BERKSHIRE HATHAWAY INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations

Results of Operations

     Net earnings for each of the past three years are disaggregated in the table that follows. Amounts are after deducting minority interests and taxes.
 

   ¾ (dollars in millions) ¾
 

2000  

1999  

1998  

Insurance ¾ underwriting

$(1,021)

$ (897)

$ 171 

Insurance ¾ investment income

1,955 

1,764 

731 

Non-Insurance businesses

804 

518 

538 

Interest expense

(61)

(70)

(63)

Goodwill amortization and other purchase-accounting adjustments

(818)

(648)

(118)

Other

   77 

     4 

    18 

   Earnings before realized investment gain

936 

671 

1,277 

Realized investment gain

 2,392 

   886 

 1,553 

   Net earnings

$3,328 

$1,557 

$2,830 

 

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     The business segment data (Note 16 to Consolidated Financial Statements) should be read in conjunction with this discussion.

Insurance ¾ Underwriting

A summary follows of underwriting results from Berkshire’s insurance businesses for the past three years.
 

    ¾ (dollars in millions) ¾
 

2000  

1999  

1998  

Underwriting gain (loss) attributable to:

      

   GEICO

$ (224)

$ 24 

$ 269 

   General Re

(1,224)

(1,184)

¾ 

   Berkshire Hathaway Reinsurance Group

(175)

(256)

(21)

   Berkshire Hathaway Direct Insurance Group

    38 

    22 

   17 

Underwriting gain (loss) ¾ pre-tax

(1,585)

(1,394)

265 

Income taxes and minority interest

  (564)

  (497)

  94 

   Net underwriting gain (loss)

$(1,021)

$ (897)

$ 171 

 

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=== 

     Berkshire engages in both primary insurance and reinsurance of property and casualty risks. Through General Re, Berkshire also reinsures life and health risks. In primary insurance activities, Berkshire subsidiaries assume defined portions of the risks of loss from persons or organizations that are directly subject to the risks. In reinsurance activities, Berkshire subsidiaries assume defined portions of similar or dissimilar risks that other insurers or reinsurers have subjected themselves to in their own insuring activities. Berkshire’s principal insurance businesses are: (1) GEICO, the sixth largest auto insurer in the United States, (2) General Re, one of the four largest reinsurers in the world, (3) Berkshire Hathaway Reinsurance Group ("BHRG") and (4) Berkshire Hathaway Direct Insurance Group.

A significant marketing strategy followed by all these businesses is the maintenance of extraordinary capital strength. Statutory surplus as regards policyholders of Berkshire’s insurance businesses totaled approximately $41.5 billion at December 31, 2000. This superior capital strength creates opportunities, especially with respect to reinsurance activities, to negotiate and enter into contracts of insurance specially designed to meet unique needs of sophisticated insurance and reinsurance buyers. Additional information regarding Berkshire’s insurance and reinsurance operations is presented on the following pages.

GEICO

     GEICO provides primarily private passenger automobile coverages to insureds in 48 states and the District of Columbia. GEICO policies are marketed mainly by direct response methods in which customers apply for coverage directly to the company over the telephone, through the mail or via the Internet. This is a significant element in GEICO’s strategy to be a low cost insurer and, yet, provide high value to policyholders.

     GEICO's underwriting results for the past three years are summarized below.

 

¾ (dollars are in millions) ¾
 

2000

1999

1998
 

Amount

%

Amount

%

Amount

%

Premiums written

$5,778 

  

$4,953

  

$4,182

  

 

===== 

  

=====

  

=====

  

Premiums earned

$5,610 

100.0

$4,757

100.0

$4,033

100.0

Losses and loss expenses

4,809 

85.7

3,815

80.2

2,978

73.8

Underwriting expenses

1,025 

18.3

918

19.3

786

19.5

Total losses and expenses

5,834 

104.0

4,733

99.5

3,764

93.3

Underwriting gain (loss) ¾ pre-tax

$ (224)

 ====

$ 24

 ====

$ 269

 ====

 

=====

  

====

  

====

  

     Premiums earned by GEICO in 2000 totaled $5,610 million, an increase of 17.9% over 1999, which, in turn exceeded premiums earned in 1998 by 17.9%. The growth in premiums earned in 2000 for voluntary auto was 18.3% reflecting an 8.5% increase in policies-in-force during the past year and increased premium rates. During 2000, in response to increased losses, GEICO implemented rate increases in many states and tightened underwriting standards. Additional rate increases will be taken, as necessary, to align rates with pricing targets. It takes six to twelve months for the full effect of a rate change to be reflected in premiums earned.

     While policies-in-force grew over the last twelve months (8.2% in the preferred-risk auto market and 9.5% in the standard and nonstandard auto lines), total policies-in-force were relatively unchanged during the second half of 2000. Voluntary auto new business sales in 2000 decreased 10.6% compared to 1999 due to decreased response to advertising, increased premium rates and tightened underwriting standards. The decline in new business sales over the last half of 2000 was significant. It is currently believed that policies-in-force in the preferred-risk auto line will increase in 2001. However, policies-in-force may decline in the standard and nonstandard auto lines.

     Losses and loss adjustment expenses incurred increased 26.1% to $4,809 million in 2000. GEICO’s loss ratio, which measures the portion of premiums earned that is paid or reserved for losses and related claims handling expenses, was 85.7% in 2000 compared to 80.2% in 1999 and 73.8% in 1998. The increased ratio in 2000 reflects higher severity of losses related to personal injury protection coverages and increasing cost trends for medical payments and automobile repair costs. The increases in severity were greater than anticipated resulting in larger than expected underwriting losses. As mentioned previously, GEICO has filed for rate increases to reflect the increased average severity of claims.

     The levels of catastrophe losses incurred in each of the past three years were relatively minor. Catastrophe losses added approximately one percentage point to the loss ratio in each of the past three years.

     GEICO’s insurance subsidiaries are defendants in several class action lawsuits related to the use of collision repair parts not produced by the original auto manufacturers. Management intends to vigorously defend GEICO’s position over the use of these after-market parts. However, these lawsuits are in early stages of development and the ultimate outcome cannot be reasonably determined.

     GEICO’s underwriting expenses in 2000 increased $107 million (11.7%) over 1999, following an increase of $132 million (16.8%) in 1999 over 1998. The increases in underwriting expenses reflect increased advertising and costs related to new business growth. In 2000, these increases were somewhat offset by significantly lower employee profit sharing expense. The unit cost of acquiring new business has continued to increase significantly in 2000 reflecting higher aggregate media spending and a lower ratio of new policies generated to new policies quoted. In response to higher unit costs, GEICO expects to reduce advertising expenditures in 2001. It is anticipated that the reduction in advertising expenditures combined with the expected impact of the previously noted underwriting actions will result in underwriting results slowly improving over the next twelve months.

General Re

     General Re was acquired by Berkshire effective December 21, 1998. General Re’s results of operations are included in Berkshire’s consolidated results beginning as of that date. The historical results for all of 1998 are presented for comparative purposes, although the full-year results are not included in Berkshire’s 1998 consolidated results.

     General Re and its affiliates conduct a global reinsurance business, which provides reinsurance coverage in the United States and 129 other countries around the world. General Re’s principal reinsurance operations are: (1) North American property/casualty, (2) International property/casualty, and (3) Global life/health. The International property/casualty operations are conducted primarily through Germany-based Cologne Re and its subsidiaries. At December 31, 2000, General Re had an 88% economic ownership interest in Cologne Re.

     General Re’s consolidated underwriting results for the past three years are summarized below. Dollar amounts are in millions.

2000(1)

1999  

1998  

Amount

Amount

Amount

Premiums earned

$ 8,696 

$ 6,905 

$ 6,095 

Underwriting loss ¾ pre-tax

$(1,224)

$(1,184)

$ (370)

 

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(1) During the fourth quarter of 2000, the International property/casualty and Global life/health operations discontinued reporting their results on a one-quarter lag. Consequently, General Re’s 2000 results include one additional quarter for these businesses. See Note 1(a) to the accompanying Consolidated Financial Statements for additional information.

     Generally, underwriting conditions within the reinsurance industry during 2000 remained difficult. General Re’s overall underwriting results during 2000 and 1999 were unsatisfactory in both the property/casualty and life/health reinsurance businesses. General Re management continues to take underwriting actions to address these matters with the objective of returning underwriting results to acceptable levels. Although the underwriting losses for 2000 were considerable, $239 million of the loss was attributed to a single large aggregate excess contract written in 2000. Additional information regarding this arrangement is provided in the North American property/casualty discussion.

     Otherwise, General Re’s results for 2000 were improved over 1999. The improvement is believed to be a result of the actions already taken both in the North American and international businesses, as well as signs of improvement in certain segments of the reinsurance market. However, the impact of underwriting initiatives on international business may take longer to become effective than on U.S. business. Absent large property/catastrophe losses or adverse development with respect to existing loss reserves, Berkshire expects that General Re’s underwriting results will continue to improve in 2001. Additional information and analysis with respect to each of General Re’s underwriting units is presented below. In the tables that follow, dollar amounts are in millions.

     General Re’s North American property/casualty underwriting results for the years ending December 31, 2000, 1999 and 1998 are summarized below.

2000

1999

1998

Amount

%

Amount

%

Amount

%

Premiums written

$3,517 

$2,801 

$2,707

 

===== 

  

=====

  

=====

  

Premiums earned

$3,389 

100.0

$2,837 

100.0

$2,708

100.0

Losses and loss expenses

3,161 

93.3

2,547 

89.8

1,830

67.6

Underwriting expenses

  854 

25.2

  874 

30.8

  857

31.6

Total losses and expenses

4,015 

118.5

3,421 

120.6

2,687

99.2

Underwriting gain (loss) ¾ pre-tax

$ (626)

====

$ (584)

====

$   21

====

 

=====

  

====

  

====

  

     General Re’s North American property/casualty operations underwrite predominantly excess reinsurance across multiple lines of business. Premiums earned in 2000 exceeded premiums earned in 1999 by $552 million or 19.5%. Premiums earned in 1999 increased over 1998 levels by $129 million or 4.8%. A single large aggregate excess reinsurance contract affected premiums earned in the past two years. This reinsurance contract accounted for earned premiums of $404 million in 2000 and $154 million in 1999. The contract was not renewed in 2001. Excluding the effects of this contract, the growth in North American premiums during 2000 was primarily due to net increases in the national accounts, excess and surplus reinsurance lines and individual risk businesses. This net growth resulted from a combination of new business, the effects of rate increases on existing business, and was partially offset by the non-renewal of significantly under-performing business. In addition, the net increase in premiums in 2000 was partially due to reductions in reinsurance premiums ceded to the Berkshire Hathaway Reinsurance Group.

     Underwriting results from North American property/casualty operations for 2000 and 1999 produced underwriting losses of $626 million and $584 million, respectively. Underwriting results for 2000 include $239 million of net underwriting loss from assumption of the aggregate excess reinsurance contract referenced above. The effect of this aggregate excess reinsurance agreement on the 1999 net underwriting results was not significant due to a retrocession to the Berkshire Hathaway Reinsurance Group. Although, this contract produced a sizable net loss, it is expected to provide more than commensurate investment benefits in future years due to the large amount of float generated. Notwithstanding, this large excess contract added 5.5 points to the combined loss and expense ratio in 2000.

     When the effects of the aforementioned large aggregate excess contract are excluded, General Re’s North American property/casualty underwriting results improved in 2000 as compared to the results for 1999. The underwriting loss ratio declined from 121.8% in 1999 to 113.0% in 2000. The improved results in 2000 were primarily due to the initial effects of underwriting actions on both property and casualty lines. In addition, catastrophe and large property losses were less in 2000 than in 1999. Losses arising from catastrophic events and other large property losses added 3.5 points to the North American property/casualty loss and loss expense ratio for 2000, as compared to 9.4 points for 1999 and 4.1 points for 1998. While the potential for catastrophe and large property losses are factors normally considered in underwriting decisions, the timing and magnitude of such losses can cause significant volatility in periodic underwriting results.

     The improvement in property lines in 2000 was partially offset by adverse development of reserves established for prior years' claims. The adverse loss development in 2000 arose primarily in the medical malpractice, commercial umbrella and casualty treaty reinsurance lines. In 1999 and 1998, General Re’s North American property/casualty loss reserves experienced favorable reserve development, although the amount of favorable development in 1999 was considerably less than in 1998.

     General Re’s International property/casualty underwriting results for the years ending December 31, 2000, 1999 and 1998 are summarized below.

2000(1)

2000(2)

1999

1998

Amount

%

Amount

%

Amount

%

Amount

%

Premiums written

$3,036 

$2,505 

$2,506 

$2,072 

 

===== 

===== 

===== 

===== 

Premiums earned

$3,046 

100.0

$2,478 

100.0

$2,343 

100.0

$2,095 

100.0

Losses and loss expenses

2,577 

84.6

2,091 

84.4

2,041 

87.1

1,514 

72.3

Underwriting expenses

   987 

32.4

   803 

32.4

   775 

33.1

   682 

32.5

Total losses and expenses

3,564 

117.0

2,894 

116.8

2,816 

120.2

2,196 

104.8

Underwriting loss ¾ pre-tax

$ (518)

====

$ (416)

====

$ (473)

====

$ (101)

====

 

=====

=====

=====

=====

(1) Column includes 15 months of data due to elimination of one-quarter lag reporting in 2000.

(2) Column includes 12 months reported on a one-quarter lag and is shown for comparability with 1999 and 1998.

     The International property/casualty operations write quota-share and excess reinsurance on risks around the world. In recent years, the largest international markets have been in Germany and Western Europe. As previously noted, the International property/casualty operations discontinued reporting their results on a one-quarter lag during the fourth quarter of 2000. Results for the 2000 period contain fifteen months, or one additional quarter of information. The preceding table shows underwriting results for both the twelve month and fifteen month periods. The comparative analysis that follows excludes the additional quarter, with results for the additional three month period of 2000 discussed separately afterward.

     Premiums earned in the twelve months of 2000 exceeded 1999 amounts by 5.8%, whereas 1999 premiums earned exceeded 1998 levels by 11.8%. Adjusting for the effects of overall declining foreign exchange rates, earned premiums in local currencies grew 16.7% during 2000 and 12.0% during 1999. The growth in 2000 earned premiums was primarily due to increased premiums in European markets outside Germany, premiums which became due in 2000 to reinstate coverage as a result of fourth quarter 1999 European winter storm losses, new business in South America, and the effect of increased volume and participation in DP Mann’s Syndicate 435 at Lloyd’s of London. This growth was partially offset by the cancellation of some significant quota-share treaties.

     Underwriting results for General Re’s International property/casualty segment for 2000 remained very bad. Loss and loss expense ratios for the twelve months of 2000 were 84.4% as compared to 87.1% for 1999 and 72.3% for 1998. The decrease in the loss ratio from 1999 was primarily due to lower levels of catastrophe and other large losses in 2000. The effect of catastrophes and other large property losses represented 5.9 points of the loss and loss expense ratio for 2000, compared to 5.4 points for 1999. The loss and loss expense ratio for 1999 also included approximately 4.0 points related to coverages for the motion picture business, which has since been discontinued. In 1998, catastrophe losses represented 1.3 points. Due to the large amount of property business written in the International property/casualty operations, periodic underwriting results can be volatile.

     The International property/casualty business generated an underwriting loss of $102 million during the additional quarter being reported in the 2000 financial statements (three month period ended December 31, 2000). The results were adversely affected by two catastrophes involving flood losses in the United Kingdom and Italy, totaling $25 million.

     General Re’s Global life/health underwriting results for the years ending December 31, 2000, 1999 and 1998 are summarized below.

2000(1)

2000(2)

1999

1998

Amount

%

Amount

%

Amount

%

Amount

%

Premiums written

$2,263 

$1,781 

$1,736 

$1,305 

 

===== 

===== 

===== 

===== 

Premiums earned

$2,261 

100.0

$1,773 

100.0

$1,725 

100.0

$1,292 

100.0

Losses and loss expenses

1,869 

82.6

1,473 

83.1

1,434 

83.2

1,263 

97.8

Underwriting expenses

   472 

  20.9

   384 

  21.6

   418 

  24.2

   319 

  24.6

Total losses and expenses

2,341 

103.5

1,857 

104.7

1,852 

107.4

1,582 

122.4

Underwriting loss ¾ pre-tax

$ (80)

====

$ (84)

====

$ (127)

====

$ (290)

====

 

====

====

====

====

(1) Column includes 15 months of data due to elimination of one-quarter lag reporting in 2000.

(2) Column includes 12 months reported on a one-quarter lag and is shown for comparability with 1999 and 1998.

     General Re’s Global life/health affiliates reinsure such risks worldwide. Global life/health operations previously reported their results on a one-quarter lag. As previously noted, the Global life/health operations discontinued reporting results on a one-quarter lag during the fourth quarter of 2000. Reported results for 2000 contain fifteen months. The table above shows underwriting results for both the twelve month and fifteen month periods. The analysis that follows excludes this additional quarter, with results for that period discussed separately afterward.

     Global life/health premiums earned in 2000 increased 2.8% over 1999 amounts. Premiums earned in 1999 increased 33.5% over 1998 levels. Adjusting both the 2000 and 1999 periods for the effects of run-off business written by a former London-based managing underwriter, Global life/health earned premiums increased 9.8% in 2000 and 20.3% in 1999. The increase in earned premiums in 2000 is primarily due to increases in the U.S. individual health segment and reduced retrocessions of business.

     The Global life/health operations produced improved but still unsatisfactory underwriting results for 2000. Underwriting results weakened in the international life/health business, while the U.S. life/health operations continued to show improvement. Of the $84 million Global life/health underwriting loss in 2000, $23 million was attributable to the U.S. operations and $61 million was incurred in the international operations. The U.S. life segment produced modest underwriting profits in 2000 and a significantly reduced loss in its health operations. Results in the international life operations deteriorated from 1999, primarily due to losses on personal accident and pension lines of business.

     Underwriting results for the additional quarter of 2000 produced a small profit of $4 million. While all segments showed improvement, the U.S. individual life and international health segments both produced underwriting profits during the quarter. The improvement in the U.S. individual life segment was primarily due to reduced mortality and better persistency.

Berkshire Hathaway Reinsurance Group

     The Berkshire Hathaway Reinsurance Group ("BHRG") underwrites principally excess-of-loss reinsurance coverages for insurers and reinsurers around the world. BHRG is believed to be one of the leaders in providing catastrophe excess-of-loss reinsurance. In addition, over the past three years, BHRG has generated significant premium volume from a few very sizable retroactive reinsurance contracts.

     Underwriting results for the past three years are summarized in the following table. Dollar amounts are in millions.
 

2000

1999

1998
 

Amount

%

Amount

%

Amount

%

Premiums written

$4,724 

  

$2,410 

  

$ 986 

  

 

===== 

  

=====

  

=====

  

Premiums earned

$4,705 

100.0

$2,382 

100.0

$ 939 

100.0

Losses and loss expenses

4,766 

101.3

2,573 

108.0

765 

81.5

Underwriting expenses

  114 

   2.4

   65 

   2.7

  195 

  20.7

Total losses and expenses

4,880 

103.7

2,638 

110.7

960 

102.2

Underwriting loss ¾ pre-tax

$ (175)

 ====

$(256)

 ====

$ (21)

 ====

 

=====

  

====

  

====

  

     Premiums earned from retroactive reinsurance contracts were $3,944 million in 2000, $1,508 million in 1999 and $343 million in 1998. In 2000, premiums of $2,438 million were derived from a single contract. Generally, retroactive reinsurance contracts indemnify the ceding company, subject to aggregate loss limits, with respect to insured loss events that are attributed to insurance contracts written in the past, usually many years ago. Many of these contracts may give rise to considerable amounts of environmental and latent injury claims.

     It is generally expected that losses ultimately paid under retroactive contracts will exceed the premiums received, in some cases by a wide margin. Premiums are based in part on time-value-of-money concepts because loss payments may occur over lengthy time periods. However, retroactive contracts do not significantly impact reported earnings in the year of inception. Consistent with Berkshire’s accounting policy, the excess of the estimated ultimate losses payable over the premiums received is established as a deferred charge and amortized against income over the estimated future claim settlement periods. Although Berkshire expects that these contracts will produce significant underwriting losses over time, the business is accepted due to the exceptional levels of policyholder float generated.

     Net underwriting losses with respect to retroactive reinsurance contracts were $191 million in 2000, $97 million in 1999 and $90 million in 1998. The net underwriting losses from this business reflect the amortization of deferred charges on retroactive reinsurance as well as the accretion of discounted structured settlement liabilities. The amortization and accretion charges are reported as losses incurred and, because there are no offsetting premiums, as underwriting losses. Due to the magnitude of the retroactive reinsurance contracts entered into during the past two years, deferred charges increased significantly. Consequently, as a result of the periodic amortization of deferred charges, underwriting losses are expected to increase in future periods.

     Premiums earned from non-catastrophe reinsurance contracts totaled $447 million in 2000, $560 million in 1999 and $310 million in 1998. In each of the last three years, the premiums earned from this business were derived predominantly from a small number of sizable contracts. Premiums earned in 2000 and 1999 included $58 million and $113 million, respectively, from contracts with General Re’s North American property/casualty operations.

     Net underwriting losses from the non-catastrophe reinsurance business were $167 million in 2000, $355 million in 1999 and $86 million in 1998. BHRG incurred a net loss of approximately $186 million from a single aggregate excess contract during the fourth quarter of 2000. In 1999, BHRG had net underwriting losses of $220 million from a similar single excess contract. As with retroactive reinsurance contracts, the premiums established for non-catastrophe reinsurance contracts are based on time-value-of-money concepts because loss payments are expected to occur over lengthy time periods. Loss reserves for this business are established without such time discounting but, unlike retroactive reinsurance contracts, no deferred charges are established. Consequently, significant underwriting losses can result. This business is accepted because of the large amounts of float that is produced. It is anticipated that Berkshire will derive significant economic benefits over the lengthy period of time that the float is available for investment.

     Premiums earned from catastrophe excess contracts were $314 million in 2000 and 1999 and $286 million in 1998. Competition within the catastrophe reinsurance markets remains intense, which in many instances, makes premium rates inadequate or coverage conditions unacceptable. As a result, BHRG has accepted relatively few new arrangements. However, it is expected that this business will still produce meaningful amounts of earned premiums during 2001.

     Net underwriting gains from catastrophe reinsurance were $183 million in 2000, $196 million in 1999 and $155 million in 1998. Catastrophe losses incurred in each of the past three years were relatively minor. Significant exposure to losses remains with respect to contracts that are in-force at year-end 2000, especially with respect to a major earthquake in California or a major hurricane affecting the U.S. Future periodic underwriting results of this business are subject to extreme volatility. However, Berkshire’s management is willing to accept volatility in reported results, provided there is a reasonable prospect of long-term profitability.

Berkshire Hathaway Direct Insurance Group

     The Berkshire Hathaway Direct Insurance Group is comprised of a wide variety of smaller property/casualty businesses. These businesses include: National Indemnity Company's traditional commercial motor vehicle and specialty risk operations ("NICO"); several companies collectively referred to as the "homestate" operations, which provide primarily standard commercial coverages to insureds and Central States Indemnity Company ("CSI"), a provider of credit card credit insurance to individuals nationwide through financial institutions. In August 2000, this group of businesses was expanded as a result of Berkshire’s acquisition of United States Investment Corporation ("USIC"), whose insurance subsidiaries underwrite specialty insurance coverage in the United States.

     Collectively, direct insurance businesses produced earned premiums of $332 million in 2000, $262 million in 1999 and $328 million in 1998. In 2000, premiums earned increased primarily due to the inclusion of USIC and to comparatively greater amounts earned by CSI. The decrease in premiums earned in 1999 compared to 1998 was principally attributed to lower premiums at CSI. Net underwriting gains of the direct businesses totaled $38 million in 2000, $22 million in 1999 and $17 million in 1998. The increase in underwriting profits in 2000 over 1999 was primarily due to underwriting gains from USIC and an increase in underwriting gains at NICO.

Insurance ¾ Investment Income

     Following is a summary of the net investment income of insurance operations for the past three years.
 

     (dollars in millions)
 

2000

1999

1998

Investment income before taxes

$2,787

$2,482

$974

Applicable income taxes and minority interest

   832

   718

   243

Investment income after taxes and minority interest

$1,955

$1,764

$731

 

=====

=====

====

     Investment income before taxes from the insurance operations increased in 2000 by $305 million (12.3%) over 1999. The increase in investment income in 2000 as compared to 1999 is due to greater amounts of taxable interest and dividend income, partially offset by reduced tax exempt interest. Approximately one-third of the total increase in pre-tax investment income in 2000 was attributed to the inclusion of the fifth quarter of General Re’s International property/casualty and Global life/health operations, as previously discussed. Investment income in 1999 includes income of General Re’s insurance operations, which were acquired by Berkshire in December 1998.

     At December 31, 2000, cash and invested assets totaled approximately $76.5 billion, an increase of approximately $4.1 billion from December 31, 1999. Insurance invested assets grew by about $25 billion in 1998 as a result of the General Re acquisition.

     Berkshire’s insurance businesses generate large amounts of investment income derived from shareholder capital, as well as policyholder float. Float represents an estimate of the amount of funds ultimately payable to policyholders that is available for investment. Float denotes the sum of net loss and loss adjustment expense reserves, unearned premiums, and funds held under reinsurance agreements, less premiums receivable, deferred acquisition costs, deferred charges on retroactive reinsurance and prepaid income taxes. The aggregate float was approximately $27.9 billion at December 31, 2000 and $25.3 billion at December 31, 1999. Most of the increase in float during 2000 was generated by BHRG.

     Income taxes and minority interest as a percentage of investment income before taxes were 29.9% for 2000, 28.9% for 1999 and 24.9% for 1998. The increase in the rates reflects an increase in the proportion of taxable interest income relative to the amounts of dividend and tax exempt interest, which are effectively taxed at lower rates.

Non-Insurance Businesses

     A summary follows of results from Berkshire’s non-insurance businesses for the past three years.

¾ (dollars in millions) ¾

2000

1999

1998

Amount

%

Amount

%

Amount

%

Revenues

$7,886

100

$6,042

100

$4,865

100

Cost and expenses

6,595

 84

5,205

 86

4,005

 82

Operating profit

1,291

16

837

14

860

18

Income taxes and minority interest

  487

  6

  319

  5

  322

  7

Contribution to net earnings

$ 804

10

$ 518

9

$ 538

11

 

====

==

====

==

====

==

     A comparison of revenues and operating profits between 2000, 1999 and 1998 for the non-insurance businesses follows.

¾ (dollars in millions) ¾

Operating Profit

Revenues

Operating Profits

as a % of Revenues

Non-Insurance Businesses

2000

1999

1998

2000

1999

1998

2000

1999

1998

Flight Services

2,279

1,856

858

213

225

181

9

12

21

Retail businesses

1,864

1,402

1,213

175

130

110

9

9

9

Scott Fetzer Companies

963

1,021

1,002

122

147

137

13

14

14

Other businesses

2,780

1,763

1,792

781

335

432

28

19

24

$7,886

$6,042

$4,865

$1,291

$837

$860

====

====

====

====

===

===

2000 compared to 1999

     Revenues from Berkshire’s numerous and diverse non-insurance businesses of $7,886 million in 2000 increased $1,844 million (30.5%) from the prior year. The aggregate operating profits from these businesses of $1,291 million in 2000 increased $454 million (54.2%). Revenues and operating results for Berkshire’s non-insurance business activities will change considerably in 2001. Just prior to the end of 2000, Berkshire acquired Benjamin Moore, a leading formulator and manufacturer of architectural and industrial coatings. Additionally, during the first two months of 2001, Berkshire acquired 87.3% of Shaw Industries, the world’s largest producer of tufted broadloom carpet and rugs and Johns Manville, a leading producer of insulation and building products. These three businesses generated approximately $7 billion in sales revenues in 2000.

    The following is a discussion of significant matters impacting comparative results for the non-insurance businesses.

Flight Services

     This segment includes FlightSafety and Executive Jet. FlightSafety provides high technology training to operators of aircraft and ships. FlightSafety’s worldwide clients include corporations, the military and government agencies. Executive Jet is the world’s leading provider of fractional ownership programs for general aviation aircraft. Revenues from flight services in 2000 increased $423 million (22.8%) over 1999. Most of the increase in revenues was attributed to Executive Jet, which produced significant increases in revenues from both flight operations and aircraft sales. Revenues from FlightSafety also increased approximately 10% in 2000 as compared to 1999, reflecting both increased training revenues and product sales. Operating profits in 2000 decreased $12 million (5.3%) as compared to 1999. Increased operating profits at FlightSafety were more than offset by reduced operating profits at Executive Jet. Executive Jet’s results in 2000 and 1999 reflect operating losses related to expansion into Europe as well as significantly higher operating costs incurred to generate future domestic growth.

Retail Businesses

     These businesses include four independently managed retailers of home furnishings (Nebraska Furniture Mart, R.C. Willey Home Furnishings, Star Furniture and Jordan’s Furniture) and three independently managed retailers of fine jewelry (Borsheim’s, Helzberg’s Diamond Shops and Ben Bridge Jeweler). Two of these businesses were acquired during the past two years (Jordan’s Furniture ¾ November, 1999 and Ben Bridge Jeweler ¾ July, 2000). Revenues of these businesses in 2000 increased $462 million (33.0%) as compared to 1999 and operating profits in 2000 increased $45 million (34.6%) as compared to 1999. Approximately 70% of the increase in revenues and 80% of the increase in operating profits in 2000 was due to the inclusion of the results of Jordan’s for the full year in 2000 and to the inclusion of Ben Bridge from the date of its acquisition.

Scott Fetzer Companies

     The Scott Fetzer companies are a group of about twenty diverse manufacturing and distribution businesses under common management. Principal businesses in this group of companies sell products under the Kirby (home cleaning systems), Campbell Hausfeld (air compressors, paint sprayers, generators and pressure washers) and World Book (encyclopedias and other educational products) names. These three businesses normally produce approximately 60% of the revenues and 65% of the operating profits of Scott Fetzer. Revenues in 2000 from Scott Fetzer’s businesses decreased $58 million (5.7%) as compared to 1999. Operating profits in 2000 declined $25 million (17.0%) as compared to 1999. The decline in revenues was due primarily to lower sales of power generators at Campbell Hausfeld and lower unit sales at Kirby. In 1999, sales of generators were unusually high due in part to Year 2000 concerns. In addition to the impact on operating profits from the aforementioned revenue declines, the decline in operating profits was also due in part to reduced profits at World Book.

Other Businesses

     Other businesses conduct a broad range of activities. A brief description of the most significant of the activities conducted by this diverse group of non-insurance businesses is provided in Note 16 to the accompanying Consolidated Financial Statements. During 2000, Berkshire acquired three businesses that are currently included in this group (CORT Business Services, acquired in February, 2000; Justin Brands and Acme Building Brands, acquired in August, 2000; and Benjamin Moore, acquired in December, 2000).

     Revenues in 2000 of this group of businesses increased approximately $1,017 million (57.7%) over 1999. Operating profits of these businesses in 2000 exceeded 1999 by $446 million (133%). Approximately $600 million of the increase in revenues and $85 million of the increase in operating profits was attributed to the aforementioned business acquisitions. In addition, a significant increase in net revenues and operating profits was generated by Berkshire’s finance and financial products businesses. The increase in operating profits of the finance and financial products businesses in 2000 was produced primarily from realized gains on a large portfolio of fixed maturity securities acquired in 1999 pursuant to a proprietary trading strategy. These securities were disposed of during 2000. Partially offsetting the realized gains on trading securities in 2000 were operating losses at GRS.

1999 compared to 1998

     Revenues from the non-insurance businesses increased $1,177 million (24.2%) in 1999 as compared to 1998. Operating profits of $837 million during 1999 decreased $23 million (2.7%) from the comparable 1998 amount. The most significant factor giving rise to the revenue increase was the inclusion of Executive Jet for a full year in 1999 versus just under five months during 1998. Operating profits increased at Berkshire’s Flight Services, Retail and Scott Fetzer business segments. However, more than offsetting these increases was a decline of $87 million in operating profits from Berkshire’s finance and financial products businesses.

Goodwill amortization and other purchase-accounting adjustments

     Goodwill amortization and other purchase-accounting adjustments reflect the after-tax effect on net earnings with respect to the amortization of goodwill of acquired businesses and the amortization of fair value adjustments to certain assets and liabilities which were recorded at the business acquisition dates. The increase in 2000 as compared to 1999 is primarily due to the inclusion of a charge of $219 million related to the write-off of goodwill related to Dexter Shoe (see Note 1(g) to the Consolidated Financial Statements). The significant increase in such charges during 1999 as compared to 1998 periods is primarily due to the acquisition of General Re at the end of 1998.

     Other purchase-accounting adjustments consist primarily of the amortization of the excess market value over the historical cost of fixed maturity investments that existed as of the date of certain business acquisitions, principally GEICO and General Re. Such excess is included in Berkshire’s cost of the investments and is being amortized over the estimated remaining lives of the assets. The unamortized excess remaining in the cost of fixed maturity investments was $680 million at December 31, 2000, $940 million at December 31, 1999 and $1.2 billion at December 31, 1998.

Realized Investment Gain

     Realized investment gain has been a recurring element in Berkshire's net earnings for many years. The amount ¾ 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 ¾ may fluctuate significantly from period to period, with a meaningful effect upon Berkshire's consolidated net earnings. However, the amount of realized investment gain or loss for any given period has no predictive value, and variations in amount from period to period have no practical analytical value, particularly in view of the net unrealized price appreciation now existing in Berkshire's consolidated investment portfolio.

     While the effects of realized gains are often material to the Consolidated Statements of Earnings, such gains often produce a minimal impact on Berkshire's total shareholders' equity. This is due to the fact that Berkshire's investments are carried in prior periods' consolidated financial statements at market value with unrealized gains, net of tax, reported as a separate component of shareholders' equity.

Market Risk Disclosures

     Berkshire's Consolidated Balance Sheet includes a substantial amount of assets and liabilities whose fair values are subject to market risks. Berkshire’s significant market risks are primarily associated with equity prices and interest rates and to a lesser degree financial products. The following sections address the significant market risks associated with Berkshire's business activities.

Equity Price Risk

     Strategically, Berkshire strives to invest in businesses that possess excellent economics, with able and honest management and at sensible prices. Berkshire's management prefers to invest a meaningful amount in each investee. Accordingly, Berkshire's equity investments are concentrated in relatively few investees. At year-end 2000 and 1999, approximately 70% of the total fair value of investments in equity securities was concentrated in four investees.

     Berkshire's preferred strategy is to hold equity investments for very long periods of time. Thus, Berkshire management is not necessarily troubled by short term price volatility with respect to its investments provided that the underlying business, economic and management characteristics of the investees remain favorable. Berkshire strives to maintain above average levels of shareholder capital to provide a margin of safety against short term equity price volatility.

     The carrying values of investments subject to equity price risks are based on quoted market prices or management's estimates of fair value as of the balance sheet dates. Market prices are subject to fluctuation and, consequently, the amount realized in the subsequent sale of an investment may significantly differ from the reported market value. Fluctuation in the market price of a security may result from perceived changes in the underlying economic characteristics of the investee, the relative price of alternative investments and general market conditions. Furthermore, amounts realized in the sale of a particular security may be affected by the relative quantity of the security being sold.

     In addition to its equity investments, Berkshire's obligations with respect to the 1% Senior Exchangeable Notes are subject to equity price risks. See Note 10 to the Consolidated Financial Statements for information regarding the Exchange Notes. The Exchange Notes had a carrying value of $235 million at December 31, 2000 and $449 million at December 31, 1999. For purposes of this discussion, these amounts have been deducted from the fair value of equity securities.

     The table below summarizes Berkshire's equity price risks as of December 31, 2000 and 1999 and shows the effects of a hypothetical 30% increase and a 30% decrease in market prices as of those dates. The selected hypothetical change does not reflect what could be considered the best or worst case scenarios. Indeed, results could be far worse due both to the nature of equity markets and the aforementioned concentrations existing in Berkshire's equity investment portfolio. Dollars are in millions.

Estimated

Hypothetical

Fair Value after

Percentage

Hypothetical

Hypothetical

Increase (Decrease) in

Fair Value

Price Change

Change in Prices

Shareholders' Equity

As of December 31, 2000

$37,384

30% increase 

$48,599  

11.7

30% decrease

26,170

(11.7)

As of December 31, 1999

$37,323

30% increase 

$48,520  

12.4

30% decrease

26,126

(12.4)

Interest Rate Risk

     This section discusses interest rate risks associated with Berkshire’s financial assets and liabilities, other than those of its finance and financial products businesses, which are discussed later. Berkshire's management prefers to invest in equity securities or to acquire entire businesses based upon the principles discussed in the preceding section on equity price risk. When unable to do so, management may alternatively invest in bonds or other interest rate sensitive instruments. Berkshire's strategy is to acquire securities that are attractively priced in relation to the perceived credit risk. Management recognizes and accepts that losses may occur. Berkshire has historically utilized a modest level of corporate borrowings and debt. Further, Berkshire strives to maintain the highest credit ratings so that the cost of debt is minimized. Berkshire utilizes derivative products to manage interest rate risks to a very limited degree.

     The fair values of Berkshire's fixed maturity investments and borrowings under investment agreements and other debt will fluctuate in response to changes in market interest rates. Increases and decreases in prevailing interest rates generally translate into decreases and increases in fair values of those instruments. Additionally, fair values of interest rate sensitive instruments may be affected by the credit worthiness of the issuer, prepayment options, relative values of alternative investments, the liquidity of the instrument and other general market conditions.

     The following table summarizes the estimated effects of hypothetical increases and decreases in interest rates on assets and liabilities that are subject to interest rate risk. It is assumed that the changes occur immediately and uniformly to each category of instrument containing interest rate risks. The hypothetical changes in market interest rates do not reflect what could be deemed best or worst case scenarios. Variations in market interest rates could produce significant changes in the timing of repayments due to prepayment options available. For these reasons, actual results might differ from those reflected in the table which follows. Dollars are in millions.

Estimated Fair Value after

Hypothetical Change in Interest Rates

(bp=basis points)

100 bp

100 bp

200 bp

300 bp

Fair Value

decrease

increase

increase

increase

As of December 31, 2000

Investments in securities with fixed maturities

$32,567

$33,466

$31,346

$30,005

$28,690

Borrowings under investment agreements and

   other debt

2,470

2,540

2,404

2,336

2,274

As of December 31, 1999

Investments in securities with fixed maturities

$30,222

$31,942

$28,483

$26,852

$25,413

Borrowings under investment agreements and

   other debt

1,971

2,059

1,891

1,819

1,753

Financial Products Risk

     The finance and financial products operations are subject to market risk principally through Gen Re Securities Holdings Limited ("GRS"). GRS monitors its market risk on a daily basis across all swap and option products by calculating the effect on operating results of potential changes in market variables over a one week period, based on historical market volatility, correlation data and informed judgment. This evaluation is done on an individual trading book basis, against limits set by individual book, to a 99% probability level. GRS sets market risk limits for each type of risk, and for an aggregate measure of risk, based on a 99% probability that movements in market rates will not affect the results from operations in excess of the risk limit over a one week period. GRS’s weekly aggregate market risk limit was $22 million in 2000 and $15 million in 1999. During 1999, the actual losses exceeded the market risk limit on one occasion. In addition to these daily and weekly assessments of risk, GRS prepares periodic stress tests to assess its exposure to extreme movements in various market risk factors.

     The table below shows the highest, lowest and average value at risk, as calculated using the above methodology, by broad category of market risk to which GRS is exposed. Dollars are in millions.
 

               2000               

  
   

Foreign

      

1999
 

Interest Rate

Exchange Rate

Equity

Credit

All Risks

All Risks

Highest

$7  

$6  

$4  

$3  

$14    

$10    

Lowest

3

3

¾

1

1

4

Average

5

4

1

1

4

8

     GRS evaluates and records a fair-value adjustment to recognize counterparty credit exposure and future costs associated with administering each contract. The expected credit exposure for each trade is initially established on the trade date and is determined through the use of a proprietary credit exposure model that is based on historical default probabilities, market volatilities and, if applicable, the legal right of setoff. These exposures are continually monitored and adjusted due to changes in the credit quality of the counterparty, changes in interest and currency rates or changes in other factors affecting credit exposure. Since inception, GRS has not experienced any credit losses.

Liquidity and Capital Resources

     Berkshire's balance sheet continues to reflect significant liquidity and a strong capital base. Consolidated shareholders' equity at December 31, 2000 totaled $61.7 billion. Consolidated cash and invested assets, excluding assets of finance and financial products businesses totaled approximately $77.1 billion at December 31, 2000. Berkshire has deployed about $7.7 billion in cash for business acquisitions and investments in MidAmerican during 2000 and the first two months of 2001. Cash utilized in these acquisitions was generated internally.

     The net amount of borrowings under investment agreements and other debt increased $198 million during 2000. The increase was due to the inclusion of debt of subsidiaries assumed in connection with business acquisitions during 2000 and an increase in borrowings of certain Berkshire subsidiaries, partially offset by a decline in corporate debt.

Forward-Looking Statements

     Investors are cautioned that certain statements contained in this document, as well as some statements by the Company in periodic press releases and some oral statements of Company officials during presentations about the Company, are "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Act"). Forward-looking statements include statements which are predictive in nature, which depend upon or refer to future events or conditions, which include words such as "expects," "anticipates," "intends," "plans," "believes," "estimates," or similar expressions. In addition, any statements concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible future Company actions, which may be provided by management are also forward-looking statements as defined by the Act. Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties, and assumptions about the Company, economic and market factors and the industries in which the Company does business, among other things. These statements are not guaranties of future performance and the Company has no specific intention to update these statements.

     Actual events and results may differ materially from those expressed or forecasted in forward-looking statements due to a number of factors. The principal important risk factors that could cause the Company's actual performance and future events and actions to differ materially from such forward-looking statements, include, but are not limited to, changes in market prices of Berkshire's significant equity investees, the occurrence of one or more catastrophic events, such as an earthquake or hurricane that causes losses insured by Berkshire's insurance subsidiaries, changes in insurance laws or regulations, changes in Federal income tax laws, and changes in general economic and market factors that affect the prices of securities or the industries in which Berkshire and its affiliates do business, especially those affecting the property and casualty insurance industry.