accretions of the discounted liabilities are charged against income
from finance and financial products businesses.
Investments in securities with fixed maturities held by Berkshire's life
insurance business are classified as held-to-maturity. Investments classified as
held-to-maturity are carried at amortized cost reflecting the Company's ability
and intent to hold such investments to maturity. Such items consist
predominantly of mortgage loans and collateralized mortgage obligations.
(8) UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
Supplemental data with respect to unpaid losses and loss adjustment
expenses of property/casualty insurance subsidiaries (in millions) is as
follows:
2000 1999 1998
-------- -------- --------
Unpaid losses and loss adjustment expenses:
Balance at beginning of year ......................................... $ 26,802 $ 23,012 $ 6,850
Ceded liabilities and deferred charges ............................... (3,848) (2,727) (754)
-------- -------- --------
Net balance .......................................................... 22,954 20,285 6,096
-------- -------- --------
Incurred losses recorded:
Current accident year ................................................ 15,252 11,275 4,235
All prior accident years ............................................. 211 (192) (195)
-------- -------- --------
Total incurred losses ................................................ 15,463 11,083 4,040
-------- -------- --------
Payments with respect to:
Current accident year ................................................ 4,589 3,648 1,919
All prior accident years ............................................. 5,890 4,532 1,834
-------- -------- --------
Total payments ....................................................... 10,479 8,180 3,753
-------- -------- --------
Unpaid losses and loss adjustment expenses:
Net balance at end of year ........................................... 27,938 23,188 6,383
Ceded liabilities and deferred charges ............................... 5,590 3,848 2,727
Foreign currency translation adjustment .............................. (722) (234) --
Net liabilities assumed in connection with business acquisitions ..... 216 -- 13,902
-------- -------- --------
Balance at end of year ................................................. $ 33,022 $ 26,802 $ 23,012
======== ======== ========
41
43
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(8) UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES (Continued)
Incurred losses "all prior accident years" reflects the amount of
estimation error charged or credited to earnings in each year with respect to
the liabilities established as of the beginning of that year. This amount
includes amortization of deferred charges regarding retroactive reinsurance
assumed and accretion of discounted liabilities. See Note 1 for additional
information regarding these items. Additional information regarding incurred
losses will be revealed over time and the estimates will be revised resulting in
gains or losses in the periods made.
The balances of unpaid losses and loss adjustment expenses are based upon
estimates of the ultimate claim costs associated with claim occurrences as of
the balance sheet dates. Considerable judgment is required to evaluate claims
and establish estimated claim liabilities, particularly with respect to certain
lines of business, such as reinsurance assumed, or certain types of claims, such
as environmental or latent injury liabilities.
Berkshire continuously evaluates its liabilities and related reinsurance
recoverable for environmental and latent injury claims and claim expenses, which
arise from exposures in the U.S., as well as internationally. Environmental and
latent injury exposures do not lend themselves to traditional methods of loss
development determination and therefore reserve estimates related to these
exposures may be considerably less reliable than for other lines of business
(e.g., automobile). The effect of joint and several liability claims severity
and a provision for inflation have been included in the loss development
estimate. The Company has also established a liability for litigation costs
associated with coverage disputes arising out of direct insurance policies.
The liabilities for environmental and latent injury claims and claim
expenses net of related reinsurance recoverables were $4,444 million and $3,211
million, respectively, at December 31, 2000 and 1999. The liabilities recorded
for environmental and latent injury claims and claim expenses are management's
best estimate of future ultimate claim and claim expense payments and recoveries
and are expected to develop over the next several decades.
Berkshire monitors evolving case law and its effect on environmental and
latent injury claims. Changing government regulations, newly identified toxins,
newly reported claims, new theories of liability, new contract interpretations
and other factors could result in significant amounts of adverse development of
the balance sheet liabilities. Such development could be material to Berkshire's
results of operations. It is not possible to estimate reliably the amount of
additional net loss, or the range of net loss, that is reasonably possible.
(9) INCOME TAXES
The liability for income taxes as reflected in the accompanying
Consolidated Balance Sheets is as follows (in millions):
Dec. 31, Dec. 31,
2000 1999
-------- --------
Payable currently ...................... $ 522 $ (27)
Deferred ............................... 9,603 9,593
-------- --------
$ 10,125 $ 9,566
======== ========
The Consolidated Statements of Earnings reflect charges for income taxes as
shown below (in millions):
2000 1999 1998
------- ------- -------
Federal .............................. $ 2,136 $ 748 $ 1,421
State ................................ 32 43 31
Foreign .............................. (150) 61 5
------- ------- -------
$ 2,018 $ 852 $ 1,457
======= ======= =======
Current .............................. $ 2,012 $ 1,189 $ 1,643
Deferred ............................. 6 (337) (186)
------- ------- -------
$ 2,018 $ 852 $ 1,457
======= ======= =======
42
44
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(9) INCOME TAXES (Continued)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at December 31,
2000 and 1999 are shown below (in millions):
2000 1999
-------- --------
Deferred tax liabilities:
Relating to unrealized appreciation of investments ....... $ 9,571 $ 9,383
Deferred charges reinsurance assumed ..................... 916 534
Investments .............................................. 441 644
Other .................................................... 717 74
-------- --------
11,645 10,635
-------- --------
Deferred tax assets:
Unpaid losses and loss adjustment expenses ............... (1,061) (697)
Unearned premiums ........................................ (227) (205)
Other .................................................... (754) (140)
-------- --------
(2,042) (1,042)
-------- --------
Net deferred tax liability ................................. $ 9,603 $ 9,593
======== ========
Charges for income taxes are reconciled to hypothetical amounts computed at
the federal statutory rate in the table shown below (in millions):
2000 1999 1998
-------- -------- --------
Earnings before income taxes ............................ $ 5,587 $ 2,450 $ 4,314
======== ======== ========
Hypothetical amounts applicable to above
computed at the federal statutory rate ................ $ 1,955 $ 858 $ 1,510
Decreases resulting from:
Tax-exempt interest income ............................ (135) (145) (30)
Dividends received deduction .......................... (116) (95) (78)
Goodwill amortization ................................... 240 161 39
State income taxes, less federal income tax benefit ..... 21 28 20
Foreign tax rate differential ........................... 34 45 --
Other differences, net .................................. 19 -- (4)
-------- -------- --------
Total income taxes ...................................... $ 2,018 $ 852 $ 1,457
======== ======== ========
(10) BORROWINGS UNDER INVESTMENT AGREEMENTS AND OTHER DEBT
Liabilities for this balance sheet caption are as follows (in millions):
Dec. 31, Dec. 31,
2000 1999
-------- --------
Commercial paper and other short-term borrowings ................. $ 991 $ 484
Borrowings under investment agreements ........................... 508 613
1% Senior Exchangeable Notes due 2001 ("Exchange Notes") ......... 235 449
General Re Corporation 9% debentures due 2009 (non-callable) ..... 150 150
GEICO Corporation 7.35% debentures due 2023 (non-callable) ....... 160 160
Other debt due 2001 -- 2028 ...................................... 619 609
------ ------
$2,663 $2,465
====== ======
Commercial paper and other short-term borrowings are obligations of several
Berkshire subsidiaries that utilize short-term borrowings as part of their
day-to-day business operations. The obligations are, in most instances,
guaranteed by Berkshire. Berkshire affiliates have approximately $4 billion
available unused lines of credit to support their short-term borrowing programs
and, otherwise, provide additional liquidity.
43
45
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(10) BORROWINGS UNDER INVESTMENT AGREEMENTS AND OTHER DEBT (Continued)
Borrowings under investment agreements are made pursuant to contracts
calling for interest payable, normally semiannually, at fixed rates ranging from
2.5% to 8.6% per annum. Contractual maturities of borrowings under investment
agreements generally range from 3 months to 30 years. Under certain conditions,
these borrowings are redeemable prior to the contractual maturity dates.
Under certain conditions, each $1,000 par amount Exchange Note is currently
exchangeable at the option of the holder or redeemable at the option of
Berkshire into 59.833 shares of Citigroup common stock or at Berkshire's option,
at the equivalent value in cash. The carrying value of the Exchange Notes is
equal to the value of the Citigroup shares into which they can be exchanged.
Other debt includes variable and fixed rate term bonds and notes issued by
a variety of Berkshire subsidiaries. These obligations generally may be redeemed
prior to maturity at the option of the issuing company.
No materially restrictive covenants are included in any of the various debt
agreements. Payments of principal amounts expected during the next five years
are as follows (in millions):
2001 2002 2003 2004 2005
---- ---- ---- ---- ----
$1,271 $22 $46 $24 $266
(11) DIVIDEND RESTRICTIONS - INSURANCE SUBSIDIARIES
Payments of dividends by insurance subsidiaries are restricted by insurance
statutes and regulations. Without prior regulatory approval, Berkshire can
receive up to approximately $1.1 billion as dividends from insurance
subsidiaries during 2001. During 2000, subsidiaries declared approximately $4.8
billion in dividends, of which $2 billion was paid in 2001.
Combined shareholders' equity of U.S. based property/casualty insurance
subsidiaries determined pursuant to statutory accounting rules (Statutory
Surplus as Regards Policyholders) was approximately $41.5 billion at December
31, 2000. This amount differs from the corresponding amount determined on the
basis of GAAP. The major differences between statutory basis accounting and GAAP
are that deferred income tax assets and liabilities, deferred
charges-reinsurance assumed, unrealized gains and losses on investments in
securities with fixed maturities and goodwill of acquired businesses are
recognized under GAAP but not for statutory reporting purposes.
Effective January 1, 2001, Berkshire's insurance companies will be required
to adopt several new accounting policies as a result of the completion of the
Codification of Statutory Accounting Principles ("SAP") by the National
Association of Insurance Commissioners. The most significant new accounting
policy affecting Berkshire's insurance companies will be the requirement to
record deferred income tax liabilities, including amounts related to unrealized
gains in investment securities. Deferred tax liabilities were previously not
recognized under SAP.
As a result, the combined statutory surplus of Berkshire's insurance
businesses will decline significantly in 2001. Berkshire estimates that the
combined surplus of the group would approximate $33 billion at December 31, 2000
under the new statutory accounting rules.
44
46
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(12) COMMON STOCK
Changes in issued and outstanding common stock of the Company during the
three years ended December 31, 2000 are shown in the table below.
Class B Common
$0.1667 Par
Value
(55,000,000
Class A Common, $5 Par Value shares
-------------------------------------------- authorized)
(1,650,000 shares authorized) Shares
Shares Treasury Shares Issued and
Issued Shares Outstanding Outstanding
---------- ---------- ----------- ---------------
Balance December 31, 1997 ................ 1,366,090 168,202 1,197,888 1,087,156
Common stock issued in connection
with acquisitions of businesses ........ 168,670 (9,709) 178,379 3,174,677
Conversions of Class A common stock
to Class B common stock and other ...... (26,732) (26,732) 808,546
Retirement of treasury shares ............ (158,493) (158,493)
---------- ---------- ---------- ----------
Balance December 31, 1998 ................ 1,349,535 0 1,349,535 5,070,379
Conversions of Class A common stock
to Class B common stock and other ...... (7,872) (7,872) 296,576
---------- ---------- ---------- ----------
Balance December 31, 1999 ................ 1,341,663 0 1,341,663 5,366,955
Common stock issued in connection
with acquisitions of businesses ........ 3,572 3,572 1,626
Conversions of Class A common stock
to Class B common stock and other ...... (1,331) (1,331) 101,205
---------- ---------- ---------- ----------
Balance December 31, 2000 ................ 1,343,904 0 1,343,904 5,469,786
========== ========== ========== ==========
Each share of Class A Common Stock is convertible, at the option of the
holder, into thirty shares of Class B Common Stock. Class B Common Stock is not
convertible into Class A Common Stock. Each share of Class B Common Stock
possesses voting rights equivalent to one-two-hundredth (1/200) of the voting
rights of a share of Class A Common Stock. Class A and Class B common shares
vote together as a single class.
In connection with the General Re merger, all shares of Class A and Class B
Common Stock of the Company outstanding immediately prior to the effective date
of the merger were canceled and replaced with new Class A and Class B common
shares and all Class A treasury shares were canceled and retired. See Note 2 for
information regarding the General Re merger.
(13) FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of Berkshire's financial instruments as of
December 31, 2000 and 1999, are as follows (in millions):
Carrying Value Fair Value
-------------------- --------------------
2000 1999 2000 1999
------- ------- ------- -------
Investments in securities with fixed maturities .............. $32,567 $30,222 $32,567 $30,222
Investments in equity securities ............................. 37,619 37,772 37,619 37,772
Assets of finance and financial products businesses .......... 16,829 24,229 16,913 24,167
Borrowings under investment agreements and other debt ........ 2,663 2,465 2,704 2,418
Liabilities of finance and financial products businesses ..... 14,730 22,223 14,896 22,151
In determining fair value of financial instruments, Berkshire used quoted
market prices when available. For instruments where quoted market prices were
not available, independent pricing services or appraisals by Berkshire's
management were used. Those services and appraisals reflected the estimated
present values utilizing current risk adjusted market rates of similar
instruments. The carrying values of cash and cash equivalents, receivables and
accounts payable, accruals and other liabilities are deemed to be reasonable
estimates of their fair values.
Considerable judgment is necessarily required in interpreting market data
used to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that could be
realized in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated fair
value.
45
47
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(14) LITIGATION
GEICO has been named as a defendant in a number of class action lawsuits
related to the use of repair parts not produced by original equipment
manufacturers in connection with settlement of collision damage claims. A number
of the lawsuits have been dismissed. The remaining lawsuits are in the early
stages of development and the ultimate outcome of any case cannot be reasonably
determined at this time. Management intends to defend vigorously GEICO's
position of recommending use of after-market parts in certain auto accident
repairs.
Berkshire and its subsidiaries are parties in a variety of legal actions
arising out of the normal course of business. In particular, and in common with
the insurance industry in general, such legal actions affect Berkshire's
insurance and reinsurance businesses. Such litigation generally seeks to
establish liability directly through insurance contracts or indirectly through
reinsurance contracts issued by Berkshire subsidiaries. Plaintiffs occasionally
seek punitive or exemplary damages. Berkshire does not believe that such normal
and routine litigation will have a material effect on its financial condition or
results of operations.
(15) INSURANCE PREMIUM AND SUPPLEMENTAL CASH FLOW INFORMATION
Premiums written and earned by Berkshire's property/casualty and
life/health insurance businesses during each of the three years ending December
31, 2000 are summarized below. Dollars are in millions.
Property/Casualty Life/Health
-------------------------------- --------------------------------
2000 1999 1998 2000 1999 1998
-------- -------- -------- -------- -------- --------
Premiums Written: (1) (2)
Direct ....................... $ 6,858 $ 5,798 $ 4,503
Assumed ...................... 11,270 7,951 1,184 $ 2,520 $ 1,981 $ 46
Ceded ........................ (729) (818) (83) (257) (245) (5)
-------- -------- -------- -------- -------- --------
$ 17,399 $ 12,931 $ 5,604 $ 2,263 $ 1,736 $ 41
======== ======== ======== ======== ======== ========
Premiums Earned: (2)
Direct ....................... $ 6,666 $ 5,606 $ 4,382
Assumed ...................... 11,036 7,762 1,147 $ 2,513 $ 1,971 $ 45
Ceded ........................ (620) (788) (89) (252) (245) (4)
-------- -------- -------- -------- -------- --------
$ 17,082 $ 12,580 $ 5,440 $ 2,261 $ 1,726 $ 41
======== ======== ======== ======== ======== ========
(1) Prior to 1999, Berkshire's insurance premium revenues were predominantly
derived in the United States. Insurance premiums written by geographic
region (based upon the domicile of the ceding company) are summarized
below.
Property/Casualty Life/Health
------------------- ------------------
2000 1999 2000 1999
------- ------- ------- -------
United States ..................... $11,409 $ 8,862 $ 1,296 $ 970
Western Europe .................... 5,064* 2,000 633 539
All other ......................... 926 2,069 334 227
------- ------- ------- -------
$17,399 $12,931 $ 2,263 $ 1,736
======= ======= ======= =======
* Premiums attributed to Western Europe include $2,438 million from a single
reinsurance policy.
(2) See Note 1(a) for information related to General Re's international
property/casualty and global life/health business.
A summary of supplemental cash flow information is presented in the
following table (in millions):
2000 1999 1998
------- ------- -------
Cash paid during the year for:
Income taxes ............................................................ $ 1,396 $ 2,215 $ 1,703
Interest of finance and financial products businesses ................... 794 513 21
Other interest .......................................................... 157 136 111
Non-cash investing and financing activities:
Liabilities assumed in connection with acquisitions of businesses ....... 901 61 36,064
Common shares issued in connection with acquisitions of businesses ...... 224 -- 22,795
Contingent value of Exchange Notes recognized in earnings ............... 117 87 54
Value of equity securities used to redeem Exchange Notes ................ 278 298 344
46
48
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(16) BUSINESS SEGMENT DATA
SFAS No. 131 requires certain disclosures about operating segments in a
manner that is consistent with how management evaluates the performance of the
segment. Information related to Berkshire's reportable business operating
segments is shown below.
Business Identity Business Activity
- ----------------- -----------------
GEICO Underwriting private passenger automobile
insurance mainly by direct response methods
General Re Underwriting excess-of-loss, quota-share and
facultative reinsurance worldwide
Berkshire Hathaway Reinsurance Group Underwriting excess-of-loss and quota-share
reinsurance for property and casualty insurers
and reinsurers
Berkshire Hathaway Direct Insurance Group Underwriting multiple lines of property and
casualty insurance policies for primarily
commercial accounts
FlightSafety and Executive Jet ("Flight Training to operators of aircraft and ships and
Services") providing fractional ownership programs for
general aviation aircraft
Nebraska Furniture Mart, R.C. Willey Home Retail sales of home furnishings, appliances,
Furnishings, Star Furniture Company, electronics, fine jewelry and gifts
Jordan's Furniture, Borsheim's, Helzberg's
Diamond Shops and Ben Bridge Jeweler
("Retail Businesses")
Scott Fetzer Companies Diversified manufacturing and distribution of
various consumer and commercial products with
principal brand names including Kirby and
Campbell Hausfeld
Other businesses not specifically identified above consist of: Buffalo
News, a daily newspaper publisher in Western New York; International Dairy
Queen, which licenses and services a system of almost 6,000 Dairy Queen stores;
See's Candies, a manufacturer and distributor of boxed chocolates and other
confectionery products; H.H. Brown Shoe, Lowell Shoe, Dexter Shoe and Justin
Brands, manufacturers and distributors of footwear and Acme Building Brands, a
manufacturer and distributor of building materials. This group of businesses
also includes several independently operated finance and financial products
businesses. In 2000, other businesses also include CORT Business Services, a
leading national provider of rental furniture and related services and Benjamin
Moore, a formulator, manufacturer and retailer of a range of architectural and
industrial coatings and paints.
General Re's reinsurance business is included as a separate reportable
segment beginning in 1999.
47
49
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(16) BUSINESS SEGMENT DATA (Continued)
A disaggregation of Berkshire's consolidated data for each of the three
most recent years is presented in the tables which follow on this and the
following page. Amounts are in millions.
REVENUES
----------------------------------
2000 1999 1998
-------- -------- --------
OPERATING SEGMENTS:
Insurance group:
Premiums earned:
GEICO .............................................................. $ 5,610 $ 4,757 $ 4,033
General Re ** ...................................................... 8,696 6,905 --
Berkshire Hathaway Reinsurance Group ............................... 4,705 2,382 939
Berkshire Hathaway Direct Insurance Group .......................... 332 262 328
Interest, dividend and other investment income ...................... 2,810 2,500 982
-------- -------- --------
Total insurance group ................................................. 22,153 16,806 6,282
Flight services ....................................................... 2,279 1,856 858
Retail businesses ..................................................... 1,864 1,402 1,213
Scott Fetzer Companies ................................................ 963 1,021 1,002
Other businesses ...................................................... 2,780 1,763 1,792
-------- -------- --------
30,039 22,848 11,147
RECONCILIATION OF SEGMENTS TO CONSOLIDATED AMOUNT:
Realized investment gain ............................................ 3,955 1,365 2,415
Other revenues ...................................................... 118 40 276
Purchase-accounting adjustments ..................................... (136) (225) (6)
-------- -------- --------
$ 33,976 $ 24,028 $ 13,832
======== ======== ========
OPERATING PROFIT BEFORE TAXES
----------------------------------
2000 1999 1998
-------- -------- --------
OPERATING SEGMENTS:
Insurance group operating profit:
Underwriting profit (loss):
GEICO .............................................................. $ (224) $ 24 $ 269
General Re ** ...................................................... (1,224) (1,184) --
Berkshire Hathaway Reinsurance Group ............................... (175) (256) (21)
Berkshire Hathaway Direct Insurance Group .......................... 38 22 17
Interest, dividend and other investment income ...................... 2,787 2,482 974
-------- -------- --------
Total insurance group operating profit ................................ 1,202 1,088 1,239
Flight services ....................................................... 213 225 181
Retail businesses ..................................................... 175 130 110
Scott Fetzer Companies ................................................ 122 147 137
Other businesses ...................................................... 781 335 432
-------- -------- --------
2,493 1,925 2,099
RECONCILIATION OF SEGMENTS TO CONSOLIDATED AMOUNT:
Realized investment gain ............................................ 3,955 1,365 2,415
Interest expense * .................................................. (92) (109) (100)
Corporate and other ................................................. 87 8 23
Goodwill amortization and other purchase-accounting adjustments ..... (856) (739) (123)
-------- -------- --------
$ 5,587 $ 2,450 $ 4,314
======== ======== ========
* Amounts of interest expense represent interest on borrowings under
investment agreements and other debt exclusive of that of finance
businesses and interest allocated to certain businesses.
** See Note 1(a) for additional information concerning the reporting of
General Re's international property/casualty and global life/health
businesses.
48
50
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(16) BUSINESS SEGMENT DATA (Continued)
DEPREC. & AMORT.
CAPITAL EXPENDITURES* OF TANGIBLE ASSETS
--------------------- --------------------
OPERATING SEGMENTS: 2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
Insurance group:
GEICO ......................................... $ 29 $ 87 $101 $ 64 $ 40 $ 27
General Re .................................... 22 17 -- 39 25 --
Berkshire Hathaway Reinsurance Group .......... -- -- -- -- -- --
Berkshire Hathaway Direct Insurance Group ..... 4 1 1 1 1 1
---- ---- ---- ---- ---- ----
Total insurance group ........................... 55 105 102 104 66 28
Flight services ................................. 472 323 213 90 77 58
Retail businesses ............................... 45 55 33 31 27 23
Scott Fetzer Companies .......................... 11 14 10 10 11 11
Other businesses ................................ 47 33 41 46 33 25
---- ---- ---- ---- ---- ----
630 530 399 281 214 145
RECONCILIATION OF SEGMENTS TO CONSOLIDATED
AMOUNT:
Corporate and other ........................... -- -- -- -- 1 2
Purchase-accounting adjustments ............... -- -- -- 1 3 8
---- ---- ---- ---- ---- ----
$630 $530 $399 $282 $218 $155
==== ==== ==== ==== ==== ====
* Excludes expenditures which were part of business acquisitions.
IDENTIFIABLE ASSETS
AT YEAR-END
--------------------------------
OPERATING SEGMENTS: 2000 1999 1998
-------- -------- --------
Insurance group:
GEICO .................................................. $ 10,569 $ 9,381 $ 8,663
General Re ............................................. 31,594 30,168 32,011
Berkshire Hathaway Reinsurance Group ................... 45,775 39,607 36,611
Berkshire Hathaway Direct Insurance Group .............. 4,168 4,866 5,564
-------- -------- --------
Total insurance group .................................... 92,106 84,022 82,849
Flight services .......................................... 2,336 1,790 1,345
Retail businesses ........................................ 1,154 906 723
Scott Fetzer Companies ................................... 295 298 242
Other businesses ......................................... 18,647 24,947 17,376
-------- -------- --------
114,538 111,963 102,535
RECONCILIATION OF SEGMENTS TO CONSOLIDATED AMOUNT:
Corporate and other .................................... 2,313 945 938
Goodwill and other purchase-accounting adjustments ..... 18,941 18,508 18,764
-------- -------- --------
$135,792 $131,416 $122,237
======== ======== ========
49
51
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(17) 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.
1st 2nd 3rd 4th
2000 Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
Revenues .......................................... $ 6,474 $ 6,553 $ 8,426 $ 12,523
-------- -------- -------- --------
Earnings:
Excluding realized investment gain .............. $ 354 $ 245 $ 301 $ 36
Realized investment gain * ...................... 453 395 496 1,048
-------- -------- -------- --------
Net earnings .................................... $ 807 $ 640 $ 797 $ 1,084
======== ======== ======== ========
Earnings per equivalent Class A common share:
Excluding realized investment gain .............. $ 233 $ 161 $ 197 $ 23
Realized investment gain * ...................... 298 260 326 687
-------- -------- -------- --------
Net earnings .................................... $ 531 $ 421 $ 523 $ 710
======== ======== ======== ========
1999
Revenues ........................................... $ 5,446 $ 5,461 $ 7,051 $ 6,070
-------- -------- -------- --------
Earnings:
Excluding realized investment gain ............... $ 294 $ 299 $ 156 $ (78)
Realized investment gain * ....................... 247 273 264 102
-------- -------- -------- --------
Net earnings ..................................... $ 541 $ 572 $ 420 $ 24
======== ======== ======== ========
Earnings per equivalent Class A common share:
Excluding realized investment gain ............... $ 194 $ 197 $ 103 $ (52)
Realized investment gain * ....................... 162 179 173 69
-------- -------- -------- --------
Net earnings ..................................... $ 356 $ 376 $ 276 $ 17
======== ======== ======== ========
* The amount of realized gain for any given period has no predictive value and
variations in amount from period to period have no practical analytical value
particularly in view of the unrealized appreciation now existing in
Berkshire's consolidated investment portfolio.
(18) SUBSEQUENT EVENT
On February 26, 2001, Berkshire and Leucadia National Corporation, through
a jointly owned entity, entered into a commitment letter with FINOVA Group and
its subsidiary FINOVA Capital Corporation to loan $6 billion to FINOVA Capital
on a senior secured basis. The loan commitment was made in connection with a
proposed restructuring of all of FINOVA Capital's outstanding bank debt and
publicly traded debt securities and is subject to bankruptcy court approval and
various other conditions.
The $6 billion term loan will be made by Berkadia LLC, an entity formed for
this purpose and owned jointly by BH Finance, an indirect wholly-owned
subsidiary of Berkshire and a wholly-owned subsidiary of Leucadia. Berkadia has
received a $60 million commitment fee and, in addition to certain other fees,
will receive an additional $60 million fee upon funding of the loan. Berkadia's
commitment for the loan has been guaranteed by Berkshire and Leucadia and
expires on August 31, 2001, or earlier, if certain conditions are not satisfied.
Berkadia expects to finance its funding commitment and Berkshire will provide
Berkadia's lenders with a 90% primary guarantee of such financing, with Leucadia
providing a 10% primary guarantee and Berkshire providing a secondary guarantee
of Leucadia's guarantee.
The term loan will be secured by all assets of FINOVA Capital and will bear
interest at an annual rate equal to the greater of 9% or LIBOR plus 3%. In
addition, an annual facility fee will be payable at the rate of 25 basis points
on the outstanding principal amount of the term loan. After payment of accrued
interest on the term loan and operating and other corporate expenses, providing
for reserves and payment of accrued interest on the restructured FINOVA Group
senior notes, 100% of excess cash flow and net proceeds from asset sales will be
used to make mandatory prepayments of principal on the term loan without
premium. Any remaining principal and accrued and unpaid interest on the term
loan will be due at maturity (five years from the closing).
50
52
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(19) INFORMATION ABOUT CERTAIN SUBSIDIARIES
The accompanying consolidated financial statements include the accounts of
OBH Inc. (formerly Berkshire Hathaway Inc.), which became a wholly-owned
subsidiary of Berkshire Hathaway Inc. upon completion of the General Re merger.
The condensed consolidated balance sheets of OBH Inc. as of December 31, 2000
and 1999 are as follows (dollars in millions):
DEC. 31, DEC. 31,
2000 1999
-------- --------
ASSETS
Cash and cash equivalents ...................................... $ 4,526 $ 2,661
Investments, primarily equity securities ....................... 48,590 48,635
Assets of finance and financial products businesses ............ 7,326 13,369
Goodwill of acquired businesses ................................ 3,819 3,926
Other assets ................................................... 12,346 7,382
-------- --------
$ 76,607 $ 75,973
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Losses and loss adjustment expenses ............................ $ 15,687 $ 10,637
Unearned premiums, accounts payable and other liabilities ...... 5,369 4,743
Income taxes, principally deferred ............................. 10,139 9,689
Borrowings under investment agreements and other debt .......... 2,249 2,156
Liabilities of finance and financial products businesses ....... 5,678 12,094
-------- --------
39,122 39,319
-------- --------
Total shareholder's equity ..................................... 37,485 36,654
-------- --------
$ 76,607 $ 75,973
======== ========
The condensed consolidated statements of earnings of OBH Inc. for the years
ended December 31, 2000, 1999 and 1998 are as follows (in millions):
2000 1999 1998
-------- -------- --------
REVENUES
Insurance premiums earned ........................................ $ 10,598 $ 7,400 $ 5,300
Sales and service revenues ....................................... 6,708 5,882 4,675
Investment income ................................................ 1,438 1,208 1,013
Income (loss) from finance and financial products businesses ..... 619 (21) 205
Realized investment gain ......................................... 3,775 1,294 2,415
-------- -------- --------
23,138 15,763 13,608
-------- -------- --------
COST AND EXPENSES
Insurance losses, loss adjustment and underwriting expense ....... 11,010 7,610 5,035
Cost of products and services sold ............................... 4,534 4,039 3,018
Selling, general and administrative expenses ..................... 1,843 1,256 1,148
Interest expense ................................................. 109 110 109
-------- -------- --------
17,496 13,015 9,310
-------- -------- --------
EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST ................. 5,642 2,748 4,298
Income taxes and minority interests .............................. 2,190 924 1,474
-------- -------- --------
NET EARNINGS ....................................................... $ 3,452 $ 1,824 $ 2,824
======== ======== ========
51
53
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(19) INFORMATION ABOUT CERTAIN SUBSIDIARIES (Continued)
The summarized financial data of the finance and financial products
businesses (See Note 7) includes the activities conducted by the Scott Fetzer
Financial Group and its subsidiaries ("SFFG"). Assets and liabilities of SFFG
are summarized below (in millions).
Dec. 31, Dec. 31,
2000 1999
-------- --------
ASSETS
Cash and cash equivalents ................................................ $ 6 $ 1
Mortgage-backed securities, installment loans and other receivables* ..... 189 196
------ ------
$ 195 $ 197
====== ======
LIABILITIES
6 3/4% Notes, due 2001 and borrowings under investment agreements ........ $ 136 $ 137
Other .................................................................... 25 27
------ ------
$ 161 $ 164
====== ======
* Other receivables include receivables from affiliates of $39 million at
December 31, 2000 and $40 million at December 31, 1999.
Net income of SFFG for each of the past three years is summarized below (in
millions).
2000 1999 1998
------ ------ ------
Revenues .................................. $ 40 $ 255 $ 211
Cost and expenses ......................... 22 301 28
------ ------ ------
Earnings (loss) before taxes .............. 18 (46) 183
Income taxes .............................. 7 (16) 64
------ ------ ------
Net earnings (loss) ....................... $ 11 $ (30) $ 119
====== ====== ======
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
Part III
Except for the information set forth under the caption "Executive Officers
of the Registrant" in Part I hereof, information required by this Part (Items
10, 11, 12, and 13) is incorporated by reference from the Registrant's
definitive proxy statement, filed pursuant to Regulation 14A, for the Annual
Meeting of Shareholders of the Registrant to be held on April 28, 2001, which
meeting will involve the election of directors.
Part IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following consolidated financial statements, as well as the
Independent Auditors' Report, are included in Part II Item 8 of
this report:
PAGE
----
Independent Auditors' Report 27
Consolidated Balance Sheets at December 31, 2000 and 1999 28
Consolidated Statements of Earnings for the years ended
2000, 1999 and 1998 29
Consolidated Statements of Cash Flows for the years ended
2000, 1999 and 1998 30
Consolidated Statements of Changes in Shareholders' Equity
for the years ended 2000, 1999 and 1998 31
Notes to Consolidated Financial Statements 32-52
52
54
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(Continued)
(a) 2. Financial Statement Schedule PAGE
---------------------------- ----
Independent Auditors' Report on Schedule 55
Schedule I -- Parent Company 56-57
Condensed Balance Sheets as of December 31, 2000 and 1999 and
Condensed Statements of Earnings and Cash Flows for the years
ended 2000, 1999 and 1998.
Other schedules are omitted because they are not required,
information therein is not applicable, or is reflected in the
Consolidated Financial Statements or notes thereto.
(a) 3. Exhibits
See the "Exhibit Index" at page 58.
(b) Reports on Form 8-K
Form 8-K filed October 24, 2000. Item 5. Other Events. Report
indicated that on October 19, 2000, the Registrant entered into
an Agreement and Plan of Merger with Shaw Industries, Inc.
("Shaw"). In addition, certain shareholders of Shaw entered into
a voting agreement with Berkshire Hathaway (the "Voting
Agreement") in connection with the merger agreement.
Form 8-K/A filed November 3, 2000. Item 5. Other Events. Report
provided a corrected total number of shares of Shaw Industries,
Inc. ("Shaw") common stock subject to the Voting Agreement.
Form 8-K filed November 9, 2000. Item 5. Other Events. Report
indicated that on November 8, 2000, the Registrant entered into
an Agreement and Plan of Merger by and among Berkshire and
Benjamin Moore & Co., a New Jersey corporation ("Benjamin Moore")
and a wholly-owned Berkshire subsidiary.
Form 8-K filed December 22, 2000. Item 5. Other Events. Report
indicated that on December 19, 2000, the Registrant entered into
an Agreement and Plan of Merger, by and among Berkshire, a
wholly-owned subsidiary of Berkshire ("Purchaser"), and Johns
Manville Corporation ("Johns Manville").
53
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
BERKSHIRE HATHAWAY INC.
Date: March 29, 2001 /s/ Marc D. Hamburg
-------------- ----------------------------------------------
Marc D. Hamburg
Vice President and Principal Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Warren E. Buffett Chairman of the Board March 29, 2001
- ------------------------------ of Directors - Chief --------------
Warren E. Buffett Executive Officer Date
/s/ Howard G. Buffett Director March 29, 2001
- ------------------------------ --------------
Howard G. Buffett Date
/s/ Susan T. Buffett Director March 29, 2001
- ------------------------------ --------------
Susan T. Buffett Date
/s/ Charles T. Munger Vice Chairman of the March 29, 2001
- ------------------------------ Board of Directors --------------
Charles T. Munger Date
/s/ Malcolm G. Chace Director March 29, 2001
- ------------------------------ --------------
Malcolm G. Chace Date
/s/ Walter Scott, Jr. Director March 29, 2001
- ------------------------------ --------------
Walter Scott, Jr. Date
/s/ Ronald L. Olson Director March 29, 2001
- ------------------------------ --------------
Ronald L. Olson Date
/s/ Marc D. Hamburg Vice President - March 29, 2001
- ------------------------------ Principal Financial --------------
Marc D. Hamburg Officer Date
/s/ Daniel J. Jaksich Controller March 29, 2001
- ------------------------------ --------------
Daniel J. Jaksich Date
54
56
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
To the Board of Directors and Shareholders
Berkshire Hathaway Inc.
We have audited the consolidated financial statements of Berkshire Hathaway
Inc. and subsidiaries as of December 31, 2000 and 1999, and for each of the
three years in the period ended December 31, 2000, and have issued our report
thereon dated March 5, 2001; such consolidated financial statements and report
are included elsewhere in this Form 10-K. Our audits also included the financial
statement schedule of Berkshire Hathaway Inc., listed in Item 14. The financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
March 5, 2001
55
57
BERKSHIRE HATHAWAY INC.
(Parent Company)
Condensed Financial Information
(Dollars in millions)
Schedule I
BALANCE SHEETS
December 31,
2000 1999
-------- --------
Assets:
Cash and cash equivalents ........................ $ -- $ --
Investments in consolidated subsidiaries ......... 60,876 57,761
Investments in MidAmerican Energy ................ 1,264 --
Other assets ..................................... 42 --
-------- --------
$ 62,182 $ 57,761
======== ========
Liabilities and Shareholders' Equity:
Accounts payable and accrued expenses ............ $ 81 $ --
Income taxes ..................................... 377 --
-------- --------
458 --
Shareholders' equity ............................. 61,724 57,761
-------- --------
$ 62,182 $ 57,761
======== ========
STATEMENTS OF EARNINGS
Year ending December 31,
------------------------------------
Income items: 2000 1999 1998
-------- -------- --------
From consolidated subsidiaries:
Interest .......................................... $ -- $ -- $ 6
Dividends ......................................... 2,432 500 1,241
Undistributed earnings ............................ 842 1,057 1,626
-------- -------- --------
3,274 1,557 2,873
Income from investments in MidAmerican Energy ...... 66 -- 4
Realized investment gain (loss) .................... -- -- (60)
Revenues of Buffalo News ........................... -- -- 157
-------- -------- --------
3,340 1,557 2,974
-------- -------- --------
Cost and expense items:
Costs and expenses of Buffalo News ................. -- -- 105
General and administrative ......................... -- -- 8
Interest ........................................... 8 -- 62
Income tax expense (benefit) ....................... 4 -- (31)
-------- -------- --------
12 -- 144
-------- -------- --------
Net earnings ...................................... $ 3,328 $ 1,557 $ 2,830
======== ======== ========
See Note to Condensed Financial Information
56
58
BERKSHIRE HATHAWAY INC.
(Parent Company)
Condensed Financial Information
(Dollars in millions)
Schedule I (continued)
STATEMENTS OF CASH FLOWS
Year ending December 31,
-----------------------------------
2000 1999 1998
------- ------- -------
Cash flows from operating activities:
Net earnings ............................................. $ 3,328 $ 1,557 $ 2,830
Adjustments to reconcile net earnings to cash flows
from operating activities:
Undistributed earnings of subsidiaries and MidAmerican
Energy............................................... (908) (1,057) (1,626)
Realized investment loss .............................. -- -- 60
Income taxes payable .................................. 377 -- (31)
Other ................................................. 15 (8) (8)
------- ------- -------
Net cash flows from operating activities ................. 2,812 492 1,225
------- ------- -------
Cash flows from investing activities:
Investments in and advances to subsidiaries .............. (1,606) (579) (803)
Purchases of investments ................................. (1,285) -- (382)
Proceeds on sales and maturities of investments .......... -- -- 16
------- ------- -------
Net cash flows from investing activities ................. (2,891) (579) (1,169)
------- ------- -------
Cash flows from financing activities:
Proceeds from borrowings ................................. -- -- 1,048
Repayment of borrowings .................................. -- -- (1,476)
Other .................................................... 79 87 6
------- ------- -------
Net cash flows from financing activities ................. 79 87 (422)
------- ------- -------
Decrease in cash and cash equivalents .................... -- -- (366)
Cash and cash equivalents at beginning of year ........... -- -- 366
------- ------- -------
Cash and cash equivalents at end of year ................. $ -- $ -- $ --
======= ======= =======
Other cash flow information:
Income taxes paid ....................................... $ 1,264 1,185 $ 1,656
Interest paid ........................................... -- -- 60
NOTE TO CONDENSED FINANCIAL INFORMATION
The condensed statements of earnings and cash flows of Berkshire Hathaway
Inc. for 1998 include the earnings and cash flow data of OBH Inc. (formerly
Berkshire Hathaway Inc. - parent company). OBH Inc. became a wholly-owned
subsidiary of Berkshire Hathaway Inc. as of December 21, 1998 upon completion of
the General Re merger. At December 31, 2000 and 1999, Berkshire Hathaway Inc.'s
investment in the net assets of OBH Inc. is included in investments in
consolidated subsidiaries in the condensed balance sheet. Borrowings under
investment agreements and other Berkshire Hathaway Inc. debt outstanding as of
the General Re merger date remain obligations of the former parent company, now
OBH Inc.
57
59
EXHIBIT INDEX
Exhibit No.
- -----------
2.1 Agreement and Plan of Merger dated as of June 19, 1998 between
Registrant and General Re Corporation.
Incorporated by reference to Annex I to Registration Statement
No. 333-61129 filed on Form S-4.
3 Restated Certificate of Incorporation
Incorporated by reference to Exhibit 3.1 to Registration
Statement No. 333-61129 filed on Form S-4.
3.1 By-Laws
Incorporated by reference to Exhibit 3.2 to Registration
Statement No. 333-61129 filed on Form S-4.
4.1 Form of Indenture dated as of December 1, 1987 between OBH Inc.
(formerly Berkshire Hathaway Inc.) and State Street Bank and
Trust Company (as successor trustee to The First National Bank of
Boston), trustee with respect to 9 3/4% Debentures due January
15, 2018
Incorporated by reference to Exhibit 4 to Registration
Statement No. 33-19000 filed on Form S-3.
4.2 Form of Indenture dated as of December 1, 1987 between OBH Inc.
(formerly Berkshire Hathaway Inc.) and State Street Bank and
Trust Company (as successor trustee to The First National Bank of
Boston), trustee with respect to 1% Senior Exchangeable Notes due
December 2, 2001.
Incorporated by reference to Exhibit 4 to Registration
Statement No. 33-30570 filed on Form S-3.
OTHER INSTRUMENTS DEFINING THE RIGHTS OF HOLDERS OF LONG-TERM
DEBT OF REGISTRANT AND ITS SUBSIDIARIES ARE NOT BEING FILED SINCE
THE TOTAL AMOUNT OF SECURITIES AUTHORIZED BY ALL OTHER SUCH
INSTRUMENTS DOES NOT EXCEED 10% OF THE TOTAL ASSETS OF THE
REGISTRANT AND ITS SUBSIDIARIES ON A CONSOLIDATED BASIS AS OF
DECEMBER 31, 2000. THE REGISTRANT HEREBY AGREES TO FURNISH TO THE
COMMISSION UPON REQUEST A COPY OF ANY SUCH DEBT INSTRUMENT TO
WHICH IT IS A PARTY.
12 Statement of computation of ratio of earnings to fixed charges
21 Subsidiaries of the Registrant
23 Independent Auditors' Consent
58