BERKSHIRE HATHAWAY INC.
3
INTERIM REPORT
For the Quarter
Ended September 30, 1996
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in millions except per share amounts)
September 30, December 31,
1996 1995
--------- ---------
ASSETS
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . .$ 810.7 $ 2,703.8
Investments:
Securities with fixed maturities at estimated fair value:
Maturing within two years (cost: 1996-$3,032.2; 1995-$596.5) . . 3,048.4 615.7
Maturing after two years (cost: 1996-$3,289.2; 1995-$651.7). . . 3,491.4 807.5
Equity securities. . . . . . . . . . . . . . . . . . . . . . . . . 25,567.9 21,017.6
Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,476.2 718.9
Assets of finance businesses . . . . . . . . . . . . . . . . . . . . 868.3 756.7
Goodwill of acquired businesses. . . . . . . . . . . . . . . . . . . 2,275.7 672.0
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,668.1 1,419.2
--------- ---------
$39,206.7 $28,711.4
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and loss adjustment expenses. . . . . . . . . . . . . . . . .$ 6,237.2 $ 3,698.6
Unearned premiums. . . . . . . . . . . . . . . . . . . . . . . . . . 1,492.5 374.1
Accounts payable, accruals and other liabilities . . . . . . . . . . 1,638.8 1,039.1
Income taxes, principally deferred . . . . . . . . . . . . . . . . . 6,155.1 4,849.5
Borrowings under investment agreements and other debt. . . . . . . . 1,435.2 1,061.7
Liabilities of finance businesses. . . . . . . . . . . . . . . . . . 747.4 685.2
--------- ---------
17,706.2 11,708.2
--------- ---------
Minority shareholders' interests . . . . . . . . . . . . . . . . . . 311.8 264.5
--------- ---------
Shareholders' equity:
Common Stock: *
Class A Common Stock, $5 par value, 1,376,870 and 1,381,308
shares issued; 1,189,074 and 1,193,512 shares outstanding . . . . 6.9 6.9
Class B Common Stock, $0.1667 par value, 650,640 shares issued
and outstanding in 1996 . . . . . . . . . . . . . . . . . . . . . 0.1 -0-
Capital in excess of par value . . . . . . . . . . . . . . . . . . 1,566.6 1,001.7
Unrealized appreciation of investments, net. . . . . . . . . . . . 10,981.8 9,220.7
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . 8,668.0 6,544.1
--------- ---------
21,223.4 16,773.4
Less: Cost of 187,796 Class A common shares in treasury. . . . . . 34.7 34.7
--------- ---------
Total shareholders' equity. . . . . . . . . . . . . . . . . . 21,188.7 16,738.7
--------- ---------
$39,206.7 $28,711.4
========= =========
* As more fully described in the Notes to Interim Consolidated Financial Statements, on May 8, 1996, Berkshire
issued 517,500 shares of Class B Common Stock having economic rights equal to one-thirtieth (1/30) of the
economic rights of Class A Common Stock. Accordingly, on an equivalent Class A Common Stock basis, there are
1,210,762 shares outstanding at September 30, 1996 versus 1,193,512 outstanding at December 31, 1995. Net
book value per equivalent Class A Common share is $17,500 at September 30, 1996 and $14,025 at December
31, 1995.
See accompanying Notes
CONSOLIDATED STATEMENTS OF EARNINGS
(dollars in millions except per share amounts)
Third Quarter First Nine Months
-------------------- ---------------------
1996 1995 1996 1995
-------- --------- --------- ---------
Revenues:
Insurance premiums earned. . . . . . . . . . . . . . $ 971.2 $ 173.8 $ 2,904.8 $ 579.4
Sales and service revenues . . . . . . . . . . . . . 721.8 682.7 2,137.0 1,871.4
Interest, dividend and other investment income . . . 220.3 175.6 582.5 456.1
Income from finance businesses . . . . . . . . . . . 5.9 8.3 16.9 21.5
Realized investment gain . . . . . . . . . . . . . . 96.1 66.8 2,428.6 141.2
-------- --------- --------- ---------
2,015.3 1,107.2 8,069.8 3,069.6
-------- --------- --------- ---------
Cost and expenses:
Insurance losses and loss adjustment expenses. . . . 769.1 153.0 2,291.1 468.7
Insurance underwriting expenses. . . . . . . . . . . 172.3 49.6 506.0 157.7
Cost of products and services sold . . . . . . . . . 469.4 442.1 1,349.9 1,189.5
Selling, general and administrative expenses . . . . 196.9 187.3 611.5 505.4
Goodwill amortization. . . . . . . . . . . . . . . . 15.1 4.7 45.7 11.6
Interest expense . . . . . . . . . . . . . . . . . . 26.5 14.0 79.7 40.6
-------- --------- --------- ---------
1,649.3 850.7 4,883.9 2,373.5
-------- --------- --------- ---------
Earnings before income taxes and minority interest . . 366.0 256.5 3,185.9 696.1
Income taxes . . . . . . . . . . . . . . . . . . . . 98.2 59.2 1,045.4 160.0
Minority interest. . . . . . . . . . . . . . . . . . 3.8 2.8 16.6 10.4
-------- --------- --------- ---------
Net earnings . . . . . . . . . . . . . . . . . . . . . $ 264.0 $ 194.5 $ 2,123.9 $ 525.7
======== ========= ========= =========
Average shares outstanding * . . . . . . . . . . . .1,210,762 1,193,512 1,202,704 1,184,942
Net earnings per share * . . . . . . . . . . . . . . . $218 $163 $1,766 $444
==== ==== ====== ====
* As more fully described in the Notes to Interim Consolidated Financial Statements, on May 8, 1996, Berkshire issued 517,500
shares of Class B Common Stock having economic rights equal to one-thirtieth (1/30) of Class A Common Stock. Average
shares outstanding for the 1996 periods include average Class A Common shares and average Class B Common shares
determined on an equivalent Class A Common Stock basis. Net earnings per share shown above represents net earnings per
Class A Common share. Net earnings per Class B Common share is equal to one-thirtieth (1/30) of such amount or $7 and
$59 per share for the third quarter and first nine months of 1996 respectively.
See accompanying Notes
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
First Nine Months
1996 1995
Net cash flows from operating activities . . . . . . . . . . . . . . . . .$ 842.4 $ 829.9
Cash flows from investing activities:
Purchases of investments. . . . . . . . . . . . . . . . . . . . . . . (3,104.8) (1,576.2)
Proceeds on sales and maturities of investments . . . . . . . . . . . 2,132.8 2,441.8
Loans and investments originated in finance businesses. . . . . . . . (425.6) (326.3)
Principal collections on loans and investments originated
in finance businesses . . . . . . . . . . . . . . . . . . . . . . . 287.2 302.8
Acquisitions of businesses. . . . . . . . . . . . . . . . . . . . . . (2,024.9) -0-
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25.2) (10.5)
--------- ---------
Net cash flows from investing activities . . . . . . . . . . . . . . . . . (3,160.5) 831.6
--------- ---------
Cash flows from financing activities:
Proceeds from borrowings of finance businesses. . . . . . . . . . . . 234.2 231.3
Proceeds from other borrowings. . . . . . . . . . . . . . . . . . . . 881.5 825.9
Repayments of borrowings of finance businesses. . . . . . . . . . . . (368.6) (202.3)
Repayments of other borrowings. . . . . . . . . . . . . . . . . . . . (916.7) (905.5)
Net proceeds from issuance of Class B Common Stock. . . . . . . . . . 565.0 -0-
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2.9) (0.8)
--------- ---------
Net cash flows from financing activities . . . . . . . . . . . . . . . . . 392.5 (51.4)
--------- ---------
Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . (1,925.6) 1,610.1
Cash and cash equivalents at beginning of year*. . . . . . . . . . . . . . 2,744.5 289.9
--------- ---------
Cash and cash equivalents at end of first nine months* . . . . . . . . . .$ 818.9 $ 1,900.0
========= =========
Supplemental cash flow information:
Cash paid during the period for:
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 745.6 $ 214.6
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103.0 65.0
Non-cash investing activities:
Liabilities assumed in connection with acquisitions of businesses . . . 3,920.3 248.5
Common shares issued in connection with acquisitions of businesses. . . -0- 348.6
* Cash and cash equivalents are comprised of the following:
Beginning of year --
Finance businesses. . . . . . . . . . . . . . . . . . . . . . . . . . .$ 40.7 $ 16.0
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,703.8 273.9
--------- ---------
$ 2,744.5 $ 289.9
========= =========
End of first nine months --
Finance businesses. . . . . . . . . . . . . . . . . . . . . . . . . . .$ 8.2 $ 20.8
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 810.7 1,879.2
--------- ---------
$ 818.9 $ 1,900.0
========= =========
See accompanying Notes
Notes To Interim Consolidated Financial Statements
September 30, 1996
Note 1. General
As more fully discussed in Note 2, on January 2, 1996, GEICO Corporation ("GEICO") became a wholly-owned
subsidiary of Berkshire Hathaway Inc. ("Berkshire" or "Company"). Consequently, the Condensed Consolidated
Balance Sheet as of September 30, 1996 and the Consolidated Statements of Earnings for the third quarter and first
nine months of 1996 include the accounts of GEICO. Prior to January 2, 1996, Berkshire owned approximately 51%
of the outstanding common stock of GEICO. Previously the investment in GEICO common stock had been classified
as an available-for-sale security and was carried in Berkshire's Consolidated Balance Sheet at fair value.
Generally accepted accounting principles require that prior year financial statements be restated when control
of a business is obtained on a "step-by-step" basis. Accordingly, the Condensed Consolidated Balance Sheet as
of December 31, 1995 and the Consolidated Statements of Earnings for the third quarter and first nine months of
1995 have been restated to account for Berkshire's previous investment in GEICO common stock under the equity
method. Berkshire's proportionate share of GEICO's net income reduced by amortization of related goodwill is
included in the 1995 Consolidated Statements of Earnings as a component of interest, dividend and other investment
income. The principal effect of the restatement was to decrease shareholders' equity as of December 31, 1995 by
$478.4 million from the amount previously reported.
Reference is made to Berkshire's most recently issued Annual Report that included information necessary or
useful to understanding of Berkshire's businesses and financial statement presentations. In particular, Berkshire's
significant accounting policies and practices were presented as Note 1 to the Consolidated Financial Statements
included in that Report.
For a number of reasons, Berkshire's results for interim periods are not normally indicative of results to be
expected for the year. Most significantly, the estimation error inherent to the process of determining liabilities for
unpaid losses of insurance subsidiaries can be relatively more significant to results of interim periods than to results
for a full year.
Realized investment gains/losses are recorded when investments are sold, other-than-temporarily impaired or
in certain situations, as required by GAAP, when investments are marked-to-market with the corresponding gain or
loss included in earnings. Variations in amount and timing of realized investment gains/losses can cause significant
variations in periodic net earnings.
Note 2. Business acquisitions
On January 2, 1996, GEICO became a wholly-owned subsidiary 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". GEICO, through its subsidiaries, is a multiple line property and casualty insurer, the principal
business of which is underwriting private passenger automobile insurance.
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, except shares held
by Berkshire subsidiaries and GEICO, was converted into the right to receive $70 per share, or an aggregate amount
of $2.3 billion (the "Merger Consideration"). The amount of Merger Consideration was based upon 33,284,733
outstanding 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 years prior to 1981 at an aggregate cost of $45.7 million. Up to the Merger Date, neither Berkshire nor
its subsidiaries had acquired any shares of GEICO common stock since 1980. However, Berkshire's ownership
percentage, due to intervening stock repurchases by GEICO, gradually increased from about 33% in 1980 to almost
51% immediately prior to the Merger Date.
The merger has been accounted for by the purchase method. The excess of the purchase cost over the fair
value of net assets acquired at the Merger Date is recorded as goodwill of acquired businesses and will subsequently
be amortized over 40 years. The following sets forth certain consolidated earnings statement information on a pro
forma basis for the first nine months of 1995 as if the GEICO merger had been consummated, on the same terms,
at the beginning of that year. Dollars are in millions, except per share amounts.
Insurance premiums earned . . . . . . .$ 2,637.3
Total revenues. . . . . . . . . . . . . 5,115.5
Net income. . . . . . . . . . . . . . . 521.0
Earnings per share. . . . . . . . . . . 440
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 (subsequently
redesignated Class A 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 181 jewelry stores operating in 28 states and R.C. Willey, through its
seven locations, is the dominant retailer of home furnishings in Utah.
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 (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 1995, the reported results would not have been materially
affected.
Note 3. Recapitalization
On May 6, 1996, Berkshire shareholders approved a recapitalization plan which creates a new class of
common stock, designated as Class B Common Stock. In connection therewith, Berkshire's existing common stock
was redesignated as Class A Common Stock. Each share of Class A Common Stock is convertible, at the option
of the holder, into thirty shares of Class B Common Stock.
On May 8, 1996, Berkshire completed its initial public offering of 517,500 shares Class B Common Stock.
Berkshire received net proceeds from the offering of $565.0 million. The Company expects that, in time, it will use
the net proceeds for acquisitions of businesses, for augmenting the capital of its insurance subsidiaries, or for other
general corporate purposes.
Since the Class B Common shares are equivalent to one-thirtieth (1/30) of the economic rights of Class A
Common shares, the issuance of the Class B Common Stock was equivalent to the issuance of 17,250 Class A
Common shares or approximately 1.4% of Class A Common shares outstanding at the time of the issuance of Class
B Common shares.
Subsequent to the issuance of Class B Common Stock and as of September 30, 1996, shareholders formerly
holding 4,438 shares of Class A Common Stock elected to convert such shares into 133,140 shares of Class B
Common Stock. The following table summarizes Berkshire's common stock activity during the first nine months of
1996.
Shares of Shares of
Class A Common Stock Class B Common Stock
Issued Held in Treasury Outstanding Issued and Outstanding
--------- ---------------- ----------- ----------------------
Balance at December 31, 1995 . . . . . 1,381,308 (187,796) 1,193,512 ---
Issuance of Class B Common Stock . . . --- --- --- 517,500
Conversions of Class A Common Stock
to Class B Common Stock . . . . . . . (4,438) --- (4,438) 133,140
--------- -------- --------- -------
Balance at September 30, 1996. . . . . 1,376,870 (187,796) 1,189,074 650,640
========= ======== ========= =======
Note 4. Investments in equity securities
Data with respect to investments in equity securities are shown in the tabulation below (in millions).
September 30, December 31,
1996 1995
--------- ---------
Total cost. . . . . . . . . . . . . . . . .$ 8,703.4 $ 7,176.2
Gross unrealized gains. . . . . . . . . . . 16,908.4 13,933.4
Gross unrealized losses . . . . . . . . . . (43.9) (92.0)
--------- ---------
Total carrying value. . . . . . . . . . . .$25,567.9 $21,017.6
========= =========
Carrying value:
American Express Company. . . . . . . . .$ 2,287.4 $ 2,046.3
Capital Cities/ABC, Inc. (a). . . . . . . -0- 2,467.5
The Coca-Cola Company . . . . . . . . . . 10,175.0 7,425.0
The Walt Disney Company (a) . . . . . . . 1,556.8 -0-
Federal Home Loan Mortgage Corporation. . 1,568.0 1,044.0
GEICO Corporation (b) . . . . . . . . . . -0- 1,175.8
The Gillette Company. . . . . . . . . . . 3,462.0 2,502.0
Wells Fargo & Company . . . . . . . . . . 1,895.8 1,466.9
All others. . . . . . . . . . . . . . . . 4,622.9 2,890.1
--------- ---------
Total . . . . . . . . . . . . . . . . . .$25,567.9 $21,017.6
========= =========
(a) In March 1996, The Walt Disney Company ("Disney") completed its acquisition of Capital Cities/ABC, Inc.
Subsidiaries of Berkshire received aggregate consideration of $2.5 billion, which included cash of $1.2 billion
and common shares of Disney with a value of $1.3 billion. The Consolidated Statement of Earnings for the
first nine months of 1996 includes a pre-tax realized investment gain of $2.2 billion from the Disney
transaction.
(b) The carrying value of GEICO common stock as of December 31, 1995 has been restated from the amount
previously reported. See Notes 1 and 2.
Note 5. Deferred income tax liability
The tax effects of significant items comprising the Company's net deferred tax liability as of September 30, 1996
and December 31, 1995 are as follows (in millions):
September 30, December 31,
1996 1995
Deferred tax liabilities: ---------- ----------
Relating to unrealized appreciation of investments. . . . $5,980.2 $4,908.5
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 744.0 157.0
-------- --------
6,724.2 5,065.5
Deferred tax assets. . . . . . . . . . . . . . . . . . . . (595.4) (302.8)
-------- --------
Net deferred tax liability. . . . . . . . . . . . . . . . $6,128.8 $4,762.7
======== ========
Note 6. Finance businesses
Assets and liabilities of Berkshire's finance businesses are summarized below (in millions).
September 30, December 31,
1996 1995
---------- ----------
Assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 8.2 $ 40.7
Installment loans and other receivables . . . . . . . . . . 213.5 185.9
Fixed maturity investments. . . . . . . . . . . . . . . . . 646.2 529.4
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.4 0.7
-------- --------
$ 868.3 $ 756.7
======== ========
Liabilities
Borrowings under investment agreements and other debt . . . $ 389.1 $ 523.6
Annuity reserves. . . . . . . . . . . . . . . . . . . . . . 320.4 116.7
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 37.9 44.9
-------- --------
$ 747.4 $ 685.2
======== ========
Note 7. Unrealized appreciation of investments
Changes in "Unrealized appreciation of investments, net", the balance of which is carried in shareholders' equity,
were as follows during the third quarter and first nine months of 1996 and 1995 (in millions):
Third Quarter First Nine Months
----------------------- -----------------------
1996 1995 1996 1995
--------- --------- --------- ---------
Increase in unrealized appreciation . . . . . . . $ 1,434.1 $ 1,658.5 $ 2,783.7 $ 4,934.4
Increase in deemed applicable
income taxes. . . . . . . . . . . . . . . . . . (502.2) (583.1) (990.9) (1,737.2)
Increase in minority shareholders' interest . . . (18.2) (7.6) (31.7) (37.9)
--------- --------- --------- ---------
Net increase . . . . . . . . . . . . . . . . . 913.7 1,067.8 1,761.1 3,159.3
Balance at beginning of period . . . . . . . . . 10,068.1 7,368.4 9,220.7 5,276.9
--------- --------- --------- ---------
Balance at end of third quarter. . . . . . . . . $10,981.8 $ 8,436.2 $10,981.8 $ 8,436.2
========= ========= ========= =========
Note 8. Acquisition of FlightSafety International, Inc.
On October 15, 1996, Berkshire and FlightSafety International, Inc. ( FlightSafety ) announced that they had
entered into a merger agreement pursuant to which FlightSafety will be acquired by Berkshire. FlightSafety provides
high-technology training to operators of aircraft and ships throughout the world. FlightSafety shareholders will have
the option to receive for each of their shares of FlightSafety either $50 in cash or $48 in Berkshire Class A or Class
B Common Stock for a total value of approximately $1.5 billion, subject to a limitation that the amount of cash to be
issued will not exceed 58% of the total value of the consideration to be received by FlightSafety shareholders.
Consummation of the merger is subject to the approval of two-thirds of the outstanding shares of FlightSafety
and certain other customary conditions. It is expected that the transaction will become effective late in December,
1996 at which time FlightSafety will become a wholly-owned subsidiary of Berkshire. The merger will be accounted
for by the purchase method of accounting, and, accordingly, the operating results of FlightSafety will be included in
Berkshire s consolidated financial statements from the effective date of the merger.
Management's Discussion
September 30, 1996
Net earnings for the third quarter and first nine months of the current and prior year are disaggregated in the
following table. Amounts are in millions and each figure is income tax effected.
Third Quarter First Nine Months
----------------- --------------------
1996 1995 1996 1995
------- ------- --------- --------
Insurance, except realized investment gain . . . . $ 165.4 $ 120.4 $ 454.5 $ 331.3
Manufacturing, merchandising and services. . . . . 40.0 33.9 123.2 111.5
Unallocated income/expense, net. . . . . . . . . . 8.9 5.7 22.7 17.9
Interest expense * . . . . . . . . . . . . . . . . (12.9) (8.7) (45.1) (25.2)
------- ------- --------- --------
Earnings before realized investment gain. . . 201.4 151.3 555.3 435.5
Realized investment gain . . . . . . . . . . . . . 62.6 43.2 1,568.6 90.2
------- ------- --------- --------
Net earnings. . . . . . . . . . . . . . . . . $ 264.0 $ 194.5 $ 2,123.9 $ 525.7
======= ======= ========= ========
* For purposes of the above table, interest expense of finance businesses is netted against the directly related service activity revenues.
Insurance Group
The after tax figures shown above for Insurance Group earnings, except realized investment gain, are aggregated in the following table.
Dollar amounts are in millions.
Third Quarter First Nine Months
-------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
Premiums earned from:
Direct insurance. . . . . . . . . . . . . $ 854.3 $ 60.4 $2,483.7 $ 176.3
Reinsurance assumed . . . . . . . . . . . 116.9 113.4 421.1 403.1
-------- -------- -------- --------
$ 971.2 $ 173.8 $2,904.8 $ 579.4
======== ======== ======== ========
Underwriting gain (loss) attributable to:
Direct insurance. . . . . . . . . . . . . $ 65.1 $ 6.9 $ 155.3 $ 10.4
Reinsurance assumed . . . . . . . . . . . (35.3) (35.8) (47.6) (58.0)
-------- -------- -------- --------
Total underwriting gain (loss). . . . . 29.8 (28.9) 107.7 (47.6)
Net investment income. . . . . . . . . . . . 191.4 166.0 510.3 426.6
Goodwill amortization. . . . . . . . . . . . (10.5) -0- (31.9) -0-
-------- -------- -------- --------
Earnings before income taxes. . . . . . 210.7 137.1 586.1 379.0
Income tax expense . . . . . . . . . . . . . 43.4 15.2 126.1 42.1
Minority interest. . . . . . . . . . . . . . 1.9 1.5 5.5 5.6
-------- -------- -------- --------
Net earnings from Insurance,
except realized investment gain. . . $ 165.4 $ 120.4 $ 454.5 $ 331.3
======== ======== ======== ========
As discussed more fully in the Notes to Interim Consolidated Financial Statements, Berkshire acquired control of GEICO Corporation
("GEICO") in January, 1996. The inclusion of GEICO's accounts in Berkshire's consolidated financial statements in 1996 has significantly
impacted the revenues and operating results of Berkshire's Insurance Group.
In direct insurance activities, Insurance Group members assume risks of loss from parties who are directly subject to the risks. In
reinsurance activities, the members assume defined portions of similar or dissimilar risks to which other insurers or reinsurers have subjected
themselves in their own insuring activities.
GEICO, through its subsidiaries, provides primarily private passenger automobile coverages to insureds in 48 states and the District of
Columbia. GEICO policies are marketed mainly by direct response methods in which customers apply for coverage directly to the company
over the telephone or through the mail. This is a significant element in GEICO's strategy to be a low cost provider of such coverages.
GEICO's underwriting results for the third quarter and first nine months of 1996 are summarized below. Amounts for 1995 periods are
shown for comparative purposes, although such amounts are not included in Berkshire's Consolidated Financial Statements. Dollar amounts
are in millions.
Third Quarter First Nine Months
----------------------------- ----------------------------------
1996 1995 1996 1995
------------- ------------- --------------- ---------------
Amount % Amount % Amount % Amount %
------ ----- ------ ----- -------- ----- -------- -----
Premiums earned. . . . . . . $780.5 100.0 $710.3 100.0 $2,278.1 100.0 $2,057.9 100.0
Losses and loss expenses . . 601.3 77.1 558.2 78.6 1,808.1 79.4 1,668.5 81.1
Underwriting expenses. . . . 125.0 16.0 113.5 16.0 348.3 15.3 315.8 15.3
------ ----- ------ ----- -------- ----- -------- -----
726.3 93.1 671.7 94.6 2,156.4 94.7 1,984.3 96.4
------ ===== ------ ===== -------- ===== -------- =====
Underwriting gain. . . . . . $ 54.2 $ 38.6 $ 121.7 $ 73.6
====== ====== ======== ========
Intensified marketing efforts for GEICO's voluntary preferred-risk, standard and non-standard-risk private passenger auto insurance have
contributed to the increases in business accepted. Such efforts have resulted in in-force policy growth over the past twelve months of 6.3% in
preferred-risk auto and 29.2% in the standard and non-standard auto lines. Recent trends indicate that growth in GEICO's voluntary auto
lines may continue at approximately these levels for the remainder of 1996 and into 1997.
Berkshire's other direct insurance businesses produced earned premiums of $205.6 million and $176.3 million for the first nine months
of 1996 and 1995, respectively. Premiums earned by Berkshire s other direct insurance businesses for the third quarter totaled $73.8 million
in 1996 and $ 60.4 million in 1995. Most of the increases in premiums earned in 1996 periods compared to 1995 periods derived from the
Group's professional/specialty risk and credit insurance businesses.
For the first nine months of 1996 and 1995, underwriting gains from non-GEICO direct insurance businesses were $33.6 million and
$10.4 million, respectively. For the third quarter, these operations produced net underwriting gains of $10.9 million in 1996 and $6.9 million
in 1995. The increases in underwriting gains in 1996 periods derived mainly from the traditional motor vehicle and professional/specialty risk
businesses.
Premiums earned from reinsurance activities in the first nine months and third quarter of 1996 exceeded amounts earned in the
corresponding 1995 periods by 4.5% and 3.1%, respectively. Premiums earned in the first nine months from catastrophe excess-of-loss contracts
totaled $145.4 million in 1996 and $133.5 million in 1995. Premiums earned from other excess-of-loss, quota-share, and structured settlement
reinsurance contracts totaled $275.7 million and $269.6 million for the first nine months of 1996 and 1995, respectively. Reinsurance premiums
earned from both catastrophe and non-catastrophe reinsurance in the third quarter of 1996 were relatively unchanged from amounts earned in
1995's third quarter.
Underwriting results from reinsurance activities include gains from catastrophe excess-of-loss policies of $80.6 million and $73.8 million
for the first nine months of 1996 and 1995, respectively. Relatively minor underwriting gains were produced from such policies in the third
quarter of 1996 and 1995. During the fourth quarter of 1996, many of the catastrophe policies will expire and the related premiums will be
earned reflecting the Group s practice to defer earning catastrophe premiums until the earlier of a loss or policy expiration. In the absence of
any fourth quarter catastrophe losses, this business could produce a pre-tax underwriting gain of approximately $90 million in 1996's fourth
quarter. This compares to 1995 s fourth quarter pre-tax gain of $78.3 million.
Net underwriting losses from other reinsurance activities totaled $73.7 million and $78.7 million for the first nine months of 1996 and 1995,
respectively. For the third quarter, net underwriting losses from these coverages were $25.4 million in 1996 and $22.9 million in 1995.
Generally, time-value-of-money concepts are important considerations in establishing premiums for non-catastrophe policies due to the anticipation
of more extended claim payment periods. Underwriting losses often occur as the estimates of losses and loss adjustment expenses are
established on an undiscounted basis, often in amounts exceeding premiums. Nevertheless, this business is accepted because of the significant
amounts of investable policyholder funds ("float") generated.
Charges related to the amortization of deferred charges re reinsurance assumed and accretion of discounted structured settlement liabilities
are a recurring element of Berkshire s reinsurance underwriting results. These charges reflect recognition of time-value-of-money concepts. For
the first nine months, amortization and accretion charges were $54.5 million in 1996 and $53.1 million in 1995. For the third quarter, such
charges were $17.8 million in 1996 and $18.8 million in 1995.
The accompanying consolidated balance sheet includes liabilities of about $6.2 billion representing estimated unpaid losses and loss
adjustment expenses related to insurance and reinsurance activities. Subsequent loss payments will likely differ and further revisions of the
estimates will occur. These revisions will be reflected in earnings in the period made and may have a substantial effect on future periodic
underwriting results.
The Insurance Group continues to generate significant levels of investment income, reflecting large amounts of invested assets. Investable
policyholder funds (or "float") at September 30, 1996 approximated $6.9 billion and included over $2.5 billion added upon the acquisition of
GEICO in January 1996. Net investment income of the Insurance Group for the third quarter and first nine months of 1996 includes the
investment results of GEICO. Net investment income of GEICO was $57.1 million for the third quarter of 1996 and $163.1 million for the
first nine months of 1996. In 1995 periods, net investment income of the Insurance Group included the equity in net earnings of GEICO
-- $33.1 million for the third quarter and $85.5 million for the first nine months.
Investment income for the third quarter of 1996 also includes dividends of $25 million related to Berkshire's investment in USAir Group,
Inc. ("USAir") preferred stock. As previously reported, during 1994 USAir suspended dividend payments on this investment. Subsequent
to September 30, 1996, Berkshire received an additional dividend payment of $22 million which will be reflected in fourth quarter earnings.
After receipt of the latter payment, USAir dividends which remain in arrears are approximately $37 million.
Manufacturing, Merchandising and Services
Results of operations of Berkshire's diverse non-insurance businesses are aggregated in the following table.
Dollar amounts are in millions.
Third Quarter First Nine Months
----------------------------- --------------------------------
1996 1995 1996 1995
------------- ------------- --------------- ---------------
Amount % Amount % Amount % Amount %
------ ----- ------ ----- -------- ----- -------- -----
Revenues . . . . . . . . . . . . $728.3 100.0 $688.2 100.0 $2,157.0 100.0 $1,890.3 100.0
Costs and expenses . . . . . . . 660.7 90.7 629.2 91.4 1,947.6 90.3 1,700.1 89.9
------ ----- ------ ----- -------- ----- -------- -----
Earnings before income taxes . . 67.6 9.3 59.0 8.6 209.4 9.7 190.2 10.1
Applicable income taxes. . . . . 26.5 3.6 24.0 3.5 83.1 3.9 75.7 4.0
Applicable minority interest . . 1.1 0.2 1.1 0.2 3.1 0.1 3.0 0.2
------ ----- ------ ----- -------- ----- -------- -----
Net earnings . . . . . . . . . . $ 40.0 5.5 $ 33.9 4.9 $ 123.2 5.7 $ 111.5 5.9
====== ===== ====== ===== ======== ===== ======== =====
Revenues from these several and diverse business activities during 1996's third quarter and first nine months
were greater by $40.1 million (5.8%) and $266.7 million (14.1%) than revenues recorded during the corresponding
1995 periods. The comparative increase in revenues for the first nine months is primarily due to the acquisitions
during 1995's second quarter of Helzberg's Diamond Shops, Inc. ("Helzberg's") and R.C. Willey Home Furnishings
("R.C. Willey").
Helzberg's operates a chain of 181 jewelry stores and R.C. Willey is the dominant retailer of home furnishings in
Utah. (See Notes to Interim Consolidated Financial Statements for additional information regarding these
acquisitions). The comparative increase in third quarter revenues arose as a result of increases in all of Berkshire's
reportable segments except for the "encyclopedias, other reference materials" segment.
Net earnings from this group of businesses increased $6.1 million (18.0%) during 1996's third quarter and $11.7
million (10.5%) during 1996's first nine months as compared to the prior year. The inclusion of Helzberg's and R.C.
Willey for the entire first nine months of 1996 had a favorable impact on comparative results for the first nine months
as did improved comparative results for Berkshire's home cleaning systems segment. However, somewhat offsetting
these increases were comparative declines in the first nine months in Berkshire's shoe and newspaper segments.
Realized Investment Gain
Realized investment gain/loss has been a recurring element in Berkshire's net earnings for many years. The
amount -- recorded when investments are sold, other-than-temporarily impaired or in certain situations, as required
by GAAP, when investments are marked-to-market with the corresponding gain or loss included in earnings may
fluctuate significantly from period to period, with a meaningful effect upon Berkshire's consolidated net earnings.
However, the amount of realized investment gain or loss for any given period has no predictive value, and variations
in amount from period to period have no practical analytical value, particularly in view of the net unrealized price
appreciation now existing in Berkshire's consolidated investment portfolio.
The Consolidated Statement of Earnings for the first nine months of 1996 reflects a pre-tax realized investment
gain of $2.4 billion ($1.6 billion after tax). Most of this gain resulted from The Walt Disney Company's ("Disney")
acquisition of Capital Cities/ABC, Inc. ("Capital Cities"). Prior to the acquisition, subsidiaries of Berkshire owned
common stock of Capital Cities which had been acquired in 1986 for an aggregate cost of $345.0 million. In
exchange for the Capital Cities common stock, Berkshire subsidiaries received cash and Disney common stock
having an aggregate value of $2.5 billion.
While the effect of this transaction is material to the Consolidated Statement of Earnings, the completion of the
acquisition had a minimal impact on Berkshire's shareholders' equity. This is due to the fact that Berkshire's
investment in Capital Cities had been carried in the prior periods' consolidated financial statements at market value
with unrealized gains, net of tax, reported as a separate component of shareholders' equity. As of December 31,
1995, the pre-tax unrealized gain related to Berkshire's investment in Capital Cities was approximately $2.1 billion.
Financial Condition
On May 8, 1996, Berkshire completed a public offering of a new class of common stock. The net proceeds from
the offering were approximately $565.0 million. The Company expects that in time it will use the net proceeds for
acquisitions of businesses, for augmenting the capital of its insurance subsidiaries, or for other general corporate
purposes.
On October 15, 1996, Berkshire and FlightSafety International, Inc. ("FlightSafety") announced that they had
entered into a merger agreement pursuant to which FlightSafety will be acquired by Berkshire. The form of the
aggregate $1.5 billion consideration to be paid will be dependent on elections of FlightSafety shareholders who will
have an option of receiving either $50 in cash or $48 in Berkshire Class A or Class B Common Stock for each of
their shares. Additionally the total cash consideration cannot exceed approximately $870 million. It is anticipated
that the merger will become effective in late December 1996.
Berkshire's balance sheet continues to reflect significant liquidity and above average capital strength.
Shareholders' equity at September 30, 1996, was $21.2 billion or $17,500 per equivalent Class A Common share.
* * * * *
CONTACT: Marc Hamburg, 402-346-1400