BERKSHIRE HATHAWAY INC. 1995 ANNUAL REPORT TABLE OF CONTENTS
*Copyright 1996 By Warren E. Buffett
All Rights Reserved
Berkshire Hathaway Inc. is a holding company owning subsidiaries engaged in a number
of diverse business activities. The most important of these is the property and casualty insurance
business conducted on both a direct and reinsurance basis through a number of subsidiaries
collectively referred to in this report as the Berkshire Hathaway Insurance Group. On January
2, 1996, a subsidiary of the Company acquired all the outstanding shares of GEICO
Corporation not then held by Berkshire subsidiaries. Accordingly, GEICO Corporation is now
a wholly owned subsidiary of Berkshire Hathaway Inc. and henceforth will be included in the
Berkshire Hathaway Insurance Group.
Investment portfolios of insurance subsidiaries include meaningful equity ownership
percentages of other publicly traded companies. Such investments at the end of 1995 include
approximately 10% of the outstanding capital stock of American Express Company, approximately
13% of the capital stock of Capital Cities/ABC, Inc., approximately 7% of the capital stock of
Federal Home Loan Mortgage Corporation ("Freddie Mac"), approximately 11% of the capital
stock of The Gillette Company, approximately 8% of the capital stock of The Coca-Cola
Company, approximately 16% of the capital stock of The Washington Post Company,
approximately 14% of the common stock of Wells Fargo & Company, and common and
convertible preferred stock of Salomon Inc having approximately 18% of the total voting power
of that company. Much information about these publicly-owned companies is available, including
information released from time to time by the companies themselves.
Additionally, Berkshire Hathaway Inc. publishes the Buffalo News, a daily and Sunday
newspaper in Western New York. Other business activities conducted by non-insurance
subsidiaries include publication and distribution of encyclopedias and related educational and
instructional material (World Book and Childcraft products), manufacture and marketing of home
cleaning systems and related accessories (sold principally under the Kirby name), manufacture
and sale of boxed chocolates and other confectionery products (See's Candies), retailing of home
furnishings (Nebraska Furniture Mart and R.C. Willey Home Furnishings), manufacture and
distribution of uniforms (Fechheimer Brothers Company), manufacture, import and distribution
of footwear (H.H. Brown Shoe Company, Lowell Shoe, Inc. and Dexter Shoe Company),
retailing of fine jewelry (Borsheim's and Helzberg's Diamond Shops) and manufacture and
distribution of air compressors, air tools and painting systems (Campbell Hausfeld products).
Berkshire also owns a number of other businesses engaged in a variety of activities, as
identified in this report.
Operating decisions for the various Berkshire businesses are made by managers of the
business units. Investment decisions and all other capital allocation decisions are made for
Berkshire and its subsidiaries by Warren E. Buffett, in consultation with Charles T. Munger.
Mr. Buffett is Chairman and Mr. Munger is Vice Chairman of Berkshire's Board of
Directors.
Certain OWNER-RELATED BUSINESS PRINCIPLES were included in the Chairman's letter* to Shareholders
of Berkshire Hathaway Inc. in the 1983 Annual Report. Because the material remains topical, it is reproduced on this and the
following page.
With so many new shareholders, it's appropriate to summarize the major business principles we follow that pertain to the
manager-owner relationship:
o Although our form is corporate, our attitude is partnership. Charlie Munger and I think of our shareholders as owner-
partners, and of ourselves as managing partners. (Because of the size of our shareholdings we also, are, for better or worse,
controlling partners.) We do not view the company itself as the ultimate owner of our business assets but, instead, view the
company as a conduit through which our shareholders own the assets.
o In line with this owner-orientation, our directors are major shareholders of Berkshire Hathaway. In the case of at least
four, over 50% of family net worth is represented by holdings of Berkshire. We eat our own cooking.
o Our long-term economic goal (subject to some qualifications mentioned later) is to maximize the average annual rate of
gain in intrinsic business value on a per-share basis. We do not measure the economic significance or performance of Berkshire by
its size; we measure by per-share progress. We are certain that the rate of per-share progress will diminish in the future a greatly
enlarged capital base will see to that. But we will be disappointed if our rate does not exceed that of the average large American
corporation.
o Our preference would be to reach this goal by directly owning a diversified group of businesses that generate cash and
consistently earn above-average returns on capital. Our second choice is to own parts of similar businesses, attained primarily
through purchases of marketable common stocks by our insurance subsidiaries. The price and availability of businesses and the need
for insurance capital determine any given year's capital allocation.
o Because of this two-pronged approach to business ownership and because of the limitations of conventional accounting,
consolidated reported earnings may reveal relatively little about our true economic performance. Charlie and I, both as owners and
managers, virtually ignore such consolidated numbers. However, we will also report to you the earnings of each major business we
control, numbers we consider of great importance. These figures, along with other information we will supply about the individual
businesses, should generally aid you in making judgments about them.
o Accounting consequences do not influence our operating or capital-allocation decisions. When acquisition costs are similar,
we much prefer to purchase $2 of earnings that is not reportable by us under standard accounting principles than to purchase $1
of earnings that is reportable. This is precisely the choice that often faces us since entire businesses (whose earnings will be fully
reportable) frequently sell for double the pro-rata price of small portions (whose earnings will be largely unreportable). In aggregate
and over time, we expect the unreported earnings to be fully reflected in our intrinsic business value through capital gains.
o We rarely use much debt and, when we do, we attempt to structure it on a long-term fixed-rate basis. We will reject
interesting opportunities rather than over-leverage our balance sheet. This conservatism has penalized our results but it is the only
behavior that leaves us comfortable, considering our fiduciary obligations to policyholders, depositors, lenders and the many equity
holders who have committed unusually large portions of their net worth to our care. (As one of the Indianapolis "500" winners said:
"To finish first, you must first finish.")
*Copyright 1984 by Warren E. Buffett
All Rights Reserved
o A managerial "wish list" will not be filled at shareholder expense. We will not diversify by purchasing entire businesses
at control prices that ignore long-term economic consequences to our shareholders. We will only do with your money what we would
do with our own, weighing fully the values you can obtain by diversifying your own portfolios through direct purchases in the stock
market.
o We feel noble intentions should be checked periodically against results. We test the wisdom of retaining earnings by
assessing whether retention, over time, delivers shareholders at least $1 of market value for each $1 retained. To date, this test has
been met. We will continue to apply it on a five-year rolling basis. As our net worth grows, it is more difficult to use retained
earnings wisely.
o We will issue common stock only when we receive as much in business value as we give. This rule applies to all forms
of issuance not only mergers or public stock offerings, but stock-for-debt swaps, stock options, and convertible securities as well.
We will not sell small portions of your company and that is what the issuance of shares amounts to on a basis inconsistent
with the value of the entire enterprise.
o You should be fully aware of one attitude Charlie and I share that hurts our financial performance: regardless of price,
we have no interest at all in selling any good businesses that Berkshire owns, and are very reluctant to sell sub-par businesses as
long as we expect them to generate at least some cash and as long as we feel good about their managers and labor relations. We
hope not to repeat the capital-allocation mistakes that led us into such sub-par businesses. And we react with great caution to
suggestions that our poor businesses can be restored to satisfactory profitability by major capital expenditures. (The projections will
be dazzling the advocates will be sincere but, in the end, major additional investment in a terrible industry usually is about as
rewarding as struggling in quicksand.) Nevertheless, gin rummy managerial behavior (discard your least promising business at
each turn) is not our style. We would rather have our overall results penalized a bit than engage in it.
o We will be candid in our reporting to you, emphasizing the pluses and minuses important in appraising business value.
Our guideline is to tell you the business facts that we would want to know if our positions were reversed. We owe you no less.
Moreover, as a company with a major communications business, it would be inexcusable for us to apply lesser standards of accuracy,
balance and incisiveness when reporting on ourselves than we would expect our news people to apply when reporting on others. We
also believe candor benefits us as managers: the CEO who misleads others in public may eventually mislead himself in private.
o Despite our policy of candor, we will discuss our activities in marketable securities only to the extent legally required. Good
investment ideas are rare, valuable and subject to competitive appropriation just as good product or business acquisition ideas are.
Therefore, we normally will not talk about our investment ideas. This ban extends even to securities we have sold (because we may
purchase them again) and to stocks we are incorrectly rumored to be buying. If we deny those reports but say "no comment" on other
occasions, the no-comments become confirmation.
Berkshire's Corporate Performance vs. the S&P 500
Annual Percentage Change
in Per-Share in S&P 500
Book Value of with Dividends Relative
Berkshire Included Results
------------- -------------- --------
Year (1) (2) (1)-(2)
1965. . . . . . . . . 23.8 10.0 13.8
1966. . . . . . . . . 20.3 (11.7) 32.0
1967. . . . . . . . . 11.0 30.9 (19.9)
1968 . . . . . . . . 19.0 11.0 8.0
1969. . . . . . . . . 16.2 (8.4) 24.6
1970. . . . . . . . . 12.0 3.9 8.1
1971. . . . . . . . . 16.4 14.6 1.8
1972. . . . . . . . . 21.7 18.9 2.8
1973. . . . . . . . . 4.7 (14.8) 19.5
1974. . . . . . . . . 5.5 (26.4) 31.9
1975. . . . . . . . . 21.9 37.2 (15.3)
1976. . . . . . . . . 59.3 23.6 35.7
1977. . . . . . . . . 31.9 (7.4) 39.3
1978. . . . . . . . . 24.0 6.4 17.6
1979. . . . . . . . . 35.7 18.2 17.5
1980. . . . . . . . . 19.3 32.3 (13.0)
1981. . . . . . . . . 31.4 (5.0) 36.4
1982. . . . . . . . . 40.0 21.4 18.6
1983. . . . . . . . . 32.3 22.4 9.9
1984. . . . . . . . . 13.6 6.1 7.5
1985. . . . . . . . . 48.2 31.6 16.6
1986. . . . . . . . . 26.1 18.6 7.5
1987. . . . . . . . . 19.5 5.1 14.4
1988. . . . . . . . . 20.1 16.6 3.5
1989. . . . . . . . . 44.4 31.7 12.7
1990. . . . . . . . . 7.4 (3.1) 10.5
1991. . . . . . . . . 39.6 30.5 9.1
1992. . . . . . . . . 20.3 7.6 12.7
1993. . . . . . . . . 14.3 10.1 4.2
1994. . . . . . . . . 13.9 1.3 12.6
1995. . . . . . . . . 43.1 37.6 5.5
Notes:Data are for calendar years with these exceptions: 1965 and 1966, year ended 9/30; 1967, 15 months ended
12/31.
Starting in 1979, accounting rules required insurance companies to value the equity securities they hold at
market rather than at the lower of cost or market, which was previously the requirement. In this table,
Berkshire's results through 1978 have been restated to conform to the changed rules.
In 1993, accounting rules changed so that all common equities, including those held by non-insurance entities,
are now carried at market. The entire change was credited to 1993, since the restatement of the figures for
earlier years would have resulted in only minor adjustments.
The S&P 500 numbers are pre-tax whereas the Berkshire numbers are after-tax. If a corporation such as
Berkshire were simply to have owned the S&P 500 and accrued the appropriate taxes, its results would have
lagged the S&P 500 in years when that index showed a positive return, but would have exceeded the S&P
in years when the index showed a negative return. Over the years, the tax costs would have caused the
aggregate lag to be substantial.
To the Shareholders of Berkshire Hathaway Inc.:
Our gain in net worth during 1995 was $5.3 billion, or 45.0%. Per-share book value grew by a little less, 43.1%, because
we paid stock for two acquisitions, increasing our shares outstanding by 1.3%. Over the last 31 years (that is, since present
management took over) per-share book value has grown from $19 to $14,426, or at a rate of 23.6% compounded annually.
There's no reason to do handsprings over 1995's gains. This was a year in which any fool could make a bundle in the
stock market. And we did. To paraphrase President Kennedy, a rising tide lifts all yachts.
Putting aside the financial results, there was plenty of good news at Berkshire last year: We negotiated three acquisitions
of exactly the type we desire. Two of these, Helzberg's Diamond Shops and R.C. Willey Home Furnishings, are included in
our 1995 financial statements, while our largest transaction, the purchase of GEICO, closed immediately after the end of the year.
(I'll tell you more about all three acquisitions later in the report.)
These new subsidiaries roughly double our revenues. Even so, the acquisitions neither materially increased our shares
outstanding nor our debt. And, though these three operations employ over 11,000 people, our headquarters staff grew only from
11 to 12. (No sense going crazy.)
Charlie Munger, Berkshire's Vice Chairman and my partner, and I want to build a collection of companies both wholly-
and partly-owned that have excellent economic characteristics and that are run by outstanding managers. Our favorite acquisition
is the negotiated transaction that allows us to purchase 100% of such a business at a fair price. But we are almost as happy
when the stock market offers us the chance to buy a modest percentage of an outstanding business at a pro-rata price well below
what it would take to buy 100%. This double-barrelled approach purchases of entire businesses through negotiation or purchases
of part-interests through the stock market gives us an important advantage over capital-allocators who stick to a single course.
Woody Allen once explained why eclecticism works: "The real advantage of being bisexual is that it doubles your chances for
a date on Saturday night."
Over the years, we've been Woody-like in our thinking, attempting to increase our marketable investments in wonderful
businesses, while simultaneously trying to buy similar businesses in their entirety. The following table illustrates our progress
on both fronts. In the tabulation, we show the marketable securities owned per share of Berkshire at ten-year intervals. A
second column lists our per-share operating earnings (before taxes and purchase-price adjustments but after interest and corporate
overhead) from all other activities. In other words, the second column shows what we earned excluding the dividends, interest
and capital gains that we realized from investments. Purchase-price accounting adjustments are ignored for reasons we have
explained at length in previous reports and which, as an act of mercy, we won't repeat. (We'll be glad to send masochists the
earlier explanations, however.)
Pre-tax Earnings Per Share
Marketable Securities Excluding All Income from
Year Per Share Investments
---- --------------------- --------------------------
1965 .......................... $ 4 $ 4.08
1975 .......................... 159 (6.48)
1985 .......................... 2,443 18.86
1995 .......................... 22,088 258.20
Yearly Growth Rate: 1965-95.... 33.4% 14.7%
These results have not sprung from some master plan that we concocted in 1965. In a general way, we knew then what
we hoped to accomplish but had no idea what specific opportunities might make it possible. Today we remain similarly
unstructured: Over time, we expect to improve the figures in both columns but have no road map to tell us how that will come
about.
We proceed with two advantages: First, our operating managers are outstanding and, in most cases, have an unusually
strong attachment to Berkshire. Second, Charlie and I have had considerable experience in allocating capital and try to go at
that job rationally and objectively. The giant disadvantage we face is size: In the early years, we needed only good ideas, but
now we need good big ideas. Unfortunately, the difficulty of finding these grows in direct proportion to our financial success,
a problem that increasingly erodes our strengths.
I will have more to say about Berkshire's prospects later in this report, when I discuss our proposed recapitalization.
Acquisitions
It may seem strange that we exult over a year in which we made three acquisitions, given that we have regularly used these
pages to question the acquisition activities of most managers. Rest assured, Charlie and I haven't lost our skepticism: We
believe most deals do damage to the shareholders of the acquiring company. Too often, the words from HMS Pinafore apply:
"Things are seldom what they seem, skim milk masquerades as cream." Specifically, sellers and their representatives invariably
present financial projections having more entertainment value than educational value. In the production of rosy scenarios, Wall
Street can hold its own against Washington.
In any case, why potential buyers even look at projections prepared by sellers baffles me. Charlie and I never give them
a glance, but instead keep in mind the story of the man with an ailing horse. Visiting the vet, he said: "Can you help me?
Sometimes my horse walks just fine and sometimes he limps." The vet's reply was pointed: "No problem when he's walking
fine, sell him." In the world of mergers and acquisitions, that horse would be peddled as Secretariat.
At Berkshire, we have all the difficulties in perceiving the future that other acquisition-minded companies do. Like they also,
we face the inherent problem that the seller of a business practically always knows far more about it than the buyer and also picks
the time of sale a time when the business is likely to be walking "just fine."
Even so, we do have a few advantages, perhaps the greatest being that we don't have a strategic plan. Thus we feel no
need to proceed in an ordained direction (a course leading almost invariably to silly purchase prices) but can instead simply decide
what makes sense for our owners. In doing that, we always mentally compare any move we are contemplating with dozens of
other opportunities open to us, including the purchase of small pieces of the best businesses in the world via the stock market.
Our practice of making this comparison acquisitions against passive investments is a discipline that managers focused simply
on expansion seldom use.
Talking to Time Magazine a few years back, Peter Drucker got to the heart of things: "I will tell you a secret: Dealmaking
beats working. Dealmaking is exciting and fun, and working is grubby. Running anything is primarily an enormous amount
of grubby detail work . . . dealmaking is romantic, sexy. That's why you have deals that make no sense."
In making acquisitions, we have a further advantage: As payment, we can offer sellers a stock backed by an extraordinary
collection of outstanding businesses. An individual or a family wishing to dispose of a single fine business, but also wishing
to defer personal taxes indefinitely, is apt to find Berkshire stock a particularly comfortable holding. I believe, in fact, that this
calculus played an important part in the two acquisitions for which we paid shares in 1995.
Beyond that, sellers sometimes care about placing their companies in a corporate home that will both endure and provide
pleasant, productive working conditions for their managers. Here again, Berkshire offers something special. Our managers
operate with extraordinary autonomy. Additionally, our ownership structure enables sellers to know that when I say we are
buying to keep, the promise means something. For our part, we like dealing with owners who care what happens to their
companies and people. A buyer is likely to find fewer unpleasant surprises dealing with that type of seller than with one simply
auctioning off his business.
In addition to the foregoing being an explanation of our acquisition style, it is, of course, a not-so-subtle sales pitch. If
you own or represent a business earning $25 million or more before tax, and it fits the criteria listed on page 23, just give me
a call. Our discussion will be confidential. And if you aren't interested now, file our proposition in the back of your mind: We
are never going to lose our appetite for buying companies with good economics and excellent management.
Concluding this little dissertation on acquisitions, I can't resist repeating a tale told me last year by a corporate executive.
The business he grew up in was a fine one, with a long-time record of leadership in its industry. Its main product, however,
was distressingly glamorless. So several decades ago, the company hired a management consultant who naturally advised
diversification, the then-current fad. ("Focus" was not yet in style.) Before long, the company acquired a number of businesses,
each after the consulting firm had gone through a long and expensive acquisition study. And the outcome? Said the
executive sadly, "When we started, we were getting 100% of our earnings from the original business. After ten years, we were
getting 150%."
Helzberg's Diamond Shops
A few years back, management consultants popularized a technique called "management by walking around" (MBWA). At
Berkshire, we've instituted ABWA (acquisitions by walking around).
In May 1994, a week or so after the Annual Meeting, I was crossing the street at 58th and Fifth Avenue in New York,
when a woman called out my name. I listened as she told me she'd been to, and had enjoyed, the Annual Meeting. A few
seconds later, a man who'd heard the woman stop me did so as well. He turned out to be Barnett Helzberg, Jr., who owned
four shares of Berkshire and had also been at our meeting.
In our few minutes of conversation, Barnett said he had a business we might be interested in. When people say that, it
usually turns out they have a lemonade stand with potential, of course, to quickly grow into the next Microsoft. So I simply
asked Barnett to send me particulars. That, I thought to myself. will be the end of that.
Not long after, Barnett sent me the financial statements of Helzberg's Diamond Shops. The company had been started by
his grandfather in 1915 from a single store in Kansas City and had developed by the time we met into a group with 134 stores
in 23 states. Sales had grown from $10 million in 1974 to $53 million in 1984 and $282 million in 1994. We weren't talking
lemonade stands.
Barnett, then 60, loved the business but also wanted to feel free of it. In 1988, as a step in that direction, he had brought
in Jeff Comment, formerly President of Wanamaker's, to help him run things. The hiring of Jeff turned out to be a homerun,
but Barnett still found that he couldn't shake a feeling of ultimate responsibility. Additionally, he owned a valuable asset that
was subject to the vagaries of a single, very competitive industry, and he thought it prudent to diversify his family's holdings.
Berkshire was made to order for him. It took us awhile to get together on price, but there was never any question in my
mind that, first, Helzberg's was the kind of business that we wanted to own and, second, Jeff was our kind of manager. In
fact, we would not have bought the business if Jeff had not been there to run it. Buying a retailer without good management
is like buying the Eiffel Tower without an elevator.
We completed the Helzberg purchase in 1995 by means of a tax-free exchange of stock, the only kind of transaction that
interested Barnett. Though he was certainly under no obligation to do so, Barnett shared a meaningful part of his proceeds from the sale with a large number of his associates. When someone behaves that generously,
you know you are going to be treated right as a buyer.
The average Helzberg's store has annual sales of about $2 million, far more than competitors operating similarly-sized stores
achieve. This superior per-store productivity is the key to Helzberg's excellent profits. If the company continues its first-rate
performance and we believe it will it could grow rather quickly to several times its present size.
Helzberg's, it should be added, is an entirely different sort of operation from Borsheim's, our Omaha jewelry business, and
the two companies will operate independently of each other. Borsheim's had an excellent year in 1995, with sales up 11.7%.
Susan Jacques, its 36-year-old CEO, had an even better year, giving birth to her second son at the start of the Christmas
season. Susan has proved to be a terrific leader in the two years since her promotion.
R.C. Willey Home Furnishings
It was Nebraska Furniture Mart's Irv Blumkin who did the walking around in the case of R.C. Willey, long the leading
home furnishings business in Utah. Over the years, Irv had told me about the strengths of that company. And he had also
told Bill Child, CEO of R.C. Willey, how pleased the Blumkin family had been with its Berkshire relationship. So in early
1995, Bill mentioned to Irv that for estate tax and diversification reasons, he and the other owners of R.C. Willey might be
interested in selling.
From that point forward, things could not have been simpler. Bill sent me some figures, and I wrote him a letter indicating
my idea of value. We quickly agreed on a number, and found our personal chemistry to be perfect. By mid-year, the merger
was completed.
R.C. Willey is an amazing story. Bill took over the business from his father-in-law in 1954 when sales were about
$250,000. From this tiny base, Bill employed Mae West's philosophy: "It's not what you've got it's what you do with what
you've got." Aided by his brother, Sheldon, Bill has built the company to its 1995 sales volume of $257 million, and it now
accounts for over 50% of the furniture business in Utah. Like Nebraska Furniture Mart, R.C. Willey sells appliances,
electronics, computers and carpets in addition to furniture. Both companies have about the same sales volume, but NFM gets
all of its business from one complex in Omaha, whereas R.C. Willey will open its sixth major store in the next few months.
Retailing is a tough business. During my investment career, I have watched a large number of retailers enjoy terrific
growth and superb returns on equity for a period, and then suddenly nosedive, often all the way into bankruptcy. This shooting-
star phenomenon is far more common in retailing than it is in manufacturing or service businesses. In part, this is because a
retailer must stay smart, day after day. Your competitor is always copying and then topping whatever you do. Shoppers are
meanwhile beckoned in every conceivable way to try a stream of new merchants. In retailing, to coast is to fail.
In contrast to this have-to-be-smart-every-day business, there is what I call the have-to-be-smart-once business. For example,
if you were smart enough to buy a network TV station very early in the game, you could put in a shiftless and backward nephew
to run things, and the business would still do well for decades. You'd do far better, of course, if you put in Tom Murphy, but
you could stay comfortably in the black without him. For a retailer, hiring that nephew would be an express ticket to bankruptcy.
The two retailing businesses we purchased this year are blessed with terrific managers who love to compete and have done
so successfully for decades. Like the CEOs of our other operating units, they will operate autonomously: We want them to feel
that the businesses they run are theirs. This means no second-guessing by Charlie and me. We avoid the attitude of the
alumnus whose message to the football coach is "I'm 100% with you win or tie." Our basic goal as an owner is to behave
with our managers as we like our owners to behave with us.
As we add more operations, I'm sometimes asked how many people I can handle reporting to me. My answer to that is
simple: If I have one person reporting to me and he is a lemon, that's one too many, and if I have managers like those we
now have, the number can be almost unlimited. We are lucky to have Bill and Sheldon associated with us, and we hope that
we can acquire other businesses that bring with them managers of similar caliber.
GEICO Corporation
Right after yearend, we completed the purchase of 100% of GEICO, the seventh largest auto insurer in the United States,
with about 3.7 million cars insured. I've had a 45-year association with GEICO, and though the story has been told before,
it's worth a short recap here.
I attended Columbia University's business school in 1950-51, not because I cared about the degree it offered, but because
I wanted to study under Ben Graham, then teaching there. The time I spent in Ben's classes was a personal high, and quickly
induced me to learn all I could about my hero. I turned first to Who's Who in America, finding there, among other things, that
Ben was Chairman of Government Employees Insurance Company, to me an unknown company in an unfamiliar industry.
A librarian next referred me to Best's Fire and Casualty insurance manual, where I learned that GEICO was based in
Washington, DC. So on a Saturday in January, 1951, I took the train to Washington and headed for GEICO's downtown
headquarters. To my dismay, the building was closed, but I pounded on the door until a custodian appeared. I asked this
puzzled fellow if there was anyone in the office I could talk to, and he said he'd seen one man working on the sixth floor.
And thus I met Lorimer Davidson, Assistant to the President, who was later to become CEO. Though my only credentials
were that I was a student of Graham's, "Davy" graciously spent four hours or so showering me with both kindness and
instruction. No one has ever received a better half-day course in how the insurance industry functions nor in the factors that
enable one company to excel over others. As Davy made clear, GEICO's method of selling direct marketing gave it an
enormous cost advantage over competitors that sold through agents, a form of distribution so ingrained in the business of these
insurers that it was impossible for them to give it up. After my session with Davy, I was more excited about GEICO than
I have ever been about a stock.
When I finished at Columbia some months later and returned to Omaha to sell securities, I naturally focused almost
exclusively on GEICO. My first sales call on my Aunt Alice, who always supported me 100% was successful. But I
was then a skinny, unpolished 20-year-old who looked about 17, and my pitch usually failed. Undaunted, I wrote a short report
late in 1951 about GEICO for "The Security I Like Best" column in The Commercial and Financial Chronicle, a leading
financial publication of the time. More important, I bought stock for my own account.
You may think this odd, but I have kept copies of every tax return I filed, starting with the return for 1944. Checking
back, I find that I purchased GEICO shares on four occasions during 1951, the last purchase being made on September 26.
This pattern of persistence suggests to me that my tendency toward self-intoxication was developed early. I probably came back
on that September day from unsuccessfully trying to sell some prospect and decided despite my already having more than 50%
of my net worth in GEICO to load up further. In any event, I accumulated 350 shares of GEICO during the year, at a
cost of $10,282. At yearend, this holding was worth $13,125, more than 65% of my net worth.
You can see why GEICO was my first business love. Furthermore, just to complete this stroll down memory lane, I
should add that I earned most of the funds I used to buy GEICO shares by delivering The Washington Post, the chief product
of a company that much later made it possible for Berkshire to turn $10 million into $500 million.
Alas, I sold my entire GEICO position in 1952 for $15,259, primarily to switch into Western Insurance Securities. This
act of infidelity can partially be excused by the fact that Western was selling for slightly more than one times its current earnings, a p/e ratio that for some reason caught my eye. But in the next 20 years, the GEICO
stock I sold grew in value to about $1.3 million, which taught me a lesson about the inadvisability of selling a stake in an
identifiably-wonderful company.
In the early 1970's, after Davy retired, the executives running GEICO made some serious errors in estimating their claims
costs, a mistake that led the company to underprice its policies and that almost caused it to go bankrupt. The company was
saved only because Jack Byrne came in as CEO in 1976 and took drastic remedial measures.
Because I believed both in Jack and in GEICO's fundamental competitive strength, Berkshire purchased a large interest
in the company during the second half of 1976, and also made smaller purchases later. By yearend 1980, we had put $45.7
million into GEICO and owned 33.3% of its shares. During the next 15 years, we did not make further purchases. Our interest
in the company, nonetheless, grew to about 50% because it was a big repurchaser of its own shares.
Then, in 1995, we agreed to pay $2.3 billion for the half of the company we didn't own. That is a steep price. But it
gives us full ownership of a growing enterprise whose business remains exceptional for precisely the same reasons that prevailed
in 1951. In addition, GEICO has two extraordinary managers: Tony Nicely, who runs the insurance side of the operation,
and Lou Simpson, who runs investments.
Tony, 52, has been with GEICO for 34 years. There's no one I would rather have managing GEICO's insurance
operation. He has brains, energy, integrity and focus. If we're lucky, he'll stay another 34 years.
Lou runs investments just as ably. Between 1980 and 1995, the equities under Lou's management returned an average
of 22.8% annually vs. 15.7% for the S&P. Lou takes the same conservative, concentrated approach to investments that we do
at Berkshire, and it is an enormous plus for us to have him on board. One point that goes beyond Lou's GEICO work: His
presence on the scene assures us that Berkshire would have an extraordinary professional immediately available to handle its
investments if something were to happen to Charlie and me.
GEICO, of course, must continue both to attract good policyholders and keep them happy. It must also reserve and price
properly. But the ultimate key to the company's success is its rock-bottom operating costs, which virtually no competitor can match.
In 1995, moreover, Tony and his management team pushed underwriting and loss adjustment expenses down further to 23.6%
of premiums, nearly one percentage point below 1994's ratio. In business, I look for economic castles protected by unbreachable
"moats." Thanks to Tony and his management team, GEICO's moat widened in 1995.
Finally, let me bring you up to date on Davy. He's now 93 and remains my friend and teacher. He continues to pay close
attention to GEICO and has always been there when the company's CEOs Jack Byrne, Bill Snyder and Tony have
needed him. Our acquisition of 100% of GEICO caused Davy to incur a large tax. Characteristically, he still warmly supported
the transaction.
Davy has been one of my heroes for the 45 years I've known him, and he's never let me down. You should understand
that Berkshire would not be where it is today if Davy had not been so generous with his time on a cold Saturday in 1951. I've
often thanked him privately, but it is fitting that I use this report to thank him on behalf of Berkshire's shareholders.
Insurance Operations
In addition to acquiring GEICO, we enjoyed other favorable developments in insurance during 1995.
As we've explained in past reports, what counts in our insurance business is, first, the amount of "float" we generate and,
second, its cost to us. Float is money we hold but don't own. In an insurance operation, float arises because most policies
require that premiums be prepaid and, more importantly, because it usually takes time for an insurer to hear about and resolve
loss claims.
Typically, the premiums that an insurer takes in do not cover the losses and expenses it must pay. That leaves it running
an "underwriting loss" and that loss is the cost of float. An insurance business is profitable over time if its cost of float is
less than the cost the company would otherwise incur to obtain funds. But the business has a negative value if the cost of its
float is higher than market rates for money.
As the numbers in the following table show, Berkshire's insurance business has been a huge winner. For the table, we
have calculated our float which we generate in exceptional amounts relative to our premium volume by adding 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. Our cost of float is
determined by our underwriting loss or profit. In those years when we have had an underwriting profit, such as the last three,
our cost of float has been negative, which means we have calculated our insurance earnings by adding underwriting profit to float
income.
(1) (2) Yearend Yield
Underwriting Approximate on Long-Term
Loss Average Float Cost of Funds Govt. Bonds
------------ ------------- ----------------- -------------
(In $ Millions) (Ratio of 1 to 2)
1967 . . profit 17.3 less than zero 5.50%
1968 . . profit 19.9 less than zero 5.90%
1969 . . profit 23.4 less than zero 6.79%
1970 . . 0.37 32.4 1.14% 6.25%
1971 . . profit 52.5 less than zero 5.81%
1972 . . profit 69.5 less than zero 5.82%
1973 . . profit 73.3 less than zero 7.27%
1974 . . 7.36 79.1 9.30% 8.13%
1975 . . 11.35 87.6 12.96% 8.03%
1976 . . profit 102.6 less than zero 7.30%
1977 . . profit 139.0 less than zero 7.97%
1978 . . profit 190.4 less than zero 8.93%
1979 . . profit 227.3 less than zero 10.08%
1980 . . profit 237.0 less than zero 11.94%
1981 . . profit 228.4 less than zero 13.61%
1982 . . 21.56 220.6 9.77% 10.64%
1983 . . 33.87 231.3 14.64% 11.84%
1984 . . 48.06 253.2 18.98% 11.58%
1985 . . 44.23 390.2 11.34% 9.34%
1986 . . 55.84 797.5 7.00% 7.60%
1987 . . 55.43 1,266.7 4.38% 8.95%
1988 . . 11.08 1,497.7 0.74% 9.00%
1989 . . 24.40 1,541.3 1.58% 7.97%
1990 . . 26.65 1,637.3 1.63% 8.24%
1991 . . 119.59 1,895.0 6.31% 7.40%
1992 . . 108.96 2,290.4 4.76% 7.39%
1993 . . profit 2,624.7 less than zero 6.35%
1994 . . profit 3,056.6 less than zero 7.88%
1995 . . profit 3,607.2 less than zero 5.95%
Since 1967, when we entered the insurance business, our float has grown at an annual compounded
rate of 20.7%. In more years than not, our cost of funds has been less than nothing. This access to "free"
money has boosted Berkshire's performance in a major way.
Any company's level of profitability is determined by three items: (1) what its assets earn; (2) what its
liabilities cost; and (3) its utilization of "leverage" that is, the degree to which its assets are funded by
liabilities rather than by equity. Over the years, we have done well on Point 1, having produced high returns
on our assets. But we have also benefitted greatly to a degree that is not generally well-understood
because our liabilities have cost us very little. An important reason for this low cost is that we have obtained
float on very advantageous terms. The same cannot be said by many other property and casualty insurers,
who may generate plenty of float, but at a cost that exceeds what the funds are worth to them. In those
circumstances, leverage becomes a disadvantage.
Since our float has cost us virtually nothing over the years, it has in effect served as equity. Of course,
it differs from true equity in that it doesn't belong to us. Nevertheless, let's assume that instead of our having
$3.4 billion of float at the end of 1994, we had replaced it with $3.4 billion of equity. Under this scenario,
we would have owned no more assets than we did during 1995. We would, however, have had somewhat
lower earnings because the cost of float was negative last year. That is, our float threw off profits. And, of
course, to obtain the replacement equity, we would have needed to sell many new shares of Berkshire. The
net result more shares, equal assets and lower earnings would have materially reduced the value of our
stock. So you can understand why float wonderfully benefits a business if it is obtained at a low cost.
Our acquisition of GEICO will immediately increase our float by nearly $3 billion, with additional growth
almost certain. We also expect GEICO to operate at a decent underwriting profit in most years, a fact that
will increase the probability that our total float will cost us nothing. Of course, we paid a very substantial
price for the GEICO float, whereas virtually all of the gains in float depicted in the table were developed
internally.
Our enthusiasm over 1995's insurance results must be tempered once again because we had our third
straight year of good fortune in the super-cat business. In this operation, we sell policies that insurance and
reinsurance companies buy to protect themselves from the effects of mega-catastrophes. Since truly major
catastrophes occur infrequently, our super-cat business can be expected to show large profits in most years
but occasionally to record a huge loss. In other words, the attractiveness of our super-cat business will take
many years to measure. We know that the results of years like the past three will be at least partially offset
by some truly terrible year in the future. We just hope that "partially" turns out to be the proper adverb.
There were plenty of catastrophes last year, but no super-cats of the insured variety. The Southeast
had a close call when Opal, sporting winds of 150 miles per hour, hovered off Florida. However, the storm
abated before hitting land, and so a second Andrew was dodged. For insurers, the Kobe earthquake was
another close call: The economic damage was huge perhaps even a record but only a tiny portion of
it was insured. The insurance industry won't always be that lucky.
Ajit Jain is the guiding genius of our super-cat business and writes important non-cat business as well.
In insurance, the term "catastrophe" is applied to an event, such as a hurricane or earthquake, that causes
a great many insured losses. The other deals Ajit enters into usually cover only a single large loss. A
simplified description of three transactions from last year will illustrate both what I mean and Ajit's versatility.
We insured: (1) The life of Mike Tyson for a sum that is large initially and that, fight-by-fight, gradually
declines to zero over the next few years; (2) Lloyd's against more than 225 of its "names" dying during the
year; and (3) The launch, and a year of orbit, of two Chinese satellites. Happily, both satellites are orbiting,
the Lloyd's folk avoided abnormal mortality, and if Mike Tyson looked any healthier, no one would get in the
ring with him.
Berkshire is sought out for many kinds of insurance, both super-cat and large single-risk, because: (1)
our financial strength is unmatched, and insureds know we can and will pay our losses under the most
adverse of circumstances; (2) we can supply a quote faster than anyone in the business; and (3) we will
issue policies with limits larger than anyone else is prepared to write. Most of our competitors have extensive
reinsurance treaties and lay off much of their business. While this helps them avoid shock losses, it also
hurts their flexibility and reaction time. As you know, Berkshire moves quickly to seize investment and
acquisition opportunities; in insurance we respond with the same exceptional speed. In another important
point, large coverages don't frighten us but, on the contrary, intensify our interest. We have offered a policy
under which we could have lost $1 billion; the largest coverage that a client accepted was $400 million.
We will get hit from time to time with large losses. Charlie and I, however, are quite willing to accept
relatively volatile results in exchange for better long-term earnings than we would otherwise have had. In
other words, we prefer a lumpy 15% to a smooth 12%. Since most managers opt for smoothness, we are
left with a competitive advantage that we try to maximize. We do, though, monitor our aggregate exposure
in order to keep our "worst case" at a level that leaves us comfortable.
Indeed, our worst case from a "once-in-a-century" super-cat is far less severe relative to net worth
than that faced by many well-known primary companies writing great numbers of property policies. These
insurers don't issue single huge-limit policies as we do, but their small policies, in aggregate, can create a
risk of staggering size. The "big one" would blow right through the reinsurance covers of some of these
insurers, exposing them to uncapped losses that could threaten their survival. In our case, losses would be
large, but capped at levels we could easily handle.
Prices are weakening in the super-cat field. That is understandable considering the influx of capital into
the reinsurance business a few years ago and the natural desire of those holding the capital to employ it.
No matter what others may do, we will not knowingly write business at inadequate rates. We unwittingly did
this in the early 1970's and, after more than 20 years, regularly receive significant bills stemming from the
mistakes of that era. My guess is that we will still be getting surprises from that business 20 years from now.
A bad reinsurance contract is like hell: easy to enter and impossible to exit.
I actively participated in those early reinsurance decisions, and Berkshire paid a heavy tuition for my
education in the business. Unfortunately, reinsurance students can't attend school on scholarship. GEICO,
incidentally, suffered a similar, disastrous experience in the early 1980's, when it plunged enthusiastically into
the writing of reinsurance and large risks. GEICO's folly was brief, but it will be cleaning things up for at
least another decade. The well-publicized problems at Lloyd's further illustrate the perils of reinsurance and
also underscore how vital it is that the interests of the people who write insurance business be aligned on
the downside as well as the upside with those of the people putting up the capital. When that kind of
symmetry is missing, insurers almost invariably run into trouble, though its existence may remain hidden for
some time.
A small, apocryphal story about an insurance CEO who was visited by an analyst tells a lot about this
industry. To the analyst's questions about his business, the CEO had nothing but gloomy answers: Rates
were ridiculously low; the reserves on his balance sheet weren't adequate for ordinary claims, much less
those likely to arise from asbestos and environmental problems; most of his reinsurers had long since gone
broke, leaving him holding the sack. But then the CEO brightened: "Still, things could be a lot worse," he
said. "It could be my money." At Berkshire, it's our money.
Berkshire's other insurance operations, though relatively small, performed magnificently in 1995. National
Indemnity's traditional business had a combined ratio of 84.2 and developed, as usual, a large amount of float
compared to premium volume. Over the last three years, this segment of our business, run by Don Wurster,
has had an average combined ratio of 85.6. Our homestate operation, managed by Rod Eldred, grew at a
good rate in 1995 and achieved a combined ratio of 81.4. Its three-year combined ratio is an amazing 82.4.
Berkshire's California workers' compensation business, run by Brad Kinstler, faced fierce price-cutting in 1995
and lost a great many renewals when we refused to accept inadequate rates. Though this operation's
volume dropped materially, it produced an excellent underwriting profit. Finally, John Kizer, at Central States
Indemnity, continues to do an extraordinary job. His premium volume was up 23% in 1995, and underwriting
profit grew by 59%. Ajit, Don, Rod, Brad and John are all under 45, an embarrassing fact demolishing my
theory that managers only hit their stride after they reach 70.
To sum up, we entered 1995 with an exceptional insurance operation of moderate size. By adding
GEICO, we entered 1996 with a business still better in quality, much improved in its growth prospects, and
doubled in size. More than ever, insurance is our core strength.
Sources of Reported Earnings
The table below shows the main sources of Berkshire's reported earnings. In this presentation,
purchase-premium charges are not assigned to the specific businesses to which they apply, but are instead
aggregated and shown separately. This procedure lets you view the earnings of our businesses as they
would have been reported had we not purchased them. This form of presentation seems to us to be more
useful to investors and managers than one utilizing GAAP, which requires purchase-premiums to be charged
off, business-by-business. The total earnings we show in the table are, of course, identical to the GAAP total
in our audited financial statements.
(in millions)
--------------------------------------
Berkshire's Share
of Net Earnings
(after taxes &
Pre-Tax Earnings minority interests)
------------------ ------------------
1995 1994 1995 1994
--------- -------- -------- ---------
Operating Earnings:
Insurance Group:
Underwriting............................$ 20.5 $ 129.9 $ 11.3 $ 80.9
Net Investment Income................... 501.6 419.4 417.7 350.5
Buffalo News.............................. 46.8 54.2 27.3 31.7
Fechheimer................................ 16.9 14.3 8.8 7.1
Finance Businesses........................ 20.8 22.1 12.6 14.6
Home Furnishings.......................... 29.7(1) 17.4 16.7(1) 8.7
Jewelry................................... 33.9(2) (3) 19.1(2) (3)
Kirby..................................... 50.2 42.3 32.1 27.7
Scott Fetzer Manufacturing Group.......... 34.1 39.5 21.2 24.9
See's Candies............................. 50.2 47.5 29.8 28.2
Shoe Group................................ 58.4 85.5 37.5 55.8
World Book................................ 8.8 24.7 7.0 17.3
Purchase-Price Premium Charges............ (27.0) (22.6) (23.4) (19.4)
Interest Expense(4)....................... (56.0) (60.1) (34.9) (37.3)
Shareholder-Designated Contributions...... (11.6) (10.4) (7.0) (6.7)
Other..................................... 37.4 35.7 24.4 22.3
Operating Earnings.......................... 814.7 839.4 600.2 606.2
Sales of Securities......................... 194.1 91.3 125.0 61.1
Decline in Value of USAir Preferred Stock... --- (268.5) --- (172.6)
--------- -------- ------- -------
Total Earnings - All Entities...............$1,008.8 $ 662.2 $725.2 $494.8
========= ======== ======= =======
(1) Includes R.C. Willey from June 29, 1995. (3) Jewelry earnings were included in "Other" in 1994.
(2) Includes Helzberg's from April 30, 1995. (4) Excludes interest expense of Finance Businesses.
A large amount of information about these businesses is given on pages 41-52, where you will also find our segment
earnings reported on a GAAP basis. In addition, on pages 57-63, we have rearranged Berkshire's financial data into four
segments on a non-GAAP basis, a presentation that corresponds to the way Charlie and I think about the company. Our
intent is to supply you with the financial information that we would wish you to give us if our positions were reversed.
At Berkshire, we believe in Charlie's dictum "Just tell me the bad news; the good news will take care of itself"
and that is the behavior we expect of our managers when they are reporting to us. Consequently, I also owe you
Berkshire's owners a report on three operations that, though they continued to earn decent (or better) returns on invested
capital, experienced a decline in earnings last year. Each encountered a different type of problem.
Our shoe business operated in an industry that suffered depressed earnings throughout last year, and many of our
competitors made only marginal profits or worse. That means we at least maintained, and in some instances widened, our
competitive superiority. So I have no doubt that our shoe operations will climb back to top-grade earnings in the future. In
other words, though the turn has not yet occurred, we believe you should view last year's figures as reflecting a cyclical problem,
not a secular one.
The Buffalo News, though still doing very well in comparison to other newspapers, is another story. In this case,
industry trends are not good. In the 1991 Annual Report, I explained that newspapers had lost a notch in their economic
attractiveness from the days when they appeared to have a bullet-proof franchise. Today, the industry retains its excellent
economics, but has lost still another notch. Over time, we expect the competitive strength of newspapers to gradually erode,
though the industry should nevertheless remain a fine business for many years to come.
Berkshire's most difficult problem is World Book, which operates in an industry beset by increasingly tough competition
from CD-ROM and on-line offerings. True, we are still profitable, a claim that perhaps no other print encyclopedia can make.
But our sales and earnings trends have gone in the wrong direction. At the end of 1995, World Book made major changes
in the way it distributes its product, stepped up its efforts with electronic products and sharply reduced its overhead costs.
It will take time for us to evaluate the effects of these initiatives, but we are confident they will significantly improve our
viability.
All of our operations, including those whose earnings fell last year, benefit from exceptionally talented and dedicated
managers. Were we to have the choice of any other executives now working in their industries, there is not one of our
managers we would replace.
Many of our managers don't have to work for a living, but simply go out and perform every day for the same reason
that wealthy golfers stay on the tour: They love both doing what they do and doing it well. To describe them as working
may be a misnomer they simply prefer spending much of their time on a productive activity at which they excel to spending
it on leisure activities. Our job is to provide an environment that will keep them feeling this way, and so far we seem to
have succeeded: Thinking back over the 1965-95 period, I can't recall that a single key manager has left Berkshire to join
another employer.
Common Stock Investments
Below we present our common stock investments. Those with a market value of more than $600 million are itemized.
12/31/95
Shares Company Cost Market
----------- ----------------------------------------------- -------- ----------
(dollars in millions)
49,456,900 American Express Company..........................$1,392.7 $2,046.3
20,000,000 Capital Cities/ABC, Inc........................... 345.0 2,467.5
100,000,000 The Coca-Cola Company............................. 1,298.9 7,425.0
12,502,500 Federal Home Loan Mortgage Corp.("Freddie Mac")... 260.1 1,044.0
34,250,000 GEICO Corp........................................ 45.7 2,393.2
48,000,000 The Gillette Company.............................. 600.0 2,502.0
6,791,218 Wells Fargo & Company............................. 423.7 1,466.9
Others............................................ 1,379.0 2,655.4
-------- --------
Total Common Stocks. . . . . . . . . . $5,745.1 $22,000.3
======== =========
We continue in our Rip Van Winkle mode: Five of our six top positions at yearend 1994 were left
untouched during 1995. The sixth was American Express, in which we increased our ownership to about
10%.
In early 1996, two major events affected our holdings: First, our purchase of the GEICO stock we
did not already own caused that company to be converted into a wholly-owned subsidiary. Second, we
exchanged our Cap Cities shares for a combination of cash and Disney stock.
In the Disney merger, Cap Cities shareholders had a choice of actions. If they chose, they could
exchange each of their Cap Cities shares for one share of Disney stock plus $65. Or they could ask
for though not necessarily get all cash or all stock, with their ultimate allotment of each depending
on the choices made by other shareholders and certain decisions made by Disney. For our 20 million
shares, we sought stock, but do not know, as this report goes to press, how much we were allocated.
We are certain, however, to receive something over 20 million Disney shares. We have also recently
bought Disney stock in the market.
One more bit of history: I first became interested in Disney in 1966, when its market valuation was
less than $90 million, even though the company had earned around $21 million pre-tax in 1965 and was
sitting with more cash than debt. At Disneyland, the $17 million Pirates of the Caribbean ride would
soon open. Imagine my excitement a company selling at only five times rides!
Duly impressed, Buffett Partnership Ltd. bought a significant amount of Disney stock at a split-
adjusted price of 31› per share. That decision may appear brilliant, given that the stock now sells for
$66. But your Chairman was up to the task of nullifying it: In 1967 I sold out at 48› per share.
Oh well we're happy to be once again a large owner of a business with both unique assets and
outstanding management.
Convertible Preferred Stocks
As many of you will remember, Berkshire made five private purchases of convertible preferred
stocks during the 1987-91 period and the time seems right to discuss their status. Here are the
particulars:
Dividend Year of Market
Company Rate Purchase Cost Value
----------------------------------- -------- -------- ------ ---------
(dollars in millions)
Champion International Corp. . . . . .9.25% 1989 $ 300 $ 388(1)
First Empire State Corp. . . . . . . .9.00% 1991 40 110
The Gillette Company . . . . . . . . .8.75% 1989 600 2,502(2)
Salomon Inc. . . . . . . . . . . . . .9.00% 1987 700 728(3)
USAir Group, Inc.. . . . . . . . . . .9.25% 1989 358 215
(1) Proceeds from sale of common we received through conversion in 1995.
(2) 12/31/95 value of common we received through conversion in 1991.
(3) Includes $140 we received in 1995 from partial redemption.
In each case we had the option of sticking with these preferreds as fixed-income securities or
converting them into common stock. Initially, their value to us came primarily from their fixed-income
characteristics. The option we had to convert was a kicker.
Our $300 million private purchase of American Express "Percs" described in the 1991 Annual
Report is not included in the table because that security was a modified form of common stock whose
fixed-income characteristics contributed only a minor portion of its initial value. Three years after we
bought them, the Percs automatically were converted to common stock. In contrast, the five securities
in the table were set to become common stocks only if we wished them to a crucial difference.
When we purchased our convertible securities, I told you that we expected to earn after-tax returns
from them that "moderately" exceeded what we could earn from the medium-term fixed-income securities they replaced. We beat this expectation but only because of the performance of a single issue. I
also told you that these securities, as a group, would "not produce the returns we can achieve when
we find a business with wonderful economic prospects." Unfortunately, that prediction was fulfilled.
Finally, I said that "under almost any conditions, we expect these preferreds to return us our money plus
dividends." That's one I would like to have back. Winston Churchill once said that "eating my words
has never given me indigestion." My assertion, however, that it was almost impossible for us to lose
money on our preferreds has caused me some well-deserved heartburn.
Our best holding has been Gillette, which we told you from the start was a superior business.
Ironically, though, this is also the purchase in which I made my biggest mistake of a kind, however,
never recognized on financial statements.
We paid $600 million in 1989 for Gillette preferred shares that were convertible into 48 million (split-
adjusted) common shares. Taking an alternative route with the $600 million, I probably could have
purchased 60 million shares of common from the company. The market on the common was then about
$10.50, and given that this would have been a huge private placement carrying important restrictions,
I probably could have bought the stock at a discount of at least 5%. I can't be sure about this, but it's
likely that Gillette's management would have been just as happy to have Berkshire opt for common.
But I was far too clever to do that. Instead, for less than two years, we received some extra
dividend income (the difference between the preferred's yield and that of the common), at which point
the company quite properly called the issue, moving to do that as quickly as was possible. If I
had negotiated for common rather than preferred, we would have been better off at yearend 1995 by
$625 million, minus the "excess" dividends of about $70 million.
In the case of Champion, the ability of the company to call our preferred at 115% of cost forced
a move out of us last August that we would rather have delayed. In this instance, we converted our
shares just prior to the pending call and offered them to the company at a modest discount.
Charlie and I have never had a conviction about the paper industry actually, I can't remember
ever owning the common stock of a paper producer in my 54 years of investing so our choice in
August was whether to sell in the market or to the company. Champion's management had always been
candid and honorable in dealing with us and wished to repurchase common shares, so we offered our
stock to the company. Our Champion capital gain was moderate about 19% after tax from a six-year
investment but the preferred delivered us a good after-tax dividend yield throughout our holding period.
(That said, many press accounts have overstated the after-tax yields earned by property-casualty
insurance companies on dividends paid to them. What the press has failed to take into account is a
change in the tax law that took effect in 1987 and that significantly reduced the dividends received credit
applicable to insurers. For details, see our 1986 Annual Report.)
Our First Empire preferred will be called on March 31, 1996, the earliest date allowable. We are
comfortable owning stock in well-run banks, and we will convert and keep our First Empire common
shares. Bob Wilmers, CEO of the company, is an outstanding banker, and we love being associated
with him.
Our other two preferreds have been disappointing, though the Salomon preferred has modestly
outperformed the fixed-income securities for which it was a substitute. However, the amount of
management time Charlie and I have devoted to this holding has been vastly greater than its economic
significance to Berkshire. Certainly I never dreamed I would take a new job at age 60 Salomon
interim chairman, that is because of an earlier purchase of a fixed-income security.
Soon after our purchase of the Salomon preferred in 1987, I wrote that I had "no special insights
regarding the direction or future profitability of investment banking." Even the most charitable
commentator would conclude that I have since proved my point.
To date, our option to convert into Salomon common has not proven of value. Furthermore, the
Dow Industrials have doubled since I committed to buy the preferred, and the brokerage group has
performed equally as well. That means my decision to go with Salomon because I saw value in the
conversion option must be graded as very poor. Even so, the preferred has continued under some trying conditions to
deliver as a fixed-income security, and the 9% dividend is currently quite attractive.
Unless the preferred is converted, its terms require redemption of 20% of the issue on October 31
of each year, 1995-99, and $140 million of our original $700 million was taken on schedule last year.
(Some press reports labeled this a sale, but a senior security that matures is not "sold.") Though we
did not elect to convert the preferred that matured last year, we have four more bites at the conversion
apple, and I believe it quite likely that we will yet find value in our right to convert.
I discussed the USAir investment at length in last year's report. The company's results improved
in 1995, but it still faces significant problems. On the plus side for us is the fact that our preferred is
structurally well-designed: For example, though we have not been paid dividends since June 1994, the
amounts owed us are compounding at 5% over the prime rate. On the minus side is the fact that we
are dealing with a weak credit.
We feel much better about our USAir preferred than we did a year ago, but your guess is as good
as mine as to its ultimate value. (Indeed, considering my record with this investment, it's fair to say that
your guess may be better than mine.) At yearend we carried our preferred (in which there is no public
market) at 60% of par, though USAir also has outstanding a junior preferred that is significantly inferior
to ours in all respects except conversion price and that was then trading at 82% of par. As I write this,
the junior issue has advanced to 97% of par. Let's hope the market is right.
Overall, our preferreds have performed well, but that is true only because of one huge winner,
Gillette. Leaving aside Gillette, our preferreds as a group have delivered us after-tax returns no more
than equal to those we could have earned from the medium-term fixed-income issues that they replaced.
A Proposed Recapitalization
At the Annual Meeting you will be asked to approve a recapitalization of Berkshire, creating two
classes of stock. If the plan is adopted, our existing common stock will be designated as Class A
Common Stock and a new Class B Common Stock will be authorized.
Each share of the "B" will have the rights of 1/30th of an "A" share with these exceptions: First,
a B share will have 1/200th of the vote of an A share (rather than 1/30th of the vote). Second, the
B will not be eligible to participate in Berkshire's shareholder-designated charitable contributions program.
When the recapitalization is complete, each share of A will become convertible, at the holder's
option and at any time, into 30 shares of B. This conversion privilege will not extend in the opposite
direction. That is, holders of B shares will not be able to convert them into A shares.
We expect to list the B shares on the New York Stock Exchange, where they will trade alongside
the A stock. To create the shareholder base necessary for a listing and to ensure a liquid market
in the B stock Berkshire expects to make a public offering for cash of at least $100 million of new
B shares. The offering will be made only by means of a prospectus.
The market will ultimately determine the price of the B shares. Their price, though, should be in
the neighborhood of 1/30th of the price of the A shares.
Class A shareholders who wish to give gifts may find it convenient to convert a share or two of
their stock into Class B shares. Additionally, arbitrage-related conversions will occur if demand for the
B is strong enough to push its price to slightly above 1/30th of the price of A.
However, because the Class A stock will entitle its holders to full voting rights and access to
Berkshire's contributions program, these shares will be superior to the Class B shares and we would
expect most shareholders to remain holders of the Class A which is precisely what the Buffett and
Munger families plan to do, except in those instances when we ourselves might convert a few shares
to facilitate gifts. The prospect that most shareholders will stick to the A stock suggests that it will enjoy
a somewhat more liquid market than the B.
There are tradeoffs for Berkshire in this recapitalization. But they do not arise from the proceeds
of the offering we will find constructive uses for the money nor in any degree from the price at
which we will sell the B shares. As I write this with Berkshire stock at $36,000 Charlie and I do
not believe it undervalued. Therefore, the offering we propose will not diminish the per-share intrinsic
value of our existing stock. Let me also put our thoughts about valuation more baldly: Berkshire is
selling at a price at which Charlie and I would not consider buying it.
What Berkshire will incur by way of the B stock are certain added costs, including those involving
the mechanics of handling a larger number of shareholders. On the other hand, the stock should be
a convenience for people wishing to make gifts. And those of you who have hoped for a split have
gained a do-it-yourself method of bringing one about.
We are making this move, though, for other reasons having to do with the appearance of
expense-laden unit trusts purporting to be low-priced "clones" of Berkshire and sure to be aggressively
marketed. The idea behind these vehicles is not new: In recent years, a number of people have told
me about their wish to create an "all-Berkshire" investment fund to be sold at a low dollar price. But
until recently, the promoters of these investments heard out my objections and backed off.
I did not discourage these people because I prefer large investors over small. Were it possible,
Charlie and I would love to turn $1,000 into $3,000 for multitudes of people who would find that gain
an important answer to their immediate problems.
In order to quickly triple small stakes, however, we would have to just as quickly turn our present
market capitalization of $43 billion into $129 billion (roughly the market cap of General Electric, America's
most highly valued company). We can't come close to doing that. The very best we hope for is on
average to double Berkshire's per-share intrinsic value every five years, and we may well fall far short
of that goal.
In the end, Charlie and I do not care whether our shareholders own Berkshire in large or small
amounts. What we wish for are shareholders of any size who are knowledgeable about our operations,
share our objectives and long-term perspective, and are aware of our limitations, most particularly those
imposed by our large capital base.
The unit trusts that have recently surfaced fly in the face of these goals. They would be sold by
brokers working for big commissions, would impose other burdensome costs on their shareholders, and
would be marketed en masse to unsophisticated buyers, apt to be seduced by our past record and
beguiled by the publicity Berkshire and I have received in recent years. The sure outcome: a multitude
of investors destined to be disappointed.
Through our creation of the B stock a low-denomination product far superior to Berkshire-only
trusts we hope to make the clones unmerchandisable.
But both present and prospective Berkshire shareholders should pay special attention to one point:
Though the per-share intrinsic value of our stock has grown at an excellent rate during the past five
years, its market price has grown still faster. The stock, in other words, has outperformed the business.
That kind of market overperformance cannot persist indefinitely, neither for Berkshire nor any other
stock. Inevitably, there will be periods of underperformance as well. The price volatility that results,
though endemic to public markets, is not to our liking. What we would prefer instead is to have the
market price of Berkshire precisely track its intrinsic value. Were the stock to do that, every shareholder
would benefit during his period of ownership in exact proportion to the progress Berkshire itself made
in the period.
Obviously, the market behavior of Berkshire's stock will never conform to this ideal. But we will
come closer to this goal than we would otherwise if our present and prospective shareholders are
informed, business-oriented and not exposed to high-commission salesmanship when making their
investment decisions. To that end, we are better off if we can blunt the merchandising efforts of the
unit trusts and that is the reason we are creating the B stock.
We look forward to answering your questions about the recapitalization at the Annual Meeting.
Miscellaneous
Berkshire isn't the only American corporation utilizing the new, exciting ABWA strategy. At about
1:15 p.m. on July 14, 1995, Michael Eisner, CEO of The Walt Disney Company, was walking up
Wildflower Lane in Sun Valley. At the same time, I was leaving a lunch at Herbert Allen's home on that
street to meet Tom Murphy, CEO of Cap Cities/ABC, for a golf game.
That morning, speaking to a large group of executives and money managers assembled by Allen's
investment bank, Michael had made a brilliant presentation about Disney, and upon seeing him, I offered
my congratulations. We chatted briefly and the subject of a possible combination of Disney and Cap
Cities came up. This wasn't the first time a merger had been discussed, but progress had never before
been made, in part because Disney wanted to buy with cash and Cap Cities desired stock.
Michael and I waited a few minutes for Murph to arrive, and in the short conversation that ensued,
both Michael and Murph indicated they might bend on the stock/cash question. Within a few weeks, they
both did, at which point a contract was put together in three very busy days.
The Disney/Cap Cities deal makes so much sense that I'm sure it would have occurred without that
chance encounter in Sun Valley. But when I ran into Michael that day on Wildflower Lane, he was
heading for his plane, so without that accidental meeting the deal certainly wouldn't have happened in
the time frame it did. I believe both Disney and Cap Cities will benefit from the fact that we all
serendipitously met that day.
* * * * * * * * * * * *
It's appropriate that I say a few words here about Murph. To put it simply, he is as fine an
executive as I have ever seen in my long exposure to business. Equally important, he possesses human
qualities every bit the equal of his managerial qualities. He's an extraordinary friend, parent, husband
and citizen. In those rare instances in which Murph's personal interests diverged from those of
shareholders, he unfailingly favored the owners. When I say that I like to be associated with managers
whom I would love to have as a sibling, in-law, or trustee of my will, Murph is the exemplar of what
I mean.
If Murph should elect to run another business, don't bother to study its value just buy the stock.
And don't later be as dumb as I was two years ago when I sold one-third of our holdings in Cap Cities
for $635 million (versus the $1.27 billion those shares would bring in the Disney merger).
* * * * * * * * * * * *
About 96.3% of all eligible shares participated in Berkshire's 1995 shareholder-designated
contributions program. Contributions made were $11.6 million and 3,600 charities were recipients. A
full description of the shareholder-designated contributions program appears on pages 54-55.
Every year a few shareholders miss out on the program because they don't have their shares
registered in their own names on the prescribed record date or because they fail to get their designation
form back to us within the 60-day period allowed. That second problem pained me especially this year
because two good friends with substantial holdings missed the deadline. We had to deny their requests
to be included because we can't make exceptions for some shareholders while refusing to make them
for others.
(To participate in future programs, you must own Class A shares that are registered in the name
of the actual owner, not the nominee name of a broker, bank or depository. Shares not so registered
on August 31, 1996, will be ineligible for the 1996 program. When you get the form, return it promptly
so that it does not get put aside or forgotten.)
* * * * * * * * * * * *
When it comes to our Annual Meetings, Charlie and I are managerial oddballs: We thoroughly
enjoy the event. So come join us on Monday, May 6. At Berkshire, we have no investor relations
department and don't use financial analysts as a channel for disseminating information, earnings
"guidance," or the like. Instead, we prefer direct manager-to-owner communication and believe that the
Annual Meeting is the ideal place for this interchange of ideas. Talking to you there is efficient for us
and also democratic in that all present simultaneously hear what we have to say.
Last year, for the first time, we had the Annual Meeting at the Holiday Convention Centre and the
logistics seemed to work. The ballroom there was filled with about 3,200 people, and we had a video
feed into a second room holding another 800 people. Seating in the main room was a little tight, so
this year we will probably configure it to hold 3,000. This year we will also have two rooms for the
overflow.
All in all, we will be able to handle 5,000 shareholders. The meeting will start at 9:30 a.m., but
be warned that last year the main ballroom was filled shortly after 8:00 a.m.
Shareholders from 49 states attended our 1995 meeting where were you, Vermont? and a
number of foreign countries, including Australia, Sweden and Germany, were represented. As always,
the meeting attracted shareholders who were interested in Berkshire's business as contrasted to
shareholders who are primarily interested in themselves and the questions were all good. Charlie and
I ate lunch on stage and answered questions for about five hours.
We feel that if owners come from all over the world, we should try to make sure they have an
opportunity to ask their questions. Most shareholders leave about noon, but a thousand or so hardcore
types usually stay to see whether we will drop. Charlie and I are in training to last at least five hours
again this year.
We will have our usual array of Berkshire products at the meeting and this year will add a sales
representative from GEICO. At the 1995 meeting, we sold 747 pounds of candy, 759 pairs of shoes,
and over $17,500 of World Books and related publications. In a move that might have been dangerous
had our stock been weak, we added knives last year from our Quikut subsidiary and sold 400 sets of
these. (We draw the line at soft fruit, however.) All of these goods will again be available this year.
We don't consider a cultural event complete unless a little business is mixed in.
Because we expect a large crowd for the meeting, we recommend that you promptly get both plane
and hotel reservations. Those of you who like to be downtown (about six miles from the Centre) may
wish to stay at the Radisson Redick Tower, a small (88 rooms) but nice hotel, or at the much larger
Red Lion Hotel a few blocks away. In the vicinity of the Centre are the Holiday Inn (403 rooms),
Homewood Suites (118 rooms) and Hampton Inn (136 rooms). Another recommended spot is the
Marriott, whose west Omaha location is about 100 yards from Borsheim's and a ten-minute drive from
the Centre. There will be buses at the Marriott that will leave at 7:30, 8:00 and 8:30 for the meeting
and return after it ends.
An attachment to our proxy material explains how you can obtain the card you will need for
admission to the meeting. A good-sized parking area is available at the Centre, while those who stay
at the Holiday Inn, Homewood Suites and Hampton Inn will be able to walk to the meeting. As usual,
we will have buses to take you to the Nebraska Furniture Mart and Borsheim's after the meeting and
to take you from there to hotels or the airport later.
NFM's main store, on its 64-acre site about two miles north of the Centre, is open from 10 a.m.
to 9 p.m. on weekdays, 10 a.m. to 6 p.m. on Saturdays, and noon to 6 p.m. on Sundays. Rose
Blumkin "Mrs. B" is now 102, but will be hard at work in Mrs. B's Warehouse. She was honored
in November at the opening of The Rose, a classic downtown theater of the 20's that has been
magnificently restored, but that would have been demolished had she not saved it. Ask her to tell you
the story.
Borsheim's normally is closed on Sunday but will be open for shareholders and their guests from
10 a.m. to 6 p.m. on May 5th. Additionally, we will have a special opening for shareholders on
Saturday, the 4th, from 6 p.m. to 9 p.m. Last year, on Shareholders Day, we wrote 1,733 tickets in the
six hours we were open which is a sale every 13 seconds. Remember, though, that records are
made to be broken.
At Borsheim's, we will also have the world's largest faceted diamond on display. Two years in the
cutting, this inconspicuous bauble is 545 carats in size. Please inspect this stone and let it guide you
in determining what size gem is appropriate for the one you love.
On Saturday evening, May 4, there will be a baseball game at Rosenblatt Stadium between the
Omaha Royals and the Louisville Redbirds. I expect to make the opening pitch owning a quarter of
the team assures me of one start per year but our manager, Mike Jirschele, will probably make his
usual mistake and yank me immediately after. About 1,700 shareholders attended last year's game.
Unfortunately, we had a rain-out, which greatly disappointed the many scouts in the stands. But the
smart ones will be back this year, and I plan to show them my best stuff.
Our proxy statement will include information about obtaining tickets to the game. We will also offer
an information packet this year listing restaurants that will be open on Sunday night and describing
various things that you can do in Omaha on the weekend.
For years, I've unsuccessfully tried to get my grade school classmate, "Pal" Gorat, to open his
steakhouse for business on the Sunday evening preceding the meeting. But this year he's relented.
Gorat's is a family-owned enterprise that has thrived for 52 years, and if you like steaks, you'll love this
place. I've told Pal he will get a good crowd, so call Gorat's at 402-551-3733 for a reservation. You'll
spot me there ... I'll be the one eating the rare T-bone with a double order of hash browns.
Warren E. Buffett
March 1, 1996 Chairman of the Board
We are eager to hear from principals or their representatives about businesses that meet all of the following criteria:
(1) Large purchases (at least $25 million of before-tax earnings),
(2) Demonstrated consistent earning power (future projections are of no interest to us, nor are
"turnaround" situations),
(3) Businesses earning good returns on equity while employing little or no debt,
(4) Management in place (we can't supply it),
(5) Simple businesses (if there's lots of technology, we won't understand it),
(6) An offering price (we don't want to waste our time or that of the seller by talking, even
preliminarily, about a transaction when price is unknown).
The larger the company, the greater will be our interest: We would like to make an acquisition in the $3-5 billion range. We are
not interested, however, in receiving suggestions about purchases we might make in the general stock market.
We will not engage in unfriendly takeovers. We can promise complete confidentiality and a very fast answer --- customarily within
five minutes --- as to whether we're interested. We prefer to buy for cash, but will consider issuing stock when we receive as much
in intrinsic business value as we give.
Charlie and I frequently get approached about acquisitions that don't come close to meeting our tests: We've found that if you
advertise an interest in buying collies, a lot of people will call hoping to sell you their cocker spaniels. A line from a country song
expresses our feeling about new ventures, turnarounds, or auction-like sales: "When the phone don't ring, you'll know it's me."
To the Board of Directors and Shareholders
Berkshire Hathaway Inc.
We have audited the accompanying consolidated balance sheets of Berkshire Hathaway Inc. and
subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of earnings, and cash
flows for each of the three years in the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial
position of Berkshire Hathaway Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity
with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1993 the Company changed its
method of accounting for income taxes and investments to conform with recent pronouncements of the Financial
Accounting Standards Board.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
March 8, 1996
(dollars in millions except per share amounts)
December 31,
---------------------
1995 1994
--------- ---------
ASSETS
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . $ 2,703.8 $ 273.9
Investments:
Securities with fixed maturities . . . . . . . . . . . . . . . 835.2 1,820.7
Marketable equity securities . . . . . . . . . . . . . . . . . 22,000.3 15,236.5
Salomon Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 822.7 1,023.4
Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . 718.9 580.6
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . 601.1 425.4
Properties and equipment . . . . . . . . . . . . . . . . . . . . . 333.3 275.7
Assets of finance businesses . . . . . . . . . . . . . . . . . . . 756.7 717.1
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,156.8 984.9
--------- ---------
$29,928.8 $21,338.2
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Property and casualty insurance policyholder liabilities . . . . . $ 4,629.7 $ 4,200.8
Accounts payable, accruals and other liabilities . . . . . . . . . 482.1 397.4
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,588.5 3,292.6
Borrowings under investment agreements and other debt. . . . . . . 1,061.7 810.7
Liabilities of finance businesses. . . . . . . . . . . . . . . . . 685.2 562.4
--------- ---------
12,447.2 9,263.9
Minority shareholders' interests . . . . . . . . . . . . . . . . . 264.5 199.3
--------- ---------
Shareholders' equity:
Common stock of $5 par value. Authorized 1,500,000 shares;
Issued 1,381,308 shares. . . . . . . . . . . . . . . . . . . 6.9 6.9
Capital in excess of par value . . . . . . . . . . . . . . . . 1,001.7 656.1
Unrealized appreciation of investments, net. . . . . . . . . . 10,632.8 6,364.4
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . 5,610.4 4,885.2
--------- ---------
17,251.8 11,912.6
Less common stock in treasury, at cost
(187,796 shares in 1995; 203,558 shares in 1994) . . . . . . . 34.7 37.6
--------- ---------
Total shareholders' equity . . . . . . . . . . . . . . . . 17,217.1 11,875.0
--------- ---------
$29,928.8 $21,338.2
========= =========
See accompanying Notes to Consolidated Financial Statements
BERKSHIRE HATHAWAY INC.
and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(dollars in millions except per share amounts)
Year Ended December 31,
------------------------------
1995 1994 1993
-------- -------- --------
Revenues:
Sales and service revenues . . . . . . . . . . . . . . . . $2,755.9 $2,351.9 $1,962.9
Insurance premiums earned. . . . . . . . . . . . . . . . . 957.5 923.2 650.7
Interest and dividend income . . . . . . . . . . . . . . . 474.8 426.1 354.1
Income from investment in Salomon Inc. . . . . . . . . . . 78.8 30.1 63.0
Income from finance businesses . . . . . . . . . . . . . . 26.6 24.9 22.2
Realized investment gain . . . . . . . . . . . . . . . . . 194.1 91.3 546.4
-------- -------- --------
4,487.7 3,847.5 3,599.3
-------- -------- --------
Cost and expenses:
Cost of products and services sold . . . . . . . . . . . . 1,706.7 1,450.0 1,180.6
Insurance losses and loss adjustment expenses. . . . . . . 612.0 565.3 450.7
Insurance underwriting expenses. . . . . . . . . . . . . . 325.0 228.0 169.1
Selling, general and administrative expenses . . . . . . . 775.9 613.4 552.6
Interest expense . . . . . . . . . . . . . . . . . . . . . 59.3 60.1 56.6
Other-than-temporary decline in value of investment in
USAir Group, Inc. Preferred Stock. . . . . . . . . . . . --- 268.5 ---
-------- -------- --------
3,478.9 3,185.3 2,409.6
-------- -------- --------
Earnings before income taxes, minority interest and
cumulative effect of accounting change . . . . . . . . . 1,008.8 662.2 1,189.7
Income taxes -
Other than effect of change in income tax rate
on deferred taxes applicable to unrealized
appreciation . . . . . . . . . . . . . . . . . . . . . 270.3 158.7 345.3
Effect of change in income tax rate on deferred
taxes applicable to unrealized appreciation. . . . . . --- --- 75.3
Minority interest. . . . . . . . . . . . . . . . . . . . . 13.3 8.7 10.0
-------- -------- --------
Earnings before cumulative effect of accounting change . . . . 725.2 494.8 759.1
Cumulative effect of change in accounting for
income taxes . . . . . . . . . . . . . . . . . . . . . --- --- (71.0)
-------- -------- --------
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . $ 725.2 $ 494.8 $ 688.1
======== ======== ========
Average shares outstanding . . . . . . . . . . . . . . . . 1,187,102 1,177,750 1,156,243
========= ========= =========
Earnings per share:
Before cumulative effect of accounting change. . . . . . . $611 $420 $656
Cumulative effect of change in accounting for income
taxes . . . . . . . . . . . . . . . . . . . . . . . . . --- --- (61)
---- ---- ----
Net earnings . . . . . . . . . . . . . . . . . . . . . . . $611 $420 $595
See accompanying Notes to Consolidated Financial Statements
BERKSHIRE HATHAWAY INC.
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
Year Ended December 31,
------------------------------
1995 1994 1993
-------- -------- --------
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 725.2 $ 494.8 $ 688.1
Adjustments to reconcile net income to cash flows
from operating activities:
Realized investment gain . . . . . . . . . . . . . . . . (194.1) (91.3) (546.4)
Other than temporary decline in value of investment
in USAir Group, Inc. Preferred Stock. . . . . . . . --- 268.5 ---
Depreciation and amortization. . . . . . . . . . . . . . 75.7 62.5 50.2
Effect of change in income tax rate on deferred taxes. . --- --- 75.3
Cumulative effect of accounting change . . . . . . . . . --- --- 71.0
Changes in assets and liabilities before effects from
business acquisitions:
Losses and loss adjustment expenses. . . . . . . . . . 268.6 274.1 (22.8)
Deferred charges re reinsurance assumed. . . . . . . . 51.0 25.3 16.2
Unearned premiums. . . . . . . . . . . . . . . . . . . 66.9 (8.5) 83.9
Receivables. . . . . . . . . . . . . . . . . . . . . . (35.4) (49.8) 134.1
Accounts payable, accruals and other liabilities . . . 228.2 210.5 35.0
Income taxes . . . . . . . . . . . . . . . . . . . . . (35.8) (257.1) 107.9
Other. . . . . . . . . . . . . . . . . . . . . . . . . . (22.4) 0.1 33.7
-------- -------- --------
Net cash flows from operating activities . . . . . . 1,127.9 929.1 726.2
-------- -------- --------
Cash flows from investing activities:
Purchases of fixed maturity investments. . . . . . . . . . (273.9) (2,485.8) (272.3)
Purchases of marketable equity securities. . . . . . . . . (1,459.9) (3,050.0) (858.9)
Proceeds from sales of fixed maturity investments. . . . . 669.7 1,772.1 ---
Proceeds from redemptions and maturities of fixed
maturity investments . . . . . . . . . . . . . . . . . . 954.6 85.9 318.9
Proceeds from sales of marketable equity securities. . . . 1,352.7 1,466.8 1,188.5
Loans and investments originated in finance businesses . . (381.2) (246.8) (866.8)
Principal collection on loans and investments
originated in finance businesses . . . . . . . . . . . . 363.0 332.4 269.3
Other . . . . . . . . . . . . . . . . . . . . . . . . . . (11.4) (23.2) 19.6
-------- -------- --------
Net cash flows from investing activities . . . . . . 1,213.6 (2,148.6) (201.7)
-------- -------- --------
Cash flows from financing activities:
Proceeds from borrowings of finance businesses . . . . . . 265.7 208.6 591.9
Proceeds from other borrowings . . . . . . . . . . . . . . 1,232.7 1,225.3 1,265.0
Repayments of borrowings of finance businesses . . . . . . (232.1) (390.5) (316.3)
Repayments of other borrowings . . . . . . . . . . . . . . (1,151.7) (1,387.7) (1,399.9)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . (1.5) (0.9) (2.9)
-------- -------- --------
Net cash flows from financing activities . . . . . . 113.1 (345.2) 137.8
-------- -------- --------
Increase (decrease) in cash and cash equivalents . . 2,454.6 (1,564.7) 662.3
Cash and cash equivalents at beginning of year . . . . . . . . 289.9 1,854.6 1,192.3
-------- -------- --------
Cash and cash equivalents at end of year * . . . . . . . . . . $2,744.5 $ 289.9 $1,854.6
======== ======== ========
*Cash and cash equivalents at end of year are comprised of the following:
Finance businesses . . . . . . . . . . . . . . . . $ 40.7 $ 16.0 $ 37.1
Other. . . . . . . . . . . . . . . . . . . . . . . 2,703.8 273.9 1,817.5
-------- -------- --------
$2,744.5 $ 289.9 $1,854.6
======== ======== ========
See accompanying Notes to Consolidated Financial Statements
BERKSHIRE HATHAWAY INC.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
(1) Significant accounting policies and practices
(a) Nature of operations and basis of consolidation
Berkshire Hathaway Inc. (the "Company" or "Berkshire") is a holding company owning subsidiaries engaged
in a number of diverse business activities. The most important of these is the property and casualty
insurance business conducted on both a direct and reinsurance basis. Further information regarding
this business and Berkshire's other reportable business segments is contained in Note 18.
The accompanying consolidated financial statements include the accounts of Berkshire consolidated with
accounts of all its subsidiaries. Intercompany accounts and transactions have been eliminated.
(b) Use of estimates in preparation of financial statements
The preparation of the consolidated financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amount of
assets and liabilities at the date of the financial statements and the reported amount of revenues and
expenses during the period. Actual results may differ from the estimates and assumptions used in
preparing the consolidated financial statements.
(c) Cash equivalents
Cash equivalents consist of funds invested in money market accounts and in investments with a
maturity of three months or less when purchased.
(d) Investments
Management determines the appropriate classifications of investments in securities with fixed maturities and
marketable equity securities at the time of purchase and reevaluates such designations as of each balance
sheet date. Investments in securities with fixed maturities (except for such securities held by finance
businesses) and marketable equity securities, are classified as available-for-sale. Securities with fixed
maturities held by finance businesses are classified as held-to-maturity. Securities with fixed maturities are
deemed to be held-to-maturity securities when the Company has the ability and positive intent to hold
them to maturity. Held-to-maturity securities are carried at amortized cost. Available-for-sale securities are
stated at fair value, with unrealized gains and losses, net of tax, reported in a separate component of
shareholders' equity. Realized gains and losses on sales of investments, as determined on a specific
identification basis, are included in the consolidated statements of earnings.
(e) Goodwill of acquired businesses
The difference between purchase cost and the fair value of the net assets of acquired businesses
is amortized on a straight line basis over forty years. The net unamortized balance is carried in other assets.
(f) Insurance premium acquisition costs
For financial reporting purposes, certain costs of acquiring insurance premiums are deferred, subject
to ultimate recoverability, and charged to income as the premiums are earned. Generally, the ultimate
recoverability of premium acquisition costs is determined without regard to investment income.
(g) Deferred charges re reinsurance assumed
The excess of estimated liabilities for claims and claim costs ultimately payable by the Insurance Group
over consideration received with respect to retroactive property/casualty reinsurance contracts that provide
for indemnification of insurance risk, other than structured settlements, is established as a deferred charge
at inception of such contracts. The deferred charges are subsequently amortized using the interest method
over the expected settlement periods of the claim liabilities. The unamortized balance of deferred charges
is included in other assets.
(h) Property and casualty insurance policyholder liabilities
Property and casualty insurance policyholder liabilities are comprised primarily of (i) unpaid losses and loss
adjustment expenses, (ii) unearned premiums, and (iii) funds held under reinsurance assumed.
Liability for unpaid losses and loss adjustment expenses represents the aggregate of such obligations of
members of the Insurance Group with respect to: (i) prospective property/casualty insurance and
reinsurance contracts, (ii) retroactive property/casualty reinsurance contracts that provide for indemnification
of insurance risk, other than structured settlements, and (iii) reinsurance contracts providing for periodic
payments with respect to settled claims ("structured settlements"). Except for structured settlement
liabilities which are stated at discounted present values, the liability for unpaid losses and loss adjustment
expenses is at the aggregate of estimated ultimate payment amounts.
Ultimate payment amounts with respect to prospective contracts are determined from (i) individual case
estimates, (ii) estimates of incurred but not reported losses, based on past experience, and (iii) reports
of losses from ceding insurers.
Ultimate payment amounts with respect to retroactive reinsurance contracts that provide for
indemnification of insurance risk, other than structured settlements, are established for financial reporting
purposes at maximum limits of indemnification under the contracts. (See also 1(g) above related to
deferred charges re reinsurance assumed.)
Liabilities under structured settlement contracts are established when the contracts are entered into, at the then
present value of the actuarially determined ultimate payment amount discounted at the prevailing market
interest rate. Annual accretions to the liabilities are charged to losses incurred. (This accounting policy also
applies to annuity reserves which are included in the liabilities of finance businesses).
Funds held under reinsurance assumed treaties include deposit balances refundable to insureds under
contracts which, at inception, the Company believed did not meet the risk transfer requirements
established by Statement of Financial Accounting Standards No. 113, "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts."
(j) Insurance premiums
Insurance premiums for prospective insurance and non-property catastrophe reinsurance policies are recognized
as revenues ratably over their terms with unearned premiums computed on a monthly or daily pro rata
basis. Premiums for catastrophe excess of loss reinsurance coverages are deferred until the earlier of a
loss occurrence or policy expiration. Consideration received for indemnification of risk under retroactive
reinsurance contracts and structured settlements is accounted for as premiums earned at the inception
of the contracts. Premiums earned are stated net of amounts ceded to reinsurers.
(k) Reinsurance
Provisions for losses and loss adjustment expenses are reported in the accompanying consolidated statements of
earnings after deducting estimates of recoveries under reinsurance contracts. Such recoveries totalled $14
million, $61 million, and $34 million for 1995, 1994 and 1993, respectively. Reinsurance contracts do not
relieve the Insurance Group Members of their obligations to indemnify policyholders with respect to the
underlying insurance and reinsurance contracts. Estimates of losses and loss adjustment expenses
recoverable under reinsurance contracts are included in receivables.
(m) Accounting changes
Effective January 1, 1993, the Company adopted the provisions of Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" ("SFAS 109"). The adoption of SFAS 109 changed the
Company's method of accounting for income taxes from the "deferred method" to the "asset and liability
method." Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are
recognized for future tax consequences attributable to differences between financial statement carrying
amounts of existing assets and liabilities and their respective tax bases. The provisions of SFAS 109
require that the effect on deferred taxes of a change in tax rates be recognized in income in the period
that includes the enactment date.
In May 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). As permitted under
the statement, the Company elected to adopt the statement's provisions as of December 31, 1993. Among
its provisions, the statement requires a change in the accounting for marketable equity securities held by
non-insurance entities. Prior to the adoption of SFAS 115, such securities were carried at the lower of
aggregate cost or market. Under the provisions of SFAS 115, these securities are now carried at market
and accounted for in the same manner as marketable equity securities held by the Company's insurance
subsidiaries.
(2) Business acquisitions
During 1995, the Company consummated mergers with Helzberg's Diamond Shops, Inc. ("Helzberg's") and R.C.
Willey Home Furnishings ("R.C. Willey") by reissuing 15,762 shares of its common stock held in treasury in exchange
for 100% of the common stock of each of these companies. Helzberg's consists of a chain of 166 jewelry stores
operating in 25 states and R.C. Willey, through its seven locations, is the dominant retailer of home furnishings in Utah.
In 1993, the Company consummated a merger with the privately held Dexter Shoe Companies ("Dexter") by
reissuing 25,203 shares of its common stock held in treasury in exchange for 100% of the outstanding common stock
of Dexter. Dexter manufactures and distributes men's and women's dress, casual and athletic shoes.
Each of these mergers was accounted for by the purchase method and, accordingly, the operating results of these
businesses are included in the Company's consolidated results of operations from the effective dates of the mergers
(Dexter November 7, 1993; Helzberg's April 30, 1995; R.C. Willey June 29, 1995). Had the results of these
businesses been included commencing with operations at the beginning of the year of their respective acquisition by
Berkshire, the reported results would not have been materially affected.
(3) Merger with GEICO Corporation
On January 2, 1996, GEICO Corporation ("GEICO") became an indirect wholly-owned subsidiary of Berkshire as
a result of the merger of an indirect wholly-owned subsidiary of Berkshire with and into GEICO. (The date of January
2, 1996 is hereafter referred to as the "Merger Date".) The merger was consummated pursuant to an Agreement and
Plan of Merger (the "Agreement") dated August 25, 1995. Pursuant to the Agreement, each issued and outstanding
common share of GEICO on the Merger Date, except shares held by Berkshire's subsidiaries and GEICO, was converted
into the right to receive $70 per share, or an aggregate amount of $2.3 billion (the "Merger Consideration"). The amount
of the Merger Consideration was determined based upon 33,284,733 outstanding common shares held by the public on
the Merger Date.
As of the Merger Date, subsidiaries of Berkshire owned 34,250,000 common shares of GEICO which were acquired
in 1980 and earlier years for an aggregate cost of $45.7 million. Up to the Merger Date, neither Berkshire nor its
subsidiaries had acquired any shares of GEICO's common stock since 1980. However, Berkshire's ownership
percentage, due to intervening stock repurchases by GEICO, gradually increased from about 33% in 1980 to almost 51%
immediately prior to the Merger Date.
GEICO, through its subsidiaries, is a multiple line property casualty insurer, the principal business of which is writing
private passenger automobile insurance. The condensed financial statements which follow are derived from GEICO's
audited consolidated financial statements as of December 31, 1995 and for the year then ended.
GEICO Corporation
(dollars in millions)
Condensed Balance Sheet Condensed Statement of Earnings
as of December 31, 1995 For the year ended December 31, 1995
Assets Revenues
Cash and cash equivalents. . . . . . . $ 391.6 Premiums . . . . . . . . . . . . . . $2,787.0
Investments: Net investment income. . . . . . . . 226.8
Securities with fixed maturities . . 3,680.8 Realized investment gain . . . . . . 21.6
Equity securities. . . . . . . . . . 971.1 Other. . . . . . . . . . . . . . . . 18.6
Other. . . . . . . . . . . . . . . . . 752.0 --------
-------- 3,054.0
$5,795.5 --------
========
Cost and expenses
Liabilities and shareholders' equity Insurance losses and expenses. . . . 2,711.3
Property and casualty insurance Interest on debt . . . . . . . . . . 34.4
policyholder liabilities . . . . . . $3,025.8 -------
Debt . . . . . . . . . . . . . . . . . 434.4 2,745.7
Other. . . . . . . . . . . . . . . . . 466.9 -------
--------
3,927.1 Earnings before income taxes . . . . 308.3
Shareholders' equity . . . . . . . . . 1,868.4 Income taxes . . . . . . . . . . . . 60.7
-------- -------
$5,795.5 Net earnings . . . . . . . . . . . . $ 247.6
======== =======
The merger will be accounted for by the purchase method and, therefore, assets and liabilities of GEICO will be
recorded in Berkshire's consolidated financial statements at fair value. The excess of the purchase cost over the fair value
of net assets acquired at the Merger Date will be recorded as goodwill and subsequently amortized over 40 years. The
following unaudited pro forma combined condensed balance sheet results from combining GEICO's condensed
consolidated balance sheet with Berkshire's consolidated balance sheet as of December 31, 1995 to give effect to the
merger as if it had occurred on such date.
Pro Forma Combined Condensed Balance Sheet
As of December 31, 1995
(dollars in millions)
Assets Liabilities and shareholders' equity
Cash and cash equivalents. . . . . . . $ 758.3 Property and casualty insurance
Investments: policyholder liabilities. . . . . . . $ 7,655.5
Securities with fixed maturities . . 5,104.0 Income taxes, principally deferred. . . 4,873.6
Marketable equity securities . . . . 20,812.9 Borrowings under investment agreements
Receivables. . . . . . . . . . . . . . 1,213.9 and other debt. . . . . . . . . . . . 1,475.5
Goodwill . . . . . . . . . . . . . . . 2,293.7 Other liabilities . . . . . . . . . . . 1,607.8
Other assets . . . . . . . . . . . . . 2,432.9 ---------
--------- 15,612.4
$32,615.7 ---------
========= Minority shareholders' interest . . . . 264.5
---------
Total shareholders' equity. . . . . . . 16,738.8
---------
$32,615.7
=========
The preceding pro forma balance sheet reflects purchase accounting adjustments which result in the consolidation
of Berkshire's previously owned investments in GEICO on a "step-by-step" basis, in accordance with the provisions of
Accounting Research Bulletin 51, "Consolidated Financial Statements" ("ARB 51"). Prior to the Merger Date the
investment in GEICO common stock was classified as an available-for-sale security and carried at market value in
accordance with the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (See Note 5). The change in accounting will result in a decrease in
shareholders' equity of about $455 million from the amount reflected on Berkshire's Consolidated Balance Sheet at
December 31, 1995.
During the fourth quarter of 1995, the Financial Accounting Standards Board ("FASB") issued a proposed statement
of financial accounting standards entitled "Consolidated Financial Statements: Policy and Procedures" ("Exposure Draft")
which would supersede ARB 51. The provisions of the Exposure Draft would require that Berkshire recognize, in earnings,
the unrealized gains or losses of such earlier GEICO investments previously carried at market value and classified as
available-for-sale securities. Therefore, if the purchase accounting adjustments had bee