November 9, 2001

To the Shareholders of Berkshire Hathaway:

Normally I write you just once a year. However, results of the third quarter, as summarized above, are anything but normal and I would like to elaborate a bit on what took place.

We initially reported an estimate of $2.2 billion for our pre-tax insurance loss from the terrorist attack of September 11^th. We labeled that amount a "guess" and the earnings reported above include a charge of $2.275 billion from the attack. This revised number remains a guess: Important questions of liability will likely remain unresolved for years. Consequently, neither we nor other industry participants can be reasonably precise now as to final losses. We estimate that about $1.7 billion of our loss occurred at General Re and $.575 billion at Berkshire Hathaway's Reinsurance Group.

A mega-catastrophe is no surprise: One will occur from time to time, and this will not be our last. We did not, however, price for manmade mega-cats, and we were foolish in not doing so. In effect, we, and the rest of the industry, included coverage for terrorist acts in policies covering other risks ¾  and received no additional premium for doing so. That was a huge mistake and one that I myself allowed.

There are three basic rules in running an insurance company:

1. Only accept risks you are able to properly evaluate (stay within your circle of competence) and confine your underwriting to business that, after an evaluation of all relevant factors, including remote loss scenarios, carries the expectancy of profit (though obviously every policy we issue carries with it a risk of loss, often significant);



2. Limit the business accepted in a manner that guarantees you will suffer no aggregation of losses from a single event or from related events that will threaten your solvency; and



3. Avoid business involving moral risk: No matter what the rate, you can't write good contracts with bad people. While most policyholders and clients are honorable and ethical, doing business with the few exceptions is usually expensive.

Unfortunately, during the past three years all of those rules were broken at General Re, although, luckily, the consequences on September 11^th from breaking the second rule were far from lethal. We are as strong as any insurer in the world and our losses from the attack, though punishing to current earnings, are not significant in relation to Berkshire's intrinsic business value.

However, as an example, had the attack in New York been nuclear, it is likely that most of the U.S. insurance industry, as well as reinsurers worldwide, would have been destroyed. Such an act could have caused $1 trillion or more of insured damage, a sum that far exceeds the aggregate capital of the world's insurance companies. There is no company or group of companies that has the resources to assume such a risk, even though all concerned have unthinkingly been doing so. The only viable reinsurer for truly large-scale terrorism is the U.S. Government.

At Berkshire we will never knowingly write policies containing promises we can't keep. Indeed, we don't want to write an accumulation of policies or coverages exposing us to a "worst case" loss that would leave us uncomfortable. If we have been paid appropriately for assuming the risk, we don't mind losing $2 billion. But we don't want to lose $20 billion, even though we could handle that.

Therefore, General Re is revamping its underwriting practices and discipline with a new urgency ¾  to insure that all three tests described earlier are met. Management recognizes that such discipline is needed immediately and Joe Brandon, the company's new CEO, and Tad Montross, its new President, are working nights and weekends. Their job is made doubly tough because interest rates have fallen, reducing the value of float and making breakeven underwriting unattractive. But Joe and Tad ¾  along with a host of talented professionals who are responding to their leadership ¾  will get the job done, have no doubt about that.

However ¾  and this is important ¾  most insurance contracts run for a year. General Re, like other major insurers, has considerable "mid-course" business on its books that exposes it to acts of massive destruction by terrorists. This business is indeed running off. But in the meantime we continue to bear huge quantities of risk for which we received no payment.

Here's an update on our other operations:

• Though Berkshire Hathaway Reinsurance Group suffered an estimated $575 million loss on September 11^th , operations continue to be very satisfactory. That unit has consistently adhered to the three underwriting rules I stated, and we've been paid appropriately for the risks we have underwritten. Near-term prospects ¾  very near-term ¾  for this business are good. We are the Fort Knox of the insurance business at a time when financial strength is a top priority for buyers of reinsurance. However, an absolute flood of capital ¾  much put up by unsophisticates ¾  is pouring into the insurance industry. (Investment bankers and promoters may not know which businesses will succeed, but they certainly know which can be sold.) You can be sure these funds will be deployed, whatever the level of rates. Consequently, any period of strong pricing will almost certainly end within a year. After that, Berkshire will do well only if we are more disciplined than others. And that we certainly intend to be.



• GEICO had a truly excellent quarter. Its underwriting discipline is paying off and its premium volume during the quarter grew because of rate increases. We have not found a formula for growth in this market ¾  indeed policies in force were unchanged during the quarter ¾  but when we find one we will spend aggressively to exploit it.



• Our smaller insurance companies are doing exceptionally well in aggregate, and several are experiencing rapid growth. These companies are jewels.



• Most of our retail, manufacturing and service businesses are to some degree feeling the effects of the recession that started many months ago (though not as measured by economists) and that was exacerbated by the events of September 11^th . In aggregate, our many units are performing somewhat better than I would have anticipated given the weakening economy. In particular, the companies acquired during the past two years are more than meeting expectations.



• At Dexter, we have sadly and reluctantly ended shoe production in the U.S. and Puerto Rico. We had an outstanding labor force but the ten-for-one wage advantage enjoyed by competitors producing elsewhere in the world finally forced us to act ¾  after our having delayed longer than was rational. I cost you considerable money by my unwillingness to face unpleasant facts when they first became obvious. Dexter's business, which remains substantial, will be continued under the management of H. H. Brown. In the third quarter, we sustained a loss of $31 million at Dexter, about 20% of that from operations and the balance from the shutdown.



• We are experiencing good gains in revenue at Executive Jet and will add a record number of customers this year. We are far and away the leader in the fractional-ownership business, and we believe our lead will continue to widen. Despite the increased volume, however, the company recorded a small loss for the nine months compared to a small profit in the same period last year. Though scale gives us major advantages in customer service as well as in operating economics, costs to maintain our extraordinary levels of safety, security, and service are both high and rising. We will not compromise on these fronts to the slightest degree out of a desire for short-term profitability. There is strong demand for a premier service and over time satisfied customers will produce satisfactory profits.



• We continue to find cash acquisitions that meet our criteria: outstanding management and a price that allows us to make reasonable returns. We closed two cash transactions in the third quarter ¾  MiTek and XTRA ¾  and we initiated another, Fruit of the Loom, after the quarter ended. We are pleased with these purchases and we are looking for more.

Additional information about the quarter can be found in our Third Quarter Interim Shareholder Report, posted on the Berkshire Hathaway website.

Warren E. Buffett