BRK-B

Business Context and Reporting Period

Company: Berkshire Hathaway Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2002
Business Overview: Berkshire is a holding company with diverse operations, primarily focused on insurance (primary and reinsurance) and a wide array of non-insurance businesses including apparel, building products, finance, flight services, retail, and manufacturing. Capital allocation decisions are made by Warren E. Buffett and Charles T. Munger.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Surge: Net earnings increased significantly from $795 million in 2001 to $4,286 million in 2002. This recovery was driven by improved underwriting results, strong non-insurance business performance, and realized investment gains.
• Insurance Underwriting: The 2001 results were severely impacted by $2.4 billion in pre-tax losses from the September 11 terrorist attacks. In 2002, the consolidated insurance group reported a pre-tax underwriting loss of $411 million, a substantial improvement over the $4.1 billion loss in 2001. GEICO returned to profitability with a $416 million gain.
• Accounting Change: Effective January 1, 2002, Berkshire adopted SFAS No. 142, ceasing the amortization of goodwill. This eliminated a non-cash expense of approximately $636 million (after-tax) that had reduced reported earnings in 2001.
• Acquisitions: Berkshire deployed approximately $3.9 billion in internally generated cash for acquisitions in 2002, including Fruit of the Loom, Garan, Albecca, CTB International, and The Pampered Chef.
• Investment Portfolio: Invested assets increased by $7 billion to $79 billion, largely due to a $6 billion increase in policyholder float. Berkshire increased holdings in high-yield corporate bonds to approximately $8 billion.

Guidance, Outlook, and Risks

• Underwriting Volatility: Management notes that periodic underwriting results, particularly in catastrophe excess reinsurance, can be extremely volatile. While 2002 saw unusually low catastrophe losses, management expects a catastrophic event will eventually occur that could produce extraordinary losses.
• Reserve Uncertainty: A significant portion of liabilities relates to long-tail claims (asbestos, environmental, latent injury). A 5% increase in net loss reserve estimates would result in a $2.1 billion charge to pre-tax earnings.
• Run-off of GRS: General Re Securities (GRS) is in a long-term run-off of its derivative business, expected to take several years. This may result in future transaction and position losses.
• Market Risk: Berkshire holds significant equity investments concentrated in four companies (68.9% of total equity fair value). A hypothetical 30% decrease in market prices would reduce shareholders' equity by approximately 8.6%.
• Dividend Policy: Berkshire has not declared a cash dividend since 1967 and does not plan to do so.

Investor Verification Checklist

• Insurance Reserve Adequacy: Verify the stability of loss reserve estimates, particularly for General Re's North American casualty lines and retroactive reinsurance contracts, which saw $1.55 billion in prior-year reserve increases in 2002.
• Goodwill Accounting Impact: Confirm understanding that 2002 earnings are not directly comparable to prior years due to the cessation of goodwill amortization under SFAS 142.
• Concentration Risk: Assess the impact of the heavy concentration in the equity portfolio (American Express, Coca-Cola, Gillette, Wells Fargo) on overall financial stability.
• Catastrophe Exposure: Review the specific exposure limits in the Berkshire Hathaway Reinsurance Group's catastrophe excess contracts, which are not ceded to other reinsurers.
• Float Cost: Monitor the "cost of float," which improved to 1.1% in 2002 from 12.8% in 2001, to ensure underwriting discipline is maintained.