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<!-- Global site tag (gtag.js) - Google Analytics -->
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<html>
<head>
<TITLE>Chairman's Letter - 1999</TITLE>
<meta http-equiv="Content-Type" content="text/html; charset=iso-8859-1">
</head>
<body bgcolor="#FFFFFF">
<table cellspacing="0" cellpadding="0" border="0">
<tr>
<td width="650" valign="top">
<table width="100%" border="0" height="258" mm_noconvert="TRUE">
<tr>
<td>
<center>
<p> </p>
<p><strong>BERKSHIRE HATHAWAY INC.</strong> </p>
</center>
<p>
<p><strong>To the Shareholders of Berkshire Hathaway Inc.:</strong>
<p> Our gain in net worth during 1999
was $358 million, which increased the per-share book value of both
our Class A and Class B stock by 0.5%. Over the last 35 years (that
is, since present management took over) per-share book value has
grown from $19 to $37,987, a rate of 24.0% compounded annually.<sup>*</sup> </p>
<hr width="40%" align="left">
<p>* All figures used in this report apply
to Berkshire's A shares, the successor to the only stock that the company
had outstanding before 1996. The B shares have an economic interest
equal to 1/30th that of the A.
</p>
<hr width="40%" align="left">
<p> The numbers on the facing page show
just how poor our 1999 record was. We had the worst absolute performance
of my tenure and, compared to the S&P, the worst relative performance
as well. Relative results are what concern us: Over time, bad relative
numbers will produce unsatisfactory absolute results.</p>
<p> Even Inspector Clouseau could find
last year's guilty party: your Chairman. My performance reminds
me of the quarterback whose report card showed four Fs and a D but
who nonetheless had an understanding coach. "Son," he drawled, "I
think you're spending too much time on that one subject."
<p> My "one subject" is capital allocation,
and my grade for 1999 most assuredly is a D. What most hurt us during
the year was the inferior performance of Berkshire's equity portfolio
-- and responsibility for that portfolio, leaving aside the small
piece of it run by Lou Simpson of GEICO, is entirely mine. Several
of our largest investees badly lagged the market in 1999 because
they've had disappointing operating results. We still like these
businesses and are content to have major investments in them. But
their stumbles damaged our performance last year, and it's no sure
thing that they will quickly regain their stride.
<p> The fallout from our weak results
in 1999 was a more-than-commensurate drop in our stock price. In
1998, to go back a bit, the stock outperformed the business. Last
year the business did much better than the stock, a divergence that
has continued to the date of this letter. Over time, of course,
the performance of the stock <em>must </em>roughly match the performance
of the business.
<p> Despite our poor showing last year,
Charlie Munger, Berkshire's Vice Chairman and my partner, and I
expect that the gain in Berkshire's intrinsic value over the next
decade will modestly exceed the gain from owning the S&P. We
can't guarantee that, of course. But we are willing to back our
conviction with our own money. To repeat a fact you've heard before,
well over 99% of my net worth resides in Berkshire. Neither my wife
nor I have ever sold a share of Berkshire and -- unless our checks
stop clearing -- we have no intention of doing so.
<p> Please note that I spoke of hoping
to beat the S&P "modestly." For Berkshire, truly large superiorities
over that index are a thing of the past. They existed then because
we could buy both businesses and stocks at far more attractive prices
than we can now, and also because we then had a much smaller capital
base, a situation that allowed us to consider a much wider range
of investment opportunities than are available to us today.
<p> Our optimism about Berkshire's performance
is also tempered by the expectation -- indeed, in our minds, the
virtual certainty -- that the S&P will do far less well in the
next decade or two than it has done since 1982. A recent article
in Fortune expressed my views as to why this is inevitable, and
I'm enclosing a copy with this report.
<p> Our goal is to run our present businesses
well -- a task made easy because of the outstanding managers we
have in place -- and to acquire additional businesses having economic
characteristics and managers comparable to those we already own.
We made important progress in this respect during 1999 by acquiring
Jordan's Furniture and contracting to buy a major portion of MidAmerican
Energy. We will talk more about these companies later in the report
but let me emphasize one point here: We bought both for cash, issuing
no Berkshire shares. Deals of that kind aren't always possible,
but that is the method of acquisition that Charlie and I vastly
prefer.
<p>
</td>
</tr>
<tr>
<td>
<p><strong>Guides to Intrinsic Value</strong> <br wp="br1">
<br wp="br2">
<p><strong> </strong> I often talk in
these pages about intrinsic value, a key, though far from precise,
measurement we utilize in our acquisitions of businesses and common
stocks. (For an extensive discussion of this, and other investment
and accounting terms and concepts, please refer to our Owner's Manual
on pages 55 - 62. Intrinsic value is discussed on page 60.)
<p> In our last four reports, we have
furnished you a table that we regard as useful in estimating Berkshire's
intrinsic value. In the updated version of that table, which follows,
we trace two key components of value. The first column lists our
per-share ownership of investments (including cash and equivalents
but excluding assets held in our financial products operation) and
the second column shows our per-share earnings from Berkshire's
operating businesses before taxes and purchase-accounting adjustments
(discussed on page 61), but after all interest and corporate expenses.
The second column excludes <em>all</em> dividends, interest and
capital gains that we realized from the investments presented in
the first column. In effect, the columns show how Berkshire would
look if it were split into two parts, with one entity holding our
investments and the other operating all of our businesses and bearing
all corporate costs.
</td>
</tr>
</table>
<table width="90%" border=0 mm_noconvert="TRUE">
<tr>
<td valign="top" width="5%"> </td>
<td valign="top" width="48%"> </td>
<td valign="top" colspan="1"> </td>
<td valign="top" width="50%"><center>Pre-tax Earnings<br>
(Loss) Per Share</center></td>
</tr>
<tr>
<td valign="top" width="5%"></td>
<td valign="top" width="48%"></td>
<td valign="top" colspan="1"><center>Investments</center></td>
<td valign="top" width="50%"><center>With All Income from</center></td>
</tr>
<tr>
<td valign="bottom" width="5%"><u>Year</u></td>
<td valign="bottom" width="48%"> </td>
<td valign="bottom" colspan="1"><center><u>Per Share</u></center></td>
<td valign="bottom" width="50%"><center><u>Investments Excluded</u> </center>
</td>
</tr>
<tr>
<td valign="top" width="5%">1969 </td>
<td valign="top" width="48%">...........................................................................</td>
<td align="center"> $ 45</center></td>
<td valign="top" width="50%"><p align="center">$ 4.39
</td>
</tr>
<tr>
<td valign="top" width="5%">1979 </td>
<td valign="top" width="48%">...........................................................................</td>
<td valign="top" colspan="1">
<p align="center"> 577
</td>
<td valign="top" width="28%">
<p align="center"> 13.07
</td>
</tr>
<tr>
<td valign="top" width="5%">1989 </td>
<td valign="top" width="48%">...........................................................................</td>
<td valign="top" colspan="1">
<p align="center">7,200
</td>
<td valign="top" width="28%">
<p align="center">108.86
</td>
</tr>
<tr>
<td valign="top" width="5%">1999</td>
<td valign="top" width="48%">...........................................................................</td>
<td valign="top" colspan="1">
<div align="center">47,339 <br wp="br1">
</div>
</td>
<td valign="top" width="28%">
<div align="center">(458.55)</div>
</td>
</tr>
<tr>
<td valign="top" width="5%"></td>
<td valign="top" width="48%"></td>
<td valign="top" colspan="1"></td>
<td valign="top" width="50%"></td>
</tr>
</table>
<p> Here are the growth
rates of the two segments by decade: </p>
<table width="90%" mm_noconvert="TRUE">
<tr>
<td valign="top" width="20%"> </td>
<td valign="top" width="20%"> </td>
<td valign="top" width="2%"> </td>
<td valign="top" width="30%"><center>Pre-tax Earnings Per Share</center></td>
</tr>
<tr>
<td valign="top" width="20%"> </td>
<td valign="top" width="20%"> </td>
<td valign="top" width="2%"><center>Investments</center></td>
<td valign="top" width="30%"><center>With All Income from</center></td>
</tr>
<tr>
<td valign="top" width="20%"><u>Decade Ending</u></td>
<td valign="top" width="20%"> </td>
<td valign="top" width="2%"><center><u>Per Share</u></center></td>
<td valign="top" width="30%"><center><u>Investments Excluded</u></center></td>
</tr>
<tr>
<td valign="top" width="20%">1979 </td>
<td valign="top" width="20%">.............................................</td>
<td align="center" valign="top" width="2%"> 29.0%</td>
<td align="center" valign="top" width="30%">11.5%</td>
</tr>
<tr>
<td valign="top" width="20%">1989 </td>
<td valign="top" width="33%">.............................................</td>
<td align="center" valign="top" width="2%"> 28.7%</td>
<td align="center" valign="top" width="30%">23.6%</td>
</tr>
<tr>
<td valign="top" width="20%">1999 </td>
<td valign="top" width="20%">.............................................</td>
<p> </p>
</td>
<td align="center" valign="top" width="2%"> 20.7%</td>
<td align="center" valign="top" width="28%"> N.A.</td>
</tr>
<tr>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr>
<td valign="top" width="53%" colspan="2">Annual Growth Rate, 1969-1999 .................</td>
<td align="center" valign="top" width="15%"> 25.4%</td>
<td align="center" valign="top" width="15%"> N.A.</td>
</tr>
</table>
<p>
<table width="100%" border="0" mm_noconvert="TRUE">
<tr>
<td>
<p> In 1999, our per-share investments
changed very little, but our operating earnings, affected by negatives
that overwhelmed some strong positives, fell apart. Most of our
operating managers deserve a grade of A for delivering fine results
and for having widened the difference between the intrinsic value
of their businesses and the value at which these are carried on
our balance sheet. But, offsetting this, we had a huge -- and, I
believe, aberrational -- underwriting loss at General Re. Additionally,
GEICO's underwriting profit fell, as we had predicted it would.
GEICO's overall performance, though, was terrific, outstripping
my ambitious goals.
<p> We do not expect our underwriting
earnings to improve in any dramatic way this year. Though GEICO's
intrinsic value should grow by a highly satisfying amount, its underwriting
performance is almost certain to weaken. That's because auto insurers,
as a group, will do worse in 2000, and because we will materially
increase our marketing expenditures. At General Re, we are raising
rates and, if there is no mega-catastrophe in 2000, the company's
underwriting loss should fall considerably. It takes some time,
however, for the full effect of rate increases to kick in, and General
Re is therefore likely to have another unsatisfactory underwriting
year. <br wp="br1">
<br wp="br2">
<p> You should be aware that one item
regularly working to widen the amount by which intrinsic value exceeds
book value is the annual charge against income we take for amortization
of goodwill -- an amount now running about $500 million. This charge
reduces the amount of goodwill we show as an asset and likewise
the amount that is included in our book value. This is an accounting
matter having nothing to do with true economic goodwill, which increases
in most years. But even if economic goodwill were to remain constant,
the annual amortization charge would persistently widen the gap
between intrinsic value and book value.
<p> Though we can't give you a precise
figure for Berkshire's intrinsic value, or even an approximation,
Charlie and I can assure you that it far exceeds our $57.8 billion
book value. Businesses such as See's and Buffalo News are now worth
fifteen to twenty times the value at which they are carried on our
books. Our goal is to continually widen this spread at all subsidiaries.
<br wp="br1">
<br wp="br2">
<p><strong>A Managerial Story You Will Never Read Elsewhere</strong> <br wp="br1">
<br wp="br2">
<p> Berkshire's collection of managers
is unusual in several important ways. As one example, a very high percentage
of these men and women are independently wealthy, having made fortunes
in the businesses that they run. They work neither because they
need the money nor because they are contractually obligated to --
we have no contracts at Berkshire. Rather, they work long and hard
because they love their businesses. And I use the word "their" advisedly,
since these managers are truly in charge -- there are no show-and-tell
presentations in Omaha, no budgets to be approved by headquarters,
no dictums issued about capital expenditures. We simply ask our
managers to run their companies as if these are the sole asset of
their families and will remain so for the next century.
<p> Charlie and I try to behave with
our managers just as we attempt to behave with Berkshire's shareholders,
treating both groups as we would wish to be treated if our positions
were reversed. Though "working" means nothing to me financially,
I love doing it at Berkshire for some simple reasons: It gives me
a sense of achievement, a freedom to act as I see fit and an opportunity
to interact daily with people I like and trust. Why should our managers
-- accomplished artists at what they do -- see things differently?
<p> In their relations with Berkshire,
our managers often appear to be hewing to President Kennedy's charge,
"Ask not what your country can do for you; ask what you can do for
your country." Here's a remarkable story from last year: It's about
R. C. Willey, Utah's dominant home furnishing business, which Berkshire
purchased from Bill Child and his family in 1995. Bill and most
of his managers are Mormons, and for this reason R. C. Willey's
stores have never operated on Sunday. This is a difficult way to
do business: Sunday is the favorite shopping day for many customers.
Bill, nonetheless, stuck to his principles -- and while doing so
built his business from $250,000 of annual sales in 1954, when he
took over, to $342 million in 1999.
<p> Bill felt that R. C. Willey could
operate successfully in markets outside of Utah and in 1997 suggested
that we open a store in Boise. I was highly skeptical about taking
a no-Sunday policy into a new territory where we would be up against
entrenched rivals open seven days a week. Nevertheless, this was
Bill's business to run. So, despite my reservations, I told him
to follow both his business judgment and his religious convictions.
<p> Bill then insisted on a truly extraordinary
proposition: He would personally buy the land and build the store
-- for about $9 million as it turned out -- and would sell it to
us at his cost if it proved to be successful. On the other hand,
if sales fell short of his expectations, we could exit the business
without paying Bill a cent. This outcome, of course, would leave
him with a huge investment in an empty building. I told him that
I appreciated his offer but felt that if Berkshire was going to
get the upside it should also take the downside. Bill said nothing
doing: If there was to be failure because of his religious beliefs,
he wanted to take the blow personally.
<p> The store opened last August and
immediately became a huge success. Bill thereupon turned the property
over to us -- including some extra land that had appreciated significantly
-- and we wrote him a check for his cost. And get this: <em>Bill
refused to take a dime of interest on the capital he had tied up
over the two years</em>. <br wp="br1">
<br wp="br2">
<p> If a manager has behaved similarly
at some other public corporation, I haven't heard about it. You
can understand why the opportunity to partner with people like Bill
Child causes me to tap dance to work every morning.
</td>
</tr>
<tr>
<td>
<center>
<p> </p>
* * * * * * * * * * * *
<p> </p>
</center>
</td>
</tr>
<tr>
<td>
<p> A footnote: After our "soft" opening
in August, we had a grand opening of the Boise store about a month
later. Naturally, I went there to cut the ribbon (your Chairman,
I wish to emphasize, is good for <em>something</em>). In my talk
I told the crowd how sales had far exceeded expectations, making
us, by a considerable margin, the largest home furnishings store
in Idaho. Then, as the speech progressed, my memory miraculously
began to improve. By the end of my talk, it all had come back to
me: Opening a store in Boise had been <em>my</em> idea. <br wp="br1">
<br wp="br2">
<p><strong>The Economics of Property/Casualty Insurance</strong> <br wp="br1">
<br wp="br2">
<p> Our main business -- though
we have others of great importance -- is insurance. To understand
Berkshire, therefore, it is necessary that you understand how to
evaluate an insurance company. The key determinants are: (1) the
amount of float that the business generates; (2) its cost; and (3)
most critical of all, the long-term outlook for both of these factors.
<p> To begin with, float is money we
hold but don't own. In an insurance operation, float arises because
premiums are received before losses are paid, an interval that sometimes
extends over many years. During that time, the insurer invests the
money. This pleasant activity typically carries with it a downside:
The premiums that an insurer takes in usually do not cover the losses
and expenses it eventually must pay. That leaves it running an "underwriting
loss," which is the cost of float. An insurance business has value
if its cost of float over time is less than the cost the company
would otherwise incur to obtain funds. But the business is a lemon
if its cost of float is higher than market rates for money.
<p> A caution is appropriate here: Because
loss costs must be estimated, insurers have enormous latitude in
figuring their underwriting results, and that makes it very difficult
for investors to calculate a company's true cost of float. Errors
of estimation, usually innocent but sometimes not, can be huge.
The consequences of these miscalculations flow directly into earnings.
An experienced observer can usually detect large-scale errors in
reserving, but the general public can typically do no more than
accept what's presented, and at times I have been amazed by the
numbers that big-name auditors have implicitly blessed. In 1999
a number of insurers announced reserve adjustments that made a mockery
of the "earnings" that investors had relied on earlier when making
their buy and sell decisions. At Berkshire, we strive to be conservative
and consistent in our reserving. Even so, we warn you that an unpleasant
surprise is always possible.
<p> The table that follows shows (at
intervals) the float generated by the various segments of Berkshire's
insurance operations since we entered the business 33 years ago
upon acquiring National Indemnity Company (whose traditional lines
are included in the segment "Other Primary"). For the table we have
calculated our float -- which we generate in large amounts relative
to our premium volume -- by adding net loss reserves, loss adjustment
reserves, funds held under reinsurance assumed and unearned premium
reserves, and then subtracting agents balances, prepaid acquisition
costs, prepaid taxes and deferred charges applicable to assumed
reinsurance. (Got that?)
</td>
</tr>
</table>
<p>
<table width="80%" mm_noconvert="TRUE">
<tr>
<td colspan="6" align="center" valign="top" width="14%" height="34">Yearend
Float (in $ millions)
</td>
</tr>
<tr>
<td align="center" valign="bottom"> <br wp="br1">
<br wp="br2">
<u>Year</u></td>
<td align="center" valign="bottom" width="17%"> <br wp="br1">
<br wp="br2">
<u>GEICO</u></td>
<td align="center" valign="bottom" width="19%"> <br wp="br1">
<br wp="br2">
<u>General Re</u></td>
<td align="center" valign="bottom" width="16%">Other
<br><u>Reinsurance</u>
</td>
<td align="center" valign="bottom" width="17%">Other
<br><u>Primary</u>
</td>
<td align="center" valign="bottom" width="14%"> <br wp="br1">
<br wp="br2">
<u>Total</u></td>
</tr>
<tr>
<td align="center" valign="top">1967</td>
<td align="center" valign="top"></td>
<td align="center" valign="top"></td>
<td align="center" valign="top"></td>
<td align="center" valign="top">20</td>
<td align="center" valign="top"> 20</td>
</tr>
<tr>
<td align="center" valign="top">1977</td>
<td align="center" valign="top"></td>
<td align="center" valign="top"></td>
<td align="center" valign="top">40</td>
<td align="center" valign="top">131</td>
<td align="center" valign="top"> 171</td>
</tr>
<tr>
<td align="center" valign="top">1987</td>
<td align="center" valign="top"></td>
<td align="center" valign="top"></td>
<td align="center" valign="top">701</td>
<td align="center" valign="top">807</td>
<td align="center" valign="top"> 1,508</td>
</tr>
<tr>
<td align="center" valign="top">1997</td>
<td align="center" valign="top">2,917</td>
<td align="center" valign="top"></td>
<td align="center" valign="top">4,014 </td>
<td align="center" valign="top">455</td>
<td align="center" valign="top"> 7,386</td>
</tr>
<tr>
<td align="center" valign="top"> </td>
<td align="center" valign="top"> </td>
<td align="center" valign="top"> </td>
<td align="center" valign="top"> </td>
<td align="center" valign="top"> </td>
<td align="center" valign="top"> </td>
</tr>
<tr>
<td align="center" valign="top">1998</td>
<td align="center" valign="top">3,125</td>
<td align="center" valign="top">14,909</td>
<td align="center" valign="top">4,305 </td>
<td align="center" valign="top">415</td>
<td align="center" valign="top">22,754</td>
</tr>
<tr>
<td align="center" valign="top">1999</td>
<td align="center" valign="top">3,444</td>
<td align="center" valign="top">15,166</td>
<td align="center" valign="top">6,285 </td>
<td align="center" valign="top">403</td>
<td align="center" valign="top">25,298</td>
</tr>
</table>
<p>
<table width="100%" border="0" mm_noconvert="TRUE">
<tr>
<td>
<p> Growth of float is important -- but
its cost is what's vital. Over the years we have usually recorded
only a small underwriting loss -- which means our cost of float
was correspondingly low -- or actually had an underwriting profit,
which means we were being <em>paid</em> for holding other people's
money. Indeed, our cumulative result through 1998 was an underwriting
profit. In 1999, however, we incurred a $1.4 billion underwriting
loss that left us with float cost of 5.8%. One mildly mitigating
factor: We enthusiastically welcomed $400 million of the loss because
it stems from business that will deliver us exceptional float over
the next decade. The balance of the loss, however, was decidedly
unwelcome, and our overall result must be judged extremely poor.
Absent a mega-catastrophe, we expect float cost to fall in 2000,
but any decline will be tempered by our aggressive plans for GEICO,
which we will discuss later.
<p> There are a number of people
who deserve credit for manufacturing so much "no-cost" float over
the years. Foremost is Ajit Jain. It's simply impossible to overstate
Ajit's value to Berkshire: He has from scratch built an outstanding
reinsurance business, which during his tenure has earned an underwriting
profit and now holds $6.3 billion of float.
<p> In Ajit, we have an underwriter
equipped with the intelligence to properly rate most risks; the
realism to forget about those he can't evaluate; the courage to
write huge policies when the premium is appropriate; and the discipline
to reject even the smallest risk when the premium is inadequate.
It is rare to find a person possessing any one of these talents.
For one person to have them all is remarkable.
<p> Since Ajit specializes in super-cat
reinsurance, a line in which losses are infrequent but extremely
large when they occur, his business is sure to be far more volatile
than most insurance operations. To date, we have benefitted from
good luck on this volatile book. Even so, Ajit's achievements are
truly extraordinary.
<p> In a smaller but nevertheless important
way, our "other primary" insurance operation has also added to Berkshire's
intrinsic value. This collection of insurers has delivered a $192
million underwriting profit over the past five years while supplying
us with the float shown in the table. In the insurance world, results
like this are uncommon, and for their feat we thank Rod Eldred,
Brad Kinstler, John Kizer, Don Towle and Don Wurster.
<p> As I mentioned earlier, the
General Re operation had an exceptionally poor underwriting year
in 1999 (though investment income left the company well in the black).
Our business was extremely underpriced, both domestically and internationally,
a condition that is improving but not yet corrected. Over time,
however, the company should develop a growing amount of low-cost
float. At both General Re and its Cologne subsidiary, incentive
compensation plans are now directly tied to the variables of float
growth and cost of float, the same variables that determine value
for owners.
<p> Even though a reinsurer may
have a tightly focused and rational compensation system, it cannot
count on every year coming up roses. Reinsurance is a highly volatile
business, and neither General Re nor Ajit's operation is immune
to bad pricing behavior in the industry. But General Re has the
distribution, the underwriting skills, the culture, and -- with
Berkshire's backing -- the financial clout to become the world's
most profitable reinsurance company. Getting there will take time,
energy and discipline, but we have no doubt that Ron Ferguson and
his crew can make it happen. <br wp="br1">
<br wp="br2">
<p><strong>GEICO (1-800-847-7536 or GEICO.com)</strong> <br wp="br1">
<br wp="br2">
<p> GEICO made exceptional progress
in 1999. The reasons are simple: We have a terrific business idea
being implemented by an extraordinary manager, Tony Nicely. When
Berkshire purchased GEICO at the beginning of 1996, we handed the
keys to Tony and asked him to run the operation exactly as if he
owned 100% of it. He has done the rest. Take a look at his scorecard:
<br>
</td>
</tr>
</table>
<table align="center" width="71%" mm_noconvert="TRUE">
<tr>
<td valign="top" width="14%"></td>
<td valign="top" width="34%"></td>
<td valign="top" width="24%">
<center>
New Auto
</center>
</td>
<td valign="top" width="26%">
<center>
Auto Policies
</center>
</td>
</tr>
<tr>
<td valign="top"><u>Years</u></td>
<td valign="top"></td>
<td valign="top">
<div align="center"><u> Policies</u><sup>(1)(2)</sup></div>
</td>
<td valign="top">
<div align="center"><u> In-Force</u><sup>(1)</sup></div>
</td>
</tr>
<tr>
<td colspan="2" valign="top">1993</td>
<td align="center" valign="top"> 346,882</td>
<td align="center" valign="top">2,011,055</td>
</tr>
<tr>
<td colspan="2" valign="top">1994</td>
<td align="center" valign="top"> 384,217</td>
<td align="center" valign="top">2,147,549</td>
</tr>
<tr>
<td colspan="2" valign="top">1995</td>
<td align="center" valign="top"> 443,539</td>
<td align="center" valign="top">2,310,037</td>
</tr>
<tr>
<td colspan="2" valign="top">1996</td>
<td align="center" valign="top"> 592,300</td>
<td align="center" valign="top">2,543,699</td>
</tr>
<tr>
<td colspan="2" valign="top">1997</td>
<td align="center" valign="top"> 868,430</td>
<td align="center" valign="top">2,949,439</td>
</tr>
<tr>
<td colspan="2" valign="top">1998</td>
<td align="center" valign="top">1,249,875</td>
<td align="center" valign="top">3,562,644</td>
</tr>
<tr>
<td colspan="2" valign="top">1999</td>
<td align="center" valign="top">1,648,095</td>
<td align="center" valign="top">4,328,900 </td>
</tr>
</table>
<p><sup>(1) </sup> "Voluntary" only; excludes assigned risks and the like.
<br><sup> (2)</sup> Revised to exclude policies moved from one GEICO company
to another.
<p>
<table width="100%" border="0" mm_noconvert="TRUE">
<tr>
<td>
<p> In 1995, GEICO spent $33 million
on marketing and had 652 telephone counselors. Last year the company
spent $242 million, and the counselor count grew to 2,631. And we
are just starting: The pace will step up materially in 2000. Indeed,
we would happily commit $1 billion annually to marketing if we knew
we could handle the business smoothly and if we expected the last
dollar spent to produce new business at an attractive cost.
<p> Currently two trends are affecting
acquisition costs. The bad news is that it has become more expensive
to develop inquiries. Media rates have risen, and we are also seeing
diminishing returns -- that is, as both we and our competitors step
up advertising, inquiries per ad fall for all of us. These negatives
are partly offset, however, by the fact that our closure ratio --
the percentage of inquiries converted to sales -- has steadily improved.
Overall, we believe that our cost of new business, though definitely
rising, is well below that of the industry. Of even greater importance,
our operating costs for renewal business are the lowest among broad-based
national auto insurers. Both of these major competitive advantages
are sustainable. Others may copy our model, but
they will be unable to replicate our economics.
<p> The table above makes it appear
that GEICO's retention of policyholders is falling, but for two
reasons appearances are in this case deceiving. First, in the last
few years our business mix has moved away from "preferred" policyholders,
for whom industrywide retention rates are high, toward "standard"
and "non-standard" policyholders for whom retention rates are much
lower. (Despite the nomenclature, the three classes have similar
profit prospects.) Second, retention rates for relatively new policyholders
are always lower than those for long-time customers -- and because
of our accelerated growth, our policyholder ranks now include an
increased proportion of new customers. Adjusted for these two factors,
our retention rate has changed hardly at all.
<p> We told you last year that underwriting
margins for both GEICO and the industry would fall in 1999, and
they did. We make a similar prediction for 2000. A few years ago
margins got too wide, having enjoyed the effects of an unusual and
unexpected decrease in the frequency and severity of accidents.
The industry responded by reducing rates -- but now is having to
contend with an increase in loss costs. We would not be surprised
to see the margins of auto insurers deteriorate by around three
percentage points in 2000.
<p> Two negatives besides worsening
frequency and severity will hurt the industry this year. First,
rate increases go into effect only slowly, both because of regulatory
delay and because insurance contracts must run their course before
new rates can be put in. Second, reported earnings of many auto
insurers have benefitted in the last few years from reserve releases,
made possible because the companies overestimated their loss costs
in still-earlier years. This reservoir of redundant reserves has
now largely dried up, and future boosts to earnings from this source
will be minor at best.
<p> In compensating its associates --
from Tony on down -- GEICO continues to use two variables, and only
two, in determining what bonuses and profit-sharing contributions
will be: 1) its percentage growth in policyholders and 2) the earnings
of its "seasoned" business, meaning policies that have been with
us for more than a year. We did outstandingly well on both fronts
during 1999 and therefore made a profit-sharing payment of 28.4%
of salary (in total, $113.3 million) to the great majority of our
associates. Tony and I love writing those checks.
<p> At Berkshire, we want to have compensation
policies that are both easy to understand and in sync with what
we wish our associates to accomplish. Writing new business is expensive
(and, as mentioned, getting more expensive). If we were to include
those costs in our calculation of bonuses -- as managements did
before our arrival at GEICO -- we would be penalizing our associates
for garnering new policies, even though these are very much in Berkshire's
interest. So, in effect, we say to our associates that we will foot
the bill for new business. Indeed, because percentage growth in
policyholders is part of our compensation scheme, we <em>reward</em>
our associates for producing this initially-unprofitable business.
And then we reward them additionally for holding down costs on our
seasoned business.
<p> Despite the extensive advertising
we do, our best source of new business is word-of-mouth recommendations
from existing policyholders, who on the whole are pleased with our
prices and service. An article published last year by <em>Kiplinger's
Personal Finance</em> <em>Magazine</em> gives a good picture of
where we stand in customer satisfaction: The magazine's survey of
20 state insurance departments showed that GEICO's complaint ratio
was well below the ratio for most of its major competitors.
<p> Our strong referral business means
that we probably could maintain our policy count by spending as
little as $50 million annually on advertising. That's a guess, of
course, and we will never know whether it is accurate because Tony's
foot is going to stay on the advertising pedal (and my foot will
be on his). Nevertheless, I want to emphasize that a major percentage
of the $300-$350 million we will spend in 2000 on advertising, as
well as large additional costs we will incur for sales counselors,
communications and facilities, are optional outlays we choose to
make so that we can both achieve significant growth and extend and
solidify the promise of the GEICO brand in the minds of Americans.
<p> Personally, I think these expenditures
are the best investment Berkshire can make. Through its advertising,
GEICO is acquiring a direct relationship with a huge number of households
that, on average, will send us $1,100 year after year. That makes
us -- among all companies, selling whatever kind of product -- one
of the country's leading direct merchandisers. Also, as we build
our long-term relationships with more and more families, cash is
pouring in rather than going out (no Internet economics here). Last
year, as GEICO increased its customer base by 766,256, it gained
$590 million of cash from operating earnings and the increase in
float.
<p> In the past three years, we have
increased our market share in personal auto insurance from 2.7%
to 4.1%. But we rightfully belong in many more households -- maybe
even yours. Give us a call and find out. About 40% of those people
checking our rates find that they can save money by doing business
with us. The proportion is not 100% because insurers differ in their
underwriting judgments, with some giving more credit than we do
to drivers who live in certain geographic areas or work at certain
occupations. Our closure rate indicates, however, that we more frequently
offer the low price than does any other national carrier selling
insurance to all comers. Furthermore, in 40 states we can offer
a special discount -- usually 8% -- to our shareholders. Just be
sure to identify yourself as a Berkshire owner so that our sales
counselor can make the appropriate adjustment.
<p>
<center>
* * * * * * * * * * * *
</center>
<br wp="br1">
<br wp="br2">
<p> It's with sadness that I report
to you that Lorimer Davidson, GEICO's former Chairman, died last
November, a few days after his 97<sup>th</sup> birthday. For GEICO,
Davy was a business giant who moved the company up to the big leagues.
For me, he was a friend, teacher and hero. I have told you of his
lifelong kindnesses to me in past reports. Clearly, my life would
have developed far differently had he not been a part of it. Tony,
Lou Simpson and I visited Davy in August and marveled at his mental
alertness -- particularly in all matters regarding GEICO. He was
the company's number one supporter right up to the end, and we will
forever miss him. <br wp="br1">
<br wp="br2">
<p><strong>Aviation Services</strong> <br wp="br1">
<br wp="br2">
<p> Our two aviation services companies
-- FlightSafety International ("FSI") and Executive Jet Aviation
("EJA") -- are both runaway leaders in their field. EJA, which sells
and manages the fractional ownership of jet aircraft, through its
NetJets® program, is larger than its next two competitors combined.
FSI trains pilots (as well as other transportation professionals)
and is five times or so the size of its nearest competitor.
<p> Another common characteristic of
the companies is that they are still managed by their founding entrepreneurs.
Al Ueltschi started FSI in 1951 with $10,000, and Rich Santulli
invented the fractional-ownership industry in 1986. These men are
both remarkable managers who have no financial need to work but
thrive on helping their companies grow and excel.
<p> Though these two businesses have
leadership positions that are similar, they differ in their economic
characteristics. FSI must lay out huge amounts of capital. A single
flight simulator can cost as much as $15 million -- and we have
222. Only one person at a time, furthermore, can be trained in a
simulator, which means that the capital investment per dollar of
revenue at FSI is exceptionally high. Operating margins must therefore
also be high, if we are to earn a reasonable return on capital.
Last year we made capital expenditures of $215 million at FSI and
FlightSafety Boeing, its 50%-owned affiliate.
<p> At EJA, in contrast, the customer
owns the equipment, though we, of course, must invest in a core
fleet of our own planes to ensure outstanding service. For example,
the Sunday after Thanksgiving, EJA's busiest day of the year, strains
our resources since fractions of 169 planes are owned by 1,412 customers,
many of whom are bent on flying home between 3 and 6 p.m. On that
day, and certain others, we need a supply of company-owned aircraft
to make sure all parties get where they want, when they want.
<p> Still, most of the planes
we fly are owned by customers, which means that modest pre-tax margins
in this business can produce good returns on equity. Currently,
our customers own planes worth over $2 billion, and in addition
we have $4.2 billion of planes on order. Indeed, the limiting factor
in our business right now is the availability of planes. We now
are taking delivery of about 8% of all business jets manufactured
in the world, and we wish we could get a bigger share than that.
Though EJA was supply-constrained in 1999, its recurring revenues
-- monthly management fees plus hourly flight fees -- increased
46%.
<p> The fractional-ownership industry
is still in its infancy. EJA is now building critical mass in Europe,
and over time we will expand around the world. Doing that will be
expensive -- very expensive -- but we will spend what it takes.
Scale is vital to both us and our customers: The company with the
most planes in the air worldwide will be able to offer its customers
the best service. "Buy a fraction, get a fleet" has real meaning
at EJA.
<p> EJA enjoys another important advantage
in that its two largest competitors are both subsidiaries of aircraft
manufacturers and sell only the aircraft their parents make. Though
these are fine planes, these competitors are severely limited in
the cabin styles and mission capabilities they can offer. EJA, in
contrast, offers a wide array of planes from five suppliers. Consequently,
we can give the customer whatever<em> he</em> needs to buy -- rather
than his getting what the competitor's parent needs to sell.
<p> Last year in this report, I described
my family's delight with the one-quarter (200 flight hours annually)
of a Hawker 1000 that we had owned since 1995. I got so pumped up
by my own prose that shortly thereafter I signed up for one-sixteenth
of a Cessna V Ultra as well. Now my annual outlays at EJA and Borsheim's,
combined, total ten times my salary. Think of this as a rough guideline
for your own expenditures with us.
<p> During the past year, two of Berkshire's
outside directors have also signed on with EJA. (Maybe we're paying
them too much.) You should be aware that they and I are charged
exactly the same price for planes and service as is any other customer:
EJA follows a "most favored nations" policy, with no one getting
a special deal.
<p> And now, brace yourself. Last year,
EJA passed the ultimate test: <em>Charlie signed up.</em> No other
endorsement could speak more eloquently to the value of the EJA
service. Give us a call at 1-800-848-6436 and ask for our "white
paper" on fractional ownership. <br wp="br1">
<br wp="br2">
<p><strong>Acquisitions of 1999</strong> <br wp="br1">
<br wp="br2">
<p> At both GEICO and Executive Jet,
our best source of new customers is the happy ones we already have.
Indeed, about 65% of our new owners of aircraft come as referrals
from current owners who have fallen in love with the service.
<p> Our acquisitions usually develop
in the same way. At other companies, executives may devote themselves
to pursuing acquisition possibilities with investment bankers, utilizing
an auction process that has become standardized. In this exercise
the bankers prepare a "book" that makes me think of the Superman
comics of my youth. In the Wall Street version, a formerly mild-mannered
company emerges from the investment banker's phone booth able to
leap over competitors in a single bound and with earnings moving
faster than a speeding bullet. Titillated by the book's description
of the acquiree's powers, acquisition-hungry CEOs -- Lois Lanes
all, beneath their cool exteriors -- promptly swoon.
<p> What's particularly entertaining
in these books is the precision with which earnings are projected
for many years ahead. If you ask the author-banker, however, what
his own firm will earn <em>next month</em>, he will go into a protective
crouch and tell you that business and markets are far too uncertain
for him to venture a forecast.
<p> Here's one story I can't resist
relating: In 1985, a major investment banking house undertook to
sell Scott Fetzer, offering it widely -- but with no success. Upon
reading of this strikeout, I wrote Ralph Schey, then and now Scott
Fetzer's CEO, expressing an interest in buying the business. I had
never met Ralph, but within a week we had a deal. Unfortunately,
Scott Fetzer's letter of engagement with the banking firm provided
it a $2.5 million fee upon sale, even if it had nothing to do with
finding the buyer. I guess the lead banker felt he should do something
for his payment, so he graciously offered us a copy of the book
on Scott Fetzer that his firm had prepared. With his customary tact,
Charlie responded: "I'll pay $2.5 million <em>not</em> to read it."
<p> At Berkshire, our carefully-crafted
acquisition strategy is simply to wait for the phone to ring. Happily,
it sometimes does so, usually because a manager who sold to us earlier
has recommended to a friend that he think about following suit.
<br wp="br1">
<br wp="br2">
<p> Which brings us to the furniture
business. Two years ago I recounted how the acquisition of Nebraska
Furniture Mart in 1983 and my subsequent association with the Blumkin
family led to follow-on transactions with R. C. Willey (1995) and
Star Furniture (1997). For me, these relationships have all been
terrific. Not only did Berkshire acquire three outstanding retailers;
these deals also allowed me to become friends with some of the finest
people you will ever meet.
<p> Naturally, I have persistently asked
the Blumkins, Bill Child and Melvyn Wolff whether there are any
more out there like you. Their invariable answer was the Tatelman
brothers of New England and their remarkable furniture business,
Jordan's.
<p> I met Barry and Eliot Tatelman last
year and we soon signed an agreement for Berkshire to acquire the
company. Like our three previous furniture acquisitions, this business
had long been in the family -- in this case since 1927, when Barry
and Eliot's grandfather began operations in a Boston suburb. Under
the brothers' management, Jordan's has grown ever more dominant
in its region, becoming the largest furniture retailer in New Hampshire
as well as Massachusetts.
<p> The Tatelmans don't just sell furniture
or manage stores. They also present customers with a dazzling entertainment
experience called "shoppertainment." A family visiting a store can
have a terrific time, while concurrently viewing an extraordinary
selection of merchandise. The business results are also extraordinary:
Jordan's has the highest sales per square foot of any major furniture
operation in the country. I urge you to visit one of their stores
if you are in the Boston area -- particularly the one at Natick,
which is Jordan's newest. Bring money.
<p> Barry and Eliot are classy people
-- just like their counterparts at Berkshire's three other furniture
operations. When they sold to us, they elected to give each of their
employees at least 50¢ for every hour that he or she had worked for
Jordan's. This payment added up to $9 million, which came from the
Tatelmans' own pockets, not from Berkshire's. And Barry and Eliot
were thrilled to write the checks.
<p> Each of our furniture operations
is number one in its territory. We now sell more furniture than
anyone else in Massachusetts, New Hampshire, Texas, Nebraska, Utah
and Idaho. Last year Star's Melvyn Wolff and his sister, Shirley
Toomim, scored two major successes: a move into San Antonio and
a significant enlargement of Star's store in Austin.
<p> There's no operation in the furniture
retailing business remotely like the one assembled by Berkshire.
It's fun for me and profitable for you. W. C. Fields once said,
"It was a woman who drove me to drink, but unfortunately I never
had the chance to thank her." I don't want to make that mistake.
My thanks go to Louie, Ron and Irv Blumkin for getting me started
in the furniture business and for unerringly guiding me as we have
assembled the group we now have. <br wp="br1">
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<p> Now, for our second acquisition
deal: It came to us through my good friend, Walter Scott, Jr., chairman
of Level 3 Communications and a director of Berkshire. Walter has
many other business connections as well, and one of them is with
MidAmerican Energy, a utility company in which he has substantial
holdings and on whose board he sits. At a conference in California
that we both attended last September, Walter casually asked me whether
Berkshire might be interested in making a large investment in MidAmerican,
and from the start the idea of being in partnership with Walter
struck me as a good one. Upon returning to Omaha, I read some of
MidAmerican's public reports and had two short meetings with Walter
and David Sokol, MidAmerican's talented and entrepreneurial CEO.
I then said that, at an appropriate price, we would indeed like
to make a deal.
<p> Acquisitions in the electric utility
industry are complicated by a variety of regulations including the
Public Utility Holding Company Act of 1935. Therefore, we had to
structure a transaction that would avoid Berkshire gaining voting
control. Instead we are purchasing an 11% fixed-income security,
along with a combination of common stock and exchangeable preferred
that will give Berkshire just under 10% of the voting power of MidAmerican
but about 76% of the equity interest. All told, our investment will
be about $2 billion.
<p> Walter characteristically backed