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The following are what I considered to be the more interesting comments in the Credit Suisse / First Boston report on Berkshire:

Regarding the cost of float

In most recent years, Berkshire Hathaway has been able to borrow at a lower interest rate than has the U.S. government. The exceptions were 1974, 1975, 1983, 1984, and 1985. These were the "bottoming out" years of the last two broad-based property-casualty insurance industry underwriting cycles.

Earnings will be more volatile with purchase of General Re. Effect of volatility on BRK stock price.

Insurance is a promise. Some promises are better than others. Berkshire Hathaway has the highest ratings from each of the agencies. The considerable strength of the company's balance sheet combined with a willingness to accept earnings volatility enables management to more broadly assume underwriting risk than other insurers. This underwriting strategy will likely contribute to a volatility in underwriting results that is greater than that at other insurers. Historically underwriting volatility has led to lower equity valuations.

Valuation of BRK.

Current reported earnings as well as near-term expectations are largely mean-ingless. We believe two approaches to valuing the Berkshire Hathaway stock have merit. The first method is based on expected growth in book value. The second is a sum-of-the-parts approach. Neither of these methods does the task justice. Both have weaknesses.

Book Value

By multiplying our estimates of book value and tangible book value at year-end 2000 by their 1994-98 average high and low multiples, we arrive at a fair value of the Berkshire Hathaway class A stock of approximately $68,000.

Sum of the Parts

Our sum-of-the-parts valuation of Berkshire Hathaway comprises the following:
· We place a valuation on the insurance operations of 22 times estimated 2000 earnings. This is a premium multiple relative to that accorded other leading insurance organizations, reflective of the strength and market position of these operations. This valuation also reflects the expectation of further re-serve strengthening by a management that would appear to have little regard for current or near-term earnings.
· We place a 25 multiple on the estimated 2000 earnings of Berkshire Hathaway's manufacturing, retailing, and servicing operations, reflecting the growth opportunities that Executive Jet and FlightSafety possess.
· We place a 12 multiple on the other earnings segment, which largely consist of the Finance and Financial Products business. These operations include General Re's financial products division, Berkshire Life, and Scott Fetzer Financial Group. These operations are largely a blind pool.
· Finally we sum the current market values of Berkshire Hathaway's large equity interests and add this value to the implied value of its operations. In performing this calculation, we tax effect the unrealized gain in these securities at a 35% effective tax rate. We believe that adding the market values of the company's large equity investments is appropriate and does not constitute double counting because of Berkshire Hathaway's extraordinarily low premiums/surplus ratio: 0.26 at year-end 1998 versus 0.84 for the industry. If Berkshire Hathaway were to increase its ratio to 0.75, it would have $30 billion in excess capital. At year-end 1998, the company had equity investments totaling $37 billion. In effect, Berkshire Hathaway has put its excess capital to work by investing it in equities.
· Our analysis indicates a fair value for Berkshire Hathaway approximating $50,000 per share, versus its current price of $57,000. Why the 14% premium? We attribute this to the outstanding long-term track record of Berkshire Hathaway's management.

General Re

On December 21, 1998, Berkshire Hathaway completed the purchase acquisition of General Re in a tax-free exchange of stock. General Re is the largest U.S. based property-casualty reinsurer and the third largest in the world after Munich Re and Swiss Re, with $4.8 billion in 1998 net premiums written. U.S. writings totaled $2.7 billion.
· The consideration paid for the acquisition was $204.40 per General Re share. This consideration, totaling $16 billion, was equal to 15.8 times estimated 1998 operating earnings, 14.6 times expected 1999 earnings, and 1.8 times September 30, 1998, GAAP book value. Under the agreement, General Re shareholders had the option of accepting either 0.0035 Class A shares or 0.105 Class B shares of Berkshire for each General Re share they owned. 30 Class B shares are equal to 1 Class A share.
· The premium paid for General Re appears quite modest relative to the acquisition premium accorded the last two property-casualty reinsurers operating on a direct writing basis, American Re and National Re. American Re was acquired by Munich Re in a transaction announced August 14, 1996, at a multiple of 3.9 times book value and 23 times 12-month operating earnings. National Re was purchased by General Re at a multiple of 2.5 times book value and 21.7 times 12-month operating earnings in a transaction announced July 2, 1996. The consideration in the American Re trade was all cash. The acquisition price exceeded the price 30 days earlier in the case of American Re by 43%, in the case of National Re by 61%, and in the case of the General Re trade by 26%.
Arguably the reinsurance market was better at the time of these trades as there was not as much impact of the current extremely powerful securities markets on the demand for reinsurance. In this same regard, General Re's book value had been exaggerated by the strength of the securities markets.
· Reinsurance is financing and in the current bull market there would appear to be less demand at the margin for such programs. Worldwide sales of property-casualty reinsurance fell 2.5% in 1998.
· Access to unlimited capital will allow General Re to grow its operations more rapidly.
· General Re will no longer buy reinsurance in order to smooth its earnings or maintain its claims-paying ratings. Quarterly or for that matter annual operating earnings no longer matter. These retrocessions or the purchase of reinsurance from others totaled $855 million for General Re in 1997. Berkshire Hathaway's other insurance operations do not buy reinsurance.

Biggest understatement regarding equity investments of BRK

There are no major technology investments.
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