BRK-B

Berkshire Hathaway Inc. 1999 Annual Report (10-K) Summary

Business Context and Reporting Period

This filing covers the fiscal year ended December 31, 1999. Berkshire Hathaway Inc. operates as a holding company with diverse business activities, primarily centered on insurance and reinsurance (GEICO, General Re, Berkshire Hathaway Reinsurance Group, and Direct Insurance Group). The company also operates eight non-insurance reportable segments including flight services, home furnishings, jewelry, and manufacturing. A significant event for the period was the full-year consolidation of General Re Corporation, acquired in December 1998, which substantially increased the company's insurance float and asset base.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Earnings Decline: Net earnings decreased 45% to $1.557 billion, primarily due to a significant drop in realized investment gains ($1.365 billion vs. $2.415 billion in 1998) and a large underwriting loss in the insurance segment.
• Insurance Underwriting Loss: The insurance segments reported a net underwriting loss of $897 million in 1999, compared to a gain of $171 million in 1998. This was driven by a $1.184 billion underwriting loss at General Re (its worst annual result in 15 years) and a $256 million loss at the Berkshire Hathaway Reinsurance Group.
• Revenue Growth: Total revenues increased 74% to $24.0 billion, largely due to the inclusion of General Re's full-year premiums ($6.9 billion) and growth in non-insurance segments like Flight Services (due to the Executive Jet acquisition).
• Goodwill Amortization: Charges for goodwill amortization and purchase-accounting adjustments increased significantly to $648 million (after-tax) due to the General Re acquisition.
• Cash Position: Cash and cash equivalents dropped from $13.6 billion to $3.8 billion, reflecting heavy investment in securities and business acquisitions.

Outlook, Risks, and Management Commentary

• Underwriting Volatility: Management notes that periodic underwriting results, particularly in reinsurance, can be volatile due to catastrophe losses. GEICO expects underwriting results to further decline in 2000 due to aggressive marketing and rate reductions.
• Investment Strategy: Berkshire maintains a strategy of holding equity investments for the long term. Approximately 60% of equity investment value was concentrated in three investees (American Express, Coca-Cola, Gillette) at year-end.
• Market Risks: The company faces significant equity price risk and interest rate risk. A hypothetical 30% decrease in equity prices would reduce shareholders' equity by approximately 12.6%.
• Year 2000 Issues: Berkshire incurred approximately $60 million in Y2K remediation costs. Management reported no significant failures or disruptions as of the filing date but noted potential future losses from insurance contracts related to Y2K failures.
• MidAmerican Investment: In March 2000, Berkshire invested approximately $1.24 billion in MidAmerican Energy Holdings Company, acquiring a 76% economic interest.

Key Facts for Investor Verification

• General Re Performance: Verify the specific drivers of General Re's $1.184 billion underwriting loss, including catastrophe losses and reserve development in life/health lines.
• GEICO Margins: Monitor GEICO's loss ratio (80.2% in 1999) and expense ratio trends as the company pursues growth through rate reductions and increased advertising.
• Investment Portfolio Concentration: Assess the risk associated with the high concentration of equity holdings in American Express, Coca-Cola, and Gillette.
• Float Growth: Confirm the sustainability of the $25.3 billion float, which is a critical source of low-cost capital for Berkshire's investment activities.
• MidAmerican Deal Structure: Review the terms of the MidAmerican Energy investment, specifically the voting vs. economic interest split and the potential obligation to purchase additional trust preferred securities.