Berkshire’s Corporate Performance vs. the S&P 500

Annual Percentage Change
Year
in Per-Share
Book Value of
Berkshire
(1)
in S&P 500
with Dividends
Included
(2)
Relative
Results
(1)-(2)
1965 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23.8 10.0 13.8
1966 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.3 (11.7) 32.0
1967 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.0 30.9 (19.9)
1968 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.0 11.0 8.0
1969 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.2 (8.4) 24.6
1970 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.0 3.9 8.1
1971 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.4 14.6 1.8
1972 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.7 18.9 2.8
1973 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7 (14.8) 19.5
1974 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5 (26.4) 31.9
1975 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.9 37.2 (15.3)
1976 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59.3 23.6 35.7
1977 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31.9 (7.4) 39.3
1978 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24.0 6.4 17.6
1979 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35.7 18.2 17.5
1980 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.3 32.3 (13.0)
1981 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31.4 (5.0) 36.4
1982 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40.0 21.4 18.6
1983 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32.3 22.4 9.9
1984 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.6 6.1 7.5
1985 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48.2 31.6 16.6
1986 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26.1 18.6 7.5
1987 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.5 5.1 14.4
1988 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.1 16.6 3.5
1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44.4 31.7 12.7
1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4 (3.1) 10.5
1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39.6 30.5 9.1
1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.3 7.6 12.7
1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.3 10.1 4.2
1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.9 1.3 12.6
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43.1 37.6 5.5
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31.8 23.0 8.8
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34.1 33.4 0.7
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48.3 28.6 19.7
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.5 21.0 (20.5)
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5 (9.1) 15.6
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6.2) (11.9) 5.7
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.0 (22.1) 32.1
2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.0 28.7 (7.7)
2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.5 10.9 (0.4)
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4 4.9 1.5
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.4 15.8 2.6
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.0 5.5 5.5
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9.6) (37.0) 27.4
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.8 26.5 (6.7)
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.0 15.1 (2.1)
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6 2.1 2.5
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.4 16.0 (1.6)
Compounded Annual Gain – 1965-2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.7% 9.4% 10.3
Overall Gain – 1964-2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 586,817% 7,433%
Notes: Data are for calendar years with these exceptions: 1965 and 1966, year ended 9/30; 1967, 15 months ended
12/31. Starting in 1979, accounting rules required insurance companies to value the equity securities they hold at
market rather than at the lower of cost or market, which was previously the requirement. In this table, Berkshire’s
results through 1978 have been restated to conform to the changed rules. In all other respects, the results are calculated
using the numbers originally reported. The S&P 500 numbers are pre-tax whereas the Berkshire numbers are aftertax.
If a corporation such as Berkshire were simply to have owned the S&P 500 and accrued the appropriate taxes, its
results would have lagged the S&P 500 in years when that index showed a positive return, but would have exceeded the
S&P 500 in years when the index showed a negative return. Over the years, the tax costs would have caused the
aggregate lag to be substantial.
2
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
In 2012, Berkshire achieved a total gain for its shareholders of $24.1 billion. We used $1.3 billion of that
to repurchase our stock, which left us with an increase in net worth of $22.8 billion for the year. The per-share book
value of both our Class A and Class B stock increased by 14.4%. Over the last 48 years (that is, since present
management took over), book value has grown from $19 to $114,214, a rate of 19.7% compounded annually.*
A number of good things happened at Berkshire last year, but let’s first get the bad news out of the way.
Š When the partnership I ran took control of Berkshire in 1965, I could never have dreamed that a year in
which we had a gain of $24.1 billion would be subpar, in terms of the comparison we present on the facing
page.
But subpar it was. For the ninth time in 48 years, Berkshire’s percentage increase in book value was less
than the S&P’s percentage gain (a calculation that includes dividends as well as price appreciation). In
eight of those nine years, it should be noted, the S&P had a gain of 15% or more. We do better when the
wind is in our face.
To date, we’ve never had a five-year period of underperformance, having managed 43 times to surpass the
S&P over such a stretch. (The record is on page 103.) But the S&P has now had gains in each of the last
four years, outpacing us over that period. If the market continues to advance in 2013, our streak of fiveyear
wins will end.
One thing of which you can be certain: Whatever Berkshire’s results, my partner Charlie Munger, the
company’s Vice Chairman, and I will not change yardsticks. It’s our job to increase intrinsic business
value – for which we use book value as a significantly understated proxy – at a faster rate than the market
gains of the S&P. If we do so, Berkshire’s share price, though unpredictable from year to year, will itself
outpace the S&P over time. If we fail, however, our management will bring no value to our investors, who
themselves can earn S&P returns by buying a low-cost index fund.
Charlie and I believe the gain in Berkshire’s intrinsic value will over time likely surpass the S&P returns by
a small margin. We’re confident of that because we have some outstanding businesses, a cadre of terrific
operating managers and a shareholder-oriented culture. Our relative performance, however, is almost
certain to be better when the market is down or flat. In years when the market is particularly strong, expect
us to fall short.
Š The second disappointment in 2012 was my inability to make a major acquisition. I pursued a couple of
elephants, but came up empty-handed.
* All per-share figures used in this report apply to Berkshire’s A shares. Figures for the B shares are
1/1500th of those shown for A.
3
Our luck, however, changed early this year. In February, we agreed to buy 50% of a holding company that
will own all of H. J. Heinz. The other half will be owned by a small group of investors led by Jorge Paulo
Lemann, a renowned Brazilian businessman and philanthropist.
We couldn’t be in better company. Jorge Paulo is a long-time friend of mine and an extraordinary
manager. His group and Berkshire will each contribute about $4 billion for common equity in the holding
company. Berkshire will also invest $8 billion in preferred shares that pay a 9% dividend. The preferred
has two other features that materially increase its value: at some point it will be redeemed at a significant
premium price and the preferred also comes with warrants permitting us to buy 5% of the holding
company’s common stock for a nominal sum.
Our total investment of about $12 billion soaks up much of what Berkshire earned last year. But we still
have plenty of cash and are generating more at a good clip. So it’s back to work; Charlie and I have again
donned our safari outfits and resumed our search for elephants.
Now to some good news from 2012:
Š Last year I told you that BNSF, Iscar, Lubrizol, Marmon Group and MidAmerican Energy – our five most
profitable non-insurance companies – were likely to earn more than $10 billion pre-tax in 2012. They
delivered. Despite tepid U.S. growth and weakening economies throughout much of the world, our
“powerhouse five” had aggregate earnings of $10.1 billion, about $600 million more than in 2011.
Of this group, only MidAmerican, then earning $393 million pre-tax, was owned by Berkshire eight years
ago. Subsequently, we purchased another three of the five on an all-cash basis. In acquiring the fifth,
BNSF, we paid about 70% of the cost in cash, and for the remainder, issued shares that increased the
amount outstanding by 6.1%. Consequently, the $9.7 billion gain in annual earnings delivered Berkshire
by the five companies has been accompanied by only minor dilution. That satisfies our goal of not simply
growing, but rather increasing per-share results.
Unless the U.S. economy tanks – which we don’t expect – our powerhouse five should again deliver higher
earnings in 2013. The five outstanding CEOs who run them will see to that.
Š Though I failed to land a major acquisition in 2012, the managers of our subsidiaries did far better. We had
a record year for “bolt-on” purchases, spending about $2.3 billion for 26 companies that were melded into
our existing businesses. These transactions were completed without Berkshire issuing any shares.
Charlie and I love these acquisitions: Usually they are low-risk, burden headquarters not at all, and expand
the scope of our proven managers.
Š Our insurance operations shot the lights out last year. While giving Berkshire $73 billion of free money to
invest, they also delivered a $1.6 billion underwriting gain, the tenth consecutive year of profitable
underwriting. This is truly having your cake and eating it too.
GEICO led the way, continuing to gobble up market share without sacrificing underwriting discipline.
Since 1995, when we obtained control, GEICO’s share of the personal-auto market has grown from 2.5% to
9.7%. Premium volume meanwhile increased from $2.8 billion to $16.7 billion. Much more growth lies
ahead.
The credit for GEICO’s extraordinary performance goes to Tony Nicely and his 27,000 associates. And to
that cast, we should add our Gecko. Neither rain nor storm nor gloom of night can stop him; the little lizard
just soldiers on, telling Americans how they can save big money by going to GEICO.com.
When I count my blessings, I count GEICO twice.
4
Š Todd Combs and Ted Weschler, our new investment managers, have proved to be smart, models of
integrity, helpful to Berkshire in many ways beyond portfolio management, and a perfect cultural fit. We
hit the jackpot with these two. In 2012 each outperformed the S&P 500 by double-digit margins. They left me in
the dust as well.
Consequently, we have increased the funds managed by each to almost $5 billion (some of this emanating
from the pension funds of our subsidiaries). Todd and Ted are young and will be around to manage
Berkshire’s massive portfolio long after Charlie and I have left the scene. You can rest easy when they
take over.
Š Berkshire’s yearend employment totaled a record 288,462 (see page 106 for details), up 17,604 from last
year. Our headquarters crew, however, remained unchanged at 24. No sense going crazy.
Š Berkshire’s “Big Four” investments – American Express, Coca-Cola, IBM and Wells Fargo – all had good
years. Our ownership interest in each of these companies increased during the year. We purchased
additional shares of Wells Fargo (our ownership now is 8.7% versus 7.6% at yearend 2011) and IBM (6.0%
versus 5.5%). Meanwhile, stock repurchases at Coca-Cola and American Express raised our percentage
ownership. Our equity in Coca-Cola grew from 8.8% to 8.9% and our interest at American Express from
13.0% to 13.7%.
Berkshire’s ownership interest in all four companies is likely to increase in the future. Mae West had it
right: “Too much of a good thing can be wonderful.”
The four companies possess marvelous businesses and are run by managers who are both talented and
shareholder-oriented. At Berkshire we much prefer owning a non-controlling but substantial portion of a
wonderful business to owning 100% of a so-so business. Our flexibility in capital allocation gives us a
significant advantage over companies that limit themselves only to acquisitions they can operate.
Going by our yearend share count, our portion of the “Big Four’s” 2012 earnings amounted to $3.9 billion.
In the earnings we report to you, however, we include only the dividends we receive – about $1.1 billion.
But make no mistake: The $2.8 billion of earnings we do not report is every bit as valuable to us as what
we record.
The earnings that the four companies retain are often used for repurchases – which enhance our share of
future earnings – and also for funding business opportunities that are usually advantageous. Over time we
expect substantially greater earnings from these four investees. If we are correct, dividends to Berkshire
will increase and, even more important, so will our unrealized capital gains (which, for the four, totaled
$26.7 billion at yearend).
Š There was a lot of hand-wringing last year among CEOs who cried “uncertainty” when faced with capitalallocation
decisions (despite many of their businesses having enjoyed record levels of both earnings and
cash). At Berkshire, we didn’t share their fears, instead spending a record $9.8 billion on plant and
equipment in 2012, about 88% of it in the United States. That’s 19% more than we spent in 2011, our
previous high. Charlie and I love investing large sums in worthwhile projects, whatever the pundits are
saying. We instead heed the words from Gary Allan’s new country song, “Every Storm Runs Out of Rain.”
We will keep our foot to the floor and will almost certainly set still another record for capital expenditures
in 2013. Opportunities abound in America.
* * * * * * * * * * * *
A thought for my fellow CEOs: Of course, the immediate future is uncertain; America has faced the
unknown since 1776. It’s just that sometimes people focus on the myriad of uncertainties that always exist
while at other times they ignore them (usually because the recent past has been uneventful).
5
American business will do fine over time. And stocks will do well just as certainly, since their fate is tied
to business performance. Periodic setbacks will occur, yes, but investors and managers are in a game that
is heavily stacked in their favor. (The Dow Jones Industrials advanced from 66 to 11,497 in the 20th
Century, a staggering 17,320% increase that materialized despite four costly wars, a Great Depression and
many recessions. And don’t forget that shareholders received substantial dividends throughout the century
as well.)
Since the basic game is so favorable, Charlie and I believe it’s a terrible mistake to try to dance in and out
of it based upon the turn of tarot cards, the predictions of “experts,” or the ebb and flow of business
activity. The risks of being out of the game are huge compared to the risks of being in it.
My own history provides a dramatic example: I made my first stock purchase in the spring of 1942 when
the U.S. was suffering major losses throughout the Pacific war zone. Each day’s headlines told of more
setbacks. Even so, there was no talk about uncertainty; every American I knew believed we would prevail.
The country’s success since that perilous time boggles the mind: On an inflation-adjusted basis, GDP per
capita more than quadrupled between 1941 and 2012. Throughout that period, every tomorrow has been
uncertain. America’s destiny, however, has always been clear: ever-increasing abundance.
If you are a CEO who has some large, profitable project you are shelving because of short-term worries,
call Berkshire. Let us unburden you.
* * * * * * * * * * * *
In summary, Charlie and I hope to build per-share intrinsic value by (1) improving the earning power of our
many subsidiaries; (2) further increasing their earnings through bolt-on acquisitions; (3) participating in the growth
of our investees; (4) repurchasing Berkshire shares when they are available at a meaningful discount from intrinsic
value; and (5) making an occasional large acquisition. We will also try to maximize results for you by rarely, if
ever, issuing Berkshire shares.
Those building blocks rest on a rock-solid foundation. A century hence, BNSF and MidAmerican Energy
will continue to play major roles in the American economy. Insurance, moreover, will always be essential for both
businesses and individuals – and no company brings greater resources to that arena than Berkshire. As we view
these and other strengths, Charlie and I like your company’s prospects.
Intrinsic Business Value
As much as Charlie and I talk about intrinsic business value, we cannot tell you precisely what that number
is for Berkshire shares (or, for that matter, any other stock). In our 2010 annual report, however, we laid out the
three elements – one of which was qualitative – that we believe are the keys to a sensible estimate of Berkshire’s
intrinsic value. That discussion is reproduced in full on pages 104-105.
Here is an update of the two quantitative factors: In 2012 our per-share investments increased 15.7% to
$113,786, and our per-share pre-tax earnings from businesses other than insurance and investments also increased
15.7% to $8,085.
Since 1970, our per-share investments have increased at a rate of 19.4% compounded annually, and our
per-share earnings figure has grown at a 20.8% clip. It is no coincidence that the price of Berkshire stock over the
42-year period has increased at a rate very similar to that of our two measures of value. Charlie and I like to see
gains in both areas, but our strong emphasis will always be on building operating earnings.
* * * * * * * * * * * *
Now, let’s examine the four major sectors of our operations. Each has vastly different balance sheet and
income characteristics from the others. Lumping them together therefore impedes analysis. So we’ll present them
as four separate businesses, which is how Charlie and I view them.
6
Insurance
Let’s look first at insurance, Berkshire’s core operation and the engine that has propelled our expansion
over the years.
Property-casualty (“P/C”) insurers receive premiums upfront and pay claims later. In extreme cases, such
as those arising from certain workers’ compensation accidents, payments can stretch over decades. This collectnow,
pay-later model leaves us holding large sums – money we call “float” – that will eventually go to others.
Meanwhile, we get to invest this float for Berkshire’s benefit. Though individual policies and claims come and go,
the amount of float we hold remains quite stable in relation to premium volume. Consequently, as our business
grows, so does our float. And how we have grown, as the following table shows:
Year Float (in $ millions)
1970 $ 39
1980 237
1990 1,632
2000 27,871
2010 65,832
2012 73,125
Last year I told you that our float was likely to level off or even decline a bit in the future. Our insurance
CEOs set out to prove me wrong and did, increasing float last year by $2.5 billion. I now expect a further increase
in 2013. But further gains will be tough to achieve. On the plus side, GEICO’s float will almost certainly grow. In
National Indemnity’s reinsurance division, however, we have a number of run-off contracts whose float drifts
downward. If we do experience a decline in float at some future time, it will be very gradual – at the outside no
more than 2% in any year.
If our premiums exceed the total of our expenses and eventual losses, we register an underwriting profit
that adds to the investment income our float produces. When such a profit is earned, we enjoy the use of free money
– and, better yet, get paid for holding it. That’s like your taking out a loan and having the bank pay you interest.
Unfortunately, the wish of all insurers to achieve this happy result creates intense competition, so vigorous
in most years that it causes the P/C industry as a whole to operate at a significant underwriting loss. This loss, in
effect, is what the industry pays to hold its float. For example, State Farm, by far the country’s largest insurer and a
well-managed company besides, incurred an underwriting loss in eight of the eleven years ending in 2011. (Their
financials for 2012 are not yet available.) There are a lot of ways to lose money in insurance, and the industry never
ceases searching for new ones.
As noted in the first section of this report, we have now operated at an underwriting profit for ten
consecutive years, our pre-tax gain for the period having totaled $18.6 billion. Looking ahead, I believe we will
continue to underwrite profitably in most years. If we do, our float will be better than free money.
So how does our attractive float affect the calculations of intrinsic value? When Berkshire’s book value is
calculated, the full amount of our float is deducted as a liability, just as if we had to pay it out tomorrow and were
unable to replenish it. But that’s an incorrect way to look at float, which should instead be viewed as a revolving
fund. If float is both costless and long-enduring, which I believe Berkshire’s will be, the true value of this liability is
dramatically less than the accounting liability.
A partial offset to this overstated liability is $15.5 billion of “goodwill” that is attributable to our insurance
companies and included in book value as an asset. In effect, this goodwill represents the price we paid for the floatgenerating
capabilities of our insurance operations. The cost of the goodwill, however, has no bearing on its true
value. For example, if an insurance business sustains large and prolonged underwriting losses, any goodwill asset
carried on the books should be deemed valueless, whatever its original cost.
7
Fortunately, that’s not the case at Berkshire. Charlie and I believe the true economic value of our insurance
goodwill – what we would happily pay to purchase an insurance operation producing float of similar quality – to be
far in excess of its historic carrying value. The value of our float is one reason – a huge reason – why we believe
Berkshire’s intrinsic business value substantially exceeds its book value.
Let me emphasize once again that cost-free float is not an outcome to be expected for the P/C industry as a
whole: There is very little “Berkshire-quality” float existing in the insurance world. In 37 of the 45 years ending in
2011, the industry’s premiums have been inadequate to cover claims plus expenses. Consequently, the industry’s
overall return on tangible equity has for many decades fallen far short of the average return realized by American
industry, a sorry performance almost certain to continue.
A further unpleasant reality adds to the industry’s dim prospects: Insurance earnings are now benefitting
from “legacy” bond portfolios that deliver much higher yields than will be available when funds are reinvested
during the next few years – and perhaps for many years beyond that. Today’s bond portfolios are, in effect, wasting
assets. Earnings of insurers will be hurt in a significant way as bonds mature and are rolled over.
* * * * * * * * * * * *
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.
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 none more so than insurance.
8
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. We insured 46,906 vehicles that were destroyed or damaged in the storm, a
staggering number reflecting GEICO’s leading market share in the New York metropolitan area.
Last year GEICO enjoyed a meaningful increase in both the renewal rate for existing policyholders
(“persistency”) and in the percentage of rate quotations that resulted in sales (“closures”). Big dollars ride on those
two factors: A sustained gain in persistency of a bare one percentage point increases intrinsic value by more than
$1 billion. GEICO’s gains in 2012 offer dramatic proof that when people check the company’s prices, they usually
find they can save important sums. (Give us a try at 1-800-847-7536 or GEICO.com. Be sure to mention that you are a
shareholder; that fact will usually result in a discount.)
* * * * * * * * * * * *
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 have consistently delivered
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.
Late in 2012, we enlarged this group by acquiring Guard Insurance, a Wilkes-Barre company that writes
workers compensation insurance, primarily for smaller businesses. Guard’s annual premiums total about $300
million. 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.
9
Regulated, Capital-Intensive Businesses
We have two major operations, BNSF and MidAmerican Energy, that have important common
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.
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. Our credit is in fact
not needed because each business has earning power that even under terrible conditions amply covers its interest
requirements. In last year’s tepid economy, for example, BNSF’s interest coverage was 9.6x. (Our definition of
coverage is pre-tax earnings/interest, not EBITDA/interest, a commonly-used measure we view as deeply flawed.)
At MidAmerican, meanwhile, two key factors ensure its ability to service debt under all circumstances: the
company’s recession-resistant earnings, which result from our exclusively offering an essential service, and its great
diversity of earnings streams, which shield it from being seriously harmed by any single regulatory body.
Every day, our two subsidiaries power the American economy in major ways:
Š BNSF carries about 15% (measured by ton-miles) of all inter-city freight, whether it is transported by
truck, rail, water, air, or pipeline. Indeed, we move more ton-miles of goods than anyone else, a fact
making BNSF the most important artery in our economy’s circulatory system.
BNSF also moves its cargo in an extraordinarily fuel-efficient and environmentally friendly way, carrying a
ton of freight about 500 miles on a single gallon of diesel fuel. Trucks taking on the same job guzzle about
four times as much fuel.
Š MidAmerican’s electric utilities serve regulated retail customers in ten states. Only one utility holding
company serves more states. In addition, we are the leader in renewables: first, from a standing start nine
years ago, we now account for 6% of the country’s wind generation capacity. Second, when we complete
three projects now under construction, we will own about 14% of U.S. solar-generation capacity.
Projects like these require huge capital investments. Upon completion, indeed, our renewables portfolio
will have cost $13 billion. We relish making such commitments if they promise reasonable returns – and on that
front, we put a large amount of trust in future regulation.
Our confidence is justified both by our past experience and by the knowledge that society will forever need
massive investment in both transportation and energy. It is in the self-interest of governments to treat capital
providers in a manner that will ensure the continued flow of funds to essential projects. And it is in our self-interest
to conduct our operations in a manner that earns the approval of our regulators and the people they represent.
Our managers must think today of what the country will need far down the road. Energy and transportation
projects can take many years to come to fruition; a growing country simply can’t afford to get behind the curve.
We have been doing our part to make sure that doesn’t happen. Whatever you may have heard about our
country’s crumbling infrastructure in no way applies to BNSF or railroads generally. America’s rail system has
never been in better shape, a consequence of huge investments by the industry. We are not, however, resting on our
laurels: BNSF will spend about $4 billion on the railroad in 2013, roughly double its depreciation charge and more
than any railroad has spent in a single year.
10
In Matt Rose, at BNSF, and Greg Abel, at MidAmerican, we have two outstanding CEOs. They are
extraordinary managers who have developed businesses that serve both their customers and owners well. Each has
my gratitude and each deserves yours. Here are the key figures for their businesses:
MidAmerican (89.8% owned) Earnings (in millions)
2012 2011
U.K. utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 429 $ 469
Iowa utility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236 279
Western utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 737 771
Pipelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 383 388
HomeServices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 39
Other (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 36
Operating earnings before corporate interest and taxes . . . . . . . . . . . . . . . . . . . 1,958 1,982
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 314 336
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172 315
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,472 $ 1,331
Earnings applicable to Berkshire . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,323 $ 1,204
BNSF Earnings (in millions)
2012 2011
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20,835 $19,548
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,835 14,247
Operating earnings before interest and taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 5,301
Interest (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 623 560
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,005 1,769
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,372 $ 2,972
Sharp-eyed readers will notice an incongruity in the MidAmerican earnings tabulation. What in the world
is HomeServices, a real estate brokerage operation, doing in a section entitled “Regulated, Capital-Intensive
Businesses?”
Well, its ownership came with MidAmerican when we bought control of that company in 2000. At that
time, I focused on MidAmerican’s utility operations and barely noticed HomeServices, which then owned only a
few real estate brokerage companies.
Since then, however, the company has regularly added residential brokers – three in 2012 – and now has
about 16,000 agents in a string of major U.S. cities. (Our real estate brokerage companies are listed on page 107.)
In 2012, our agents participated in $42 billion of home sales, up 33% from 2011.
Additionally, HomeServices last year purchased 67% of the Prudential and Real Living franchise
operations, which together license 544 brokerage companies throughout the country and receive a small royalty on
their sales. We have an arrangement to purchase the balance of those operations within five years. In the coming
years, we will gradually rebrand both our franchisees and the franchise firms we own as Berkshire Hathaway
HomeServices.
Ron Peltier has done an outstanding job in managing HomeServices during a depressed period. Now, as
the housing market continues to strengthen, we expect earnings to rise significantly.
11
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 12/31/12 (in millions)
Assets Liabilities and Equity
Cash and equivalents . . . . . . . . . . . . . . $ 5,338 Notes payable . . . . . . . . . . . . . . . $ 1,454
Accounts and notes receivable . . . . . . . 7,382 Other current liabilities . . . . . . . . 8,527
Inventory . . . . . . . . . . . . . . . . . . . . . . . 9,675 Total current liabilities . . . . . . . . 9,981
Other current assets . . . . . . . . . . . . . . . 734
Total current assets . . . . . . . . . . . . . . . . 23,129
Deferred taxes . . . . . . . . . . . . . . . 4,907
Goodwill and other intangibles . . . . . . 26,017 Term debt and other liabilities . . 5,826
Fixed assets . . . . . . . . . . . . . . . . . . . . . 18,871 Non-controlling interests . . . . . . 2,062
Other assets . . . . . . . . . . . . . . . . . . . . . 3,416 Berkshire equity . . . . . . . . . . . . . 48,657
$71,433 $71,433
Earnings Statement (in millions)
2012 2011* 2010
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $83,255 $72,406 $66,610
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,978 67,239 62,225
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 130 111
Pre-tax earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,131 5,037 4,274
Income taxes and non-controlling interests . . . . . . . . . . . . . . . . . . 2,432 1,998 1,812
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,699 $ 3,039 $ 2,462
*Includes earnings of Lubrizol from September 16.
Our income and expense data conforming to Generally Accepted Accounting Principles (“GAAP”) is on
page 29. In contrast, the operating expense figures above are non-GAAP. In particular, they exclude some
purchase-accounting items, primarily the amortization of certain intangible assets. We present the data in this
manner because Charlie and I believe the adjusted numbers more accurately reflect the real expenses and profits of
the businesses aggregated in the table.
I won’t explain all of the adjustments – some are small and arcane – but serious investors should
understand the disparate nature of intangible assets: Some truly deplete over time while others never lose value.
With software, for example, amortization charges are very real expenses. Charges against other intangibles such as
the amortization of customer relationships, however, arise through purchase-accounting rules and are clearly not real
expenses. GAAP accounting draws no distinction between the two types of charges. Both, that is, are recorded as
expenses when calculating earnings – even though from an investor’s viewpoint they could not be more different.
In the GAAP-compliant figures we show on page 29, amortization charges of $600 million for the
companies included in this section are deducted as expenses. We would call about 20% of these “real” – and indeed
that is the portion we have included in the table above – and the rest not. This difference has become significant
because of the many acquisitions we have made.
“Non-real” amortization expense also looms large at some of our major investees. IBM has made many
small acquisitions in recent years and now regularly reports “adjusted operating earnings,” a non-GAAP figure that
excludes certain purchase-accounting adjustments. Analysts focus on this number, as they should.
12
A “non-real” amortization charge at Wells Fargo, however, is not highlighted by the company and never, to
my knowledge, has been noted in analyst reports. The earnings that Wells Fargo reports are heavily burdened by an
“amortization of core deposits” charge, the implication being that these deposits are disappearing at a fairly rapid
clip. Yet core deposits regularly increase. The charge last year was about $1.5 billion. In no sense, except GAAP
accounting, is this whopping charge an expense.
And that ends today’s accounting lecture. Why is no one shouting “More, more?”
* * * * * * * * * * * *
The crowd of companies in this section sell products ranging from lollipops to jet airplanes. Some of the
businesses enjoy terrific economics, measured by earnings on unleveraged net tangible assets that run from 25%
after-tax to more than 100%. Others produce good returns in the area of 12-20%. A few, however, have very poor
returns, a result of some serious mistakes I made in my job of capital allocation.
More than 50 years ago, Charlie told me that it was far better to buy a wonderful business at a fair price
than to buy a fair business at a wonderful price. Despite the compelling logic of his position, I have sometimes
reverted to my old habit of bargain-hunting, with results ranging from tolerable to terrible. Fortunately, my mistakes
have usually occurred when I made smaller purchases. Our large acquisitions have generally worked out well and,
in a few cases, more than well.
Viewed as a single entity, therefore, the companies in this group are an excellent business. They employ
$22.6 billion of net tangible assets and, on that base, earned 16.3% after-tax.
Of course, a business with terrific economics can be a bad investment if the price paid is excessive. We
have paid substantial premiums to net tangible assets for most of our businesses, a cost that is reflected in the large
figure we show for intangible assets. Overall, however, we are getting a decent return on the capital we have
deployed in this sector. Furthermore, the intrinsic value of the businesses, in aggregate, exceeds their carrying value
by a good margin. Even so, the difference between intrinsic value and carrying value in the insurance and regulatedindustry
segments is far greater. It is there that the huge winners reside.
* * * * * * * * * * * *
Marmon provides an example of a clear and substantial gap existing between book value and intrinsic
value. Let me explain the odd origin of this differential.
Last year I told you that we had purchased additional shares in Marmon, raising our ownership to 80% (up
from the 64% we acquired in 2008). I also told you that GAAP accounting required us to immediately record the
2011 purchase on our books at far less than what we paid. I’ve now had a year to think about this weird accounting
rule, but I’ve yet to find an explanation that makes any sense – nor can Charlie or Marc Hamburg, our CFO, come
up with one. My confusion increases when I am told that if we hadn’t already owned 64%, the 16% we purchased
in 2011 would have been entered on our books at our cost.
In 2012 (and in early 2013, retroactive to yearend 2012) we acquired an additional 10% of Marmon and the
same bizarre accounting treatment was required. The $700 million write-off we immediately incurred had no effect
on earnings but did reduce book value and, therefore, 2012’s gain in net worth.
The cost of our recent 10% purchase implies a $12.6 billion value for the 90% of Marmon we now own.
Our balance-sheet carrying value for the 90%, however, is $8 billion. Charlie and I believe our current purchase
represents excellent value. If we are correct, our Marmon holding is worth at least $4.6 billion more than its
carrying value.
Marmon is a diverse enterprise, comprised of about 150 companies operating in a wide variety of
industries. Its largest business involves the ownership of tank cars that are leased to a variety of shippers, such as oil
and chemical companies. Marmon conducts this business through two subsidiaries, Union Tank Car in the U.S. and
Procor in Canada.
13
Union Tank Car has been around a long time, having been owned by the Standard Oil Trust until that
empire was broken up in 1911. Look for its UTLX logo on tank cars when you watch trains roll by. As a Berkshire
shareholder, you own the cars with that insignia. When you spot a UTLX car, puff out your chest a bit and enjoy the
same satisfaction that John D. Rockefeller undoubtedly experienced as he viewed his fleet a century ago.
Tank cars are owned by either shippers or lessors, not by railroads. At yearend Union Tank Car and Procor
together owned 97,000 cars having a net book value of $4 billion. A new car, it should be noted, costs upwards of
$100,000. Union Tank Car is also a major manufacturer of tank cars – some of them to be sold but most to be
owned by it and leased out. Today, its order book extends well into 2014.
At both BNSF and Marmon, we are benefitting from the resurgence of U.S. oil production. In fact, our
railroad is now transporting about 500,000 barrels of oil daily, roughly 10% of the total produced in the “lower 48”
(i.e. not counting Alaska and offshore). All indications are that B