Back to GetFilings.com
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, 1998
COMMISSION FILE NUMBER ____________
BERKSHIRE HATHAWAY INC.
(Exact name of Registrant as specified in its charter)
Delaware 47-0813844
------------------------------------- -------------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification number)
1440 Kiewit Plaza, Omaha, Nebraska 68131
------------------------------------- -------------------------
(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
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 - $76,272,000,000 **
Indicate number of shares outstanding of each of the Registrant's classes of
common stock:
March 19, 1999 -- Class A Common Stock, $5 par value....................1,343,357 shares
March 19, 1999 -- Class B Common Stock, $0.1667 par value...............5,274,030 shares
DOCUMENTS INCORPORATED BY REFERENCE
Document Incorporated In
-------- ---------------
Proxy Statement for Registrant's
Annual Meeting to be held May 3, 1999 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, 1999. It does not include the value of Class A Common Stock
(535,648 shares) and Class B Common Stock (58 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.
2
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 32 domestic and 15 foreign-based insurance companies. Since the
beginning of 1996, Berkshire's insurance operations 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. In
future periods, Berkshire's insurance operations will also include meaningful
amounts of the life, accident and health reinsurance, as well as international
property and casualty reinsurance through General Re and its affiliates.
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 (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.
U.S. based insurers and reinsurers 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.
1
3
ITEM 1. BUSINESS (CONTINUED)
INSURANCE AND REINSURANCE BUSINESSES (CONTINUED)
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.
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 is expected to become effective in 2001 and, in its
current form, should not have a significant effect on Berkshire's insurance
businesses. However, the amount of reported regulatory capital, also known as
statutory surplus, of Berkshire's insurance subsidiaries will decline due to the
recognition of deferred income tax liabilities on unrealized appreciation of
investments. Under current SAP, such liabilities are not recognized.
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.
Jurisdictions may impose fines, censure and/or criminal sanctions for violation
of regulatory requirements.
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 $11.5 billion at December 31, 1993 to approximately $45.0 billion
at December 31, 1998. All of Berkshire's major insurance companies are rated AAA
by Standard & Poor's Corporation with respect to their claims-paying abilities
and are rated A++ (superior) by A.M. Best with respect to their financial
condition and operating performance.
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 CORPORATION -- On January 2, 1996, GEICO Corp. became an indirect
wholly-owned subsidiary of Berkshire as a result of the merger of an indirect
wholly-owned subsidiary of Berkshire with and into GEICO Corp. The acquisition
was pursuant to an Agreement and Plan of Merger wherein each outstanding share
of GEICO Corp., except treasury shares and shares already held by Berkshire
subsidiaries, was converted to the right to receive $70 cash, or $2.3 billion in
the aggregate. Immediately prior to the merger, Berkshire subsidiaries owned
approximately 51% of all outstanding GEICO Corp. common stock.
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 in 1996, premium
volume has grown significantly due to growth in voluntary automobile policies
in-force. Net premiums written in 1998 were $4,182 million compared to $2,856
million in 1995. Collectively, GEICO Corp. companies are currently the sixth
largest auto insurer, in terms of premium volume, in the United States.
2
4
ITEM 1. BUSINESS (CONTINUED)
INSURANCE AND REINSURANCE BUSINESSES (CONTINUED)
GEICO CORPORATION (CONTINUED)
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. GEICO also writes
small amounts of homeowners, fire and boat owners insurance (businesses that
GEICO has already substantially reduced and plans to fully exit in 1999), and
personal umbrella insurance for all 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 or through the
mail.
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.
GEICO Corp. companies compete for private passenger auto insurance
customers with other companies that sell direct 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. Like all other Berkshire
insurance and reinsurance businesses, 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 is headed by National Indemnity Company ("National
Indemnity"), and operates from offices located in Stamford, Connecticut.
National Indemnity provides principally excess and, to a lesser degree,
quota-share reinsurance to other property and casualty insurers and reinsurers.
National Indemnity'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. Over the past 5 years, annual net premiums written have ranged from
$690 million (in 1994) to $986 million (in 1998).
During the past five years, National Indemnity 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. Generally,
National Indemnity does not cede any of the risks it has assumed under
catastrophe excess reinsurance contracts to third-party reinsurers, 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 National
Indemnity has become a major provider of such coverages.
3
5
ITEM 1. BUSINESS (CONTINUED)
INSURANCE AND REINSURANCE BUSINESSES (CONTINUED)
BERKSHIRE HATHAWAY REINSURANCE GROUP (CONTINUED)
In recent years, the amount of capital (i.e. capacity) devoted to the
catastrophe excess reinsurance business by the industry has increased, through
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 is 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 National Indemnity'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. Under the terms of most
contracts, limits of indemnification may be subject to minimum and maximum
payment amounts. Minimum payment requirements arise from profit-sharing or
commutation clauses that call for repayments to the reinsureds of amounts not
otherwise paid as losses. Premium amounts and limits of indemnification per
contract are likely to be large and contracts may span a number of years. This
business is accepted, in large part, because of the substantial amounts of
policyholder funds ("float") produced.
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 truck and bus operators. 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; Cypress Insurance Company, based in California, an underwriter of
principally workers' compensation policies for insureds located in California
and a small number of other states; Central States Indemnity Company of Omaha,
82% owned by Berkshire and located in Omaha, Nebraska, which provides credit
card credit insurance marketed primarily through credit card issuers nationwide;
80.1% owned Kansas Bankers Surety Company, based in Kansas, and 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; and Berkshire Hathaway
International Ltd, an insurer of primarily private passenger and commercial auto
risks in the United Kingdom.
GENERAL RE -- On June 19, 1998 Berkshire and General Re executed a
Merger Agreement and Plan of Merger. In September 1998, shareholders of the two
companies approved the merger and during the fourth quarter all regulatory
approvals and tax rulings were received. The transaction was completed on
December 21, 1998. General Re shareholders received merger consideration
consisting of approximately 272,200 equivalent Class A shares.
Berkshire's Consolidated Balance Sheet at December 31, 1998 reflects the
consolidation of the General Re accounts. Berkshire's Consolidated Statements of
Earnings and Cash Flows include the consolidated results of General Re for the
10 day period ending December 31, 1998. Additional information regarding General
Re's insurance and reinsurance business is provided below. The financial amounts
and percentages related to General Re business activities are derived from its
activities for the full year.
General Re was established in 1980 to serve as the holding company of
General Reinsurance Corporation ("GRC", incorporated in 1921) and its
affiliates. Other 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, holds an 83% economic interest in Cologne Re.
General Re subsidiaries have global reinsurance operations in 61 cities
throughout the world and provide reinsurance coverage in 124 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 North America and Germany. Collectively, General Re is among
the four largest reinsurers in the world based on net premiums written and
capital.
4
6
ITEM 1. BUSINESS (CONTINUED)
INSURANCE AND REINSURANCE BUSINESSES (CONTINUED)
GENERAL RE (CONTINIUED)
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 Corporation ("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. NRC
is domiciled in Delaware and licensed in all 50 states, the District of
Columbia, Puerto Rico, Canada and the United Kingdom.
North American reinsurance operations generated $2,707 million in net
written premiums in 1998. Casualty reinsurance represented approximately 61
percent of North American property/casualty net premiums written and property
reinsurance business represented approximately 25 percent.
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. General Re also
writes excess insurance for self insurers through GRC. 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 14
percent of General Re's North American property/casualty net premiums written.
INTERNATIONAL PROPERTY/CASUALTY REINSURANCE
In total, General Re operates its international property/casualty
reinsurance business in 31 countries and provides reinsurance coverage in 124
countries throughout the world. In 1998, the international property/casualty
operations principally wrote business in the form of reinsurance treaties with
lesser amounts written on a facultative basis. International property/casualty
reinsurance business is primarily written through Cologne Re. In addition,
international reinsurance business is written through a number of wholly-owned
subsidiaries of General Re.
In 1998, General Re's international property/casualty operations
produced net written premiums totaling $2,072 million. Approximately 78 percent
of international premiums written related to quota-share coverages and 22
percent were excess coverages. Property premiums written were approximately 63
percent of total international property/casualty premiums and casualty premiums
were approximately 37 percent.
GLOBAL LIFE/HEALTH REINSURANCE
This segment includes the North American and international life/health
operations of Cologne Re. Life/health net premiums written in 1998 were $1,304
million. Approximately 38 percent of life/health net premiums were written in
Europe, another 45 percent were written in North America and the remaining 17
percent 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 re
reinsurance assumed, and related prepaid income taxes. The amount of float has
grown from about $2.8 billion at the end of 1993 to about $22.8 billion at the
end of 1998. Approximately two-thirds of the year end 1998 amount derives from
General Re. 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.
5
7
ITEM 1. BUSINESS (CONTINUED)
INSURANCE AND REINSURANCE BUSINESSES (CONTINUED)
INVESTMENTS (CONTINUED)
Investment portfolios of insurance subsidiaries include meaningful
equity ownership percentages of other publicly traded companies. Investments in
excess of 5% of the investees outstanding capital stock at December 31, 1998
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 Federal Home Loan Mortgage Corporation
("Freddie Mac"), approximately 8 1/2% of the capital stock of The Gillette
Company, and approximately 17% of the capital stock of The Washington Post
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 Registrant's eight non-insurance "reportable business segments" are
described below.
BUFFALO NEWS -- 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.
Among newspapers published in those primary markets, The Buffalo News
claims the highest percentage of its area household coverage, 64% on weekdays
and 80% on Sundays. Berkshire management believes the "newshole" percentage
(portion of the paper devoted to news) of The Buffalo News to be greater than
any other dominant newspaper of its size or larger. During 1998, this percentage
was approximately 58%.
FLIGHT SERVICES -- On December 23, 1996, FlightSafety International Inc.
("FSI") became a wholly-owned subsidiary of Berkshire. Aggregate consideration
of $1.5 billion was paid to former FSI shareholders, consisting of approximately
$769 million in cash, and the remainder in Berkshire Class A and Class B Common
Stock. 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
shiphandling and related training services. FSI also develops classroom
instructional systems and materials for use in its training business and for
sale to others.
A significant element 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 more than 200 civil aviation simulators and training devices. FSI's
training businesses are conducted primarily in the United States, with
facilities located in 20 states. FSI also operates training facilities in
Canada, China, France, United Kingdom and the Netherlands. 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"), which was completed on August 7, 1998. EJ
shareholders received aggregate consideration of $700 million, consisting of
$350 million in cash and the remainder in Berkshire Class A and B Common Stock.
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.
6
8
ITEM 1. BUSINESS (CONTINUED)
NON-INSURANCE BUSINESSES OF BERKSHIRE (CONTINUED)
FLIGHT SERVICES (CONTINUED)
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 has since grown to include seven aircraft types with plans to
introduce several more models in the next two 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 157 aircraft in its fleet as of
December 31, 1998. 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.
HOME FURNISHINGS -- The Home Furnishings segment includes the retail
furniture businesses of the Nebraska Furniture Mart ("NFM"), 80% owned by
Berkshire, R.C. Willey Home Furnishings ("R.C. Willey") and Star Furniture
Company ("Star"), both 100% owned by Berkshire. Berkshire has owned its interest
in NFM since 1983, and acquired R.C. Willey in 1995 and Star in 1997. NFM, R.C.
Willey and Star 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. All three businesses offer
customer financing to complement their retail operations. An important feature
of all three businesses is their ability to control costs and to produce high
business volume from offerings of significant value to its customers.
NFM operates its business from a single very large - approximately
500,000 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.
R.C. Willey, founded in 1932, is the dominant home furnishings retailer
in Utah. Based in Salt Lake City, R.C. Willey operates six full retail stores, a
distribution center and three clearance facilities. These facilities -- which
include more than 635,000 square feet of retail space -- are strategically
located in northern suburban sections in the state of Utah and serve customers
in four western states.
Star's retail, office and warehouse facilities, include about 480,000
square feet of retail space in nine locations. Seven retail locations are in
Houston, Texas where Star is a major furniture retailer in that market.
INTERNATIONAL DAIRY QUEEN -- On January 7, 1998, Berkshire completed the
acquisition of International Dairy Queen ("IDQ"). IDQ shareholders received
total merger consideration of approximately $590 million, consisting of $ 265
million in cash and the remainder in Berkshire Class A and B stock.
IDQ develops, licenses and services a system of approximately 5,900
Dairy Queen stores that feature hamburgers, hot dogs, various dairy desserts and
beverages. The company franchises Dairy Queen stores either directly with
individual operators or indirectly through agreements with territorial
operators, who then grant franchises to individual operators within a specific
geographical territory. The company also directly owns and operates
approximately 60 stores. IDQ supports and promotes the store operations of
franchisees through product development, market testing, advertising, training
and advisory services. IDQ creates and enforces quality control standards for
franchisees. A major portion of IDQ's operating profit derives from franchise
service fees paid by franchised stores and stores licensed by territorial
operators.
IDQ also sells equipment directly to stores and sells products used in
store operations to a system of independently-owned warehouses that also
purchase approved products from other suppliers. These warehouses in turn sell
products to the Dairy Queen stores within specified geographical areas. The
first Dairy Queen store was opened in 1940 and stores are currently located in
49 states, as well as Canada, Japan, and several other countries.
The company also develops and services approximately 400 stores
operating under the name of Orange Julius featuring blended fruit drinks and
snack items and approximately 40 stores operating under the name of Karmelkorn
featuring popcorn and other snacks items.
7
9
ITEM 1. BUSINESS (CONTINUED)
NON-INSURANCE BUSINESSES OF BERKSHIRE (CONTINUED)
JEWELRY -- In 1995, Berkshire acquired Helzberg's Diamond Shops, Inc.
("Helzberg's"). Helzberg's, based in North Kansas City, Missouri, operates a
chain of 194 retail jewelry stores in thirty states. Most of Helzberg's stores
are located in malls or power strip centers, and operate under the name Helzberg
Diamonds. In addition, since 1989, Berkshire has owned an 85% interest 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.
SCOTT FETZER COMPANIES -- The Scott Fetzer Companies are a diversified
group of 22 businesses that manufacture and distribute a wide variety of
products for residential, industrial and institutional use. The two most
significant of these businesses are the Kirby home cleaning systems and the
Campbell Hausfeld businesses.
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 460 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 through retail outlets. Scott Fetzer management
believes that Campbell Hausfeld offers products that are a superior value to the
consumer in comparison to its competitors.
SEE'S CANDIES -- 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 - over
200 in number, located in 10 western and midwestern states, including Hawaii -
and by mail order. A meaningful volume of candy business is also recorded from
direct shipments made nationwide from its California based quantity order
distribution centers.
Seasonality in this business is extreme. Nearly 50% of each year's unit
sales volume is generated during the last two months of the year, when quantity
order sales at reduced prices to businesses and other organizations augment the
extremely high retail store and mail order volume during December.
SHOE GROUP -- This segment includes H. H. Brown Shoe Company ("H. H.
Brown"), Lowell Shoe, Inc. ("Lowell") and Dexter Shoe Company ("Dexter"). A
description of each of these businesses follows.
H. H. Brown manufactures, imports and markets work, safety, outdoor,
western work and casual footwear. They are distributed under the H. H. Brown,
Born, Carolina, Double-H Boot and other brand names as well as under private
label. H. H. Brown is the leading domestic producer of steel toe safety work
shoes. The company maintains a significant share in many niche markets in which
it competes by providing functional footwear and emphasizing comfort. The
company's competitors in this market are typically domestic work boot
manufacturers. Management believes that its products are competitive in terms of
quality and price.
In addition to manufacturing its products at three facilities located in
the United States and a facility in Canada, H. H. Brown sources shoes and shoe
components offshore. The company markets its products entirely within the United
States and Canada through a direct sales force of about 120 employees. Its
customer base is primarily composed of small independent retailers and
wholesalers who sell to workers in a variety of industries including
construction, heavy manufacturing, agriculture and other light duty and service
occupations.
Lowell manufactures and markets women's casual, service and nurses
footwear. These products are marketed primarily under the brand names Soft Spots
and Nurse Mates.
Dexter manufactures and markets men's and women's dress, casual and
athletic footwear primarily in the continental U.S. All products are
manufactured and sold under the trademark Dexter. The company specializes in the
construction of Handsewns, Welts and Cements. Leather is purchased from domestic
tanneries, and many of the other components used in the manufacturing process
are made by Dexter. Dexter has four manufacturing facilities in Maine, two in
Puerto Rico and one in the Dominican Republic. In addition to the manufacturing
facilities, Dexter operates 95 factory outlet stores located in 16 states and
Puerto Rico.
8
10
ITEM 1. BUSINESS (CONTINUED)
NON-INSURANCE BUSINESSES OF BERKSHIRE (CONTINUED)
OTHER NON-INSURANCE ACTIVITIES not identified with Berkshire business
segments include a group of finance and financial products businesses. Included
in this group is Berkshire Hathaway Life Insurance Company of Nebraska. This
company primarily sells annuity contracts that provide for periodic payments to
claimants associated with settlements of personal injury claims. Additionally,
the finance group includes Scott Fetzer Financial Group, Inc., which for many
years has provided financing of receivables related to Scott Fetzer's, Kirby and
World Book products.
Also included in these business activities is General Re Financial
Products Corporation and affiliates ("GRFP"). GRFP 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. GRFP and its affiliates
maintain offices in London, New York, Tokyo, Hong Kong and Toronto. GRFP's
client base consists principally of major corporations, insurance companies,
financial institutions and sovereigns that use derivative products as part of
their asset and liability risk management strategies. Berkshire's finance
operations also include several smaller businesses of General Re, which provide
insurance, reinsurance, investment, and real estate brokerage and management
services.
Berkshire Hathaway Inc. and subsidiaries employed approximately 47,600
persons on a full-time equivalent basis at December 31, 1998.
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 15 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 3 and 4 to Registrant's Consolidated Financial Statements.
9
11
ITEM 2. PROPERTIES
The physical properties used by the Registrant and its significant
business segments are summarized below:
Owned Approx.
or Square
Business Location Type of Property Leased Footage
-------- -------- ---------------- ------ -------
Company Headquarters Omaha, NE Offices Leased 7,000
GEICO Chevy Chase, MD, Woodbury, Offices Owned 2,000,000
NY, Macon, GA, Dallas,
TX, Fredericksburg &
Virginia Beach, VA
San Diego, CA & various Offices and drive-in Leased 250,000
locations throughout the claims
United States facilities
Berkshire Hathaway Stamford, CT Offices Leased 10,000
Reinsurance Group
Berkshire Hathaway Omaha, NE Offices Owned 73,000
Direct Insurance Group Omaha, NE & various Offices Leased 138,000
locations throughout the
United States & England
General Re Stamford, CT, Offices Owned 580,000
Cologne, Germany and
various non-U.S. locations
Various U.S. and Offices Leased 900,000
non-U.S. locations
Buffalo News Buffalo, NY Offices Owned 195,000
Buffalo, NY Printing Plant Owned 150,000
New York & Washington, D.C. Offices/Warehouses Leased 85,000
Flight Services 23 U.S. States, Canada, Offices/Training Owned 962,000
Netherlands, France, Facilities/Hangars
United Kingdom and China Offices/Training Leased 1,250,000
Facilities/Hangars
Oklahoma and Missouri Manufacturing Owned 84,000
and
leased
Home Furnishings Omaha, NE Retail Stores Owned 986,000
Salt Lake City, UT & Warehouses/Offices Owned 1,691,000
other locations in UT & NE
Salt Lake City, UT, Retail Stores Leased 630,000
Houston, TX & other Warehouses/Offices Leased 490,000
locations in UT, TX & IA
10
12
ITEM 2. PROPERTIES (CONTINUED)
Owned Approx.
or Square
Business Location Type of Property Leased Footage
-------- -------- ---------------- ------ -------
International Dairy Decatur, GA, Minneapolis, Manufacturing/ Owned 145,000
Queen MN & Canada Offices/
Warehouses
11 U.S. locations Restaurants/Stores Owned 35,000
11 U.S. locations & Canada Offices/Warehouses Leased 54,000
45 U.S. locations Restaurants/Stores Leased 129,000
Jewelry Kansas City, MO Office/Warehouse Owned 65,000
Omaha, NE and 194 Retail Leased 477,000
other U.S. locations stores/offices
Scott Fetzer Companies Cleveland, OH, & other Plants/Warehouses/ Owned 2,330,000
locations in 13 U.S. Offices
states Warehouses/Offices Leased 805,000
Canada, England, Taiwan & Warehouses/Offices Leased 93,000
Mexico
See's Candies Los Angeles, CA & South Plants/Warehouses/ Owned 625,000
San Francisco, CA Offices
California Warehouses/Offices Leased 227,000
California & other Retail outlets Leased 339,000
locations and
principally in western quantity order
states centers
(205 locations)
Shoe Group Morganton, NC, Plants/Warehouses/ Owned 1,723,000
Womelsdorf, PA, Offices
Martinsburg, PA,
Hudson, NH, Dexter,
ME, Puerto Rico &
Canada
Greenwich, CT, Plants/Warehouses/ Leased 819,000
Morganton, NC, Offices
Skowhedgan, ME,
Newton, MA,
Northkingstown, RI,
Womelsdorf, PA, Hudson,
NH, Canada, Puerto Rico
& Dominican Republic
45 U.S. locations Retail Stores Owned 311,000
67 U.S. & Puerto Rico Retail Stores Leased 456,000
locations
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
11
13
EXECUTIVE OFFICERS OF THE REGISTRANT
Following is a list of the Registrant's executive officers:
Name Age Position with Registrant Since
- ---- --- ------------------------ -----
Warren E. Buffett 68 Chairman of the Board 1970
Marc D. Hamburg 49 Vice President 1992
Charles T. Munger 75 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
The Company'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:
1998 1997
---- ----
Class A Class B Class A Class B
------- ------- ------- -------
High Low High Low High Low High Low
---- --- ---- --- ---- --- ---- ---
First Quarter $69,500 $45,700 $ 2,324 $ 1,526 $37,900 $33,000 $ 1,264 $ 1,088
Second Quarter 84,000 65,800 2,795 2,184 48,600 35,900 1,624 1,197
Third Quarter 78,500 57,000 2,622 1,893 48,300 41,300 1,608 1,377
Fourth Quarter 71,000 57,700 2,396 1,916 47,200 42,500 1,565 1,400
SHAREHOLDERS
The Company had approximately 9,300 record holders of its Class A Common
Stock and 13,400 record holders of its Class B Common Stock at March 5, 1999.
Record owners included nominees holding at least 385,000 shares of Class A
Common Stock and 4,850,000 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
Part II (Continued)
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA FOR THE PAST FIVE YEARS
(dollars in millions, except per share data)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
REVENUES:
Insurance premiums earned......................... $ 5,481 $ 4,761 $ 4,118 $ 957 $ 923
Sales and service revenues........................ 4,675 3,615 3,095 2,756 2,352
Interest, dividend and other investment income.... 1,049 916 778 629 519
Income from finance and financial products
businesses..................................... 212 32 25 27 25
Realized investment gain (1)...................... 2,415 1,106(2) 2,484(3) 194 91
-------- ------- ------- ------- -------
Total revenues.................................... $ 13,832 $10,430 $10,500 $ 4,563 $ 3,910
======== ======= ======= ======= ======
EARNINGS:
Before realized investment gain................... $ 1,277 $ 1,197 $ 884 $ 670 $ 492
Realized investment gain (1)...................... 1,553 704(2) 1,605(3) 125 61
-------- ------- ------- ------- -------
Net earnings...................................... $ 2,830 $ 1,901 $ 2,489 $ 795 $ 553
======== ======= ======= ======= =======
EARNINGS PER SHARE:
Before realized investment gain................... $ 1,021 $ 971 $ 733 $ 565 $ 417
Realized investment gain (1)...................... 1,241 571(2) 1,332(3) 105 52
-------- ------- ------- ------- ------
Net earnings...................................... $ 2,262 $ 1,542 $ 2,065 $ 670 $ 469
======== ======= ======= ======= =======
YEAR-END DATA (4):
Total assets...................................... $122,237 $56,111 $43,409 $28,711 $20,610
Borrowings under investment agreements
and other debt (5)............................. 2,385 2,267 1,944 1,062 811
Shareholders' equity.............................. 57,403 31,455 23,427 16,739 11,651
Class A equivalent common shares
outstanding, in thousands...................... 1,519 1,234 1,232 1,194 1,178
Shareholders' equity per outstanding
Class A equivalent share....................... $ 37,801 $25,488 $19,011 $14,025 $ 9,893
======== ======= ======= ======= =======
- -----------------
(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) In November 1997, Travelers Group Inc. completed its acquisition of
Salomon Inc. A pre-tax realized gain of $678 million ($427 million
after-tax) is included in 1997's results.
(3) In March 1996, The Walt Disney Company completed its acquisition of
Capital Cities/ABC, Inc. A pre-tax realized gain related to this
transaction of $2.2 billion ($1.4 billion after-tax) is included in
1996's results.
(4) Year-end data for 1998 includes General Re Corporation acquired by
Berkshire on December 21, 1998.
(5) Excludes borrowings of finance businesses.
13
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) --
1998 1997 1996
---- ---- ----
Insurance segments - underwriting................................................... $ 171 $ 298 $ 143
Insurance segments - investment income.............................................. 731 704 593
Non-Insurance business segments..................................................... 389 311 226
Interest expense.................................................................... (63) (67) (57)
Goodwill amortization and other purchase-accounting-adjustments..................... (118) (94) (70)
Other............................................................................... 167 45 49
------ ------ ------
Earnings before realized investment gain......................................... 1,277 1,197 884
Realized investment gain............................................................ 1,553 704 1,605
------ ------ ------
Net earnings..................................................................... $2,830 $1,901 $2,489
====== ====== ======
The business segment data (Note 15 to Consolidated Financial Statements)
should be read in conjunction with this discussion.
INSURANCE SEGMENTS -- UNDERWRITING
A summary follows of underwriting results from Berkshire's insurance segments
for the past three years.
-- (dollars in millions) --
1998 1997 1996
---- ---- ----
Underwriting gain (loss) attributable to:
GEICO Corporation.............................................................. $ 269 $ 281 $ 171
Berkshire Hathaway Reinsurance Group........................................... (21) 128 (8)
Berkshire Hathaway Direct Insurance Group...................................... 17 52 59
----- ----- -----
Pre-tax underwriting gain........................................................... 265 461 222
Income taxes and minority interest ................................................. 94 163 79
----- ----- -----
Net underwriting gain............................................................ $ 171 $ 298 $ 143
===== ===== =====
Berkshire Hathaway engages in both direct insurance and reinsurance of
property and casualty risks. In direct 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 underwriting businesses are: (1)
GEICO, which became a wholly owned subsidiary of Berkshire on January 3, 1996,
(2) Berkshire Hathaway Reinsurance Group and (3) Berkshire Hathaway Direct
Insurance Group. On December 21, 1998, Berkshire completed its merger with
General Re. General Re and its affiliates comprise one of the four largest
reinsurance companies in the world. See Note 2 to the Consolidated Financial
Statements.
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 increased to approximately $40
billion (excluding General Re Corporation) at December 31, 1998. 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.
14
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
INSURANCE SEGMENTS - UNDERWRITING (continued)
GEICO Corporation
GEICO through its subsidiaries, 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 or through the
mail. This is a significant element in GEICO's strategy to be a low-cost
provider of such coverages. In 1995, GEICO entered into an agreement with
another major insurance provider that over time will allow it to effectively
exit the homeowners insurance business which represented a relatively small
percentage of GEICO's business.
GEICO's underwriting results for the past three years are summarized
below.
-- (dollars are in millions) --
1998 1997 1996
---------------- ----------------- ----------------
Amount % Amount % Amount %
------ ----- ------ ----- ------ -----
Premiums written........................... $4,182 $3,588 $3,122
====== ====== ======
Premiums earned............................ $4,033 100.0 $3,482 100.0 $3,092 100.0
------ ----- ------ ----- ------ -----
Losses and loss expenses................... 2,978 73.8 2,630 75.5 2,434 78.7
Underwriting expenses...................... 786 19.5 571 16.4 487 15.8
------- ------ ------- ------ ------- ------
Total losses and expenses.................. 3,764 93.3 3,201 91.9 2,921 94.5
------ ====== ------ ====== ------ ======
Underwriting gain-- pre-tax................ $ 269 $ 281 $ 171
====== ====== ======
As shown in the table above, GEICO's premium volume grew significantly
during the last two years. Premiums earned by GEICO in 1998 exceeded amounts
earned in 1997 by 15.8% and amounts earned in 1997 surpassed 1996 by 12.6%. The
increases in premium volume were attributed to growth in voluntary auto
insurance, partially mitigated by premium rate reductions taken in certain
states during 1998 and 1997. Such rate reductions were intended to better align
premium rates with pricing targets, and will result in lower premiums earned per
policy in the future. The growth in voluntary auto premium volume in each of the
past two years was also offset by declines in homeowners and residual auto
market business. In-force policy growth for GEICO's core preferred-risk auto
business was 17.2% in 1998 and 12.8% in 1997. Policy growth in standard and
non-standard auto markets was 40.4% in 1998 and 36.6% in 1997. In-force policy
growth reflects GEICO's continued marketing efforts and competitive prices.
Sales of new voluntary policies increased 44.3% in 1998 as compared to 1997 and
followed growth of 47.8% in 1997 as compared to 1996.
Losses and loss expenses incurred during 1998 were 13.2% greater than
amounts incurred during 1997. This followed an 8.1% increase in such costs
during 1997 as compared to 1996. The loss and loss expense ratio, a measurement
of the portion of earned premiums that were paid or reserved for losses and
related claims handling expenses, was 73.8% in 1998, 75.5% in 1997 and 78.7% in
1996. These lower than expected loss and loss expense ratios reflect the
declining severity of auto liability claims and generally mild weather
conditions. Catastrophe losses added 0.7% to the loss and loss expense ratio in
1998 compared to 0.3% in 1997 and 1.7% in 1996. As a result of GEICO's
diminishing homeowners business, risks of weather related catastrophe losses are
currently lower than in years prior to 1996.
Underwriting expenses in 1998 for GEICO's businesses increased $215
million (37.7%) over 1997 and in 1997 increased $84 million (17.2%) over 1996.
The increases reflect additional advertising and personnel costs incurred to
generate and service the aforementioned in-force policy growth, as well as
increased levels of administrative expenses, particularly profit-sharing costs.
15
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
INSURANCE SEGMENTS - UNDERWRITING (continued)
GEICO Corporation (continued)
GEICO's underwriting results have been above expectations in recent
years and the private passenger auto insurance industry as a whole had generally
good results due to favorable claims experience. However, premium rates are
subject to downward pressure from competition and through the ordinary rate
regulation processes of state insurance departments. The rate reductions taken
by GEICO in 1998 were greater than 1997's reductions and will be fully reflected
in earned premiums in 1999. GEICO currently anticipates that there will be some
further rate reductions in 1999. In addition, while the level of claim costs
(including catastrophe losses) in recent years have been relatively low, there
is no assurance that these favorable conditions will continue. Accordingly,
management expects that GEICO's underwriting profit margins will return to more
normal levels as costs increase faster than premiums. Notwithstanding,
Berkshire's management believes that GEICO's underwriting results will remain
better than industry averages.
Berkshire Hathaway Reinsurance Group
The Berkshire Hathaway Reinsurance Group underwrites principally
excess-of-loss reinsurance coverages for insurers and reinsurers world wide.
This Group is believed to be one of the world leaders in providing catastrophe
excess-of-loss reinsurance.
Underwriting results for the past three years are summarized in the
following table.
-- (dollars are in millions) --
1998 1997 1996
---------------- ----------------- ----------------
Amount % Amount % Amount %
------ ----- ------ ----- ------ -----
Premiums written............................. $ 986 $ 955 $ 715
====== ====== =======
Premiums earned.............................. $ 939 100.0 $ 967 100.0 $ 758 100.0
------ ----- ------ ----- ------- -----
Losses and loss expenses..................... 765 81.5 676 69.9 573 75.6
Underwriting expenses........................ 195 20.7 163 16.9 193 25.4
------ ----- ------ ----- ------- ------
Total losses and expenses.................... 960 102.2 839 86.8 766 101.0
------ ===== ------ ===== ------- =====
Underwriting gain (loss)-- pre-tax........... $ (21) $ 128 $ (8)
====== ====== =======
Reinsurance premiums earned from catastrophe excess-of-loss policies
totaled $286 million in 1998, $310 million in 1997 and $268 million in 1996.
Management believes that increased industry capital devoted to this type of
business and the lack of large catastrophic loss events in recent years
continues to promote intensifying price competition in the catastrophe
reinsurance markets. As a result, there are currently fewer opportunities to
write catastrophe reinsurance coverages at acceptable prices. Management
anticipates that the level of catastrophe reinsurance business accepted may
decline in 1999.
The catastrophe reinsurance business produced net underwriting gains in
1998 of $155 million as compared to net underwriting gains of $283 million in
1997 and $167 million in 1996. During the 1996-1998 period, there were no truly
large catastrophic events. Catastrophe losses incurred were $34 million in 1998,
nearly zero in 1997 and $46 million in 1996.
Berkshire's management continues to believe that, eventually, a large
catastrophe event will occur which will produce a significant loss. The
Berkshire Hathaway Reinsurance Group's exposure to loss from a single event with
respect to in-force policies at year end 1998 is estimated at approximately $600
million after-tax (excludes losses which would likely be incurred by General
Re). Accordingly, periodic underwriting results remain subject to extreme
volatility. Berkshire's management is willing to accept such volatility provided
there is a reasonable prospect of long-term profitability.
16
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
INSURANCE SEGMENTS -- UNDERWRITING (continued)
Berkshire Hathaway Reinsurance Group (continued)
Premiums earned from other property and casualty excess-of-loss and
quota-share reinsurance contracts totaled $310 million in 1998, $513 million in
1997 and $485 million in 1996. These contracts often provide considerable
amounts of indemnification in exchange for large premiums. Certain of these
contracts, which produced annual premiums of approximately $200 million in 1997
and 1996, expired at the end of 1997 and were not renewed in 1998. Other
property and casualty reinsurance contracts produced net underwriting losses of
approximately $86 million in 1998, $73 million in 1997 and $101 million in 1996.
Premiums from these types of reinsurance contracts are often based, in part, on
time discounting of estimated loss payments because such payments are expected
to occur over lengthy time periods. Estimated claim liabilities are established
for financial reporting purposes without recognition of such discounting, thus
producing underwriting losses. This business is accepted because of the large
amounts of policyholder float that it generates.
Premiums earned from retroactive reinsurance and structured settlement
contracts were $343 million in 1998 and $144 million in 1997. Minor amounts of
premiums were earned from such contracts in 1996. These contracts provide excess
of loss coverage with respect to past loss events or periodic payments to
claimants in connection with settled claims. Underwriting losses occur from such
policies as a result of the recurring recognition of time value of money
concepts--the amortization of deferred charges re reinsurance assumed and the
accretion of discounted structured settlement liabilities. The amortization and
accretion charges are reported as losses incurred, and because there is no
offsetting premium income, as underwriting losses. Underwriting losses from
retroactive reinsurance and structured settlement contracts were $90 million in
1998, $82 million in 1997 and $74 million in 1996.
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; five companies collectively referred to as "homestate"
operations that provide primarily standard commercial coverages to insureds in
an increasing number of states; Cypress Insurance Company, a provider of
workers' compensation insurance in California and other states; Central States
Indemnity Company, a provider of credit card credit insurance to individuals
nationwide through financial institutions; Kansas Bankers Surety Company, an
insurer for primarily small and medium size banks located in the midwest; and
Berkshire Hathaway International, a London-based writer of personal and
commercial auto insurance.
Collectively, the Berkshire Hathaway Direct Insurance businesses
produced earned premiums of $328 million in 1998, $312 million in 1997 and $268
million in 1996. Increases in premiums earned in 1998 and 1997 were achieved by
the homestate, credit card credit, international auto and specialty risk
businesses offset by comparative declines in the traditional commercial motor
vehicle business. Net underwriting gains attributed to direct insurance
activities were $17 million in 1998, $52 million in 1997 and $59 million in
1996. The decline in 1998 underwriting results as compared to 1997 principally
derived from the traditional motor vehicle and specialty risk operations.
General Re
On December 21, 1998, General Re became a wholly owned subsidiary of
Berkshire upon completion of the merger of the two companies. Berkshire's
results of operations in 1998 include the results of General Re for the last ten
days of 1998. Although the revenues and operating results of General Re for that
ten-day period are not significant to Berkshire for the full year, General Re
will have a major impact on Berkshire's results in future periods. For purposes
of this discussion, General Re's results for the last ten days of 1998 are
included in other sources of earnings.
17
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
INSURANCE SEGMENTS - UNDERWRITING (continued)
General Re (continued)
General Re and its affiliates operate a global insurance/reinsurance
business with operations in the U.S. and 124 other countries around the world.
General Re's principal reinsurance operations are internally classified: (1)
North American property/casualty, (2) international property/casualty, and (3)
global life/health reinsurance.
North American property/casualty operations underwrite predominantly
excess-of-loss reinsurance across various lines of business. The international
property/casualty operations write quota-share and excess-of-loss reinsurance
for risks throughout the world. The global life/health operations reinsure such
risks in North America and throughout the world. The international
property/casualty and global life/health businesses are primarily conducted
through German-based Cologne Re and its subsidiaries. As of December 31, 1998,
General Re, directly and indirectly through a joint venture arrangement,
maintained an 82% economic interest in Cologne Re.
Summarized information regarding General Re's historical pre-tax
underwriting results for 1998 and 1997 is presented below.
-- (dollars in millions) --
Net premiums earned Net underwriting gain (loss)
1998 1997 1998 1997
---- ---- ---- ----
North American property/casualty .............. $ 2,708 $ 3,143 $ (15) $ 23
International property/casualty ............... 2,095 2,270 (112) (55)
Global life/health ............................ 1,292 1,193 (282)* 13
------- ------- ------- -------
$ 6,095 $ 6,606 $ (409) $ (19)
======= ======= ======= =======
* Includes a pre-tax loss of $275 million related to estimated losses incurred
by a Cologne Re U.S. based life insurance subsidiary. Such losses were
incurred with respect to U.S. workers' compensation reinsurance written
through an underwriting facility in the London market.
General Re's historical pre-tax net investment income in each of the
years ending December 31, 1998 and 1997 totaled approximately $1.3 billion. On
an after-tax basis, General Re's historical net investment income was about $975
million in both 1998 and 1997.
INSURANCE SEGMENTS - INVESTMENT INCOME
Following is a summary of the insurance segments net investment income
for the past three years.
(dollars in millions)
1998 1997 1996
---- ---- ----
Investment income before taxes................................... $974 $882 $726
Applicable income taxes.......................................... 236 172 128
Applicable minority interest..................................... 7 6 5
---- ---- ----
Investment income after taxes and minority interest.............. $731 $704 $593
==== ==== ====
Investment income of the insurance businesses in 1998 exceeded amounts
earned in 1997 by $92 million (10.4%) and 1997 income earned exceeded 1996 by
$156 million (21.5%). Investment income earned in 1998 reflects increased
taxable interest income, partially offset by lower tax-exempt interest and
dividend income. Dividends earned from the investment in US Airways Group, Inc.
("US Airways") Cumulative Convertible Preferred Stock, including amounts
previously in arrears, were $78 million in 1997 and $46 million in 1996. During
the first quarter of 1998, Berkshire converted the US Airways preferred shares
into common shares of that company.
18
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
INSURANCE SEGMENTS - INVESTMENT INCOME (continued)
Berkshire's insurance businesses continue to generate significant
levels of investment income from maintaining large levels of invested assets.
The acquisition of General Re at the end of 1998 increased invested assets by
about $25 billion. Increases in invested assets in recent years also derive from
reinvested earnings and additional capital contributions, as well as increases
in the amounts of "float". Reinvested earnings and capital contributions over
the three year period ending December 31, 1998 were approximately $6 billion.
Float represents the sum of unpaid losses and loss expenses, unearned premiums,
and other liabilities to policyholders less the aggregate of premiums and
reinsurance balances receivable, deferred policy acquisition costs, deferred
charges re reinsurance assumed and related prepaid income taxes. Total float was
approximately $22.8 billion at year end 1998 which includes $14.9 billion
assumed as a result of the General Re acquisition.
Income tax expense as a percentage of investment income before taxes
was 24.2% in 1998, 19.5% in 1997 and 17.6% in 1996. Investment income in each of
these years includes substantial amounts of interest on municipal obligations
and dividends from equity investments that are effectively taxed at rates below
the full statutory federal rate.
NON-INSURANCE BUSINESS SEGMENTS
A summary follows of results to Berkshire from these identified
business segments for the past three years.
-- (dollars in millions) --
1998 1997 1996
---------------- --------------- ---------------
Amount % Amount % Amount %
------ --- ------ --- ------ ---
Revenues................................... $ 4,458 100 $ 3,404 100 $ 2,888 100
Cost and expenses.......................... 3,823 86 2,892 85 2,528 88
------ --- ------ --- ------ ---
Operating profit........................... 635 14 512 15 360 12
Income taxes and minority interest......... 246 5 201 6 134 4
------- ---- ------- ---- ------- ----
Contribution to net earnings............... $ 389 9 $ 311 9 $ 226 8
======= ==== ======= ==== ======= ====
A comparison of revenues and operating profits between 1998, 1997 and
1996 for each of the eight identifiable non-insurance business segments follows.
-- (dollars in millions) -- Operating Profit
Revenues Operating Profits as a % of Revenues
Segment 1998 1997 1996 1998 1997 1996 1998 1997 1996
- ------- ---- ---- ---- ---- ---- ---- ---- ---- ----
Buffalo News.................... $ 157 $ 156 $ 154 $ 53 $ 56 $ 50 34 36 32
Flight Services................. 858 411 8 181 140 3 21 34 37
Home Furnishings................ 793 667 587 72 57 44 9 9 8
International Dairy Queen....... 420 -- -- 58 -- -- 14 -- --
Jewelry......................... 440 398 392 39 32 28 9 8 7
Scott Fetzer Companies.......... 1,002 961 938 137 119 122 14 12 13
See's Candies................... 288 269 249 62 59 52 22 22 21
Shoe Group...................... 500 542 560 33 49 61 7 9 11
------ ------ ------ ---- ---- ----
$4,458 $3,404 $2,888 $635 $512 $360
====== ====== ====== ==== ==== ====
1998 compared to 1997
Revenues from the eight identifiable non-insurance business segments of
$4,458 million in 1998 increased $1,054 million (31.0%) from the prior year. The
aggregate operating profits from these business segments of $635 million in 1998
increased $123 million (24.0%). The acquisitions of International Dairy Queen
("Dairy Queen") at the beginning of 1998 and Executive Jet during August, 1998
account for a significant portion of the comparative increases. The following is
a discussion of other significant matters impacting comparative results for each
of the non- insurance business segments.
19
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
NON-INSURANCE BUSINESS SEGMENTS (continued)
Buffalo News
The Buffalo News revenues were relatively unchanged in 1998 as compared
to 1997. Operating profits in 1998 of $53 million decreased $3 million (5.4%)
from the comparable 1997 amount. Much of the decrease arose as a result of a
special non recurring charge related to workers' compensation insurance. Without
the charge, operating profits in 1998 would have been comparable to the prior
year.
Flight Services
This segment includes FlightSafety and Executive Jet. FlightSafety,
acquired at the end of 1996, provides high technology training to operators of
aircraft and ships. FlightSafety's worldwide clients include corporations, the
military and government agencies. On August 7, 1998, Berkshire acquired
Executive Jet, the worlds' leading provider of fractional ownership programs for
general aviation aircraft. Executive Jet operates the NetJets(R) fractional
ownership program in the United States and Europe. Revenues of this segment
increased $447 million (108.8%) over comparable prior year amounts. The
acquisition of Executive Jet accounts for about 85% of the overall revenue
increase. Operating profits of this segment increased $41 million (29.3%) over
comparable prior year amounts. The acquisition of Executive Jet accounts for
about half of the overall increase. FlightSafety's operating profits increased
significantly over 1997 as a result of continued growth in all areas of its
training business.
Home Furnishings
This segment is comprised of three separately managed but similar
retail home furnishing businesses: Nebraska Furniture Mart ("NFM"), based in
Omaha, Nebraska; R.C. Willey Home Furnishings ("Willey"), based in Salt Lake
City, Utah; and Star Furniture Company ("Star"), based in Houston, Texas.
Berkshire acquired NFM in 1983, Willey in 1995 and Star in 1997. Revenues of
this segment increased $126 million (18.9%) as compared to the prior year. Over
half of this increase resulted from the acquisition of Star in July 1997. Both
NFM and Willey also reported strong increases in revenues in 1998 as compared to
1997. Operating profits of $72 million in 1998 increased $15 million (26.3%)
over the comparable prior year amount. Star's inclusion in this segment's
results, for the full year of 1998 versus only the last half of 1997, accounts
for over half of the comparative increase. The remainder of the increase arose
primarily from increased sales and improved margins at NFM and Willey.
International Dairy Queen
At the beginning of 1998, Berkshire completed the acquisition of Dairy
Queen. Dairy Queen develops, licenses and services a system of approximately
5,900 Dairy Queen stores located throughout the United States, Canada and other
foreign countries. Dairy Queen stores feature hamburgers, hot dogs, various
dairy desserts and beverages. Dairy Queen also develops, licenses and services
other stores and shops operating under the names of Orange Julius and Karmelkorn
which feature blended fruit drinks, popcorn and other snacks. Dairy Queen's
results for 1998 were in line with management's plan and continued positive
results are expected from this business.
Jewelry
This segment consists of two separately managed retailers of fine
jewelry. Borsheim's operates from a single location in Omaha, Nebraska.
Helzberg's Diamonds operates a national chain of retail stores located primarily
in malls throughout the United States. Revenues of $440 million increased $42
million (10.6%) and operating profits of $39 million increased $7 million
(21.9%) over the comparable prior year amounts. While the revenue increase
accounted for much of the increase in operating profits, both of these
businesses were able to effectively control operating expenses resulting in
improved results.
Scott Fetzer Companies
The Scott Fetzer companies are a group of about twenty diverse
manufacturing and distribution businesses under common management. Principal
businesses in this group of companies sell products under the Kirby (home
cleaning systems), Campbell Hausfeld (air compressors, paint sprayers and
pressure washers) and World Book (encyclopedias and other educational products)
names. Revenues of $1,002 million increased $41 million (4.3%) over
the comparable prior year amount.
20
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
NON-INSURANCE BUSINESS SEGMENTS (continued)
1998 compared to 1997 (continued)
Scott Fetzer Companies (continued)
The increase in revenues was primarily due to increases at Campbell Hausfeld
somewhat offset by lower World Book revenues. Operating profits of $137 million
increased $18 million (15.1%) from the prior year. Increased sales at Campbell
Hausfeld along with improved results from World Book's international businesses
account for a significant portion of the improved results.
See's Candies
See's revenues increased $19 million (7.1%) over comparable prior year
amounts. Total pounds of candy sold increased about 3.3% with 3% to 4% increases
being achieved both in See's quantity order business as well as its retail
stores. Operating profits increased $3 million (5.1%) as compared to the prior
year.
Shoes
This segment includes H. H. Brown Shoe Company, Inc., Lowell Shoe, Inc.
and Dexter Shoe Companies. These businesses manufacture and distribute work,
dress, casual and athletic footwear. In addition, over 100 retail shoe stores
are included in this segment. Revenues for this segment decreased by $42 million
(7.7%) in 1998 as compared to 1997. Operating profits of $33 million in 1998
decreased $16 million (32.7%) from the prior year. The unfavorable results
represent a continuation of a trend which began three years ago. Manufacturers
such as Brown, Lowell and Dexter are facing reduced demand for their products.
Additionally, major retailers are offering promotions to generate sales which is
resulting in an ongoing margin squeeze. Management of these businesses is
working to align production activity to the reduced sales levels.
1997 compared to 1996
Revenues from the non-insurance business segments increased $516
million (17.9%) in 1997 as compared to 1996. Operating profits of $512 million
during 1997 increased $152 million (42.2%) from the comparable 1996 amount. The
most significant factor which gave rise to the increase in both revenues and
operating profits was the acquisition of FlightSafety at the end of 1996. With
the exception of the shoe group, all other reportable segments reported
excellent results in 1997 as compared to 1996.
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.
The Consolidated Statement of Earnings for 1997 reflects a pre-tax
realized investment gain of $1.1 billion ($704 million after-tax). A significant
portion ($678 million pre-tax) of this gain resulted from Travelers Group Inc.'s
acquisition of Salomon Inc. The Consolidated Statement of Earnings for 1996
reflects a pre-tax realized investment gain of $2.5 billion ($1.6 billion
after-tax). Most of this gain resulted from The Walt Disney Company's
acquisition of Capital Cities/ABC, Inc. See Note 5 to Consolidated Financial
Statements for additional details regarding these transactions.
While the effects of these transactions are material to the
Consolidated Statements of Earnings, the completion of these acquisitions had a
minimal impact on Berkshire's shareholders' equity. This is due to the fact that
Berkshire's investments in Salomon Inc and Capital Cities had been carried in
prior periods' consolidated financial statements at market value with unrealized
gains, net of tax, reported as a separate component of shareholders' equity.
21
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
MARKET RISK DISCLOSURES
Berkshire's Consolidated Balance Sheet includes a substantial amount of
assets and liabilities whose fair values are subject to market risks. Due to
Berkshire's significant level of investments in equity securities, fluctuations
in equity prices represent the largest market risk factor affecting Berkshire's
consolidated financial position. The following sections address the significant
market risks associated with Berkshire's business activities as of year end 1998
and 1997.
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 1998 and 1997, approximately 60% of the total fair value
of investments in equity securities was concentrated in three investees.
Berkshire's primary investment strategy contemplates that most equity
investments will be held 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
maintains 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 9 to the Consolidated Financial Statements for information regarding
the Exchange Notes. As of year-end 1998 and 1997, the market price of Citigroup
common stock far exceeded the current exchange price of the Exchange Notes.
Therefore, the fair values of the Exchange Notes are primarily subject to equity
price risk.
The table below summarizes Berkshire's equity price risks as of
December 31, 1998 and 1997 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 investment
portfolio.
-- (dollars in millions) --
Estimated Hypothetical
Fair Value after Percentage
Hypothetical Hypothetical Increase (Decrease) in
Fair Value Price Change Change in Prices Shareholders' Equity
---------- ------------ ---------------- --------------------
As of December 31, 1998
Equity securities *.................... $38,476 30% increase $50,019 12.8
30% decrease 26,933 (12.8)
1% Senior Exchangeable Notes........... 489 30% increase 636 **
30% decrease 342 **
As of December 31, 1997
Equity securities *.................... $37,528 30% increase $48,786 22.9
30% decrease 26,270 (22.9)
1% Senior Exchangeable Notes........... 780 30% increase 1,014 **
30% decrease 546 **
* Includes redeemable convertible preferred shares of investees in which the
market prices of the common stock of the investees significantly exceeded the
related conversion prices.
** Less than 1%
22
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
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. The Company 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. The Company does not actively utilize stand-alone derivatives to
manage interest rate risks.
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 table below 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. The hypothetical fair values are based upon
the same prepayment assumptions utilized in computing fair values at year-end
1998 and 1997. Significant variations in market interest rates could produce
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 in millions) --
Hypothetical Estimated
Change in Fair Value after
Interest Rate Hypothetical Change
Fair Value (bp=basis points) in Interest Rate
---------- ----------------- ----------------
As of December 31, 1998
Investments in securities with fixed maturities(1)....... $20,891 100 bp decrease $ 21,774
100 bp increase 19,974
200 bp increase 19,093
300 bp increase 18,130
Borrowings under investment agreements and other
debt(2)............................................... 1,986 100 bp decrease 2,095
100 bp increase 1,865
200 bp increase 1,768
300 bp increase 1,681
As of December 31, 1997
Investments in securities with fixed maturities(1)....... 9,018 100 bp decrease 10,283
100 bp increase 7,857
200 bp increase 7,074
300 bp increase 6,416
Borrowings under investment agreements and other
debt(2)............................................... 1,482 100 bp decrease 1,535
100 bp increase 1,410
200 bp increase 1,354
300 bp increase 1,303
(1) Excludes redeemable convertible preferred stocks (See Equity Price Risk)
(2) Excludes 1% Senior Exchangeable Notes (See Equity Price Risk)
23
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
FINANCIAL PRODUCTS RISK
The finance and financial products operations are subject to market
risk principally through General Re Financial Products ("GRFP"). GRFP 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 95% probability
level. GRFP 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. GRFP's weekly aggregate market risk limit is $15 million. Risk is
measured primarily by Monte Carlo simulations to obtain the required degree of
confidence. In addition to these daily and weekly assessments of risk, GRFP
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 GRFP is exposed.
-- (dollars in millions) --
Foreign
Interest Rate Exchange Rate Equity All Risks
------------- ------------- ------ ---------
Highest............................................... $9 $7 $8 $13
Lowest................................................ 5 2 2 6
Average............................................... 7 4 5 9
GRFP 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, GRFP has not experienced any credit
losses.
LIQUIDITY AND CAPITAL RESOURCES
Berkshire's Consolidated Balance Sheet as of December 31, 1998,
reflects continuing capital strength. In the past three years, Berkshire
shareholders' equity has increased from approximately $16.7 billion at December
31, 1995, to approximately $57.4 billion at December 31, 1998. In that
three-year period, realized and unrealized securities gains increased equity
capital by approximately $13.2 billion, and reinvested earnings, other than
realized securities gains, were about $3.4 billion.
YEAR 2000 ISSUE
Many computer systems in use today may be unable to correctly process
data or may not operate at all after December 31, 1999 because those systems
recognize the year within a date only by the last two digits. Some computer
programs may interpret the year "00" as 1900, instead of as 2000, causing errors
in calculations or the value "00" may be considered invalid by the computer
program, causing the system to fail. Year 2000 issues affect: (1) Information
Technology (IT) utilized in the Company's widely diversified business
information systems, including mainframe and client server hardware and software
applications, (2) non-IT systems utilized by the Company, such as
communications, facilities management, and manufacturing and service equipment
containing embedded computer chips, and (3) IT and non-IT systems of significant
customers, suppliers, business partners and equity investees.
Berkshire and its subsidiaries could be adversely affected if Year 2000
issues are not resolved by Berkshire or its significant customers, suppliers,
business partners or equity investees before the Year 2000. Possible adverse
consequences include but are not limited to: (1) the inability to obtain
products or services used in business operations, (2) the inability to transact
business with key customers, (3) the inability to execute transactions through
the financial markets, (4) the inability to manufacture or deliver goods or
services sold to customers, (5) the decline in economic value of one or more of
Berkshire's significant equity investees and (6) the occurrence of Year 2000
related losses under property and casualty insurance and reinsurance contracts
entered into by subsidiaries. Berkshire's management believes that at least some
minor disruptions due to Year 2000 issues will occur. On a worst case basis, if
Berkshire,
24
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
YEAR 2000 ISSUE (continued)
one or more of its significant business partners, equity investees or key
governmental bodies are unable to implement timely and effective solutions to
the Year 2000 issues, Berkshire could suffer material adverse effects. The
financial impact of such effects cannot currently be estimated.
Although Berkshire's business operations are diverse, they all rely
on computers to conduct daily business activities. Because of the diversity of
those operations, Year 2000 issues are independently managed at each of the
Company's operating units. Berkshire and its subsidiaries have been working on
Year 2000 readiness issues in varying degrees for several years.
Generally, the stages involved in managing Year 2000 issues include (a)
identifying the IT and non-IT systems that are non-compliant, (b) formulating
strategies to remedying the problems, (c) making the changes necessary through
purchasing compliant systems or fixing existing systems, (d) testing the changes
and (e) developing contingency plans. The identification and formulation stages
are nearly complete at all significant operating units. Many systems have been
purchased, upgraded or corrected to make them Year 2000 compliant. In certain
instances the Company has obtained certifications of Year 2000 compliance from
the manufacturers of systems used by the Company. Management expects that by the
end of 1999, all critical systems that are not currently Year 2000 compliant
will be corrected or replaced.
The Company has begun the testing of several systems that are
believed to be Year 2000 compliant. Significant levels of testing will continue
throughout 1999. In addition, Berkshire has contacted a large number of its
business partners to obtain information regarding their own progress on Year
2000 issues. While all business partners have not fully completed their own Year
2000 projects, Berkshire is currently not aware of any significant business
partner whose Year 2000 issues will not be resolved in a timely manner. However,
there is no assurance that significant Year 2000 related problems will not
ultimately arise with its business partners.
Berkshire and its subsidiaries expect to ultimately incur about $60
million in identification, remediation and testing of Year 2000 issues.
Approximately $40 million of this amount was incurred as of December 31, 1998.
Year 2000 related costs are expensed as incurred. The Company does not believe
that any significant IT projects have been delayed due to Year 2000 efforts.
Berkshire and its subsidiaries have begun consideration of contingency
plans to deal with certain Year 2000 issues in the event that remediation
efforts are unsuccessful. Such plans will be more fully developed in 1999 to
address specific areas of need.
FORWARD-LOOKING STATEMENTS
Investors are cautioned that certain statements contained in this
document, including but not limited to those under the caption Year 2000 Issues
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 ability of the Company
and its significant business partners and equity investees to successfully
implement timely Year 2000 solutions, 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.
25
27
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, 1998 and 1997, and the related
consolidated statements of earnings, changes in shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1998. 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 generally accepted auditing
standards. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
March 8, 1999
Omaha, Nebraska
26
28
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,
----------------------
1998 1997
---- ----
ASSETS
Cash and cash equivalents..................................................... $ 13,582 $ 1,002
Investments:
Securities with fixed maturities........................................... 21,246 10,298
Equity securities and other investments.................................... 39,761 36,248
Receivables................................................................... 7,224 1,711
Inventories................................................................... 767 639
Assets of finance and financial products businesses........................... 16,989 1,249
Property, plant and equipment................................................. 1,491 1,057
Goodwill of acquired businesses............................................... 18,446 3,067
Other assets.................................................................. 2,731 840
-------- --------
$122,237 $ 56,111
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and loss adjustment expenses........................................... $23,012 $ 6,850
Unearned premiums............................................................. 3,324 1,274
Accounts payable, accruals and other liabilities.............................. 7,182 2,202
Income taxes, principally deferred............................................ 11,762 10,539
Borrowings under investment agreements and other debt......................... 2,385 2,267
Liabilities of finance and financial products businesses...................... 15,525 1,067
-------- --------
63,190 24,199
-------- --------
Minority shareholders' interests.............................................. 1,644 457
-------- --------
Shareholders' equity:
Common Stock:*
Class A Common Stock, $5 par value
and Class B Common Stock, $0.1667 par value............................ 8 7
Capital in excess of par value.............................................. 25,121 2,347
Accumulated other comprehensive income...................................... 18,510 18,198
Retained earnings........................................................... 13,764 10,934
-------- --------
57,403 31,486
Less: Cost of Class A common shares in treasury............................... -- 31
-------- --------
Total shareholders' equity.............................................. 57,403 31,455
-------- --------
$122,237 $ 56,111
======== ========
* 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 1,518,548 shares outstanding at
December 31, 1998 versus 1,234,127 outstanding at December 31, 1997.
See accompanying Notes to Consolidated Financial Statements
27
29
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,
-----------------------
1998 1997 1996
---- ---- ----
REVENUES:
Insurance premiums earned............................................ $ 5,481 $ 4,761 $ 4,118
Sales and service revenues........................................... 4,675 3,615 3,095
Interest, dividend and other investment income....................... 1,049 916 778
Income from finance and financial products businesses................ 212 32 25
Realized investment gain............................................. 2,415 1,106 2,484
------ ------ ------
13,832 10,430 10,500
------ ------ ------
COST AND EXPENSES:
Insurance losses and loss adjustment expenses........................ 4,040 3,420 3,089
Insurance underwriting expenses...................................... 1,184 880 798
Cost of products and services sold................................... 3,018 2,187 1,884
Selling, general and administrative expenses......................... 1,056 921 862
Goodwill amortization................................................ 111 83 61
Interest expense..................................................... 109 112 100
------- ------- -------
9,518 7,603 6,794
------ ------ ------
EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST..................... 4,314 2,827 3,706
Income taxes......................................................... 1,457 898 1,197
Minority interest.................................................... 27 28 20
------- ------- -------
NET EARNINGS........................................................... $ 2,830 $ 1,901 $ 2,489
======= ======= =======
Average common shares outstanding *.................................. 1,251,363 1,233,192 1,205,257
NET EARNINGS PER COMMON SHARE *........................................ $ 2,262 $ 1,542 $ 2,065
======= ======= =======
* 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 $75 per
share for 1998, $51 per share for 1997 and $69 per share for 1996.
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 CASH FLOWS
(dollars in millions)
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings................................................................. $ 2,830 $ 1,901 $ 2,489
Adjustments to reconcile net earnings to cash flows
from operating activities:
Realized investment gain................................................... (2,415) (1,106) (2,484)
Depreciation and amortization.............................................. 265 227 151
Changes in assets and liabilities before effects from business acquisitions:
Losses and loss adjustment expenses...................................... 347 576 352
Deferred charges re reinsurance assumed.................................. (80) (142) 52
Unearned premiums........................................................ 179 90 (9)
Receivables.............................................................. (56) (120) (127)
Accounts payable, accruals and other liabilities......................... 4 547 558
Income taxes............................................................. (329) 383 222
Other...................................................................... (88) (21) 56
------- ------- -------
Net cash flows from operating activities................................. 657 2,335 1,260
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities with fixed maturities................................ (2,697) (6,837) (2,465)
Purchases of equity securities and other investments......................... (1,865) (714) (1,423)
Proceeds from sales of securities with fixed maturities...................... 6,339 3,397 277
Proceeds from redemptions and maturities of securities
with fixed maturities...................................................... 2,132 779 792
Proceeds from sales of equity securities and other investments............... 4,868 2,016 1,531
Loans and investments originated in finance businesses....................... (1,028) (491) (577)
Principal collection on loans and investments
originated in finance businesses........................................... 295 276 351
Acquisitions of businesses, net of cash acquired............................. 4,971 (775) (1,975)
Other........................................................................ (302) (182) (19)
------- ------- -------
Net cash flows from investing activities................................. 12,713 (2,531) (3,508)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings of finance businesses............................... 120 157 285
Proceeds from other borrowings............................................... 1,339 1,074 1,604
Repayments of borrowings of finance businesses............................... (83) (214) (427)
Repayments of other borrowings............................................... (1,318) (1,112) (1,170)
Net proceeds from issuance of Class B Common Stock........................... -- -- 565
Other........................................................................ 3 (1) (3)
------- ------- -------
Net cash flows from financing activities................................. 61 (96) 854
------- ------- -------
Increase (decrease) in cash and cash equivalents......................... 13,431 (292) (1,394)
Cash and cash equivalents at beginning of year................................. 1,058 1,350 2,744
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR *..................................... $14,489 $ 1,058 $1,350
======= ======= ======
* Cash and cash equivalents at end of year are comprised of the following:
Finance and financial products businesses............................... $ 907 $ 56 $ 10
Other................................................................... 13,582 1,002 1,340
------- ------- -------
$14,489 $ 1,058 $ 1,350
======= ======= =======
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 CHANGES IN SHAREHOLDERS' EQUITY
(dollars in millions)
Accumulated
Class A & B Capital in Class A Other
Common Excess of Treasury Retained Comprehensive Comprehensive
Stock Par Value Stock Earnings Income Income
----------- ---------- -------- -------- ------------- -------------
BALANCE DECEMBER 31, 1995.................. $ 7 $ 1,002 $ (35) $ 6,544 $ 9,221
Common stock issued in connection with
acquisitions of businesses................. -- 707 4 -- --
Issuance of Class B Stock.................. -- 565 -- -- --
Net earnings............................... -- -- -- 2,489 -- $ 2,489
------
Other comprehensive income items:
Unrealized appreciation of investments..... -- -- -- -- 7,088 7,088
Reclassification adjustment for
appreciation included in net earnings...... -- -- -- -- (2,484) (2,484)
Income taxes and minority interests........ -- -- -- -- (1,681) (1,681)
------
Other comprehensive income................. -- -- -- -- -- 2,923
------
Total comprehensive income................. $5,412
----- ------- ------- ------- ------- ======
BALANCE DECEMBER 31, 1996.................. $ 7 $ 2,274 $ (31) $ 9,033 $12,144
Common stock issued in connection with
acquisitions of businesses................. -- 73 -- -- --
Net earnings............................... -- -- -- 1,901 -- 1,901
------
Other comprehensive income items:
Unrealized appreciation of investments..... -- -- -- -- 10,574 10,574
Reclassification adjustment for
appreciation included in net earnings...... -- -- -- -- (1,106) (1,106)
Income taxes and minority interests........ -- -- -- -- (3,414) (3,414)
------
Other comprehensive income................. -- -- -- -- -- 6,054
------
Total comprehensive income................. $7,955
----- ------- ------- ------- ------- ======
BALANCE DECEMBER 31, 1997.................. $ 7 $ 2,347 $ (31) $10,934 $18,198
Common stock issued in connection with
acquisitions of businesses................. 1 22,803 2 -- --
Retirement of treasury stock............... -- (29) 29 -- --
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
===== ======= ======= ======= =======
See accompanying Notes to Consolidated Financial Statements
30
32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(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 15. The accompanying
consolidated financial statements include the accounts of
Berkshire consolidated with accounts of all its
subsidiaries. Intercompany accounts and transactions have
been eliminated. As more fully described in Note 2, on
December 21, 1998, Berkshire consummated a merger with
General Re Corporation ("General Re"). The balance sheet of
General Re is consolidated with the balance sheets of
Berkshire and its other subsidiaries as of December 31,
1998. However, General Re's results of operations are only
included in the Consolidated Statement of Earnings for the
ten day period ended December 31, 1998.
(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 tax, 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. Investments in limited
partnerships are classified as available-for-sale. The
realized and unrealized gains and losses associated with
commodities are included in the Consolidated Statements of
Earnings as a component of realized investment gain.
(e) 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 over forty years. The Company periodically
reviews the recoverability of the carrying value of goodwill
of acquired businesses using the methodology prescribed by
SFAS No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of."
31
33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(1) SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (Continued)
(f) Insurance premiums
Insurance premiums for prospective insurance and 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. Consideration
received for retroactive reinsurance policies, including
structured settlements, is recognized as premiums earned at
the inception of the contracts. Premiums earned are stated
net of amounts ceded to reinsurers. Earned premiums ceded
were $93 million in 1998, $86 million in 1997 and $79
million in 1996.
(g) 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 $666 million and $127 million at December 31, 1998 and
1997, respectively.
(h) 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 (i) individual case estimates, (ii) estimates of
incurred-but-not reported losses, based upon past experience
and (iii) 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. The periodic accretion of discounts is included in
the Consolidated Statements of Earnings as a component of
losses and loss adjustment expenses incurred.
(j) Deferred charges re reinsurance assumed
The excess of estimated liabilities for claims and claim costs
payable by the Insurance Group 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 $560
million at December 31, 1998 and $480 million at December
31, 1997.
(k) 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 $2,167 million and $274 million at
December 31, 1998 and 1997, respectively.
32
34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(1) SIGNIFICANT ACCOUNTING POLICES AND PRACTICES (Continued)
(m) Accounting pronouncements to be adopted subsequent to December
31, 1998
During 1998, the Financial Accounting Standards Board ("FASB")
and the Accounting Standards Executive Committee ("AcSEC")
issued the following new accounting standards that become
effective after December 31, 1998:
(i) The FASB issued Statement of Financial Accounting
Standard No. 133 "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS No. 133"). SFAS No. 133
establishes accounting and reporting standards for
derivative instruments, including certain derivative
instruments imbedded in other contracts, and hedging
activities. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. Berkshire expects to adopt
SFAS No. 133 as of the beginning of 2000.
(ii) AcSEC issued Statement of Position ("SOP") No. 98-1
"Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". SOP No. 98-1 provides guidance
on the recognition and measurement of costs incurred in
connection with the acquisition or development of computer
software used in the business activities of a company. This
SOP is effective for fiscal years beginning after December
15, 1998 and will be adopted by Berkshire as of the
beginning of 1999.
(iii) AcSEC issued Statement of Position ("SOP") No. 98-7
"Deposit Accounting: Accounting for Insurance and
Reinsurance Contracts That Do Not Transfer Insurance Risk".
SOP No. 98-7 provides guidance on accounting and disclosure
for insurance and reinsurance contracts that do not transfer
insurance risk. This SOP is effective for fiscal years
beginning after June 15, 1999. Berkshire expects to adopt
this pronouncement as of the beginning of 2000.
The Company does not believe that adoption of these new accounting
principles will have a material effect on the Company's financial position or
the results of operations.
(2) BUSINESS ACQUISITIONS
During 1998, Berkshire consummated three business acquisitions --
International Dairy Queen, Inc. ("Dairy Queen"), effective January 7, 1998;
Executive Jet, Inc. ("Executive Jet"), effective August 7, 1998; and General Re
Corporation ("General Re"), effective December 21, 1998. Additional information
regarding these acquisitions is provided below.
On January 7, 1998, the merger of Dairy Queen with and into a wholly
owned subsidiary of Berkshire was completed. Shareholders of Dairy Queen
received merger consideration of approximately $590 million, consisting of $265
million in cash and the remainder in Class A and Class B Common Stock.
Dairy Queen develops, licenses and services a system of approximately
5,900 Dairy Queen stores located throughout the United States, Canada, and other
foreign countries, which feature hamburgers, hot dogs, various dairy desserts
and beverages. Dairy Queen also develops, licenses and services other stores and
shops operating under the names of Orange Julius and Karmelkorn, which feature
blended fruit drinks, popcorn and other snacks.
On July 23, 1998, Berkshire signed a merger agreement with Executive
Jet and on August 7, 1998, the merger was consummated. Under the terms of the
Executive Jet agreement, shareholders of Executive Jet received total
consideration of approximately $700 million, consisting of $350 million in cash
and the remainder in Class A and Class B Common Stock.
Executive Jet is the world's leading provider of fractional ownership
programs for general aviation aircraft. Executive Jet currently operates its
NetJets(R) fractional ownership programs in the United States and Europe. In
addition, Executive Jet is pursuing other international activities. The
fractional ownership concept was first introduced in 1986. Since then the
NetJets program has grown to include nine aircraft types with plans to introduce
several more models in the next two years.
On June 19, 1998, Berkshire signed a merger agreement with General
Re. The merger was approved by Berkshire shareholders on September 16, 1998 and
by General Re shareholders on September 18, 1998. During the fourth quarter of
1998, all necessary regulatory approvals and tax rulings were received and on
December 21, 1998, the merger was completed.
33
35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(2) BUSINESS ACQUISITIONS (Continued)
Under the terms of the merger agreement, General Re shareholders
received at their election either 0.0035 shares of Berkshire Class A Common
Stock or 0.105 shares of Berkshire Class B Common Stock for each share of
General Re common stock they owned. Berkshire issued approximately 272,200 Class
A equivalent shares in exchange for the General Re shares outstanding as of
December 21, 1998. The total consideration for the transaction, based upon the
closing prices of Berkshire Class A Common Stock for the 10-day period ending
June 26, 1998, was approximately $22 billion.
General Re is a holding company for global reinsurance and related
risk management operations. It owns General Reinsurance Corporation and National
Reinsurance Corporation, 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. Together, General Re and Cologne Re
transact reinsurance business as "General & Cologne Re".
In addition, General Re writes excess and surplus lines insurance
through General Star Management Company, provides alternative risk solutions
through Genesis Underwriting Management Company, provides reinsurance brokerage
services through Herbert Clough, Inc., manages aviation insurance risks through
United States Aviation Underwriters, Inc., and acts as a business development
consultant and reinsurance intermediary through Ardent Risk Services, Inc.
General Re also operates as a dealer in the swap and derivatives market through
General Re Financial Products Corporation, and provides specialized investment
services to the insurance industry through General Re-New England Asset
Management, Inc.
Each of the business acquisitions described above was accounted for
under the purchase method. The excess of the purchase cost of the business over
the fair value of net assets acquired was recorded as goodwill of acquired
businesses. The aggregate goodwill associated with the three acquisitions
discussed above was $15.5 billion, including $14.5 billion associated with the
General Re merger.
The results of operations for each of these entities are included in
Berkshire's consolidated results of operations from the dates of each merger.
The following table sets forth certain consolidated earnings data for the years
ended December 31, 1998 and 1997, as if the Dairy Queen, Executive Jet and
General Re acquisitions had been consummated on the same
terms at the beginning of 1997. Dollars in millions except per share amounts.
1998 1997
---- ----
Insurance premiums earned........................................ $11,395 $11,369
Sales and service revenues....................................... 5,267 4,719
Total revenues................................................... 24,174 19,422
Net earnings..................................................... 4,764 2,438
Earnings per equivalent Class A Common Share..................... 3,137 1,607
In 1996, Berkshire consummated mergers with GEICO Corporation
("GEICO") and FlightSafety International, Inc. ("FlightSafety"). Additional
information concerning each merger is provided below.
On January 2, 1996, GEICO became a wholly-owned subsidiary of
Berkshire. GEICO, through its subsidiaries, is a multiple line property and
casualty insurer, the principal business of which is underwriting private
passenger automobile insurance. Pursuant to the GEICO merger agreement, each
issued and outstanding common share of GEICO, except shares held by Berkshire
subsidiaries and GEICO, was converted into the right to receive $70 per share,
or an aggregate amount of $2.3 billion. As of the merger date, subsidiaries of
Berkshire owned 34,250,000 common shares of GEICO, which were acquired prior to
1981 at an aggregate cost of $45.7 million. Up to the merger date, neither
Berkshire nor its subsidiaries had acquired any shares of GEICO common stock
since 1980. However, Berkshire's ownership percentage, due to intervening stock
repurchases by GEICO, gradually increased from about 33% in 1980 to almost 51%
immediately prior to the merger date.
On December 23, 1996, FlightSafety became a wholly-owned subsidiary
of Berkshire. FlightSafety provides high technology training to operators of
aircraft and ships throughout the world. Pursuant to the FlightSafety merger
agreement aggregate consideration of approximately $1.5 billion was paid to
FlightSafety shareholders consisting of $769 million in cash and the remainder
in Class A and Class B Common Stock.
34
36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(3) INVESTMENTS IN SECURITIES WITH FIXED MATURITIES
The amortized cost and estimated fair values of investments in
securities with fixed maturities as of December 31, 1998 and 1997 are as follows
(in millions):
December 31, 1998 Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
Bonds:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies................. $2,518 $ 10 -- $ 2,528
Obligations of states, municipalities
and political subdivisions................................ 9,574 73 -- 9,647
Obligations of foreign governments.......................... 2,864 -- -- 2,864
Corporate bonds............................................. 4,609 -- -- 4,609
Redeemable preferred stocks................................... 359 3 (7) 355
Mortgage-backed securities.................................... 1,235 8 -- 1,243
------- ---- ----- -------
$21,159 $ 94 $ (7) $21,246
======= ==== ===== =======
December 31, 1997 Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
Bonds:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies................. $5,890 $ 601 $ (1) $ 6,490
Obligations of states, municipalities
and political subdivisions................................ 2,151 58 -- 2,209
Corporate bonds............................................. 35 -- -- 35
Redeemable preferred stocks................................... 764 516 -- 1,280
Mortgage-backed securities.................................... 273 11 -- 284
------ ------ ------ -------
$9,113 $1,186 $ (1) $10,298
====== ====== ====== =======
Amounts above exclude securities with fixed maturities held by
finance businesses. See Note 6.
Shown below are the amortized cost and estimated fair values of
securities with fixed maturities at December 31, 1998, 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............................................................. $ 2,190 $ 2,188
Due after one year through five years............................................... 5,194 5,232
Due after five years through ten years.............................................. 6,295 6,335
Due after ten years................................................................. 6,245 6,248
-------- --------
19,924 20,003
Mortgage-backed securities.......................................................... 1,235 1,243
-------- --------
$ 21,159 $ 21,246
======== ========
35
37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(4) INVESTMENTS IN EQUITY SECURITIES AND OTHER INVESTMENTS
Data with respect to the consolidated investment in equity securities
and other investments are shown below. Amounts are in millions.
December 31, 1998 Unrealized Fair
Cost Gains(Losses) Value
---- ------------- -----
Common stock of:
American Express Company *.................................................... $ 1,470 $ 3,710 $ 5,180
The Coca-Cola Company......................................................... 1,299 12,101 13,400
The Gillette Company.......................................................... 600 3,990 4,590
Other equity securities......................................................... 5,889 9,062 14,951
Other investments............................................................... 1,736 (96) 1,640
------- ------ -------
$10,994 $28,767 $39,761
======= ======= =======
December 31, 1997 Unrealized Fair
Cost Gains Value
---- ---------- -----
Common stock of:
American Express Company *.................................................. $1,393 $ 3,021 $ 4,414
The Coca-Cola Company....................................................... 1,299 12,039 13,338
The Gillette Company........................................................ 600 4,221 4,821
Other equity securities....................................................... 5,725 7,950 13,675
------ ------- -------
$9,017 $27,231 $36,248
====== ======= =======
* 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, 1998. 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 Harvey
Golub 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.
(5) REALIZED INVESTMENT GAINS (LOSSES)
Realized gains (losses) from sales and redemptions of investments are
summarized below (in millions):
1998 1997 1996
---- ---- ----
Equity securities and other investments --
Gross realized gains................................................ $2,087 $ 739* $2,379**
Gross realized losses............................................... (272) (23) (36)
Securities with fixed maturities --
Gross realized gains................................................ 602 396 144
Gross realized losses............................................... (2) (6) (3)
------ ------ ------
$2,415 $1,106 $2,484
====== ====== ======
* In November 1997, the merger of Salomon Inc ("Salomon") with and
into a subsidiary of Travelers Group Inc. ("Travelers") was completed. Berkshire
subsidiaries received common and preferred stock of Travelers in exchange for
common and preferred shares of Salomon then owned. The value of the Travelers
shares received was approximately $1.8 billion. Realized investment gains for
1997 include $678 million with respect to the transaction. The gain is net of a
charge of $298 million for the contingent value associated with Berkshire's
Exchange Notes. See Note 9 for additional information regarding the Exchange
Notes.
** In March 1996, The Walt Disney Company ("Disney") completed its
acquisition of Capital Cities/ABC, Inc. ("Capital Cities"). Subsidiaries of
Berkshire received aggregate consideration of $2.5 billion, which included cash
of $1.2 billion and common shares of Disney with a value of $1.3 billion. Gross
realized gains from sales of equity securities include a gain of $2.2 billion
relating to Disney's acquisition of Capital Cities.
36
38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(6) FINANCE AND FINANCIAL PRODUCTS BUSINESSES
Assets and liabilities of Berkshire's finance and financial products
businesses are summarized below (in millions). Amounts as of December 31, 1998
include the financial products business of General Re, which merged with
Berkshire on December 21, 1998. See Note 2.
1998 1997
---- ----
ASSETS
Cash and cash equivalents................................................................ $ 907 $ 56
Investment in securities with fixed maturities:
Held to maturity, at cost (fair value $1,366 in 1998; $1,082 in 1997)............ 1,227 971
Trading, at fair value (cost $5,279)............................................. 5,219 --
Available for sale, at fair value (cost $745).................................... 743 --
Trading account assets................................................................... 6,234 --
Securities purchased under agreements to resell.......................................... 1,083 --
Other.................................................................................... 1,576 222
------- ------
$16,989 $1,249
======= ======
LIABILITIES
Annuity reserves and policyholder liabilities............................................ $ 816 $ 697
Securities sold under agreements to repurchase........................................... 4,065 --
Securities sold but not yet purchased.................................................... 1,181 --
Trading account liabilities.............................................................. 5,834 --
Notes payable and other borrowings*...................................................... 1,503 326
Other.................................................................................... 2,126 44
------- ------
$15,525 $1,067
======= ======
* Payments of principal amounts of notes payable and other borrowings during the
next five years are as follows (in millions):
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
$341 $2 $112 $268 $466
Berkshire's finance and financial products businesses consist
primarily of the financial products businesses of General Re, the finance
business of Scott Fetzer Financial Group and a life insurance subsidiary in the
business of selling annuities. General Re's financial products businesses
consist of General Re Financial Products ("GRFP") group and a collection of
other businesses that provide investment, insurance, reinsurance and real estate
management and brokerage services. Significant accounting policies and
disclosures for these businesses are as follows:
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.
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.
GRFP 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 Statement of Earnings.
37
39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(6) FINANCE AND FINANCIAL PRODUCTS BUSINESSES (Continued)
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,
1998 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, 1998
(in millions)
-------------
Interest rate and currency swap agreements.................................................. $514,935
Options written............................................................................. 88,245
Options purchased........................................................................... 90,826
Financial futures contracts:
Commitments to purchase............................................................. 26,041
Commitments to sell................................................................. 6,872
Forward - rate agreements................................................................... 24,579
Foreign exchange spot and forward contracts................................................. 14,794
The table below discloses the net fair value or carrying amount at
the reporting date for each class of derivative financial
contract held or issued by GRFP.
December 31, 1998
-----------------
Asset Liability
----- ---------
(in millions)
Interest rate and foreign currency swaps............................................... $ 25,963 $ 25,445
Interest rate and foreign currency options............................................. 4,338 4,439
-------- --------
Gross fair value....................................................................... 30,301 29,884
Adjustment for counterparty netting.................................................... (24,067) (24,067)
------- -------
Net fair value......................................................................... 6,234 5,817
Security receivables/payables.......................................................... -- 17
-------- --------
Trading account assets/liabilities..................................................... $ 6,234 $ 5,834
======== ========
These 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.
38
40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(6) FINANCE AND FINANCIAL PRODUCTS BUSINESSES (Continued)
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. 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.
(7) 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:
1998 1997 1996
---- ---- ----
Unpaid losses and loss adjustment expenses:
Balance at beginning of year............................................ $ 6,850 $6,274 $5,924
Less ceded liabilities and deferred charges............................. 754 586 645
------- ------ ------
Net balance............................................................. 6,096 5,688 5,279
------- ------ ------
Incurred losses recorded:
Current accident year................................................... 4,235 3,551 3,179
All prior accident years................................................ (195) (131) (90)
------- ------ ------
Total incurred losses................................................... 4,040 3,420 3,089
------- ------ ------
Payments with respect to:
Current accident year................................................... 1,919 1,602 1,485
All prior accident years................................................ 1,834 1,410 1,195
------- ------ ------
Total payments.......................................................... 3,753 3,012 2,680
------- ------ ------
Unpaid losses and loss adjustment expenses:
Net balance at end of year.............................................. 6,383 6,096 5,688
Ceded liabilities and deferred charges.................................. 2,727 754 586
Net liabilities assumed in connection with General Re Merger............ 13,902 -- --
------- ------ ------
Balance at end of year.................................................... $23,012 $6,850 $6,274
======= ====== ======
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 re reinsurance 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 judgement 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.
The Company 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
39
41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(7) UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES (Continued)
reserves 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 gross liabilities for environmental and latent injury claims and
claim expenses and the related reinsurance recoverable were $2,329 million and
$416 million, respectively, at December 31, 1998. 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.
(8) INCOME TAXES
The liability for income taxes as reflected in the accompanying
Consolidated Balance Sheets is as follows (in millions):
Dec. 31, Dec. 31,
1998 1997
------- -------
Payable currently................................................. $ 1,006 $ 139
Deferred.......................................................... 10,756 10,400
------- -------
$11,762 $10,539
======= =======
The Consolidated Statements of Earnings reflect charges for
income taxes as shown below (in millions):
1998 1997 1996
------ ---- ------
Federal....................................................... $1,421 $865 $1,170
State......................................................... 31 32 26
Foreign....................................................... 5 1 1
------ ---- ------
$1,457 $898 $1,197
====== ==== ======
Current....................................................... $1,643 $692 $ 819
Deferred...................................................... (186) 206 378
------ ---- ------
$1,457 $898 $1,197
====== ==== ======
The tax effects of temporary differences that give rise to
significant portions of deferred tax assets and deferred tax liabilities at
December 31, 1998 and 1997, are shown below (in millions):
1998 1997
------- -------
Deferred tax liabilities:
Relating to unrealized appreciation of investments................ $10,149 $ 9,940
Other............................................................. 1,615 1,168
------- -------
11,764 11,108
Deferred tax assets................................................. (1,008) (708)
------- -------
Net deferred tax liability.......................................... $10,756 $10,400
======= =======
40
42
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(8) INCOME TAXES (Continued)
Charges for income taxes are reconciled to hypothetical amounts
computed at the federal statutory rate in the table shown
below (in millions):
1998 1997 1996
---- ---- ----
Earnings before income taxes.................................................... $4,314 $2,827 $3,706
====== ====== ======
Hypothetical amounts applicable to above
computed at the federal statutory rate....................................... $1,510 $ 989 $1,297
Decreases, resulting from:
Tax-exempt interest income................................................... (30) (36) (42)
Dividends received deduction................................................. (78) (104) (90)
Goodwill amortization........................................................... 39 29 22
State income taxes, less federal income tax benefit............................. 20 21 17
Other differences, net.......................................................... (4) (1) (7)
------ ----- ------
Total income taxes.............................................................. $1,457 $ 898 $1,197
====== ===== ======
(9) BORROWINGS UNDER INVESTMENT AGREEMENTS AND OTHER DEBT
Liabilities reflected for this balance sheet caption are as follows
(in millions):
Dec. 31, Dec. 31,
1998 1997
------ ------
Borrowings under investment agreements....................................................... $ 724 $ 816
1% Senior Exchangeable Notes Due 2001 ("Exchange Notes")..................................... 469 806
Other debt................................................................................... 1,192 645
------ ------
$2,385 $2,267
====== ======
Under certain terms and conditions, each $1,000 principal amount
Exchange Note then outstanding is exchangeable at the option of the holder into
29.92 shares of Citigroup common stock. Beginning on December 2, 1999, under
certain conditions, the Exchange Notes are exchangeable into 29.92 shares of
Citigroup common stock at the option of the Company. Upon such exchange,
Berkshire may elect to redeem the Exchange Notes for the equivalent cash value
of the underlying Citigroup common stock. In all other circumstances, Berkshire
will pay the principal amount at maturity. The Exchange Notes are carried at
accreted value plus an additional amount (the "contingent value") representing
the excess of the value of the underlying Citigroup common stock over the
accreted value of the Notes. The contingent value component of the aggregate
carrying value of the Exchange Notes was $ 171 million at December 31, 1998 and
$343 million at year end 1997. During 1998, approximately $185 million par
amount of Exchange Notes were converted by holders into Citigroup common shares.
Borrowings under investment agreements are made pursuant to contracts
calling for interest payable, normally semiannually, at fixed rates ranging from
3% to 9% per annum. 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):
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
$297 $30 $505 $49 $93
(10) DIVIDEND RESTRICTIONS - INSURANCE SUBSIDIARIES
Payments of dividends by Insurance Group members are restricted by
insurance statutes and regulations. Without prior regulatory approval in 1999,
Berkshire can receive up to approximately $4 billion as dividends from insurance
subsidiaries.
Combined shareholders' equity of U.S. based insurance subsidiaries
determined pursuant to statutory accounting rules (Statutory Surplus as Regards
Policyholders) was approximately $45 billion at December 31, 1998. 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 re reinsurance assumed, and
unrealized gains and losses on investments in securities with fixed maturities
are recognized under GAAP but not for statutory reporting purposes. In addition,
the GAAP amount includes goodwill of acquired businesses.
41
43
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(11) COMMON STOCK
Changes in issued and outstanding common stock of the Company during
the three years ended December 31, 1998, are shown in the table below.
Class B Common
--------------
Class A Common, $5 Par Value $0.1667 Par Value
---------------------------- (55,000,000 shares
(1,650,000 shares authorized*) authorized*)
Shares Treasury Shares Shares Issued and
Issued Shares Outstanding Outstanding
------ ------ ----------- -----------
Balance December 31, 1995........................... 1,381,308 187,796 1,193,512 --
Issuance of Class B common stock.................... -- -- -- 517,500
Common stock issued in connection
with acquisition of business..................... -- (17,728) 17,728 112,655
Conversions of Class A common stock
to Class B common stock.......................... (5,120) -- (5,120) 153,600
--------- -------- --------- ---------
Balance December 31, 1996........................... 1,376,188 170,068 1,206,120 783,755
Common stock issued in connection
with acquisition of business..................... -- (1,866) 1,866 165
Conversions of Class A common stock
to Class B common stock and other................ (10,098) -- (10,098) 303,236
--------- -------- --------- ---------
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 -- 1,349,535 5,070,379
========= ======== ========= =========
* Prior to the General Re merger the number of authorized Class A and Class B
Common Shares was 1,500,000 and 50,000,000 respectively.
On May 6, 1996, Berkshire shareholders approved a recapitalization
plan which created a new class of common stock, designated as Class B Common
Stock. In connection therewith, Berkshire's then existing common stock was
redesignated as Class A Common Stock. 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 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.
(12) FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
requires certain fair value disclosures. Fair value disclosures are required for
most investment securities as well as other contractual assets and liabilities.
Certain financial instruments, including insurance contracts, are excluded from
SFAS 107 disclosure requirements due to perceived difficulties in measuring fair
value. Accordingly, an estimation of fair value was not made with respect to
unpaid losses and loss adjustment expenses.
In determining fair value, the Company used quoted market prices when
available. For instruments where quoted market prices were not available, the
Company used independent pricing services or appraisals by the Company's
management. Those services and appraisals reflected the estimated present values
utilizing current risk adjusted market rates of similar instruments.
42
44
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(12) FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
Considerable judgement 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 the Company could
realize 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.
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. The estimated fair values of the Company's other
financial instruments as of December 31, 1998 and 1997, are as follows (in
millions):
Carrying Value Estimated Fair Value
-------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
Investments in securities with fixed
maturities........................................................... $21,246 $10,298 $21,246 $10,298
Investments in equity securities and other investments.................. 39,761 36,248 39,761 36,248
Assets of finance and financial products businesses..................... 16,989 1,249 17,129 1,367
Borrowings under investment agreements and
other debt........................................................... 2,385 2,267 2,475 2,262
Liabilities of finance and financial products businesses................ 15,525 1,067 15,698 1,149
(13) 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
1998 Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenues.............................................................. $3,325 $3,936 $2,909 $3,662
------ ------ ------ ------
Earnings:
Excluding realized investment gain................................. $ 252 $ 312 $ 264 $ 449
Realized investment gain *......................................... 470 864 101 118
-------- -------- -------- --------
Net earnings....................................................... $ 722 $1,176 $ 365 $ 567
======= ====== ======= =======
Earnings per equivalent Class A common share:
Excluding realized investment gain................................. $ 203 $ 251 $ 212 $ 352
Realized investment gain *......................................... 379 696 81 92
-------- -------- --------- ---------
Net earnings....................................................... $ 582 $ 947 $ 293 $ 444
======= ======= ======= =======
1st 2nd 3rd 4th
1997 Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenues.............................................................. $2,075 $2,338 $2,373 $3,644
------ ------ ------ ------
Earnings:
Excluding realized investment gain................................. $ 263 $ 255 $248 $432
Realized investment gain *......................................... 21 23 119 540
------ ------ ------ ------
Net earnings....................................................... $ 284 $ 278 $ 367 $ 972
====== ====== ====== ======
Earnings per equivalent Class A common share:
Excluding realized investment gain *............................... $ 214 $ 207 $ 201 $ 350
Realized investment gain........................................... 17 19 96 438
------ ------ ------ ------
Net earnings....................................................... $ 231 $ 226 $ 297 $ 788
====== ====== ====== ======
* 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 particulary in view of the unrealized appreciation now
existing in Berkshire's consolidated investment portfolio.
43
45
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(14) SUPPLEMENTAL CASH FLOW INFORMATION
A summary of supplemental cash flow information is presented in the
following table (in millions):
1998 1997 1996
---- ---- ----
Cash paid during the year for:
Income taxes................................................................. $ 1,703 $ 498 $ 965
Interest..................................................................... 132 123 129
Non-cash investing and financing activities:
Liabilities assumed in connection with acquisitions of businesses............ 36,064 25 4,172
Common shares issued in connection with acquisitions of businesses........... 22,795 73 710
Fair value of investments acquired as part of exchanges and conversions...... -- 1,837 1,618
Contingent value of Exchange Notes recognized in earnings.................... 54 298 --
Value of equity securities used to redeem Exchange Notes..................... 344 -- --
(15) BUSINESS SEGMENT DATA
Berkshire adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" as of December 31, 1998. 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 operating segments is shown below.
Prior years' presentations are restated to conform to current year
presentations.
Berkshire identified the following eleven business segments for
purposes of 1998 reporting pursuant to SFAS No. 131.
Business Identity Business Activity
- ----------------- -----------------
GEICO Corporation Underwriting private passenger automobile insurance
mainly by direct response methods
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
Buffalo News Publication of a daily and Sunday newspaper in Western
New York
FlightSafety and Executive Jet ("Flight Services") Training to operators of aircraft and ships and providing
fractional ownership programs for general aviation aircraft
Nebraska Furniture Mart, R.C. Willey Home Retail sales of home furnishings, appliances and electronics
Furnishings and Star Furniture Company
("Home Furnishings")
International Dairy Queen Licensing and servicing a system of approximately 5,900
Dairy Queen stores
Helzberg's Diamond Shops and Borsheim's Retailing of fine jewelry
("Jewelry")
Scott Fetzer Companies Diversified manufacturing and distribution of various
consumer and commercial products with principal brand
names including Kirby and Campbell Hausfeld
See's Candies Manufacture and distribution of boxed chocolates and other
confectionery products
H.H. Brown Shoe Company, Lowell Shoe, Inc. Manufacture and distribution of footwear
and Dexter Shoe Company ("Shoe Group")
The segments identified above do not include the reinsurance business
of General Re Corporation, which was acquired by Berkshire on December 21, 1998.
Beginning in 1999, General Re's reinsurance business will be included as a
reportable segment. For further information regarding the acquisition, see Note
2.
44
46
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(15) 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
1998 1997 1996
---- ---- ----
OPERATING SEGMENTS:
GEICO Corporation *........................................................... $ 4,033 $ 3,482 $ 3,092
Berkshire Hathaway Reinsurance Group *......................................... 939 967 758
Berkshire Hathaway Direct Insurance Group *.................................... 328 312 268
Buffalo News................................................................... 157 156 154
Flight services................................................................ 858 411 8
Home furnishings............................................................... 793 667 587
International Dairy Queen...................................................... 420 -- --
Jewelry........................................................................ 440 398 392
Scott Fetzer Companies......................................................... 1,002 961 938
See's Candies.................................................................. 288 269 249
Shoe group..................................................................... 500 542 560
------- ------- -------
9,758 8,165 7,006
Reconciliation of segment amounts to consolidated amount:
Other sales and service revenues....................................... 398 211 205
Interest, dividend and other investment income......................... 1,055 925 794
Income from finance and financial products businesses.................. 212 32 25
Realized investment gain............................................... 2,502 1,112 2,485
Purchase-accounting-adjustments........................................ (93) (15) (15)
------- ------- -------
$13,832 $10,430 $10,500
======= ======= =======
* Represents insurance premiums earned
OPERATING PROFIT BEFORE TAXES
1998 1997 1996
---- ---- ----
OPERATING SEGMENTS
GEICO Corporation *............................................................ $ 269 $ 281 $ 171
Berkshire Hathaway Reinsurance Group *......................................... (21) 128 (8)
Berkshire Hathaway Direct Insurance Group *.................................... 17 52 59
Buffalo News................................................................... 53 56 50
Flight services................................................................ 181 140 3
Home furnishings............................................................... 72 57 44
International Dairy Queen...................................................... 58 -- --
Jewelry........................................................................ 39 32 28
Scott Fetzer Companies......................................................... 137 119 122
See's Candies.................................................................. 62 59 52
Shoe group..................................................................... 33 49 61
------ ------ ------
900 973 582
Reconciliation of segment amounts to consolidated amounts:
Interest, dividend and other investment income.......................... 1,046 919 780
Income from finance and financial products businesses................... 212 32 25
Realized investment gain................................................ 2,502 1,112 2,485
Interest expense **..................................................... (100) (107) (94)
Corporate and other..................................................... (36) 3 4
Goodwill amortization and other purchase-accounting-
adjustments........................................................... (210) (105) (76)
------ ------ ------
$4,314 $2,827 $3,706
====== ====== ======
* Represents underwriting profit (loss)
** Amounts of interest expense represent those for borrowings under investment
agreements and other debt exclusive of that of finance businesses and
interest allocated to certain identified segments.
45
47
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(15) BUSINESS SEGMENT DATA (Continued)
DEPREC. & AMORT.
CAPITAL EXPENDITURES* OF TANGIBLE ASSETS
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
GEICO Corporation.................................. $ 101 $ 27 $ 11 $ 27 $ 26 $ 25
Berkshire Hathaway Reinsurance Group............... -- -- -- -- -- --
Berkshire Hathaway Direct Insurance Group.......... 1 1 1 1 1 1
Buffalo News....................................... 2 3 1 2 3 3
Flight services.................................... 213 119 -- 58 55 --
Home furnishings................................... 21 43 22 13 10 10
International Dairy Queen.......................... 10 -- -- 7 -- --
Jewelry............................................ 12 9 16 10 10 9
Scott Fetzer Companies............................. 10 6 11 11 11 12
See's Candies...................................... 15 20 5 5 5 4
Shoe group......................................... 9 11 13 13 12 12
------ ------ ------ ------ ----- -----
394 239 80 147 133 76
Reconciliation of segment amounts to consolidated amount:
Corporate and other........................ 5 3 2 4 3 4
Purchase-accounting-adjustments............ -- -- -- 8 8 8
------ ------ ------ ------ ----- -----
$ 399 $ 242 $ 82 $ 159 $ 144 $ 88
====== ====== ====== ====== ===== =====
* Excludes expenditures which were part of business acquisitions.
IDENTIFIABLE ASSETS
AT YEAR-END
1998 1997 1996
------ ------ ------
GEICO Corporation................................................... $ 8,663 $ 7,683 $ 6,437
Berkshire Hathaway Reinsurance Group................................ 36,611 34,781 24,458
Berkshire Hathaway Direct Insurance Group........................... 5,564 5,902 4,061
Buffalo News........................................................ 29 28 27
Flight services..................................................... 1,345 792 733
Home furnishings.................................................... 489 457 342
International Dairy Queen........................................... 199 -- --
Jewelry............................................................. 234 219 267
Scott Fetzer Companies.............................................. 242 256 240
See's Candies....................................................... 79 65 50
Shoe group.......................................................... 336 353 334
---------- -------- --------
53,791 50,536 36,949
Reconciliation of segment amounts to consolidated amount:
Corporate and other......................................... 49,682* 2,450 3,283
Goodwill and other purchase-accounting-adjustments.......... 18,764 3,125 3,177
---------- -------- --------
$ 122,237 $ 56,111 $ 43,409
========== ======== ========
* Includes the assets of General Re's reinsurance business which will be
included as a reportable segment in 1999.
46
48
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(16) 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 sheet of OBH Inc. as of December 31, 1998 is
as follows (dollars in millions):
DEC. 31, 1998
-------------
ASSETS
Cash and cash equivalents........................................................... $ 8,841
Investments, primarily equity securities............................................ 40,572
Assets of finance and financial products businesses................................. 5,759
Goodwill of acquired businesses..................................................... 4,004
Other assets........................................................................ 5,140
--------
$ 64,316
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and loss adjustment expenses................................................. $ 7,198
Unearned premiums, accounts payable and other liabilities........................... 4,483
Income taxes, principally deferred.................................................. 10,426
Borrowings under investment agreements and other debt............................... 2,056
Liabilities of finance and financial products businesses............................ 4,881
--------
29,044
Total shareholders' equity.......................................................... 35,272
--------
$ 64,316
========
The condensed consolidated statement of earnings of OBH Inc. for the
year ended December 31, 1998 is as follows (in millions):
1998
----
REVENUES
Insurance premiums earned................................................... $ 5,300
Sales and service revenues.................................................. 4,675
Investment income........................................................... 1,013
Income from finance and financial products businesses....................... 205
Realized investment gain.................................................... 2,415
-------
13,608
-------
COST AND EXPENSES
Insurance losses, loss adjustment and underwriting expense.................. 5,035
Cost of products and services sold.......................................... 3,018
Selling, general and administrative expenses................................ 1,148
Interest expense............................................................ 109
-------
9,310
-------
EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST.................................. 4,298
Income taxes and minority interests......................................... 1,474
-------
NET EARNINGS........................................................................ $ 2,824
=======
The consolidated balance sheet of OBH Inc. at December 31, 1997 and
consolidated statements of earnings for the years ended December 31, 1997 and
1996 are identical to the accompanying Consolidated Balance Sheet and
Consolidated Statements of Earnings of Berkshire Hathaway Inc.
47
49
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
BERKSHIRE HATHAWAY INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(16) INFORMATION ABOUT CERTAIN SUBSIDIARIES (Continued)
The summarized financial data of the finance and financial products
businesses (See Note 6) 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,
1998 1997
-------- --------
ASSETS
Cash and cash equivalents........................................................... $ 98 $ 12
Mortgage-backed securities, installment loans and other receivables*................ 371 238
Trading securities, at market....................................................... 3,488 --
Securities purchased under agreements to resell..................................... 192 --
-------- -----
$ 4,149 $ 250
======== =====
LIABILITIES
6 3/4% Notes, due 2001 and borrowings under investment agreements................... $ 152 $ 193
Securities sold under agreements to repurchase...................................... 3,469 --
Securities sold but not yet purchased............................................... 177 --
Other*.............................................................................. 208 24
-------- -----
$ 4,006 $ 217
======== =====
* Other liabilities include payables to affiliates of $105 at December 31, 1998
and other receivables include receivables from affiliates of $49 at December
31, 1997.
Net income of SFFG for each of the past three years is summarized
below (in millions).
1998 1997 1996
---- ---- ----
Revenues............................................................................ $211 $ 47 $ 59
Cost and expenses................................................................... 28 36 48
---- ---- ----
Income before taxes................................................................. 183 11 11
Income taxes........................................................................ 64 4 4
---- ---- ----
Net income.......................................................................... $119 $ 7 $ 7
==== ==== ====
48
50
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 May 3, 1999, 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 26
Consolidated Balance Sheets at December 31, 1998 and 1997 27
Consolidated Statements of Earnings for the years ended
1998, 1997 and 1996 28
Consolidated Statements of Cash Flows for the years ended
1998, 1997 and 1996 29
Consolidated Statements of Changes in Shareholders' Equity
for the years ended 1998, 1997 and 1996 30
Notes to Consolidated Financial Statements 31-48
(a)2. Financial Statement Schedule PAGE
------
Independent Auditors' Report on Schedule 51
Schedule I -- Parent Company 52-53
Condensed Balance Sheets as of December 31, 1998 and 1997 and
Condensed Statements of Earnings and Cash Flows for the years
ended 1998, 1997 and 1996.
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 54.
(b) Reports on Form 8-K
Form 8-K filed January 5, 1999 -- Acquisition or Disposition of
Assets. Report described that the merger between Registrant and
General Re Corporation was completed on December 21, 1998.
Form 8-K/A filed January 22, 1999 -- Item 7 Financial Statements
and Exhibits -- Report incorporated the respective financial
statements of OBH Inc.(formerly Berkshire Hathaway Inc.) and
General Re Corporation for the year ended December 31, 1997 as
filed on Form 10-K and for the nine months ended September 30, 1998
as filed on Form 10-Q. Report also provided pro forma financial
information for those periods.
49
51
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, 1999 /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, 1999
- --------------------------- of Directors - Chief --------------
Warren E. Buffett Executive Officer Date
/s/ Howard G. Buffett Director March 29, 1999
- --------------------------- --------------
Howard G. Buffett Date
/s/ Susan T. Buffett Director March 29, 1999
- --------------------------- --------------
Susan T. Buffett Date
/s/ Charles T. Munger Vice Chairman of the March 29, 1999
- --------------------------- Board of Directors --------------
Charles T. Munger Date
/s/ Malcolm G. Chace Director March 29, 1999
- --------------------------- --------------
Malcolm G. Chace Date
/s/ Walter Scott, Jr. Director March 29, 1999
- --------------------------- --------------
Walter Scott, Jr. Date
/s/ Ronald L. Olson Director March 29, 1999
- --------------------------- --------------
Ronald L. Olson Date
/s/ Marc D. Hamburg Vice President - March 29, 1999
- --------------------------- Principal Financial --------------
Marc D. Hamburg Officer Date
/s/ Daniel J. Jaksich Controller March 29, 1999
- --------------------------- --------------
Daniel J. Jaksich Date
50
52
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, 1998 and 1997, and for each of
the three years in the period ended December 31, 1998, and have issued our
report thereon dated March 8, 1999; 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 8, 1999
51
53
BERKSHIRE HATHAWAY INC.
(Parent Company)
Condensed Financial Information
(Dollars in millions)
Schedule I
BALANCE SHEETS
December 31,
1998 1997
-------- --------
Assets:
Cash and cash equivalents ................................ $ -- $ 366
Investments in consolidated subsidiaries ................. 57,411 32,587
Investments - other than consolidated subsidiaries ....... -- 37
Other assets ............................................. -- 54
-------- --------
$ 57,411 $ 33,044
======== ========
Liabilities and Shareholders' Equity:
Accounts payable and accrued expenses .................... $ 8 $ 28
Borrowings under investment agreements and other debt .... -- 1,627
Income taxes, principally deferred ....................... -- (66)
-------- --------
8 1,589
Shareholders' equity ..................................... 57,403 31,455
-------- --------
$ 57,411 $ 33,044
======== ========
STATEMENTS OF EARNINGS
Year ending December 31,
Income items: 1998 1997 1996
------- ------- -------
From consolidated subsidiaries:
Interest .................................... $ 6 $ 11 $ 7
Dividends ................................... 1,241 328 304
Undistributed earnings ...................... 1,626 1,771 2,081
------- ------- -------
2,873 2,110 2,392
Interest and dividends - other investments ..... 4 7 35
Realized investment gain (loss) ................ (60) (297) 138
Revenues of Buffalo News ....................... 157 156 154
------- ------- -------
2,974 1,976 2,719
------- ------- -------
Cost and expense items:
Costs and expenses of Buffalo News ............. 105 100 104
General and administrative ..................... 8 9 7
Interest and finance charges ................... 62 67 58
Income tax expense (benefit) ................... (31) (101) 61
------- ------- -------
144 75 230
------- ------- -------
Net earnings ................................ $ 2,830 $ 1,901 $ 2,489
======= ======= =======
See Note to Condensed Financial Information
52
54
BERKSHIRE HATHAWAY INC.
(Parent Company)
Condensed Financial Information
(Dollars in millions)
Schedule I (continued)
STATEMENTS OF CASH FLOWS
Year ending December 31,
1998 1997 1996
------- ------- -------
Cash flows from operating activities:
Net earnings ............................................. $ 2,830 $ 1,901 $ 2,489
Adjustments of reconcile net earnings to cash flows
from operating activities:
Undistributed current earnings of subsidiaries ..... (1,626) (1,771) (2,081)
Realized investment (gain) loss .................... 60 297 (138)
Increase (decrease) in income taxes ................ (31) (35) (77)
Other .............................................. (8) (4) (72)
------- ------- -------
Net cash flows from operating activities ................. 1,225 388 121
------- ------- -------
Cash flows from investing activities:
Investments in and advances to subsidiaries .............. (803) (881) 24
Purchases of investments ................................. (382) -- (717)
Proceeds on sales and maturities of investments .......... 16 189 36
------- ------- -------
Net cash flows from investing activities ................. (1,169) (692) (657)
------- ------- -------
Cash flows from financing activities:
Proceeds from borrowings ................................. 1,048 1,005 1,525
Repayment of borrowings .................................. (1,476) (1,054) (1,085)
Net proceeds from issuance of Class B Common Stock ....... -- -- 565
Other .................................................... 6 -- --
------- ------- -------
Net cash flows from financing activities ................. (422) (49) 1,005
------- ------- -------
Increase (decrease) in cash and cash equivalents ......... (366) (353) 469
Cash and cash equivalents at beginning of year ........... 366 719 250
------- ------- -------
Cash and cash equivalents at end of year ................. $ -- $ 366 $ 719
======= ======= =======
Other cash flow information:
Income taxes paid ..................................... $ 1,656 $ 470 $ 887
Interest paid ......................................... 60 57 55
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, 1998, 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.
53
55
EXHIBIT INDEX
Exhibit No.
- -----------
2.1 Agreement and Plan of Merger dated as of August 25, 1995,
between the Registrant and GEICO Corporation. Incorporated by
reference to Exhibit 1 to the Registrant's Form 8-K dated
August 25, 1995.
2.2 Agreement and Plan of Merger dated as of October 14, 1996
between the Registrant and FlightSafety International, Inc.
Incorporated by reference to Exhibit 1 to the Registrant's Form
8-K filed on October 16, 1996.
2.3 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, 1998. 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
27 Financial Data Schedule
(Submitted as an Exhibit pursuant to the requirements of Item
601(b)(27) of Reg. S-K and not deemed filed for purposes of
Section 11 of the Securities Act of 1933 or Section 18 of the
Securities Exchange Act of 1934.)
54