WESCO FINANCIAL CORPORATION

LETTER TO SHAREHOLDERS

To Our Shareholders:

Consolidated net income for the calendar year 2002 was $52,718,000 ($7.40
per share), essentially the same as $52,536,000 ($7.38 per share) in the previous
year.

Wesco has four major subsidiaries: (1) Wesco-Financial Insurance Company

(""Wes-FIC''), headquartered in Omaha and engaged principally in the reinsurance
business, (2) The Kansas Bankers Surety Company (""KBS''), owned by Wes-FIC
and specializing in insurance products tailored to midwestern banks, (3) CORT
Business Services Corporation (""CORT''), headquartered in Fairfax, Virginia and
engaged principally in the furniture rental business, and (4) Precision Steel Ware-
house, Inc. (""Precision Steel''), headquartered in Chicago and engaged in the steel
warehousing and specialty metal products businesses. Consolidated net income for
the two years just ended breaks down as follows (in 000s except for per-share
amounts)(1):
Year Ended
December 31, 2002 December 31, 2001
Per Per
Wesco Wesco
(2)
Amount Share Amount Share(2)

Operating earnings:
Insurance businessesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $49,471 $6.95 $45,254 $6.36
CORT furniture rental business ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,442 .34 13,076 1.84
Precision Steel businesses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 250 .03 388 .05
Goodwill amortization(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (6,814) (.96)
Other(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 555 .08 632 .09
Wesco consolidated net income(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $52,718 $7.40 $52,536 $7.38

(1) All Ñgures are net of income taxes.

(2) Per-share data are based on 7,119,807 shares outstanding. Wesco has had no dilutive capital stock equivalents.

(3) In accordance with a new pronouncement of the Financial Accounting Standards Board, Wesco discontinued goodwill
amortization at the beginning of 2002. The requirement for such amortization has been replaced by a standard that
requires an annual assessment to determine whether the value of goodwill has been impaired, at which time the intangible
would be written down or written oÅ, as appropriate. Had the new accounting standard been in eÅect for 2001, Wesco
would have reported after-tax income of $59,350,000 or $8.34 per share, exclusive of goodwill amortization. Thus,
Wesco's 2002 after-tax net income, on a pro forma basis, actually decreased in 2002 by $6,632,000, or $.94 per share.

(4) Represents income from ownership of the Wesco headquarters oÇce building, primarily leased to outside tenants, and
interest and dividend income from cash equivalents and marketable securities owned outside the insurance subsidiaries,
less interest and other corporate expenses.

This supplementary breakdown of earnings diÅers somewhat from that used in

audited Ñnancial statements which follow standard accounting convention. The
foregoing supplementary breakdown is furnished because it is considered useful to
shareholders. The total consolidated net income shown above is, of course, identical
to the total in our audited Ñnancial statements.

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Insurance Businesses

Consolidated operating earnings from insurance businesses represent the com-

bination of the results of their insurance underwriting with their net investment
income. Following is a summary of these Ñgures as they pertain to all insurance
operations except The Kansas Bankers Surety Company (""KBS''), which is sepa-
rately discussed below.
Pre-Tax After-Tax
Operating Earnings Operating Earnings
2002 2001 2002 2001

Underwriting gain (loss) ÏÏÏÏÏÏÏÏ $ 92,000 $(12,403,000) $(1,926,000) $(8,062,000)

Net investment income ÏÏÏÏÏÏÏÏÏ 64,484,000 64,529,000 44,030,000 44,001,000
Operating income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $64,576,000 $ 52,126,000 $42,104,000 $35,939,000

As shown above, operating income includes signiÑcant net investment income,

representing dividends and interest earned from marketable securities. Our discus-
sion will concentrate on insurance underwriting, not on the results from investments.

Results for 2002 from insurance underwriting, other than at KBS, were sharply
improved from those for 2001. Results for 2001 were the worst since we entered the
insurance business in 1985. Results for 2002 were satisfactory.

The nature of our non-KBS insurance business was roughly described in our year
2000 Annual Report wherein we reported to shareholders that we were not currently
active in super-catastrophe reinsurance and had never suÅered a super-catastrophe
loss, but that shareholders should continue to realize that Wes-FIC's marvelous
underwriting results were sure to be followed, sometime, by one or more horrible
underwriting losses.

When we said that, we had in mind a natural catastrophe. But, instead, in 2001
we were clobbered by a man-made catastrophe on September 11 Ì an event that
delivered the insurance industry its largest loss in history. Fortunately, we recorded a
loss of only $10 million before income taxes ($6.5 million, after taxes) in connection
with that event. The $10 million is an estimate and is subject to considerable
estimation error. It will literally take years to resolve complicated coverage issues, as
well as to develop an accurate estimation of insured losses that will ultimately be
incurred. That $10 million, however, was the principal cause of our substantial
underwriting loss in 2001.

At the end of 2002 we retained about $15 million in invested assets, oÅset by
claims reserves, from our former reinsurance arrangement with Fireman's Fund
Group. This arrangement was terminated August 31, 1989. However, it will take a
long time before all claims are settled, and, meanwhile, Wes-FIC is being helped
over many years by proceeds from investing ""Öoat'' and by favorable loss develop-
ment, which has enabled it to reduce the liability for losses and loss-related
expenses, beneÑting after-tax operating earnings in 2002 and 2001 by $.8 million
each year.

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 We engage in other reinsurance business, including large and small quota share
arrangements similar and dissimilar to our previous reinsurance contract with Fire-
man's Fund Group, and, from time to time, in super-cat reinsurance, described in
detail in previous annual reports, which Wesco shareholders should re-read each
year.
Following is a summary of Wes-FIC's current reinsurance activity:
‚ A three-year arrangement entered into in 2000 through an insurance subsidi-
ary of Berkshire Hathaway, our 80%-owning parent, as intermediary without
ceding commission, for participation to the extent of 3.3% in certain property
and casualty exposure ceded by a large, unaÇliated insurer. The terms of this
arrangement are identical to those accepted by that Berkshire subsidiary
except as to the amount of the participation.
‚ Participation in four risk pools managed by a Berkshire insurance subsidiary
(also acting as intermediary without ceding commission) covering hull,
liability, workers' compensation and satellite exposures relating to the aviation
industry as follows: with respect to 2001, to the extent of 3% for each pool; for
2002, 13% of the hull and liability pools, 3% of the workers' compensation
pool and, eÅective mid-year, 15.5% of the satellite pool; and, for 2003, 10% of
the hull and liability pools only. The Berkshire subsidiary provides a portion
of the reinsurance protection to these aviation risk pools, and therefore to
Wes-FIC.
In much reinsurance sold by us, other Berkshire subsidiaries sold several times as
much reinsurance to the same customers on the same terms. In certain instances but
not always, such subsidiaries have taken from us a 3%-of-premiums ceding commis-
sion on premium volume passed through them to Wes-FIC. Excepting this ceding
commission, Wes-FIC has had virtually no insurance-acquisition or insurance admin-
istration costs.
KBS, purchased by Wes-FIC in 1996 for approximately $80 million in cash,
contributed $7.4 million to the after-tax operating earnings of the insurance busi-
nesses in 2002 and $9.3 million in 2001. The 2001 Ñgure is before goodwill
amortization of $.8 million; there was no goodwill amortization for 2002. Prior to
2002 goodwill was amortized mainly on a straight-line basis over 40 years. As
explained above, as of the beginning of 2002, Wesco discontinued amortization of
goodwill and became subject to other changes in goodwill accounting, as required
by the Financial Accounting Standards Board. The results of KBS have been com-
bined with those of Wes-FIC, and are included in the table on page 1 in the category
of ""insurance businesses.''
KBS was chartered in 1909 to underwrite deposit insurance for Kansas banks. Its
oÇces are in Topeka, Kansas. Over the years its service has continued to adapt to the
changing needs of the banking industry. Today its customer base, consisting mostly
of small and medium-sized community banks, is spread throughout 27 mainly
midwestern states. In addition to bank deposit guaranty bonds which insure deposits

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in excess of FDIC coverage, KBS oÅers directors and oÇcers indemnity policies, bank
employment practices policies, bank annuity and mutual funds indemnity policies,
and bank insurance agents professional errors and omissions indemnity policies.
Also, KBS has recently begun oÅering Internet banking catastrophe theft insurance.

Beginning in 2003, KBS revised the allocation of its reinsurance between a

Berkshire insurance subsidiary and a non-aÇliate: Under the previous program, the
Berkshire subsidiary and the non-aÇliate each reinsured 50% of the per-occurrence
risks of $3 million in excess of $2 million, and the non-aÇliate also reinsured 70% of
the per-occurrence risks up to $10 million above $5 million, all for approximately 5%
of KBS's premiums. Beginning in 2003, the Berkshire subsidiary has replaced the
non-aÇliate on the second layer, and total reinsurance costs are expected to
aggregate 10%-12% of premiums. Reinsurance costs have risen greatly throughout
the insurance industry, and the revised arrangement is considered fair by all in-
volved, all factors considered. (Indeed, we believe that our combined insurance
arrangements through Berkshire constitute a net advantage to Wes-FIC that would
not be available from Berkshire in the absence of its 80% ownership of Wesco, and
such combined insurance arrangements have worked out well so far, even after
taking into account our September 11 loss in 2001.)

KBS increased the volume of business retained eÅective in 1998. It had

previously ceded almost half of its premium volume to reinsurers. Now it reinsures
only about 5%. As we indicated last year, the increased volume of business retained
comes, of course, with increased irregularity in the income stream.

The combined ratio of an insurance company represents the percentage that its
underwriting losses and expenses bear to its premium revenues. KBS's combined
ratio has been much better than average for insurers, at 71.3% for 2002 and 55.1%
for 2001, and we continue to expect volatile but favorable long-term eÅects from
increased insurance retained.

KBS is ably run by Donald Towle, President, assisted by 15 dedicated oÇcers

and employees.

CORT Business Services Corporation (""CORT'')

In February 2000, Wesco purchased CORT Business Services Corporation

(""CORT'') for $386 million in cash.

CORT is a very long established company that is the country's leader in rentals
of furniture that lessees have no intention of buying. In the trade, people call CORT's
activity ""rent-to-rent'' to distinguish it from ""lease-to-purchase'' businesses that are,
in essence, installment sellers of furniture.

However, just as Hertz, as a rent-to-rent auto lessor in short-term arrangements,

must be skilled in selling used cars, CORT must be and is skilled in selling used
furniture.

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 CORT's revenues totaled $389 million for calendar 2002, versus $395 million for
calendar 2001. Of these amounts, furniture rental revenues were $316 million and
$329 million, and furniture sales revenues were $73 million and $66 million. CORT
contributed $2.4 million and $13.1 million to Wesco's consolidated operating
income for 2002 and 2001, versus $29.0 million for the ten months that we owned it
in 2000. These Ñgures are before (1) goodwill amortization of zero for 2002 (see
discussion above), $6.0 million for 2001 and $5.1 million for 2000, and (2) realized
securities losses of $.7 million in 2000.

CORT's after-tax operating income (before goodwill amortization) for the entire
calendar year 2000 was $33.4 million compared to only $2.4 million for 2002 and
$13.1 million for 2001. 2002 was a terrible year in the ""rent-to-rent'' segment of the
furniture rental business.

When we purchased CORT early in 2000, its furniture rental business was
rapidly growing, reÖecting the strong U.S. economy, phenomenal business expansion
and explosive growth of IPOs and the high-tech sector. Beginning late in 2000,
however, new business coming into CORT began to decline. With the burst of the
dot-com bubble, the events of September 11, and continued weakness in the
economy, CORT's operations have been hammered. Obviously, when we purchased
CORT we were poor predictors of near-term industry-wide prospects of the ""rent-to-
rent'' sector of the furniture business.

Moreover, CORT started up a new subsidiary during 2001, Relocation Central

Corporation, whose operations should be considered as still in a ""start-up'' phase
and, so far, have generated pre-tax losses amounting to $12.8 million in 2002 and
$10.8 million in 2001. The results of its operations have been consolidated with
those reported for CORT, shown above.

Relocation Central has developed a virtual call center which carries out an Internet-
based furniture and apartment leads operation ([Link]), and it
markets CORT's furniture rental services to real estate investment trusts, owners of
many major apartment communities. As a result of the acquisition of its largest
competitor in December 2002, Relocation Central operates in 20 metropolitan cities
in sixteen states. CORT is hopeful that, through Relocation Central, it will ultimately
become the principal source of rental furniture to the apartment industry, but this
outcome is far from certain.

We expect to report in due course that all CORT operations have become more
satisfactory, but prospects for 2003 do not seem good. However, there is good news
along with bad. CORT has operated at a positive cash Öow and the general distress in
its Ñeld permitted various small expansions. During the past two years it invested
$57 million in business expansion through acquisitions of several small businesses
and reduced its line-of-credit debt by $30 million. CORT would not be making these
acquisitions if we believed its furniture rental business prospects were permanently
impaired.

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 When Wesco paid $386 million for CORT, about 60% of the purchase price was
attributable to goodwill, an intangible balance sheet asset.

Wesco's consolidated balance sheet now contains about $266 million in good-
will (including $27 million from Wesco's 1996 purchase of KBS). The Financial
Accounting Standards Board recently adopted a rule which became eÅective in 2002
that no longer requires automatic amortization of acquired goodwill. Thus, earnings
we report more closely reÖect microeconomic reality as we appraise it. As above
shown in the Ñrst page of this letter, Wesco's reported earnings were reduced by
about $7 million of mostly-non-tax-deductible amortization of goodwill for 2001,
versus no such amortization for 2002.

More details with respect to CORT are contained throughout this annual report,
to which your careful attention is directed.

CORT has long been headed by Paul Arnold, age 56, who is a star executive as is
convincingly demonstrated by his long record as CEO of CORT. We are absolutely
delighted to have Paul and CORT within Wesco, and are pleased with CORT's
progress under his leadership, despite adverse developments in 2001 and 2002. We
continue to expect a considerable expansion of CORT's business and earnings at
some future time.

Precision Steel Warehouse, Inc. (""Precision Steel'')

The businesses of Wesco's Precision Steel subsidiary, headquartered in the

outskirts of Chicago at Franklin Park, Illinois, contributed $.3 million to Wesco's net
operating earnings in 2002, down from $.4 million in 2001 and $1.3 million in 2000.
Had it not been for LIFO inventory accounting adjustments, Precision Steel would
have reported $.1 million for 2002 and no income at all for the year 2001, versus
$1.7 million for 2000.

Last year we reported that the U.S. steel industry was generally a disaster in
2000, and that Precision Steel suÅered worse eÅects than occurred for it in previous
general declines in the U.S. steel business. The year 2001 was much worse. The
absence of Precision Steel's operating earnings for 2001, before the eÅect of the
LIFO adjustment, was due principally to a signiÑcant reduction in demand for steel,
combined with intensiÑed competition above the Ñerce level encountered in the
prior year. This resulted in a 29.7% decrease in pounds of product sold. Sales
revenues declined 25.6%.

We do not regard earnings changes from LIFO accounting adjustments, up or

down, as material in predicting future earning power.

Terry Piper, who became Precision Steel's President and Chief Executive OÇcer
late in 1999, has done an excellent job in leading Precision Steel through diÇcult
years.

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Tag Ends from Savings and Loan Days
All that now remains outside Wes-FIC but within Wesco as a consequence of
Wesco's former involvement with Mutual Savings, Wesco's long-held savings and
loan subsidiary, is a small real estate subsidiary, MS Property Company, that holds tag
ends of real estate assets with a net book value of about $5.8 million, consisting
mainly of the nine-story commercial oÇce building in downtown Pasadena, where
Wesco is headquartered. MS Property Company's results of operations, immaterial
versus Wesco's present size, are included in the breakdown of earnings on page 1
within ""other operating earnings.''

Other Operating Earnings

Other operating earnings, net of interest paid and general corporate expenses,
amounted to $.6 million in both 2002 and 2001. Sources were (1) rents ($3.3 mil-
lion gross in 2002) from Wesco's Pasadena oÇce property (leased almost entirely to
outsiders, including Citibank as the ground Öoor tenant), and (2) interest and
dividends from cash equivalents and marketable securities held outside the insur-
ance subsidiaries, less (3) general corporate expenses plus minor expenses involving
tag-end real estate.

Corporate Governance
Two of our long-standing directors, Jim Gamble and Dave Robinson, are not
standing for reelection. At practically no pay, they have been wise and honorable
protectors of Wesco shareholders for many decades going back to a time before
Berkshire Hathaway had any interest in Wesco. During their long tenure the value of
Wesco stock appreciated about 5,000 percent. We will much miss their directorial
service, but will not lose touch. They both retain oÇces in our building and will
surely be in our oÇces from time to time.

Consolidated Balance Sheet and Related Discussion

Wesco carries its investments at market value, with unrealized appreciation,
after income tax eÅect, included as a separate component of shareholders' equity,
and related taxes included in income taxes payable, in its consolidated balance
sheet. As indicated in the accompanying Ñnancial statements, Wesco's net worth, as
accountants compute it under their conventions, increased to $1.96 billion ($275
per Wesco share) at yearend 2002 from $1.91 billion ($269 per Wesco share) at
yearend 2001. The main cause of increase was net income after deduction of
dividends paid to shareholders.
The foregoing $275-per-share book value approximates liquidation value assum-
ing that all Wesco's non-security assets would liquidate, after taxes, at book value.
Of course, so long as Wesco does not liquidate, and does not sell any
appreciated securities, it has, in eÅect, an interest-free ""loan'' from the government
equal to its deferred income taxes on the unrealized gains, subtracted in determining
its net worth. This interest-free ""loan'' from the government is at this moment

7
working for Wesco shareholders and amounted to about $28 per Wesco share at
yearend 2002.

However, some day, parts of the interest-free ""loan'' may be removed as

securities are sold. Therefore, Wesco's shareholders have no perpetual advantage
creating value for them of $28 per Wesco share. Instead, the present value of
Wesco's shareholders' advantage must logically be much lower than $28 per Wesco
share.

Business and human quality in place at Wesco continues to be not nearly as

good, all factors considered, as that in place at Berkshire Hathaway. Wesco is not an
equally-good-but-smaller version of Berkshire Hathaway, better because its small
size makes growth easier. Instead, each dollar of book value at Wesco continues
plainly to provide much less intrinsic value than a similar dollar of book value at
Berkshire Hathaway. Moreover, the quality disparity in book value's intrinsic merits
has, in recent years, continued to widen in favor of Berkshire Hathaway.

All that said, we make no attempt to appraise relative attractiveness for invest-
ment of Wesco versus Berkshire Hathaway stock at present stock-market quotations.

To progress from this point at a satisfactory rate, Wesco plainly needs more
favorable investment opportunities, recognizable as such by its management, prefer-
ably in whole companies, but, alternatively, in marketable securities to be purchased
by Wesco's insurance subsidiaries. Our views regarding the general prospects for
investment in common stocks are contained in the following excerpt from Warren
BuÅett's recent letter to shareholders of our parent company:

""We continue to do little in equities. ®We© are increasingly comfortable

with our holdings in ®our© major investees because most of them have in-
creased their earnings while their valuations have decreased. But we are not
inclined to add to them. Though these enterprises have good prospects, we
don't yet believe their shares are undervalued.

""In our view, the same conclusion Ñts stocks generally. Despite three years
of falling prices, which have signiÑcantly improved the attractiveness of com-
mon stocks, we still Ñnd very few that even mildly interest us. That dismal fact is
testimony to the insanity of valuations reached during The Great Bubble.
Unfortunately, the hangover may prove to be proportional to the binge.

""The aversion to equities that ®we© exhibit today is far from congenital. We
love owning common stocks Ì if they can be purchased at attractive prices. In
®(Warren states:) my© 61 years of investing, 50 or so years have oÅered that
kind of opportunity. There will be years like that again. Unless, however, we see
a very high probability of at least 10% pre-tax returns (which translates to
61/2-7% after corporate tax), we will sit on the sidelines. With short-term money
returning less than 1% after-tax, sitting it out is no fun. But occasionally
successful investing requires inactivity.''

8
 In fact, the one thing that should interest Wesco shareholders most with respect
to 2002 is that, as in 2001, Wesco found no new common stocks for our insurance
companies to buy.
The Board of Directors recently increased Wesco's regular dividend from 321/2
cents per share to 331/2 cents per share, payable March 5, 2003, to shareholders of
record as of the close of business on February 5, 2003.
This annual report contains Form 10-K, a report Ñled with the Securities and
Exchange Commission, and includes detailed information about Wesco and its
subsidiaries as well as audited Ñnancial statements bearing extensive footnotes. As
usual, your careful attention is sought with respect to these items.

Charles T. Munger
Chairman of the Board

March 6, 2003