Shareholder Letter - 1998

*All figures used in this report apply to Berkshire’s A shares, the successor to the only stock that the company had outstanding before 1996. The B shares have an economic interest equal to 1/30th that of the A.

To the Shareholders of Berkshire Hathaway Inc.:

Our gain in net worth during 1998 was $25.9 billion, which increased the per-share book value of both our Class A and Class B stock by 48.3%. Over the last 34 years (that is, since present management took over) per-share book value has grown from $19 to $37,801, a rate of 24.7% compounded annually. * Normally, a gain of 48.3% would call for handsprings — but not this year. Remember Wagner, whose music has been described as better than it sounds? Well, Berkshire’s progress in 1998 — though more than satisfactory — was not as good as it looks. That’s because most of that 48.3% gain came from our issuing shares in acquisitions. To explain: Our stock sells at a large premium over book value, which means that any issuing of shares we do — whether for cash or as consideration in a merger — instantly increases our per-share book-value figure, even though we’ve earned not a dime. What happens is that we get more per-share book value in such transactions than we give up. These t ransactions, however, do not deliver us any immediate gain in per-share intrinsic value , because in this respect what we give and what we get are roughly equal. And, as Charlie Munger, Berkshire’s Vice Chairman and my partner, and I can’t tell you too often (though you may feel that we try ), it’s the per-share gain in intrinsic value that counts rather than the per-share gain in book value. Though Berkshire’s intrinsic value grew very substantially in 1998, the gain fell well short of the 48.3% recorded for book value. Nevertheless, intrinsic value still far exceeds book value. (For a more extensive discussion of these terms, and other investment and accounting concepts, please refer to our Owner’s Manual, on pages 56-64, in which we set forth our owner-related business principles. Intrinsic value is discussed on pages 61 and 62.) We entered 1999 with the best collection of businesses and managers in our history. The two companies we acquired in 1998, General Re and Executive Jet, are first-class in every way — more about both later — and th e performance of our operating businesses last year exceeded my hopes. GEICO, once again, simply shot the lights out. On the minus side, several of the public companies in which we have major investments experienced significant operating shortfalls that neither they nor I anticipated early in the year. Consequently, our equity portfolio did not perform nearly as well as did the S&P 500. The problems of these companies are almost certainly temporary, and Charlie and I believe that their long-term prospects are excellent. In our last three annual reports, we furnished you a table that we regard as central to estimating Berkshire’s intrinsic value. In the updated version of th at table, which follows, we trace our two key components of value, including General Re on a pro-forma basis as if we had owned it throughout the year. The first column lists our per-shar e ownership of investments (including cash and equivalents but excluding securities held in our financial products operation) and the second column shows our per-share earnings from Berkshire’s operating businesses before taxes and purchase accounting adjustments (discussed on pages 62 and 63), but after all interest and corporate expenses. Th e second column excludes all dividends, interest and capital gains that we realized from the investments presented in the first column. In effect, the columns show how Berkshire would look if it were split into two parts, with one entity holding our investments and the other operating all of our businesses and bearing all corporate costs.

Pre-tax Earnings Per Share Investments With All Income from Year Per Share Investments Excluded

1968 … $ 53 $ 2. 1978 … 465 12. 1988 … 4,876 145. 1998 … 47,647 474. Here are the growth rates of the two segments by decade:

Pre-tax Earnings Per Share Investments With All Income from Decade Ending Per Share Investments Excluded

1978 … 24.2% 16.2% 1988 … 26.5% 27.5% 1998 … 25.6% 12.5% Annual Growth Rate, 1968-1998 … 25.4% 18.6% During 1998, our investments increased by $9,604 per-share, or 25.2%, but per-share operating earnings fell by 33.9%. General Re (included, as noted, on a pro-forma basis) explains both facts. This company has very large investments, and these greatly increased our per-share investment figure. But General Re also had an underwriting loss in 1998, and that hurt operating earnings. Had we not acquired General Re, per-share operating earnings would have shown a modest gain. Though certain of our acquisitions and operating strategies may from time to time affect one column more than the other, we continually work t o increase the figures in both. But one thing is certain: Our future rates of gain will fall far short of those achieved in the past. Berkshire’s capital base is now simply too large to allow us to earn truly outsized returns. If you believe otherwise, you should consider a career in sales but avoid one in mathematics (bearing in mind that there are really only three kinds of people in the world: those who can count and those who can’t). Currently we are working to compound a net worth of $57.4 billion, the largest of any American corporation ( though our figure will be eclipsed if the merger of Exxon and Mobil takes place). Of course, our lead in net worth does not mean that Berkshire outranks all other businesses in value: Market value is what counts for owners and General Electric and Mic ro soft for example, have valuations more than three times Berkshire’s. Net worth, though, measures the capital that managers must deploy, and at Berkshire that figure has indeed become huge. Nonetheless, Charlie and I will do our best to increase intrinsic value in the future at an average rate of 15%, a result we consider to be at the very peak of possible outcomes. We may have years when we exceed 15%, but we will most certainly have other years when we fall far short of that — including years showing negative returns — and those will bring our average down. In the meantime, you should understand just what an average gain of 15% over the next five year s implies: It means we will need to increase net worth by $58 billion. Earning this daunting 15% will require us to come up with b ig ideas: Popcorn stands just won’t do. Today’s markets are not friendly to our search fo r “elephants,” but you can be sure that we will stay focused on the hunt. Whatever the future holds, I make you one prom ise: I’ll keep at least 99% of my net worth in Berkshire for as long as I am around. How long will that be? My model is the loyal Democrat in Fort Wayne who asked to be buried i n Chicago so that he could stay active in the party. To that end, I’ve already selected a “power spot” at the office for my urn.

Our financial growth has been matched by employment growth: We now have 47,566 on our payroll, with th e acquisitions of 1998 bringing 7,074 employees to us and internal growth adding another 2,500. To balance this gain of 9,500 in hands-on employees, we have enlarged the staff at world headquarters from 12 to 12.8. (The .8 doesn’t refer to me or Charlie: We have a new person in accounting, working four days a week.) Despite this alarming trend toward corporate bloat, our after-tax overhead l ast year was about $3.5 million, or well under one basis point (.01 of 1%) of the value of the assets we manage. Taxes One beneficiary of our increased size has been the U. S. Treasury. The federal income taxes that Berkshire an d General Re have paid, or will soon pay, in respect to 1998 earnings total $2.7 billion. That means we shouldered all of the U. S. Government’s expenses for more than a half-day. Follow that thought a little further: If only 625 other U. S. taxpayers had paid the Treasury as much as we an d General Re did last year, no one else — neither corporations nor 270 million citizens — would have had to pay federal income taxes or any other kind of federal tax (for example, social security or estate taxes). Our shareholders can truly say that they “gave at the office.” Writing checks to the IRS tha t include strings of zeros does not bother Charlie or me. Berkshire as a corporation, and we as individuals, have prospered in America as we would have in no other country. Indeed, if we lived in some other part of the world and completely escaped taxes, I’m sure we would be worse off financially (and in many other ways as well). Overall, we feel extraordinarily lucky to have been dealt a hand in life that enables us to write large checks to the government rather than one requiring the government to regularly write checks to us — say, because we are disabled or unemployed. Berkshire’s tax situation is sometimes misunderstood. First, capital gains have no special attraction for us: A corporation pays a 35% rate on taxable income, whether it comes from capital gains or from ordinary operations. This means that Berkshire’s tax on a long-term capital gain is fully 75% higher than what an individual would pay on a n identical gain. Some people harbor another misconception, believing that we can exclude 70% of all dividends we receive from our taxable income . Indeed, the 70% rate applies to most corporations and also applies to Berkshire in cases where we hold stocks in non-insurance subsidiaries. However, almost all of our equity investments are owned by our insurance companies, and in that case the exclusion is 59 .5%. That still means a dollar of dividends is considerably more valuable to us than a dollar of ordinary income, but not to the degree often assumed.

Berkshire truly went all out f or the Treasury last year. In connection with the General Re merger, we wrote a $ million check t o the government to pay an SEC fee tied to the new shares created by the deal. We understand that this payment set an SEC record. Charlie and I are enormous admirers of what the Commission has accomplished fo r American investors. We would rather, however, have found another way to show our admiration. GEICO (1-800-847-7536) Combine a great idea w ith a great manager and you’re certain to obtain a great result. That mix is alive and well at GEICO. The idea is low-cost auto insurance, made possible by d irect-to-customer marketing, and the manager is Tony Nicely. Quite simply, there is no one in the business world who could run GEICO better than Tony does. His instincts are u nerring, his energy is boundless, and his execution is flawless. While maintaining underwriting discipline, Tony is building an organization that is gaining market share at an accelerating rate. This pace has been encouraged by our compensation policies. The direct writing of insurance — that is, without there being an agent or broker between the insurer and its policyholder — involves a substantial front-end investment. First-year business is therefore unprofitable in a major way. At GEICO, we do not wish this cost to deter our associates from the aggressive pursuit of new business — which, as it renews, will deliver significant profits — so we leave it out of our compensation formulas. What’s included then? We base 50% of our associates’ bonuses and profit sharing on the earnings of our “seasoned” book, meaning policies that have been with us for more than a year. The other 50% is tied to growth in policyholders — and here we have stepped on the gas. In 1995, the year prior to its acquisition by Berkshire, GEICO spent $33 million on marketing and had 65 telephone counselors. Last year the company spent $143 million, and the counselor count grew to 2,162. The effects that these efforts had at the company are shown by the new business and in-force figures below:

New Auto Auto Policies Years Policies* In-Force*

1993 1, 354,882 2,011, 1994 1, 396,217 2,147, 1995 1, 461,608 2,310, 1996 1, 617,669 2,543, 1997 1, 913,176 2,949, 1998 1,317,761 3,562, * “Voluntary” only; excludes assigned risks and the like. In 1999, we will again increase our marketing budget, spending at least $190 million. In fact, there is no limit to wha t Berkshire is willing to invest in GEICO’s new-business activity, as long as we can concurrently build th e infrastructure the company needs to properly serve its policyholders. Because of the first-year costs, companies that are concerned about quarterly or annual earnings would shy from similar investments, no matter how intelligent these might be in terms of building long-term value. Our calculus is different: We simply measure whether we are creating more than a dollar of value per dollar spent — and if tha t calculation is favorable, the more dollars we spend the happier I am. There is far more to GEICO’s success, of course, than low prices and a torrent of advertising. The handling o f claims must also be fair, fast and friendly — and ours is. Here’s an impartial scorecard on how we shape up: In New York, our largest volume state, the Insurance Department recently reported that GEICO’s complaint ratio in 1997 was not only the lowest of the five largest auto insurers but was also less than half the average of the other four. GEICO’s 1998 profit margin of 6.7% was better than we had anticipated — and, indeed, better than we wished. Our results reflect an industry-wide phenomen on: In recent years, both the frequency of auto accidents and their severity have unexpectedly declined. We responded by reducing rates 3.3% in 1998, and we will reduce them still more in 1999. These moves will soon bring profit margins down — at the least to 4%, which is our target, and perhaps considerably lower. Whatever the case, we believe that our margins will continue to be much better than those of the industry. With GEIC O’s growth and profitability both outstanding in 1998, so also were its profit sharing and bonus payments. Indeed, the prof it-sharing payment of $103 million or 32.3% of salary — which went to all 9,313 associates who had been with us for more than a year — may well have been the highest percentage payment at any large company in the country. (In addition, associates benefit from a company funded pension plan.) The 32.3% may turn out to be a high-water mark, given that the profitability component in our profit-sharin g calculation is almost certain to come down in the future. The growth component, though, may well increase. Overall, we expect the two benchmarks together to dictate very significant profit sharing payments for decades to come. For our associates, growth pays off in other ways as well: Last year we promoted 4,612 people. Impressive as the GEICO figures are, we have far more to do. Our market share improved significantly in — but only from 3% to 3½%. Fo r every policyholder we now have, there are another ten who should be giving us their business. Some of you who are reading this may be in that category. About 40% of those who check our rates find that they ca n save money by doing business with us. The proportion is not 100% because insurers differ in their underwriting judgements, with some giving more credit than we do to d rivers who live in certain geographical areas or work at certain occupations. We believe, however, that we more frequently offer the low price than does any other national carrie r selling insurance to all comers. Furthermore, in 40 states we can offer a special discount — usually 8% — to ou r shareholders. So give us a call and check us out.

You m ay think that one commercial in this section is enough. But I have another to present, this one directed at managers of publicly owned companies. At Berkshire we feel that telling outstanding CEOs, such as Tony, how to run their companies would be the height of foolishness. Most of ou r managers wouldn’t work for us if they got a lot of backseat driving. (Generally, they don’t have to work for anyone , since 75% or so are independently wealthy.) Besides, they are the Mark Mc Gwires of th e business world and need no advice from us as to how to hold the bat or when to swing. Never the le ss, Berkshire’s ownership may make even the best of managers more effective. First, we eliminate all of the ritualistic and nonproductive activities that normally go with the job of CEO. Our managers are totally in charge of their personal schedules. Second, we give each a simple mission: Just run your business as if: 1) you own 100% of it; 2) it is the only asset in the world that you and your family have or will ever have; and 3) you can’t sell or merge it for at least a cent ury. As a corollary, we tell them they should not let any of their decisions be affected even slightly by accounting considerations. We want our managers to think about what counts, not how it will be counted. Very few CEOs of public companies operate under a similar mandate, mainly because they have owners who focus on short-term prospects and reported earnings. Berkshire, however, has a shareholder base — which it will have fo r decades to come — that has the longest investment horizon to be found in the public company universe. Indeed, a majority of our shares are held by investors who expect to die still holding them. We can therefore ask our CEOs t o manage for maximum long-term value, rather than for next quarter’s earnings. We certainly don’t ignore the current results of our business es — in most cases, they are of great importance — but we never want them to be achieved at the expense of our building ever-greater competitive strengths. I believe t he GEICO story demonstrates the benefits of Berkshire’s approach. Charlie and I haven’t taught Tony a thing — and never will — but we have created an environment that allows him to apply all of his talents to what’s important. He does not have to devote his time or energy to board meetings, press interviews, presentations by investment bankers or talks with financial analysts. Furthermore, he need never spend a moment thinking about financing, credit ratings or “Street” expectations for earnings per-share. Because of our ownership structure, he also knows that thi s operational framework will endure for decades to come. In this environment of freedom, both Tony and his company can convert their almost limitless potential into matching achievements. If you are running a large, profitable business that will thrive in a GEICO-like environment, check our acquisition criteria on page 21 and give me a call. I promise a fast answer and will mention your inquiry to no one except Charlie. Executive Jet Aviation (1-800-848-6436) To understand the huge potential at Executive Jet Aviation (EJA), you need some understanding of its business, which is selling fractional shares of jets and operating the fleet for its many owners. Rich Santulli, CEO of EJA, created the fractional ownership industry in 1986, by visualizing an important new way of using planes. Then he combined guts and talent to turn his idea into a major business. In a fractional owner ship plan, you purchase a portion — say /8th — of any of a wide variety of jets that EJ A off ers. That purchase entitles you to 100 hours of flying time annually. (“Dead-head” hours don’t count against you r allotme nt, and you are also allowed to average your hours over five years.) In addition, you pay both a monthly management fee and a fee for hours actually flown. Then, on a few hours not ice, EJA makes your plane, or another at least as good, available to you at your choice of the 5500 airports in the U. S. In effect, calling up your plane is like phoning for a taxi. I first heard about the Net Jets® program, as it is called, about four years ago from Frank Rooney, our manager at H. H. Brown. Frank ha d used and been delighted with the service and suggested that I meet Rich to investigate signing up for my family’s use. It took Rich about 15 minutes to sell me a quarter (200 hours annually) of a Hawker 1000. Since then, my family has learned firsthand — through flying 900 hours on 300 trips — what a friendly, efficient, and safe operation EJA runs . Quite simply, they love this service. In fact, they quickly grew so enthusiastic that I did a testimonial ad for EJA l ong before I knew there was any possibility of our purchasing the business. I did, however, ask Rich to give me a call if he ever got interested in selling. Luckily, he phoned me last May, and we quickly made a $ million deal, paying equal amounts of cash and stock. EJA, which is by far the largest operator in its in dustry, has more than 1,000 customers and 163 aircraft (including 23 “cor e” aircraft that are owned or leased by EJA itself, so that it can make sure that service is first-class even during the times when demand i s heaviest). Safety, of course, is the paramount issue in any flight operation, and Rich’s pilots — now numbering about 650 — receive extensive training at least twice a year from Flight Safety International, another Berkshire subsidiary and the world leader in pilot training. The bottom line on our pilots: I’ve sold the Berkshire plane and will now do all of my business flying, as well as my personal flying, with Net Jets’ crews. Being the lead er in this industry is a major advantage for all concerned. Our customers gain because we have an armada of planes positioned throughout the country at all times, a blanket ing that allows us to provide unmatched service. Mean wh ile, we gain from the blanketing because it reduces dead-head costs. Another compelling attraction for ou r clients is t hat we offer products from Boeing, Gulfstream, Falcon, Cessna, and Raytheon, whereas our two competitors are owned by manufacturers that offer only their own planes. In effect, Net Jets is like a physician who can recommend whatever medicine best fits the needs of each patien t; our competitors, in contrast, are producers of a “house” brand that they must prescribe for one and all. In many cases our clients, both corporate and individual, o wn fractions of several different planes and can therefore match specific planes to specific missions. For example, a client might own /16th of three different jets (each giving it 50 hour s of flying time), which in total give it a virtual fleet, obtained for a small fraction of the cost of a single plane. Significantly, it is not only small businesses that can benefit from fractional ownership. Already, some of America’s largest companies use Net Jets as a supplement to their own fleet. This saves them big money in both meeting pea k requirements and in flying missions that would require their wholly-owned planes to log a disproportionate amount of dead-head hours. When a plane is slated for personal use, the clinching argument is t hat either the client signs up now or his children likely will later. That’s an equation I explained to my wonderful Aunt Alice 40 years ago when she asked me whether she could afford a fur coat. My reply settled the issue: “Alice, you aren’t buying it; your heirs are.” EJA’s growth ha s been explosive: In 1997, it accounted for 31% of all corporate jets ordered in the world . Nonetheless, Rich and I believe that the potential of fractional ownership has barely been scratched. If many thousands of owners find it sensible to own 100% of a plane — which must be used 350-400 hours annually if it’s to mak e economic sense — there must be a large multiple of that number for whom fractional ownership works. In addition to being a terrific executive, Rich is fun. Like most of our managers, he has no economic nee d whatsoever to work. Rich spends his time at EJA because it’s his baby — and he wants to see how far he can take it. We both already know the answer, both literally and figuratively: to the ends of the earth.

And now a small h int to Berkshire directors: Last year I spent more than nine times my salary at Borsheim’s and EJA. Just think how Berkshire’s business would boom if you’d only spring for a raise.

General Re

On December 21, we completed our $22 billion acquisition of General Re Corp. In addition to owning 100% of General Reinsurance Corp or ation, the largest U. S. property casualty re insurer the company also owns (including stock it has an arrangement to buy) 82% of the oldest reinsurance company in the world, Cologne Re. The two companies together re in sure all lines of insurance and operate in 124 countries. For many decades, General Re’s name has stood for quality, integrity and professionalism in reinsurance — and under R on Ferguson’s leadership, this reputation has been burnished still more. Berkshire can add absolutely nothing to the skills of General Re’s and Cologne Re’s managers. On the contrary, there is a lot that they can teach us. Nevertheless, we believe that Berkshire’s ownership will benefit General Re in important ways and that its earnings a decade from now will materially exceed those that would have been attainable absent the merger. We base thi s optimism on the fact that we can offer General Re’s management a freedom to operate in whatever manner will best allow the company to exploit its strengths. L e t’s look for a moment at the reinsurance business to understand why General Re could not on its own do what it can under Berkshire. Most of the demand for reinsurance comes from primary insurers who want to escape the wide swings in earnings that result f rom large and unusual losses. In effect, a re insurer gets paid for absorbing the volatility that the client insurer wants to shed. Ironically, though, a publicly-held re insurer ge ts graded by both its owners and those who evaluate its credit on the smoothness of i ts own results. Wide swings in earnings hurt both credit ratings and p/e ratios, even when the business that produces such swings has an expectancy of satisfactory profits over time. This market reality sometimes causes a re insurer to make costly moves, among them laying o ff a significant portion of the business it writes (in transactions that are called “retrocessions”) or rejecting good business simply because it threatens to bring on too much volatility. Berkshire, in contrast, happily accepts volatility, just as long as it carries with it the expectation of increased profits over time. Furthermore, we are a Fort Knox of capital, and that means volatile earnings can’t impair our premier credit ratings. Thus we have the perfect structure for writing — and retaining — reinsurance in virtually any amount. In fact, we’ve used this strength over the past decade to build a powerful super-cat business. What General Re gives us, however, is the distribution force, technical facilities and management that will allow us to employ our structural strength in every facet of the industry. In particular, General Re and Cologne Re can now accelerate their push into international markets, w here the preponderance of industry growth will almost certainly occur. As the merger proxy statement spelled out, Berkshire also brings tax and investment benefits to General Re. But the most compelling reason for the merger is simply that General Re’s outstanding management can now do what it does best, unfettered by the constraints that have limited its growth. Berkshire is assuming responsibility for General Re’s investment portfolio, though not for Cologne Re’s. We will not, howe ver, be involved in General Re’s underwriting. We will simply ask the company to exercise the discipline of the past while increasing the proportion of its business that is retained, expanding its product line, and widening it’s geographical coverage — making these moves in recognition of Berkshire’s financial strength and tolerance for wide swings in earnings. As we’ve long said, we prefer a lumpy 15% return to a smooth 12%. Ov er time, Ron and his team will maximize General Re’s new potential. He and I have known each other fo r many years, and each of our companies has initiated significant business that it has re insured with the other. Indeed, General Re played a key role in the resuscitation of GEICO from its near-death status in 1976. Both Ron and Rich Santulli plan to be at the annual meeting, and I hope you get a chance to say hello to them.

The Economics of Property Casualty Insurance With the acquisition of General Re — and with GEICO’s business mushrooming — it becomes more important than ever that you understand how to evaluate an insurance company. The key determinants are: (1) the amount of float that th e business generates; (2) its cost; and (3) most important of all, the long-term outlook for both of these factors. To begin with, float is money we hold but d on’t own. In an insurance operation, float arises because premiums are received before losses are paid, an interval that sometimes extends over many years. During that time, the insurer invests the money. Typically, this pleasant activity carries with it a downside: The premiums that an insurer takes in usually do not cover the losses and expense s it eventually must pay. That leaves it running an “underwriting loss, ” which is the cost of float. An insurance business has value if its cost of float over time is less than the cost the company would otherwise incur to obtain funds. But the business is a lemon if its cost of float is higher than market rates for money. A caution is appropriate here: Because loss costs must be estimated, insurers have enormous latitude in figuring their underwriting results, and that makes it very difficult for investors to calculate a company’s true cost of float. Errors of estimation, usually innocent but sometimes no t, can be huge. The consequences of these miscalculations flow directly into earn in gs. An experienced observer can usually detect large-scale errors in reserving, but the general public ca n typically do no more than accept what’s presented, and at times I have been amazed by the numbers that big-nam e auditors have implicitly blessed. As for Berkshire, Charlie and I attempt to be conservative in presenting its underwriting results to you, because we have found that virtually all surprises in insurance are unpleasant ones. The table that follows shows the float generated by Berkshire’s insurance operations since we entered the business 32 years a go. The data are for every fifth year and also the last, which includes General Re’s huge float. For the table we have calculated our float — which we generate in large amounts relative to our premium volume — by adding net loss reserves, loss adjustment reserves, funds held under reinsurance assumed and unearned premium reserves, and then subtracting agents balances, prepaid acquisition costs, prepaid taxes and deferred charges applicable to assume d reinsurance. (Got that?)

Year Average Float

(in $ millions) 1967 1972 1977 1982 1987 1, 1992 2, 1997 7, 1998 22,762 (year-end) Impressive as the growth in our float has been — 25.4% compounded annually — what really counts is the cost of this item. If that becomes too high, growth in float becomes a curse rather than a blessing. At Berkshire, the news is all good: Our average cost over the 32 years has been well under zero. In aggregate, we have posted a substantial underwriting profit, which means that we have been paid for holding a large and growing amount of money. This is the best of all worlds. Indeed, though our net float is recorded on our balance sheet as a liability, it has had more economic value to us than an equal amount of net worth would have had. As long as we can continue to achieve an underwriting profit, float will continue to outrank net worth in value. During the next few years, Berkshire’s growth in float may well be modest. The reinsurance market is soft, and in t his business, relationships change slowly. Therefore, General Re’s float — /3 rds of our total — is unlikely t o increase significantly in the near term. We do expect, however, that our cost of float will remain very attractive compared to that of other insurers.

Sources of Reported Earnings The table that follows shows the main sources of Berkshire’s reported earnings. In this presentation, purchase - accounting adjustments are not assigned to the specific businesses to which they apply, but are instead aggregated and shown separately. This procedure lets you view the earnings of our businesses as they would have been reported had we not purchased them. For the reasons discussed on pages 62 and 63, this form of presentation seems to us to be mor e useful to investors and managers than one utilizing generally accepted accounting principles (GAAP), which require purc hase-premiums to be charged off business by business The total earnings we show in the table are, of course , identical to the GAAP total in our audited financial statements. (in millions)

Berkshire’s Share

of Net Earnings

(after-taxes and Pre-Tax Earnings minority interests)

1998 1997 1998 Operating Earnings: Insurance Group: Underwriting — Super-Cat … $154 $283 $100 $ Underwriting — Other Reinsurance … (175 ) (155 ) (114 ) (100 ) Underwriting — GEICO … 269 281 175 Underwriting — Other Primary … 17 53 10 Net Investment Income … 974 882 731 Buffalo News … 53 56 32 Finance and Financial Products Businesses … 205 28 133 Flight Services … 181 140 110 84(1) (1) Home Furnishings … 72 57 41 32(2) (2) International Dairy Queen … 58 — 35 — Jewelry … 39 32 23 Scott Fetzer (excluding finance operation) … 137 119 85 See’s Candies … 62 59 40 Shoe Group … 33 49 23 General Re … 26 — 16 —(3) (3) Purchase Accounting Adjustments … (123 ) (101 ) (118 ) (94 ) Interest Expense … (4) (100 ) (107 ) (63 ) (67 ) Shareholder Designated Contributions … (17 ) (15 ) (11 ) (10 ) Other … 60 29 Operating Earnings … 1,899 1,721 1,277 1, Capital Gains from Investments … 2,415 1,106 1,553 Total Earnings - All Entities … $4,314 $2,827 $ 2,830 $1, Includes Executive Jet from August 7, 1998 . From date of acquisition, December 21, 1998. (1) (3) Includes Star Furniture from July 1, 1997. Excludes interest expense of Finance Businesses. (2) (4) You can be proud of our operating managers. They almost invariably deliver earnings that are at the very top of what conditions in their industries allow, meanwhile fortifying their businesses’ long-term competitive strengths. I n aggregate, they have created many billions of dollars of value for you. An example: In my 1994 lett er, I reported on Ralph Schey’s extraordinary performance at Scott Fetzer. Little did I realize that he was just warming up. Last year Scott Fetzer, operating with no leverage (except for a conservative level of debt in its finance subsidiary), earned a record $96.5 million after-tax on its $112 million net worth. Today, Berkshire has an unusually large number of individuals, such as Ralph, who are truly legends in their industries. Many of these joined us when we purchased their companies, but in recent years we have also identified a number of strong managers internally. We further expanded our corps of all-stars in an important way when we acquired General Re and EJA. Charlie and I have the easy jobs at Berk shire: We do very little except allocate capital. And, even then, we are not al l that energetic. We have one excuse, though: In allocating capital, activity does not correlate with achievement . Indeed, in the fields of investments and acquisitions, frenetic behavior is often counterproductive. Therefore, Charlie and I mainly just wait for the phone to ring. Our managers, however, work very hard — and it shows. Naturally, they want to be paid fairly for their efforts, but pay alone can’t explain their extraordinary ac com pl is hm ents Instead, each is primarily motivated by a vision of just how far his or her business can go — and by a desire to be the one who gets it there. Charlie and I thank them on your behalf and ours.

Additional information about our various businesses is give n on pages 39-53, where you will also find our segment earnings reported on a GAAP basis. In addition, on pages 65-71, we have rearranged Berkshire’s financial data into four segments on a non-GAAP basis, a presentation that corresponds to the way Charlie and I think about the company. Normally, we follow this section with one on “Look-Through” Earnings. Because the General Re acquisition occurred near year-end though, neither a historical nor a pro-forma calculation of a 1998 number seems relevant. We will resume the look-through calculation in next year’s report. Investments Below we present our common stock investments. Those with a market value of more than $750 million ar e itemized. 12/31/

Shares Company Cost* Market

(dollars in millions) 50,536,900 American Express Company … $1,470 $ 5, 200,000,000 The Coca-Cola Company … 1,299 13, 51,202,242 The Walt Disney Company … 281 1, 60,298,000 Freddie Mac … 308 3, 96,000,000 The Gillette Company … 600 4, 1,727,765 The Washington Post Company … 11 63,595,180 Wells Fargo & Company … 392 2, Others … 2,683 5, Total Common Stocks … $ 7,044 $ 37, * Represents tax-basis cost which, in aggregate, is $1.5 billion less than GAAP cost. During the year, we slightly increased our holdings in American Express, one of our three largest commitment s, and left the other two unchanged. However, we trimmed or substantially cut many of our smaller positions. Here , I need to make a confession (ugh): The portfolio actions I took in 1998 actually decrease d our gain for the year. In particular, my decision to sell M c Donald’s was a very big mistake. Overall, you would have been better off last year if I had regularly snuck off to the movies during market hours.