Berkshire Hathaway 1999 Annual Report Download - page 54

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Interest Rate Risk (continued)
prepayment assumptions utilized in computing fair values at year-end 1999 and 1998. Significant variations in market
interest rates could produce changes in the timing of repayments due to prepayment options available. For these reasons,
actual results might differ from those reflected in the table which follows. Dollars are in millions.
Estimated fair value after
Hypothetical change in interest rates
(bp=basis points)
100 bp 100 bp 200 bp 300 bp
Fair Value decrease increase increase increase
As of December 31, 1999
Investments in securities with fixed maturities .$30,222 $31,942 $28,483 $26,852 $25,413
Borrowings under investments agreements and
other debt .......................... 1,971 2,059 1,891 1,819 1,753
As of December 31, 1998
Investments in securities with fixed maturities .$20,891 $21,774 $19,974 $19,093 $18,130
Borrowings under investments agreements and
other debt .......................... 1,986 2,095 1,865 1,768 1,681
Financial Products Risk
The finance and financial products operations are subject to market risk principally through General Re
Financial Products (“GRFP”). GRFP monitors its market risk on a daily basis across all swap and option products by
calculating the effect on operating results of potential changes in market variables over a one week period, based on
historical market volatility, correlation data and informed judgment. This evaluation is done on an individual trading
book basis, against limits set by individual book, to a 95% probability level. GRFP sets market risk limits for each type
of risk, and for an aggregate measure of risk, based on a 99% probability that movements in market rates will not affect
the results from operations in excess of the risk limit over a one week period. GRFP’s weekly aggregate market risk
limit is $15 million. During 1999, the actual losses exceeded the market risk limit on one occasion. In addition to these
daily and weekly assessments of risk, GRFP prepares periodic stress tests to assess its exposure to extreme movements
in various market risk factors.
The table below shows the highest, lowest and average value at risk, as calculated using the above methodology,
by broad category of market risk to which GRFP is exposed. Dollars are in millions.
1999
Foreign 1998
Interest Rate Exchange Rate Equity Credit All Risks All Risks
Highest ............. $11 $5 $7 $5 $10 $13
Lowest .............. 6 3 4 1 4 6
Average ............. 8 4 6 2 8 9
GRFP evaluates and records a fair-value adjustment to recognize counterparty credit exposure and future costs
associated with administering each contract. The expected credit exposure for each trade is initially established on the
trade date and is determined through the use of a proprietary credit exposure model that is based on historical default
probabilities, market volatilities and, if applicable, the legal right of setoff. These exposures are continually monitored
and adjusted due to changes in the credit quality of the counterparty, changes in interest and currency rates or changes
in other factors affecting credit exposure. Since inception, GRFP has not experienced any credit losses.
Liquidity and Capital Resources
Berkshire's Consolidated Balance Sheet as of December 31, 1999, reflects continuing capital strength. In the
past three years, Berkshire shareholders' equity has increased from approximately $23.4 billion at December 31, 1996,
to approximately $57.8 billion at December 31, 1999. In that three-year period, realized and unrealized securities gains
increased equity capital by approximately $8.2 billion, and reinvested earnings, other than realized securities gains, were
about $3.1 billion.