General Re

I earlier described our gradual shift from a company obtaining most of its gains from investment activities to one that grows in value by owning businesses. Launching that transition, we took baby steps – making small acquisitions whose impact on Berkshire’s profits was dwarfed by our gains from marketable securities. Despite that cautious approach, I made one particularly egregious error, acquiring Dexter Shoe for $434 million in 1993. Dexter’s value promptly went to zero. The story gets worse: I used stock for the purchase, giving the sellers 25,203 shares of Berkshire that at yearend 2016 were worth more than $6 billion. That wreck was followed by three key happenings – two positive, one negative – that set us firmly on our present course. At the beginning of 1996, we acquired the half of GEICO we didn’t already own, a cash transaction that changed our holding from a portfolio investment into a wholly-owned operating business. GEICO, with its almost unlimited potential, quickly became the centerpiece around which we built what I believe is now the world’s premier property/casualty business. Unfortunately, I followed the GEICO purchase by foolishly using Berkshire stock – a boatload of stock – to buy General Reinsurance in late 1998. After some early problems, General Re has become a fine insurance operation that we prize.

It was, nevertheless, a terrible mistake on my part to issue 272,200 shares of Berkshire in buying General Re, an act that increased our outstanding shares by a whopping 21.8%. My error caused Berkshire shareholders to give far more than they received (a practice that – despite the Biblical endorsement – is far from blessed when you are buying businesses). Early in 2000, I atoned for that folly by buying 76% (since grown to 90%) of MidAmerican Energy, a brilliantly-managed utility business that has delivered us many large opportunities to make profitable and socially-useful investments. The MidAmerican cash purchase – I was learning – firmly launched us on our present course of (1) continuing to build our insurance operation; (2) energetically acquiring large and diversified non-insurance businesses and (3) largely making our deals from internally-generated cash. (Today, I would rather prep for a colonoscopy than issue Berkshire shares.) Our portfolio of bonds and stocks, de-emphasized though it is, has continued in the post-1998 period to grow and to deliver us hefty capital gains, interest, and dividends. Those portfolio earnings have provided us major help in financing the purchase of businesses. Though unconventional, Berkshire’s two-pronged approach to capital allocation gives us a real edge.

Indeed, Berkshire is far more conservative in avoiding risk than most large insurers. For example, if the insurance industry should experience a $250 billion loss from some mega-catastrophe – a loss about triple anything it has ever experienced – Berkshire as a whole would likely record a large profit for the year. Our many streams of non-insurance earnings would see to that. Additionally, we would remain awash in cash and be eager to write business in an insurance market that might well be in disarray. Meanwhile, other major insurers and reinsurers would be swimming in red ink, if not facing insolvency. When Ajit entered Berkshire’s office on a Saturday in 1986, he did not have a day’s experience in the insurance business. Nevertheless, Mike Goldberg, then our manager of insurance, handed him the keys to our small and struggling reinsurance business. With that move, Mike achieved sainthood: Since then, Ajit has created tens of billions of value for Berkshire shareholders. If there were ever to be another Ajit and you could swap me for him, don’t hesitate. Make the trade! * * * * * * * * * * * * We have another reinsurance powerhouse in General Re, managed until recently by Tad Montross. After 39 years at General Re, Tad retired in 2016. Tad was a class act in every way and we owe him a ton of thanks. Kara Raiguel, who has worked with Ajit for 16 years, is now CEO of General Re. At bottom, a sound insurance operation needs to adhere to four disciplines.

Instead, he and his crew delivered significant underwriting profits throughout the start-up period. BHSI’s volume increased 40% in 2016, reaching $1.3 billion. It’s clear to me that the company is destined to become one of the world’s leading P/C insurers. Here’s a recap of pre-tax underwriting earnings and float by division: Underwriting Profit Yearend Float (in millions) Insurance Operations 2016 2015 2016 2015 BH Reinsurance .................................... $ 822 $ 421 $ 45,081 $ 44,108 General Re ........................................... 190 132 17,699 18,560 GEICO ................................................ 462 460 17,148 15,148 Other Primary ....................................... 657 824 11,649 9,906 $2,131 $1,837 $ 91,577 $ 87,722 Berkshire’s great managers, premier financial strength and a range of business models protected by wide moats amount to something unique in the insurance world. This assemblage of strengths is a huge asset for Berkshire shareholders that time will only make more valuable. Regulated, Capital-Intensive Businesses Our BNSF railroad and Berkshire Hathaway Energy (“BHE”), our 90%-owned utility business, share important characteristics that distinguish them from Berkshire’s other activities. Consequently, we assign them their own section in this letter and split out their combined financial statistics in our GAAP balance sheet and income statement.

Nevertheless, Mike Goldberg, then our manager of insurance, handed him the keys to our reinsurance business. With that move, Mike achieved sainthood: Since then, Ajit has created tens of billions of value for Berkshire shareholders. * * * * * * * * * * * * We have another reinsurance powerhouse in General Re, managed by Tad Montross. At bottom, a sound insurance operation needs to adhere to four disciplines. It must (1) understand all exposures that might cause a policy to incur losses; (2) conservatively assess the likelihood of any exposure actually causing a loss and the probable cost if it does; (3) set a premium that, on average, will deliver a profit after both prospective loss costs and operating expenses are covered; and (4) be willing to walk away if the appropriate premium can’t be obtained.

Many insurers pass the first three tests and flunk the fourth. They simply can’t turn their back on business that is being eagerly written by their competitors. That old line, “The other guy is doing it, so we must as well,” spells trouble in any business, but in none more so than insurance. Tad has observed all four of the insurance commandments, and it shows in his results. General Re’s huge float has been considerably better than cost-free under his leadership, and we expect that, on average, to continue. We are particularly enthusiastic about General Re’s international life reinsurance business, which has grown consistently and profitably since we acquired the company in 1998. It can be remembered that soon after we purchased General Re, it was beset by problems that caused commentators – and me as well, briefly – to believe I had made a huge mistake. That day is long gone. General Re is now a gem. * * * * * * * * * * * * Finally, there is GEICO, the insurer on which I cut my teeth 65 years ago. GEICO is managed by Tony Nicely, who joined the company at 18 and completed 54 years of service in 2015. Tony became CEO in 1993, and since then the company has been flying. There is no better manager than Tony. In the 40 years that I’ve known him, his every action has made great sense. When I was first introduced to GEICO in January 1951, I was blown away by the huge cost advantage the company enjoyed compared to the expenses borne by the giants of the industry.

Here’s a recap of underwriting earnings and float by division: Underwriting Profit Yearend Float (in millions) Insurance Operations 2015 2014 2015 2014 BH Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 421 $ 606 $ 44,108 $ 42,454 General Re . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 277 18,560 19,280 GEICO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 460 1,159 15,148 13,569 Other Primary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 824 626 9,906 8,618 $ 1,837 $ 2,668 $ 87,722 $ 83,921 Berkshire’s great managers, premier financial strength and a variety of business models protected by wide moats amount to something unique in the insurance world. This assemblage of strengths is a huge asset for Berkshire shareholders that will only get more valuable with time. Regulated, Capital-Intensive Businesses We have two major operations, BNSF and BHE, that share important characteristics distinguishing them from our other businesses. Consequently, we assign them their own section in this letter and split out their combined financial statistics in our GAAP balance sheet and income statement. Together, they last year accounted for 37% of Berkshire’s after-tax operating earnings. A key characteristic of both companies is their huge investment in very long-lived, regulated assets, with these partially funded by large amounts of long-term debt that is not guaranteed by Berkshire.

* * * * * * * * * * * * We have another reinsurance powerhouse in General Re, managed by Tad Montross. At bottom, a sound insurance operation needs to adhere to four disciplines. It must (1) understand all exposures that might cause a policy to incur losses; (2) conservatively assess the likelihood of any exposure actually causing a loss and the probable cost if it does; (3) set a premium that, on average, will deliver a profit after both prospective loss costs and operating expenses are covered; and (4) be willing to walk away if the appropriate premium can’t be obtained. Many insurers pass the first three tests and flunk the fourth. They simply can’t turn their back on business that is being eagerly written by their competitors. That old line, “The other guy is doing it, so we must as well,” spells trouble in any business, but in none more so than insurance. Tad has observed all four of the insurance commandments, and it shows in his results. General Re’s huge float has been considerably better than cost-free under his leadership, and we expect that, on average, to continue. We are particularly enthusiastic about General Re’s international life reinsurance business, which has grown consistently and profitably since we acquired the company in 1998. It can be remembered that soon after we purchased General Re, it was beset by problems that caused commentators – and me as well, briefly – to believe I had made a huge mistake. That day is long gone. General Re is now a gem.

GEICO’s cost advantage is the factor that has enabled the company to gobble up market share year after year. (We ended 2014 at 10.8% compared to 2.5% in 1995, when Berkshire acquired control of GEICO.) The company’s low costs create a moat – an enduring one – that competitors are unable to cross. Our gecko never tires of telling Americans how GEICO can save them important money. The gecko, I should add, has one particularly endearing quality – he works without pay. Unlike a human spokesperson, he never gets a swelled head from his fame nor does he have an agent to constantly remind us how valuable he is. I love the little guy. * * * * * * * * * * * * In addition to our three major insurance operations, we own a group of smaller companies, most of them plying their trade in odd corners of the insurance world. In aggregate, these companies are a growing operation that consistently delivers an underwriting profit. Indeed, over the past decade, they have earned $2.95 billion from underwriting while growing their float from $1.7 billion to $8.6 billion. Charlie and I treasure these companies and their managers. Underwriting Profit Yearend Float (in millions) Insurance Operations 2014 2013 2014 2013 BH Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 606 $1,294 $42,454 $37,231 General Re . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277 283 19,280 20,013 GEICO . . . . . . . . . . . . . . . . . . . . . . . . .

One venture materialized last June when he formed Berkshire Hathaway Specialty Insurance (“BHSI”). This initiative took us into commercial insurance, where we were instantly accepted by both major insurance brokers and corporate risk managers throughout America. These professionals recognize that no other insurer can match the financial strength of Berkshire, which guarantees that legitimate claims arising many years in the future will be paid promptly and fully. BHSI is led by Peter Eastwood, an experienced underwriter who is widely respected in the insurance world. Peter has assembled a spectacular team that is already writing a substantial amount of business with many Fortune 500 companies and with smaller operations as well. BHSI will be a major asset for Berkshire, one that will generate volume in the billions within a few years. Give Peter a Berkshire greeting when you see him at the annual meeting. * * * * * * * * * * * * We have another reinsurance powerhouse in General Re, managed by Tad Montross. At bottom, a sound insurance operation needs to adhere to four disciplines. It must (1) understand all exposures that might cause a policy to incur losses; (2) conservatively assess the likelihood of any exposure actually causing a loss and the probable cost if it does; (3) set a premium that, on average, will deliver a profit after both prospective loss costs and operating expenses are covered; and (4) be willing to walk away if the appropriate premium can’t be obtained.

Many insurers pass the first three tests and flunk the fourth. They simply can’t turn their back on business that is being eagerly written by their competitors. That old line, “The other guy is doing it, so we must as well,” spells trouble in any business, but in none more so than insurance. Tad has observed all four of the insurance commandments, and it shows in his results. General Re’s huge float has been better than cost-free under his leadership, and we expect that, on average, to continue. We are particularly enthusiastic about General Re’s international life reinsurance business, which has grown consistently and profitably since we acquired the company in 1998. It can be remembered that soon after we purchased General Re, the company was beset by problems that caused commentators – and me as well, briefly – to believe I had made a huge mistake. That day is long gone. General Re is now a gem. * * * * * * * * * * * * Finally, there is GEICO, the insurer on which I cut my teeth 63 years ago. GEICO is managed by Tony Nicely, who joined the company at 18 and completed 52 years of service in 2013. Tony became CEO in 1993, and since then the company has been flying. When I was first introduced to GEICO in January 1951, I was blown away by the huge cost advantage the company enjoyed compared to the expenses borne by the giants of the industry. That operational efficiency continues today and is an all-important asset. No one likes to buy auto insurance.

In 1995, we purchased the half of GEICO that we didn’t already own, paying $1.4 billion more than the net tangible assets we acquired. That’s “goodwill,” and it will forever remain unchanged on our books. As GEICO’s business grows, however, so does its true economic goodwill. I believe that figure to be approaching $20 billion. * * * * * * * * * * * * In addition to our three major insurance operations, we own a group of smaller companies, most of them plying their trade in odd corners of the insurance world. In aggregate, these companies are a growing operation that consistently delivers an underwriting profit. Moreover, as the table below shows, they also provide us with substantial float. Charlie and I treasure these companies and their managers. Underwriting Profit Yearend Float (in millions) Insurance Operations 2013 2012 2013 2012 BH Reinsurance . . . . . . . . . . . . . . $1,294 $ 304 $37,231 $34,821 General Re . . . . . . . . . . . . . . . . . . 283 355 20,013 20,128 GEICO . . . . . . . . . . . . . . . . . . . . . 1,127 680 12,566 11,578 Other Primary . . . . . . . . . . . . . . . . 385 286 7,430 6,598 $3,089 $1,625 $77,240 $73,125 * * * * * * * * * * * * Simply put, insurance is the sale of promises. The “customer” pays money now; the insurer promises to pay money in the future if certain events occur. Sometimes, the promise will not be tested for decades. (Think of life insurance bought by those in their 20s.)

* * * * * * * * * * * * Berkshire’s outstanding economics exist only because we have some terrific managers running some extraordinary insurance operations. Let me tell you about the major units. First by float size is the Berkshire Hathaway Reinsurance Group, run by Ajit Jain. Ajit insures risks that no one else has the desire or the capital to take on. His operation combines capacity, speed, decisiveness and, most important, brains in a manner unique in the insurance business. Yet he never exposes Berkshire to risks that are inappropriate in relation to our resources. Indeed, we are far more conservative in avoiding risk than most large insurers. For example, if the insurance industry should experience a $250 billion loss from some mega-catastrophe – a loss about triple anything it has ever experienced – Berkshire as a whole would likely record a significant profit for the year because it has so many streams of earnings. All other major insurers and reinsurers would meanwhile be far in the red, with some facing insolvency. From a standing start in 1985, Ajit has created an insurance business with float of $35 billion and a significant cumulative underwriting profit, a feat that no other insurance CEO has come close to matching. He has thus added a great many billions of dollars to the value of Berkshire. If you meet Ajit at the annual meeting, bow deeply. * * * * * * * * * * * * We have another reinsurance powerhouse in General Re, managed by Tad Montross.

Tad has observed all four of the insurance commandments, and it shows in his results. General Re’s huge float has been better than cost-free under his leadership, and we expect that, on average, it will continue to be. We are particularly enthusiastic about General Re’s international life reinsurance business, which has achieved consistent and profitable growth since we acquired the company in 1998. * * * * * * * * * * * * Finally, there is GEICO, the insurer on which I cut my teeth 62 years ago. GEICO is run by Tony Nicely, who joined the company at 18 and completed 51 years of service in 2012. I rub my eyes when I look at what Tony has accomplished. Last year, it should be noted, his record was considerably better than is indicated by GEICO’s GAAP underwriting profit of $680 million. Because of a change in accounting rules at the beginning of the year, we recorded a charge to GEICO’s underwriting earnings of $410 million. This item had nothing to do with 2012’s operating results, changing neither cash, revenues, expenses nor taxes. In effect, the writedown simply widened the already huge difference between GEICO’s intrinsic value and the value at which we carry it on our books. GEICO earned its underwriting profit, moreover, despite the company suffering its largest single loss in history. The cause was Hurricane Sandy, which cost GEICO more than three times the loss it sustained from Katrina, the previous record-holder.

The company has excellent prospects for growth in both its traditional business and new lines it has begun to offer. Underwriting Profit Yearend Float (in millions) Insurance Operations 2012 2011 2012 2011 BH Reinsurance . . . . . . . . . $ 304 $(714) $34,821 $33,728 General Re . . . . . . . . . . . . . 355 144 20,128 19,714 GEICO . . . . . . . . . . . . . . . . 680* 576 11,578 11,169 Other Primary . . . . . . . . . . 286 242 6,598 5,960 $1,625 $ 248 $73,125 $70,571 *After a $410 million charge against earnings arising from an industry-wide accounting change. Among large insurance operations, Berkshire’s impresses me as the best in the world. It was our lucky day when, in March 1967, Jack Ringwalt sold us his two property-casualty insurers for $8.6 million.

By these accomplishments, he has added a great many billions of dollars to the value of Berkshire. Charlie would gladly trade me for a second Ajit. Alas, there is none. * * * * * * * * * * * * We have another insurance powerhouse in General Re, managed by Tad Montross. At bottom, a sound insurance operation needs to adhere to four disciplines. It must (1) understand all exposures that might cause a policy to incur losses; (2) conservatively evaluate the likelihood of any exposure actually causing a loss and the probable cost if it does; (3) set a premium that will deliver a profit, on average, after both prospective loss costs and operating expenses are covered; and (4) be willing to walk away if the appropriate premium can’t be obtained. Many insurers pass the first three tests and flunk the fourth. They simply can’t turn their back on business that their competitors are eagerly writing. That old line, “The other guy is doing it so we must as well,” spells trouble in any business, but in none more so than insurance. Indeed, a good underwriter needs an independent mindset akin to that of the senior citizen who received a call from his wife while driving home. “Albert, be careful,” she warned, “I just heard on the radio that there’s a car going the wrong way down the Interstate.” “Mabel, they don’t know the half of it,” replied Albert, “It’s not just one car, there are hundreds of them.” Tad has observed all four of the insurance commandments, and it shows in his results.

General Re’s huge float has been better than cost-free under his leadership, and we expect that, on average, it will continue to be. In the first few years after we acquired it, General Re was a major headache. Now it’s a treasure. * * * * * * * * * * * * Finally, there is GEICO, the insurer on which I cut my teeth 61 years ago. GEICO is run by Tony Nicely, who joined the company at 18 and completed 50 years of service in 2011. GEICO’s much-envied record comes from Tony’s brilliant execution of a superb and almost- impossible-to-replicate business model. During Tony’s 18-year tenure as CEO, our market share has grown from 2.0% to 9.3%. If it had instead remained static – as it had for more than a decade before he took over – our premium volume would now be $3.3 billion rather than the $15.4 billion we attained in 2011. The extra value created by Tony and his associates is a major element in Berkshire’s excess of intrinsic value over book value. There is still more than 90% of the auto-insurance market left for GEICO to rake in. Don’t bet against Tony acquiring chunks of it year after year in the future. Our low costs permit low prices, and every day more Americans discover that the Gecko is doing them a favor when he urges them to visit GEICO.com for a quote. (Our lizard has another endearing quality: Unlike human spokesmen or spokeswomen who expensively represent other insurance companies, our little fellow has no agent.)

At yearend, we acquired Princeton Insurance, a New Jersey writer of medical malpractice policies. This bolt-on transaction expands the managerial domain of Tim Kenesey, the star CEO of Medical Protective, our Indiana-based med-mal insurer. Princeton brings with it more than $600 million of float, an amount that is included in the following table. Here is the record of all four segments of our property-casualty and life insurance businesses: Underwriting Profit Yearend Float (in millions) Insurance Operations 2011 2010 2011 2010 BH Reinsurance . . . . . . . . . . . . . . . . $(714) $ 176 $33,728 $30,370 General Re . . . . . . . . . . . . . . . . . . . . 144 452 19,714 20,049 GEICO . . . . . . . . . . . . . . . . . . . . . . . 576 1,117 11,169 10,272 Other Primary . . . . . . . . . . . . . . . . . . 242 268 5,960 5,141 $ 248 $2,013 $70,571 $65,832 Among large insurance operations, Berkshire’s impresses me as the best in the world. Regulated, Capital-Intensive Businesses We have two very large businesses, BNSF and MidAmerican Energy, that have important common characteristics distinguishing them from our many other businesses. Consequently, we assign them their own sector in this letter and also split out their combined financial statistics in our GAAP balance sheet and income statement.

From a standing start in 1985, Ajit has created an insurance business with float of $30 billion and significant underwriting profits, a feat that no CEO of any other insurer has come close to matching. By his accomplishments, he has added a great many billions of dollars to the value of Berkshire. Even kryptonite bounces off Ajit. * * * * * * * * * * * * We have another insurance powerhouse in General Re, managed by Tad Montross. At bottom, a sound insurance operation requires four disciplines: (1) An understanding of all exposures that might cause a policy to incur losses; (2) A conservative evaluation of the likelihood of any exposure actually causing a loss and the probable cost if it does; (3) The setting of a premium that will deliver a profit, on average, after both prospective loss costs and operating expenses are covered; and (4) The willingness to walk away if the appropriate premium can’t be obtained. Many insurers pass the first three tests and flunk the fourth. The urgings of Wall Street, pressures from the agency force and brokers, or simply a refusal by a testosterone-driven CEO to accept shrinking volumes has led too many insurers to write business at inadequate prices. “The other guy is doing it so we must as well” spells trouble in any business, but none more so than insurance. Tad has observed all four of the insurance commandments, and it shows in his results.

General Re’s huge float has been better than cost-free under his leadership, and we expect that, on average, it will continue to be. * * * * * * * * * * * * Finally, we own a group of smaller companies, most of them specializing in odd corners of the insurance world. In aggregate, their results have consistently been profitable and, as the table below shows, the float they provide us is substantial. Charlie and I treasure these companies and their managers. Here is the record of all four segments of our property-casualty and life insurance businesses: Underwriting Profit Yearend Float (in millions) Insurance Operations 2010 2009 2010 2009 General Re . . . . . . . . . . . . . . . . . . . . . . $ 452 $ 477 $20,049 $21,014 BH Reinsurance . . . . . . . . . . . . . . . . . . 176 250 30,370 27,753 GEICO . . . . . . . . . . . . . . . . . . . . . . . . . 1,117 649 10,272 9,613 Other Primary . . . . . . . . . . . . . . . . . . . 268 84 5,141 5,061 $2,013 $1,460 $65,832 $63,441 Among large insurance operations, Berkshire’s impresses me as the best in the world.

Over the years, he has built this business into a one-of-a-kind giant in the insurance world. Staffed today by only 30 people, Ajit’s operation has set records for transaction size in several areas of insurance. Ajit writes billion-dollar limits – and then keeps every dime of the risk instead of laying it off with other insurers. Three years ago, he took over huge liabilities from Lloyds, allowing it to clean up its relationship with 27,972 participants (“names”) who had written problem-ridden policies that at one point threatened the survival of this 322-year-old institution. The premium for that single contract was $7.1 billion. During 2009, he negotiated a life reinsurance contract that could produce $50 billion of premium for us over the next 50 or so years. Ajit’s business is just the opposite of GEICO’s. At that company, we have millions of small policies that largely renew year after year. Ajit writes relatively few policies, and the mix changes significantly from year to year. Throughout the world, he is known as the man to call when something both very large and unusual needs to be insured. If Charlie, I and Ajit are ever in a sinking boat – and you can only save one of us – swim to Ajit. * * * * * * * * * * * * Our third insurance powerhouse is General Re. Some years back this operation was troubled; now it is a gleaming jewel in our insurance crown.

Under the leadership of Tad Montross, General Re had an outstanding underwriting year in 2009, while also delivering us unusually large amounts of float per dollar of premium volume. Alongside General Re’s P/C business, Tad and his associates have developed a major life reinsurance operation that has grown increasingly valuable. Last year General Re finally attained 100% ownership of Cologne Re, which since 1995 has been a key – though only partially-owned – part of our presence around the world. Tad and I will be visiting Cologne in September to thank its managers for their important contribution to Berkshire.

Finally, we own a group of smaller companies, most of them specializing in odd corners of the insurance world. In aggregate, their results have consistently been profitable and, as the table below shows, the float they provide us is substantial. Charlie and I treasure these companies and their managers. Here is the record of all four segments of our property-casualty and life insurance businesses: Underwriting Profit Yearend Float (in millions) Insurance Operations 2009 2008 2009 2008 General Re . . . . . . . . . . . . . . . . . . . . . . $ 477 $ 342 $21,014 $21,074 BH Reinsurance . . . . . . . . . . . . . . . . . . 349 1,324 26,223 24,221 GEICO . . . . . . . . . . . . . . . . . . . . . . . . . 649 916 9,613 8,454 Other Primary . . . . . . . . . . . . . . . . . . . 84 210 5,061 4,739 $1,559 $2,792 $61,911 $58,488 * * * * * * * * * * * * And now a painful confession: Last year your chairman closed the book on a very expensive business fiasco entirely of his own making. For many years I had struggled to think of side products that we could offer our millions of loyal GEICO customers. Unfortunately, I finally succeeded, coming up with a brilliant insight that we should market our own credit card. I reasoned that GEICO policyholders were likely to be good credit risks and, assuming we offered an attractive card, would likely favor us with their business. We got business all right – but of the wrong type. Our pre-tax losses from credit-card operations came to about $6.

We have long invested in derivatives contracts that Charlie and I think are mispriced, just as we try to invest in mispriced stocks and bonds. Indeed, we first reported to you that we held such contracts in early 1998. The dangers that derivatives pose for both participants and society – dangers of which we’ve long warned, and that can be dynamite – arise when these contracts lead to leverage and/or counterparty risk that is extreme. At Berkshire nothing like that has occurred – nor will it. It’s my job to keep Berkshire far away from such problems. Charlie and I believe that a CEO must not delegate risk control. It’s simply too important. At Berkshire, I both initiate and monitor every derivatives contract on our books, with the exception of operations-related contracts at a few of our subsidiaries, such as MidAmerican, and the minor runoff contracts at General Re. If Berkshire ever gets in trouble, it will be my fault. It will not be because of misjudgments made by a Risk Committee or Chief Risk Officer. * * * * * * * * * * * * In my view a board of directors of a huge financial institution is derelict if it does not insist that its CEO bear full responsibility for risk control. If he’s incapable of handling that job, he should look for other employment. And if he fails at it – with the government thereupon required to step in with funds or guarantees – the financial consequences for him and his board should be severe.

Our RV and ATV businesses are also growing rapidly, albeit from a small base. And, finally, we recently began insuring commercial autos, a big market that offers real promise. GEICO is now saving money for millions of Americans. Go to GEICO.com or call 1-800-847-7536 and see if we can save you money as well. General Re, our large international reinsurer, also had an outstanding year in 2008. Some time back, the company had serious problems (which I totally failed to detect when we purchased it in late 1998). By 2001, when Joe Brandon took over as CEO, assisted by his partner, Tad Montross, General Re’s culture had further deteriorated, exhibiting a loss of discipline in underwriting, reserving and expenses. After Joe and Tad took charge, these problems were decisively and successfully addressed. Today General Re has regained its luster. Last spring Joe stepped down, and Tad became CEO. Charlie and I are grateful to Joe for righting the ship and are certain that, with Tad, General Re’s future is in the best of hands.

Reinsurance is a business of long-term promises, sometimes extending for fifty years or more. This past year has retaught clients a crucial principle: A promise is no better than the person or institution making it. That’s where General Re excels: It is the only reinsurer that is backed by an AAA corporation. Ben Franklin once said, “It’s difficult for an empty sack to stand upright.” That’s no worry for General Re clients. Our third major insurance operation is Ajit Jain’s reinsurance division, headquartered in Stamford and staffed by only 31 employees. This may be one of the most remarkable businesses in the world, hard to characterize but easy to admire. From year to year, Ajit’s business is never the same. It features very large transactions, incredible speed of execution and a willingness to quote on policies that leave others scratching their heads. When there is a huge and unusual risk to be insured, Ajit is almost certain to be called. Ajit came to Berkshire in 1986. Very quickly, I realized that we had acquired an extraordinary talent. So I did the logical thing: I wrote his parents in New Delhi and asked if they had another one like him at home. Of course, I knew the answer before writing. There isn’t anyone like Ajit. Our smaller insurers are just as outstanding in their own way as the “big three,” regularly delivering valuable float to us at a negative cost. We aggregate their results below under “Other Primary.

” For space reasons, we don’t discuss these insurers individually. But be assured that Charlie and I appreciate the contribution of each. Here is the record for the four legs to our insurance stool. The underwriting profits signify that all four provided funds to Berkshire last year without cost, just as they did in 2007. And in both years our underwriting profitability was considerably better than that achieved by the industry. Of course, we ourselves will periodically have a terrible year in insurance. But, overall, I expect us to average an underwriting profit. If so, we will be using free funds of large size for the indefinite future. Underwriting Profit Yearend Float (in millions) Insurance Operations 2008 2007 2008 2007 General Re . . . . . . . . . . . . . . . . . . . . . . $ 342 $ 555 $21,074 $23,009 BH Reinsurance . . . . . . . . . . . . . . . . . . 1,324 1,427 24,221 23,692 GEICO . . . . . . . . . . . . . . . . . . . . . . . . . 916 1,113 8,454 7,768 Other Primary . . . . . . . . . . . . . . . . . . . 210 279 4,739 4,229 $2,792 $3,374 $58,488 $58,698 Manufacturing, Service and Retailing Operations Our activities in this part of Berkshire cover the waterfront. Let’s look, though, at a summary balance sheet and earnings statement for the entire group. Balance Sheet 12/31/08 (in millions) Assets Cash and equivalents . . . . . . . . . . . . . . . . . $ 2,497 Accounts and notes receivable . . . . . . . . . . 5,047 Inventory . . . . . . . . . . . . . . . . . . . . . . . .

Indeed, recent events demonstrate that certain big-name CEOs (or former CEOs) at major financial institutions were simply incapable of managing a business with a huge, complex book of derivatives. Include Charlie and me in this hapless group: When Berkshire purchased General Re in 1998, we knew we could not get our minds around its book of 23,218 derivatives contracts, made with 884 counterparties (many of which we had never heard of). So we decided to close up shop. Though we were under no pressure and were operating in benign markets as we exited, it took us five years and more than $400 million in losses to largely complete the task. Upon leaving, our feelings about the business mirrored a line in a country song: “I liked you better before I got to know you so well.” Improved “transparency” – a favorite remedy of politicians, commentators and financial regulators for averting future train wrecks – won’t cure the problems that derivatives pose. I know of no reporting mechanism that would come close to describing and measuring the risks in a huge and complex portfolio of derivatives. Auditors can’t audit these contracts, and regulators can’t regulate them. When I read the pages of “disclosure” in 10-Ks of companies that are entangled with these instruments, all I end up knowing is that I don’t know what is going on in their portfolios (and then I reach for some aspirin). For a case study on regulatory effectiveness, let’s look harder at the Freddie and Fannie example.

• GEICO possesses the widest moat of any of our insurers, one carefully protected and expanded by Tony Nicely, its CEO. Last year – again – GEICO had the best growth record among major auto insurers, increasing its market share to 7.2%. When Berkshire acquired control in 1995, that share was 2.5%. Not coincidentally, annual ad expenditures by GEICO have increased from $31 million to $751 million during the same period. Tony, now 64, joined GEICO at 18. Every day since, he has been passionate about the company – proud of how it could both save money for its customers and provide growth opportunities for its associates. Even now, with sales at $12 billion, Tony feels GEICO is just getting started. So do I. Here’s some evidence. In the last three years, GEICO has increased its share of the motorcycle market from 2.1% to 6%. We’ve also recently begun writing policies on ATVs and RVs. And in November we wrote our first commercial auto policy. GEICO and National Indemnity are working together in the commercial field, and early results are very encouraging. Even in aggregate, these lines will remain a small fraction of our personal auto volume. Nevertheless, they should deliver a growing stream of underwriting profits and float. • General Re, our international reinsurer, is by far our largest source of “home-grown” float – $23 billion at yearend. This operation is now a huge asset for Berkshire. Our ownership, however, had a shaky start.

For decades, General Re was the Tiffany of reinsurers, admired by all for its underwriting skills and discipline. This reputation, unfortunately, outlived its factual underpinnings, a flaw that I completely missed when I made the decision in 1998 to merge with General Re. The General Re of 1998 was not operated as the General Re of 1968 or 1978. Now, thanks to Joe Brandon, General Re’s CEO, and his partner, Tad Montross, the luster of the company has been restored. Joe and Tad have been running the business for six years and have been doing first-class business in a first-class way, to use the words of J. P. Morgan. They have restored discipline to underwriting, reserving and the selection of clients. Their job was made more difficult by costly and time-consuming legacy problems, both in the U.S. and abroad. Despite that diversion, Joe and Tad have delivered excellent underwriting results while skillfully repositioning the company for the future. • Since joining Berkshire in 1986, Ajit Jain has built a truly great specialty reinsurance operation from scratch. For one-of-a-kind mammoth transactions, the world now turns to him. Last year I told you in detail about the Equitas transfer of huge, but capped, liabilities to Berkshire for a single premium of $7.1 billion. At this very early date, our experience has been good. But this doesn’t tell us much because it’s just one straw in a fifty-year-or-more wind.

We made one large sale last year. In 2002 and 2003 Berkshire bought 1.3% of PetroChina for $488 million, a price that valued the entire business at about $37 billion. Charlie and I then felt that the company was worth about $100 billion. By 2007, two factors had materially increased its value: the price of oil had climbed significantly, and PetroChina’s management had done a great job in building oil and gas reserves. In the second half of last year, the market value of the company rose to $275 billion, about what we thought it was worth compared to other giant oil companies. So we sold our holdings for $4 billion. A footnote: We paid the IRS tax of $1.2 billion on our PetroChina gain. This sum paid all costs of the U.S. government – defense, social security, you name it – for about four hours. * * * * * * * * * * * * Last year I told you that Berkshire had 62 derivative contracts that I manage. (We also have a few left in the General Re runoff book.) Today, we have 94 of these, and they fall into two categories. First, we have written 54 contracts that require us to make payments if certain bonds that are included in various high-yield indices default. These contracts expire at various times from 2009 to 2013. At yearend we had received $3.2 billion in premiums on these contracts; had paid $472 million in losses; and in the worst case (though it is extremely unlikely to occur) could be required to pay an additional $4.7 billion. We are certain to make many more payments.

” There will be bad years periodically. You can be sure of that. In 2006, though, everything went right in insurance – really right. Our managers – Tony Nicely (GEICO), Ajit Jain (B-H Reinsurance), Joe Brandon and Tad Montross (General Re), Don Wurster (National Indemnity Primary), Tom Nerney (U.S. Liability), Tim Kenesey (Medical Protective), Rod Eldred (Homestate Companies and Cypress), Sid Ferenc and Steve Menzies (Applied Underwriters), John Kizer (Central States) and Don Towle (Kansas Bankers Surety) – simply shot the lights out. When I recite their names, I feel as if I’m at Cooperstown, reading from the Hall of Fame roster. Of course, the overall insurance industry also had a terrific year in 2006. But our managers delivered results generally superior to those of their competitors.

Below is the tally on our underwriting and float for each major sector of insurance. Enjoy the view, because you won’t soon see another like it. (in $ millions) Underwriting Profit (Loss) Yearend Float Insurance Operations 2006 2005 2006 2005 General Re ....................... $ 526 $( 334) $22,827 $22,920 B-H Reinsurance .............. 1,658 (1,069) 16,860 16,233 GEICO ............................. 1,314 1,221 7,171 6,692 Other Primary................... 340** 235* 4,029 3,442 Total ................................. $3,838 $ 53 $50,887 $49,287 * Includes MedPro from June 30, 2005. ** Includes Applied Underwriters from May 19, 2006. * * * * * * * * * * * * In 2007, our results from the bread-and-butter lines of insurance will deteriorate, though I think they will remain satisfactory. The big unknown is super-cat insurance. Were the terrible hurricane seasons of 2004-05 aberrations? Or were they our planet’s first warning that the climate of the 21st Century will differ materially from what we’ve seen in the past? If the answer to the second question is yes, 2006 will soon be perceived as a misleading period of calm preceding a series of devastating storms. These could rock the insurance industry. It’s naïve to think of Katrina as anything close to a worst-case event. Neither Ajit Jain, who manages our super-cat operation, nor I know what lies ahead.

This is powerful evidence that our prices are more attractive relative to the competition than ever before. Test us by going to GEICO.com or by calling 800-847-7536. Be sure to indicate you are a shareholder because that fact will often qualify you for a discount. I told you last year about GEICO’s entry into New Jersey in August, 2004. Drivers in that state love us. Our retention rate there for new policyholders is running higher than in any other state, and by sometime in 2007, GEICO is likely to become the third largest auto insurer in New Jersey. There, as elsewhere, our low costs allow low prices that lead to steady gains in profitable business. That simple formula immediately impressed me 55 years ago when I first discovered GEICO. Indeed, at age 21, I wrote an article about the company – it’s reproduced on page 24 – when its market value was $7 million. As you can see, I called GEICO “The Security I Like Best.” And that’s what I still call it. * * * * * * * * * * * * We have major reinsurance operations at General Re and National Indemnity. The former is run by Joe Brandon and Tad Montross, the latter by Ajit Jain. Both units performed well in 2005 considering the extraordinary hurricane losses that battered the industry. It’s an open question whether atmospheric, oceanic or other causal factors have dramatically changed the frequency or intensity of hurricanes. Recent experience is worrisome.

They behave like the fellow in a switchblade fight who, after his opponent has taken a mighty swipe at his throat, exclaimed, “You never touched me.” His adversary’s reply: “Just wait until you try to shake your head.” Excluding the reserves we added for prior periods, MedPro wrote at an underwriting profit. And our other primary companies, in aggregate, had an underwriting profit of $324 million on $1,270 million of volume. This is an extraordinary result, and our thanks go to Rod Eldred of Berkshire Hathaway Homestate Companies, John Kizer of Central States Indemnity, Tom Nerney of U. S. Liability, Don Towle of Kansas Bankers Surety and Don Wurster of National Indemnity. Here’s the overall tally on our underwriting and float for each major sector of insurance: (in $ millions) Underwriting Profit (Loss) Yearend Float Insurance Operations 2005 2004 2005 2004 General Re ....................... $( 334) $ 3 $22,920 $23,120 B-H Reinsurance .............. (1,069) 417 16,233 15,278 GEICO ............................. 1,221 970 6,692 5,960 Other Primary................... 235* 161 3,442 1,736 Total ................................. $ 53 $1,551 $49,287 $46,094 *Includes MedPro from June 30, 2005. Regulated Utility Business We have an 80.5% (fully diluted) interest in MidAmerican Energy Holdings, which owns a wide variety of utility operations. The largest of these are (1) Yorkshire Electricity and Northern Electric, whose 3.

25 billion loss, our reinsurance operations did well last year. At General Re, Joe Brandon has restored a long-admired culture of underwriting discipline that, for a time, had lost its way. The excellent results he realized in 2004 on current business, however, were offset by adverse developments from the years before he took the helm. At NICO’s reinsurance operation, Ajit Jain continues to successfully underwrite huge risks that no other reinsurer is willing or able to accept. Ajit’s value to Berkshire is enormous. * * * * * * * * * * * * Our insurance managers, maximizing the competitive strengths I’ve mentioned in this section, again delivered first-class underwriting results last year. As a consequence, our float was better than costless.scorecard:

(in $ millions) Underwriting Profit Yearend Float Insurance Operations 2004 2004 2003 General Re ....................... $ 3 $23,120 $23,654 B-H Reinsurance .............. 417 15,278 13,948 GEICO ............................. 970 5,960 5,287 Other Primary*................. 161 1,736 1,331 Total ................................. $1,551 $46,094 $44,220 *Includes, in addition to National Indemnity, a variety of other exceptional insurance businesses, run by Rod Eldred, John Kizer, Tom Nerney and Don Towle. Berkshire’s float increased $1.9 billion in 2004, even though a few insureds opted to commute (that is, unwind) certain reinsurance contracts. We agree to such commutations only when we believe the economics are favorable to us (after giving due weight to what we might earn in the future on the money we are returning). To summarize, last year we were paid more than $1.5 billion to hold an average of about $45.2 billion. In 2005 pricing will be less attractive than it has been. Nevertheless, absent a mega-catastrophe, we have a decent chance of achieving no-cost float again this year. Finance and Finance Products Last year in this section we discussed a potpourri of activities. In this report, we’ll skip over several that are now of lesser importance: Berkadia is down to tag ends; Value Capital has added other investors, negating our expectation that we would need to consolidate its financials into ours; and the trading operation that I run continues to shrink.