Berkshire Hathaway 2003 Annual Report Download - page 67

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Management’s Discussion (Continued)
Interest Rate Risk (Continued)
interest rate sensitive instruments may be affected by the creditworthiness of the issuer, prepayment options, relative
values of alternative investments, the liquidity of the instrument and other general market conditions. Fixed interest
rate investments may be more sensitive to interest rate changes than variable rate investments.
The following table summarizes the estimated effects of hypothetical increases and decreases in interest
rates on assets and liabilities that are subject to interest rate risk. It is assumed that the changes occur immediately
and uniformly to each category of instrument containing interest rate risks. The hypothetical changes in market
interest rates do not reflect what could be deemed best or worst case scenarios. Variations in market interest rates
could produce significant changes in the timing of repayments due to prepayment options available. For these
reasons, actual results might differ from those reflected in the table. Dollars are in millions.
Estimated Fair Value after
Hypothetical Change in Interest Rates
(bp=basis points)
Insurance and other businesses 100 bp 100 bp 200 bp 300 bp
Fair Value decrease increase increase increase
As of December 31, 2003
Investments in securities with fixed maturities ..... $26,116 $27,113 $25,220 $24,333 $23,550
Notes payable and other borrowings..................... 4,334 4,397 4,277 4,226 4,177
As of December 31, 2002
Investments in securities with fixed maturities ..... $38,096 $40,411 $36,087 $34,129 $32,262
Notes payable and other borrowings..................... 4,925 5,010 4,847 4,777 4,712
Finance and financial products businesses *
As of December 31, 2003
Investments in securities with fixed maturities
and loans and finance receivables ...................... $14,573 $14,905 $14,323 $13,987 $13,557
Notes payable and other borrowings **................ 11,617 11,838 11,419 11,244 11,079
As of December 31, 2002
Investments in securities with fixed maturities
and loans and finance receivables ...................... $20,011 $20,152 $20,062 $19,779 $19,161
Notes payable and other borrowings **................ 17,237 17,317 17,112 17,032 16,962
*Excludes General Re Securities – See Financial Products Risk section for discussion of risks associated with this business.
** Includes securities sold under agreements to repurchase.
Equity Price Risk
Strategically, Berkshire strives to invest in businesses that possess excellent economics, with able and
honest management and at sensible prices. Berkshire’ s management prefers to invest a meaningful amount in
each investee. Accordingly, Berkshire’ s equity investments are concentrated in relatively few investees. At
December 31, 2003, 68.9% of the total fair value of equity investments was concentrated in four investees.
Berkshire’ s preferred strategy is to hold equity investments for very long periods of time. Thus, Berkshire
management is not necessarily troubled by short term equity price volatility with respect to its investments provided
that the underlying business, economic and management characteristics of the investees remain favorable.
Berkshire strives to maintain above average levels of shareholder capital to provide a margin of safety against short
term equity price volatility.
The carrying values of investments subject to equity price risks are based on quoted market prices or
management’ s estimates of fair value as of the balance sheet dates. Market prices are subject to fluctuation and,
consequently, the amount realized in the subsequent sale of an investment may significantly differ from the reported
market value. Fluctuation in the market price of a security may result from perceived changes in the underlying
economic characteristics of the investee, the relative price of alternative investments and general market conditions.
Furthermore, amounts realized in the sale of a particular security may be affected by the relative quantity of the
security being sold.