Berkshire Hathaway 2001 Annual Report Download - page 60

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59
Equity Price Risk (Continued)
The table below summarizes Berkshire's equity price risks as of December 31, 2001 and 2000 and shows
the effects of a hypothetical 30% increase and a 30% decrease in market prices as of those dates. The selected
hypothetical change does not reflect what could be considered the best or worst case scenarios. Indeed, results could
be far worse due both to the nature of equity markets and the aforementioned concentrations existing in Berkshire's
equity investment portfolio. Dollars are in millions.
Estimated Hypothetical
Fair Value after Percentage
Hypothetical Hypothetical Increase (Decrease) in
Fair Value Price Change Change in Prices Shareholders’ Equity
As of December 31, 2001................. $28,675 30% increase $37,277 9.6
30% decrease 20,072 (9.6)
As of December 31, 2000................. $37,384 30% increase $48,599 11.7
30% decrease 26,170 (11.7)
Financial Products Risk
Gen Re Securities Holdings Limited (“GRS”) operates as a dealer in various types of derivative
instruments in conjunction with offering risk management products to its clients. As previously noted, in January
2002, General Re announced that it would commence a long-term run off of GRS’ s business. It is expected that the
orderly run-off will take several years to complete. GRS monitors its market risk on a daily basis across all swap
and option products by estimating 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
performed on an individual trading book basis, against limits set by individual book, to a 99% probability level.
GRS sets market risk limits for each type of risk, and for an aggregate measure of risk across all trading books,
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. GRS’ s weekly aggregate market risk limit was $22 million in 2001. In 2001,
there were no days where the actual losses exceeded the estimated value at risk and no days where the value at risk
exceeded the aggregate limit. In addition to these daily and weekly assessments of risk, GRS 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 GRS is exposed over one week intervals. Dollars are in
millions.
2001
Foreign 2000
Interest Rate Exchange Rate Equity Credit All Risks All Risks
Highest ............................. $18 $8 $5 $3 $14 $14
Lowest.............................. 10 3 2 1 3 1
Average ............................ 13 4 3 1 7 4
GRS 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.
Liquidity and Capital Resources
Berkshire’ s balance sheet continues to reflect significant liquidity and a strong capital base. Consolidated
shareholders’ equity at December 31, 2001 totaled $58.0 billion. Consolidated cash and invested assets, excluding
assets of finance and financial products businesses totaled approximately $72.5 billion at December 31, 2001
compared to $77.1 billion at December 31, 2000, including approximately $5.3 billion in cash and cash equivalents
at the end of each year. During 2001 Berkshire deployed about $4.7 billion in cash for business acquisitions. Cash
utilized in these acquisitions was generated internally. Also contributing to the decline in invested assets was a $7.0
billion reduction in unrealized gains in Berkshire’ s investments in equity securities. Partially offsetting these
declines was cash flows generated from operations of approximately $6.6 billion, primarily from insurance
operations.