e10vk
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition period from to
Commission file number 1-4720
WESCO FINANCIAL CORPORATION
(Exact name of Registrant as Specified in its Charter)
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Delaware
(State or Other Jurisdiction of
Incorporation or organization)
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95-2109453
(I.R.S. Employer Identification No.) |
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301 East Colorado Boulevard, Suite 300,
Pasadena, California
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91101-1901
(Zip Code) |
(Address of Principal Executive Offices) |
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(626) 585-6700
(Registrants Telephone Number, Including Area Code)
Securities registered pursuant to section 12(b) of the Act:
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Title of Each Class
Capital Stock, $1 par value
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Name of Each Exchange on Which Registered
NYSE Amex |
Securities registered pursuant to Section 12(g) of the Act:
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Exchange Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The aggregate market value of voting and non-voting stock of the registrant held by
non-affiliates of the registrant as of June 30, 2010 was: $434,333,000.
The number of shares outstanding of the registrants Capital Stock as of February 25, 2011
was: 7,119,807.
DOCUMENTS INCORPORATED BY REFERENCE
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Title of Document
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Parts of
Form 10-K |
None
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None |
TABLE OF CONTENTS
PART I
Item 1. Business
GENERAL
Wesco Financial Corporation (Wesco) was incorporated in Delaware on March 19, 1959. Wesco
engages in three principal businesses through its direct or indirect wholly owned subsidiaries:
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the insurance business, through Wesco-Financial Insurance Company (Wes-FIC), which was
incorporated in 1985 and engages in the property and casualty insurance business, and The
Kansas Bankers Surety Company (KBS), which was incorporated in 1909, purchased by Wes-FIC
in 1996 and provides specialized insurance coverages for banks; |
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the furniture rental business, through CORT Business Services Corporation (CORT), which
traces its national presence to the combination of five regional furniture rental companies
in 1972 and was purchased by Wesco in 2000, and |
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the steel service center business, through Precision Steel Warehouse, Inc. (Precision
Steel), which was begun in 1940 and acquired by Wesco in 1979. |
Wescos operations also include, through another wholly owned subsidiary, MS Property Company
(MS Property), management of owned commercial real estate in downtown Pasadena, California. MS
Property began its operations in late 1993, upon transfer to it of real properties previously owned
by Wesco and by a former savings and loan subsidiary of Wesco.
Since 1977, Wesco has been 80.1%-owned by Blue Chip Stamps (Blue Chip), a wholly owned
subsidiary of Berkshire Hathaway Inc. (Berkshire). Thus, Wesco and its subsidiaries are
controlled by Blue Chip and Berkshire. All of these companies may also be deemed to be controlled
by Warren E. Buffett, who is Berkshires Chairman and Chief Executive Officer and economic owner of
23.3% of its stock. Wescos Chairman, President and Chief Executive Officer, Charles T. Munger, is
also Vice Chairman of Berkshire, and consults with Mr. Buffett with respect to Wescos investment
decisions, major capital allocations, and the selection of the chief executives to head each of its
operating businesses, subject to ultimate approval of Wescos Board of Directors.
On February 7, 2011, Wesco and Berkshire announced that they had entered into a definitive
merger agreement, whereby Berkshire will acquire the remaining 19.9% of the shares of Wescos
capital stock that it does not presently own in exchange for cash or shares of Berkshire Class B
common stock, at the election of each Wesco shareholder. The transaction requires the affirmative
vote of holders of a majority of Wescos outstanding shares in favor of the adoption of the merger
agreement, which will be sought at a special meeting of the shareholders of Wesco, and is subject
to customary closing conditions. The transaction is also subject to a non-waivable condition that
a majority of the outstanding shares not owned by Berkshire (and excluding certain specified
shareholders) vote in favor of the adoption of the merger agreement. Berkshire has agreed to vote
the Wesco shares it owns in favor of the transaction. Closing is expected to occur before the end
of the second quarter of 2011, though there can be no assurance that any transaction will be
completed. A Form 8-K filed by Wesco with the Securities and Exchange Commission (the SEC) on
February 7, 2011 contains
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additional information about the proposed transaction, including a copy of the merger
agreement. That report is available at no charge at Wescos website, www.wescofinancial.com, or the
SECs website, www.sec.gov.
In connection with the proposed transaction, Berkshire will file with the SEC a registration
statement that will include a proxy statement of Wesco that also constitutes a prospectus of
Berkshire relating to the proposed transaction. Investors are urged to read the registration
statement and proxy statement/prospectus and any other relevant documents filed with the SEC when
they become available, because they will contain important information about Wesco, Berkshire and
the proposed transaction. The registration statement and proxy statement/prospectus and other
documents relating to the proposed transaction filed with the SEC (when they are available) can be
obtained free of charge from the websites listed above.
Wescos activities fall into three business segments insurance, furniture rental and
industrial. The insurance segment consists of the operations of Wes-FIC and KBS. The furniture
rental segment consists of the operations of CORT. The industrial segment comprises Precision
Steels steel service center and industrial supply operations. Wesco is also engaged in several
activities not identified with the three business segments, including investment activity unrelated
to the insurance segment, MS Propertys real estate activities, and parent company activities.
INSURANCE SEGMENT
Wes-FIC was incorporated in 1985 to engage in the property and casualty insurance and
reinsurance business. Its insurance operations are managed by National Indemnity Company (NICO),
which is headquartered in Omaha, Nebraska. To simplify discussion, the term Berkshire Insurance
Group refers to NICO, General Reinsurance Corporation, and certain other wholly owned insurance
subsidiaries of Berkshire, although Berkshire also includes in its insurance group the insurance
subsidiaries that are 80.1%-owned through Berkshires ownership of Wesco.
Wes-FICs high statutory net worth (about $2.8 billion at December 31, 2010) has enabled
Berkshire to offer Wes-FIC the opportunity to participate, from time to time, in contracts in which
Wes-FIC effectively has reinsured certain property and casualty risks of unaffiliated property and
casualty insurers. These arrangements have included excess-of-loss contracts such as
super-catastrophe reinsurance contracts which subject the reinsurer to especially large amounts
of losses from mega-catastrophes such as hurricanes or earthquakes. Super-catastrophe policies,
which indemnify the ceding companies for all or part of covered losses in excess of large,
specified retentions, have been subject to aggregate limits. Wes-FIC is also a party to large
quota-share reinsurance arrangements under which it shares in premiums and losses proportionately
with the ceding companies as described in more detail below.
Wescos board of directors has authorized automatic acceptance of retrocessions of
super-catastrophe reinsurance offered by the Berkshire Insurance Group provided the following
guidelines and limitations are complied with: (1) in order not to delay the acceptance process, the
retrocession is to be accepted without delay in writing in Nebraska by agents of Wes-FIC who are
salaried employees of the Berkshire Insurance Group; (2) any ceding commission received by the
Berkshire Insurance Group cannot exceed 3% of premiums, which is believed to be less than the
Berkshire Insurance Group could get in the marketplace; (3) Wes-FIC is to assume 20% or less of the
total risk; (4) the Berkshire Insurance Group must retain at least 80% of the identical risk; and
(5) the aggregate premiums from this type of business in any twelve-month period cannot exceed 10%
of Wes-FICs net worth. Occasionally, the Berkshire Insurance Group will also have an upper-level
reinsurance interest with interests different from Wes-FICs, particularly in the event of one or
more large losses. Wes-FIC currently has no active super-catastrophe reinsurance contracts in
force.
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Following are some of the more significant reinsurance arrangements in which Wes-FIC has
participated in recent years:
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Participation, since 2001, in several risk pools managed by a subsidiary of General
Reinsurance Corporation, covering principally hull, liability and workers compensation
exposures, relating to the aviation industry. For the past four years, Wes-FIC has
participated to the extent of 16.67% in several hull and liability pools and 5% of a
workers compensation pool. In July 2009, it began to participate to the extent of 25% in an
international pool. Another General Reinsurance Corporation subsidiary provides a portion of
the upper-level reinsurance protection to these aviation risk pools, and therefore to
Wes-FIC, on terms that could cause some conflict of interest under certain conditions, such
as in settling a large loss. Wes-FICs exposure to detrimental effects, however, is
mitigated because a senior manager of NICO who represents the membership interests of
Wes-FIC and unrelated pool members with an additional 75% of the hull and liability pools
and 90% of the workers compensation pool who have the same exposures to this potential
conflict of interest, has access to information regarding significant losses and thus is
able to address conflict issues that might arise. |
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Participation, since the beginning of 2008, in a retrocession agreement with NICO, to
assume 10% of NICOs quota share reinsurance of Swiss Reinsurance Company and its major
property-casualty affiliates (Swiss Re). Under this agreement, Wes-FIC has assumed 2% part
of NICOs 20% quota share reinsurance of all Swiss Re property-casualty risks incepting over
the five-year period ending December 31, 2012 on the same terms as NICOs agreement with
Swiss Re. Wes-FICs share of written premiums under the contract was $241.1 million in 2010,
giving rise to earned premiums of $240.5 million, the latter representing 84.5% of Wes-FICs
2010 earned premiums and 31.4% of Wescos consolidated revenues. Annual premiums in each of
the two remaining years under the contract could vary significantly depending on market
conditions and opportunities. The contract expires at the end of 2012. See Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations, beginning on page 15, for more
information about the impact of Wes-FICs participation in the Swiss Re contract. |
Wes-FIC is also licensed to write direct, or primary insurance business (as distinguished
from reinsurance) in Nebraska, Utah and Iowa, and may write such insurance in the non-admitted
excess and surplus lines market in several other states, but the volume written to date has been
minimal.
In 1996, Wes-FIC purchased 100% of KBS, which writes specialized primary insurance coverage to
mostly small and medium-sized banks in the Midwest. Its product line for financial institutions
includes policies for crime insurance, check kiting fraud indemnification, Internet banking
catastrophe theft insurance, Internet banking privacy liability insurance, directors and officers
liability, bank employment practices, and bank insurance agents professional errors and omissions
indemnity.
Through the latter part of 2008, KBS also offered deposit guarantee bonds which insured bank
deposits in excess of federally insured limits. Beginning in 2008, events in the banking industry
led to a rapid increase in bank failures. Although few of KBSs customer banks were believed to be
subject to significant risk of failure, management became less confident in the long-term
profitability of this line of insurance. Following the failure of one of its customer banks in the
third quarter of 2008, resulting in a loss to KBS, and thus, Wesco, of $4.7 million, after taxes,
(subsequently reduced to $3.7 million, net, as a result of subsequent recoveries from the FDIC),
KBS notified its customers of its decision to exit this line of insurance as rapidly as feasible.
KBS is
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currently writing premiums of approximately $10 million, annually, approximately half of the
volume written before it discontinued its line of deposit guarantee bonds.
The aggregate face amount of outstanding deposit guarantee bonds has been reduced, from $9.7
billion at September 30, 2008, to $2.9 million, at December 31, 2010. The number of institutions
with outstanding KBS bonds has been reduced from 1,671 at September 30, 2008, to one, at December
31, 2010. At the time KBS discontinued its line of deposit guarantee bonds, it was licensed to
write business in 39 states, including 16 in which it wrote only deposit guarantee bonds. KBS is
currently licensed to write business in 25 states. Management is hopeful that KBSs primary
insurance premiums will increase, albeit slowly, in future periods.
KBS limits its loss exposure per loss event to a maximum of $7.6 million, after taxes, by
limiting the maximum amount of risk underwritten to $30 million to any single customer or group of
affiliated customers, and through the purchase of reinsurance from the Berkshire Insurance Group,
at prices believed to be market prices. KBS reinsures the entire layer of losses between $3 million
and $5 million and 65% of the entire layer above $5 million.
In 2010, premiums of $0.2 million were ceded to the Berkshire Insurance Group, no reinsured
losses were allocated to it, and $0.8 million of losses which had been allocated to it in prior
years were recovered and repaid to it. In 2009, premiums of $0.1 million were ceded to the Group,
$0.2 million of reinsured losses were allocated to it, and $1.4 million of losses which had been
allocated to it in 2008 were recovered and repaid to it.
KBS markets its products in some states through exclusive, commissioned agents, and directly
to insureds in other states. Inasmuch as the number of small Midwestern banks is declining as the
banking industry consolidates, KBS has attributed the growth in its business that occurred prior to
late 2008 to an extraordinary level of service provided by its employees and agents, and to the
introduction of new products, such as deposit guarantee bonds which, until KBS decided in late 2008
to exit that line of insurance, had grown to represent approximately half of its business. Internet
banking catastrophe theft insurance and Internet banking privacy liability insurance, which were
introduced several years ago, are steadily increasing in volume, but do not yet provide a
significant amount of premium volume.
A significant marketing advantage enjoyed by the Berkshire Insurance Group, including Wescos
insurance segment, is the maintenance of exceptional capital strength. The combined statutory
surplus of Wescos insurance businesses totaled approximately $2.8 billion at December 31, 2010.
This capital strength creates opportunities, particularly at times when the reinsurance and
insurance capacity available in the market is constrained, for Wes-FIC to participate in
reinsurance and insurance contracts not necessarily available to many of its competitors.
Management of Wesco believes that an insurer in the reinsurance business must maintain a large
net worth in relation to annual premiums in order to remain solvent when called upon to pay claims
when a loss occurs. In this respect, Wes-FIC and KBS are competitively well positioned, inasmuch as
their net premiums written for calendar 2010 amounted to only 10% of their combined statutory
surplus, compared to an industry average of 80% based on figures reported for 2009 by A.M. Best
Company, a nationally recognized statistical rating organization for the insurance industry. In
2009, Standard & Poors Corporation reduced from AAA to AA+ the rating it assigned to Wes-FICs
claims-paying ability. This rating continues to recognize Wes-FICs strong competitive position as
a member of the Berkshire Insurance Group and its significant capital strength, as well
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as the commitment of Wes-FICs management to a disciplined approach to underwriting and
conservative reserving.
Insurance companies are subject to regulation by the departments of insurance of the various
states in which they write policies as well as the states in which they are domiciled and, in the
case of KBS, because of its business of insuring banks, by the Department of the Treasury.
Regulations relate to, among other things, capital requirements, shareholder and policyholder
dividend restrictions, reporting requirements, annual audits by independent accountants, periodic
regulatory examinations and limitations on the risk exposures that can be retained, as well as the
size and types of investments that can be made.
Because it is operated by NICO, Wes-FIC has no employees of its own. KBS has 14 employees.
FURNITURE RENTAL SEGMENT
CORT is the nations largest provider of rental furniture, accessories and related services in
the rent-to-rent (as opposed to rent-to-own) segment of the furniture industry. CORT rents
high-quality furniture to corporate and individual customers who desire flexibility in meeting
their temporary office, residential or trade show furnishing needs, and who typically do not seek
to own such furniture. In addition, CORT sells previously rented furniture through company-owned
clearance centers, thereby enabling it to regularly renew its inventory and update styles. CORTs
network of facilities (in 34 states, the District of Columbia and the United Kingdom (the U.K.))
comprises 85 showrooms, 75 clearance centers and 81 warehouses, as well as thirteen websites,
including www.cort.com.
CORTs rent-to-rent business is differentiated from rent-to-own businesses primarily by the
terms of the rental arrangements and the type of customer served. Rent-to-rent customers generally
desire high-quality furniture to meet temporary needs, have established credit, and pay on a
monthly basis. Typically, these customers do not seek to acquire the property on a permanent basis.
In a typical rent-to-rent transaction, the customer agrees to rent furniture for a minimum of three
months, subject to extension by the customer on a month-to-month basis. By contrast, rent-to-own
arrangements are generally made by customers lacking established credit whose objective is the
eventual ownership of the property. These transactions are typically entered into on a
month-to-month basis and may require weekly rental payments.
CORTs customer base includes primarily Fortune 500 companies, small businesses,
professionals, and owners and operators of apartment communities. CORTs management believes its
size, national presence, brand awareness, consistently high level of customer service, product
quality, breadth of selection, depth and experience of management, and efficient clearance centers
have been key contributors to the companys success. CORT offers a wide variety of office and home
furnishings, including commercial panel systems, televisions, housewares and accessories. CORT
emphasizes its ability to furnish an apartment, home or entire suite of offices with high-quality
furniture, housewares and accessories in two business days. CORTs objective is to build upon these
core competencies and competitive advantages to increase revenues and market share. Key to CORTs
growth strategies are:
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expanding its corporate and individual customer base; |
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enhancing its ability to capture an increasing number of Internet customers through its
on-line catalog and other web services;
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making selective acquisitions; and |
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continuing to develop various products and services. |
In order to capitalize on the significant profit potential available from longer average
rental periods and the higher average monthly rent typically available for office products, CORTs
strategy is to place greater emphasis on growth in rentals of office furniture while maintaining
its premier position in residential furniture rental. In order to promote longer office lease
terms, CORT offers lower rates on leases when lease terms exceed six months. A significant portion
of CORTs residential furniture rentals is derived from corporate relocations and temporary
assignments, as new and transferred employees of CORTs corporate customers enter into leases for
residential furniture. Thus, CORT offers its corporate rental customers a way to reduce the costs
of corporate relocation and travel while developing residential business with new and transferred
employees. CORT also provides short-term rentals for trade shows and conventions. Its
www.corttradeshow.com website assists in providing information to and gathering leads from
prospects.
In January 2008, CORT expanded its operation to the U.K. through the purchase of Roomservice
Group, now doing business as CORT Business Services UK Ltd., a small regional provider of furniture
rental and relocation services. In November 2008, CORT acquired a business division of Aaron Rents,
Inc., expanding its national presence in the U.S. In 2009 and 2010, CORT made several small
acquisitions of local furniture rental companies to expand its presence in select local markets.
The rent-to-rent segment of the furniture rental industry is highly competitive. There are
several large regional competitors, as well as a number of smaller regional and local rent-to-rent
competitors. The availability of low-priced furniture, principally from overseas manufactures, sold
through online retailers is also providing additional competitive pressure. In addition, numerous
retailers offer residential and office furniture under rent-to-own arrangements. It is believed
that the principal competitive factors in the furniture rental industry are product value,
furniture condition, the extent of furniture selection, terms of the rental agreement, speed of
delivery, exchange privileges, options to purchase, deposit requirements and customer service.
CORT provides a nation-wide apartment locator service through its website
www.apartmentsearch.com and customer call centers. The service is intended to supplement and lead
to increased furniture rentals, and is marketed to individual renters as well as relocation
departments of Fortune 2000 companies. Through its network of foreign contacts, CORT also provides
such services internationally.
The majority of CORTs furniture sales revenue is derived from its clearance center sales. The
remaining furniture sales revenue results principally from lease conversions and sales of new
furniture. The sale of previously leased furniture allows CORT to control inventory quantities and
to maintain inventory quality at showroom level. On average, furniture is typically sold through
the clearance centers from three to five years after its initial purchase. With respect to sales of
furniture through its clearance centers, CORT competes with numerous new and used furniture
retailers, some of which are larger than CORT. Wesco management believes that price and value are
CORTs principal competitive advantages.
CORT has approximately 2,100 full-time employees, including 49 union members. Management
considers labor relations to be good.
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INDUSTRIAL SEGMENT
Precision Steel and one of its subsidiaries operate steel service centers in the Chicago and
Charlotte metropolitan areas. The service centers buy stainless steel, low carbon sheet and strip
steel, coated metals, spring steel, brass and other metals, cut these metals to order, and sell
them to a wide variety of customers.
The steel service center business is highly competitive. Its annual sales volume of
approximately 15.5 thousand tons of flat rolled products compares with the domestic steel service
industrys annual volume for all shapes of products (flat rolled, bar, wire, structural, plate,
tubular steel, etc.) of approximately 36 million tons. Precision Steel competes not only with large
national chains and other service centers, but also with mills that supply metal to service
centers, original equipment manufacturers and end-users. Sales competition exists in the areas of
price, quality, availability and speed of delivery. Because it is willing to sell in relatively
small quantities, Precision Steel has been able to compete in geographic areas distant from its
service center facilities.
Precision Brand Products, Inc. (Precision Brand), a wholly owned subsidiary of Precision
Steel that is also located in the Chicago area, manufactures shim stock and other toolroom
specialty items, and distributes a line of hose clamps and threaded rod. These products are sold
under the Precision Brand and DuPage names nationwide, generally through industrial distributors.
This business is highly competitive, and Precision Brands sales represent a very small share of
the market.
Steel Service raw materials are obtained principally from major domestic steel mills. Periodic
scarcities of domestic supplies resulting from an ongoing tendency by domestic manufacturers to
shift production abroad, consolidation and downsizing at the mill level, increasing worldwide
demand for certain popular but relatively scarce imported materials, and economic cycles, have
resulted in periods of intensified competition and large fluctuations in prices at all levels.
Sales volume of the industrial segment, which has been declining for more than a decade, was
significantly affected by the recent recession. Since late in 2009, as the economy began to
strengthen, raw material supplies have been adequate and prices have been relatively stable,
following more than one year during which prices declined rapidly as a result of the recession.
Precision Steels businesses are not dependent on a few large customers. The backlog of steel
service orders, however, decreased to $3.4 million at December 31, 2010 from $3.7 million at
December 31, 2009.
Precision Steels service centers continue to focus on cost-cutting measures where feasible,
while focusing on customer service and the maintenance of extensive inventories in order to meet
customer demand for prompt deliveries; typically, processed metals are delivered to the customer
within one or two weeks. Precision Brand normally maintains inventories adequate to allow for
off-the-shelf service to customers within 24 hours.
There are 172 full-time employees engaged in the industrial segment businesses, one-third of
whom are members of unions. Management considers labor relations to be good.
ACTIVITIES NOT IDENTIFIED WITH A BUSINESS SEGMENT
Certain of Wescos activities are not identified with any business segment. These include
investment activity unrelated to the insurance segment, management and development of owned real
property, including a multi-story luxury condominium building that MS Property is marketing, and
parent company activities.
Five full-time employees are engaged in the activities of Wesco and MS Property.
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AVAILABLE INFORMATION
Wescos Forms 10-K, 10-Q and 8-K, and amendments thereto, as well as proxy materials, may be
accessed soon after they are electronically filed with the SEC, through Wescos website,
www.wescofinancial.com, or the SECs website, www.sec.gov.
In addition to the factors affecting specific business operations identified in connection
with the description of these operations and their financial results elsewhere in this report, we
invite your attention to the considerations and risk factors described below. The risk factors
could cause Wescos actual results to differ materially from the forward-looking and other
statements contained in this report and in the other periodic reports and other filings Wesco makes
with the SEC, as well as in news releases, annual reports and other communications that Wesco makes
from time to time. It should be noted that there are other risks facing Wesco, and that additional
risks and uncertainties not presently known or that are currently deemed immaterial may also impair
Wescos business operations.
An investment in Wesco is not an investment in Berkshire Hathaway.
From time to time in the past there have been erroneous reports by an analyst or reporter that
an investor wishing to purchase Berkshire common stock can instead purchase shares of Wesco.
Berkshire is the parent of Wesco. Wescos operations differ significantly from those of Berkshire,
and its shares may trade at a significantly different price relative to its intrinsic value than do
those of Berkshire. In addition to the risk factors affecting Wescos operations, Berkshire has
risk factors of its own. Investors wishing to have investment exposure to Berkshire cannot
accomplish this by purchasing Wesco shares. They should carefully read Berkshires published
financial statements and filings with the SEC.
Wescos investments are unusually concentrated and fair values are subject to loss in
value.
Compared to other companies, Wesco keeps an unusually high percentage of its assets
(principally related to its insurance businesses) in common stocks and diversifies its portfolio
far less than is conventional. A significant decline in the general stock market or in the price of
major investments may produce a large decrease in Wescos shareholders equity and under certain
circumstances may require the recognition of such losses in the statement of income. Decreases in
values of equity investments could have a material adverse effect on Wescos book value per share.
Wesco is dependent for its investment and all other capital allocation decisions on a few key
people.
Investment decisions and all other capital allocation decisions are made for Wescos
businesses by Charles T. Munger, Chairman of the Board of Directors, President and CEO of Wesco,
and Vice Chairman of the Board of Directors of Berkshire Hathaway, age 87, in consultation with
Warren E. Buffett, Chairman of the Board of Directors and CEO of Berkshire Hathaway, age 80. If for
any reason the services of those key personnel, particularly Mr. Buffett, were to become
unavailable to Wesco, there could be a material adverse effect on Wesco. However, Berkshires Board
of Directors has agreed on a replacement for Mr. Buffett should a replacement be needed currently.
Its Board continually monitors this matter and could alter its current view in the future.
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Wescos Wes-FIC subsidiary is dependent upon the Berkshire Insurance Group for its management
and personnel, and for opportunities to participate with the Berkshire Insurance Group in
reinsurance contracts representing essentially the entirety of its reinsurance business, as well as
a significant portion of its insurance business to date.
Since the incorporation of Wes-FIC in 1985, Wescos insurance and reinsurance business, other
than that conducted by its Kansas Bankers Surety subsidiary, has been limited principally to
participation with members of the Berkshire Insurance Group in contracts for the reinsurance of
risks of unaffiliated property and casualty insurance companies. Wes-FICs operations are managed
by NICO, a member of the Berkshire Insurance Group; it has no employees of its own. In the event
the Berkshire Insurance Group were to cease operating Wes-FICs business or to significantly
curtail Wes-FICs participation with it in reinsurance contracts, Wes-FIC would be required to look
elsewhere for personnel who would conduct and manage its operations, and/or seek to continue its
insurance business in a different manner. Alternatively, in those circumstances Wes-FIC might need
to significantly curtail its insurance business or cease it altogether.
Wescos tolerance for risk in its insurance businesses may result in a high degree of
volatility in periodic reported earnings.
Wes-FIC participates with members of the Berkshire Insurance Group in certain reinsurance
contracts in which significant risk is periodically assumed. The Berkshire Insurance Group has
indicated that it believes that it has been and continues to be willing to assume more risk than
any other insurer has knowingly assumed.
As described in Item 1, Business, effective January 1, 2008, Wes-FIC entered into a
quota-share retrocession agreement with NICO, a member of the Berkshire Insurance Group, to assume
10% of NICOs quota share reinsurance of Swiss Re. Under this retrocession agreement, Wes-FIC has
assumed 2% part of NICOs 20% quota share reinsurance of all Swiss Re property-casualty risks
incepting over the five-year period which began January 1, 2008, on the same terms as NICOs
agreement with Swiss Re (the Swiss Re contract). This arrangement significantly increased
Wes-FICs premium volume as well as exposure to large losses, such as hurricanes, floods,
earthquakes and acts of terrorism, as well as foreign exchange risk, and thus the potential for
increased volatility and losses. In addition, as with all reinsurance arrangements, Wes-FIC does
not control the underwriting of the primary insurer and relies on the primary insurers reputation
and judgment in deciding what underlying risks to insure.
Aside from risks assumed under the Swiss Re contract, Wes-FICs reinsurance activities
currently in force do not subject it to super-catastrophe risks. However, it has procedures in
place for the immediate acceptance of participations in catastrophic excess of loss reinsurance,
which could subject it to large amounts of losses from mega-catastrophes such as hurricanes or
earthquakes, if offered to it by the Berkshire Insurance Group, so long as the Berkshire Insurance
Group participates in such reinsurance activities to a greater degree. The tolerance for
significant risks may in certain future periods result in significant losses. This policy may
result in a high degree of volatility in Wescos periodic reported earnings.
The degree of estimation error inherent in the process of estimating property and casualty
insurance loss reserves may result in a high degree of volatility in periodic reported
earnings.
In the insurance business, premiums are charged today for promises to pay covered losses in
the future. The principal cost associated with premium revenue is claims. However, it will
literally take decades before all losses that have occurred as of the balance sheet date will be
reported and settled. Although Wesco believes that loss reserve balances are adequate to cover
losses, Wesco will not truly know whether the premiums charged for
10
the coverages provided were sufficient until well after the balance sheet date. Wescos
objective is to generate underwriting profits over the long term. Estimating insurance claim costs
is inherently imprecise. Wescos reserve estimates are large ($408.4 million at December 31, 2010),
so adjustments to reserve estimates can have a material effect on periodic reported earnings.
Each of Wescos operating businesses faces intense competitive pressures.
Each of Wescos operating businesses faces intense competitive pressures within its respective
markets. Such competition may come from domestic and international operators. While Wescos
businesses are managed with the objective of achieving sustainable growth over the long term
through developing and strengthening competitive advantages, many factors, including market changes
and technology, could erode or impede those competitive advantages or prevent their strengthening.
Accordingly, future operating results will depend to some degree on whether the operating units are
successful in protecting or enhancing their competitive advantages.
Unfavorable economic conditions could hurt Wescos operating businesses.
Wescos operating businesses are subject to normal economic cycles affecting the economy in
general and the industries in which they operate. To the extent that the current weak economic
environment continues for a prolonged period of time, one or more of Wescos significant operations
could be materially harmed.
Berkshire and Wesco have entered into a merger agreement. In the event the merger does not
close, there could be an adverse effect on the trading price of Wescos capital stock.
On February 7, 2011, Wesco and Berkshire announced that they had entered into a definitive
merger agreement, whereby Berkshire will acquire the remaining 19.9% of the shares of Wescos
capital stock that it does not presently own in exchange for cash or shares of Berkshire Class B
common stock, at the election of each Wesco shareholder. The trading price of Wescos capital stock
on the NYSE Amex increased upon the public announcement of Berkshires original offer to acquire
the remaining Wesco shares, and it increased again upon public announcement of the execution of the
merger agreement. In the event a transaction does not occur, there could be an adverse effect on
the trading price of Wescos capital stock.
In addition to the foregoing risk factors inherent in Wescos operations, Wescos shareholders
face a market liquidity risk because the daily trading volume of Wescos shares on NYSE Amex is
relatively low.
In addition to the risks facing Wesco in its business operations, investors wishing to
purchase or sell shares of its capital stock face market price risks because the daily NYSE Amex
trading volume of Wescos shares is relatively low. An order for the purchase or sale of a large
number of Wesco shares could significantly affect the price at which the order is executed.
|
|
|
Item 1B. |
|
Unresolved Staff Comments |
None.
11
CORT leases 16,212 square feet of office space in a multistory office building in Fairfax,
Virginia, which it uses as its headquarters under a lease which will expire in 2012.
CORT carries out its rental, sales and warehouse operations in metropolitan areas in 34
states, the District of Columbia and the U.K. through 148 facilities, of which 15 were owned and
the remaining were leased as of December 31, 2010. The leased facilities lease terms expire at
dates ranging from 2011 to 2021. CORT has generally been able to extend expiration dates of its
leases or obtain suitable alternative facilities on satisfactory terms. As leases expire, CORT has
been eliminating redundant locations and decreasing the size of its showrooms, which as of yearend
2010 ranged in size from 1,200 to 10,388 square feet of floor space. Where locations are desirable,
its management has been attempting to combine rental, clearance and warehouse operations rather
than retain separate showrooms, because business and residential customers have been increasingly
using the Internet. CORT regularly reviews the presentation and appearance of its furniture
showrooms and clearance centers and periodically improves or refurbishes them to enhance their
attractiveness to customers.
MS Property owns a business block in Pasadena, California situated between the city hall and a
large shopping mall. The blocks improvements include a nine-story office building that was
constructed in 1964 and has approximately 125,000 square feet of rentable area, and a multistory
garage with space for 420 vehicles. Of the 125,000 square feet of space in the office building,
approximately 5,000 square feet are used by MS Property or leased to Blue Chip or Wesco at market
rental rates. The remaining space is almost fully leased to outside parties, including Citibank
(the ground floor tenant), law firms and others, under agreements expiring at dates extending to
2017.
Wes-FICs place of business is the Omaha, Nebraska headquarters office of NICO.
KBS leases 5,100 square feet of office space in an office building in Topeka, Kansas under a
lease that expires in 2012.
Precision Steel and its subsidiaries own three buildings housing their plant and office
facilities, with usable area approximately as follows: 138,000 square feet in Franklin Park,
Illinois; 63,000 square feet in Charlotte, North Carolina; and 59,000 square feet in Downers Grove,
Illinois.
|
|
|
Item 3. |
|
Legal Proceedings |
Two lawsuits were filed on February 8, 2011 by plaintiffs claiming to be Wesco shareholders
challenging the transactions contemplated by the merger agreement between Berkshire and Wesco.
Both of the lawsuits name Wesco, Wescos directors, Berkshire and Montana Acquisitions, LLC as
defendants. One of them also names Blue Chip and Wescos Chief Financial Officer as defendants.
One of the actions was filed in Delaware Chancery Court and the other in Los Angeles Superior
Court. Both purport to be class actions on behalf of Wesco shareholders.
The Delaware action is styled Joel Krieger v. Wesco Financial Corporation, et al. The Los
Angeles action is styled James Kinsey v. Wesco Financial Corporation, et al. The lawsuits allege,
among other things, that Wescos directors have breached their fiduciary duties based on
allegations that (i) the consideration being offered is unfair and inadequate, (ii) statements in
Wescos annual reports comparing its prospects for growth with those of Berkshire have been unduly
unfavorable to Wesco, and (iii) the Wesco directors approval of the
12
proposed merger was tainted by conflicts of interest between Berkshire and the non-Berkshire
shareholders of Wesco in breach of the Boards fiduciary duties. The lawsuits also allege that
Berkshire and its affiliates violated fiduciary duties owed by a majority shareholder and/or aided
and abetted the alleged breaches by Wescos directors. The plaintiffs seek various remedies,
including enjoining the transaction from being consummated in accordance with the agreed-upon
terms. The defendants intend to defend against these and any additional actions asserting similar
claims that may be brought in the future.
Wesco and its subsidiaries are not otherwise involved in any legal proceedings the ultimate
outcomes of which are expected to be significant to Wesco.
|
|
|
Item 4. |
|
Submission of Matters to a Vote of Security Holders |
Reserved.
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Wescos capital stock is listed on the NYSE Amex, owned and operated by NYSE Euronext, a
holding company also owning the New York Stock Exchange.
The following table sets forth quarterly ranges of composite prices for trading of Wesco
shares for 2010 and 2009, based on data reported by Bloomberg LP, as well as cash dividends paid by
Wesco on each outstanding share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
|
|
Sales Price |
|
|
|
|
|
Sales Price |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends |
|
|
|
|
|
|
|
|
|
Dividends |
Quarter Ended |
|
High |
|
Low |
|
Paid |
|
High |
|
Low |
|
Paid |
March 31 |
|
$ |
416 |
|
|
$ |
342 |
|
|
$ |
0.41 |
|
|
$ |
309 |
|
|
$ |
208 |
|
|
$ |
0.395 |
|
June 30 |
|
|
408 |
|
|
|
319 |
|
|
|
0.41 |
|
|
|
323 |
|
|
|
269 |
|
|
|
0.395 |
|
September 30 |
|
|
387 |
|
|
|
318 |
|
|
|
0.41 |
|
|
|
328 |
|
|
|
285 |
|
|
|
0.395 |
|
December 31 |
|
|
373 |
|
|
|
352 |
|
|
|
0.41 |
|
|
|
354 |
|
|
|
313 |
|
|
|
0.395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.64 |
|
|
|
|
|
|
|
|
|
|
$ |
1.580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were approximately 400 shareholders of record of Wescos capital stock as of the close
of business on February 15, 2011. It is estimated that approximately 10,700 additional Wesco
shareholders held shares of Wescos capital stock in street name at that date.
Wesco did not purchase any of its own equity securities during 2010.
13
Item 6. Selected Financial Data
Set forth below and on the following page are selected consolidated financial data for Wesco
and its subsidiaries. For additional financial information, attention is directed to Wescos
audited 2010 consolidated financial statements appearing in Item 8 of this report. (Amounts are in
thousands except for amounts per share.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
472,569 |
|
|
$ |
273,671 |
|
|
$ |
297,643 |
|
|
$ |
526,722 |
|
|
$ |
1,257,351 |
|
Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities with fixed maturities |
|
|
235,193 |
|
|
|
229,872 |
|
|
|
28,656 |
|
|
|
38,600 |
|
|
|
81,861 |
|
Equity securities |
|
|
2,272,253 |
|
|
|
2,065,627 |
|
|
|
1,868,293 |
|
|
|
1,919,425 |
|
|
|
1,040,550 |
|
Accounts receivable |
|
|
37,191 |
|
|
|
37,983 |
|
|
|
57,489 |
|
|
|
42,841 |
|
|
|
37,204 |
|
Receivable from affiliates |
|
|
170,852 |
|
|
|
173,476 |
|
|
|
133,396 |
|
|
|
36,671 |
|
|
|
23,182 |
|
Rental furniture |
|
|
177,680 |
|
|
|
177,793 |
|
|
|
217,597 |
|
|
|
178,297 |
|
|
|
182,846 |
|
Goodwill of acquired businesses |
|
|
277,514 |
|
|
|
277,590 |
|
|
|
277,742 |
|
|
|
266,607 |
|
|
|
266,607 |
|
Other assets |
|
|
148,692 |
|
|
|
165,414 |
|
|
|
169,879 |
|
|
|
103,846 |
|
|
|
80,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
3,791,944 |
|
|
$ |
3,401,426 |
|
|
$ |
3,050,695 |
|
|
$ |
3,113,009 |
|
|
$ |
2,970,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance losses and loss
adjustment expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliated business |
|
$ |
371,805 |
|
|
$ |
290,375 |
|
|
$ |
164,424 |
|
|
$ |
39,687 |
|
|
$ |
29,761 |
|
Unaffiliated business |
|
|
36,579 |
|
|
|
53,091 |
|
|
|
50,844 |
|
|
|
54,158 |
|
|
|
48,549 |
|
Unearned insurance premiums |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliated business |
|
|
112,019 |
|
|
|
110,477 |
|
|
|
94,544 |
|
|
|
15,041 |
|
|
|
14,062 |
|
Unaffiliated business |
|
|
9,545 |
|
|
|
11,516 |
|
|
|
13,251 |
|
|
|
15,225 |
|
|
|
15,298 |
|
Deferred furniture rental income
and security deposits |
|
|
8,269 |
|
|
|
11,846 |
|
|
|
17,674 |
|
|
|
19,947 |
|
|
|
20,440 |
|
Accounts payable and accrued
expenses |
|
|
73,500 |
|
|
|
54,537 |
|
|
|
61,145 |
|
|
|
49,476 |
|
|
|
48,258 |
|
Notes payable |
|
|
51,200 |
|
|
|
28,200 |
|
|
|
40,400 |
|
|
|
37,200 |
|
|
|
38,200 |
|
Income taxes payable, principally
deferred |
|
|
363,310 |
|
|
|
290,667 |
|
|
|
230,657 |
|
|
|
347,416 |
|
|
|
355,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
1,026,227 |
|
|
$ |
850,709 |
|
|
$ |
672,939 |
|
|
$ |
578,150 |
|
|
$ |
569,967 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital stock and additional paid-
in capital |
|
$ |
33,324 |
|
|
$ |
33,324 |
|
|
$ |
33,324 |
|
|
$ |
33,324 |
|
|
$ |
33,324 |
|
Accumulated other comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized appreciation of
investments, net of taxes |
|
|
438,918 |
|
|
|
284,051 |
|
|
|
154,660 |
|
|
|
381,017 |
|
|
|
344,978 |
|
Foreign currency translation
adjustments, net of taxes |
|
|
(1,553 |
) |
|
|
(1,151 |
) |
|
|
(1,897 |
) |
|
|
|
|
|
|
|
|
Retained earnings |
|
|
2,295,028 |
|
|
|
2,234,493 |
|
|
|
2,191,669 |
|
|
|
2,120,518 |
|
|
|
2,022,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
$ |
2,765,717 |
|
|
$ |
2,550,717 |
|
|
$ |
2,377,756 |
|
|
$ |
2,534,859 |
|
|
$ |
2,400,338 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per capital share |
|
$ |
388.45 |
|
|
$ |
358.26 |
|
|
$ |
333.96 |
|
|
$ |
356.03 |
|
|
$ |
337.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture rentals |
|
$ |
309,439 |
|
|
$ |
312,234 |
|
|
$ |
340,162 |
|
|
$ |
327,671 |
|
|
$ |
324,300 |
|
Sales and service revenues |
|
|
106,278 |
|
|
|
106,342 |
|
|
|
130,753 |
|
|
|
129,861 |
|
|
|
139,058 |
|
Insurance premiums earned |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliated business |
|
|
272,223 |
|
|
|
307,560 |
|
|
|
218,094 |
|
|
|
35,530 |
|
|
|
32,643 |
|
Unaffiliated business |
|
|
12,294 |
|
|
|
15,661 |
|
|
|
19,870 |
|
|
|
18,881 |
|
|
|
21,506 |
|
Dividend and interest income |
|
|
75,807 |
|
|
|
67,458 |
|
|
|
79,079 |
|
|
|
90,872 |
|
|
|
84,504 |
|
Realized net investment gains |
|
|
6,541 |
|
|
|
|
|
|
|
7,006 |
|
|
|
24,240 |
|
|
|
|
|
Other-than-temporary impairment
losses on investments |
|
|
(21,021 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
4,142 |
|
|
|
4,076 |
|
|
|
3,990 |
|
|
|
3,869 |
|
|
|
3,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
765,703 |
|
|
|
813,331 |
|
|
|
798,954 |
|
|
|
630,924 |
|
|
|
605,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products and services sold |
|
|
124,245 |
|
|
|
130,992 |
|
|
|
149,319 |
|
|
|
143,282 |
|
|
|
154,218 |
|
Insurance losses and loss adjustment
expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliated business |
|
|
182,925 |
|
|
|
198,853 |
|
|
|
151,308 |
|
|
|
24,008 |
|
|
|
21,401 |
|
Unaffiliated business |
|
|
(2,669 |
) |
|
|
14,454 |
|
|
|
20,892 |
|
|
|
4,269 |
|
|
|
9,944 |
|
Insurance underwriting expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliated business |
|
|
82,059 |
|
|
|
92,857 |
|
|
|
63,156 |
|
|
|
8,019 |
|
|
|
7,566 |
|
Unaffiliated business |
|
|
5,525 |
|
|
|
5,946 |
|
|
|
7,135 |
|
|
|
7,284 |
|
|
|
7,294 |
|
Selling, general and administrative |
|
|
281,929 |
|
|
|
305,934 |
|
|
|
300,231 |
|
|
|
280,728 |
|
|
|
265,327 |
|
Interest expense |
|
|
504 |
|
|
|
641 |
|
|
|
1,798 |
|
|
|
2,408 |
|
|
|
2,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
674,518 |
|
|
|
749,677 |
|
|
|
693,839 |
|
|
|
469,998 |
|
|
|
468,461 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
91,185 |
|
|
|
63,654 |
|
|
|
105,115 |
|
|
|
160,926 |
|
|
|
137,266 |
|
Income taxes |
|
|
18,973 |
|
|
|
9,581 |
|
|
|
22,999 |
|
|
|
51,765 |
|
|
|
45,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
72,212 |
|
|
$ |
54,073 |
|
|
$ |
82,116 |
|
|
$ |
109,161 |
|
|
$ |
92,033 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
10.14 |
|
|
$ |
7.59 |
|
|
$ |
11.53 |
|
|
$ |
15.33 |
|
|
$ |
12.93 |
|
Cash dividends |
|
|
1.64 |
|
|
|
1.58 |
|
|
|
1.54 |
|
|
|
1.50 |
|
|
|
1.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reinsurance activities of Wescos insurance segment are managed by Berkshires NICO
subsidiary and represent participations in contracts in which NICO and other members of the
Berkshire Insurance Group also participate. Financial information associated with these
participations is identified in Wescos consolidated financial statements, as well as in Item 6,
Selected Financial Data, as affiliated business.
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
In reviewing this item, attention is directed to Item 6, Selected Financial Data, and Item 1,
Business.
OVERVIEW
The principal goal of Wescos management is to maximize gain in Wescos intrinsic business
value per share over the long term. Accounting consequences do not influence business decisions,
nor do fluctuations in annual net income. Management strives to maintain high liquidity to ensure
that Wesco and its subsidiaries are able to endure unforeseen circumstances, including recessionary
economic cycles and periods of significant declines in
15
the trading prices of investments, with a margin of safety, and to invest the investable funds
principally held in Wescos insurance segment in common stocks of outstanding publicly traded
companies at prices deemed reasonable. In the event that such investments are not available,
capital is preserved through investments in high-quality cash equivalents, securities of the U.S.
Government and its agencies, and high-quality corporate debt instruments.
Wescos operating businesses are managed on a decentralized basis. There are essentially no
centralized or integrated business functions (such as sales, marketing, purchasing, legal or human
resources) and there is minimal involvement by Wescos management in the day-to-day business
activities of the operating businesses. Wescos Chairman, President and Chief Executive Officer,
Charles T. Munger, is also Vice Chairman of Berkshire Hathaway, and consults with Warren E.
Buffett, Chairman and Chief Executive Officer of Berkshire, with respect to Wescos investment
decisions, major capital allocations, and the selection of the chief executives to head each of
Wescos operating units, subject to ultimate approval of Wescos Board of Directors.
The operations of Wescos Wes-FIC subsidiary are managed by Berkshires NICO subsidiary.
Wes-FIC participates principally in reinsurance contracts in which NICO and other Berkshire
insurance subsidiaries participate, in the reinsurance of property and casualty risks of
unaffiliated insurance companies. The terms of Wes-FICs participation are essentially identical to
those by which the other Berkshire insurance subsidiaries participate, except as to the percentages
of participation (see Item 1, Business, for further information).
FINANCIAL CONDITION
Wesco continues to have a strong consolidated balance sheet, with high liquidity and
relatively little debt.
Its equity investments are in strong, well-known companies. Wescos practice of concentrating
its investments in a few issuers, rather than diversifying, follows the investment philosophy of
the chairmen-CEOs of Wesco and its parent, Berkshire, who consult with respect to Wescos
investments and major capital allocations.
Wescos shareholders equity was $2.77 billion ($388.45 per share) at December 31, 2010, $2.55
billion ($358.26 per share) at December 31, 2009, and $2.38 billion ($333.96 per share) as of
December 31, 2008. Wesco carries substantially all of its investments on its consolidated balance
sheet at fair value, with net unrealized appreciation or depreciation included as a component of
shareholders equity, net of deferred taxes, without being reflected in earnings. The change in
shareholders equity reflects principally the after-tax net appreciation of the aggregate values of
Wescos investments, as well as net income retained, after payment of dividends to shareholders.
During 2010, however, as explained below, under Results of Operations, Wesco recorded an
other-than-temporary impairment loss with respect to one investment, in the amount of $21.0
million ($13.7 million, after taxes). The realization of the loss did not affect Wescos
shareholders equity, but merely resulted in a reclassification of the after-tax amount from net
unrealized appreciation to retained earnings, another component of shareholders equity.
Because unrealized appreciation and depreciation is recorded based upon market quotations and,
in some cases, upon other inputs that are affected by economic and market conditions as of the
balance sheet date, gains or losses ultimately realized upon sale of investments could differ
substantially from unrealized appreciation or depreciation recorded on the balance sheet. See Item
7A, Quantitative and Qualitative Disclosures About Market Risk, as well as Notes 1, 2 and 8 to
Wescos accompanying consolidated financial statements, for additional information on Wescos
investments.
16
Wescos liability for unpaid losses and loss adjustment expenses at December 31, 2010 totaled
$408.4 million versus $343.5 million at December 31, 2009. The increase related principally to the
retrocession agreement with Berkshires NICO subsidiary, described in Item 1, Business, above.
Wescos consolidated borrowings totaled $51.2 million at December 31, 2010 versus $28.2
million at December 31, 2009. These amounts related primarily to a $100 million revolving credit
facility used in CORTs furniture rental business. In addition to this recorded debt, Wesco and its
subsidiaries had $128.2 million of operating lease and other contractual obligations at December
31, 2010, versus $125.8 million one year earlier. (See the section on off-balance sheet
arrangements and contractual obligations appearing below in this Item 7, as well as Note 7 to the
accompanying consolidated financial statements, for additional information on debt.)
Wes-FIC has a rating of AA+ from Standard & Poors Corporation with respect to its
claims-paying ability.
RESULTS OF OPERATIONS
Over the last half of 2008 and throughout 2009, operating results of Wescos furniture rental
and industrial segments were adversely impacted by the world-wide economic recession. While Wescos
insurance segment has remained strong, late in 2008, KBS discontinued its line of deposit guarantee
bonds, the premiums from which had provided half of its insurance premium revenues. In 2010,
operating results of Wescos furniture rental and industrial segments improved versus 2009,
reflecting some improvement in economic conditions; and, Wescos insurance segment reported
improved income from underwriting activities.
Wescos consolidated net income has also been and will continue to be impacted from year to
year as a result of the realization of gains or losses on investments, and, in 2010, it was also
impacted by an other-than-temporary impairment (OTTI) loss on certain purchase lots of an
investment that had been below cost for more than two years. The amounts, if any, of these gains
and losses in any year have no predictive value, and variations in amount from year to year have no
practical analytical value. In 2010, realized net investment gains were $6.5 million ($4.2 million,
after taxes), and OTTI losses were $21.0 million ($13.7 million, after taxes). No investment gains
or losses were realized in 2009. Realized investment gains of $7.0 million ($4.6 million, after
taxes) were realized in 2008.
Wescos reportable business segments are organized in a manner that reflects how Wescos top
management views those business activities. Wescos management views insurance businesses as
possessing two distinct operations underwriting and investing, and believes that underwriting
gain or loss is an important measure of their financial performance. Underwriting gain or loss
represents the simple arithmetic difference between the following line items appearing on the
consolidated statement of income: (1) insurance premiums earned, less (2) insurance losses and loss
adjustment expenses, and insurance underwriting expenses. Managements goal is to generate
underwriting gains over the long term. Underwriting decisions are the responsibility of the unit
managers; investing is the responsibility of Charles T. Munger in consultation with Warren E.
Buffett, subject to ultimate approval by Wescos Board of Directors. Accordingly, underwriting
results are evaluated without allocation of investment income.
Wescos consolidated net income, excluding realized net investment gains and OTTI losses,
increased by $27.6 million for 2010. Several factors were involved, principally (1) improved
profitability of CORTs furniture rental business due to a reduction in operating expenses, (2)
increased underwriting gain and investment income of Wescos insurance businesses, and (3)
improving economic conditions. The operations of CORT and Precision Steel, although improved,
continue to reflect the effects of weak economic conditions.
17
While there has been some improvement in economic conditions, Wescos management believes that
generally weak conditions will likely persist at least through 2011. Wescos subsidiaries will
continue their cost reduction actions in response to this situation, including ongoing reductions
in capital expenditures and operating expenses. Wesco has historically attempted to manage its
financial condition such that it can weather cyclical economic conditions, and it intends to
continue doing so throughout the current economic cycle.
The selected financial data in Item 6 are set forth essentially in the income statement format
customary to accounting principles generally accepted in the United States (GAAP). Revenues,
including realized net investment gains and OTTI losses, are followed by costs and expenses, and a
provision for income taxes, to arrive at net income. The following summary sets forth the after-tax
contribution to GAAP net income of each business segment insurance, furniture rental and
industrial as well as activities not considered related to such segments. Realized net
investment gains and OTTI losses are excluded from segment activities, consistent with the way
Wescos management views the business operations. (Amounts are in thousands, all after income tax
effect.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Insurance segment: |
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting |
|
|
$10,840 |
|
|
$ |
7,222 |
|
|
$ |
(2,942 |
) |
Investment income |
|
|
62,211 |
|
|
|
55,781 |
|
|
|
64,274 |
|
Furniture rental segment |
|
|
11,480 |
|
|
|
(1,359 |
) |
|
|
15,744 |
|
Industrial segment |
|
|
1,079 |
|
|
|
(648 |
) |
|
|
842 |
|
Nonsegment items other than investment gains |
|
|
(3,986 |
) |
|
|
(6,923 |
) |
|
|
(356 |
) |
Realized net investment gains |
|
|
4,252 |
|
|
|
|
|
|
|
4,554 |
|
Other-than-temporary impairment losses on investments |
|
|
(13,664 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income |
|
|
$72,212 |
|
|
$ |
54,073 |
|
|
$ |
82,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the following sections the data set forth in the foregoing summary on an after-tax basis
are broken down and discussed.
18
Insurance Segment
Wesco engages principally in reinsurance of property and casualty risks through Wes-FIC. It
also engages in primary insurance through KBS. Their operations are conducted or supervised by
wholly owned subsidiaries of Berkshire, Wescos ultimate parent company, principally, NICO. In
reinsurance activities, defined portions of similar or dissimilar risks that other insurers or
reinsurers have subjected themselves to in their own insuring activities are assumed. In primary
insurance activities, defined portions of the risks of loss from persons or organizations that are
directly subject to the risks are assumed. For purposes of the following discussion, the results
have been disaggregated between reinsurance and primary insurance activities. Following is a
summary of the insurance segments underwriting activities. (Amounts are in thousands.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Insurance premiums written |
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance |
|
$ |
275,126 |
|
|
$ |
329,227 |
|
|
$ |
298,622 |
|
Primary |
|
|
9,658 |
|
|
|
9,964 |
|
|
|
17,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
284,784 |
|
|
$ |
339,191 |
|
|
$ |
316,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance premiums earned |
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance |
|
$ |
274,567 |
|
|
$ |
311,144 |
|
|
$ |
217,584 |
|
Primary |
|
|
9,950 |
|
|
|
12,077 |
|
|
|
20,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
284,517 |
|
|
|
323,221 |
|
|
|
237,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance losses, loss adjustment expenses and underwriting
expenses |
|
|
267,840 |
|
|
|
312,110 |
|
|
|
242,491 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting gain (loss), before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance |
|
|
13,820 |
|
|
|
15,968 |
|
|
|
(2,162 |
) |
Primary |
|
|
2,857 |
|
|
|
(4,857 |
) |
|
|
(2,365 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
16,677 |
|
|
|
11,111 |
|
|
|
(4,527 |
) |
Income taxes |
|
|
5,837 |
|
|
|
3,889 |
|
|
|
(1,585 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting gain (loss) |
|
$ |
10,840 |
|
|
$ |
7,222 |
|
|
$ |
(2,942 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual delays in reporting, and limitations in details reported by the ceding companies,
necessitate that estimates be made of reinsurance premiums written and earned, as well as
reinsurance losses and expenses. Under the Swiss Re contract, for example, premiums, claims and
expenses are reported by Swiss Re 45 days after the end of each quarterly period. Estimates are
therefore made each reporting period by management for the activity not yet reported. Such
estimates are developed by NICO based on information publicly available and adjusted for the impact
of its, as well as NICOs and Wes-FICs managements, assessments of prevailing market conditions
and other factors with respect to the underlying reinsured business. The relative importance of the
Swiss Re contract to Wescos results of operations causes those results to be particularly
sensitive to this estimation process. However, increases or decreases in premiums earned as a
result of the estimation process related to the reporting lag have been and will typically be
substantially offset by corresponding increases or decreases in claim and expense estimates.
Periodic underwriting results can also be affected significantly by changes in estimates for unpaid
losses and loss adjustment expenses, including amounts established for occurrences in prior years.
See the Critical Accounting Policies section of this discussion for information concerning the loss
reserve estimation process.
Written and earned reinsurance premiums assumed under the Swiss Re contract were $241.1
million and $240.5 million, respectively, for 2010, $294.1 million and $276.7 million, for 2009,
and $265.2 million and $183.2 million, for 2008. The 2010 figures represented decreases of 18.0% in
written and 13.1% in earned premiums for the year; the 2009 figures represented increases of 10.9%
in written and 51.0% in earned premiums for the year. Premiums assumed in each of the remaining two
years under the contract could vary
19
significantly depending on Swiss Res response to market conditions and opportunities that may
arise, as well as any significant fluctuation in the value of the U.S. Dollar as compared with the
many currencies in which Swiss Re conducts its business. For 2010, written aviation-related
reinsurance premiums decreased by $1.1 million (3.1%) from those of 2009, after having increased
by $1.7 million (5.2%) for 2009, from those of 2008. Earned aviation-related premiums for 2010
decreased by $0.5 million (1.3%) for 2010, after having increased by $0.1 million (0.2%) for 2009,
from those of 2008. Property casualty insurance is a competitive business. Both Swiss Re and the
aviation pool manager have indicated that the level of business written in a given period will vary
due to changes in market conditions and their respective managements assessments of the adequacy
of premium rates.
Written primary insurance premiums decreased by $0.3 million (3.1%) for 2010 and by $7.9
million (44.2%) for 2009, and earned primary insurance premiums decreased by $2.1 million (17.6%)
for 2010 and by $8.3 million (40.7%) for 2009, from the corresponding prior year figures. These
fluctuations related essentially to KBSs discontinued line of bank deposit guarantee bonds,
discussed in Item 1, Business.
Management believes that underwriting gain or loss is an important measure of financial
performance of insurance companies. When stated as a percentage, the sum of insurance losses, loss
adjustment expenses and underwriting expenses, divided by premiums, gives the combined ratio. A
combined ratio of less than 100% connotes an underwriting profit and a combined ratio of greater
than 100% connotes an underwriting loss. The ratio is figured on a pre-tax basis. Underwriting
results of Wescos insurance segment have generally been favorable, but have fluctuated from year
to year for various reasons, including competitiveness of pricing in terms of premiums charged for
risks assumed, and volatility of losses incurred.
Reinsurance generated pre-tax underwriting gains (losses) of $13.8 million, $16.0 million and
($2.2 million), for 2010, 2009 and for 2008, respectively, representing combined ratios of 95.0%,
94.9% and 101.0%. The foregoing figures included pre-tax underwriting gains (losses) under the
Swiss Re contract of $10.7 million, $12.6 million and ($5.4 million).
During 2010, several events occurred which produced large catastrophe losses for the property
casualty industry, notably the Chilean earthquake, European winter storm Xynthia, the loss of the
Deepwater Horizon oil rig in the Gulf of Mexico, the New Zealand earthquake in September, and the
Australian flood that began in December. Underwriting results under the Swiss Re contract for 2010
reflect estimated losses of $31.3 million, before taxes, related to those events. Loss estimates
relating to the New Zealand earthquake were based significantly on, and the Australian flood, were
based entirely on, Wes-FIC managements assessment of publicly available information. Underwriting
results under the contract for 2010 also reflect favorable pre-tax reserve development of $4.7
million attributed to accident year 2009 and $2.3 million related to accident year 2008. During the
third quarter of 2008, Hurricanes Gustav and Ike struck the Caribbean and the Gulf coast region of
the United States, also producing large catastrophe losses. The underwriting figures for 2008
included Wes-FICs estimate that its share of Swiss Res losses from those events was $13.5
million, before taxes, based entirely on Wes-FIC managements assessment of publicly available
information. Pre-tax underwriting results under the contract for 2009 include favorable loss
development of $12.0 million in recognition of more favorable underwriting results for 2008 than
had been reflected in Wes-FICs estimate of Swiss Res results at the end of 2008. Wes-FIC, for
2009, reserved for Swiss Re losses and loss expenses at a lower rate than for 2008 in part based on
the lack of major catastrophes in 2009 and in part based on the reported performance by Swiss Re.
Underwriting results under the contract also reflect the effects from the fluctuating value of the
U.S. Dollar relative to other currencies in which Swiss Re conducts much of its business. To date,
these
20
fluctuations
have not been significant. Wesco does not hedge against such fluctuations, recognizing that
foreign exchange risk is an inherent part of assuming risks denominated in other currencies, which
it is willing to retain.
Underwriting gains from the aviation-related reinsurance contracts were $3.1 million, $3.4
million and $3.2 million, before taxes, for 2010, 2009 and 2008. Underwriting results often
fluctuate from period to period. The severity component of aviation-related losses tends to be
volatile, especially with respect to losses incurred during a single reporting period. Included in
the pre-tax underwriting gains for each year was net favorable prior period reserve development of
$3.4 million, $3.5 million and $4.2 million, in 2010, 2009 and 2008.
Primary insurance activities resulted in pre-tax underwriting gains (losses) of $2.9 million,
($4.9 million) and ($2.4 million), for 2010, 2009 and 2008. These figures represented combined
ratios of 71.2%, 140.2% and 111.6%. The frequency and severity of primary insurance losses tend to
be volatile. Not only do the foregoing figures reflect net favorable (unfavorable) pre-tax loss
development of $5.9 million, ($3.4 million) and ($0.4 million) for the respective years, but the
2009 and 2008 figures also reflect pre-tax losses of $2.6 million ($1.7 million, after taxes) and
$6.9 million ($4.7 million, after taxes), respectively, from the FDICs seizure of several failed
banks that had portions of their deposits insured by KBS. There were no such losses in 2010. As the
FDIC liquidates the assets of failed banks, it distributes funds to the banks creditors and owners
of deposits in excess of FDIC insurance limits, including KBS (by right of subrogation). KBSs
pre-tax underwriting results for 2010 and 2009 also reflect $0.7 million and $1.2 million ($0.4
million and $0.8 million, after taxes), respectively, recovered from the FDIC. Additional
recoveries, if any, will be recorded when received.
KBS operates with few employees and from modest offices, and its ongoing operations require a
basic level of services with annual costs that do not lend themselves to downsizing nearly in
proportion to the significant reduction in revenues beginning late in 2008 which resulted from the
discontinuation of the deposit-guarantee bond line of insurance. Underwriting results of future
periods will likely continue to reflect the disproportionately higher level of operating expenses
to revenues, as in 2010 and 2009, unless and until KBS is able to replace the premiums from deposit
guarantee bonds it no longer writes, with other premium revenues.
The profitability of a reinsurance or insurance arrangement is better assessed after all
losses and expenses have been realized, perhaps many years after the coverage period, rather than
for any given reporting period. No trends have recently been identified which directly relate to
losses, other than periodic effects from increasing competition (causing declining premium rates),
fluctuations in exchange rates of foreign currencies relative to the U.S. dollar (which will affect
the underwriting results under the Swiss Re contract), and the generally weak economy. Losses
incurred by Wescos insurance segment, by their very nature, occur unexpectedly and fluctuate from
period to period in both frequency and magnitude. Wescos insurers cede minimal amounts of their
direct business, and as a result underwriting results may be volatile.
Since September 11, 2001, the insurance industry has been particularly concerned about its
exposure to claims resulting from acts of terrorism. In spite of partial relief provided to the
insurance industry by the Terrorism Risk Insurance Act, enacted in 2002 and amended by the
Terrorism Risk Extension Act of 2005, and the Terrorism Risk Insurance Program Reauthorization Act
of 2007, Wes-FIC is exposed to insurance losses from terrorist events. Wes-FICs (and thus Wescos)
exposure to such losses from an insurance standpoint cannot be predicted. Management, however, does
not believe it likely that, on a worst-case basis, Wescos shareholders equity would be severely
impacted by future terrorism-related insurance losses under reinsurance or insurance contracts
currently in effect. Losses from terrorism could, however, significantly impact Wescos periodic
earnings.
Other industry concerns in recent years have included exposures to losses relating to
environmental contamination and asbestos. Management currently believes Wescos exposures to such
losses is minimal.
21
Management also believes that recent legislative attempts to address certain issues generally
referred to as climate change are unlikely to have a material effect on Wescos businesses.
Following is a summary of investment income produced by Wescos insurance segment (in
thousands of dollars).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Investment income, before taxes |
|
$ |
75,643 |
|
|
$ |
67,253 |
|
|
$ |
77,914 |
|
Income taxes |
|
|
13,432 |
|
|
|
11,472 |
|
|
|
13,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, after taxes |
|
$ |
62,211 |
|
|
$ |
55,781 |
|
|
$ |
64,274 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income of the insurance segment comprises dividends and interest earned principally
from the investment of shareholder capital (including reinvested earnings) as well as float
(principally, unpaid losses and unearned premiums, less premiums and reinsurance receivables, and
deferred policy acquisition costs). Float, which amounted to $76 million at yearend 2007, increased
to $164 million at yearend 2008, $264 million at yearend 2009 and $339 million at yearend 2010. The
increases are attributable principally to the Swiss Re contract.
Wescos insurance segment redeployed $205 million to purchase shares of 10% cumulative
perpetual preferred stock of The Goldman Sachs Group, Inc. in the fourth quarter of 2008 and $200
million of 5% senior notes of Wm. Wrigley Jr. Company in the fourth quarter of 2009. Not only did
interest rates soften during 2008 and 2009, and hold at relatively low levels throughout 2010, but
Wells Fargo & Company and US Bancorp, in which Wescos insurance segment has significant
investments, reduced their quarterly dividend distributions to shareholders beginning in the second
quarter of 2009. The insurance segments pre-tax dividend income decreased by $1.9 million for
2010, having decreased by $1.0 million for 2009, and pre-tax interest income increased by $10.3 in
2010, following a decrease of $9.9 million in 2009, from the corresponding prior year figures.
Wescos insurance subsidiaries, as a matter of practice, maintain liquidity in amounts which
exceed by wide margins expected near-term requirements for payment of claims and expenses. As a
result, it would be unlikely that any unanticipated payment of claims or expenses would require the
liquidation of investments at a loss. Wesco does not attempt to match long-term investment
maturities to estimated durations of claim liabilities.
Reference is made to the table of contractual obligations appearing on page 26.
22
Furniture Rental Segment
Following is a summary of the results of operations of CORT, Wescos furniture rental segment.
(Amounts are in thousands.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Furniture rentals |
|
$ |
309,439 |
|
|
$ |
312,234 |
|
|
$ |
340,162 |
|
Furniture sales |
|
|
51,075 |
|
|
|
61,191 |
|
|
|
61,800 |
|
Service fees |
|
|
6,937 |
|
|
|
6,771 |
|
|
|
8,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
367,451 |
|
|
|
380,196 |
|
|
|
410,043 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of rentals, sales and fees |
|
|
85,837 |
|
|
|
99,042 |
|
|
|
97,997 |
|
Selling, general and administrative expenses |
|
|
262,627 |
|
|
|
283,590 |
|
|
|
287,498 |
|
Interest expense |
|
|
504 |
|
|
|
640 |
|
|
|
1,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
348,968 |
|
|
|
383,272 |
|
|
|
387,293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
18,483 |
|
|
|
(3,076 |
) |
|
|
22,750 |
|
Income taxes |
|
|
7,003 |
|
|
|
(1,717 |
) |
|
|
7,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net income (loss) |
|
$ |
11,480 |
|
|
$ |
(1,359 |
) |
|
$ |
15,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture rental revenues decreased $2.8 million (0.9%) for 2010, after decreasing $27.9
million (8.2%) for 2009 from those of the respective prior years. Management believes that core
rental revenues, a measurement that excludes revenues from trade shows and locations not in
operation throughout each period, is an important statistic in analyzing comparable revenue levels
from different periods. Core rental revenues decreased 6.1% for 2010 after decreasing 17.8% for
2009; however, core rental revenues increased by 9.2% for the fourth quarter of 2010 compared with
the corresponding 2009 figure. Management also views the number of furniture leases outstanding as
an important indicator for future revenues. The number of furniture leases outstanding at yearend
2010 increased 7.2%, following a decline of 24.9% in 2009. Customer demand for rental furniture
decreased significantly during the recent economic recession; however, management is hopeful that
the improvements in quarterly core rental revenues and in furniture leases outstanding indicate
that customer demand has begun to recover from the depressed levels reached in 2009.
Furniture sales revenues decreased $10.1 million (16.5%) for 2010 from those of 2009, after
having been relatively unchanged in 2009 from those of the prior year. The decrease in furniture
sales for the current year was attributable principally to the closing of eight furniture clearance
centers during the year and a lower level of inventory available for sale.
Service fees revenues for 2010, 2009 and 2008 have not been significant.
Cost of rentals, sales and fees amounted to 23.4% of revenues for 2010, 26.1% for 2009 and
23.9% for 2008. The decrease in the cost percentage for 2010 was due principally to a decrease in
the depreciation expense component, attributable mainly to lower average furniture inventory levels
in the current year, as well as an increase in profit margin on furniture sold. The increase in the
percentage for 2009, from the corresponding 2008 figure, was due principally to higher depreciation
expense on rental furniture acquired in the acquisition of the Aaron Rents business division in
November 2008 and to lower profit margins on furniture sold.
Selling, general, administrative and interest expenses (operating expenses) for the segment
were $263.1 million for 2010, down 7.4% from the $284.2 million incurred for 2009, following a
decrease of 1.8% from the
23
$289.3 million incurred for 2008. The decreases in operating expenses principally reflect
lower occupancy and employee-related expenses as a result of managements cost-cutting initiatives.
Management intends to continue its focus on the containment of operating expenses.
Income (loss) before income taxes for the furniture rental segment amounted to $18.5 million
for 2010, ($3.1 million) for 2009, and $22.8 million for 2008. The improvement in profitability in
2010 was due principally to the reduction in fixed operating expenses, explained above. The
significant decline in pre-tax income for 2009 was due primarily to a dramatic decrease in
revenues, principally attributable to the effect of the weak economic environment, coupled with a
level of expenses that could not be sufficiently reduced to match the depressed revenue level.
Industrial Segment
Following is a summary of the results of operations of the industrial segment, consisting of
the businesses of Precision Steel and its subsidiaries. (Amounts are in thousands.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Revenues, principally sales and services |
|
$ |
48,266 |
|
|
$ |
38,380 |
|
|
$ |
60,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales and services |
|
|
38,408 |
|
|
|
31,950 |
|
|
|
51,323 |
|
Selling, general and administrative expenses |
|
|
8,225 |
|
|
|
7,435 |
|
|
|
7,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,633 |
|
|
|
39,385 |
|
|
|
59,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
1,633 |
|
|
|
(1,005 |
) |
|
|
1,601 |
|
Income taxes |
|
|
554 |
|
|
|
(357 |
) |
|
|
759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net income (loss) |
|
$ |
1,079 |
|
|
$ |
(648 |
) |
|
$ |
842 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The operations of Wescos industrial segment are subject to economic cycles and have suffered
a variety of ongoing difficulties for a number of years, including a shift of production from
domestic to overseas facilities, (resulting in a general decline in the number of orders placed and
a trend towards smaller-sized orders), the unprecedented ability of the major steel producers in
recent years to raise prices and establish minimum order quantities following consolidation in the
industry, periods of intensified competitive pressures for product from suppliers, and intensifying
competitive pressures among service centers for the remaining domestic business.
In last years Form 10-K it was reported that the severity of the impact of the foregoing
factors on Wescos industrial segment was demonstrated by the significant decline in sales volume,
in terms of pounds sold, from an average of 68 million pounds annually over the three-year period
of 1998 through 2000, to an average of 39 million pounds annually for the three-year period of 2006
through 2008. The recent recessionary conditions have further caused the average volume of steel
products sold by the steel service segment during the most recent three-year period (2008-2010) to
decrease to 30.7 million pounds.
Sales and service revenues of the industrial segment for 2009 fell by $22.5 million (36.9%)
from those of 2008, and volume, in terms of pounds sold, fell by 34%, to 24.4 million pounds, less
than half the volume that Precision Steel had sold thirty years earlier, when Wesco acquired it in
1979. Segment sales and service revenues for 2010 improved by $9.9 million (25.8%) over those of
2009, and volume improved by 25.8%, to 30.7 million pounds, 14.7% below the volume as recently as
for 2008. Management attributes these fluctuations principally to recent recessionary conditions
from which the industrial segment has not yet fully recovered.
24
The industrial segment has continually strived to improve its gross profit margins (revenues,
less cost of products and services), which were 20.4%, 16.8% and 15.7% of revenues for 2010, 2009
and 2008, determined on a last-in, first-out (LIFO) basis with respect to cost of products sold.
Following recessionary-driven decreases in worldwide demand during 2009, the pricing of raw
materials, which reached historic highs in 2008, declined to pricing levels of earlier periods,
where they remained relatively steady throughout 2010. In 2009, the combination of decreased volume
and lower selling prices resulted in a $3.1 million reduction of gross profit, from $9.5 million
realized by the industrial segment in 2008, to $6.4 million in 2009. Gross profit increased by $3.4
million for 2010. The improvement was attributable principally to the increase in sales volume
resulting from improving economic conditions.
The industrial segments business activities require a base of operations supported by
significant fixed operating costs. In 2009, there were fewer gross profit dollars available to
absorb those costs, while, in 2010, gross profit dollars exceeded those costs. Management
continues to strive to reduce costs and expenses where feasible, while maintaining exceptional
customer service. The segments operating results also reflected litigation-related expenses of
$0.6 million ($0.4 million, after taxes) for 2010 and $0.3 million ($0.2 million, after taxes) for
2008, incurred in connection with the environmental matter discussed in Note 11 to the accompanying
consolidated financial statements.
Unrelated to Business Segment Operations
Realized gains and losses on, and other-than-temporary impairments (OTTI) of, Wescos
investments have fluctuated in amount from year to year, sometimes impacting net income
significantly. Amounts and timing of these realizations have no predictive or practical analytical
value. Wescos investments are carried at fair value, and unrealized gains and losses are
reflected, net of deferred income tax effect, in the unrealized appreciation component of other
comprehensive income, in its shareholders equity. When gains or losses are realized, due to sale
of securities or other triggering events such as the determination that an OTTI is to be
recognized, they are credited or charged to the consolidated statement of income; generally, in
Wescos case, there has been little effect on total shareholders equity essentially only a
transfer from net unrealized appreciation or depreciation to retained earnings. Wescos
consolidated earnings contained after-tax realized net investment gains of $4.2 million and OTTI
losses of $13.7 million for 2010, and realized investment gains of $4.6 million for 2008; no gains
or losses were realized in 2009.
Managements principal goal is to maximize gain in Wescos intrinsic business value per share
over the long term. Accounting consequences do not influence business decisions. There is no
particular strategy as to the timing of sales of investments. Investments may be sold for a variety
of reasons, including (1) the belief that prospects for future appreciation of a particular
investment are less attractive than the prospects for reinvestment of the after-tax proceeds from
its sale, or (2) the desire to generate funds for an acquisition or repayment of debt. Investment
gains may also derive from non-cash exchanges of securities for other investment securities as a
result of merger activity involving the investees.
Other nonsegment items typically include mainly (1) rental income from owned commercial real
estate and (2) dividend and interest income from equity securities and cash equivalents owned
outside the insurance subsidiaries, reduced by real estate and general and administrative expenses.
The 2010 figure also included expenses related to Berkshires offer to acquire the shares of Wesco
that it does not already own (discussed above), of $4.2 million ($2.7 million, after taxes), and
the 2009 figures included impairment losses of $9.5 million ($6.2 million, after taxes), on real
estate held for sale.
25
* * * *
Consolidated revenues, expenses and net income reported for any period are not necessarily
indicative of future results in that they are subject to significant variations in amount and
timing of (1) participations in reinsurance contracts with members of the Berkshire Insurance
Group, such as the quota-share arrangement with NICO described in Item 1, Business, which
significantly increased the business of the insurance segment beginning in 2008, (2) investment
gains and losses, (3) the possibility of OTTI losses, and (4) unusual nonoperating items. In
addition, consolidated revenues, expenses and net income are subject to external conditions, such
as terrorist activity, and changes in the economy.
Wesco is not presently suffering from inflation, but each of its business operations has
potential exposure. Large unanticipated changes in the rate of inflation could adversely impact the
insurance business, because premium rates are established well in advance of expenditures.
Precision Steels businesses are competitive and operate on tight gross profit margins, making
their earnings susceptible to inflationary and deflationary cost changes; the impact, though not
material in relation to Wescos consolidated net income, may be significant to that of the
industrial segment, due particularly to the segments use of LIFO inventory accounting.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
Neither Wesco nor any of its subsidiaries has off-balance sheet arrangements other than the
unrecorded contractual obligations discussed below. Nor do they have any insurance obligations for
which estimated provisions have not been made in the accompanying consolidated financial
statements.
Wesco and its subsidiaries have contractual obligations associated with ongoing business
activities, which will result in cash payments in future periods. Certain obligations, such as
notes payable, accrued interest, and unpaid insurance losses and loss adjustment expenses, are
reflected in the accompanying consolidated financial statements. In addition, Wesco and its
subsidiaries have entered into long-term contracts to acquire goods or services in the future,
which are not currently reflected in the consolidated financial statements and will be reflected in
future periods as the goods are delivered or services provided. A summary of contractual
obligations as of December 31, 2010 follows. (Amounts are in thousands.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due |
|
|
|
Total |
|
|
2011 |
|
|
2012-2013 |
|
|
2014-2015 |
|
|
Thereafter |
|
Notes payable, including interest |
|
$ |
51,305 |
|
|
$ |
51,105 |
|
|
$ |
200 |
|
|
$ |
|
|
|
$ |
|
|
Operating lease obligations |
|
|
107,934 |
|
|
|
26,659 |
|
|
|
39,291 |
|
|
|
23,308 |
|
|
|
18,676 |
|
Payment of insurance losses and loss
adjustment expenses* |
|
|
408,384 |
|
|
|
104,905 |
|
|
|
148,095 |
|
|
|
98,774 |
|
|
|
56,610 |
|
Purchase obligations, other than for
capital expenditures |
|
|
9,064 |
|
|
|
8,483 |
|
|
|
406 |
|
|
|
145 |
|
|
|
30 |
|
Purchase obligations for capital
expenditures |
|
|
4,379 |
|
|
|
1,324 |
|
|
|
1,638 |
|
|
|
1,417 |
|
|
|
|
|
Other, principally deferred
compensation |
|
|
6,782 |
|
|
|
169 |
|
|
|
339 |
|
|
|
314 |
|
|
|
5,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
587,848 |
|
|
$ |
192,645 |
|
|
$ |
189,969 |
|
|
$ |
123,958 |
|
|
$ |
81,276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Amounts and timing of payments are significantly dependent on estimates. See Critical
Accounting Policies and Practices below. |
26
Credit markets have become restricted as a consequence of the ongoing worldwide credit crisis.
As a result, the availability of credit to corporations has declined significantly and interest
rates for new issues have increased relative to government obligations, even for companies with
strong credit histories and capital to withstand these conditions. Management believes that Wesco
currently maintains ample liquidity to cover its contractual obligations and provide for contingent
liquidity needs.
CRITICAL ACCOUNTING POLICIES AND PRACTICES
Wescos consolidated financial statements are prepared in conformity with GAAP. The
significant accounting policies and practices followed by Wesco are set forth in Note 1 to the
accompanying consolidated financial statements. Following are the accounting policies and practices
considered by Wescos management to be critical to the determination of consolidated financial
position and results of operations.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities at the date of
the financial statements and the reported revenues and expenses during the period reported upon. In
particular, estimates of written and earned premiums and unpaid losses and loss adjustment expenses
for property and casualty insurance are subject to considerable estimation error, due both to the
necessity of estimating information with respect to certain reinsurance contracts where reports
from ceding companies for the quarterly reporting periods are not contractually due until after the
balance sheet date, as well as the inherent uncertainty in estimating ultimate claim amounts that
will be reported and settled over a period of many years. The estimates and assumptions are based
on managements evaluation of the relevant facts and circumstances using information available at
the time such estimates and assumptions are made. The amounts of such assets, liabilities, revenues
and expenses included in the consolidated financial statements may differ significantly from those
that might result from use of estimates and assumptions based on facts and circumstances not yet
available. Although Wescos management does not believe such changes in estimates would have a
materially adverse effect on shareholders equity, they could produce a material effect on results
of operations in a particular period.
Fair Value Measurements
Fair value is defined under GAAP as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the measurement date.
Market participants are assumed to be independent, knowledgeable, able and willing to transact an
exchange and not under duress. Considerable judgment may be required in interpreting market data
used to develop the estimates of fair value.
The framework established for measuring fair value is based on observable, independent market
inputs and unobservable market assumptions. Following is a description of the three levels of
inputs that may be used to measure fair value:
Level 1 inputs represent unadjusted quoted prices in active markets for identical assets or
liabilities. Most of Wescos equity investments are traded on an exchange in active markets and
fair value is based on the closing prices as of the balance sheet date.
27
Level 2 inputs represent observable inputs other than Level 1 prices, such as quoted prices
for similar assets or liabilities in active or inactive markets; quoted prices for identical
assets or liabilities in markets that are not active; other inputs that may be considered in fair
value determinations of the assets or liabilities, such as interest rates and yield curves,
volatilities, prepayment speeds, loss severities, credit risks and default rates; and inputs that
are derived principally from or corroborated by observable market data by correlation or other
means. Fair values for Wescos investments in fixed maturity securities are based primarily on
market prices and market data available for instruments with similar characteristics, since
active markets are not common for many instruments.
Level 3 inputs are unobservable inputs used in the measurement of assets. Measurement of the
fair values of the non-exchange traded investments are based on a standard warrant valuation
model or discounted cash flow model, as applicable, which are techniques believed to be widely
used by other market participants. Significant assumptions inherent in the warrant valuation
model include an estimated stock price volatility factor, dividend and interest rate assumptions,
and the estimated term of the warrants. Significant assumptions used in a discounted cash flow
model include the discount rate and estimated duration of the instrument.
Investments
The appropriate classifications of investments in securities with fixed maturities and equity
securities are established at the time of purchase and reevaluated as of each balance sheet date.
There are three permissible classifications: held-to-maturity, trading, and, when neither of those
classifications is applicable, available-for-sale. Trading investments are carried at fair value
and include securities acquired with the intent to sell in the near term. Held-to-maturity
investments are carried at amortized cost, reflecting the ability and intent to hold the securities
to maturity. All other investments are classified as available-for-sale and carried at fair value,
with unrealized gains and losses, net of applicable deferred income taxes, reported as a separate
component of shareholders equity.
Realized investment gains and losses, determined on a specific-identification basis, are
included in the consolidated statement of income, as are provisions for other-than-temporary
declines in market or fair value of equity investments, when applicable. With respect to an
investment in a fixed-maturity security, an other-than-temporary impairment would be recognized if
the Company (a) intends to sell or expects to be required to sell the security before amortized
cost is recovered or (b) does not expect to ultimately recover the amortized cost basis even if it
does not intend to sell the security. Losses under (a) would be recognized in earnings. Under (b)
any credit loss component would be recognized in earnings, and any difference between fair value
and the amortized cost basis, net of the credit loss, would be reflected in other comprehensive
income. Factors considered in judging whether an impairment is other than temporary include: the
financial condition, business prospects and creditworthiness of the issuer, the length of time that
fair value has been less than cost, the relative amount of the decline, and Wescos ability and
intent to hold the investment until the fair value recovers. See Notes 2 and 8 to Wescos
consolidated financial statements for additional information as to Wescos investments.
Rental furniture
Rental furniture consists principally of residential and office furniture which is available
for rental or, if no longer up to rental standards, for sale. Rental furniture is carried at cost,
less accumulated depreciation calculated primarily on a declining-balance basis over 3 to 5 years
using estimated salvage values of 25 to 40 percent of original cost.
28
Revenue recognition
Insurance premiums are stated net of amounts ceded to reinsurers and are recognized as earned
revenues in proportion to the insurance protection provided, which in most cases is pro rata over
the term of each contract. Premiums are estimated with respect to certain reinsurance contracts
written during the period where reports from ceding companies for the period are not contractually
due until well after the balance sheet date. Unearned insurance premiums are deferred and reflected
in the liability section of the consolidated balance sheet. Certain costs of acquiring insurance
premiums commissions, premium taxes, and other are deferred and charged to income as the
premiums are earned.
Furniture rentals are recognized as revenue proportionately over the rental contract period;
rentals received in advance are deferred in the liability section of the consolidated balance
sheet. Costs related to furniture rentals comprise the main element of cost of products and
services sold on the consolidated income statement and include depreciation expense, repairs and
maintenance, and inventory losses.
Revenues from product sales are recognized upon passage of title to the customer, which
coincides with customer pickup, product shipment, delivery or acceptance, depending on the sales
arrangement. Revenues from services performed are recognized at the completion of the elements
specified in the contract, which typically coincides with their being billed.
Interest income from investments in fixed maturity securities is earned under the constant
yield method and includes accrual of interest due as well as amortization of acquisition premiums
and accruable discounts. In determining the constant yield for mortgage-backed securities,
anticipated counterparty prepayments are estimated and evaluated periodically. Dividends from
equity securities are earned on the ex-dividend date.
Losses and loss adjustment expenses
Liabilities for unpaid insurance losses and loss adjustment expenses represent estimates of
the ultimate amounts payable under property and casualty reinsurance and insurance contracts
related to losses occurring on or before the balance sheet date. Liabilities for insurance losses
are comprised of estimates for reported claims (case reserves) and reserve development on
reported claims, as well as estimates for claims that have not yet been reported (some of which may
not be reported for many years), which together are also referred to as incurred-but-not-reported
reserves (IBNR reserves). The liability for unpaid losses includes significant estimates for
these claims and includes estimates reported by ceding insurers. Loss reserve estimates reflect
past loss experience, adjusted as appropriate when losses are reasonably expected to deviate from
experience.
Considerable judgment is required to evaluate claims and estimate claims liabilities in
connection with reinsurance contracts. As further data becomes available, the liabilities are
reevaluated and adjusted as appropriate. Additionally, claims, at each balance sheet date, are in
various stages of the settlement process. Each claim is settled individually based upon its merits,
and some take years to settle, especially if legal action is involved. Actual ultimate claims
amounts are likely to differ from amounts recorded at the balance sheet date.
Depending on the type of loss being estimated, the timing and amount of loss payments are
subject to a great degree of variability and are contingent upon, among other factors, the timing
of the claim reporting by cedants and insureds, and the determination and payment of the ultimate
loss amounts through the loss adjustment
process. Judgments and assumptions are necessary in projecting the ultimate amounts payable in
the future with respect to loss events that have occurred.
29
The time period between the claim occurrence date and payment date of the loss is referred to
as the claim tail. Property claims usually have fairly short claim tails, and, absent litigation,
are reported and settled within a few months or years after occurrence. Casualty losses usually
have very long claim tails. Casualty claims can be more susceptible to litigation and can be more
significantly affected by changing contract interpretations and the legal environment, which
contributes to extended claim tails. Claim tails for reinsurers may be further extended due to
delayed reporting by ceding insurers or reinsurers due to contractual provisions or reporting
practices. Actual ultimate loss settlement amounts are likely to differ from amounts recorded at
the balance sheet date. Changes in estimates, referred to as loss development, are recorded as a
component of losses incurred in the period of change. Wes-FIC and KBS do not use consultants to
assist in reserving activities.
Provisions for losses and loss adjustment expenses are reported in the consolidated statement
of income after deducting estimates of amounts that will be recoverable under reinsurance
contracts. Reinsurance contracts do not relieve the ceding companies of their obligations to
indemnify policyholders with respect to the underlying insurance contracts. Ceded reinsurance
losses recoverable (ceded reserves) are reflected in the accompanying consolidated balance sheet
as a component of accounts receivable.
Following are summaries of Wescos consolidated liabilities for unpaid insurance losses and
loss adjustment expenses and related reinsurance recoverables reflected in the Consolidated Balance
Sheet. Wesco does not discount the amounts for time value, regardless of the length of the
estimated claim tail. Amounts are in thousands.
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Case reserves |
|
$ |
165,125 |
|
|
$ |
121,389 |
|
IBNR reserves |
|
|
243,259 |
|
|
|
222,077 |
|
|
|
|
|
|
|
|
|
|
Gross liability before ceded reinsurance |
|
|
408,384 |
|
|
|
343,466 |
|
Ceded reserves |
|
|
(24,271 |
)* |
|
|
(19,288 |
)* |
|
|
|
|
|
|
|
|
|
Net reserves |
|
$ |
384,113 |
|
|
$ |
324,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Represents principally, Wes-FICs proportionate share of reinsurance purchased by the
aviation pools. |
30
Following is a breakdown of Wescos consolidated liabilities for unpaid insurance losses and
loss adjustment expenses and related reinsurance recoverables reflected in the Consolidated Balance Sheet at yearends 2010 and 2009. Amounts are in thousands.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Unpaid Losses |
|
|
Net Unpaid Losses* |
|
|
|
Dec. 31, |
|
|
Dec. 31, |
|
|
Dec. 31, |
|
|
Dec. 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Swiss Re contract |
|
$ |
307,117 |
|
|
$ |
246,596 |
|
|
$ |
307,117 |
|
|
$ |
246,596 |
|
Other reinsurance, principally aviation-related |
|
|
84,833 |
|
|
|
80,170 |
|
|
|
60,562 |
|
|
|
61,152 |
|
KBS primary |
|
|
16,434 |
|
|
|
16,700 |
|
|
|
16,434 |
|
|
|
16,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
408,384 |
|
|
$ |
343,466 |
|
|
$ |
384,113 |
|
|
$ |
324,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Net of reinsurance recoverable, and before foreign currency translation effects. |
Included in other reinsurance losses in the foregoing table are $6.3 million at yearend 2010
and $6.8 million at yearend 2009, representing non-aviation reinsurance reserve amounts at those
dates, consisting mainly of IBNR reserves relating to a quota-share contract that has been in
runoff for more than 10 years, under which Wes-FIC continues to make loss payments. Such amounts
reflected loss estimates reported by the ceding companies and additional IBNR reserves estimates by
Wes-FIC management, which were mainly a function of reported losses from ceding companies,
anticipated loss ratios for the contract period, and managements judgment as to the loss reserving
adequacy of the ceding companies. There is no reinsurance recoverable with respect to these
reserves.
The techniques and processes employed in estimating loss reserves are differentiated between
reinsurance and primary insurance.
Reinsurance Historically, Wes-FICs property and casualty loss reserves derive from
individual risk, multi-line and catastrophe reinsurance policies. In 2008, Wes-FIC entered into a
retrocession agreement with NICO to assume 10% of NICOs quota share reinsurance of Swiss Re and
its property-casualty affiliates. Other Wes-FIC reinsurance activities in recent years have
consisted almost exclusively of participations in aviation-related pools that are underwritten and
managed by a wholly owned indirect subsidiary of Berkshire.
Losses from aviation coverages generally have reasonably short tails with respect to the
property components. The claim tail for the liability coverage can be somewhat longer, especially
when litigation results. The case reserving process for aviation risks is believed to involve less
uncertainty than for many other types of insurance, because loss events tend to become known and
reported relatively soon after the events occur. The material judgments underlying the loss
reserving by the aviation pools manager assume that future loss patterns
(incurred and paid) will be similar to those of the past. The aviation pools manager
establishes case and IBNR reserves and manages the claims settlement process, including payment of
the related claims. Wes-FIC is allocated its share of these amounts, monthly. The pools manager
has considerable experience with aviation insurance and claims. Wes-FIC management reviews reported
claim amounts for reasonableness and has historically accepted the amounts without further
adjustment, except for adjustments made for minor reporting delays.
Wes-FICs estimates of losses and loss adjustment expenses under the Swiss Re contract are
derived from Swiss Res quarterly reports to NICO on a quarterly-lag basis, plus NICOs and
Wes-FICs managements estimates of underwriting results for the current quarter, which reflect
their assessments of publicly available information and prevailing market conditions. As Swiss Res
business underlying the contract is predominately
31
reinsurance, Swiss Res quarterly reports are
affected by the estimation processes of its management, which are believed to be similar to those
underlying Wes-FICs other reinsurance contracts. In addition, inasmuch as more than half of the
business assumed under the Swiss Re contract is denominated with NICO in currencies other than
United States dollars, significant portions of assumed losses are also subject to foreign exchange
risks relative to United States dollars. Thus, the foreign exchange risk adds greater uncertainty
to the underwriting results estimated by management than the uncertainty relating to the other
property-casualty insurance and reinsurance contracts in which Wes-FIC participates. Wesco and
Wes-FIC managements understand and accept the greater uncertainty under the Swiss Re contract as a
business risk that in managements judgment is likely to be compensated by the expected
profitability of the assumed business.
Primary insurance Loss reserves from Wescos primary insurance activities derive from
individual risk policies written by KBS, which primarily provides specialty coverages for financial
institutions. Reserve amounts are comprised of case estimates and estimates of IBNR reserves, which
were $7.1 million at each yearend of 2010 and 2009. Because of the relatively low number (or
frequency) of losses and potential for higher severity (or amount per claim), KBS management is
familiar with and closely monitors each claim. Losses generally are expected to have a relatively
short reporting and claim tail due to the nature of the claims. KBS provides crime insurance, check
kiting fraud indemnification, Internet banking catastrophe theft insurance, Internet banking
privacy liability insurance, directors and officers liability, bank employment practices, and bank
insurance agents professional errors and omissions indemnity.
As a result of KBS managements intimate knowledge as to its claims, reserves are developed
primarily from case estimates, reducing the need for extended actuarial studies and broad estimates
of IBNR of the nature typically performed by large primary insurers whose business volume requires
such procedures for the development of their loss data. A range of reserve amounts as a result of
changes in underlying assumptions is not prepared.
Goodwill of acquired businesses
Goodwill of acquired businesses represents the excess of the cost of acquired entities over
the fair values assigned to assets acquired and liabilities assumed. All goodwill acquired is
assigned to the reporting unit that the related assets are employed in and the liabilities relate
to, as it is believed that those reporting units benefit from the acquisition. Wesco accounts for
goodwill in accordance with GAAP, which requires a test for impairment annually or if an event
occurs or circumstances change that would more likely than not reduce the fair value of a reporting
unit below its carrying amount. The impairment test is performed in two phases. The first step
compares the carrying value of the reporting unit, including goodwill, to its estimated fair value.
If the
carrying value is greater than the estimated fair value of the unit, a second step is
required, comparing the implied fair value of the reporting units goodwill with the carrying
amount of that goodwill. An impairment loss, charged to earnings, is recorded to the extent that
the carrying amount of goodwill exceeds its implied fair value.
Wesco determines the fair value of its furniture rental unit using the discounted cash flows
approach. Under the discounted cash flows approach, Wesco estimates the fair value of the reporting
unit based on the present value of its estimated future cash flows. This approach incorporates a
number of significant estimates and assumptions that include: a forecast of the reporting units
future cash flows, estimated growth rates, future terminal value, and an appropriate discount rate.
Wesco then prepares a sensitivity analysis as to how changes in key estimates or assumptions might
affect the outcome of the goodwill impairment test. In projecting future
32
cash flows, Wesco
considers the current economic environment as well as historical results of the unit. Wesco
believes that the discounted cash flows approach is the most meaningful valuation technique for the
furniture rental business, as CORT is the only national company that operates in the rent-to-rent
furniture industry, thus making market-based and transaction-based valuation techniques less
meaningful.
Realized Investment Gains and Losses and Other-Than-Temporary Impairments
Realized investment gains and losses, determined on a specific-identification basis, are
included in the consolidated statement of income, as are provisions for other-than-temporary
declines in market or estimated fair value, when applicable. Factors considered in judging whether
an impairment is other than temporary include: the financial condition, business prospects and
creditworthiness of the issuer, the length of time that fair value has been less than cost, the
relative amount of the decline, and Wescos ability and intent to hold the investment until the
fair value recovers.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Wescos consolidated balance sheet contains substantial liquidity as well as substantial
amounts of investments whose estimated fair values are subject to market risks. Values of
investment securities are subject to market fluctuations. Apart from investments, the consolidated
balance sheet at December 31, 2010 did not contain significant assets or liabilities with values
subject to these or other potential market exposures such as changes in commodity prices or foreign
exchange rates. Wesco does not utilize derivatives to manage market risks.
EQUITY PRICE RISK
Strategically, Wesco strives to invest in businesses that possess excellent economics, with
able and honest management, at sensible prices. Wescos management prefers to invest a meaningful
amount in each investee, resulting in concentration. Most equity investments are expected to be
held for long periods of time; thus, Wescos management is not ordinarily troubled by short-term
price volatility with respect to its investments provided that the underlying business, economic
and management characteristics of the investees remain favorable. Wesco strives to maintain
above-average levels of shareholders equity and liquidity 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. During 2008, several crises affecting the financial system and capital markets of the U.S.
resulted in very large price
declines in the general stock market and in Wescos equity securities. Certain of Wescos
equity investments declined further in 2009 but significantly recovered in value in 2010.
Fluctuation in the market price of a security may also result from actual or perceived changes in
the underlying economic characteristics of the investee and the relative prices of alternative
investments. Furthermore, amounts realized upon the sale of a particular security may be adversely
affected if a relatively large quantity of the security is being sold.
Wescos consolidated balance sheet at December 31, 2010 contained $2.27 billion of equity
securities stated at fair value, reflecting a net increase in fair values of $207 million during
the year. The concentration existing in Wescos equity securities portfolio exposes it to more
significant market price fluctuations than might be the case were Wescos investments more
diversified. This exposure to fluctuations is further exacerbated by the large amount invested in
companies engaged in the banking industry, inasmuch as trading prices of financial
33
institutions shares were more severely impacted than general trading prices as a result of recent economic
conditions and their impact on the banking industry. At December 31, 2010, five investments, with
carrying values aggregating $1.85 billion, comprised 81.5% of the carrying value of Wescos equity
securities portfolio. These five were common stocks of Wells Fargo & Company, US Bancorp, The
Procter & Gamble Company, The Coca-Cola Company and Kraft Foods Incorporated, of which the first
two are in the banking industry and the latter three have significant global operations and thus
are subject to changes in global economic conditions and foreign currency exchange rates.
The following table summarizes Wescos equity price risks as of December 31, 2010 and 2009. It
shows the effects of a hypothetical 50% overall increase or decrease in market prices of equity
securities owned by the Wesco group on total recorded market value and, after tax effect, on
Wescos shareholders equity at each of those dates. (Amounts are in thousands.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
December 31, 2009 |
|
|
|
Increase |
|
|
Decrease |
|
|
Increase |
|
|
Decrease |
|
Market value of equity
securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As recorded |
|
$ |
2,272,253 |
|
|
$ |
2,272,253 |
|
|
$ |
2,065,627 |
|
|
$ |
2,065,627 |
|
Hypothetical |
|
|
3,408,380 |
|
|
|
1,136,127 |
|
|
|
3,098,440 |
|
|
|
1,032,813 |
|
Shareholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As recorded |
|
|
2,765,717 |
|
|
|
2,765,717 |
|
|
|
2,550,717 |
|
|
|
2,550,717 |
|
Hypothetical |
|
|
3,504,199 |
|
|
|
2,027,235 |
|
|
|
3,222,045 |
|
|
|
1,879,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The 50% hypothetical changes in market values assumed in preparing the tables do not reflect
what could be considered best- or worst-case scenarios. Actual results could be much worse or
better due both to the nature of equity markets and the aforementioned concentration existing in
Wescos equity investment portfolio.
INTEREST RATE RISK
Wescos consolidated balance sheet at December 31, 2010 contained $473 million of cash and
cash equivalents and $235 million of securities with fixed maturities. Consequently, market value
risks with respect to changing interest rates were not considered significant at December 31, 2010.
The fair values of Wescos fixed-maturity investments fluctuate in response to changes in
market interest rates. Increases and decreases in prevailing interest rates generally translate
into decreases and increases in fair values. Fair values of Wescos investments may also be
affected by the creditworthiness of the issuer, prepayment options, relative values of alternative
investments, the liquidity of the instrument and other market conditions.
FOREIGN CURRENCY RISK
Wescos participation in the Swiss Re contract beginning in 2008 has subjected Wesco to
foreign currency risk inasmuch as more than half of the business assumed by NICO under the contract
is denominated in currencies other than U.S. dollars. In addition, CORTs new U.K.-based subsidiary
also subjects Wesco to foreign currency risk, although the volume of business conducted in the U.K.
is not significant. Otherwise, Wescos foreign currency risk is limited principally to that of its
investees.
* * * *
34
FORWARD-LOOKING STATEMENTS
Certain written or oral representations of management stated in this annual report or
elsewhere constitute forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, including the statement as to the expected closing of the merger
with Berkshire. as contrasted with statements of historical fact. Forward-looking statements
include statements which are predictive in nature, or which depend upon or refer to future events
or conditions, or which include words such as expects, anticipates, intends, plans, believes,
estimates, may, or could, or which involve hypothetical events. Forward-looking statements are
based on information currently available and are subject to various risks and uncertainties that
could cause actual events or results to differ materially from those characterized as being likely
or possible to occur. Such statements should be considered judgments only, not guarantees, and
Wescos management assumes no duty, nor has it any specific intention, to update them.
Actual events and results may differ materially from those expressed or forecasted in
forward-looking statements due to a number of factors. The principal important risk factors that
could cause Wescos actual performance and future events and actions to differ materially from
those expressed in or implied by such forward-looking statements include, but are not limited to
those risks reported in Item 1A, Risk Factors, but also to the occurrence of one or more
catastrophic events such as acts of terrorism, hurricanes, or other events that cause losses
insured by Wescos insurance subsidiaries, changes in insurance laws or regulations, changes in
income tax laws or regulations, and changes in general economic and market factors that affect the
prices of investment securities or the industries in which Wesco and its affiliates do business.
Special consideration should also be given to the pending merger transaction between Berkshire and
Wesco described in Item 1, Business. There can be no assurance that the merger will actually be
consummated.
Item 8. Financial Statements and Supplementary Data
Following is an index to financial statements and related schedules of Wesco appearing in this
report:
|
|
|
|
Financial Statements |
|
Page Number(s) |
|
|
48-49 |
|
|
|
50 |
|
|
|
51 |
|
|
|
52 |
|
|
|
53 |
|
|
|
54-69 |
|
Listed below are financial statement schedules required by the SEC to be included in this
report. The data appearing therein should be read in conjunction with the consolidated financial
statements and notes thereto of Wesco and report of independent registered public accounting firm
referred to above. Schedules not included with these financial statement schedules have been
omitted because they are not applicable or the required information is shown in the consolidated
financial statements or notes thereto.
|
|
|
|
|
Financial Statement Schedule |
|
Schedule Number |
|
Page Number(s) |
Condensed financial information of Wesco
December 31, 2010 and 2009, and years ended December 31, 2010,
2009 and 2008 |
|
I |
|
70-71 |
35
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable, as there were no such changes or disagreements.
Item 9A. Controls and Procedures
An evaluation was performed under the supervision and with the participation of Wescos
management, including Charles T. Munger, its Chief Executive Officer and Jeffrey L. Jacobson, its
Chief Financial Officer, of the effectiveness of the design and operation of Wescos disclosure
controls and procedures as of December 31, 2010. Based on that evaluation, Messrs. Munger and
Jacobson concluded that Wescos disclosure controls and procedures are effective in ensuring that
information required to be disclosed by Wesco in reports it files or submits under the Securities
Exchange Act of 1934, is recorded, processed, summarized and reported as specified in the rules and
forms of the Securities Exchange Commission, and are effective to ensure that information required
to be disclosed by Wesco in the reports it files or submits under the Securities Exchange Act of
1934 is accumulated and communicated to Wescos management, including Messrs. Munger and Jacobson,
as appropriate, to allow timely decisions regarding required disclosure.
There has been no change in Wescos internal control over financial reporting during the
fiscal quarter ended December 31, 2010 that has materially affected, or is reasonably likely to
materially affect, Wescos internal control over financial reporting.
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Wescos management is responsible for establishing and maintaining adequate internal control
over financial reporting as such term is defined in Rule 13A-5(f) under the Exchange Act. The
internal control system of
Wesco and its subsidiaries is designed to provide reasonable assurance regarding the
preparation and fair presentation of Wescos published consolidated financial statements. Under the
supervision and with the participation of our management, including Charles T. Munger, our
principal executive officer, and Jeffrey L. Jacobson, our principal financial officer, we conducted
an evaluation of the effectiveness of Wescos internal control over financial reporting as of
December 31, 2010 as required by Rule 13a-15(c) under the Exchange Act. In making this assessment,
we used the criteria set forth in the framework in Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation,
we concluded that Wescos internal control over financial reporting was effective as of December
31, 2010.
Wescos independent registered public accounting firm has audited our internal control over
financial reporting as of December 31, 2010. Its report begins on Page 48.
WESCO FINANCIAL CORPORATION
Pasadena, California
February 25, 2011
Item 9B. Other Information
None.
36
PART III
Item 10. Directors, Executive Officers and Corporate Governance
DIRECTORS
Set forth below for each Wesco Director is his or her principal occupation, business
experience during at least the past five years, age, and certain other information.
CHARLES T. MUNGER, age 87, has been a Director since 1973, and Chairman of the Board and Chief
Executive Officer of Wesco since 1984. He has also served Wesco as President since May 2005. He has
been Chairman of the Board of Blue Chip Stamps (Blue Chip) since 1976, and its president since
February 2011, having joined its board in 1969; Blue Chip, the parent of Wesco, is engaged in the
trading stamp business. Since 1978, Mr. Munger has been Vice Chairman of Berkshire, the parent of
Blue Chip; Berkshire is engaged in the property and casualty insurance business and many other
diverse businesses. Mr. Munger has been Chairman of the Board of Daily Journal Corporation, a
publisher of specialty newspapers primarily in California, since 1977. He also has been a director
of Costco Wholesale Corporation, which operates a large chain of membership warehouses, since 1997.
Wesco benefits from Mr. Mungers leadership for numerous reasons, not the least of which are
his experience and ability as a successful investor, close working relationship with Warren E.
Buffett, familiarity with the reinsurance activities of the Berkshire Insurance Group, in which
Wescos insurance subsidiary is periodically offered certain opportunities to participate, and his
focus on creating long-term growth in shareholder value.
CAROLYN H. CARLBURG, age 64, has been a Director since 1991. Since 2005, she has been Chief
Executive Officer of AIDS Research Alliance of America, Inc., a non-profit, national research
organization which collaborates with scientists, universities and researchers worldwide. She is
also an ex officio member of that organizations board of directors. From 2001 until 2005, Ms.
Carlburg was engaged in the practice of law under her own name and specialized in land use matters
and business litigation. From 1997 until July 2001, she was Executive Director of the Center for
Community & Family Services, Inc. Prior thereto, she practiced law under the name Carolyn H.
Carlburg & Associates.
Wesco benefits from Ms. Carlburgs experience as an attorney and her almost two decades of
service as a director. In addition, her experience as the leader of two non-profit organizations
has contributed to her effectiveness as the leader of Wescos Audit Committee as well as the
committee of independent Wesco Directors appointed by Wescos Board in September 2010
to evaluate the proposal from Berkshire to acquire the remaining 19.9% of the shares of Wesco
common stock that it does not presently own, as more fully described in Item 1, Business, above (the
Special Committee).
ROBERT E. DENHAM, age 65, has been a Director since 2000. He is a partner of Munger, Tolles & Olson
LLP, a law firm which renders legal services for Wesco, Berkshire, and certain of their affiliates.
In 1998, he rejoined that firm, with which he had been associated for twenty years, after serving
Salomon Inc, a former investee of Berkshire, Wesco and several of their subsidiaries, in the
following capacities: 1992 to 1997, Chairman and Chief Executive Officer of Salomon Inc; 1991 and
1992, general counsel of Salomon Inc and its investment banking subsidiary, Salomon Brothers. Mr.
Denham has also been a director of Chevron Corporation, an international energy company, since
2004; Fomento Economico Mexicano, S.A. de C.V., a beverage and convenience store company, since
2001; and The New York Times Company, a media company, since 2008. He was also a director of Lucent
Technologies, Inc., a telecommunications equipment manufacturer, from 2002 and of its successor by
merger, Alcatel-Lucent, from 2006 through 2009.
37
Mr. Denham has a significant amount of experience as a director of various public companies,
and Wesco benefits from his knowledge of other companies practices. Mr. Denham also contributes
through his experience as a business lawyer and as a chief executive officer, and through his
financial and accounting experience, which includes five years as chairman of the Financial
Accounting Foundation.
ROBERT T. FLAHERTY, age 73, has been a Director since 2003. He is engaged in personal investments.
From 1983 through 1996, he served as President of Flaherty & Crumrine Incorporated, a registered
investment and commodities trading advisor. In addition, he served as a director of Flaherty &
Crumrine Incorporated until 2002; he retired from that company in 2003. During his affiliation with
Flaherty & Crumrine Incorporated, Mr. Flaherty also served as Chairman, President and Chief
Executive Officer of three publicly traded closed-end investment companies managed by that firm.
Mr. Flahertys extensive investment management experience is of substantial value to Wesco,
which maintains a sizable investment portfolio. Mr. Flaherty also has an MBA and is a Chartered
Financial Analyst. His experience and education have contributed to his effectiveness as a member
of Wescos Audit Committee as well as its Special Committee.
PETER D. KAUFMAN, age 56, has been a Director since 2003. He is Chairman and Chief Executive
Officer of Glenair, Inc., a privately held manufacturer of electrical and fiber optic components
and assemblies for the aerospace industry. He has served in various capacities at that company
since 1977. Mr. Kaufman has also been a director of Daily Journal Corporation since 2006.
Mr. Kaufman has many years of practical experience as a chief executive officer, and he
specializes in fostering a business culture that motivates and retains exceptional employees. His
background in accounting also makes him a valuable member of Wescos Audit Committee.
ELIZABETH CASPERS PETERS, age 84, has been a Director since 1959 except for the period 1961 to
1967. She is engaged in personal investments.
Ms. Peters has served on Wescos board of directors for more than 40 years. Her long-time
service provides important knowledge of Wescos operations and corporate history and contributes to
her effectiveness as a member of Wescos Special Committee.
EXECUTIVE OFFICERS
In addition to Mr. Munger, Wesco has three executive officers, who are listed below. All
officers are elected by Wescos Board to serve for the twelve-month period following Wescos annual
meeting of shareholders or until their successors have been elected and qualified. Set forth below
for each executive officer other than Mr. Munger is his principal occupation, business experience
during at least the past five years, age, and certain other information.
JEFFREY L. JACOBSON, age 63, has served as Vice President and Chief Financial Officer of Wesco
since 1984. He has served MS Property Company, a wholly owned Wesco subsidiary, as Vice President
and Chief Financial Officer since 1993, and as a director since 2005. He has served in various
financial and other offices of Blue Chip since joining it in 1977 currently he is Vice President
and Chief Financial Officer and has served as a Blue Chip director since 1987.
38
ROBERT E. SAHM, age 83, has, since 1971, served Wesco as Vice President in charge of building
management and, ultimately, all real estate operations; prior thereto, he served as Building
Manager from 1967. Since 2005, he has served MS Property Company as President and, from 1993 to
2005, as Senior Vice President in charge of property management, development and sales. He has
served as a director of MS Property since 1993.
CHRISTOPHER M. GRECO, age 33, has served Wesco as Treasurer since 2005. He has also served MS
Property as Executive Vice President since 2008 and, prior thereto, as Treasurer, since 2005. He
has also served Blue Chip as Treasurer since 2005 and as a director since February 2011.
Previously, he was employed by PriceWaterhouseCoopers, providing audit, tax-related and business
consulting services to publicly traded and privately owned companies, and other clients of that
accounting firm.
STANDING BOARD COMMITTEES
Wesco has a standing audit committee (Audit Committee) established in accordance with
Section 3(a)(58)(A) of the Exchange Act that is responsible for assisting the Board in fulfilling
its responsibilities as they relate to Wescos accounting policies, internal controls and financial
reporting practices. The members of the Audit Committee are Carolyn H. Carlburg (Chair), Robert T.
Flaherty and Peter D. Kaufman. The Board has determined that each of these Directors is independent
in accordance with NYSE Amex listing standards, and with Rule 10A-3 promulgated under the Exchange
Act. The Board has determined that Messrs. Flaherty and Kaufman are each audit committee financial
experts as that term is used in Item 407 of Regulation S-K promulgated under the Exchange Act. The
Audit Committees charter is available at www.wescofinancial.com.
The Audit Committee is the only standing committee of the Board. Wesco does not have a
nominating committee or a compensation committee.
SECTION 16 (a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires Wescos executive officers and
Directors, and persons who own more than ten percent of Wescos outstanding capital stock, to file
reports of ownership and changes in ownership with the SEC. Copies of all such Section 16(a)
reports must be furnished to Wesco.
Based solely on its review of the copies of such Section 16(a) reports received by it, and
representations from certain persons subject to Section 16(a) reporting that no such reports were
required to be filed, Wesco believes that its executive officers, Directors, and beneficial owners
of more than ten percent filed all such required reports on a timely basis during 2010.
CODE OF BUSINESS CONDUCT AND ETHICS
Wesco has adopted a Code of Business Conduct and Ethics (the Code) applicable to its
Directors, officers and employees and those of its subsidiaries. A copy of the Code may be accessed
through Wescos website, www.wescofinancial.com.
39
Item 11. Executive Compensation
DIRECTOR COMPENSATION
Directors who are not officers receive fees totaling $9,000 per year, plus $750 for each
special meeting of the Board which they attend. The chair of the Audit Committee receives an
additional $9,000 per year, and each other member of the Audit Committee receives $750 for each
Audit Committee meeting attended. Mr. Munger does not receive any compensation for serving as a
Director. In addition, as described above, a Special Committee of independent Directors was formed
to evaluate the Berkshire Offer. Based on the Boards recommendation, retainers were paid to the
members of the Special Committee as follows: $50,000 to Ms. Carlburg, Chair, and $25,000 each to
Mr. Flaherty and Ms. Peters.
Wescos directors do not participate in any equity plans, deferred compensation arrangements,
non-equity incentive plans, pensions or other arrangements. All compensation is paid in cash and is
disclosed in the table.
|
|
|
|
|
Name |
|
Cash Fees |
Carolyn H. Carlburg |
|
$ |
69,500 |
(1,2) |
Robert E. Denham |
|
|
10,500 |
|
Robert T. Flaherty |
|
|
38,500 |
(2,3) |
Peter D. Kaufman |
|
|
13,500 |
(3) |
Elizabeth Caspers Peters |
|
|
38,500 |
(2) |
|
|
|
(1) |
|
Includes $9,000 paid to Ms. Carlburg as chair of the Audit Committee. |
|
(2) |
|
Includes retainers paid to Special Committee members early in 2011.
|
|
(3) |
|
Includes fees of $3,000 each, paid to Messrs. Flaherty and Kaufman
as members of the Audit Committee, representing $750 for each of
four meetings they attended. |
COMPENSATION DISCUSSION AND ANALYSIS
Wesco is a holding company with no employees of its own. Accordingly, Wescos program of
executive compensation is believed different from most public corporations programs. Messrs.
Munger, Jacobson and Greco are not employees of Wesco or a Wesco subsidiary (together, the Wesco
Group); nor are they or have they been remunerated directly by any member of the Wesco Group for
their services. All three have been employed by Blue Chip, are
its directors, and Mr. Munger is chairman of its board.
The Wesco Group reimburses Blue Chip for the services of Messrs. Jacobson and Greco based on
Blue Chips cost of their compensation, including related taxes, benefits and perquisites, and an
estimate of the relative time each individual has devoted to the business of each company.
In determining the allocation to the Wesco Group, Blue Chips actual cost is simply multiplied
by the percentage of time Messrs. Jacobson and Greco estimate in good faith that they devote to the
business of the Wesco Group. In 2010, those percentages were approximately 91.5% for Mr. Jacobson
and 97% for Mr. Greco. Nothing else is considered by Mr. Munger or by Wescos Board in the
determination and approval of the amounts reimbursed to Blue Chip, except that, in 2010 and 2009,
in recognition of the extraordinary services provided by Mr. Greco in connection with MS Propertys
development of a multi-story luxury condominium
40
building, Mr. Munger proposed, and the Boards of
Wesco and MS Property authorized, that MS Property reimburse Blue Chip for special $50,000 bonuses
to Mr. Greco.
Mr. Jacobson has primary responsibility for all aspects of accounting, financial reporting,
and income tax reporting for Blue Chip, Wesco and MS Property. He also performs the other duties
typical of chief financial officers on behalf of each of these companies.
Mr. Greco assists Mr. Jacobson with respect to accounting, financial reporting and income tax
reporting, and has hands-on responsibility for the Sarbanes-Oxley-required documentation and
testing of internal control over financial reporting at the Wesco parent company level, and,
ultimately, for the testing of internal control over financial reporting for the Wesco Group. He is
also directly responsible for Wescos internal audit function, from the parent company perspective,
and he has had primary responsibility for the management and marketing of MS Propertys multi-story
luxury condominium development.
Mr. Munger determines the level of compensation of Blue Chips executive officers using
subjective factors, including individual performance, changes in responsibility and inflation. The
profitability of Blue Chip is not considered in setting its executives compensation. Wesco and its
subsidiaries do not reimburse Blue Chip for Mr. Mungers services. Wescos Board, at least
annually, reviews and approves the compensation of, or any reimbursement to Blue Chip for, Wescos
executive officers based on the recommendations of Mr. Munger.
The sharing of executives, as well as the allocation of their compensation among Blue Chip and
the Wesco Group, was the product of evolution. Mr. Jacobson had been involved in the financial
reporting for Blue Chip as an auditor with Price Waterhouse beginning in 1969, and then as an
employee of Blue Chip beginning in 1977. He has also been involved in the development of
consolidated Wesco financial information for inclusion in the consolidated financial reporting of
Blue Chip, when it was a publicly owned company until mid-1983, and of
Berkshire, since approximately the mid-1970s. Throughout the early 1980s, he had assumed
increasing responsibilities for the financial and income tax reporting for Wesco and its savings
and loan subsidiary, in addition to his similar responsibilities for Blue Chip.
In 1984, Mr. Munger, Chairman and CEO and president of Blue Chip, as well as a Wesco Director,
became Chairman and CEO of Wesco and of its savings and loan subsidiary, and Mr. Jacobson was
appointed Chief Financial Officer of Wesco and the savings and loan subsidiary. He also retained
his financial reporting responsibilities for Blue Chip, and Blue Chip began to apportion the cost
of Mr. Jacobsons compensation and benefits to Wesco and its subsidiary.
When Mr. Greco was hired, because Wesco did not and still does not have any employees of its
own, he logically became an employee of Blue Chip just like Mr. Jacobson.
No tax considerations have been taken into account in the structuring of Wescos executive
compensation or in the allocation of such compensation among Blue Chip and the Wesco Group, and no
outside compensation consultants have been used. Wesco has no equity plans, deferred compensation
arrangements, non-equity incentive or pension plans for its executive officers. Neither the
profitability of Wesco nor the market price of Wescos stock is considered in setting executive
compensation.
Factors considered by Mr. Munger in setting the level of remuneration of Mr. Sahm, who is
employed by a member of the Wesco Group and not Blue Chip, are typically subjective and include his
performance, changes in responsibilities and inflation.
41
BOARD OF DIRECTORS REPORT ON COMPENSATION
The Board reviewed and discussed the Compensation Discussion and Analysis section with Wesco
management and, based on such review and discussion, recommended that the Compensation Discussion
and Analysis be included in this Form 10-K Annual Report.
Submitted by Wescos Board of Directors: Charles T. Munger, Carolyn H. Carlburg, Robert E.
Denham, Robert T. Flaherty, Peter D. Kaufman and Elizabeth Caspers Peters.
COMPENSATION OF EXECUTIVE OFFICERS
The following table shows compensation paid by the Wesco Group to Wescos executive officers for
the years ended December 31, 2010, 2009 and 2008.(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All |
|
|
|
|
Name and Capacity in Which Served |
|
Year |
|
|
Salary(2) |
|
|
Bonus(3) |
|
|
Other(4) |
|
|
Total |
|
Charles T. Munger Chairman of the Board, |
|
|
2010 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
President and Chief Executive Officer of Wesco |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey L. Jacobson Vice President and Chief Financial |
|
|
2010 |
|
|
|
294,000 |
|
|
|
|
|
|
|
|
|
|
|
294,000 |
_ |
Officer of Wesco and MS Property Company |
|
|
2009 |
|
|
|
276,600 |
|
|
|
|
|
|
|
|
|
|
|
276,600 |
|
|
|
|
2008 |
|
|
|
286,000 |
|
|
|
|
|
|
|
|
|
|
|
286,000 |
|
Robert E. Sahm Vice President of Wesco and |
|
|
2010 |
|
|
|
244,800 |
|
|
|
20,400 |
|
|
|
12,441 |
|
|
|
277,641 |
|
President of MS Property Company |
|
|
2009 |
|
|
|
242,400 |
|
|
|
20,400 |
|
|
|
14,865 |
|
|
|
277,665 |
|
|
|
|
2008 |
|
|
|
235,200 |
|
|
|
20,000 |
|
|
|
20,822 |
|
|
|
276,022 |
|
Christopher M. Greco Treasurer of Wesco and |
|
|
2010 |
|
|
|
266,000 |
|
|
|
|
|
|
|
|
|
|
|
266,000 |
|
Executive Vice President of MS Property Company |
|
|
2009 |
|
|
|
256,400 |
|
|
|
|
|
|
|
|
|
|
|
256,400 |
|
|
|
|
2008 |
|
|
|
177,600 |
|
|
|
|
|
|
|
|
|
|
|
177,600 |
|
|
|
|
(1) |
|
Wesco has no equity plans, deferred compensation arrangements, non-equity
incentive or pension plans for its executive officers. |
|
(2) |
|
Messrs. Munger, Jacobson and Greco have been employees of, and compensated by,
Blue Chip but have spent a portion of their time on the activities of Wesco and
its subsidiaries. The figures shown in this column for Messrs. Jacobson and Greco
represent amounts paid to Blue Chip by Wesco or its subsidiaries for their
services. Blue Chip has not been compensated by Wesco or its subsidiaries for Mr.
Mungers services. Mr. Munger was paid a total of $100,000 annually by Blue Chip
for 2010, 2009 and 2008. Mr. Sahm is compensated by MS Property Company. |
|
(3) |
|
Mr. Sahms bonus is based on a length-of-service formula applicable to all
employees of MS Property Company and is equal to one months salary. |
|
(4) |
|
Represents the value of company-owned automobile and club dues paid by MS Property. |
BOARD OF DIRECTORS INTERLOCKS AND INSIDER PARTICIPATION
Charles T. Munger, Chairman of the Board, President and Chief Executive Officer of Wesco, is
also Chairman of the Board and president of Blue Chip and Vice Chairman of the Board of Berkshire.
Jeffrey L.
42
Jacobson, Vice President and Chief Financial Officer of Wesco, and Christopher M. Greco,
Treasurer of Wesco, are also a directors of Blue Chip and serve Blue Chip as Vice President and
Chief Financial Officer, and Treasurer, respectively. Mr. Munger participated in discussions of
Wescos Board regarding executive officer compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Wescos capital stock is the only class of its outstanding stock, with a total of 7,119,807
shares outstanding. Blue Chip, a wholly owned subsidiary of Berkshire, owns 5,703,087 shares
(80.1%) of Wesco capital stock. Blue Chip is the only organization or individual known to Wescos
management to own beneficially 5% or more of its outstanding shares. Warren E. Buffett, Chairman of
the Board and Chief Executive Officer of Berkshire, may be deemed to be in control of Berkshire,
and Mr. Buffett, as well as Berkshire, may be deemed to be in control of Blue Chip and Wesco.
Charles T. Munger, Chairman of the Board and President of Wesco, is also Vice Chairman of the Board
of Berkshire. Mr. Munger consults with Mr. Buffett with respect to Wescos investment decisions and
major capital allocations. Berkshire has two classes of common stock, designated Class A and Class
B. Beneficial ownership as of February 15, 2011 of Wesco capital stock and Berkshire common stock
by Blue Chip and by all Wesco Directors and executive officers who own shares is set forth below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wesco Capital Stock |
|
Berkshire Class A Stock |
|
Berkshire Class B Stock |
|
|
Amount and Nature |
|
|
|
|
|
Amount and Nature |
|
|
|
|
|
Amount and Nature |
|
|
|
|
of Beneficial |
|
Percent |
|
of Beneficial |
|
Percent |
|
of Beneficial |
|
Percent |
Name |
|
Ownership(1) |
|
of Class |
|
Ownership(1) |
|
of Class |
|
Ownership(1) |
|
of Class |
Blue Chip Stamps |
|
|
5,703,087 |
(2) |
|
|
80.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carolyn H. Carlburg |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
550 |
|
|
|
* |
|
Robert E. Denham |
|
|
1,270 |
(3) |
|
|
* |
|
|
|
60 |
(4) |
|
|
* |
|
|
|
9,250 |
(4) |
|
|
* |
|
Robert T. Flaherty |
|
|
|
|
|
|
|
|
|
|
147 |
|
|
|
* |
|
|
|
|
|
|
|
* |
|
Peter D. Kaufman |
|
|
1,000 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
2,300 |
(5) |
|
|
* |
|
Charles T. Munger |
|
|
|
|
|
|
|
|
|
|
6,403 |
|
|
|
* |
|
|
|
750 |
|
|
|
* |
|
Elizabeth Caspers Peters |
|
|
66,843 |
(6) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher M. Greco |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250 |
(7) |
|
|
* |
|
Jeffrey L. Jacobson |
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
* |
|
|
|
7,320 |
(8) |
|
|
* |
|
Robert E. Sahm |
|
|
3,150 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
2,000 |
|
|
|
* |
|
All directors and
executive officers as a
group |
|
|
72,263 |
(2,3,6,9) |
|
|
1.0 |
|
|
|
6,612 |
(4) |
|
|
* |
|
|
|
22,420 |
(4,5,7,8) |
|
|
* |
|
|
|
|
* |
|
Less than 1%. |
|
(1) |
|
Beneficial owner has sole voting and investment power, except as indicated. With respect to
Berkshire shares, each share of Class A stock is convertible into one thousand five hundred
shares of Class B stock at the option of the shareholder. As a result, pursuant to Rule
13d-3(d)(1) of the Securities Exchange Act of 1934, a shareholder is deemed to have beneficial
ownership of the shares of Class B stock which such shareholder may acquire upon conversion of
the Class A stock. In order to avoid overstatement in this table, the amount of Class B stock
beneficially owned does not take into account such shares of Class B stock which may be
acquired upon conversion of shares of Class A stock held by a shareholder. The percentage of
outstanding Class B stock is based on the total number of shares of Class B stock outstanding
as of February 15, 2011 and does not take into account shares of Class B stock which may be
issued upon conversion of Class A stock. |
43
|
|
|
(2) |
|
Voting and investment power may be deemed to be controlled by Berkshire and Warren E. Buffett
by virtue of the relationships described above. Blue Chips principal executive offices are
located at 301 East Colorado Boulevard, Suite 300, Pasadena, California 91101-1901.
Berkshires principal executive offices are located at 3555 Farnam Street, Omaha, Nebraska
68131, which is also Mr. Buffetts principal address. |
|
(3) |
|
Includes 270 shares held by Mr. Denhams spouse, as to which Mr. Denham disclaims beneficial
ownership. |
|
(4) |
|
Includes 20 Class A shares and 1,750 Class B shares as to which Mr. Denham has shared
beneficial ownership by virtue of a power of attorney, allowing Mr. Denham investment power
but with respect to which he has no voting power. Also includes 5,250 Class B shares as to
which Mr. Denham has voting and investment power but with respect to which he has no economic
interest. |
|
(5) |
|
Represents shares held by Mr. Kaufmans spouse, as to which Mr. Kaufman disclaims beneficial
ownership. |
|
(6) |
|
Includes 16,843 shares held by a trust of which Mrs. Peters is co-trustee with her children
and income beneficiary. |
|
(7) |
|
Includes 50 shares held by Mr. Grecos spouse, as to which Mr. Greco disclaims beneficial
ownership. |
|
(8) |
|
Includes 1,050 shares held jointly by Mr. Jacobson and his spouse as to which Mr. Jacobson
has shared voting and investment power and 300 shares as to which he has shared voting and
investment power but with respect to which he has no economic interest. |
|
(9) |
|
Does not include the 5,703,087 shares (80.1%) held by Blue Chip, of which Charles T. Munger,
Jeffrey L. Jacobson and Christopher M. Greco are directors and executive officers. |
Item 13. Certain Relationships and Related Transactions, and Director Independence
RELATED PERSON TRANSACTIONS
Wesco-Financial Insurance Company (Wes-FIC), a wholly owned subsidiary of Wesco, is
headquartered in Omaha, Nebraska, where its business is administered by employees of wholly owned
insurance subsidiaries of Berkshire. From time to time, Berkshire has offered to Wes-FIC, and
Wes-FIC (with Wescos concurrence) has accepted, retrocessions of portions of reinsurance contracts
under arrangements described above on page 4. Wescos and Wes-FICs boards believe all such
retrocessions have been entered into at terms more favorable than Wes-FIC could have obtained
elsewhere. In 2010, written premiums of $271,717,000 were retroceded to Wes-FIC by insurance
subsidiaries of Berkshire. Kansas Bankers Surety Company (KBS), wholly owned by Wes-FIC, is
supervised by Berkshire subsidiaries. For several years, two Berkshire subsidiaries have provided
reinsurance for KBS at rates believed to be market prices. In 2010, premiums of $211,000 were ceded
to Berkshire subsidiaries, no reinsured losses were allocated to them, and $821,000 of losses which
had been reinsured by them in prior years were recovered and repaid to them.
Robert T. Flaherty, a Wesco Director, owns a significant portion of the stock of Flaherty &
Crumrine Incorporated, which leases office space in the commercial office building owned by Wescos
MS Property Company subsidiary. Terms of the lease are believed by Wescos management to be within
the general market range for such third-party leases. Wescos subsidiary received $121,000 under
the lease during 2010.
Pursuant to a written policy, Wescos Audit Committee must ratify or reject any transaction or
proposed transaction in which Wesco is a participant if the amount involved exceeds $120,000 and a
related person is also a participant, as that term is defined by the federal securities laws. The
transactions with Berkshire and its
44
subsidiaries described above were ratified by Wescos Audit
Committee. The lease with Flaherty & Crumrine Incorporated was also ratified by Wescos Audit
Committee (with Mr. Flaherty abstaining from the vote).
DIRECTOR INDEPENDENCE
Because 80.1% of Wescos capital stock is owned by Blue Chip, the Board has determined that
Wesco is a controlled company within the meaning of Section 801 of the listing standards of the
NYSE Amex, on which Wescos shares are traded. Controlled companies are exempted from a number of
the NYSE Amex listing standards, including the requirement to have a majority of independent
directors and the requirement to have director nominees selected by a nominating committee
comprised entirely of independent directors or by a majority of the independent directors.
Controlled companies are also exempt from the requirement to have the compensation of the issuers
officers determined by a compensation committee comprised solely of independent directors or by a
majority of the independent directors.
Nonetheless, the Board has affirmatively determined that Carolyn H. Carlburg, Robert T.
Flaherty, Peter D. Kaufman and Elizabeth Caspers Peters are independent as defined in Section
803A of the NYSE Amex listing standards.
Item 14. Principal Accountant Fees and Services
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Wescos consolidated financial statements are required to be included in the consolidated
financial statements of its 80.1% parent, Berkshire. Accordingly, to facilitate the efficient
examination of the statements of both companies, Wescos Audit Committee, effective with the year
2004, delegated to Berkshires audit committee authority to select a public accounting firm to
audit Wescos consolidated financial statements, subject to ratification by Wescos Audit
Committee. Deloitte & Touche LLP (Deloitte) was selected by Berkshires audit committee for 2010
and the appointment was ratified by Wescos Audit Committee.
Audit Fees. In 2010, Berkshire allocated to Wesco $447,930, representing Wescos share of
billings by Deloitte for the audits of the 2010 consolidated financial statements of Berkshire and
all of its subsidiaries, including Wesco and its subsidiaries. Such services included testing
required by the Sarbanes-Oxley Act of 2002, as well as reviews of the financial statements included
in Wescos Quarterly Reports to the SEC on Form 10-Q for 2010. In 2009, Berkshire allocated to
Wesco $508,760 for Deloittes audit services.
Audit-Related Fees. There were no other audit-related fees billed by Deloitte or allocated by
Berkshire in 2010 or 2009.
Tax Fees. There were no fees billed by Deloitte or allocated by Berkshire in either 2010 or
2009 for tax compliance, tax advice or tax planning for Wesco or its subsidiaries.
All Other Fees. There were no fees billed by Deloitte or allocated by Berkshire in either
2010 or 2009 other than those set forth above.
Audit Fees Pre-approval Policy. Beginning in 2004, Wescos Audit Committee delegated to
Berkshires audit committee authority to pre-approve other audit and non-audit services for Wesco
that are to be performed by the independent registered public accounting firm that audits Berkshire
and its subsidiaries, including Wesco and its subsidiaries. Berkshires pre-approval policy
requires that Berkshires audit committee pre-approve all
45
services the independent registered
public accounting firm provides, including audit services, audit-related services, tax and other
services. Some services have a general pre-approval. The term of any general pre-approval is 12
months from the date of pre-approval, unless the Berkshire audit committee considers a different
period and states otherwise. Berkshires audit committee will annually review and pre-approve the
services that may be provided by the independent registered public accounting firm without
obtaining specific pre-approval. It will revise the list of general pre-approved services from time
to time, based on subsequent determinations. Any proposed services exceeding pre-approved cost
levels or budgeted amounts will also require specific pre-approval by Berkshires audit committee.
Wesco has been informed that all services performed by Deloitte in 2010 on behalf of Wesco and its
subsidiaries were pre-approved in accordance with the pre-approval policy adopted by Berkshires
audit committee, and Wescos Audit Committee has ratified all such pre-approvals.
Item 15. Exhibits and Financial Statement Schedules
The following exhibits (listed by numbers corresponding to Table 1 of Item 601 of Regulation
S-K) are filed as part of this Annual Report on Form 10-K or are incorporated herein by reference:
2 Agreement and Plan of Merger by and among Berkshire Hathaway Inc., Montana Acquisitions,
LLC and Wesco Financial Corporation, dated February 4, 2011 (filed as exhibit 2.1 to Wescos Form
8-K dated February 7, 2011 Commission File No. 1-4720)
3a Articles of Incorporation of Wesco (filed as exhibit 3a to Wescos Form 10-K for the
year ended December 31, 1999) and Bylaws of Wesco (filed as exhibit 3.2 to Wescos Form 8-K dated
December 5, 2007 Commission File No. 1-4720)
21 List of subsidiaries
31(a) Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (chief
executive officer)
31(b) Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (chief
financial officer)
32(a) Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (chief
executive officer)
32(b) Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (chief
financial officer)
Instruments defining the rights of holders of long-term debt of Wesco and its subsidiaries are
not being filed since the total amount of securities authorized by all such instruments does not
exceed 10% of the total assets of Wesco and its subsidiaries on a consolidated basis as of December
31, 2010. Wesco hereby agrees to furnish to the Commission upon request a copy of any such debt
instrument to which it is a party.
The index to financial statements and related schedules set forth in Item 8 of this report is
incorporated herein by reference.
46
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
WESCO FINANCIAL CORPORATION |
|
|
|
|
|
|
|
|
|
/s/ Charles T. Munger |
|
|
|
|
Charles T. Munger
|
|
February 25, 2011 |
|
|
Chairman of the Board and President (principal executive officer) |
|
|
|
|
|
|
|
|
|
/s/ Jeffrey L. Jacobson |
|
|
|
|
Jeffrey L. Jacobson
|
|
February 25, 2011 |
|
|
Vice President and Chief Financial Officer |
|
|
|
|
(principal financial and accounting officer) |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
|
February 25, 2011 |
|
|
|
|
|
|
|
|
|
|
|
February 25, 2011 |
|
|
|
|
|
|
|
|
|
|
|
February 25, 2011 |
|
|
|
|
|
|
|
|
|
|
|
February 25, 2011 |
|
|
|
|
|
|
|
|
|
|
|
February 25, 2011 |
|
|
|
|
|
|
/s/ Elizabeth Caspers Peters |
|
|
|
|
February 25, 2011 |
|
|
|
47
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Wesco Financial Corporation
Pasadena, California
We have audited the accompanying consolidated balance sheets of Wesco Financial Corporation
and subsidiaries (the Company) as of December 31, 2010 and 2009, and the related consolidated
statements of income, changes in shareholders equity and comprehensive income, and cash flows for
each of the three years in the period ended December 31, 2010. Our audits also included the
financial statement schedule listed in the Index at Item 8. We also have audited the Companys
internal control over financial reporting as of December 31, 2010, based on criteria established in
Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. The Companys management is responsible for these financial statements and
financial statement schedule, for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial reporting, included
in the accompanying Managements Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on these financial statements and the financial statement
schedule and an opinion on the effectiveness of the Companys internal control over financial
reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was maintained in all
material respects. Our audits of the financial statements included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control over financial reporting based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the circumstances. We believe that
our audits provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed by, or under the
supervision of, the companys principal executive and principal financial officers, or persons
performing similar functions, and effected by the companys board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A companys internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles and
that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the companys
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including
the possibility of collusion or improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal
48
control over financial reporting to future periods
are subject to the risk that the controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Wesco Financial Corporation and its subsidiaries as of
December 31, 2010 and 2009, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2010, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth therein. Also, in our
opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2010, based on the criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
/s/ DELOITTE & TOUCH LLP
Omaha, Nebraska
February 25, 2011
49
WESCO FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollar amounts in thousands except for amounts per share)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
ASSETS
|
Cash and cash equivalents |
|
$ |
472,569 |
|
|
$ |
273,671 |
|
Investments |
|
|
|
|
|
|
|
|
Securities with fixed maturities |
|
|
235,193 |
|
|
|
229,872 |
|
Equity securities |
|
|
2,272,253 |
|
|
|
2,065,627 |
|
Accounts receivable |
|
|
37,191 |
|
|
|
37,983 |
|
Receivable from affiliates |
|
|
170,852 |
|
|
|
173,476 |
|
Rental furniture |
|
|
177,680 |
|
|
|
177,793 |
|
Goodwill of acquired businesses |
|
|
277,514 |
|
|
|
277,590 |
|
Other assets |
|
|
148,692 |
|
|
|
165,414 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,791,944 |
|
|
$ |
3,401,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
Insurance losses and loss adjustment expenses |
|
|
|
|
|
|
|
|
Affiliated business |
|
$ |
371,805 |
|
|
$ |
290,375 |
|
Unaffiliated business |
|
|
36,579 |
|
|
|
53,091 |
|
Unearned insurance premiums |
|
|
|
|
|
|
|
|
Affiliated business |
|
|
112,019 |
|
|
|
110,477 |
|
Unaffiliated business |
|
|
9,545 |
|
|
|
11,516 |
|
Deferred furniture rental income and security deposits |
|
|
8,269 |
|
|
|
11,846 |
|
Accounts payable and accrued expenses |
|
|
73,500 |
|
|
|
54,537 |
|
Notes payable |
|
|
51,200 |
|
|
|
28,200 |
|
Income taxes payable, principally deferred |
|
|
363,310 |
|
|
|
290,667 |
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,026,227 |
|
|
|
850,709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
Capital stock, $1 par value authorized, 7,500,000 shares; issued and
outstanding, 7,119,807 shares |
|
|
7,120 |
|
|
|
7,120 |
|
Additional paid-in capital |
|
|
26,204 |
|
|
|
26,204 |
|
Accumulated other comprehensive income |
|
|
437,365 |
|
|
|
282,900 |
|
Retained earnings |
|
|
2,295,028 |
|
|
|
2,234,493 |
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
2,765,717 |
|
|
|
2,550,717 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,791,944 |
|
|
|
3,401,426 |
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
50
WESCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Dollar amounts in thousands except for amounts per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Furniture rentals |
|
$ |
309,439 |
|
|
$ |
312,234 |
|
|
$ |
340,162 |
|
Sales and service revenues |
|
|
106,278 |
|
|
|
106,342 |
|
|
|
130,753 |
|
Insurance premiums earned |
|
|
|
|
|
|
|
|
|
|
|
|
Affiliated business |
|
|
272,223 |
|
|
|
307,560 |
|
|
|
218,094 |
|
Unaffiliated business |
|
|
12,294 |
|
|
|
15,661 |
|
|
|
19,870 |
|
Dividend and interest income |
|
|
75,807 |
|
|
|
67,458 |
|
|
|
79,079 |
|
Realized, net investment gains |
|
|
6,541 |
|
|
|
|
|
|
|
7,006 |
|
Other-than-temporary impairment losses on investments |
|
|
(21,021 |
) |
|
|
|
|
|
|
|
|
Other |
|
|
4,142 |
|
|
|
4,076 |
|
|
|
3,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
765,703 |
|
|
|
813,331 |
|
|
|
798,954 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products and services sold |
|
|
124,245 |
|
|
|
130,992 |
|
|
|
149,319 |
|
Insurance losses and loss adjustment expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Affiliated business |
|
|
182,925 |
|
|
|
198,853 |
|
|
|
151,308 |
|
Unaffiliated business |
|
|
(2,669 |
) |
|
|
14,454 |
|
|
|
20,892 |
|
Insurance underwriting expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Affiliated business |
|
|
82,059 |
|
|
|
92,857 |
|
|
|
63,156 |
|
Unaffiliated business |
|
|
5,525 |
|
|
|
5,946 |
|
|
|
7,135 |
|
Selling, general and administrative expenses |
|
|
281,929 |
|
|
|
305,934 |
|
|
|
300,231 |
|
Interest expense |
|
|
504 |
|
|
|
641 |
|
|
|
1,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
674,518 |
|
|
|
749,677 |
|
|
|
693,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
91,185 |
|
|
|
63,654 |
|
|
|
105,115 |
|
Income taxes |
|
|
18,973 |
|
|
|
9,581 |
|
|
|
22,999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
72,212 |
|
|
$ |
54,073 |
|
|
$ |
82,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts per capital share based on 7,119,807 shares outstanding
throughout each year: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
10.14 |
|
|
$ |
7.59 |
|
|
$ |
11.53 |
|
Cash dividends |
|
|
1.64 |
|
|
|
1.58 |
|
|
|
1.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
51
WESCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
72,212 |
|
|
$ |
54,073 |
|
|
$ |
82,116 |
|
Adjustments to reconcile net income with net cash flows
from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit on sale of rental furniture |
|
|
(17,964 |
) |
|
|
(20,755 |
) |
|
|
(22,447 |
) |
Realized investment gains, net |
|
|
(6,541 |
) |
|
|
|
|
|
|
(7,006 |
) |
Other-than-temporary impairment losses |
|
|
21,021 |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
46,595 |
|
|
|
55,500 |
|
|
|
49,574 |
|
Change in liabilities for insurance losses and loss
adjustment
expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Affiliated business |
|
|
81,430 |
|
|
|
125,951 |
|
|
|
124,737 |
|
Unaffiliated business |
|
|
(16,512 |
) |
|
|
2,247 |
|
|
|
(3,314 |
) |
Change in unearned insurance premiums |
|
|
|
|
|
|
|
|
|
|
|
|
Affiliated business |
|
|
1,542 |
|
|
|
15,933 |
|
|
|
79,503 |
|
Unaffiliated business |
|
|
(1,971 |
) |
|
|
(1,735 |
) |
|
|
(1,974 |
) |
Change in receivable from affiliates |
|
|
7,177 |
|
|
|
(40,080 |
) |
|
|
(96,725 |
) |
Change in income taxes payable |
|
|
(11,080 |
) |
|
|
(9,410 |
) |
|
|
4,953 |
|
Other, net |
|
|
9,392 |
|
|
|
12,134 |
|
|
|
(16,767 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from operating activities |
|
|
185,301 |
|
|
|
193,858 |
|
|
|
192,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of securities with fixed maturities |
|
|
(13,123 |
) |
|
|
(208,269 |
) |
|
|
|
|
Purchases of equity securities |
|
|
|
|
|
|
|
|
|
|
(349,071 |
) |
Purchases of rental furniture |
|
|
(69,525 |
) |
|
|
(45,385 |
) |
|
|
(74,572 |
) |
Proceeds from redemptions and maturities of securities with
fixed maturities |
|
|
14,782 |
|
|
|
8,639 |
|
|
|
7,402 |
|
Proceeds from sales of rental furniture |
|
|
51,075 |
|
|
|
61,192 |
|
|
|
61,800 |
|
Proceeds from sales of equity securities |
|
|
11,394 |
|
|
|
|
|
|
|
60,203 |
|
Change in condominium construction in process |
|
|
18,734 |
|
|
|
(5,420 |
) |
|
|
(28,510 |
) |
Acquisitions of businesses, net of cash acquired |
|
|
(4,631 |
) |
|
|
(878 |
) |
|
|
(81,428 |
) |
Other, net |
|
|
(6,384 |
) |
|
|
(4,333 |
) |
|
|
(8,863 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from investing activities |
|
|
2,322 |
|
|
|
(194,454 |
) |
|
|
(413,039 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under revolving credit facility |
|
|
124,100 |
|
|
|
45,100 |
|
|
|
87,200 |
|
Repayments under revolving credit facility |
|
|
(101,100 |
) |
|
|
(57,300 |
) |
|
|
(84,000 |
) |
Payment of cash dividends |
|
|
(11,677 |
) |
|
|
(11,249 |
) |
|
|
(10,965 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from financing activities |
|
|
11,323 |
|
|
|
(23,449 |
) |
|
|
(7,765 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency exchange rate changes |
|
|
(48 |
) |
|
|
73 |
|
|
|
(925 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents |
|
|
198,898 |
|
|
|
(23,972 |
) |
|
|
(229,079 |
) |
Cash and cash equivalents beginning of year |
|
|
273,671 |
|
|
|
297,643 |
|
|
|
526,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of year |
|
$ |
472,569 |
|
|
$ |
273,671 |
|
|
$ |
297,643 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary disclosures |
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid during year |
|
$ |
318 |
|
|
$ |
713 |
|
|
$ |
1,744 |
|
Income taxes paid, net, during year |
|
|
30,017 |
|
|
|
19,133 |
|
|
|
17,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
52
WESCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS EQUITY
AND COMPREHENSIVE INCOME
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Capital stock: |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning and end of year |
|
$ |
7,120 |
|
|
$ |
7,120 |
|
|
$ |
7,120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital: |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning and end of year |
|
$ |
26,204 |
|
|
$ |
26,204 |
|
|
$ |
26,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
2,234,493 |
|
|
$ |
2,191,669 |
|
|
$ |
2,120,518 |
|
Net income |
|
|
72,212 |
|
|
|
54,073 |
|
|
|
82,116 |
|
Cash dividends declared and paid |
|
|
(11,677 |
) |
|
|
(11,249 |
) |
|
|
(10,965 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
2,295,028 |
|
|
$ |
2,234,493 |
|
|
$ |
2,191,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized appreciation (depreciation) of investments,
net |
|
$ |
224,034 |
|
|
$ |
198,917 |
|
|
$ |
(341,277 |
) |
Applicable income taxes |
|
|
(78,579 |
) |
|
|
(69,526 |
) |
|
|
119,474 |
|
Reclassification of investment appreciation (depreciation)
in net earnings, including other-than-temporary impairment |
|
|
14,480 |
|
|
|
|
|
|
|
(7,006 |
) |
Applicable income taxes |
|
|
(5,068 |
) |
|
|
|
|
|
|
2,452 |
|
Foreign currency translation adjustments |
|
|
(618 |
) |
|
|
1,434 |
|
|
|
(2,687 |
) |
Applicable income taxes |
|
|
216 |
|
|
|
(688 |
) |
|
|
790 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
154,465 |
|
|
|
130,137 |
|
|
|
(228,254 |
) |
Accumulated other comprehensive income at beginning
of year |
|
|
282,900 |
|
|
|
152,763 |
|
|
|
381,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income at end
of year |
|
$ |
437,365 |
|
|
$ |
282,900 |
|
|
$ |
152,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
72,212 |
|
|
$ |
54,073 |
|
|
$ |
82,116 |
|
Other comprehensive income (loss) |
|
|
154,465 |
|
|
|
130,137 |
|
|
|
(228,254 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
$ |
226,677 |
|
|
$ |
184,210 |
|
|
$ |
(146,138 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
53
WESCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except for amounts per share)
Note 1. Significant Accounting Policies and Practices
Nature of operations, basis of consolidation, and presentation
Wesco Financial Corporation (Wesco) is an 80.1% indirectly owned subsidiary of Berkshire
Hathaway Inc. (Berkshire). Wesco is a holding company. Its consolidated financial statements
include the accounts of Wesco and its subsidiaries, all wholly owned. Its principal subsidiaries
are Wesco-Financial Insurance Company (Wes-FIC), The Kansas Bankers Surety Company (KBS), CORT
Business Services Corporation (CORT) and Precision Steel Warehouse, Inc. (Precision Steel).
Further information regarding these businesses is contained in Note 13. Intercompany balances and
transactions are eliminated in the preparation of the consolidated financial statements.
In 2008, 2009 and 2010, CORT made a few minor acquisitions in select markets in an effort to
increase market share. The fair values of the assets acquired and liabilities assumed are included
in the accompanying consolidated financial statements from dates of acquisition.
The operations of Wes-FIC are managed by Berkshires subsidiary, National Indemnity Company
(NICO). Historically, a significant part of Wes-FICs insurance business has derived from
contracts with NICO and other wholly owned insurance subsidiaries of Berkshire, herein referred to
as the Berkshire Insurance Group. Terms of Wes-FICs participation in the insurance contracts are
identical to those by which the other Berkshire Insurance Group members participate, except as to
the relative percentages of their participation in the various contracts. Financial data appearing
in the accompanying consolidated financial statements relative to business with the Berkshire
Insurance Group is designated as affiliated business.
Wes-FIC significantly increased its reinsurance activities effective at the beginning of 2008,
when it entered into a retrocession agreement with NICO, to assume 10% of NICOs quota share
reinsurance of Swiss Reinsurance Company and its major property-casualty affiliates (Swiss Re).
Under this arrangement, Wes-FIC has assumed 2% part of NICOs 20% quota share reinsurance of all
Swiss Re property-casualty risks incepting over the five-year period ending December 31, 2012 on
the same terms as NICOs agreement with Swiss Re. Wes-FIC recorded written premiums of $241.1
million, $294.1 million and $265.2 million in 2010, 2009 and 2008, and earned premiums of $
240.5 million, $276.7 million and $183.2 million in those respective years, under this arrangement.
Use of estimates in preparation of financial statements
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America (GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the date of the financial
statements and the reported revenues and expenses during the period reported upon. In particular,
estimates of written and earned premiums and unpaid losses and loss adjustment expenses for
property and casualty insurance are subject to considerable estimation error, due both to the
necessity of estimating information with respect to certain reinsurance contracts where reports
from ceding companies for the quarterly reporting periods are not contractually due until after the
54
balance sheet date, as well as the inherent uncertainty in estimating ultimate claim amounts
that will be reported and settled over a period of many years. The estimates and assumptions are
based on managements evaluation of the relevant facts and circumstances using information
available at the time such estimates and assumptions are made. The amounts of such assets,
liabilities, revenues and expenses included in the consolidated financial statements may differ
significantly from those that might result from use of estimates and assumptions based on facts and
circumstances not yet available. Although Wescos management does not believe such changes in
estimates would have a materially adverse effect on shareholders equity, they could produce a
material effect on results of operations in a particular period.
Fair Value Measurements
Fair value is defined under GAAP as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the measurement date.
Market participants are assumed to be independent, knowledgeable, able and willing to transact an
exchange and not under duress. Considerable judgment may be required in interpreting market data
used to develop the estimates of fair value.
The framework established for measuring fair value is based on observable, independent market
inputs and unobservable market assumptions. Following is a description of the three levels of
inputs that may be used to measure fair value:
Level 1 inputs represent unadjusted quoted prices in active markets for identical assets or
liabilities. Most of Wescos equity investments are traded on an exchange in active markets and
fair value is based on the closing prices as of the balance sheet date.
Level 2 inputs represent observable inputs other than Level 1 prices, such as quoted prices
for similar assets or liabilities in active or inactive markets; quoted prices for identical
assets or liabilities in markets that are not active; other inputs that may be considered in fair
value determinations of the assets or liabilities, such as interest rates and yield curves,
volatilities, prepayment speeds, loss severities, credit risks and default rates; and inputs that
are derived principally from or corroborated by observable market data by correlation or other
means. Fair values for Wescos investments in fixed maturity securities are based primarily on
market prices and market data available for instruments with similar characteristics, since
active markets are not common for many instruments.
Level 3 inputs are unobservable inputs used in the measurement of assets. Measurement of the
fair values of the non-exchange traded investments are based on a standard warrant valuation
model or discounted cash flow model, as applicable, which are techniques believed to be widely
used by other market participants. Significant assumptions inherent in the warrant valuation
model include an estimated stock price volatility factor, dividend and interest rate assumptions,
and the estimated term of the warrants. Significant assumptions used in a discounted cash flow
model include the discount rate and estimated duration of the instrument.
Cash equivalents
Cash equivalents consist of funds invested in U.S. Treasury Bills, money market accounts, and
other investments with a maturity of three months or less when purchased.
Dollar amounts in thousands except for amounts per share
55
Investments
The appropriate classifications of investments in securities with fixed maturities and equity
securities are established at the time of purchase and reevaluated as of each balance sheet date.
There are three permissible classifications: held-to-maturity, trading, and, when neither of those
classifications is applicable, available-for-sale. Trading investments are carried at fair value
and include securities acquired with the intent to sell in the near term. Held-to-maturity
investments are carried at amortized cost, reflecting the ability and intent to hold the securities
to maturity. All other investments are classified as available-for-sale and carried at fair value,
with unrealized gains and losses, net of applicable deferred income taxes, reported as a separate
component of shareholders equity.
Realized investment gains and losses, determined on a specific-identification basis, are
included in the consolidated statement of income, as are provisions for other-than-temporary
declines in market or fair value of equity investments, when applicable. With respect to an
investment in a fixed-maturity security, an other-than-temporary impairment would be recognized if
the Company (a) intends to sell or expects to be required to sell the security before amortized
cost is recovered or (b) does not expect to ultimately recover the amortized cost basis even if it
does not intend to sell the security. Losses under (a) would be recognized in earnings. Under (b)
any credit loss component would be recognized in earnings, and any difference between fair value
and the amortized cost basis, net of the credit loss, would be reflected in other comprehensive
income. Factors considered in judging whether an impairment is other than temporary include: the
financial condition, business prospects and creditworthiness of the issuer, the length of time that
fair value has been less than cost, the relative amount of the decline, and Wescos ability and
intent to hold the investment until the fair value recovers.
Accounts receivable
Substantially all accounts receivable are due from customers and affiliates located within the
United States. Accounts receivable are recorded net of an allowance for doubtful accounts, based on
a review of specifically identified accounts in addition to an overall collectability analysis.
Judgments are made with respect to the collectability of accounts receivable based on historical
experience and current economic trends. Actual losses could differ from those estimates.
Rental furniture
Rental furniture consists principally of residential and office furniture which is available
for rental or, if no longer up to rental standards, for sale. Rental furniture is carried at cost,
less accumulated depreciation calculated primarily on a declining-balance basis over 3 to 5 years
using estimated salvage values of 25 to 40 percent of original cost.
Goodwill of acquired businesses
Goodwill of acquired businesses represents the excess of the cost of acquired entities over
the fair values assigned to assets acquired and liabilities assumed. All goodwill acquired is
assigned to the reporting unit that the related assets are employed in and the liabilities relate
to, as it is believed that those reporting units benefit from the acquisition. The Company accounts
for goodwill in accordance with GAAP, which requires a test for impairment annually or if an event
occurs or circumstances change that would more likely than not reduce the
Dollar amounts in thousands except for amounts per share
56
fair value of a reporting unit below its carrying amount. The impairment test is performed in
two phases. The first step compares the carrying value of the reporting unit, including goodwill,
to its estimated fair value. If the carrying value is greater than the estimated fair value of the
unit, a second step is required, comparing the implied fair value of the reporting units goodwill
with the carrying amount of that goodwill. An impairment loss, charged to earnings, is recorded to
the extent that the carrying amount of goodwill exceeds its implied fair value.
The Company determines the fair value of its furniture rental unit using the discounted cash
flows approach. Under the discounted cash flows approach, the Company estimates the fair value of
the reporting unit based on the present value of its estimated future cash flows. This approach
incorporates a number of significant estimates and assumptions that include: a forecast of the
reporting units future cash flows, estimated growth rates, future terminal value, and an
appropriate discount rate. The Company then prepares a sensitivity analysis as to how changes in
key estimates or assumptions might affect the outcome of the goodwill impairment test. In
projecting future cash flows, the Company considers the current economic environment as well as
historical results of the unit. The Company believes that the discounted cash flows approach is the
most meaningful valuation technique for the furniture rental business, as CORT is the only national
company that operates in the rent-to-rent furniture industry, thus making market-based and
transaction-based valuation techniques less meaningful.
Inventories
Inventories of $5,006 and $6,221, included in other assets on the accompanying consolidated
balance sheet at December 31, 2010 and 2009, are stated at the lower of last-in, first-out (LIFO)
cost or market; under this method, the most recent costs are reflected in cost of products sold.
The aggregate differences in values between LIFO cost and cost determined under the first-in,
first-out (FIFO) methods were $8,445 and $9,793 as of December 31, 2010 and December 31, 2009,
respectively. LIFO inventory accounting adjustments increased income before income taxes by $1,389
and $2,551 ($833 and $1,535 after income taxes) for 2010 and 2009 and decreased income before
income taxes by $1,167 ($702, after income taxes) for 2008.
Capitalized construction costs
Capitalized construction costs of $54,721 and $72,005 are included in other assets on the
accompanying consolidated balance sheet at December 31, 2010 and 2009. These costs are associated
with the acquisition, development and construction of a real estate project managed by MS Property
Company, a Wesco subsidiary.
Revenue recognition
Insurance premiums are stated net of amounts ceded to reinsurers and are recognized as earned
revenues in proportion to the insurance protection provided, which in most cases is pro rata over
the term of each contract. Premiums are estimated with respect to certain reinsurance contracts
written during the period where reports from ceding companies for the period are not contractually
due until well after the balance sheet date. Unearned insurance premiums are deferred and reflected
in the liability section of the consolidated balance sheet. Certain costs of acquiring insurance
premiums commissions, premium taxes, and other are deferred and charged to income as the
premiums are earned.
Dollar amounts in thousands except for amounts per share
57
Furniture rentals are recognized as revenue proportionately over the rental contract period;
rentals received in advance are deferred in the liability section of the consolidated balance
sheet. Costs related to furniture rentals comprise the main element of cost of products and
services sold on the consolidated income statement and include depreciation expense, repairs and
maintenance, and inventory losses.
Revenues from product sales are recognized upon passage of title to the customer, which
coincides with customer pickup, product shipment, delivery or acceptance, depending on the sales
arrangement. Revenues from services performed are recognized at the completion of the elements
specified in the contract, which typically coincides with their being billed.
Interest income from investments in fixed maturity securities is earned under the constant
yield method and includes accrual of interest due as well as amortization of acquisition premiums
and accruable discounts. In determining the constant yield for mortgage-backed securities,
anticipated counterparty prepayments are estimated and evaluated periodically. Dividends from
equity securities are earned on the ex-dividend date.
Losses and loss adjustment expenses
Liabilities for unpaid insurance losses and loss adjustment expenses represent estimates of
the ultimate amounts payable under property and casualty reinsurance and insurance contracts
related to losses occurring on or before the balance sheet date. Liabilities for insurance losses
are comprised of estimates for reported claims (case reserves) and reserve development on
reported claims, as well as estimates for claims that have not yet been reported (some of which may
not be reported for many years), which together are also referred to as incurred-but-not-reported
reserves (IBNR reserves). The liability for unpaid losses includes significant estimates for
these claims and includes estimates reported by ceding insurers. Loss reserve estimates reflect
past loss experience, adjusted as appropriate when losses are reasonably expected to deviate from
experience.
Considerable judgment is required to evaluate claims and estimate claims liabilities in
connection with reinsurance contracts. As further data becomes available, the liabilities are
reevaluated and adjusted as appropriate. Additionally, claims, at each balance sheet date, are in
various stages of the settlement process. Each claim is settled individually based upon its merits,
and some take years to settle, especially if legal action is involved. Actual ultimate claims
amounts are likely to differ from amounts recorded at the balance sheet date.
Depending on the type of loss being estimated, the timing and amount of loss payments are
subject to a great degree of variability and are contingent upon, among other factors, the timing
of the claim reporting by cedants and insureds, and the determination and payment of the ultimate
loss amounts through the loss adjustment process. Judgments and assumptions are necessary in
projecting the ultimate amounts payable in the future with respect to loss events that have
occurred.
The time period between the claim occurrence date and payment date of the loss is referred to
as the claim tail. Property claims usually have fairly short claim tails, and, absent litigation,
are reported and settled within a few months or years after occurrence. Casualty losses usually
have very long claim tails. Casualty claims can be more susceptible to litigation and can be more
significantly affected by changing contract interpretations and the legal environment, which
contributes to extended claim tails. Claim tails for reinsurers may be further extended due to
delayed reporting by ceding insurers or reinsurers due to contractual provisions or reporting
practices. Actual ultimate loss settlement amounts are likely to differ from amounts recorded at
the balance
Dollar amounts in thousands except for amounts per share
58
sheet date. Changes in estimates, referred to as loss development, are recorded as a
component of losses incurred in the period of change.
Provisions for losses and loss adjustment expenses are reported in the consolidated statement
of income after deducting estimates of amounts that will be recoverable under reinsurance
contracts. Reinsurance contracts do not relieve the ceding companies of their obligations to
indemnify policyholders with respect to the underlying insurance contracts. Ceded reinsurance
losses recoverable (ceded reserves) are reflected in the accompanying consolidated balance sheet
as a component of accounts receivable.
Income taxes
Wesco and its subsidiaries join in the filing of consolidated Federal income tax returns of
Berkshire. The consolidated Federal tax liability is apportioned among group members pursuant to
methods that result in each member of the group paying or receiving an amount that approximates the
increase or decrease in consolidated taxes attributable to that member. In addition, Wesco and its
subsidiaries also file income tax returns in state and local jurisdictions as applicable.
Provisions for current income tax liabilities are calculated and accrued on income and expense
amounts expected to be included in the income tax returns for the current year. Deferred income
taxes are calculated under the liability method. Deferred income tax assets and liabilities are
based on differences between the financial statement and tax bases of assets and liabilities at the
current enacted tax rates.
Changes in deferred income tax assets and liabilities that are associated with components of
other comprehensive income (principally, unrealized investment gains and losses) are charged or
credited directly to other comprehensive income. Otherwise, changes in deferred income tax assets
and liabilities are included as a component of income tax expense. Changes in deferred income taxes
and liabilities attributable to changes in enacted tax rates are charged or credited to income tax
expense in the period of enactment. Valuation allowances are established for deferred tax assets
where realization is not likely.
Assets and liabilities are established for uncertain tax positions taken or positions expected
to be taken in income tax returns when such positions are judged to not meet the
more-likely-than-not threshold based on the technical merits of the positions. Estimated interest
and penalties related to uncertain tax positions are included as a component of income tax expense.
Foreign currency
The accounts of the Companys foreign-based subsidiary are measured using the local currency
as the functional currency. Thus, revenues and expenses of this business are translated into U.S.
dollars at the average exchange rate for the period. Assets and liabilities are translated at the
exchange rate as of the end of the reporting period. Gains or losses from translating the financial
statements of the foreign-based operations are included in shareholders equity as a component of
accumulated other comprehensive income.
Accounting pronouncements adopted in 2010 and 2009
In May 2009, the FASB amended ASC 855 Subsequent Events to set forth general accounting and
disclosure requirements for events that occur subsequent to the balance sheet date, but before the
companys financial
Dollar amounts in thousands except for amounts per share
59
statements are issued, and was effective for the periods ending after June 15, 2009. Wesco
management has evaluated events that have occurred subsequent to December 31, 2010.
In January 2010, the FASB issued Accounting Standards Update 2010-06, Improving Disclosures
About Fair Value Measurements (ASU 2010-06). ASU 2010-06 requires disclosing separately the
amount of significant transfers in and out of the Level 1 and Level 2 categories and the reasons
for the transfers, and it requires that Level 3 purchases, sales, issuances and settlement activity
be reported on a gross rather than a net basis. ASU 2010-06 also requires fair value measurement
disclosures for each class of assets and liabilities and disclosures about valuation techniques and
inputs used to measure fair value for both recurring and nonrecurring fair value measurements for
Level 2 and Level 3 measurements.
Accounting pronouncements not yet in effect
Wescos management does not believe than any authoritative accounting pronouncements issued to
date and required to be adopted after yearend 2010 are likely to have a material effect on
shareholders equity.
Note 2. Investments
Following is a summary of investments in securities with fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Fair |
|
|
Carrying |
|
|
|
Cost |
|
|
Gains (Losses) |
|
|
Value |
|
|
Value |
|
|
Mortgage-backed securities |
|
$ |
17,031 |
|
|
$ |
1,941 |
|
|
$ |
18,972 |
|
|
$ |
18,972 |
|
Corporate bonds |
|
|
206,800 |
|
|
|
5,400 |
|
|
|
212,200 |
|
|
|
206,800 |
|
Other |
|
|
9,407 |
|
|
|
14 |
|
|
|
9,421 |
|
|
|
9,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
233,238 |
|
|
$ |
7,355 |
|
|
$ |
240,593 |
|
|
$ |
235,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Fair |
|
|
Carrying |
|
|
|
Cost |
|
|
Gains (Losses) |
|
|
Value |
|
|
Value |
|
|
Mortgage-backed securities |
|
$ |
18,865 |
|
|
$ |
1,837 |
|
|
$ |
20,702 |
|
|
$ |
20,702 |
|
Corporate bonds |
|
|
200,000 |
|
|
|
|
|
|
|
200,000 |
|
|
|
200,000 |
|
Other |
|
|
8,265 |
|
|
|
905 |
|
|
|
9,170 |
|
|
|
9,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
227,130 |
|
|
$ |
2,742 |
|
|
$ |
229,872 |
|
|
$ |
229,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At yearend 2010 and 2009, the fair values of securities with fixed maturities contained
unrealized gains of $7,355 and $2,742. There were no unrealized losses at December 31, 2010 or
2009.
On December 17, 2009 Wesco acquired $200 million par amount of 5% senior notes due 2014 of Wm.
Wrigley Jr. Company (Wrigley). Wesco has classified the Wrigley Notes as held-to-maturity, and
accordingly, they are carried at cost.
Dollar amounts in thousands except for amounts per share
60
Shown below are the amortized costs and fair values of securities with fixed maturities at
December 31, 2010, by contractual maturity dates.
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost |
|
|
Fair Value |
|
Due in 2011 2013 |
|
$ |
9,407 |
|
|
$ |
9,421 |
|
Due in 2014 |
|
|
206,800 |
|
|
|
212,200 |
|
Mortgage-backed securities |
|
|
17,031 |
|
|
|
18,972 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
233,238 |
|
|
$ |
240,593 |
|
|
|
|
|
|
|
|
|
|
Following is a summary of investments in equity securities (all common stocks except for
Goldman Sachs Group, Inc. preferred stock and warrants):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
December 31, 2009 |
|
|
|
|
|
|
|
Fair |
|
|
|
|
|
|
Fair |
|
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
The Procter & Gamble Company |
|
$ |
372,480 |
|
|
$ |
401,419 |
|
|
$ |
372,480 |
|
|
$ |
378,331 |
|
The Coca-Cola Company |
|
|
40,761 |
|
|
|
473,912 |
|
|
|
40,761 |
|
|
|
410,719 |
|
Wells Fargo & Company |
|
|
382,779 |
|
|
|
391,813 |
|
|
|
382,779 |
|
|
|
341,240 |
|
Kraft Foods Incorporated |
|
|
325,816 |
|
|
|
315,100 |
|
|
|
325,816 |
|
|
|
271,800 |
|
US Bancorp |
|
|
245,919 |
|
|
|
269,700 |
|
|
|
266,940 |
|
|
|
225,100 |
|
Other |
|
|
232,007 |
|
|
|
420,309 |
|
|
|
243,661 |
|
|
|
438,437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,599,762 |
|
|
$ |
2,272,253 |
|
|
$ |
1,632,437 |
|
|
$ |
2,065,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other equity securities includes an investment of $205,000, at cost, in shares of 10%
cumulative perpetual preferred stock of The Goldman Sachs Group, Inc. (GS) and warrants to
purchase 1.78 million shares of GS common stock, at any time until they expire on October 1, 2013,
at a price of $115 per share. GS has the right to call the preferred shares for redemption at any
time at a premium of 10%.
At yearends 2010 and 2009, the estimated fair values of equity securities contained unrealized
gains of $731,159 and $590,395 and unrealized losses of $58,668 and $157,205, respectively. As of
December 31, 2010, the unrealized losses were attributable to two equity securities with respect to
which $55,998 had been in an unrealized loss position for more than twelve months. The unrealized
loss on each security approximated 2.5% and 12.5% of its respective cost. In managements judgment
the financial condition and near term prospects of these issuers are favorable and Wesco possesses
the intent and ability to retain these investments for a period of time sufficient to allow for the
prices to recover.
During the fourth quarter of 2010, Wesco recorded other-than-temporary impairment losses of
$21,021 related to certain purchase lots of an equity security that had been below cost
for more than two years. Other-than-temporary impairment losses result in a reduction of the cost
basis of the investment and not its fair value. Accordingly, such losses that are included in
after-tax earnings are offset by a corresponding credit to other comprehensive income.
Although the investments of Wesco and its subsidiaries are subject to market risks,
derivatives are not utilized to manage risks.
Dollar amounts in thousands except for amounts per share
61
Following is a summary of realized investment gains and (losses) for each of the past three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Fixed Maturity Securities |
|
|
|
|
|
|
|
|
|
|
|
|
Gross gains |
|
$ |
6,800 |
|
|
$ |
|
|
|
$ |
|
|
Gross losses |
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
Gross gains |
|
|
|
|
|
|
|
|
|
|
7,006 |
|
Gross losses |
|
|
(259 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,541 |
|
|
$ |
|
|
|
$ |
7,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 3. Accounts Receivable
Accounts receivable from unaffiliated companies are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Trade accounts receivable |
|
$ |
39,700 |
|
|
$ |
40,592 |
|
Allowance for uncollectible accounts |
|
|
(2,509 |
) |
|
|
(2,609 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
37,191 |
|
|
$ |
37,983 |
|
|
|
|
|
|
|
|
|
|
Note 4. Rental Furniture
Following is a reconciliation of the change in carrying value of rental furniture for 2010 and
2009:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Cost of rental furniture |
|
$ |
303,526 |
|
|
$ |
294,266 |
|
Less accumulated depreciation |
|
|
(125,846 |
) |
|
|
(116,473 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
177,680 |
|
|
$ |
177,793 |
|
|
|
|
|
|
|
|
|
|
Note 5. Goodwill
Following is a breakdown of goodwill:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Balance at beginning of year |
|
$ |
277,590 |
|
|
$ |
277,742 |
|
Foreign currency translation |
|
|
(76 |
) |
|
|
(152 |
) |
Acquisitions of businesses and other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
277,514 |
|
|
$ |
277,590 |
|
|
|
|
|
|
|
|
|
|
The decrease in goodwill for 2010 and 2009 relates to the fluctuation of the foreign currency
exchange rate of the functional currency for Roomservice Group, CORTs foreign based subsidiary.
The Company performed its annual goodwill impairment test for 2010 and 2009 in the fourth
quarters of each respective year, and concluded that there was no impairment for any of its
reporting units at that time because the fair values exceeded the book carrying values.
Dollar amounts in thousands except for amounts per share
62
There can be no assurance that the Companys estimates and assumptions regarding future
operating results made for purposes of the goodwill impairment testing will be accurate predictions
of the future. If the slow recovery from the recent economic recession has an adverse impact on the
long-term economic value of the reporting units, the Company may be required to record goodwill
impairment losses in future periods. Currently, it is not possible to determine if any such future
impairment losses would result or if such losses would be material.
Note 6. Insurance Losses and Loss Adjustment Expenses Payable
The balances of unpaid losses and loss adjustment expenses are based upon estimates of the
ultimate claim costs associated with property and casualty claim occurrences as of the balance
sheet dates including estimates for IBNR claims. Considerable judgment is required to evaluate
claims and establish estimated claim liabilities.
Following is a summary of liabilities for unpaid losses and loss adjustment expenses for each
of the past three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Gross liabilities at beginning of year |
|
$ |
343,466 |
|
|
$ |
215,268 |
|
|
$ |
93,845 |
|
Less ceded liabilities* |
|
|
(19,288 |
) |
|
|
(17,914 |
) |
|
|
(23,502 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance at beginning of year |
|
|
324,178 |
|
|
|
197,354 |
|
|
|
70,343 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred losses recorded during year |
|
|
|
|
|
|
|
|
|
|
|
|
For current year |
|
|
196,870 |
|
|
|
225,451 |
|
|
|
175,962 |
|
For all prior years |
|
|
(16,614 |
) |
|
|
(12,144 |
) |
|
|
(3,762 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred losses |
|
|
180,256 |
|
|
|
213,307 |
|
|
|
172,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments made during year |
|
|
|
|
|
|
|
|
|
|
|
|
For current year |
|
|
12,893 |
|
|
|
34,618 |
|
|
|
19,433 |
|
For all prior years |
|
|
107,428 |
|
|
|
51,865 |
|
|
|
25,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total payments |
|
|
120,321 |
|
|
|
86,483 |
|
|
|
45,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net liabilities at end of year |
|
|
384,113 |
|
|
|
324,178 |
|
|
|
197,354 |
|
Plus ceded liabilities* |
|
|
24,271 |
|
|
|
19,288 |
|
|
|
17,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross liabilities at end of year |
|
$ |
408,384 |
|
|
$ |
343,466 |
|
|
$ |
215,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Principally represents Wes-FICs proportionate share of reinsurance purchased by the
aviation pools. |
Incurred losses for all prior years, commonly known as reserve development, represents the
net amount of estimation error charged (credited) to earnings with respect to the liabilities
established as of the beginning of the year. Reference is made to Note 13, Business Segment Data,
for a summary of the principal insurance activities in which Wescos insurance segment has engaged
in the past three years. During 2010, $16,614 of net favorable reserve development was recorded,
which principally included $6,994 attributable to the Swiss Re contract for the years 2009 and
2008, and $3,858 attributable to aviation-related reinsurance, primarily for the years 2004 through
2009, as well as $5,887 attributable to primary insurance. During 2009, $12,144 of net favorable
reserve development was recorded, which principally included $12,043 attributed to the Swiss Re
contract for the year 2008 and $3,502 attributable to aviation-related reinsurance, primarily for
the years 2005 to 2007, partially offset by $4,579 of unfavorable reserve development attributable
to primary insurance, including, most notably, increases in loss estimates relating to the years
2007 and 2008, less loss recoveries of $1,002 attributable mainly to a deposit guarantee loss
recorded in 2008. During 2008, $3,762 of net favorable reserve development was recorded, which
included $4,158 attributable to aviation-related reinsurance, primarily for years 2002-2007,
partially offset by $396 of unfavorable reserve development attributable to primary insurance.
Dollar amounts in thousands except for amounts per share
63
Note 7. Notes Payable and Other Contractual Obligations
Following is a summary of notes payable, at year end:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Revolving credit facility |
|
$ |
51,000 |
|
|
$ |
28,000 |
|
Other |
|
|
200 |
|
|
|
200 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
51,200 |
|
|
$ |
28,200 |
|
|
|
|
|
|
|
|
|
|
The credit facility, used in the furniture rental business, totals $100,000 and is unsecured.
The weighted average annual interest rate on amounts outstanding under the revolving credit
facility at yearend 2010 was 0.50% in addition to an annual commitment fee of .075% of the total
credit facility. The underlying agreement does not contain any materially restrictive covenants,
and is guaranteed by Berkshire. The credit facility expires in June 2011. In addition to the
$51,200 of loans outstanding at December 31, 2010, the business was contingently liable with
respect to letters of credit totaling $12,440.
Fair values of the notes payable at yearend 2010 and 2009 approximated carrying values of
$51,200 and $28,200.
In addition to recorded liabilities, Wesco at yearend 2010 had operating lease obligations
aggregating $107,934 (payable in 2011, $26,659; in 2012, $22,244; in 2013, $17,047; in 2014,
$13,417; in 2015, $9,890; and thereafter, $16,678) and other contractual obligations aggregating
$20,330. Rent expense amounted to $31,460, $34,391, and $32,013 for 2010, 2009, and 2008.
Note 8. Fair Value Measurements
Following is a summary of Wescos yearend 2010 and 2009 financial assets and liabilities
measured at fair value on a recurring basis by the type of inputs applicable to fair value
measurement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair |
|
|
Fair Value Measurements Using |
|
|
|
Value |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in fixed maturity securities |
|
$ |
28,393 |
|
|
$ |
|
|
|
$ |
28,393 |
|
|
$ |
|
|
Investments in equity securities |
|
|
2,272,253 |
|
|
|
1,944,271 |
|
|
|
|
|
|
|
327,982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in fixed maturity securities |
|
$ |
29,872 |
|
|
$ |
|
|
|
$ |
29,872 |
|
|
$ |
|
|
Investments in equity securities |
|
|
2,065,627 |
|
|
|
1,726,878 |
|
|
|
|
|
|
|
338,749 |
|
Following is a summary of Wescos assets and liabilities measured at fair value, with the use
of significant unobservable inputs (Level 3):
|
|
|
|
|
|
|
Investments in |
|
|
|
Equity Securities |
|
Balance at December 31, 2009 |
|
$ |
338,749 |
|
Change in unrealized gains included in other comprehensive income |
|
|
(10,767 |
) |
Purchases |
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010 |
|
$ |
327,982 |
|
|
|
|
|
|
Dollar amounts in thousands except for amounts per share
64
|
|
|
|
|
|
|
Investments in |
|
|
|
Equity Securities |
|
Balance at December 31, 2008 |
|
$ |
209,510 |
|
Change in unrealized gains included in other comprehensive income |
|
|
129,239 |
|
Purchases |
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
$ |
338,749 |
|
|
|
|
|
|
Note 9. Income Taxes
Following is a breakdown of income taxes payable at 2010 and 2009 yearends:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Deferred tax liabilities, relating to |
|
|
|
|
|
|
|
|
Appreciation of investments |
|
$ |
237,136 |
|
|
$ |
153,511 |
|
Cost basis differences in investments |
|
|
116,368 |
|
|
|
116,368 |
|
Other items |
|
|
60,831 |
|
|
|
63,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
414,335 |
|
|
|
333,673 |
|
Deferred tax assets |
|
|
(54,069 |
) |
|
|
(43,066 |
) |
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities |
|
|
360,266 |
|
|
|
290,607 |
|
Taxes currently payable |
|
|
2,374 |
|
|
|
60 |
|
Other |
|
|
670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes payable |
|
$ |
363,310 |
|
|
$ |
290,667 |
|
|
|
|
|
|
|
|
|
|
The consolidated statement of income contains a provision (benefit) for income taxes, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Federal |
|
$ |
18,784 |
|
|
$ |
12,786 |
|
|
$ |
24,958 |
|
State |
|
|
652 |
|
|
|
(2,517 |
) |
|
|
(957 |
) |
Foreign |
|
|
(463 |
) |
|
|
(688 |
) |
|
|
(1,002 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
$ |
18,973 |
|
|
$ |
9,581 |
|
|
$ |
22,999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
31,553 |
|
|
$ |
17,349 |
|
|
$ |
15,987 |
|
Deferred |
|
|
(12,580 |
) |
|
|
(7,768 |
) |
|
|
7,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
$ |
18,973 |
|
|
$ |
9,581 |
|
|
$ |
22,999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Following is a reconciliation of the statutory federal income tax rate with the effective
income tax rate resulting in the provision for income taxes appearing on the consolidated statement
of income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
|
2008 |
Statutory Federal income tax rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
Increase (decrease) resulting from |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends received deduction |
|
|
(16.9 |
) |
|
|
(25.1 |
) |
|
|
(14.6 |
) |
State income taxes, less Federal tax benefit |
|
|
(0.3 |
) |
|
|
(2.7 |
) |
|
|
(0.3 |
) |
Other differences, net |
|
|
3.0 |
|
|
|
7.9 |
|
|
|
1.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax provision rate |
|
|
20.8 |
% |
|
|
15.1 |
% |
|
|
21.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated U.S. federal income tax return liabilities have been substantially settled with
the Internal Revenue Service (the IRS) through 2001. The IRS has completed its examination of the
consolidated
Dollar amounts in thousands except for amounts per share
65
U.S. federal income tax returns for the years 2002 through 2006. The results of the examinations
are currently in the IRS appeals process. The IRS has begun its examination of returns for the 2007
through 2009 tax years. Wesco management believes that the ultimate outcome of the Federal income
tax audits will not materially affect Wescos consolidated financial statements.
Note 10. Recent Events
On February 7, 2011, Wesco and Berkshire announced that they had entered into a definitive
merger agreement, whereby Berkshire will acquire the remaining 19.9% of the shares of Wescos
common stock that it does not presently own in exchange for cash or shares of Berkshire Class B
common stock, at the election of each Wesco shareholder. The transaction requires the affirmative
vote of holders of a majority of Wescos outstanding shares in favor of the adoption of the merger
agreement, which will be sought at a special meeting of the shareholders of Wesco, and is subject
to customary closing conditions. The transaction is also subject to a non-waivable condition that
a majority of the outstanding shares not owned by Berkshire (and excluding certain specified
shareholders) vote in favor of the adoption of the merger agreement. Berkshire has agreed to vote
the Wesco shares it owns in favor of the transaction. Closing is expected to occur before the end
of the second quarter of 2011, but there can be no assurance that any transaction will actually be
completed. Reference is made to the Form 8-K filed by Wesco with the Securities and Exchange
Commission (the SEC) on February 7, 2011 for the terms of the transaction and additional
information. That report is available at no charge at Wescos website, www.wescofinancial.com, or
the SECs website, www.sec.gov.
Note 11. Litigation and Environmental Matters
Two lawsuits were filed on February 8, 2011 by plaintiffs claiming to be Wesco shareholders
challenging the transactions contemplated by the merger agreement between Berkshire and Wesco.
Both of the lawsuits name Wesco, Wescos directors, Berkshire and Montana Acquisitions, LLC as
defendants. One of them also names Blue Chip Stamps (a wholly owned subsidiary of Berkshire) and
Wescos Chief Financial Officer as defendants. One of the actions was filed in Delaware Chancery
Court and the other in Los Angeles Superior Court. Both purport to be class actions on behalf of
Wesco shareholders.
The Delaware action is styled Joel Krieger v. Wesco Financial Corporation, et al. The Los
Angeles action is styled James Kinsey v. Wesco Financial Corporation, et al. The lawsuits allege,
among other things, that Wescos directors have breached their fiduciary duties based on
allegations that (i) the consideration being offered is unfair and inadequate, (ii) statements in
Wescos annual reports comparing its prospects for growth with those of Berkshire have been unduly
unfavorable to Wesco, and (iii) the Wesco directors approval of the proposed merger was tainted by
conflicts of interest between Berkshire and the non-Berkshire shareholders of Wesco in breach of
the Boards fiduciary duties. The lawsuits also allege that Berkshire and its affiliates violated
fiduciary duties owed by a majority shareholder and/or aided and abetted the alleged breaches by
Wescos directors. The plaintiffs seek various remedies, including enjoining the transaction from
being consummated in accordance with the agreed-upon terms. The defendants intend to defend
against these and any additional actions asserting similar claims that may be brought in the
future.
Federal and state environmental agencies have made claims relating to alleged contamination of
soil and groundwater with trichloroethylene and perchloroethylene against Precision Brand Products
(PBP), whose results, like those of its parent, Precision Steel, are included in Wescos
industrial segment, and various other businesses situated in an industrial park in Downers Grove,
Illinois. PBP, along with the other businesses, have
Dollar amounts in thousands except for amounts per share
66
been negotiating remedial actions with various governmental entities. Included in other
liabilities on the accompanying consolidated balance sheet is $652 as of December 31, 2010,
representing managements estimate of the remaining costs that are likely to be incurred in
connection with the these matters. Although the ultimate cost is not yet certain, it is not
expected that the ultimate impact of additional future costs, if any, will be significant to Wesco.
Note 12. Quarterly Financial Information
Unaudited quarterly consolidated financial information for 2010 and 2009 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
March 31, |
|
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
|
Total For Year |
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
191,798 |
|
|
$ |
197,092 |
|
|
$ |
197,491 |
|
|
$ |
179,322 |
|
|
$ |
765,703 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
12,327 |
|
|
$ |
31,270 |
|
|
$ |
17,748 |
|
|
$ |
10,867 |
|
|
$ |
72,212 |
|
Per capital share |
|
|
1.73 |
|
|
|
4.39 |
|
|
|
2.49 |
|
|
|
1.53 |
|
|
|
10.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
210,802 |
|
|
$ |
202,515 |
|
|
$ |
203,884 |
|
|
$ |
196,130 |
|
|
$ |
813,331 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
19,959 |
|
|
$ |
12,930 |
|
|
$ |
9,882 |
|
|
$ |
11,302 |
|
|
$ |
54,073 |
|
Per capital share |
|
|
2.80 |
|
|
|
1.82 |
|
|
|
1.39 |
|
|
|
1.58 |
|
|
|
7.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment
gains
(losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before taxes (included in
revenues) |
|
$ |
(259 |
) |
|
$ |
|
|
|
$ |
4,000 |
|
|
$ |
(18,221 |
)* |
|
$ |
(14,480 |
)* |
After taxes (included in
net income) |
|
|
(168 |
) |
|
|
|
|
|
|
2,600 |
|
|
|
(11,844 |
)* |
|
|
($9,412 |
)* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
None |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Includes OTTI losses of $21.0 million ($13.7 million, after taxes), as applicable. |
Note 13. Business Segment Data
Wescos reportable business segments are organized in a manner that reflects how management
views those business activities. The financial information that follows shows data of reportable
segments reconciled to amounts reflected in the Consolidated Financial Statements.
The insurance segment includes the accounts of Wes-FIC and its subsidiary, KBS. Wes-FIC is
engaged in the property and casualty insurance and reinsurance business. For the past three years
its reinsurance business has consisted principally of participation with the Berkshire Insurance
Group in several reinsurance contracts, as follows: (1) since 2008, in a retrocession agreement in
which it is now reinsuring a portion of Swiss Res property-casualty risks incepting over a
five-year period effective in 2008, described more fully in Note 1, and (2) since 2001, in several
pools of aviation-related risks.
Wes-FIC has also participated through the Berkshire Insurance Group in several contracts for
super-catastrophe reinsurance covering hurricane risks in Florida and catastrophic excess-of-loss
risks of a major international reinsurer, in prior years. Because Wescos board of directors
desires that Wesco participate in
Dollar amounts in thousands except for amounts per share
67
insurance and reinsurance activities in which the Berkshire Insurance Group also participates,
it has approved Wes-FICs automatic acceptance of retrocessions of super-catastrophe reinsurance
provided that the following guidelines are met: (1) in order not to delay the acceptance process,
the retrocession is to be accepted without delay in writing in Nebraska by agents of Wes-FIC who
are salaried employees of the Berkshire Insurance Group; (2) any ceding commission received by the
Berkshire Insurance Group cannot exceed 3% of premiums; (3) Wes-FIC is to assume 20% or less of the
total risk; (4) the Berkshire Insurance Group must retain at least 80% of the identical risk; and
(5) the aggregate premiums from this type of business in any twelve-month period cannot exceed 10%
of Wes-FICs net worth.
KBS provides specialized insurance coverage mainly to small- and medium-sized banks in the
Midwestern United States. In addition to generating insurance premiums, Wescos insurance segment
derives dividend and interest income from the investment of float (premiums received before payment
of related claims and expenses) as well as earnings retained and reinvested.
Payments of dividends by insurance subsidiaries are restricted by insurance statutes and
regulations. Without prior regulatory approval, Wescos insurance subsidiaries were able to pay up
to approximately $291,970 as ordinary dividends as of yearend 2010.
Combined shareholders equity of Wes-FIC and KBS determined pursuant to statutory accounting
rules (statutory surplus) was approximately $2,779,000 at December 31, 2010 and $2,568,000 at
December 31, 2009. Statutory surplus differs from the corresponding amount determined on the basis
of GAAP. The major differences between statutory basis accounting and GAAP are that deferred policy
acquisition costs, unrealized gains and losses on investments in securities with fixed maturities
and related deferred income taxes are recognized under GAAP but not for statutory reporting
purposes. In addition, statutory accounting for goodwill of acquired businesses requires
amortization of goodwill over 10 years, whereas under GAAP, goodwill is subject to periodic tests
for impairment.
The furniture rental segment includes the operating accounts of CORT. CORT is a nation-wide
provider of rental furniture, accessories and related services in the rent-to-rent segment of the
furniture industry. It rents high-quality furniture to corporate and individual customers who
desire flexibility in meeting their temporary office, residential or trade show furnishing needs
and who typically do not seek to own such furniture. In addition, CORT sells previously rented
furniture through company-owned clearance centers.
The industrial segment includes the operating accounts of Precision Steel and its
subsidiaries. The Precision Steel group operates two service centers which buy steel and other
metals in the form of sheets or strips, cut these to order and sell them directly to a wide variety
of industrial customers throughout the United States. The Precision Steel group also manufactures
shim stock and other toolroom specialty items and sells them, along with hose clamps and threaded
rod, nationwide, generally through distributors.
Wescos consolidated realized net investment gains and goodwill of acquired businesses, are
shown separately as nonsegment items, consistent with the way Wescos management evaluates the
performance of its operating segments. Other items considered unrelated to Wescos three business
segments include principally (1) investments other than those held by Wes-FIC and KBS, together
with related dividend and interest income, (2) commercial real estate, together with related
revenues and expenses, (3) residential real estate development, and (4) the assets, revenues and
expenses of the parent company.
Dollar amounts in thousands except for amounts per share
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Insurance segment: |
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned |
|
$ |
284,517 |
|
|
$ |
323,221 |
|
|
$ |
237,964 |
|
Dividend and interest income |
|
|
75,643 |
|
|
|
67,253 |
|
|
|
77,914 |
|
Income taxes |
|
|
19,269 |
|
|
|
15,156 |
|
|
|
12,055 |
|
Net income |
|
|
73,051 |
|
|
|
63,003 |
|
|
|
61,332 |
|
Depreciation and amortization other than of discounts and
premiums of investments |
|
|
27 |
|
|
|
26 |
|
|
|
36 |
|
Advertising expense |
|
|
65 |
|
|
|
111 |
|
|
|
138 |
|
Capital expenditures |
|
|
23 |
|
|
|
7 |
|
|
|
4 |
|
Goodwill of acquired businesses |
|
|
26,991 |
|
|
|
26,991 |
|
|
|
26,991 |
|
Assets at yearend |
|
|
3,184,937 |
|
|
|
2,782,500 |
|
|
|
2,363,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture rental segment: |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
367,451 |
|
|
$ |
380,196 |
|
|
$ |
410,043 |
|
Income taxes |
|
|
7,003 |
|
|
|
(1,717 |
) |
|
|
7,006 |
|
Net income (loss) |
|
|
11,480 |
|
|
|
(1,359 |
) |
|
|
15,744 |
|
Depreciation and amortization other than of discounts and
premiums of investments |
|
|
45,815 |
|
|
|
53,783 |
|
|
|
43,195 |
|
Advertising expense |
|
|
10,355 |
|
|
|
12,837 |
|
|
|
16,762 |
|
Interest expense |
|
|
504 |
|
|
|
640 |
|
|
|
1,798 |
|
Capital expenditures |
|
|
4,642 |
|
|
|
2,972 |
|
|
|
7,197 |
|
Goodwill of acquired businesses |
|
|
250,523 |
|
|
|
250,599 |
|
|
|
250,751 |
|
Assets at yearend |
|
|
507,393 |
|
|
|
502,779 |
|
|
|
561,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial segment: |
|
|
|
|
|
|
|
|
|
|
|
|
Sales, service and other revenues |
|
$ |
48,266 |
|
|
$ |
38,380 |
|
|
$ |
60,872 |
|
Income taxes |
|
|
554 |
|
|
|
(357 |
) |
|
|
759 |
|
Net income (loss) |
|
|
1,079 |
|
|
|
(648 |
) |
|
|
842 |
|
Depreciation and amortization |
|
|
404 |
|
|
|
402 |
|
|
|
409 |
|
Advertising expense |
|
|
202 |
|
|
|
211 |
|
|
|
202 |
|
Capital expenditures |
|
|
191 |
|
|
|
230 |
|
|
|
456 |
|
Assets at yearend |
|
|
18,668 |
|
|
|
19,502 |
|
|
|
16,734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment gains: |
|
|
|
|
|
|
|
|
|
|
|
|
Before taxes (included in revenues) |
|
$ |
(14,480 |
) |
|
$ |
|
|
|
$ |
7,006 |
|
After taxes (included in net income) |
|
|
(9,412 |
) |
|
|
|
|
|
|
4,554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other items unrelated to business segments: |
|
|
|
|
|
|
|
|
|
|
|
|
Dividend and interest income |
|
$ |
164 |
|
|
$ |
205 |
|
|
$ |
1,165 |
|
Other revenues |
|
|
4,142 |
|
|
|
4,076 |
|
|
|
3,990 |
|
Income taxes |
|
|
(2,785 |
) |
|
|
(3,501 |
) |
|
|
726 |
|
Net income (loss) |
|
|
(3,986 |
) |
|
|
(6,923 |
) |
|
|
(356 |
) |
Depreciation and amortization |
|
|
321 |
|
|
|
387 |
|
|
|
351 |
|
Capital expenditures |
|
|
48 |
|
|
|
755 |
|
|
|
95 |
|
Assets at yearend |
|
|
80,946 |
|
|
|
96,645 |
|
|
|
109,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenues (total of those set forth above) |
|
$ |
765,703 |
|
|
$ |
813,331 |
|
|
$ |
798,954 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated assets (total of those set forth above) |
|
$ |
3,791,944 |
|
|
$ |
3,401,426 |
|
|
$ |
3,050,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar amounts in thousands except for amounts per share
69
WESCO FINANCIAL CORPORATION
SCHEDULE I CONDENSED FINANCIAL
INFORMATION OF REGISTRANT
BALANCE SHEET
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
41 |
|
|
$ |
18 |
|
Investment in subsidiaries, at cost plus equity in subsidiaries
undistributed earnings and unrealized appreciation |
|
|
2,980,774 |
|
|
|
2,749,442 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,980,815 |
|
|
$ |
2,749,460 |
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders equity: |
|
|
|
|
|
|
|
|
Loans from subsidiaries |
|
$ |
212,192 |
|
|
$ |
198,268 |
|
Income taxes payable |
|
|
(943 |
) |
|
|
128 |
|
Other liabilities |
|
|
3,849 |
|
|
|
347 |
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
215,098 |
|
|
|
198,743 |
|
Shareholders equity (see consolidated balance sheet and statement of
changes in shareholders equity) |
|
|
2,765,717 |
|
|
|
2,550,717 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,980,815 |
|
|
$ |
2,749,460 |
|
|
|
|
|
|
|
|
|
|
STATEMENT OF INCOME
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany interest |
|
|
1,791 |
|
|
|
1,914 |
|
|
|
5,083 |
|
General and administrative |
|
|
5,373 |
|
|
|
1,041 |
|
|
|
1,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,164 |
|
|
|
2,955 |
|
|
|
6,360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before items shown below |
|
|
(7,164 |
) |
|
|
(2,955 |
) |
|
|
(6,360 |
) |
Income taxes |
|
|
(2,507 |
) |
|
|
(1,034 |
) |
|
|
(2,225 |
) |
Equity in undistributed earnings of subsidiaries |
|
|
76,869 |
|
|
|
55,994 |
|
|
|
86,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
72,212 |
|
|
$ |
54,073 |
|
|
$ |
82,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
70
WESCO FINANCIAL CORPORATION
SCHEDULE I CONDENSED FINANCIAL
INFORMATION OF REGISTRANT (Continued)
STATEMENT OF CASH FLOWS
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
72,212 |
|
|
$ |
54,073 |
|
|
$ |
82,116 |
|
Adjustments to reconcile net income with cash flows from
operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Change in income taxes payable currently |
|
|
(1,071 |
) |
|
|
66 |
|
|
|
(417 |
) |
Equity in undistributed earnings of subsidiaries |
|
|
(76,869 |
) |
|
|
(55,994 |
) |
|
|
(86,251 |
) |
Other, net |
|
|
3,502 |
|
|
|
25 |
|
|
|
202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from operating activities |
|
|
(2,226 |
) |
|
|
(1,830 |
) |
|
|
(4,350 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings from subsidiaries, net |
|
|
13,924 |
|
|
|
13,064 |
|
|
|
15,331 |
|
Payment of cash dividends |
|
|
(11,675 |
) |
|
|
(11,249 |
) |
|
|
(10,965 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from financing activities |
|
|
2,249 |
|
|
|
1,815 |
|
|
|
4,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
23 |
|
|
|
(15 |
) |
|
|
16 |
|
Cash and cash equivalents beginning of year |
|
|
18 |
|
|
|
33 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of year |
|
$ |
41 |
|
|
$ |
18 |
|
|
$ |
33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
71