a6021509.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended June 30, 2009
OR
¨
|
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 001-14905
BERKSHIRE
HATHAWAY INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
47-0813844
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer Identification
Number)
|
3555
Farnam Street, Omaha, Nebraska 68131
(Address
of principal executive office)
(Zip
Code)
(402)
346-1400
(Registrant’s
telephone number, including area code)
(Former
name, former address and former fiscal year, if changed since last
report)
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 and (2) has been subject to such filing
requirements for the past 90 days. Yes x No ¨
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 (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes x No ¨
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.
Large
accelerated filer x
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨
|
Smaller reporting company ¨
|
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ¨ No x
Number of
shares of common stock outstanding as of July 31, 2009:
Class A
— 1,057,259
Class B
—14,834,062
BERKSHIRE
HATHAWAY INC.
|
Page No.
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
3
|
|
|
4
|
|
|
5-20
|
|
|
21-33
|
|
|
33
|
|
|
33
|
|
|
|
|
|
|
|
|
|
34
|
|
|
34
|
|
|
34
|
|
|
34
|
|
|
34
|
|
|
34
|
|
|
35
|
|
|
|
35
|
and
Subsidiaries
CONDENSED
CONSOLIDATED BALANCE SHEETS
(dollars
in millions)
|
|
June
30,
2009
|
|
|
December 31,
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Insurance
and Other:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
21,439 |
|
|
$ |
24,302 |
|
Investments:
|
|
|
|
|
|
|
|
|
Fixed
maturity securities
|
|
|
32,018 |
|
|
|
27,115 |
|
Equity
securities
|
|
|
45,794 |
|
|
|
49,073 |
|
Other
|
|
|
30,365 |
|
|
|
21,535 |
|
Receivables
|
|
|
15,778 |
|
|
|
14,925 |
|
Inventories
|
|
|
6,387 |
|
|
|
7,500 |
|
Property,
plant and equipment
|
|
|
17,016 |
|
|
|
16,703 |
|
Goodwill
|
|
|
27,535 |
|
|
|
27,477 |
|
Other
|
|
|
13,306 |
|
|
|
13,257 |
|
|
|
|
209,638 |
|
|
|
201,887 |
|
|
|
|
|
|
|
|
|
|
Utilities
and Energy:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
875 |
|
|
|
280 |
|
Property,
plant and equipment
|
|
|
29,987 |
|
|
|
28,454 |
|
Goodwill
|
|
|
5,363 |
|
|
|
5,280 |
|
Other
|
|
|
5,597 |
|
|
|
7,556 |
|
|
|
|
41,822 |
|
|
|
41,570 |
|
|
|
|
|
|
|
|
|
|
Finance
and Financial Products:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
2,197 |
|
|
|
957 |
|
Investments
in fixed maturity securities
|
|
|
4,150 |
|
|
|
4,517 |
|
Loans
and finance receivables
|
|
|
13,631 |
|
|
|
13,942 |
|
Goodwill
|
|
|
1,024 |
|
|
|
1,024 |
|
Other
|
|
|
3,184 |
|
|
|
3,502 |
|
|
|
|
24,186 |
|
|
|
23,942 |
|
|
|
$ |
275,646 |
|
|
$ |
267,399 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Insurance
and Other:
|
|
|
|
|
|
|
|
|
Losses
and loss adjustment expenses
|
|
$ |
58,867 |
|
|
$ |
56,620 |
|
Unearned
premiums
|
|
|
8,831 |
|
|
|
7,861 |
|
Life
and health insurance benefits
|
|
|
3,898 |
|
|
|
3,619 |
|
Accounts
payable, accruals and other liabilities
|
|
|
14,676 |
|
|
|
14,987 |
|
Notes
payable and other borrowings
|
|
|
4,379 |
|
|
|
4,349 |
|
|
|
|
90,651 |
|
|
|
87,436 |
|
Utilities
and Energy:
|
|
|
|
|
|
|
|
|
Accounts
payable, accruals and other liabilities
|
|
|
5,800 |
|
|
|
6,175 |
|
Notes
payable and other borrowings
|
|
|
19,708 |
|
|
|
19,145 |
|
|
|
|
25,508 |
|
|
|
25,320 |
|
|
|
|
|
|
|
|
|
|
Finance
and Financial Products:
|
|
|
|
|
|
|
|
|
Accounts
payable, accruals and other liabilities
|
|
|
2,580 |
|
|
|
2,656 |
|
Derivative
contract liabilities
|
|
|
12,299 |
|
|
|
14,612 |
|
Notes
payable and other borrowings
|
|
|
14,697 |
|
|
|
13,388 |
|
|
|
|
29,576 |
|
|
|
30,656 |
|
Income
taxes, principally deferred
|
|
|
11,074 |
|
|
|
10,280 |
|
Total
liabilities
|
|
|
156,809 |
|
|
|
153,692 |
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|
Common
stock and capital in excess of par value
|
|
|
27,089 |
|
|
|
27,141 |
|
Accumulated
other comprehensive income
|
|
|
7,505 |
|
|
|
3,954 |
|
Retained
earnings
|
|
|
79,933 |
|
|
|
78,172 |
|
Berkshire
Hathaway shareholders’ equity
|
|
|
114,527 |
|
|
|
109,267 |
|
Noncontrolling
interests
|
|
|
4,310 |
|
|
|
4,440 |
|
Total
shareholders’ equity
|
|
|
118,837 |
|
|
|
113,707 |
|
|
|
$ |
275,646 |
|
|
$ |
267,399 |
|
See
accompanying Notes to Condensed Consolidated Financial
Statements
and
Subsidiaries
CONDENSED
CONSOLIDATED STATEMENTS OF EARNINGS
(dollars
in millions except per share amounts)
|
|
Second
Quarter
|
|
|
First
Six Months
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
and Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
premiums earned
|
|
$ |
6,485 |
|
|
$ |
6,231 |
|
|
$ |
14,668 |
|
|
$ |
12,440 |
|
Sales
and service revenues
|
|
|
15,587 |
|
|
|
17,332 |
|
|
|
29,897 |
|
|
|
32,092 |
|
Interest,
dividend and other investment income
|
|
|
1,454 |
|
|
|
1,261 |
|
|
|
2,772 |
|
|
|
2,445 |
|
Investment
gains/losses
|
|
|
33 |
|
|
|
671 |
|
|
|
(429 |
) |
|
|
786 |
|
Other-than-temporary
impairments of investments
|
|
|
(30 |
) |
|
|
(429 |
) |
|
|
(3,126 |
) |
|
|
(429 |
) |
|
|
|
23,529 |
|
|
|
25,066 |
|
|
|
43,782 |
|
|
|
47,334 |
|
Utilities
and Energy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
|
2,502 |
|
|
|
2,992 |
|
|
|
5,471 |
|
|
|
6,348 |
|
Other
|
|
|
153 |
|
|
|
43 |
|
|
|
133 |
|
|
|
81 |
|
|
|
|
2,655 |
|
|
|
3,035 |
|
|
|
5,604 |
|
|
|
6,429 |
|
Finance
and Financial Products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
419 |
|
|
|
458 |
|
|
|
837 |
|
|
|
896 |
|
Investment
gains/losses
|
|
|
(30 |
) |
|
|
4 |
|
|
|
62 |
|
|
|
4 |
|
Derivative
gains/losses
|
|
|
2,357 |
|
|
|
689 |
|
|
|
840 |
|
|
|
(952 |
) |
Other
|
|
|
677 |
|
|
|
841 |
|
|
|
1,266 |
|
|
|
1,557 |
|
|
|
|
3,423 |
|
|
|
1,992 |
|
|
|
3,005 |
|
|
|
1,505 |
|
|
|
|
29,607 |
|
|
|
30,093 |
|
|
|
52,391 |
|
|
|
55,268 |
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
and Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
losses and loss adjustment expenses
|
|
|
4,072 |
|
|
|
3,695 |
|
|
|
10,086 |
|
|
|
7,735 |
|
Life
and health insurance benefits
|
|
|
403 |
|
|
|
452 |
|
|
|
885 |
|
|
|
942 |
|
Insurance
underwriting expenses
|
|
|
1,885 |
|
|
|
1,524 |
|
|
|
3,233 |
|
|
|
2,921 |
|
Cost
of sales and services
|
|
|
13,128 |
|
|
|
14,106 |
|
|
|
25,086 |
|
|
|
26,214 |
|
Selling,
general and administrative expenses
|
|
|
2,073 |
|
|
|
2,049 |
|
|
|
4,036 |
|
|
|
3,909 |
|
Interest
expense
|
|
|
38 |
|
|
|
40 |
|
|
|
72 |
|
|
|
73 |
|
|
|
|
21,599 |
|
|
|
21,866 |
|
|
|
43,398 |
|
|
|
41,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilities
and Energy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales and operating expenses
|
|
|
1,955 |
|
|
|
2,410 |
|
|
|
4,310 |
|
|
|
4,994 |
|
Interest
expense
|
|
|
298 |
|
|
|
296 |
|
|
|
589 |
|
|
|
590 |
|
|
|
|
2,253 |
|
|
|
2,706 |
|
|
|
4,899 |
|
|
|
5,584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance
and Financial Products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
174 |
|
|
|
157 |
|
|
|
337 |
|
|
|
306 |
|
Other
|
|
|
790 |
|
|
|
893 |
|
|
|
1,509 |
|
|
|
1,660 |
|
|
|
|
964 |
|
|
|
1,050 |
|
|
|
1,846 |
|
|
|
1,966 |
|
|
|
|
24,816 |
|
|
|
25,622 |
|
|
|
50,143 |
|
|
|
49,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
before income taxes and equity method earnings
|
|
|
4,791 |
|
|
|
4,471 |
|
|
|
2,248 |
|
|
|
5,924 |
|
Income
tax expense
|
|
|
1,520 |
|
|
|
1,443 |
|
|
|
506 |
|
|
|
1,851 |
|
Earnings
from equity method investments
|
|
|
113 |
|
|
|
— |
|
|
|
196 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
|
3,384 |
|
|
|
3,028 |
|
|
|
1,938 |
|
|
|
4,073 |
|
Less:
Earnings attributable to noncontrolling interests
|
|
|
89 |
|
|
|
148 |
|
|
|
177 |
|
|
|
253 |
|
Net
earnings attributable to Berkshire Hathaway
|
|
$ |
3,295 |
|
|
$ |
2,880 |
|
|
$ |
1,761 |
|
|
$ |
3,820 |
|
Average
common shares outstanding *
|
|
|
1,551,724 |
|
|
|
1,548,982 |
|
|
|
1,550,610 |
|
|
|
1,548,688 |
|
Net
earnings per share attributable to Berkshire Hathaway shareholders
*
|
|
$ |
2,123 |
|
|
$ |
1,859 |
|
|
$ |
1,136 |
|
|
$ |
2,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Average shares outstanding
include average Class A common shares and average Class B common
shares determined on an equivalent Class A common stock basis. Net
earnings per common share attributable to Berkshire Hathaway shown above
represents net earnings per equivalent Class A common share. Net
earnings per Class B common share is equal to one-thirtieth (1/30) of
such amount.
|
See
accompanying Notes to Condensed Consolidated Financial Statements
and
Subsidiaries
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars
in millions)
|
|
First
Six Months
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
Net
cash flows from operating activities
|
|
$ |
7,497 |
|
|
$ |
4,991 |
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of fixed maturity securities
|
|
|
(7,450 |
) |
|
|
(26,754 |
) |
Purchases
of equity securities
|
|
|
(974 |
) |
|
|
(5,513 |
) |
Purchases
of other investments
|
|
|
(6,068 |
) |
|
|
— |
|
Sales
of fixed maturity securities
|
|
|
2,282 |
|
|
|
11,950 |
|
Redemptions
and maturities of fixed maturity securities
|
|
|
2,716 |
|
|
|
6,807 |
|
Sales
of equity securities
|
|
|
1,343 |
|
|
|
1,764 |
|
Purchases
of loans and finance receivables
|
|
|
(148 |
) |
|
|
(1,045 |
) |
Principal
collections on loans and finance receivables
|
|
|
356 |
|
|
|
370 |
|
Acquisitions
of businesses
|
|
|
(221 |
) |
|
|
(5,424 |
) |
Purchases
of property, plant and equipment
|
|
|
(2,633 |
) |
|
|
(2,538 |
) |
Other
|
|
|
1,156 |
|
|
|
959 |
|
Net
cash flows from investing activities
|
|
|
(9,641 |
) |
|
|
(19,424 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from borrowings of finance businesses
|
|
|
1,504 |
|
|
|
4,118 |
|
Proceeds
from borrowings of utilities and energy businesses
|
|
|
992 |
|
|
|
1,047 |
|
Proceeds
from other borrowings
|
|
|
58 |
|
|
|
84 |
|
Repayments
of borrowings of finance businesses
|
|
|
(216 |
) |
|
|
(2,602 |
) |
Repayments
of borrowings of utilities and energy businesses
|
|
|
(230 |
) |
|
|
(1,120 |
) |
Repayments
of other borrowings
|
|
|
(306 |
) |
|
|
(133 |
) |
Change
in short term borrowings
|
|
|
(339 |
) |
|
|
(107 |
) |
Acquisitions
of noncontrolling interests and other
|
|
|
(387 |
) |
|
|
(31 |
) |
Net
cash flows from financing activities
|
|
|
1,076 |
|
|
|
1,256 |
|
Effects
of foreign currency exchange rate changes
|
|
|
40 |
|
|
|
7 |
|
Decrease
in cash and cash equivalents
|
|
|
(1,028 |
) |
|
|
(13,170 |
) |
Cash
and cash equivalents at beginning of year *
|
|
|
25,539 |
|
|
|
44,329 |
|
Cash
and cash equivalents at end of first six months *
|
|
$ |
24,511 |
|
|
$ |
31,159 |
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$ |
1,333 |
|
|
$ |
1,921 |
|
Interest
of finance and financial products businesses
|
|
|
299 |
|
|
|
257 |
|
Interest
of utilities and energy businesses
|
|
|
556 |
|
|
|
592 |
|
Interest
of insurance and other businesses
|
|
|
74 |
|
|
|
93 |
|
Non-cash
investing activity:
|
|
|
|
|
|
|
|
|
Liabilities
assumed in connection with acquisitions of businesses
|
|
|
— |
|
|
|
4,309 |
|
|
|
|
|
|
|
|
|
|
*
Cash and cash equivalents are comprised of the following:
|
|
|
|
|
|
|
|
|
Beginning
of year—
|
|
|
|
|
|
|
|
|
Insurance
and Other
|
|
$ |
24,302 |
|
|
$ |
37,703 |
|
Utilities
and Energy
|
|
|
280 |
|
|
|
1,178 |
|
Finance
and Financial Products
|
|
|
957 |
|
|
|
5,448 |
|
|
|
$ |
25,539 |
|
|
$ |
44,329 |
|
|
|
|
|
|
|
|
|
|
End
of first six months—
|
|
|
|
|
|
|
|
|
Insurance
and Other
|
|
$ |
21,439 |
|
|
$ |
28,148 |
|
Utilities
and Energy
|
|
|
875 |
|
|
|
1,002 |
|
Finance
and Financial Products
|
|
|
2,197 |
|
|
|
2,009 |
|
|
|
$ |
24,511 |
|
|
$ |
31,159 |
|
See
accompanying Notes to Condensed Consolidated Financial Statements
and
Subsidiaries
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2009
Note
1. General
The
accompanying unaudited Condensed Consolidated Financial Statements include the
accounts of Berkshire Hathaway Inc. (“Berkshire” or “Company”) consolidated with
the accounts of all its subsidiaries and affiliates in which Berkshire
holds controlling financial interests as of the financial statement date.
Reference is made to Berkshire’s most recently issued Annual Report on Form 10-K
(“Annual Report”) that included information necessary or useful to understanding
Berkshire’s businesses and financial statement presentations. In particular,
Berkshire’s significant accounting policies and practices were presented as Note
1 to the Consolidated Financial Statements included in the Annual Report.
Certain immaterial amounts in 2008 have been reclassified to conform with the
current year presentation. Financial information in this Report reflects any
adjustments (consisting only of normal recurring adjustments) that are, in the
opinion of management, necessary to a fair statement of results for the interim
periods in accordance with accounting principles generally accepted in the
United States (“GAAP”).
For a
number of reasons, Berkshire’s results for interim periods are not normally
indicative of results to be expected for the year. The timing and magnitude of
catastrophe losses incurred by insurance subsidiaries and the estimation error
inherent to the process of determining liabilities for unpaid losses of
insurance subsidiaries can be relatively more significant to results of interim
periods than to results for a full year. Variations in the amounts and timing of
investment gains/losses and other-than-temporary impairments of investments can
cause significant variations in periodic net earnings. Investment gains/losses
are recorded when investments are sold or in instances when investments are
required to be marked-to-market. In addition, changes in the fair value of
derivative assets/liabilities associated with derivative contracts that do not
qualify for hedge accounting treatment can cause significant variations in
periodic net earnings.
Note
2. Accounting pronouncements adopted in 2009
As of
January 1, 2009, Berkshire adopted SFAS No. 160, “Noncontrolling
Interests in Consolidated Financial Statements—an amendment of ARB No. 51”
(“SFAS 160”). SFAS 160 requires that noncontrolling interests (formerly known as
“minority interests”) be displayed in the consolidated balance sheet as a
separate component of shareholders’ equity and that the consolidated net
earnings attributable to the noncontrolling interests be clearly indentified and
presented in the consolidated statement of earnings. In addition, changes in
ownership interests where the parent retains a controlling interest are to be
reported as transactions affecting shareholders’ equity. Previously such
transactions were reported as additional investment purchases (potentially
resulting in recognition of additional other assets, including goodwill, or
liabilities). During the first six months of 2009, Berkshire acquired certain
noncontrolling interests in subsidiaries that resulted in a reduction to
shareholders’ equity attributable to Berkshire of approximately $118 million,
representing the excess of consideration paid over the previously recorded
balance sheet carrying amount of the acquired noncontrolling (minority)
interests.
Effective
April 1, 2009, Berkshire adopted three Staff Positions (“FSP”) that were issued
by the FASB in April 2009 to amend Financial Accounting Standards (“FAS”)
relating to financial instruments. These FSP’s are discussed in the following
three paragraphs.
FSP FAS
115-2 and FAS 124-2 “Recognition and Presentation of Other-Than-Temporary
Impairments” amends the recognition, measurement and presentation standards for
other-than-temporary impairments of debt securities and requires additional
disclosure requirements for both debt and equity securities. With respect to an
investment in a debt security, an other-than-temporary impairment occurs if the
investor (a) intends to sell before amortized cost is recovered,
(b) will more likely than not be required to sell before amortized cost is
recovered or (c) does not expect to ultimately recover the amortized cost
basis even if it does not intend to sell. Under (a) and (b) the entire
other-than-temporary loss is recognized in earnings. Under (c) a credit
loss is recognized in earnings to the extent that the present value of expected
cash flows is less than the amortized cost basis and any difference between fair
value and the amortized cost basis net of the credit loss is reflected in other
comprehensive income net of applicable income taxes. The effect of adopting this
FSP was not material to Berkshire’s Consolidated Financial
Statements.
FSP FAS
157-4 “Determining Fair Value When the Volume and Level of Activity for the
Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly” (“FSP FAS 157-4”) clarifies that adjustments to quoted
market prices may be required in illiquid or disorderly markets in order to
estimate fair value in accordance with SFAS 157 “Fair Value Measurements” and
provides guidance on the circumstances indicating whether markets are illiquid
or disorderly. FSP FAS 157-4 prescribes no specific methodology for making
adjustments to quoted prices but rather confirms that different valuation
techniques may be appropriate under the circumstances to determine the value
that would be received to sell an asset or paid to transfer a liability in an
orderly transaction. The effect of adopting this FSP was not material to
Berkshire’s Consolidated Financial Statements.
Notes To Condensed Consolidated
Financial Statements (Continued)
Note
2. Accounting pronouncements adopted in 2009 (Continued)
FSP FAS
107-1 and APB 28-1 “Interim Disclosures about Fair Value of Financial
Instruments” requires publicly traded companies to make fair value disclosures
of financial instruments in interim financial statements whether or not such
instruments are carried in the financial statements at fair value. Previously,
these disclosures were required only in annual statements. See Note
10.
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165
sets forth general accounting and disclosure requirements for events that occur
subsequent to the balance sheet date but before the company’s financial
statements are issued and is effective for the periods ending after June 15,
2009. Events that occurred subsequent to June 30, 2009 have been evaluated by
Berkshire’s management in accordance with SFAS 165 through the time of filing
this report on August 7, 2009.
Note
3. Accounting pronouncements to be adopted
In June
2009, the FASB issued two Financial Accounting Standards relating to
securitizations and special-purpose entities. SFAS No. 166,
“Accounting for Transfers of Financial Assets-an amendment of FASB Statement No.
140” (“SFAS 166”) eliminates the concept of a qualifying special-purpose entity
(“QSPE”) and the exemption for QSPE’s from the consolidation guidance prescribed
in FASB Interpretation No. 46(R) “Consolidation of Variable
Interest Entities (revised December 2003)—an
interpretation of ARB No. 51.” SFAS 166 also
modifies the derecognition criteria for transfers of financial
assets. SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”
(“SFAS 167”) includes new criteria for determining the primary beneficiary of
variable interest entities and increases the frequency in which reassessments
must be made to determine the primary beneficiary of such variable interest
entities. SFAS 166 and SFAS 167 also require additional disclosures
and are effective for financial statements issued for fiscal periods beginning
after November 15, 2009. Berkshire is currently evaluating the impact
that these accounting standards will have on its consolidated financial
statements.
In June
2009, the FASB issued Statement No. 168, “The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles-a
replacement of FASB Statement No. 162” (“SFAS 168”). SFAS 168
supersedes existing Financial Accounting Standards and introduces FASB
Accounting Standards Codification (“the Codification”) as the single source of
authoritative GAAP. The Codification does not change existing GAAP
and accordingly, SFAS 168 will not have a material impact on Berkshire’s
consolidated financial statements. SFAS 168 is effective for
financial statements issued for interim periods ending after September 15,
2009.
Note
4. Business acquisitions
Berkshire’s
long-held acquisition strategy is to purchase businesses with consistent
earnings, good returns on equity, able and honest management and at sensible
prices. On March 18, 2008, Berkshire acquired 60% of Marmon Holdings, Inc.
(“Marmon”), a private company owned by trusts for the benefit of members of the
Pritzker Family of Chicago, for $4.5 billion. In the second quarter of 2008,
subsequent to this acquisition, Berkshire acquired additional shares of Marmon
and currently owns 63.6%. Under the terms of the original purchase agreement,
Berkshire will acquire the remaining interests in Marmon between 2011 and 2014
for consideration based on the future earnings of Marmon. Berkshire also
acquired several other relatively small businesses during 2008. Consideration
paid for all businesses acquired in 2008 (including Marmon) was approximately
$6.1 billion.
Marmon
consists of approximately 130 manufacturing and service businesses that operate
independently within eleven diverse business sectors. These sectors are:
Engineered Wire & Cable, serving energy related markets, residential
and non-residential construction and other industries; Building Wire, producing
copper electrical wiring for residential, commercial and industrial buildings;
Transportation Services & Engineered Products, including railroad tank
cars and intermodal tank containers; Highway Technologies, primarily serving the
heavy-duty highway transportation industry; Distribution Services for specialty
pipe and steel tubing; Flow Products, producing a variety of metal products and
materials for the plumbing, HVAC/R, construction and industrial markets;
Industrial Products, including metal fasteners, safety products and metal
fabrication; Construction Services, providing the leasing and operation of
mobile cranes primarily to the energy, mining and petrochemical markets; Water
Treatment equipment for residential, commercial and industrial applications;
Retail Store Fixtures, providing store fixtures and accessories for major
retailers worldwide; and Food Service Equipment, providing food preparation
equipment and shopping carts for restaurants and retailers worldwide. Marmon
operates more than 250 manufacturing, distribution and service facilities,
primarily in North America, Europe and China.
Notes To Condensed Consolidated
Financial Statements (Continued)
Note
4. Business acquisitions (Continued)
The
results of operations for businesses acquired in 2008 are included in
Berkshire’s consolidated results from the effective date of each acquisition.
The following table sets forth certain unaudited pro forma consolidated earnings
data for the first six months of 2008 as if each acquisition occurring during
2008 was consummated on the same terms at the beginning of the year. Pro forma
data for 2009 was not materially different from the amounts reported. Amounts
are in millions, except earnings per share.
|
|
2008
|
|
Total
revenues
|
|
$ |
56,678 |
|
Net
earnings attributable to Berkshire Hathaway
|
|
|
3,867 |
|
Earnings
per equivalent Class A common share attributable to Berkshire
Hathaway shareholders
|
|
|
2,497 |
|
Note
5. Investments in fixed maturity securities
Investments
in securities with fixed maturities as of June 30, 2009 and December 31, 2008
are shown below (in millions).
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses *
|
|
|
Value
|
|
June
30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury, U.S. government corporations and agencies
|
|
$ |
2,425 |
|
|
$ |
61 |
|
|
$ |
(2 |
) |
|
$ |
2,484 |
|
States,
municipalities and political subdivisions
|
|
|
4,052 |
|
|
|
266 |
|
|
|
(2 |
) |
|
|
4,316 |
|
Foreign
governments
|
|
|
11,077 |
|
|
|
351 |
|
|
|
(42 |
) |
|
|
11,386 |
|
Corporate
bonds and redeemable preferred stocks
|
|
|
13,227 |
|
|
|
1,238 |
|
|
|
(1,070 |
) |
|
|
13,395 |
|
Mortgage-backed
securities
|
|
|
4,318 |
|
|
|
326 |
|
|
|
(57 |
) |
|
|
4,587 |
|
|
|
$ |
35,099 |
|
|
$ |
2,242 |
|
|
$ |
(1,173 |
) |
|
$ |
36,168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
and
other
|
|
|
31,261 |
|
|
|
1,859 |
|
|
|
(1,102 |
) |
|
|
32,018 |
|
Finance
and financial products
|
|
|
3,838 |
|
|
|
383 |
|
|
|
(71 |
) |
|
|
4,150 |
|
|
|
$ |
35,099 |
|
|
$ |
2,242 |
|
|
$ |
(1,173 |
) |
|
$ |
36,168 |
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses *
|
|
|
Value
|
|
December
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury, U.S. government corporations and agencies
|
|
$ |
2,107 |
|
|
$ |
123 |
|
|
$ |
(2 |
) |
|
$ |
2,228 |
|
States,
municipalities and political subdivisions
|
|
|
4,504 |
|
|
|
242 |
|
|
|
(5 |
) |
|
|
4,741 |
|
Foreign
governments
|
|
|
9,106 |
|
|
|
343 |
|
|
|
(59 |
) |
|
|
9,390 |
|
Corporate
bonds and redeemable preferred stocks
|
|
|
10,798 |
|
|
|
394 |
|
|
|
(1,568 |
) |
|
|
9,624 |
|
Mortgage-backed
securities
|
|
|
5,400 |
|
|
|
338 |
|
|
|
(89 |
) |
|
|
5,649 |
|
|
|
$ |
31,915 |
|
|
$ |
1,440 |
|
|
$ |
(1,723 |
) |
|
$ |
31,632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
and other
|
|
|
27,618 |
|
|
|
1,151 |
|
|
|
(1,654 |
) |
|
|
27,115 |
|
Finance
and financial products
|
|
|
4,297 |
|
|
|
289 |
|
|
|
(69 |
) |
|
|
4,517 |
|
|
|
$ |
31,915 |
|
|
$ |
1,440 |
|
|
$ |
(1,723 |
) |
|
$ |
31,632 |
|
*
|
Includes
unrealized losses of $199 million at June 30, 2009 and $176 million at
December 31, 2008 related to securities that have been in an unrealized
loss position for 12 months or
more.
|
The
amortized cost and estimated fair value of securities with fixed maturities at
June 30, 2009 are summarized below by contractual maturity dates. Actual
maturities will differ from contractual maturities because issuers of certain of
the securities retain early call or prepayment rights. Amounts are in
millions.
|
|
|
|
|
Due
after one
|
|
|
Due
after five
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
in one
|
|
|
year
through
|
|
|
years
through
|
|
|
Due
after
|
|
|
Mortgage-backed
|
|
|
|
|
|
|
year or less
|
|
|
five years
|
|
|
ten years
|
|
|
ten years
|
|
|
securities
|
|
|
Total
|
|
Amortized
cost
|
|
$ |
4,805 |
|
|
$ |
15,459 |
|
|
$ |
6,566 |
|
|
$ |
3,951 |
|
|
$ |
4,318 |
|
|
$ |
35,099 |
|
Fair
value
|
|
|
4,944 |
|
|
|
16,028 |
|
|
|
6,106 |
|
|
|
4,503 |
|
|
|
4,587 |
|
|
|
36,168 |
|
Notes To Condensed Consolidated
Financial Statements (Continued)
Note
6. Investments in equity securities
Investments
in equity securities are summarized below (in millions).
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost Basis
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
June
30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
American
Express Company
|
|
$ |
1,287 |
|
|
$ |
2,236 |
|
|
$ |
— |
|
|
$ |
3,523 |
|
The
Coca-Cola Company
|
|
|
1,299 |
|
|
|
8,299 |
|
|
|
— |
|
|
|
9,598 |
|
ConocoPhillips
|
|
|
2,525 |
|
|
|
187 |
|
|
|
— |
|
|
|
2,712 |
|
Johnson
& Johnson
|
|
|
2,322 |
|
|
|
6 |
|
|
|
(152 |
) |
|
|
2,176 |
|
Kraft
Foods Inc.
|
|
|
4,330 |
|
|
|
— |
|
|
|
(1,029 |
) |
|
|
3,301 |
|
The
Procter & Gamble Company
|
|
|
5,484 |
|
|
|
— |
|
|
|
(786 |
) |
|
|
4,698 |
|
Wells
Fargo & Company
|
|
|
6,917 |
|
|
|
2,368 |
|
|
|
(1,600 |
) |
|
|
7,685 |
|
Other
|
|
|
12,098 |
|
|
|
2,433 |
|
|
|
(2,430 |
) |
|
|
12,101 |
|
|
|
$ |
36,262 |
|
|
$ |
15,529 |
|
|
$ |
(5,997 |
) |
|
$ |
45,794 |
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost Basis
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
December
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
American
Express Company
|
|
$ |
1,287 |
|
|
$ |
1,525 |
|
|
$ |
— |
|
|
$ |
2,812 |
|
The
Coca-Cola Company
|
|
|
1,299 |
|
|
|
7,755 |
|
|
|
— |
|
|
|
9,054 |
|
ConocoPhillips
|
|
|
6,820 |
|
|
|
— |
|
|
|
(2,422 |
) |
|
|
4,398 |
|
Johnson
& Johnson
|
|
|
1,847 |
|
|
|
24 |
|
|
|
(76 |
) |
|
|
1,795 |
|
Kraft
Foods Inc.
|
|
|
4,330 |
|
|
|
— |
|
|
|
(832 |
) |
|
|
3,498 |
|
The
Procter & Gamble Company
|
|
|
5,484 |
|
|
|
200 |
|
|
|
— |
|
|
|
5,684 |
|
Wells
Fargo & Company
|
|
|
6,703 |
|
|
|
2,850 |
|
|
|
(580 |
) |
|
|
8,973 |
|
Other
|
|
|
12,370 |
|
|
|
2,428 |
|
|
|
(1,939 |
) |
|
|
12,859 |
|
|
|
$ |
40,140 |
|
|
$ |
14,782 |
|
|
$ |
(5,849 |
) |
|
$ |
49,073 |
|
Berkshire
uses no bright-line test in determining whether impairments are temporary or
other-than-temporary. Berkshire considers several factors in determining
other-than-temporary impairment losses including the current and expected
long-term business prospects of the issuer, the length of time and relative
magnitude of the price decline and its ability and intent to hold the investment
until the price recovers.
Unrealized
losses at June 30, 2009 included $1,034 million related to securities that have
been in an unrealized loss position for 12 months or more. Approximately 90% of
the gross unrealized losses at June 30, 2009 were concentrated in six issuers.
Unrealized losses generally ranged from 15% to 50% of cost. In management’s
judgment, the future earnings potential and underlying business economics of
these companies are favorable and Berkshire possesses the ability and intent to
hold these securities until their prices recover. Changing market
conditions and other facts and circumstances may change the business prospects
of these issuers as well as Berkshire’s ability and intent to hold these
securities until the prices recover. Accordingly,
other-than-temporary impairment charges may be recorded in future periods with
respect to one or more of these securities.
Note
7. Other Investments
A summary
of other investments as of June 30, 2009 and December 31, 2008 follows (in
millions).
|
|
June 30,
2009
|
|
|
|
Cost
|
|
|
Unrealized
Gains
|
|
|
Fair
Value
|
|
|
Carrying
Value
|
|
Fixed
maturity and equity
|
|
$ |
20,089 |
|
|
$ |
3,036 |
|
|
$ |
23,125 |
|
|
$ |
22,907 |
|
Equity
method
|
|
|
6,350 |
|
|
|
561 |
|
|
|
6,911 |
|
|
|
7,458 |
|
|
|
$ |
26,439 |
|
|
$ |
3,597 |
|
|
$ |
30,036 |
|
|
$ |
30,365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2008
|
|
|
|
Cost
|
|
|
Unrealized
Gains
|
|
|
Fair
Value
|
|
|
Carrying
Value
|
|
Fixed
maturity and equity
|
|
$ |
14,452 |
|
|
$ |
36 |
|
|
$ |
14,488 |
|
|
$ |
14,675 |
|
Equity
method
|
|
|
5,919 |
|
|
|
352 |
|
|
|
6,271 |
|
|
|
6,860 |
|
|
|
$ |
20,371 |
|
|
$ |
388 |
|
|
$ |
20,759 |
|
|
$ |
21,535 |
|
Notes To Condensed Consolidated
Financial Statements (Continued)
Note 7. Other
Investments (Continued)
Fixed
maturity and equity investments in the preceding table include perpetual
preferred stock and common stock warrants of The Goldman Sachs Group, Inc.
(“GS”) and The General Electric Company (“GE”) and preferred stock and
subordinated notes of Wm. Wrigley Jr. Company (“Wrigley”). These securities were
acquired in the fourth quarter of 2008.
Berkshire
owns 50,000 shares of 10% Cumulative Perpetual Preferred Stock of GS (“GS
Preferred”) and Warrants to purchase 43,478,260 shares of common stock of GS
(“GS Warrants”) which were acquired for a combined cost of $5 billion. The GS
Preferred may be redeemed at any time by GS at a price of $110,000 per share
($5.5 billion in aggregate). The GS Warrants expire in 2013 and can be exercised
for an additional aggregate cost of $5 billion ($115/share). Berkshire also owns
30,000 shares of 10% Cumulative Perpetual Preferred Stock of GE (“GE Preferred”)
and Warrants to purchase 134,831,460 shares of common stock of GE (“GE
Warrants”) which were acquired for a combined cost of $3 billion. The GE
Preferred may be redeemed beginning in October 2011 by GE at a price of $110,000
per share ($3.3 billion in aggregate). The GE Warrants expire in 2013 and can be
exercised for an additional aggregate cost of $3 billion
($22.25/share).
Berkshire
owns $4.4 billion par amount of 11.45% subordinated notes due 2018 of Wrigley
(“Wrigley Notes”) and $2.1 billion of 5% preferred stock of Wrigley (“Wrigley
Preferred”). The Wrigley Notes and Wrigley Preferred were acquired in connection
with Mars, Incorporated’s acquisition of Wrigley.
On
March 23, 2009, Berkshire acquired a 12% convertible perpetual capital
instrument issued by Swiss Re at a cost of 3 billion Swiss Francs (“CHF”), which
is also the face amount of the instrument. The instrument has no maturity or
mandatory redemption date but can be redeemed under certain conditions at the
option of Swiss Re at 140% of the face amount until March 23, 2011 and
thereafter at 120% of the face amount. The instrument possesses no voting rights
and is subordinated to senior securities of Swiss Re as defined in the
agreement. Beginning March 23, 2012, the instrument can be converted into
120,000,000 common shares of Swiss Re (a rate of 25 CHF per share of Swiss Re
common stock).
On
April 1, 2009, Berkshire acquired 3,000,000 shares of Series A Cumulative
Convertible Perpetual Preferred Stock of The Dow Chemical Company (“Dow
Preferred”) for a cost of $3 billion. The Dow Preferred was issued in connection
with Dow’s acquisition of the Rohm and Haas Company. Under certain conditions,
each share of the Dow Preferred is convertible into 24.201 shares of Dow common
stock. The Dow Preferred is entitled to dividends at a rate of 8.5% per
annum.
Equity
method investments include Burlington Northern Santa Fe Corporation (“BNSF”) and
Moody’s Corporation (“Moody’s”). During the fourth quarter of 2008, Berkshire’s
investment in each of these companies exceeded 20%. Accordingly, Berkshire
adopted the equity method of accounting with respect to these investments as of
December 31, 2008. As of June 30, 2009, Berkshire owned 22.6% of BNSF’s and
20.3% of Moody’s outstanding common stock. Prior to December 31, 2008, the
BNSF and Moody’s investments were accounted for as available-for-sale equity
securities recorded in the financial statements at fair value. The cumulative
effect of adopting the equity method with respect to the investments in BNSF and
Moody’s was recorded in the financial statements as of December 31, 2008.
Prior years’ financial statements were not restated due to
immateriality.
In July
2009, Berkshire’s ownership of Moody’s common stock declined to about 17% as a
result of dispositions by Berkshire. As a result, Berkshire will
discontinue the use of the equity method with respect to its investment in
Moody’s beginning in the third quarter of 2009. Thereafter, Berkshire
will carry its investment in Moody’s common stock at fair value. This
change is not expected to have a material impact on Berkshire’s Consolidated
Financial Statements.
Note
8. Investment Gains/Losses
Investment
gains/losses are summarized below (in millions).
|
|
Second
Quarter
|
|
|
First Six
Months
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Fixed
maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
gains from sales and other disposals
|
|
$ |
22 |
|
|
$ |
82 |
|
|
$ |
172 |
|
|
$ |
106 |
|
Gross
losses from sales and other disposals
|
|
|
— |
|
|
|
(1 |
) |
|
|
(9 |
) |
|
|
(1 |
) |
Equity
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
gains from sales
|
|
|
61 |
|
|
|
600 |
|
|
|
95 |
|
|
|
677 |
|
Gross
losses from sales
|
|
|
(51 |
) |
|
|
(4 |
) |
|
|
(559 |
) |
|
|
(4 |
) |
Other
|
|
|
(29 |
) |
|
|
(2 |
) |
|
|
(66 |
) |
|
|
12 |
|
|
|
$ |
3 |
|
|
$ |
675 |
|
|
$ |
(367 |
) |
|
$ |
790 |
|
Notes To Condensed Consolidated
Financial Statements (Continued)
Note
8. Investment Gains/Losses (Continued)
Net
investment gains/losses are reflected in the Condensed Consolidated Statements
of Earnings as follows (in millions).
|
|
Second
Quarter
|
|
|
First
Six Months
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
2009
|
|
|
|
2008
|
|
Insurance
and other
|
|
$ |
33 |
|
|
$ |
671 |
|
|
$ |
(429 |
) |
|
$ |
786 |
|
Finance
and financial products
|
|
|
(30 |
) |
|
|
4 |
|
|
|
62 |
|
|
|
4 |
|
|
|
$ |
3 |
|
|
$ |
675 |
|
|
$ |
(367 |
) |
|
$ |
790 |
|
Note
9. Derivative contracts of finance and financial products
businesses
Derivative
contracts of Berkshire’s finance and financial products businesses, with limited
exceptions, are not designated as hedges for financial reporting purposes. These
contracts were initially entered into with the expectation that the premiums
received would exceed the amounts ultimately paid to counterparties. Changes in
the fair values of such contracts are reported in earnings as derivative
gains/losses. A summary of derivative contracts outstanding as of June 30, 2009
and December 31, 2008 follows (in millions).
|
|
June 30,
2009
|
|
|
December 31,
2008
|
|
|
|
Assets (3)
|
|
|
Liabilities
|
|
|
Notional
Value
|
|
|
Assets (3)
|
|
|
Liabilities
|
|
|
Notional
Value
|
|
Equity
index put options
|
|
$ |
— |
|
|
$ |
8,233 |
|
|
$ |
37,480 |
(1) |
|
$ |
— |
|
|
$ |
10,022 |
|
|
$ |
37,134 |
(1) |
Credit
default obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
yield indexes
|
|
|
— |
|
|
|
2,507 |
|
|
|
6,383 |
(2) |
|
|
— |
|
|
|
3,031 |
|
|
|
7,892 |
(2) |
States/municipalities
|
|
|
— |
|
|
|
1,049 |
|
|
|
16,042 |
(2) |
|
|
— |
|
|
|
958 |
|
|
|
18,364 |
(2) |
Individual
corporate
|
|
|
— |
|
|
|
80 |
|
|
|
3,775 |
(2) |
|
|
— |
|
|
|
105 |
|
|
|
3,900 |
(2) |
Other
|
|
|
439 |
|
|
|
461 |
|
|
|
|
|
|
|
503 |
|
|
|
528 |
|
|
|
|
|
Counterparty
netting and funds held as collateral
|
|
|
(239 |
) |
|
|
(31 |
) |
|
|
|
|
|
|
(295 |
) |
|
|
(32 |
) |
|
|
|
|
|
|
$ |
200 |
|
|
$ |
12,299 |
|
|
|
|
|
|
$ |
208 |
|
|
$ |
14,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents
the aggregate undiscounted amount payable at the contract expiration dates
assuming that the value of each index is zero at the contract expiration
date.
|
(2)
|
Represents
the maximum undiscounted future value of losses payable under the
contracts, assuming a sufficient number of credit defaults occur. The
number of losses required to exhaust contract limits under substantially
all of the contracts is dependent on the loss recovery rate related to the
specific obligor at the time of the
default.
|
(3)
|
Included
in other assets of finance and financial products
businesses.
|
A summary
of derivative gains/losses included in the Condensed Consolidated Statements of
Earnings are as follows (in millions).
|
|
Second
Quarter
|
|
|
First Six
Months
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Equity
index put options
|
|
$ |
1,956 |
|
|
$ |
326 |
|
|
$ |
1,790 |
|
|
$ |
(851 |
) |
Credit
default obligations
|
|
|
391 |
|
|
|
339 |
|
|
|
(960 |
) |
|
|
(136 |
) |
Other
|
|
|
10 |
|
|
|
24 |
|
|
|
10 |
|
|
|
35 |
|
|
|
$ |
2,357 |
|
|
$ |
689 |
|
|
$ |
840 |
|
|
$ |
(952 |
) |
Berkshire
has written equity index put option contracts on four major equity indexes
including three indexes outside of the United States. These contracts are
European style options and will be settled on the contract expiration dates,
which occur between June 2018 and January 2028. Future payments, if any, under
these contracts will be required if the underlying index value is below the
strike price at the contract expiration dates. Premiums on these contracts were
received in full at the contract inception dates and therefore Berkshire has no
counterparty credit risk.
At June
30, 2009, the aggregate intrinsic value (the undiscounted liability assuming the
contracts are settled on their future expiration dates based on the June 30,
2009 index values) was $9.3 billion. Aggregate intrinsic value was approximately
$13.3 billion at March 31, 2009 and $10.8 billion as of December 31,
2008. However, these contracts may not be terminated or fully settled
before the expiration dates and therefore the ultimate amount of cash basis
gains or losses on these contracts will not be known for many
years.
Notes To Condensed Consolidated
Financial Statements (Continued)
Note
9. Derivative contracts of finance and financial products
businesses (Continued)
In the
second quarter of 2009, Berkshire agreed with certain counterparties to amend
six equity index put option contracts. The amendments reduced the
remaining durations of these contracts between 3.5 and 9.5 years. As
a result, the remaining average life of all of Berkshire’s contracts declined
from 13 years at March 31, 2009 to 12 years at June 30, 2009. In
addition, the amendments reduced the strike prices of those contracts between
29% and 39%. The reductions in the strike prices had the effect of
reducing the intrinsic value losses on those contracts by approximately $1.1
billion. In addition, the aggregate notional value related to three
of the amended contracts increased by approximately $161 million. No
consideration was paid by either party with respect to these
amendments.
Credit
default contracts include various high yield indexes, state/municipal debt
issuers and individual corporate issuers. These contracts cover the loss in
value of specified debt obligations of the issuers arising from default events,
which are usually for non-payment or bankruptcy. Loss amounts are subject to
contract limits.
High yield
indexes are comprised of specified North American corporate issuers (usually 100
in number) whose obligations are rated below investment grade. The weighted
average contract life at June 30, 2009 was approximately 2 years. State and
municipality contracts are comprised of over 500 reference obligations issuers,
which had a weighted average duration at June 30, 2009 of approximately 11.5
years. Risks related to approximately 50% of the notional amount cannot be
settled before the maturity dates of the underlying obligations, which range
from 2019 to 2054.
Premiums
on the high yield index and state/municipality contracts were received in full
at the inception dates of the contracts and, as a result, Berkshire has no
counterparty credit risk. Berkshire’s payment obligations under certain of these
contracts are on a first loss basis. Several other contracts are subject to
aggregate loss deductibles that must be satisfied before Berkshire has any
payment obligations.
Credit
default contracts written on individual corporate issuers primarily relate to
investment grade obligations. Installment premiums are due from counterparties
over the terms of the contracts. In most instances, premiums are due from
counterparties on a quarterly basis. Most individual issuer contracts expire in
2013.
With
limited exception, Berkshire’s equity index put option and credit default
contracts contain no collateral posting requirements with respect to changes in
either the fair value or intrinsic value of the contracts and/or a downgrade of
Berkshire’s credit rating. Under certain conditions, a few contracts require
that Berkshire post collateral. As of June 30, 2009, Berkshire’s collateral
posting requirement under such contracts was approximately $650
million.
Note
10. Fair value measurements
The fair
values of Berkshire’s financial assets and liabilities as of June 30, 2009 and
December 31, 2008 are shown in the following table (in millions). The carrying
values of cash and cash equivalents, accounts receivable and accounts payable,
accruals and other liabilities are deemed to be reasonable estimates of their
fair values.
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
|
|
June 30,
2009
|
|
|
Dec. 31,
2008
|
|
|
June 30,
2009
|
|
|
Dec. 31,
2008
|
|
Insurance
and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
in fixed maturity securities
|
|
$ |
32,018 |
|
|
$ |
27,115 |
|
|
$ |
32,018 |
|
|
$ |
27,115 |
|
Investments
in equity securities
|
|
|
45,794 |
|
|
|
49,073 |
|
|
|
45,794 |
|
|
|
49,073 |
|
Other
investments
|
|
|
30,365 |
|
|
|
21,535 |
|
|
|
30,036 |
|
|
|
20,759 |
|
Notes
payable and other borrowings
|
|
|
4,379 |
|
|
|
4,349 |
|
|
|
4,365 |
|
|
|
4,300 |
|
Finance
and financial products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
in fixed maturity securities
|
|
|
4,150 |
|
|
|
4,517 |
|
|
|
4,150 |
|
|
|
4,517 |
|
Derivative
contract assets (1)
|
|
|
200 |
|
|
|
208 |
|
|
|
200 |
|
|
|
208 |
|
Loans
and finance receivables
|
|
|
13,631 |
|
|
|
13,942 |
|
|
|
13,679 |
|
|
|
14,016 |
|
Notes
payable and other borrowings
|
|
|
14,697 |
|
|
|
13,388 |
|
|
|
15,165 |
|
|
|
13,820 |
|
Derivative
contract liabilities
|
|
|
12,299 |
|
|
|
14,612 |
|
|
|
12,299 |
|
|
|
14,612 |
|
Utilities
and energy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
contract assets (1)
|
|
|
252 |
|
|
|
324 |
|
|
|
252 |
|
|
|
324 |
|
Notes
payable and other borrowings
|
|
|
19,708 |
|
|
|
19,145 |
|
|
|
20,547 |
|
|
|
19,144 |
|
Derivative
contract liabilities (2)
|
|
|
575 |
|
|
|
729 |
|
|
|
575 |
|
|
|
729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Included in Other
assets
|
(2)
|
Included in Accounts payable,
accruals and other
liabilities
|
Notes To Condensed Consolidated
Financial Statements (Continued)
Note 10. Fair
value measurements (Continued)
Fair value
is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants as of the
measurement date. Fair value measurements assume the asset or liability is
exchanged in an orderly manner; the exchange is in the principal market for that
asset or liability (or in the most advantageous market when no principal market
exists); and the market participants are independent, knowledgeable, able and
willing to transact an exchange. Nonperformance risk (credit risk) is considered
in valuing liabilities.
Fair
values for substantially all of Berkshire’s financial instruments were measured
using market or income approaches. Considerable judgment may be required in
interpreting market data used to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts that could be realized in an actual current market exchange. The use
of different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value.
SFAS 157
establishes a hierarchy for measuring fair value consisting of Levels 1 through
3.
Level 1 – Inputs
represent unadjusted quoted prices for identical assets or liabilities exchanged
in active markets. Substantially all of Berkshire’s 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
include directly or indirectly observable inputs (other than Level 1 inputs)
such as quoted prices for similar assets or liabilities exchanged in active or
inactive markets; quoted prices for identical assets or liabilities exchanged in
inactive markets; 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
Berkshire’s investments in fixed maturity securities are primarily based on
market prices and market data available for instruments with similar
characteristics since active markets are not common for many instruments.
Pricing evaluations are based on yield curves for instruments with similar
characteristics, such as credit rating, estimated duration, and yields for other
instruments of the issuer or entities in the same industry sector.
Level 3 – Inputs
include unobservable inputs used in the measurement of assets and liabilities.
Management is required to use its own assumptions regarding unobservable inputs
because there is little, if any, market activity in the assets or liabilities or
related observable inputs that can be corroborated at the measurement date.
Unobservable inputs require management to make certain projections and
assumptions about the information that would be used by market participants in
pricing assets or liabilities. Measurements of non-exchange traded derivative
contracts and certain other investments carried at fair value are based
primarily on valuation models, discounted cash flow models or other valuation
techniques that are believed to be used by market participants. Berkshire values
its equity index put option contracts based on the Black-Scholes option
valuation model which Berkshire believes is widely used by market participants.
Credit default contracts are primarily valued based on indications of bid or
offer data as of the balance sheet date. These contracts are not exchange traded
and certain of the terms of Berkshire’s contracts are not standard in
derivatives markets. For example, Berkshire is not required to post collateral
under most of its contracts. For these reasons, Berkshire has classified these
contracts as Level 3.
Notes To Condensed Consolidated
Financial Statements (Continued)
Note 10. Fair
value measurements (Continued)
Financial
assets and liabilities measured at fair value on a recurring basis in the
financial statements as of June 30, 2009 and December 31, 2008 are
summarized according to the hierarchy previously described as follows (in
millions).
June
30, 2009
|
|
Total
Fair Value
|
|
|
Quoted
Prices
(Level
1)
|
|
|
Significant Other
Observable Inputs
(Level
2)
|
|
|
Significant
Unobservable Inputs
(Level
3)
|
|
Insurance
and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
in fixed maturity securities
|
|
$ |
32,018 |
|
|
$ |
5,230 |
|
|
$ |
26,243 |
|
|
$ |
545 |
|
Investments
in equity securities
|
|
|
45,794 |
|
|
|
45,379 |
|
|
|
86 |
|
|
|
329 |
|
Other
investments
|
|
|
16,455 |
|
|
|
— |
|
|
|
— |
|
|
|
16,455 |
|
Finance
and financial products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
in fixed maturity securities
|
|
|
4,150 |
|
|
|
— |
|
|
|
3,743 |
|
|
|
407 |
|
Net
derivative contract liabilities
|
|
|
12,099 |
|
|
|
— |
|
|
|
227 |
|
|
|
11,872 |
|
Utilities
and energy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
derivative contract (assets)/liabilities
|
|
|
323 |
|
|
|
11 |
|
|
|
(48 |
) |
|
|
360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
in fixed maturity securities
|
|
$ |
27,115 |
|
|
$ |
4,961 |
|
|
$ |
21,650 |
|
|
$ |
504 |
|
Investments
in equity securities
|
|
|
49,073 |
|
|
|
48,666 |
|
|
|
79 |
|
|
|
328 |
|
Other
investments
|
|
|
8,223 |
|
|
|
— |
|
|
|
— |
|
|
|
8,223 |
|
Finance
and financial products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
in fixed maturity securities
|
|
|
4,517 |
|
|
|
— |
|
|
|
4,382 |
|
|
|
135 |
|
Net
derivative contract liabilities
|
|
|
14,404 |
|
|
|
— |
|
|
|
288 |
|
|
|
14,116 |
|
Utilities
and energy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
derivative contract liabilities
|
|
|
405 |
|
|
|
— |
|
|
|
2 |
|
|
|
403 |
|
Reconciliations
of assets and liabilities measured at fair value on a recurring basis with the
use of significant unobservable inputs (Level 3) for the first six months of
2009 and 2008 follow (in millions).
|
|
Investments
in
fixed
maturity
securities
|
|
|
Investments
in
equity
securities
|
|
|
Other
investments
|
|
|
Net
derivative
contract
liabilities
|
|
Balance
at January 1, 2009
|
|
$ |
639 |
|
|
$ |
328 |
|
|
$ |
8,223 |
|
|
$ |
(14,519 |
) |
Gains
(losses) included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
*
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
857 |
|
Other
comprehensive income
|
|
|
43 |
|
|
|
3 |
|
|
|
2,595 |
|
|
|
— |
|
Regulatory
assets and liabilities
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
69 |
|
Purchases,
sales, issuances and settlements
|
|
|
258 |
|
|
|
(1 |
) |
|
|
5,637 |
|
|
|
1,384 |
|
Transfers
into (out of) Level 3
|
|
|
12 |
|
|
|
(1 |
) |
|
|
— |
|
|
|
(23 |
) |
Balance
at June 30, 2009
|
|
$ |
952 |
|
|
$ |
329 |
|
|
$ |
16,455 |
|
|
$ |
(12,232 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Gains and losses related to
changes in valuations are included in the Condensed Consolidated
Statements of Earnings as components of investment gains/losses,
derivative gains/losses or other revenues as appropriate. Substantially
all of the gains included in earnings were related to derivative contract
liabilities outstanding as of June 30,
2009.
|
Notes To Condensed Consolidated
Financial Statements (Continued)
Note 10. Fair
value measurements (Continued)
|
|
Investments
in
fixed
maturity
securities
|
|
|
Investments
in
equity
securities
|
|
|
Net
derivative
contract
liabilities
|
|
Balance
at January 1, 2008
|
|
$ |
393 |
|
|
$ |
356 |
|
|
$ |
(6,784 |
) |
Gains
(losses) included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
*
|
|
|
9 |
|
|
|
— |
|
|
|
(1,009 |
) |
Other
comprehensive income
|
|
|
(19 |
) |
|
|
(40 |
) |
|
|
1 |
|
Regulatory
assets and liabilities
|
|
|
— |
|
|
|
— |
|
|
|
135 |
|
Purchases,
sales, issuances and settlements
|
|
|
(12 |
) |
|
|
— |
|
|
|
(608 |
) |
Transfers
into Level 3
|
|
|
8 |
|
|
|
— |
|
|
|
— |
|
Balance
at June 30, 2008
|
|
$ |
379 |
|
|
$ |
316 |
|
|
$ |
(8,265 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Gains and losses related to
changes in valuations are included in the Condensed Consolidated
Statements of Earnings as components of investment gains/losses,
derivative gains/losses or other revenues as appropriate. Substantially
all of the losses included in earnings were related to derivative contract
liabilities outstanding as of June 30,
2008.
|
Note
11. Receivables
Loans and
receivables of insurance and other businesses are comprised of the following (in
millions).
|
|
June
30,
2009
|
|
|
December 31,
2008
|
|
Insurance
premiums receivable
|
|
$ |
5,935 |
|
|
$ |
4,961 |
|
Reinsurance
recoverables
|
|
|
3,164 |
|
|
|
3,235 |
|
Trade
and other receivables
|
|
|
7,120 |
|
|
|
7,141 |
|
Allowances
for uncollectible accounts
|
|
|
(441 |
) |
|
|
(412 |
) |
|
|
$ |
15,778 |
|
|
$ |
14,925 |
|
Loans and
finance receivables of finance and financial products businesses are comprised
of the following (in millions).
|
|
June
30,
2009
|
|
|
December 31,
2008
|
|
Consumer
installment loans and finance receivables
|
|
$ |
12,937 |
|
|
$ |
13,190 |
|
Commercial
loans and finance receivables
|
|
|
1,011 |
|
|
|
1,050 |
|
Allowances
for uncollectible loans
|
|
|
(317 |
) |
|
|
(298 |
) |
|
|
$ |
13,631 |
|
|
$ |
13,942 |
|
Note
12. Property, plant and equipment
Property,
plant and equipment of insurance and other businesses is comprised of the
following (in millions).
|
|
Ranges of
estimated useful life
|
|
|
June
30,
2009
|
|
|
December 31,
2008
|
|
Land
|
|
—
|
|
|
$ |
742 |
|
|
$ |
751 |
|
Buildings
and improvements
|
|
3 – 40 years
|
|
|
|
4,502 |
|
|
|
4,351 |
|
Machinery
and equipment
|
|
3 – 25 years
|
|
|
|
11,701 |
|
|
|
11,009 |
|
Furniture,
fixtures and other
|
|
3 – 20 years
|
|
|
|
1,747 |
|
|
|
1,856 |
|
Assets
held for lease
|
|
12 – 30 years
|
|
|
|
5,600 |
|
|
|
5,311 |
|
|
|
|
|
|
|
|
24,292 |
|
|
|
23,278 |
|
Accumulated
depreciation
|
|
|
|
|
|
|
(7,276 |
) |
|
|
(6,575 |
) |
|
|
|
|
|
|
$ |
17,016 |
|
|
$ |
16,703 |
|
Notes To Condensed Consolidated
Financial Statements (Continued)
Note
12. Property, plant and equipment (Continued)
Property,
plant and equipment of utilities and energy businesses is comprised of the
following (in millions).
|
|
Ranges of
estimated useful life
|
|
|
June
30,
2009
|
|
|
December 31,
2008
|
|
Utility
generation, distribution and transmission system
|
|
5 – 85 years
|
|
|
$ |
34,654 |
|
|
$ |
32,795 |
|
Interstate
pipeline assets
|
|
3 – 67
years
|
|
|
|
5,657 |
|
|
|
5,649 |
|
Independent
power plants and other assets
|
|
3 – 30
years
|
|
|
|
1,260 |
|
|
|
1,228 |
|
Construction
in progress
|
|
—
|
|
|
|
1,897 |
|
|
|
1,668 |
|
|
|
|
|
|
|
|
43,468 |
|
|
|
41,340 |
|
Accumulated
depreciation
|
|
|
|
|
|
|
(13,481 |
) |
|
|
(12,886 |
) |
|
|
|
|
|
|
$ |
29,987 |
|
|
$ |
28,454 |
|
The
utility generation, distribution and transmission system and interstate pipeline
assets are the regulated assets of public utility and natural gas pipeline
subsidiaries. At June 30, 2009 and December 31, 2008, accumulated
depreciation related to regulated assets was $13.0 billion and $12.5 billion,
respectively. Substantially all of the construction in progress related to the
construction of regulated assets.
Note
13. Inventories
Inventories
are comprised of the following (in millions).
|
|
June
30,
2009
|
|
|
December 31,
2008
|
|
Raw
materials
|
|
$ |
984 |
|
|
$ |
1,161 |
|
Work
in process and other
|
|
|
543 |
|
|
|
607 |
|
Finished
manufactured goods
|
|
|
2,444 |
|
|
|
2,580 |
|
Purchased
goods
|
|
|
2,416 |
|
|
|
3,152 |
|
|
|
$ |
6,387 |
|
|
$ |
7,500 |
|
Note
14. Income taxes
The
liability for income taxes as of June 30, 2009 and December 31, 2008 is as
follows (in millions).
|
|
June
30,
2009
|
|
|
December 31,
2008
|
|
Payable
currently
|
|
$ |
(344 |
) |
|
$ |
161 |
|
Deferred
|
|
|
10,574 |
|
|
|
9,316 |
|
Other
|
|
|
844 |
|
|
|
803 |
|
|
|
$ |
11,074 |
|
|
$ |
10,280 |
|
Note
15. Notes payable and other borrowings
Notes
payable and other borrowings of Berkshire and its subsidiaries are summarized
below (in millions).
|
|
June
30,
2009
|
|
|
December 31,
2008
|
|
Insurance
and other:
|
|
|
|
|
|
|
Issued
or guaranteed by Berkshire due 2009-2035
|
|
$ |
2,431 |
|
|
$ |
2,275 |
|
Issued
by subsidiaries and not guaranteed by Berkshire due
2009-2041
|
|
|
1,948 |
|
|
|
2,074 |
|
|
|
$ |
4,379 |
|
|
$ |
4,349 |
|
Notes To Condensed Consolidated
Financial Statements (Continued)
Note 15. Notes
payable and other borrowings (Continued)
Debt
issued or guaranteed by Berkshire includes short term borrowings of $2.0 billion
as of June 30, 2009 and $1.8 billion as of December 31, 2008.
|
|
June
30,
2009
|
|
|
December 31,
2008
|
|
Utilities
and energy:
|
|
|
|
|
|
|
Issued
by MidAmerican Energy Holdings Company (“MidAmerican”) and its
subsidiaries and not
guaranteed
by Berkshire:
|
|
|
|
|
|
|
MidAmerican
senior debt due 2012-2037
|
|
$ |
5,121 |
|
|
$ |
5,121 |
|
Subsidiary
debt due 2009-2039
|
|
|
14,351 |
|
|
|
13,573 |
|
Other
|
|
|
236 |
|
|
|
451 |
|
|
|
$ |
19,708 |
|
|
$ |
19,145 |
|
MidAmerican
senior debt is unsecured and has a weighted average interest rate of about 6.3%
as of June 30, 2009. Subsidiary debt of utilities and energy businesses
represents amounts issued by subsidiaries of MidAmerican pursuant to separate
financing agreements and has a weighted average interest rate of about 6% as of
June 30, 2009. All or substantially all of the assets of certain MidAmerican
subsidiaries are or may be pledged or encumbered to support or otherwise secure
the debt. These borrowing arrangements generally contain various covenants
including, but not limited to, leverage ratios, interest coverage ratios and
debt service coverage ratios. As of June 30, 2009, MidAmerican and its
subsidiaries were in compliance with all applicable covenants. Subsidiary debt
with an aggregate par amount of $1.0 billion was issued in the first quarter of
2009. These subsidiary debt obligations mature in 2019 and 2039 and have
interest rates of 5.5% and 6.0%.
|
|
June
30,
2009
|
|
|
December 31,
2008
|
|
Finance
and financial products:
|
|
|
|
|
|
|
Issued
by Berkshire Hathaway Finance Corporation (“BHFC”) and guaranteed by
Berkshire
|
|
$ |
12,049 |
|
|
$ |
10,778 |
|
Issued
by other subsidiaries and guaranteed by Berkshire due
2009-2027
|
|
|
696 |
|
|
|
706 |
|
Issued
by other subsidiaries and not guaranteed by Berkshire due
2009-2036
|
|
|
1,952 |
|
|
|
1,904 |
|
|
|
$ |
14,697 |
|
|
$ |
13,388 |
|
Debt
issued by BHFC matures between 2010 and 2018 and pays interest at a weighted
average rate of approximately 4.3% as of June 30, 2009. In 2009, BHFC issued $1
billion par amount of 4% notes due in 2012 and $250 million of 5.4% notes due in
2018.
Note
16. Shareholders’ equity
The
following table summarizes Berkshire’s Class A and B common stock activity
during the first six months of 2009.
|
|
Class A common stock
(1,650,000 shares authorized)
Issued and
Outstanding
|
|
|
Class B common stock
(55,000,000 shares authorized)
Issued and
Outstanding
|
|
Balance
at December 31, 2008
|
|
|
1,059,001 |
|
|
|
14,706,996 |
|
Issuance
of Class B common stock and conversions of
Class
A common stock to Class B
|
|
|
(1,691 |
) |
|
|
125,449 |
|
Balance
at June 30, 2009
|
|
|
1,057,310 |
|
|
|
14,832,445 |
|
Each share
of Class A common stock ($5 par per share) is convertible, at the option of
the holder, into thirty shares of Class B common stock ($0.1667 par per share).
Class B common stock is not convertible into Class A common stock. Class B
common stock has economic rights equal to one-thirtieth (1/30) of the
economic rights of Class A common stock. Accordingly, on an equivalent
Class A common stock basis, there are 1,551,725 shares outstanding at June
30, 2009 and 1,549,234 shares outstanding at December 31, 2008. Each
Class A common share is entitled to one vote per share. Each Class B common
share possesses the voting rights of one-two-hundredth (1/200) of the
voting rights of a Class A share. Class A and Class B common shares
vote together as a single class. In March 2009, Berkshire issued 74,574 shares
of Class B common stock to acquire certain noncontrolling shareholder interests
in MidAmerican.
Notes To Condensed Consolidated
Financial Statements (Continued)
Note
16. Shareholders’ equity (Continued)
Changes in
shareholders’ equity for the first six months of 2008 and 2009 are shown in the
table below (in millions).
|
|
Berkshire
Hathaway shareholders’ equity
|
|
|
|
|
|
|
Common stock
and
capital in
excess
of par
value
|
|
|
Accumulated
other
comprehensive
income
|
|
|
Retained
earnings
|
|
|
Total
|
|
|
Non-
controlling
interests
|
|
Balance
at December 31, 2007
|
|
$ |
26,960 |
|
|
$ |
21,620 |
|
|
$ |
72,153 |
|
|
$ |
120,733 |
|
|
$ |
2,668 |
|
Net
earnings
|
|
|
— |
|
|
|
— |
|
|
|
3,820 |
|
|
|
3,820 |
|
|
|
253 |
|
Other
comprehensive income, net
|
|
|
— |
|
|
|
(6,739 |
) |
|
|
— |
|
|
|
(6,739 |
) |
|
|
(55 |
) |
Issuance
of common stock
|
|
|
180 |
|
|
|
— |
|
|
|
— |
|
|
|
180 |
|
|
|
— |
|
Changes
in noncontrolling interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
acquisitions
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,570 |
|
Noncontrolling
interests acquired
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(206 |
) |
Balance
at June 30, 2008
|
|
$ |
27,140 |
|
|
$ |
14,881 |
|
|
$ |
75,973 |
|
|
$ |
117,994 |
|
|
$ |
4,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2008
|
|
$ |
27,141 |
|
|
$ |
3,954 |
|
|
$ |
78,172 |
|
|
$ |
109,267 |
|
|
$ |
4,440 |
|
Net
earnings
|
|
|
— |
|
|
|
— |
|
|
|
1,761 |
|
|
|
1,761 |
|
|
|
177 |
|
Other
comprehensive income, net
|
|
|
— |
|
|
|
3,442 |
|
|
|
— |
|
|
|
3,442 |
|
|
|
22 |
|
Issuance
of common stock
|
|
|
175 |
|
|
|
— |
|
|
|
— |
|
|
|
175 |
|
|
|
— |
|
Changes
in noncontrolling interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling
interests acquired
|
|
|
(227 |
) |
|
|
109 |
|
|
|
— |
|
|
|
(118 |
) |
|
|
(329 |
) |
Balance
at June 30, 2009
|
|
$ |
27,089 |
|
|
$ |
7,505 |
|
|
$ |
79,933 |
|
|
$ |
114,527 |
|
|
$ |
4,310 |
|
Berkshire’s
comprehensive income for the second quarter and first six months of 2009 and
2008 is shown in the table below (in millions).
|
|
Second
Quarter
|
|
|
First Six
Months
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Comprehensive
income attributable to Berkshire:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
3,295 |
|
|
$ |
2,880 |
|
|
$ |
1,761 |
|
|
$ |
3,820 |
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in unrealized appreciation of investments
|
|
|
11,594 |
|
|
|
(6,690 |
) |
|
|
4,560 |
|
|
|
(10,688 |
) |
Applicable
income taxes
|
|
|
(4,062 |
) |
|
|
2,331 |
|
|
|
(1,602 |
) |
|
|
3,739 |
|
Foreign
currency translation and other
|
|
|
909 |
|
|
|
72 |
|
|
|
403 |
|
|
|
175 |
|
Applicable
income taxes
|
|
|
(6 |
) |
|
|
(3 |
) |
|
|
81 |
|
|
|
35 |
|
Other
comprehensive income
|
|
|
8,435 |
|
|
|
(4,290 |
) |
|
|
3,442 |
|
|
|
(6,739 |
) |
Comprehensive
income attributable to Berkshire
|
|
$ |
11,730 |
|
|
$ |
(1,410 |
) |
|
$ |
5,203 |
|
|
$ |
(2,919 |
) |
Comprehensive
income of noncontrolling interests
|
|
$ |
205 |
|
|
$ |
99 |
|
|
$ |
199 |
|
|
$ |
198 |
|
Notes To Condensed Consolidated
Financial Statements (Continued)
Note
17. Business segment data
Berkshire’s
consolidated segment data for the second quarter and first six months of 2009
and 2008 is as follows (in millions).
|
|
Revenues
|
|
|
|
Second
Quarter
|
|
|
First Six
Months
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Operating
Businesses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
group:
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
earned:
|
|
|
|
|
|
|
|
|
|
|
|
|
GEICO
|
|
$ |
3,394 |
|
|
$ |
3,086 |
|
|
$ |
6,655 |
|
|
$ |
6,118 |
|
General
Re
|
|
|
1,426 |
|
|
|
1,488 |
|
|
|
2,805 |
|
|
|
3,192 |
|
Berkshire
Hathaway Reinsurance Group
|
|
|
1,210 |
|
|
|
1,156 |
|
|
|
4,297 |
|
|
|
2,140 |
|
Berkshire
Hathaway Primary Group
|
|
|
455 |
|
|
|
501 |
|
|
|
911 |
|
|
|
990 |
|
Investment
income
|
|
|
1,437 |
|
|
|
1,221 |
|
|
|
2,747 |
|
|
|
2,320 |
|
Total
insurance group
|
|
|
7,922 |
|
|
|
7,452 |
|
|
|
17,415 |
|
|
|
14,760 |
|
Finance
and financial products
|
|
|
1,099 |
|
|
|
1,303 |
|
|
|
2,108 |
|
|
|
2,461 |
|
Marmon
|
|
|
1,286 |
|
|
|
1,901 |
|
|
|
2,540 |
|
|
|
2,166 |
|
McLane
|
|
|
7,864 |
|
|
|
7,269 |
|
|
|
14,857 |
|
|
|
14,258 |
|
MidAmerican
|
|
|
2,655 |
|
|
|
3,035 |
|
|
|
5,604 |
|
|
|
6,429 |
|
Shaw
|
|
|
1,029 |
|
|
|
1,337 |
|
|
|
2,032 |
|
|
|
2,561 |
|
Other
businesses
|
|
|
5,204 |
|
|
|
6,986 |
|
|
|
9,999 |
|
|
|
13,377 |
|
|
|
|
27,059 |
|
|
|
29,283 |
|
|
|
54,555 |
|
|
|
56,012 |
|
Reconciliation
of segments to consolidated amount:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
and derivative gains/losses*
|
|
|
2,330 |
|
|
|
935 |
|
|
|
(2,653 |
) |
|
|
(591 |
) |
Eliminations
and other
|
|
|
218 |
|
|
|
(125 |
) |
|
|
489 |
|
|
|
(153 |
) |
|
|
$ |
29,607 |
|
|
$ |
30,093 |
|
|
$ |
52,391 |
|
|
$ |
55,268 |
|
|
|
Earnings before
income taxes and equity method earnings
|
|
|
|
Second
Quarter
|
|
|
First
Six Months
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Operating
Businesses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
group:
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting:
|
|
|
|
|
|
|
|
|
|
|
|
|
GEICO
|
|
$ |
111 |
|
|
$ |
298 |
|
|
$ |
259 |
|
|
$ |
484 |
|
General
Re
|
|
|
276 |
|
|
|
102 |
|
|
|
260 |
|
|
|
144 |
|
Berkshire
Hathaway Reinsurance Group
|
|
|
(291 |
) |
|
|
79 |
|
|
|
(88 |
) |
|
|
108 |
|
Berkshire
Hathaway Primary Group
|
|
|
29 |
|
|
|
81 |
|
|
|
33 |
|
|
|
106 |
|
Net
investment income
|
|
|
1,422 |
|
|
|
1,204 |
|
|
|
2,720 |
|
|
|
2,293 |
|
Total
insurance group
|
|
|
1,547 |
|
|
|
1,764 |
|
|
|
3,184 |
|
|
|
3,135 |
|
Finance
and financial products
|
|
|
135 |
|
|
|
254 |
|
|
|
262 |
|
|
|
495 |
|
Marmon
|
|
|
170 |
|
|
|
261 |
|
|
|
332 |
|
|
|
289 |
|
McLane
|
|
|
66 |
|
|
|
68 |
|
|
|
209 |
|
|
|
141 |
|
MidAmerican
|
|
|
402 |
|
|
|
329 |
|
|
|
705 |
|
|
|
845 |
|
Shaw
|
|
|
30 |
|
|
|
82 |
|
|
|
85 |
|
|
|
133 |
|
Other
businesses
|
|
|
171 |
|
|
|
874 |
|
|
|
322 |
|
|
|
1,567 |
|
|
|
|
2,521 |
|
|
|
3,632 |
|
|
|
5,099 |
|
|
|
6,605 |
|
Reconciliation
of segments to consolidated amount:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
and derivative gains/losses*
|
|
|
2,330 |
|
|
|
935 |
|
|
|
(2,653 |
) |
|
|
(591 |
) |
Interest
expense, excluding interest allocated to operating
businesses
|
|
|
(15 |
) |
|
|
(9 |
) |
|
|
(23 |
) |
|
|
(17 |
) |
Eliminations
and other
|
|
|
(45 |
) |
|
|
(87 |
) |
|
|
(175 |
) |
|
|
(73 |
) |
|
|
$ |
4,791 |
|
|
$ |
4,471 |
|
|
$ |
2,248 |
|
|
$ |
5,924 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Includes other-than-temporary
impairments of
investments.
|
Notes To Condensed Consolidated
Financial Statements (Continued)
Note
18. Contingencies
Berkshire
and its subsidiaries are parties in a variety of legal actions arising out of
the normal course of business. In particular, such legal actions affect
Berkshire’s insurance and reinsurance businesses. Such litigation generally
seeks to establish liability directly through insurance contracts or indirectly
through reinsurance contracts issued by Berkshire subsidiaries. Plaintiffs
occasionally seek punitive or exemplary damages. Berkshire does not believe that
such normal and routine litigation will have a material effect on its financial
condition or results of operations. Berkshire and certain of its subsidiaries
are also involved in other kinds of legal actions, some of which assert or may
assert claims or seek to impose fines and penalties in substantial
amounts.
|
a)
|
Governmental
Investigations
|
Berkshire,
General Re Corporation (“General Re”) and certain of Berkshire’s insurance
subsidiaries, including General Reinsurance Corporation (“General Reinsurance”)
and National Indemnity Company (“NICO”) have been continuing to cooperate fully
with the U.S. Securities and Exchange Commission (“SEC”), the U.S. Department of
Justice, the U.S. Attorney for the Eastern District of Virginia and the New York
State Attorney General (“NYAG”) in their ongoing investigations of
non-traditional products. General Re originally received subpoenas from the SEC
and NYAG in January 2005. Berkshire, General Re, General Reinsurance and NICO
have been providing information to the government relating to transactions
between General Reinsurance or NICO (or their respective subsidiaries or
affiliates) and other insurers in response to the January 2005 subpoenas and
related requests and, in the case of General Reinsurance (or its subsidiaries or
affiliates), in response to subpoenas from other U.S. Attorneys conducting
investigations relating to certain of these transactions. In particular,
Berkshire and General Re have been responding to requests from the government
for information relating to certain transactions that may have been accounted
for incorrectly by counterparties of General Reinsurance (or its subsidiaries or
affiliates). The government has interviewed a number of current and former
officers and employees of General Re and General Reinsurance as well as
Berkshire’s Chairman and CEO, Warren E. Buffett, in connection with these
investigations.
In one
case, a transaction initially effected with American International Group (“AIG”)
in late 2000 (the “AIG Transaction”), AIG has corrected its prior accounting for
the transaction on the grounds, as stated in AIG’s 2004 10-K, that the
transaction was done to accomplish a desired accounting result and did not
entail sufficient qualifying risk transfer to support reinsurance accounting.
General Reinsurance has been named in related civil actions brought against AIG.
As part of their ongoing investigations, governmental authorities have also
inquired about the accounting by certain of Berkshire’s insurance subsidiaries
for certain assumed and ceded finite reinsurance transactions.
In June
2005, John Houldsworth, the former Chief Executive Officer of Cologne
Reinsurance Company (Dublin) Limited (“CRD”), a subsidiary of General Re, and
Richard Napier, a former Senior Vice President of General Re who had served as
an account representative for the AIG account, each pleaded guilty to a federal
criminal charge of conspiring with others to misstate certain AIG financial
statements in connection with the AIG Transaction and entered into a partial
settlement agreement with the SEC with respect to such matters.
On
February 25, 2008, Ronald Ferguson, General Re’s former Chief Executive
Officer, Elizabeth Monrad, General Re’s former Chief Financial Officer,
Christopher Garand, a former General Reinsurance Senior Vice President and
Robert Graham, a former General Reinsurance Senior Vice President and Assistant
General Counsel, were each convicted in a trial in the U.S. District Court for
the District of Connecticut on charges of conspiracy, mail fraud, securities
fraud and making false statements to the SEC in connection with the AIG
Transaction. These individuals have the right to appeal their convictions.
Following their convictions, each of these individuals agreed to a judgment of a
forfeiture allegation which required them to be jointly and severally liable for
a payment of $5 million to the U.S. Government. This $5 million amount, which
represented the fee received by General Reinsurance in connection with the AIG
Transaction, was paid by General Reinsurance in April 2008. Each of these
individuals, who had previously received a “Wells” notice in 2005 from the SEC,
is also the subject of an SEC enforcement action for allegedly aiding and
abetting AIG’s violations of the antifraud provisions and other provisions of
the federal securities laws in connection with the AIG Transaction. The SEC case
is presently stayed. Joseph Brandon, who resigned as the Chief Executive Officer
of General Re effective on April 14, 2008, also received a “Wells” notice
from the SEC in 2005.
Berkshire
understands that the government is evaluating the actions of General Re and its
subsidiaries, as well as those of their counterparties, to determine whether
General Re or its subsidiaries conspired with others to misstate counterparty
financial statements or aided and abetted such misstatements by the
counterparties. Berkshire believes that government authorities are continuing to
evaluate possible legal actions against General Re and its
subsidiaries.
Various
state insurance departments have issued subpoenas or otherwise requested that
General Reinsurance, NICO and their affiliates provide documents and information
relating to non-traditional products. The Office of the Connecticut Attorney
General has also issued a subpoena to General Reinsurance for information
relating to non-traditional products. General Reinsurance, NICO and their
affiliates have been cooperating fully with these subpoenas and
requests.
Notes To Condensed Consolidated
Financial Statements (Continued)
Note
18. Contingencies (Continued)
CRD is
also providing information to and cooperating fully with the Irish Financial
Services Regulatory Authority in its inquiries regarding the activities of CRD.
The Office of the Director of Corporate Enforcement in Ireland is conducting a
preliminary evaluation in relation to CRD concerning, in particular,
transactions between CRD and AIG. CRD is cooperating fully with this preliminary
evaluation.
Berkshire
cannot at this time predict the outcome of these matters and is unable to
estimate a range of possible loss and cannot predict whether or not the outcomes
will have a material adverse effect on Berkshire’s business or results of
operations for at least the quarterly period when these matters are completed or
otherwise resolved.
Reference
is made to Note 20 to the Annual Report on Form 10-K for the year ended
December 31, 2008 for detailed discussion of such actions. Except as
discussed in the paragraph below, there have been no material developments
related to such actions since December 31, 2008.
In August
2005, General Reinsurance received a Summons and First Amended Consolidated
Shareholders’ Derivative Complaint in In re American International Group, Inc.
Consolidated Derivative Litigation, Case No. 769-N, Delaware Chancery
Court. In June 2007, AIG filed an Amended Complaint in the Delaware Derivative
Litigation asserting claims against two of its former officers, but not against
General Reinsurance. On September 28, 2007, AIG and the shareholder
plaintiffs filed a Second Combined Amended Complaint, in which AIG asserted
claims against certain of its former officers and the shareholder plaintiffs
asserted claims against a number of other defendants, including General
Reinsurance and General Re. The claims asserted in the Delaware complaint are
substantially similar to those asserted in the New York derivative complaint,
except that the Delaware complaint makes clear that the plaintiffs are asserting
claims against both General Reinsurance and General Re. General Reinsurance and
General Re filed a motion to dismiss on November 30, 2007. Various parties
moved to stay discovery and/or all proceedings in the Delaware derivative
litigation. At a hearing held on February 12, 2008, the Court ruled that
discovery would be stayed pending the resolution of the claims asserted against
AIG in the AIG Securities Litigation. The briefing on the motions filed by
General Reinsurance and General Re was completed by September 8, 2008. The
court heard argument on certain other defendants’ motions to dismiss on
November 7, 2008 and issued a decision on February 10, 2009 granting
some defendants’ motions and denying others. On July 13, 2009, the Delaware
Chancery Court entered judgment dismissing with prejudice the claims asserted
against General Re, General Reinsurance and certain other defendants in the
matter. Plaintiff has indicated it will appeal the judgment. General Re
and General Reinsurance will vigorously oppose any such appeal.
Item 2. Management’s Discussion and
Analysis of Financial Condition and Results of Operations
Results
of Operations
Net
earnings attributable to Berkshire are disaggregated in the table that follows.
Amounts are after deducting income taxes and exclude earnings attributable to
noncontrolling interests. Amounts are in millions.
|
|
Second
Quarter
|
|
|
First
Six Months
|
|
|
|
2009 |
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Insurance
– underwriting
|
|
$ |
83 |
|
|
$ |
360 |
|
|
$ |
302 |
|
|
$ |
541 |
|
Insurance
– investment income
|
|
|
1,159 |
|
|
|
884 |
|
|
|
2,192 |
|
|
|
1,686 |
|
Utilities
and energy
|
|
|
253 |
|
|
|
208 |
|
|
|
456 |
|
|
|
524 |
|
Manufacturing,
service and retailing
|
|
|
239 |
|
|
|
719 |
|
|
|
497 |
|
|
|
1,206 |
|
Finance
and financial products
|
|
|
82 |
|
|
|
159 |
|
|
|
160 |
|
|
|
306 |
|
Other
|
|
|
(36 |
) |
|
|
(60 |
) |
|
|
(122 |
) |
|
|
(62 |
) |
Investment
and derivative gains/losses
|
|
|
1,515 |
|
|
|
610 |
|
|
|
(1,724 |
) |
|
|
(381 |
) |
Net
earnings attributable to Berkshire
|
|
$ |
3,295 |
|
|
$ |
2,880 |
|
|
$ |
1,761 |
|
|
$ |
3,820 |
|
Berkshire’s
operating businesses are managed on an unusually 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 Berkshire’s corporate headquarters in the day-to-day business
activities of the operating businesses. Berkshire’s corporate office management
participates in and is ultimately responsible for significant capital allocation
decisions, investment activities and the selection of the Chief Executive to
head each of the operating businesses. The business segment data (Note 17 to the
Condensed Consolidated Financial Statements) should be read in conjunction with
this discussion.
The
declines in global economic activity over the last half of 2008 (and in the
fourth quarter in particular) continued through the first half of 2009.
Berkshire’s operating results in 2009 have been significantly impacted by those
declines. Earnings in 2009 of most of Berkshire’s diverse group of
manufacturing, service and retailing businesses declined, in some cases
severely, compared to the prior year. The effects from the current worldwide
economic recession resulted in lower sales volume, revenues and profit margins
as consumers have significantly curtailed spending, particularly for
discretionary items. Berkshire’s two largest business segments, insurance and
utilities, remain strong and have not been negatively impacted by the
recession.
Investment
and derivative gains were $1.5 billion in the second quarter of 2009, while in
the first six months there were losses of $1.7 billion. The gains and losses
primarily derived from credit default contracts, dispositions of certain equity
securities, non-cash other-than-temporary impairment charges with respect to
certain equity securities and changes in estimated fair values of long duration
equity index put option contracts. Changes in the equity and credit markets from
period to period can and have caused significant volatility in periodic
earnings.
In
response to the crises in the financial and capital markets and global
recession, the U.S. and other governments around the world are taking measures
to stabilize financial institutions, regulate markets (including
over-the-counter derivatives markets) and stimulate economic activity. While
management hopes such actions will prove successful, the potential impact on
Berkshire is not clear at this time. It is expected that the current economic
conditions will persist at least through 2009 before meaningful improvements
become evident. Berkshire’s operating companies have taken and will continue to
take cost reduction actions to manage through the current economic situation.
Management believes that the economic franchises of Berkshire’s business
operations remain intact and that operating results will ultimately return to
more normal historical levels, although it cannot predict the timing of a
recovery.
Insurance
—Underwriting
Berkshire’s
management views insurance businesses as possessing two distinct operations –
underwriting and investing. Underwriting decisions are the responsibility of the
unit managers; investing, with limited exception, is the responsibility of
Berkshire’s Chairman and CEO, Warren E. Buffett. Accordingly, Berkshire
evaluates performance of underwriting operations without any allocation of
investment income.
Berkshire’s
principal insurance and reinsurance underwriting units are: (1) GEICO,
(2) General Re, (3) Berkshire Hathaway Reinsurance Group and
(4) Berkshire Hathaway Primary Group. Through General Re, Berkshire also
reinsures life and health risks.
Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations (Continued)
Insurance —Underwriting
(Continued)
Periodic
underwriting results can be affected significantly by changes in estimates for
unpaid losses and loss adjustment expenses, including amounts established for
occurrences in prior years. In addition, the timing and amount of catastrophe
losses produce significant volatility in periodic underwriting results. A key
marketing strategy followed by all of the insurance businesses is the
maintenance of extraordinary capital strength. Statutory surplus of Berkshire’s
insurance businesses was approximately $51 billion at December 31, 2008.
This superior capital strength creates opportunities, especially with respect to
reinsurance activities, to negotiate and enter into insurance and reinsurance
contracts specially designed to meet the unique needs of insurance and
reinsurance buyers.
A summary
follows of underwriting results from Berkshire’s insurance businesses. Amounts
are in millions.
|
|
Second
Quarter
|
|
|
First
Six Months
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Underwriting
gain (loss) attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
GEICO
|
|
$ |
111 |
|
|
$ |
298 |
|
|
$ |
259 |
|
|
$ |
484 |
|
General
Re
|
|
|
276 |
|
|
|
102 |
|
|
|
260 |
|
|
|
144 |
|
Berkshire
Hathaway Reinsurance Group
|
|
|
(291 |
) |
|
|
79 |
|
|
|
(88 |
) |
|
|
108 |
|
Berkshire
Hathaway Primary Group
|
|
|
29 |
|
|
|
81 |
|
|
|
33 |
|
|
|
106 |
|
Pre-tax
underwriting gain
|
|
|
125 |
|
|
|
560 |
|
|
|
464 |
|
|
|
842 |
|
Income
taxes and noncontrolling interests
|
|
|
42 |
|
|
|
200 |
|
|
|
162 |
|
|
|
301 |
|
Net
underwriting gain
|
|
$ |
83 |
|
|
$ |
360 |
|
|
$ |
302 |
|
|
$ |
541 |
|
GEICO
GEICO
provides primarily private passenger automobile coverages to insureds in all 50
states and the District of Columbia. GEICO policies are marketed mainly by
direct response methods in which customers apply for coverage directly to the
company via the Internet, over the telephone or through the mail. This is a
significant element in GEICO’s strategy to be a low-cost insurer. In addition,
GEICO strives to provide excellent service to customers, with the goal of
establishing long-term customer relationships. GEICO’s underwriting results are
summarized in the table below. Dollar amounts are in millions.
|
|
Second
Quarter
|
|
|
First
Six Months
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Premiums
earned
|
|
$ |
3,394 |
|
|
|
100.0 |
|
|
$ |
3,086 |
|
|
|
100.0 |
|
|
$ |
6,655 |
|
|
|
100.0 |
|
|
$ |
6,118 |
|
|
|
100.0 |
|
Losses
and loss adjustment expenses
|
|
|
2,648 |
|
|
|
78.0 |
|
|
|
2,233 |
|
|
|
72.4 |
|
|
|
5,162 |
|
|
|
77.6 |
|
|
|
4,518 |
|
|
|
73.9 |
|
Underwriting
expenses
|
|
|
635 |
|
|
|
18.7 |
|
|
|
555 |
|
|
|
18.0 |
|
|
|
1,234 |
|
|
|
18.5 |
|
|
|
1,116 |
|
|
|
18.2 |
|
Total
losses and expenses
|
|
|
3,283 |
|
|
|
96.7 |
|
|
|
2,788 |
|
|
|
90.4 |
|
|
|
6,396 |
|
|
|
96.1 |
|
|
|
5,634 |
|
|
|
92.1 |
|
Pre-tax
underwriting gain
|
|
$ |
111 |
|
|
|
|
|
|
$ |
298 |
|
|
|
|
|
|
$ |
259 |
|
|
|
|
|
|
$ |
484 |
|
|
|
|
|
Premiums
earned in the second quarter and first six months of 2009 increased $308 million
(10.0%) and $537 million (8.8%), respectively, over the premiums earned in the
corresponding 2008 periods. The growth in premiums earned for voluntary auto was
8.7% for the first six months of 2009, reflecting an increase in
policies-in-force. The weakening economy is also believed to be causing
customers to raise policy deductibles and reduce coverage in order to save
money. Policies-in-force over the last twelve months increased 10.8% overall,
including 9.1% in the preferred risk auto markets and 15.9% in the standard and
nonstandard auto markets. Voluntary auto new business sales in the first six
months of 2009 increased 25.6% versus 2008. Growth was particularly strong
during the first quarter and slowed to a more normal rate in the second quarter.
Voluntary auto policies-in-force at June 30, 2009 were 596,000 greater than at
December 31, 2008.
Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations (Continued)
Insurance —Underwriting
(Continued)
GEICO (Continued)
Losses and
loss adjustment expenses incurred in the second quarter and first six months of
2009 increased $415 million (18.6%) and $644 million (14.3%), respectively, over
amounts incurred in 2008 periods. The loss ratio was 77.6% in the first six
months of 2009 compared to 73.9% in 2008. The higher loss ratio in 2009
reflected overall increases in average claim frequencies and injury claim
severities. Claims frequencies in 2009 for physical damage coverages increased
in the one to three percent range, while frequencies for injury coverages
increased in the three to five percent range compared with 2008. Average injury
severities in 2009 increased in the three to five percent range while average
physical damage severities decreased in the three to five percent range over
2008.
Incurred losses from catastrophe events in 2009 and 2008 were relatively
insignificant. Management anticipates that loss ratios over the remainder of
2009 will be generally higher than in 2008, resulting in comparatively lower
underwriting gains. Underwriting expenses in the first six months of 2009
increased 10.6% over 2008 to $1,234 million due to higher policy issuance costs
and increased salary and employee benefit expenses.
General
Re
General Re
conducts a reinsurance business offering property and casualty and life and
health coverages to clients worldwide. Property and casualty reinsurance is
written in North America on a direct basis through General Reinsurance
Corporation and internationally through Cologne Re (based in Germany) and other
wholly-owned affiliates. Property and casualty reinsurance is also written
through brokers with respect to Faraday in London. Life and health reinsurance
is written worldwide through Cologne Re. General Re strives to generate
underwriting gains in essentially all product lines. Underwriting performance is
not evaluated based upon market share and underwriters are instructed to reject
inadequately priced risks. General Re’s underwriting results are summarized in
the following table. Amounts are in millions.
|
|
Premiums
earned
|
|
|
Pre-tax
underwriting gain
|
|
|
|
Second
Quarter
|
|
|
First Six
Months
|
|
|
Second
Quarter
|
|
|
First Six
Months
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Property/casualty
|
|
$ |
814 |
|
|
$ |
821 |
|
|
$ |
1,577 |
|
|
$ |
1,859 |
|
|
$ |
214 |
|
|
$ |
55 |
|
|
$ |
191 |
|
|
$ |
70 |
|
Life/health
|
|
|
612 |
|
|
|
667 |
|
|
|
1,228 |
|
|
|
1,333 |
|
|
|
62 |
|
|
|
47 |
|
|
|
69 |
|
|
|
74 |
|
|
|
$ |
1,426 |
|
|
$ |
1,488 |
|
|
$ |
2,805 |
|
|
$ |
3,192 |
|
|
$ |
276 |
|
|
$ |
102 |
|
|
$ |
260 |
|
|
$ |
144 |
|
Property/casualty
Property/casualty
premiums earned in the second quarter and first six months of 2009 declined $7
million (0.9%) and $282 million (15.2%), respectively, versus the corresponding
2008 periods. Premiums earned in 2008 included $205 million from a
reinsurance-to-close transaction in the first quarter that increased General
Re’s economic interest in the runoff of Lloyd’s Syndicate 435’s 2000 year of
account from 39% to 100%. Under this transaction, General Re also assumed a
corresponding amount of net loss reserves and as a result, there was no impact
on net underwriting gains in the first quarter of 2008. There was no similar
transaction in 2009.
Excluding
the effect of the reinsurance-to-close transaction in 2008 and the effects of
foreign currency translation rate changes, premiums earned in the first six
months of 2009 increased $63.6 million (3.8%). The increase was due primarily to
increased volume in Europe and lower retrocessions of Lloyd’s market business.
Premium volume in 2009 may remain flat or increase slightly above 2008 levels if
current market conditions continue.
Underwriting
gains were $214 million in the second quarter and $191 million for the first six
months of 2009. Underwriting gains for the first six months of 2009
included gains of $111 million from property business and $80 million from
casualty/workers’ compensation business. The property results in 2009
were net of $82 million of losses from catastrophes, including winter storm
Klaus in Europe, the Victoria bushfires in Australia and an earthquake in Italy.
The timing and magnitude of catastrophe and large individual losses can produce
significant volatility in periodic underwriting results. The
underwriting gains from casualty/workers’ compensation business reflected the
overall favorable run-off of prior years’ loss reserves.
Underwriting
results were $55 million in the second quarter and $70 million for the first six
months of 2008. Underwriting gains for the first six months of 2008
included gains of $133 million from property business and losses of $63 million
from casualty/workers’ compensation business. Property results for
the first six months of 2008 included a $50 million loss from winter storm Emma
in Germany and hailstorms in Europe. Casualty losses were adversely
impacted by legal costs incurred in connection with the regulatory
investigations of finite reinsurance.
Life/health
Premiums
earned in the second quarter and first six months of 2009 were $612 million and
$1,228 million, respectively, decreases of $55 million (8.2%) and $105 million
(7.9%) from the 2008 comparable periods. Excluding the effects of
changes in foreign currency translation rates, premiums earned in 2009 were
relatively unchanged from the first six months of 2008. The life/health
operations produced underwriting gains of $62 million in the second quarter of
2009, an increase of $15 million over 2008, which was due primarily to lower
losses in the U.S. long-term health business.
Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations (Continued)
Insurance —Underwriting
(Continued)
Berkshire
Hathaway Reinsurance Group
The
Berkshire Hathaway Reinsurance Group (“BHRG”) underwrites excess-of-loss
reinsurance and quota-share coverages for insurers and reinsurers worldwide.
BHRG’s business includes catastrophe excess-of-loss reinsurance and excess
direct and facultative reinsurance for large or otherwise unusual discrete
property risks referred to as individual risk. Retroactive reinsurance policies
provide indemnification of losses and loss adjustment expenses with respect to
past loss events. Other multi-line refers to other business written on both a
quota-share and excess basis, participations in and contracts with Lloyd’s
syndicates, as well as property, aviation and workers’ compensation programs.
BHRG’s underwriting results are summarized in the table below. Amounts are in
millions.
|
|
Premiums
earned
|
|
|
Pre-tax
underwriting gain/loss
|
|
|
|
Second
Quarter
|
|
|
First Six
Months
|
|
|
Second
Quarter
|
|
|
First Six
Months
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Catastrophe
and individual risk
|
|
$ |
241 |
|
|
$ |
222 |
|
|
$ |
495 |
|
|
$ |
439 |
|
|
$ |
169 |
|
|
$ |
176 |
|
|
$ |
322 |
|
|
$ |
350 |
|
Retroactive
reinsurance
|
|
|
77 |
|
|
|
3 |
|
|
|
1,886 |
|
|
|
3 |
|
|
|
(95 |
) |
|
|
(112 |
) |
|
|
(202 |
) |
|
|
(233 |
) |
Other
multi-line
|
|
|
892 |
|
|
|
931 |
|
|
|
1,916 |
|
|
|
1,698 |
|
|
|
(365 |
) |
|
|
15 |
|
|
|
(208 |
) |
|
|
(9 |
) |
|
|
$ |
1,210 |
|
|
$ |
1,156 |
|
|
$ |
4,297 |
|
|
$ |
2,140 |
|
|
$ |
(291 |
) |
|
$ |
79 |
|
|
$ |
(88 |
) |
|
$ |
108 |
|
Premiums
earned in the first six months of 2009 from catastrophe and individual risk
contracts increased $56 million (13%) versus the first half of 2008. The
level of business written in a given period will vary significantly due to
changes in market conditions and management’s assessment of the adequacy of
premium rates. In addition, management has constrained the volume of business
written in 2009 in response to the decline in Berkshire’s net worth that
occurred in the first quarter of 2009. Due to the restoration of net worth that
occurred during the second quarter, management’s willingness to write large
catastrophe risks has increased but to date rates have not warranted such
writing. Underwriting results in 2009 and 2008 reflected no significant
catastrophe losses.
Premiums
earned in the first six months of 2009 from retroactive reinsurance included 2
billion Swiss Francs (“CHF”) (approximately $1.7 billion) from an adverse loss
development contract with Swiss Reinsurance Company Limited and its affiliates
(“Swiss Re”) covering substantially all of Swiss Re’s non-life insurance losses
and allocated loss adjustment expenses for loss events occurring prior to
January 1, 2009. The Swiss Re contract provides aggregate limits of
indemnification of 5 billion CHF in excess of a retention of Swiss Re’s reported
loss reserves at December 31, 2008 (58.725 billion CHF) less 2 billion CHF. The
impact on underwriting results from this contract was negligible as the premiums
earned were offset by a corresponding amount of losses incurred.
Retroactive
policies generally provide very large, but limited, indemnification of unpaid
losses and loss adjustment expenses with respect to past loss events that are
generally expected to be paid over long periods of time. The underwriting losses
from retroactive policies primarily represent the periodic amortization of
deferred charges established at the inception of the contracts. At June 30,
2009, unamortized deferred charges were approximately $3.7 billion and gross
unpaid losses were approximately $18.1 billion for all of BHRG’s retroactive
contracts.
Premiums
earned in the second quarter of 2009 from other multi-line business declined $39
million compared to 2008 and in the first six months of 2009 increased $218
million versus 2008. Premiums earned in the second quarter and first six months
of 2009 included $652 million and $1,317 million, respectively, from a 20%
quota-share contract with Swiss Re covering substantially all of Swiss Re’s
property/casualty risks incepting from January 1, 2008 and running through
December 31, 2012. Premiums earned in 2008 from the Swiss Re contract were $534
million in the second quarter and $673 million in the first six months.
Excluding the Swiss Re quota-share contract, other multi-line business premiums
earned in 2009 declined $157 million in the second quarter and $426 million
(approximately 40%) versus 2008 periods, primarily due to lower property,
workers’ compensation and Lloyd’s market volume.
Pre-tax
underwriting results from other multi-line reinsurance in 2009 included foreign
currency transaction losses of $417 million for the second quarter and $365
million for the first six months. These non-cash losses arose from the
conversion of certain reinsurance loss reserves and other liabilities
denominated in foreign currencies (primarily the U.K. Pound Sterling and the
Euro) into U.S. Dollars as of the balance sheet date. The value of these
currencies rose significantly versus the U.S. Dollar in the second quarter of
2009 resulting in losses. The foreign currency transaction gains and losses were
relatively insignificant in the first half of 2008. As disclosed in Berkshire’s
2008 Annual Report on Form 10-K, these currencies weakened significantly in 2008
versus the U.S. Dollar (particularly over the last half of 2008), which produced
a pre-tax foreign currency transaction gain of approximately $930 million for
the year. Excluding foreign currency transaction losses, other
multi-line reinsurance produced underwriting gains of $52 million in the second
quarter and $157 million in the first six months of 2009, reflecting
underwriting gains from the Swiss Re quota-share contract and improved loss
ratios for property business.
Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations (Continued)
Insurance —Underwriting
(Continued)
Berkshire
Hathaway Primary Group
Premiums
earned in 2009 by Berkshire’s various primary insurers were $455 million in the
second quarter and $911 million in the first six months, representing declines
of $46 million and $79 million compared to the corresponding 2008 periods,
resulting from increased competition across virtually all market segments. For
the first six months, Berkshire’s primary insurers produced underwriting gains
of $33 million in 2009 and $106 million in 2008. Underwriting results in the
first half of 2009 were lower than 2008 for most of the primary insurance
operations due to higher loss ratios and expense ratios, which reflected the
impact of fixed costs on lower premium volume.
Insurance—Investment
Income
A summary
of net investment income of Berkshire’s insurance operations follows. Amounts
are in millions.
|
|
Second
Quarter
|
|
|
First
Six Months
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Investment
income before taxes, noncontrolling interests and equity method
earnings
|
|
$ |
1,422 |
|
|
$ |
1,204 |
|
|
$ |
2,720 |
|
|
$ |
2,293 |
|
Income
taxes and noncontrolling interests
|
|
|
376 |
|
|
|
320 |
|
|
|
724 |
|
|
|
607 |
|
Net
investment income before equity method earnings
|
|
|
1,046 |
|
|
|
884 |
|
|
|
1,996 |
|
|
|
1,686 |
|
Equity
method earnings
|
|
|
113 |
|
|
|
— |
|
|
|
196 |
|
|
|
— |
|
Net
investment income
|
|
$ |
1,159 |
|
|
$ |
884 |
|
|
$ |
2,192 |
|
|
$ |
1,686 |
|
Investment
income consists of interest and dividends earned on cash equivalents and
investments allocable to Berkshire’s insurance businesses. Pre-tax investment
income earned in the second quarter and first six months of 2009 exceeded
amounts earned in 2008 periods by $218 million and $427 million, respectively.
The increases in investment income in 2009 primarily reflected earnings from
several large investments made during the fourth quarter of 2008 and first half
of 2009, partially offset by lower earnings on cash and cash equivalents due to
lower short-term interest rates and lower average cash balances in
2009.
In
October 2008, Berkshire subsidiaries acquired Wrigley, Goldman Sachs and
General Electric securities for an aggregate cost of $14.5 billion and in March
2009, Berkshire invested 3 billion CHF in a 12% convertible perpetual instrument
of Swiss Re. In addition, on April 1, 2009, Berkshire invested $3 billion
in 8.5% Cumulative Convertible Perpetual Preferred Stock of The Dow Chemical
Company. See Note 7 to the Condensed Consolidated Financial Statements. Interest
and dividends from these securities will be approximately $2 billion per
annum, which is expected to produce comparative increases in investment income
over the remainder of 2009. Partially offsetting these increases will be
reductions in dividends from Berkshire’s investments in Wells Fargo and U.S.
Bancorp common stock as a result of dividend rate cuts announced by those
companies.
Beginning
in 2009, investment income also includes earnings from equity method investments
(Burlington Northern Santa Fe and Moody’s). Equity method earnings represents
Berkshire’s proportionate share of the net earnings of these companies.
Dividends earned on these investments in the first six months of 2009 were $71
million, but were not reflected in Berkshire’s earnings as a result of the
application of the equity method. For the first six months of 2008, dividends
earned from these investments of $50 million were included in investment income.
In the third quarter of 2009, Berkshire intends to discontinue the use of the
equity method with respect to its investment in Moody’s common stock as a result
of a reduction in its ownership interest to less than 20% (about 17% at July 31,
2009).
A summary
of cash and investments held in Berkshire’s insurance businesses follows.
Amounts are in millions.
|
|
June
30,
2009
|
|
|
Dec.
31,
2008
|
|
|
June
30,
2008
|
|
Cash
and cash equivalents
|
|
$ |
15,077 |
|
|
$ |
18,845 |
|
|
$ |
25,358 |
|
Equity
securities
|
|
|
45,557 |
|
|
|
48,892 |
|
|
|
69,278 |
|
Fixed
maturity securities
|
|
|
31,727 |
|
|
|
26,932 |
|
|
|
30,169 |
|
Other
*
|
|
|
30,365 |
|
|
|
21,535 |
|
|
|
— |
|
|
|
$ |
122,726 |
|
|
$ |
116,204 |
|
|
$ |
124,805 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Other investments include the
investments in Wrigley, Goldman Sachs, General Electric, Swiss Re and Dow
Chemical as well as investments in BNSF and Moody’s, which beginning as of
December 31, 2008 are accounted for under the equity method. At June
30, 2008, investments in BNSF and Moody’s are included in equity
securities.
|
Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations (Continued)
Insurance—Investment Income
(Continued)
Fixed
maturity securities as of June 30, 2009 were as follows. Amounts are in
millions.
|
|
Amortized
Cost
|
|
|
Unrealized
Gains/Losses
|
|
|
Fair
Value
|
|
U.S.
Treasury, government corporations and agencies
|
|
$ |
2,418 |
|
|
$ |
60 |
|
|
$ |
2,478 |
|
States,
municipalities and political subdivisions
|
|
|
4,052 |
|
|
|
264 |
|
|
|
4,316 |
|
Foreign
governments
|
|
|
10,801 |
|
|
|
309 |
|
|
|
11,110 |
|
Corporate
bonds, investment grade
|
|
|
5,043 |
|
|
|
319 |
|
|
|
5,362 |
|
Corporate
bonds, non-investment grade
|
|
|
6,023 |
|
|
|
(228 |
) |
|
|
5,795 |
|
Mortgage-backed
securities
|
|
|
2,632 |
|
|
|
34 |
|
|
|
2,666 |
|
|
|
$ |
30,969 |
|
|
$ |
758 |
|
|
$ |
31,727 |
|
All U.S.
government obligations are rated AAA by the major rating agencies and
approximately 85% of all state, municipal and political subdivisions, foreign
government obligations and mortgage-backed securities were rated AA or higher.
Non-investment grade securities represent securities that are rated below BBB-
or Baa3.
Invested
assets derive from shareholder capital and reinvested earnings as well as net
liabilities assumed under insurance contracts or “float.” The major components
of float are unpaid losses, unearned premiums and other liabilities to
policyholders less premiums and reinsurance receivables, deferred charges
assumed under retroactive reinsurance contracts and deferred policy acquisition
costs. Float was approximately $61 billion at June 30, 2009 and $58 billion as
of December 31, 2008. The cost of float, as represented by the ratio of
pre-tax underwriting gain or loss to average float, was negative in 2009 and
2008, as Berkshire’s insurance businesses generated underwriting gains in each
period.
Utilities
and Energy (“MidAmerican”)
Revenues
and earnings from MidAmerican are summarized below. Amounts are in
millions.
|
|
Second
Quarter
|
|
|
First
Six Months
|
|
|
|
Revenues
|
|
|
Earnings
|
|
|
Revenues
|
|
|
Earnings
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
MidAmerican
Energy Company
|
|
$ |
768 |
|
|
$ |
1,093 |
|
|
$ |
40 |
|
|
$ |
67 |
|
|
$ |
1,906 |
|
|
$ |
2,471 |
|
|
$ |
148 |
|
|
$ |
201 |
|
PacifiCorp
|
|
|
1,041 |
|
|
|
1,069 |
|
|
|
160 |
|
|
|
159 |
|
|
|
2,172 |
|
|
|
2,176 |
|
|
|
344 |
|
|
|
327 |
|
Natural
gas pipelines
|
|
|
220 |
|
|
|
244 |
|
|
|
78 |
|
|
|
91 |
|
|
|
560 |
|
|
|
588 |
|
|
|
270 |
|
|
|
283 |
|
U.K.
utilities
|
|
|
199 |
|
|
|
244 |
|
|
|
62 |
|
|
|
73 |
|
|
|
392 |
|
|
|
533 |
|
|
|
130 |
|
|
|
193 |
|
Real
estate brokerage
|
|
|
290 |
|
|
|
347 |
|
|
|
26 |
|
|
|
15 |
|
|
|
468 |
|
|
|
592 |
|
|
|
13 |
|
|
|
(4 |
) |
Other
|
|
|
137 |
|
|
|
38 |
|
|
|
115 |
|
|
|
13 |
|
|
|
106 |
|
|
|
69 |
|
|
|
(41 |
) |
|
|
17 |
|
|
|
$ |
2,655 |
|
|
$ |
3,035 |
|
|
|
|
|
|
|
|
|
|
$ |
5,604 |
|
|
$ |
6,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
before corporate interest and income taxes
|
|
|
|
|
|
|
|
|
|
|
481 |
|
|
|
418 |
|
|
|
|
|
|
|
|
|
|
|
864 |
|
|
|
1,017 |
|
Interest,
other than to Berkshire
|
|
|
|
|
|
|
|
|
|
|
(79 |
) |
|
|
(89 |
) |
|
|
|
|
|
|
|
|
|
|
(159 |
) |
|
|
(172 |
) |
Interest
on Berkshire junior debt
|
|
|
|
|
|
|
|
|
|
|
(16 |
) |
|
|
(22 |
) |
|
|
|
|
|
|
|
|
|
|
(34 |
) |
|
|
(45 |
) |
Income
taxes and noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
(115 |
) |
|
|
(87 |
) |
|
|
|
|
|
|
|
|
|
|
(183 |
) |
|
|
(238 |
) |
Net
earnings
|
|
|
|
|
|
|
|
|
|
$ |
271 |
|
|
$ |
220 |
|
|
|
|
|
|
|
|
|
|
$ |
488 |
|
|
$ |
562 |
|
Earnings
attributable to Berkshire *
|
|
|
|
|
|
|
|
|
|
$ |
253 |
|
|
$ |
208 |
|
|
|
|
|
|
|
|
|
|
$ |
456 |
|
|
$ |
524 |
|
Debt
owed to others at June 30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
19,708 |
|
|
$ |
18,891 |
|
Debt
owed to Berkshire at June 30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
520 |
|
|
$ |
754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Net of noncontrolling
interests and includes interest earned by Berkshire (net of related income
taxes).
|
Berkshire
currently owns an 89.5% interest in MidAmerican Energy Holdings Company
(“MidAmerican”), an international energy company. MidAmerican’s domestic
regulated energy interests are comprised of two regulated utility companies and
two interstate natural gas pipeline companies. In the United Kingdom,
MidAmerican owns two electricity distribution businesses. The rates that
MidAmerican’s utilities, electricity distribution businesses and natural gas
pipelines charge customers for energy and other services are generally subject
to regulatory approval. Rates are based in large part on the costs of business
operations, including a return on
capital. To the extent these operations are not allowed to include such costs in
the approved rates, operating results will be adversely affected. In addition,
MidAmerican’s other businesses include a diversified portfolio of independent
power projects and the second-largest residential real estate brokerage firm in
the United States.
Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations (Continued)
Utilities and Energy
(“MidAmerican”) (Continued)
Revenues
of MidAmerican Energy Company (“MEC”) in the second quarter and first six months
of 2009 declined $325 million (30%) and $565 million (23%), respectively, from
the same periods in 2008. The revenue decreases in both periods reflect lower
regulated natural gas revenues and, to a lesser extent, lower regulated
electricity revenues. Regulated natural gas revenues decreased by
$162 million in the second quarter and $345 million in the first six months
primarily due to a lower average per-unit cost of gas sold, which is directly
passed through to customers, and to lower sales volume (decreased demand due to
milder temperatures). MEC’s regulated electricity revenues declined $101 million
in the second quarter and $140 million in the first six months primarily as a
result of lower average wholesale prices and volumes, which have decreased as a
result of reduced demand in the current economic environment. Declines in MEC’s
2009 earnings before corporate interest and income taxes (“EBIT”) of $27 million
(40%) for the second quarter and $53 million (26%) for the first six months
primarily reflect the lower regulated electricity revenues, partially offset by
lower cost of sales.
PacifiCorp’s
2009 revenues decreased slightly ($28 million or 3%) in the second quarter and
were relatively unchanged for the first six months compared to 2008. Revenues in
2009 reflect an overall decrease in sales volume (both wholesale and retail) of
approximately 5% and lower wholesale prices, somewhat offset by higher retail
prices approved by regulators. EBIT in the 2009 periods reflects lower energy
costs as a result of reduced amounts and prices of purchased energy in response
to lower sales volumes and the use of lower-cost generation facilities put into
service in the second half of 2008 and first quarter of 2009.
Natural
gas pipelines revenues and EBIT in the second quarter and first six months of
2009 were lower compared to 2008 as a result of reduced transportation revenue
(due to the current economic climate) and the effects of a favorable rate
proceeding included in the results for 2008. U.K. utility revenues
declined $45 million (18%) in the second quarter and $141 million (26%) in the
first six months of 2009, principally due to the impact from foreign currency
exchange rates as a result of a much stronger U.S. Dollar in 2009 as
compared with 2008. EBIT of the U.K. utilities in the second quarter
and first six months of 2009 decreased $11 million (15%) and $63 million
(33%), respectively, from 2008 periods. The declines in EBIT reflect
foreign currency exchange rate changes as well as higher depreciation and
operating expenses.
Real
estate brokerage revenues declined $57 million (16%) in the second quarter and
$124 million (21%) in the first six months of 2009 as compared to
corresponding 2008 periods due to declines in transaction volume and lower home
sales prices, reflecting the continuing weakness in U.S. housing markets.
Improvements in earnings of the real estate brokerage business in 2009 compared
to 2008 reflect lower commission and other operating expenses as well as the
benefit of increased home refinancing transaction volume conducted by an
affiliated home mortgage business.
Other
revenues and EBIT in 2009 included gains of $93 million in the second quarter
and $37 million in the first six months associated with the Constellation Energy
common stock investment. Other EBIT also included $125 million in
stock-based compensation expense recorded in the first quarter of 2009 as a
result of the purchase of common stock issued by MidAmerican upon the exercise
of the last remaining stock options that had been granted to certain members of
management at the time of Berkshire’s acquisition of MidAmerican in
2000.
Manufacturing,
Service and Retailing
Many of
Berkshire’s subsidiaries are engaged in a wide variety of manufacturing, service
and retailing businesses. A comparison of revenues and pre-tax earnings of these
businesses follows. Amounts are in millions.
|
|
Second
Quarter
|
|
|
First
Six Months
|
|
|
|
Revenues
|
|
|
Earnings
|
|
|
Revenues
|
|
|
Earnings
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Marmon
|
|
$ |
1,286 |
|
|
$ |
1,901 |
|
|
$ |
170 |
|
|
$ |
261 |
|
|
$ |
2,540 |
|
|
$ |
2,166 |
|
|
$ |
332 |
|
|
$ |
289 |
|
McLane
|
|
|
7,864 |
|
|
|
7,269 |
|
|
|
66 |
|
|
|
68 |
|
|
|
14,857 |
|
|
|
14,258 |
|
|
|
209 |
|
|
|
141 |
|
Shaw
|
|
|
1,029 |
|
|
|
1,337 |
|
|
|
30 |
|
|
|
82 |
|
|
|
2,032 |
|
|
|
2,561 |
|
|
|
85 |
|
|
|
133 |
|
Other
manufacturing
|
|
|
2,975 |
|
|
|
3,972 |
|
|
|
226 |
|
|
|
528 |
|
|
|
5,607 |
|
|
|
7,475 |
|
|
|
347 |
|
|
|
980 |
|
Other
service
|
|
|
1,572 |
|
|
|
2,276 |
|
|
|
(76 |
) |
|
|
317 |
|
|
|
3,078 |
|
|
|
4,402 |
|
|
|
(62 |
) |
|
|
526 |
|
Retailing
|
|
|
657 |
|
|
|
738 |
|
|
|
21 |
|
|
|
29 |
|
|
|
1,314 |
|
|
|
1,500 |
|
|
|
37 |
|
|
|
61 |
|
|
|
$ |
15,383 |
|
|
$ |
17,493 |
|
|
|
|
|
|
|
|
|
|
$ |
29,428 |
|
|
$ |
32,362 |
|
|
|
|
|
|
|
|
|
Pre-tax
earnings
|
|
|
|
|
|
|
|
|
|
$ |
437 |
|
|
$ |
1,285 |
|
|
|
|
|
|
|
|
|
|
$ |
948 |
|
|
$ |
2,130 |
|
Income
taxes and noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
198 |
|
|
|
566 |
|
|
|
|
|
|
|
|
|
|
|
451 |
|
|
|
924 |
|
|
|
|
|
|
|
|
|
|
|
$ |
239 |
|
|
$ |
719 |
|
|
|
|
|
|
|
|
|
|
$ |
497 |
|
|
$ |
1,206 |
|
Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations (Continued)
Manufacturing, Service and Retailing
(Continued)
Marmon
Berkshire
acquired a 60% interest in Marmon Holdings, Inc. (“Marmon”) on March 18,
2008 and currently owns a 63.6% interest. Marmon’s revenues, costs and expenses
are included in Berkshire’s Consolidated Financial Statements beginning as of
that date. See Note 4 to the Condensed Consolidated Financial Statements for
additional information concerning the acquisition and Marmon’s operations. For
the second quarter and six months ended June 30, 2009, Marmon’s revenues
declined approximately 32% and 30%, respectively, from the revenues for the
comparable 2008 periods (including periods in 2008 prior to Berkshire’s
acquisition). Earnings in the 2009 periods also declined significantly from
earnings in the comparable 2008 periods, reflecting the revenue declines,
partially offset by the impact of ongoing cost reduction efforts across all
business sectors. With the exception of Retail Store Fixtures and Food Service
Equipment sectors, which produced increased earnings in the first half of 2009,
earnings declined in the other nine business sectors.
McLane
McLane’s
revenues for the second quarter of 2009 increased $595 million (8%) over 2008
and for the first six months increased $599 million (4%) over 2008. Pre-tax
earnings for the second quarter of 2009 were relatively unchanged from 2008. For
the first six months of 2009, earnings were $209 million, an increase of $68
million (48%) over 2008. Earnings for the first six months of 2009 included
the impact of a substantial inventory price change gain associated with an
increase in federal excise taxes on cigarettes. Many tobacco manufacturers
raised prices in anticipation of the tax increase, which allowed McLane to
generate a one-time price change gain. The one-time inventory price change gain
was partially offset by a federally mandated one-time floor stock tax on related
inventory held.
McLane’s
business is marked by high sales volume and very low profit margins and has been
subject to increased price competition in recent years. The gross margin rate
was 6.10% in the first half of 2009 compared to 5.96% in 2008. Approximately
one-third of McLane’s annual revenues are from Wal-Mart. A curtailment of
purchasing by Wal-Mart could have a material adverse impact on the earnings of
McLane.
Shaw
Shaw’s
revenues in the second quarter and first six months of 2009 declined $308
million (23%) and $529 million (21%) from revenues in the corresponding
2008 periods. The revenue declines in 2009 were driven primarily by lower unit
sales. Pre-tax earnings for the second quarter of 2009 were $30 million, a
decrease of $52 million (63%) versus 2008. Earnings were $85 million for the
first six months of 2009, a decrease of $48 million (36%) compared with 2008.
Operating results in 2009 benefitted from lower raw material costs. However, the
favorable impact of the lower material costs was more than offset by relatively
higher operating costs attributable to significant declines in sales volume,
which decreased plant operating levels and manufacturing efficiencies, and costs
related to plant closures. During 2009, Shaw incurred costs of $43 million in
the second quarter and $54 million in the first six months related to plant
closures. Comparable costs in 2008 periods were not significant. Operating
results in 2009 reflect the effects of the ongoing recession and the slow
residential real estate activity.
Other
manufacturing
Berkshire’s
other manufacturing businesses include a wide array of businesses. Included in
this group are several manufacturers of building products (Acme Building Brands,
Benjamin Moore, Johns Manville and MiTek) and apparel (led by Fruit of the Loom
which includes the Russell athletic apparel and sporting goods business and the
Vanity Fair Brands women’s intimate apparel business). Also included in this
group are Forest River, a leading manufacturer of leisure vehicles and ISCAR
Metalworking Companies (“IMC”), an industry leader in the metal cutting tools
business with operations worldwide.
Revenues
from other manufacturing activities for the second quarter of 2009 were $2,975
million, a decrease of $997 million (25%) from 2008. Revenues for the first
six months of 2009 were $5,607 million, a decrease of $1,868 million (25%) from
2008. Nearly all of the businesses in the manufacturing group experienced the
adverse effects of the global economic recession as consumers and customers
dramatically cut purchases. During the first six months of 2009, revenues were
lower for apparel (16%), building products (26%) and other businesses (31%) as
compared to the comparable prior year period.
Pre-tax
earnings of the other manufacturing businesses were $226 million in the second
quarter of 2009, a decrease of $302 million (57%) versus 2008. Earnings for
the first six months of 2009 were $633 million (65%) lower than in the
comparable 2008 period. The declines in earnings reflected the dramatic drop in
revenues as well as relatively higher costs resulting from lower manufacturing
efficiencies. Lower earnings were generated by essentially all of these
businesses. Each business has taken actions to reduce costs, slow production and
reduce or delay capital spending until the economy improves.
Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations (Continued)
Manufacturing, Service and Retailing
(Continued)
Other
service
Berkshire’s
other service businesses include NetJets, the world’s leading provider of
fractional ownership programs for general aviation aircraft and FlightSafety, a
provider of high technology training to operators of aircraft. Among the other
businesses included in this group are: TTI, a leading electronic components
distributor; Business Wire, a leading distributor of corporate news, multimedia
and regulatory filings; The Pampered Chef, a direct seller of high quality
kitchen tools; International Dairy Queen, a licensor and service provider to
about 5,700 stores that offer prepared dairy treats and food; The Buffalo News,
a publisher of a daily and Sunday newspaper; and businesses that provide
management and other services to insurance companies.
Revenues
of the other service businesses were $1,572 million in the second quarter of
2009, a decrease of $704 million (31%) compared to 2008. For the first six
months of 2009, revenues of $3,078 million declined $1,324 million (30%) versus
2008. In 2009, pre-tax losses were $76 million for the second quarter and $62
million for the first six months. Other service businesses generated
pre-tax earnings in 2008 of $317 million for the second quarter and $526 million
for the first six months. The decreases in revenues and pre-tax earnings reflect
the negative impact of the global recession on substantially all of Berkshire’s
other service businesses and in particular, NetJets’ fractional ownership
business.
In 2009,
NetJets' revenues declined $550 million (43%) for the second quarter and $1,024
million (42%) for the first six months as compared to 2008. The declines
reflected an 81% decline in aircraft sales as well as a 22% decline in flight
operations revenues primarily due to lower flight revenue hours. NetJets
produced pre-tax losses in 2009 of $253 million for the second quarter and $349
million for the first six months. The pre-tax losses included asset writedowns
and other downsizing costs of $192 million for the second quarter and $255
million for the first six months. NetJets owns more planes than is required for
its present level of operations and further downsizing will be required unless
demand rebounds.
Retailing
Berkshire’s
retailing operations consist of four home furnishings businesses (Nebraska
Furniture Mart, R.C. Willey, Star Furniture and Jordan’s), three jewelry
businesses (Borsheims, Helzberg and Ben Bridge) and See’s Candies. Revenues of
the retailing businesses were $657 million in the second quarter of 2009 and
$1,314 million for the first six months, decreases of $81 million (11%) and $186
million (12%) compared with the corresponding 2008 periods. Pre-tax
earnings in the second quarter of 2009 declined $8 million (28%) to $21 million
and in the first six months declined $24 million (39%) to $37 million versus
2008. Throughout 2008 and in the fourth quarter in particular, as the impact of
the economic recession in the U.S. worsened, consumer spending declined. These
conditions continued through the first half of 2009. Revenues and pre-tax
earnings declined in both the jewelry and home furnishings businesses as a
result of the general economic conditions. In general, sales of “higher-end”
retail products have suffered greater declines than “popular-priced”
items.
Finance
and Financial Products
A summary
of revenues and pre-tax earnings from Berkshire’s finance and financial products
businesses follows. Amounts are in millions.
|
|
Second
Quarter
|
|
|
First
Six Months
|
|
|
|
Revenues
|
|
|
Earnings
|
|
|
Revenues
|
|
|
Earnings
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Manufactured
housing and finance
|
|
$ |
821 |
|
|
$ |
937 |
|
|
$ |
47 |
|
|
$ |
86 |
|
|
$ |
1,548 |
|
|
$ |
1,754 |
|
|
$ |
89 |
|
|
$ |
201 |
|
Furniture/transportation
equipment leasing
|
|
|
167 |
|
|
|
196 |
|
|
|
2 |
|
|
|
22 |
|
|
|
340 |
|
|
|
386 |
|
|
|
5 |
|
|
|
40 |
|
Other
|
|
|
111 |
|
|
|
170 |
|
|
|
86 |
|
|
|
146 |
|
|
|
220 |
|
|
|
321 |
|
|
|
168 |
|
|
|
254 |
|
|
|
$ |
1,099 |
|
|
$ |
1,303 |
|
|
|
|
|
|
|
|
|
|
$ |
2,108 |
|
|
$ |
2,461 |
|
|
|
|
|
|
|
|
|
Pre-tax
earnings
|
|
|
|
|
|
|
|
|
|
$ |
135 |
|
|
$ |
254 |
|
|
|
|
|
|
|
|
|
|
$ |
262 |
|
|
$ |
495 |
|
Income
taxes and noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
53 |
|
|
|
95 |
|
|
|
|
|
|
|
|
|
|
|
102 |
|
|
|
189 |
|
|
|
|
|
|
|
|
|
|
|
$ |
82 |
|
|
$ |
159 |
|
|
|
|
|
|
|
|
|
|
$ |
160 |
|
|
$ |
306 |
|
Revenues
from manufactured housing and finance activities (Clayton Homes) in 2009
declined $116 million (12%) for the second quarter and $206 million (12%) for
the first six months compared to 2008. The declines were due primarily to a 26%
decline in year-to-date home unit sales, partially offset by a 7% increase in
average selling price due primarily to mix changes and higher interest from
installment loans. The increase in interest income reflects higher average
installment loan balances in 2009 versus 2008 due primarily to portfolio
acquisitions in 2008. Installment loan balances were approximately $12.4 billion
as of June 30, 2009.
Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations (Continued)
Finance and Financial Products
(Continued)
Pre-tax
earnings of Clayton Homes in the second quarter and first six months of 2009
declined $39 million (45%) and $112 million (56%) from earnings for the
corresponding 2008 periods. Pre-tax earnings in 2009 reflected increases in loan
loss provisions of $42 million for the second quarter and $80 million for the
first six months. Lower earnings in the 2009 periods also reflected lower unit
sales and increased interest expense, partially offset by lower selling, general
and administrative expenses from cost reduction efforts. Pre-tax earnings in
2008 included a $22 million gain from the sale of certain housing community
assets in the first quarter.
Revenues
and pre-tax earnings from furniture and transportation equipment leasing
activities for the first six months of 2009 declined $46 million and $35
million, respectively, compared to 2008. The declines primarily reflect lower
rental income driven by relatively low utilization rates for over-the-road
trailer and storage units. Significant cost components of this business are
fixed (depreciation and facility expenses) and therefore earnings generally
change disproportionately to revenues. Revenues and earnings of Clayton Homes
and the furniture/transportation equipment leasing businesses have been
negatively affected by the economic recession as well as the credit
crisis.
Earnings
from other finance business activities consist primarily of interest income
earned on short-term and fixed maturity investments and from a small portfolio
of commercial real estate loans. The declines in revenues and pre-tax earnings
in 2009 are primarily attributable to lower short-term interest rates and lower
invested asset levels. In addition, other activities include earnings from a 100
basis point interest rate spread on $12 billion in Berkshire Hathaway Finance
Corporation borrowings, which are used in connection with Clayton Homes’
installment lending activities. A corresponding charge is reflected in Clayton
Homes’ earnings.
Investment
and Derivative Gains/Losses
A summary
of investment and derivative gains and losses and other-than-temporary
impairments of investments follows. Amounts are in millions.
|
|
Second
Quarter
|
|
|
First Six
Months
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Investment
gains/losses
|
|
$ |
3 |
|
|
$ |
675 |
|
|
$ |
(367 |
) |
|
$ |
790 |
|
Other-than-temporary
impairments of investments
|
|
|
(30 |
) |
|
|
(429 |
) |
|
|
(3,126 |
) |
|
|
(429 |
) |
Derivative
gains/losses
|
|
|
2,357 |
|
|
|
689 |
|
|
|
840 |
|
|
|
(952 |
) |
Gains/losses
before income taxes and noncontrolling interests
|
|
|
2,330 |
|
|
|
935 |
|
|
|
(2,653 |
) |
|
|
(591 |
) |
Income
taxes and noncontrolling interests
|
|
|
815 |
|
|
|
325 |
|
|
|
(929 |
) |
|
|
(210 |
) |
Net
gains/losses
|
|
$ |
1,515 |
|
|
$ |
610 |
|
|
$ |
(1,724 |
) |
|
$ |
(381 |
) |
Investment
gains or losses are recognized upon the sales of investments or as otherwise
required under GAAP. The timing of realized gains or losses from sales can have
a material effect on periodic earnings. However, such gains or losses usually
have little, if any, impact on total shareholders’ equity because most equity
and fixed maturity investments are carried at fair value with any unrealized
gain or loss included as components of accumulated other comprehensive
income.
Other-than-temporary
impairments (“OTTI”) of investments in 2009 predominantly relate to a first
quarter OTTI charge with respect to Berkshire’s investment in ConocoPhillips
common stock. The market price of ConocoPhillips shares declined sharply over
the last half of 2008. In the first six months of 2009, Berkshire sold
approximately 20.4 million shares of ConocoPhillips and sold additional
shares in July. Although Berkshire expects the market price for ConocoPhillips
shares to increase over time to levels that exceed original cost, Berkshire may
sell additional shares before the price recovers. Sales in 2009 were or may be
in anticipation of other investment opportunities, to increase overall liquidity
and to carry back realized capital losses to prior years for income tax
purposes. Capital losses can be carried back three years and carried forward
five years for federal income tax purposes. Income taxes of approximately $690
million paid on capital gains in 2006 will be fully recoverable if capital
losses of at least $1.98 billion are generated by the end of 2009. Since a
significant portion of the decline in the market value of Berkshire’s investment
in ConocoPhillips occurred during the last half of 2008, a significant portion
of the other-than-temporary impairment losses recorded in earnings in the first
quarter of 2009 was recognized in other comprehensive income as of
December 31, 2008.
Derivative
gains/losses primarily represent the non-cash changes in fair value of credit
default and equity index put option contracts. Changes in the fair values of
these contracts are reflected in earnings and can be significant, reflecting the
volatility of equity and credit markets. Management does not view the periodic
gains or losses from the changes in fair value as meaningful given the volatile
nature of equity and credit markets over short periods of time.
Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations (Continued)
Investment and Derivative
Gains/Losses (Continued)
Losses
from credit default contracts for the first quarter of 2009 were approximately
$1.35 billion, which reflected several defaults and the widening of credit
default spreads with respect to the underlying non-investment grade issuers
included in the high yield indexes. During the second quarter of 2009, credit
default spreads tightened resulting in a second quarter gain of approximately
$400 million. Non-investment grade issuers are typically highly leveraged and
therefore dependent on having ongoing access to the capital markets. The
freezing of the credit markets in late 2008 and early 2009 was particularly
detrimental to these issuers. As a result, several high yield issuers defaulted
in the first six months of 2009. In the first six months of 2009, credit default
loss payments were approximately $1.5 billion and additional payments of
approximately $350 million were made in July.
In the
second quarter and first six months of 2009, gains from equity index put option
contracts were $1.96 billion and $1.79 billion, respectively. The gains in the
second quarter of 2009 reflected increases in the equity indexes ranging from 8%
to 23%, partially offset by the impact of a weaker U.S. Dollar on non-U.S.
contracts. In 2008, equity index put option contracts produced a gain of $326
million in the second quarter and a loss of $851 million for the first six
months. The loss for the first six months reflected declines in the equity
indexes and a weaker U.S. Dollar. Berkshire’s ultimate payment obligations, if
any, under equity index put option contracts will be determined as of the
contract expiration dates, which begin in 2018.
Financial
Condition
Berkshire’s
balance sheet continues to reflect significant liquidity and a strong capital
base. Consolidated Berkshire shareholders’ equity at June 30, 2009 was $114.5
billion, an increase of $5.3 billion from December 31, 2008. Consolidated
cash and invested assets of insurance and other businesses was approximately
$129.6 billion at June 30, 2009, an increase of about $7.6 billion from
December 31, 2008. Cash and cash equivalents of insurance and
other businesses were $21.4 billion as of June 30, 2009. Invested assets are
held predominantly in Berkshire’s insurance businesses.
During the
first six months of 2009, Berkshire acquired a 12% convertible perpetual
instrument issued by Swiss Re for $2.7 billion and 8.5% Cumulative Convertible
Perpetual Preferred Stock of The Dow Chemical Company for $3 billion. Investment
income generated by these investments will greatly exceed income currently
earned on short-term investments (which, for the first half of 2009 was at
rates, generally, less than 0.50% per annum).
Capital
expenditures of the utilities and energy businesses in the first six months of
2009 were approximately $1.7 billion. Forecasted capital expenditures for 2009
are estimated at $3.4 billion. MidAmerican intends to fund future capital
expenditures with cash flows from operations and debt proceeds. MidAmerican’s
borrowings were $19.7 billion at June 30, 2009, an increase of $563 million from
December 31, 2008. During the first quarter of 2009, MidAmerican issued
$350 million of 5.5% bonds maturing in 2019 and $650 million of 6.0% bonds
maturing in 2039. Notes payable and other borrowings of approximately $200
million mature over the remainder of 2009 and an additional $1.28 billion
matures before the end of 2011. Berkshire has committed until February 28,
2011 to provide up to $3.5 billion of additional capital to MidAmerican to
permit the repayment of its debt obligations or to fund its regulated utility
subsidiaries. Berkshire does not intend to guarantee the repayment of debt by
MidAmerican or any of its subsidiaries.
Assets of
the finance and financial products businesses, which consisted primarily of
loans and finance receivables, fixed maturity securities and cash and cash
equivalents, were approximately $24.2 billion as of June 30, 2009 and $23.9
billion at December 31, 2008. Liabilities were $29.6 billion as of June 30,
2009 and $30.7 billion at December 31, 2008. As of June 30, 2009, notes
payable and other borrowings of $14.7 billion included $12.0 billion of
medium-term notes issued by Berkshire Hathaway Finance Corporation (“BHFC”). In
2009, BHFC issued $250 million of 5.4% notes due in 2018 and $1.0 billion of
4.0% notes due in 2012. The BHFC notes are unsecured and mature at various dates
extending through 2018, beginning with a $1.5 billion maturity in January 2010.
The proceeds from the medium-term notes were used to finance originated and
acquired loans of Clayton Homes. The full and timely payment of principal and
interest on the notes is guaranteed by Berkshire.
During
2008 and continuing into 2009, access to credit markets became limited as a
consequence of the ongoing worldwide credit crisis. As a result, interest rates
for investment grade corporate issuers increased relative to government
obligations, even for companies with strong credit histories and ratings.
Although management believes that the credit crisis is temporary and that
Berkshire has ample liquidity and capital to withstand these conditions,
restricted access to credit markets at affordable rates over longer periods
could have a significant negative impact on operations, particularly the
utilities and energy businesses and the finance and financial products
operations. Management believes that it currently maintains ample liquidity to
cover its existing contractual obligations and provide for contingent liquidity
needs.
Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations (Continued)
Contractual
Obligations
Berkshire
and its subsidiaries are parties to contracts associated with ongoing business
and financing activities, which will result in cash payments to counterparties
in future periods. Certain obligations reflected in the Condensed Consolidated
Balance Sheets, such as notes payable, require future payments on contractually
specified dates and in fixed and determinable amounts. The timing and amount of
the payment of other obligations, such as unpaid property and casualty loss
reserves and long duration credit default and equity index put option contracts,
are contingent upon the outcome of future events. Actual payments will likely
vary, perhaps significantly, from estimates. Other obligations pertain to the
acquisition of goods or services in the future, which are not currently
reflected in the financial statements, such as minimum rentals under operating
leases. Berkshire’s consolidated contractual obligations as of June 30, 2009 did
not change materially from those disclosed in “Contractual Obligations,”
included in “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” contained in Berkshire’s Annual Report on Form 10-K for
the year ended December 31, 2008.
Critical
Accounting Policies
In
applying certain accounting policies, Berkshire’s management is required to make
estimates and judgments regarding transactions that have occurred and ultimately
will be settled several years in the future. Amounts recognized in the financial
statements from such estimates are necessarily based on assumptions about
numerous factors involving varying, and possibly significant, degrees of
judgment and uncertainty. Accordingly, the amounts currently recorded in the
financial statements may prove, with the benefit of hindsight, to be inaccurate.
Reference is made to “Critical Accounting Policies” discussed in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
included in Berkshire’s Annual Report on Form 10-K for the year ended
December 31, 2008 for additional discussion regarding these
estimates.
Berkshire’s
Condensed Consolidated Balance Sheet as of June 30, 2009 includes estimated
liabilities for unpaid losses from property and casualty insurance and
reinsurance contracts of $58.9 billion. Due to the inherent uncertainties in the
process of establishing loss reserve amounts, the actual ultimate claim amounts
will likely differ from the currently recorded amounts. A very small percentage
change in estimates of this magnitude will result in a material effect on
reported earnings. The effects from changes in these estimates are recorded as a
component of losses incurred in the period of the change.
Berkshire’s
Condensed Consolidated Balance Sheet as of June 30, 2009 includes goodwill of
acquired businesses of $33.9 billion. A significant amount of judgment is
required in performing goodwill impairment tests. Such tests include
periodically determining or reviewing the estimated fair value of Berkshire’s
reporting units. There are several methods of estimating a reporting unit’s fair
value, including market quotations, asset and liability fair values and other
valuation techniques, such as discounted projected future net earnings and
multiples of earnings. If the carrying amount of a reporting unit, including
goodwill, exceeds the estimated fair value, then individual assets, including
identifiable intangible assets, and liabilities of the reporting unit are
estimated at fair value. The excess of the estimated fair value of the reporting
unit over the estimated fair value of net assets would establish the implied
value of goodwill. The excess of the recorded amount of goodwill over the
implied value is then charged to earnings as an impairment loss. Although
Berkshire has not concluded that any significant amounts of goodwill were
impaired in recent years, the ultimate length and depth of the ongoing economic
recession could adversely impact the long-term economic values of certain of its
businesses and result in impairment charges in future periods. Conversely, in
light of Berkshire’s strong capital position, the current recession may enhance
the long-term economic value of Berkshire’s subsidiaries.
Berkshire’s
consolidated financial position reflects very significant amounts of invested
assets and derivative contract liabilities that are measured at fair value. A
substantial portion of invested assets are carried at fair value based upon
current market quotations and, when not available, based upon fair value pricing
matrices or models. Derivative contract values reflect estimates of the amounts
at which the contracts could be exchanged based upon varying levels of
observable market information and other assumptions. Certain of Berkshire’s
fixed maturity securities are not actively traded in the securities markets, and
loans and finance receivables of Berkshire’s finance businesses are not traded
at all. Considerable judgment may be required in determining the assumptions
used in certain valuation models, including interest rate, loan prepayment
speed, credit risk and liquidity risk assumptions. Changes in these assumptions
may produce a significant effect on values. Furthermore, accounting and
reporting standards are continually and rapidly changing in the area of
financial instruments, which may impact the values recorded in the financial
statements in future periods.
Information
concerning recently issued accounting pronouncements which are not yet effective
is included in Note 3 to the Condensed Consolidated Financial Statements.
Berkshire is currently evaluating the impact of these accounting
pronouncements.
Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations (Continued)
Forward-Looking
Statements
Investors
are cautioned that certain statements contained in this document as well as some
statements in periodic press releases and some oral statements of Berkshire
officials during presentations about Berkshire are “forward-looking” statements
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
“Act”). Forward-looking statements include statements which are predictive in
nature, which depend upon or refer to future events or conditions, which include
words such as “expects,” “anticipates,” “intends,” “plans,” “believes,”
“estimates” or similar expressions. In addition, any statements concerning
future financial performance (including future revenues, earnings or growth
rates), ongoing business strategies or prospects and possible future Berkshire
actions, which may be provided by management, are also forward-looking
statements as defined by the Act. Forward-looking statements are based on
current expectations and projections about future events and are subject to
risks, uncertainties and assumptions about Berkshire, economic and market
factors and the industries in which Berkshire does business, among other things.
These statements are not guaranties of future performance and Berkshire has no
specific intention to update these statements.
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 Berkshire’s actual performance and future events
and actions to differ materially from such forward-looking statements include,
but are not limited to, changes in market prices of Berkshire’s investments in
fixed maturity and equity securities, losses realized from derivative contracts,
the occurrence of one or more catastrophic events, such as an earthquake,
hurricane or act of terrorism that causes losses insured by Berkshire’s
insurance subsidiaries, changes in insurance laws or regulations, changes in
Federal income tax laws, and changes in general economic and market factors that
affect the prices of securities or the industries in which Berkshire and its
affiliates do business.
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
Reference
is made to Berkshire’s most recently issued Annual Report and in particular the
“Market Risk Disclosures” included in “Management’s Discussion and Analysis of
Financial Condition and Results of Operations.” As of June 30, 2009, there are
no material changes in the market risks described in Berkshire’s Annual Report
on Form 10-K for the year ended December 31, 2008.
As of the
end of the period covered by this Quarterly Report on Form 10-Q, the Corporation
carried out an evaluation, under the supervision and with the participation of
the Corporation’s management, including the Chairman (Chief Executive Officer)
and the Senior Vice President-Treasurer (Chief Financial Officer), of the
effectiveness of the design and operation of the Corporation’s disclosure
controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that
evaluation, the Chairman (Chief Executive Officer) and the Senior Vice
President-Treasurer (Chief Financial Officer) concluded that the Corporation’s
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Corporation (including its consolidated
subsidiaries) required to be included in the Corporation’s periodic SEC filings.
During the quarter, there have been no significant changes in the Corporation’s
internal control over financial reporting or in other factors that could
significantly affect internal control over financial reporting.
Berkshire
and its subsidiaries are parties in a variety of legal actions arising out of
the normal course of business. In particular, such legal actions affect
Berkshire’s insurance and reinsurance businesses. Such litigation generally
seeks to establish liability directly through insurance contracts or indirectly
through reinsurance contracts issued by Berkshire subsidiaries. Plaintiffs
occasionally seek punitive or exemplary damages. Berkshire does not believe that
such normal and routine litigation will have a material effect on its financial
condition or results of operations. Berkshire and certain of its subsidiaries
are also involved in other kinds of legal actions, some of which assert or may
assert claims or seek to impose fines and penalties in substantial amounts.
Reference is made to Note 20 to the Annual Report on Form 10-K for the year
ended December 31, 2008 and Note 18 to the Condensed Consolidated Financial
Statements included in Part I of this Form 10-Q for detailed discussion of such
actions.
Berkshire’s
significant business risks are described in Item 1A to Form 10-K for the
year ended December 31, 2008 to which reference is made
herein.
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote
of Security Holders
At the
annual meeting of shareholders of Berkshire Hathaway Inc. (“Berkshire”), held
May 2, 2009, Berkshire’s shareholders re-elected Berkshire’s directors in an
uncontested election. Berkshire’s shareholders also voted on a
shareholder proposal to request that the Board of Directors issue a
sustainability report to shareholders. Proxies for the meeting had
previously been solicited pursuant to Regulation 14A under the Securities
Exchange Act of 1934.
Following are the votes cast for and
against each director. There were no votes withheld, abstentions or
broker non-votes.
Directors
|
|
For
|
|
|
Against
|
|
Warren
E. Buffett
|
|
|
884,193 |
|
|
|
6,123 |
|
Howard
G. Buffett
|
|
|
888,686 |
|
|
|
1,631 |
|
Susan
L. Decker
|
|
|
886,184 |
|
|
|
4,134 |
|
William
H. Gates III
|
|
|
889,352 |
|
|
|
965 |
|
David
S. Gottesman
|
|
|
889,437 |
|
|
|
880 |
|
Charlotte
Guyman
|
|
|
889,015 |
|
|
|
1,301 |
|
Donald
R. Keough
|
|
|
889,043 |
|
|
|
1,274 |
|
Charles
T. Munger
|
|
|
885,530 |
|
|
|
4,787 |
|
Thomas
S. Murphy
|
|
|
876,364 |
|
|
|
13,953 |
|
Ronald
L. Olson
|
|
|
886,622 |
|
|
|
3,696 |
|
Walter
Scott, Jr.
|
|
|
888,966 |
|
|
|
1,350 |
|
Votes on the shareholder proposal
were as follows:
|
For
|
|
|
Against
|
|
|
Abstain
|
|
|
|
52,667
|
|
|
|
716,678
|
|
|
|
39,971
|
|
None
|
a.
Exhibits |
|
|
|
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certifications
|
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certifications
|
|
32.1
|
Section 1350
Certifications
|
|
32.2
|
Section 1350
Certifications
|
|
101
|
The
following financial information from Berkshire Hathaway Inc.’s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2009, formatted in XBRL
(Extensible Business Reporting Language) includes: (i) the Condensed
Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008,
(ii) the Condensed Consolidated Statements of Earnings for each of the
three-month and six-month periods ended June 30, 2009 and 2008, (iii) the
Condensed Consolidated Statements of Cash Flows for each of the six-month
periods ended June 30, 2009 and 2008, and (iv) the Notes to Condensed
Consolidated Financial Statements, tagged as blocks of
text.
|
Pursuant
to the requirement 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.
|
BERKSHIRE
HATHAWAY INC.
|
|
(Registrant)
|
|
|
Date
August 7, 2009
|
/S/ MARC D. HAMBURG
|
|
(Signature)
|
|
Marc
D. Hamburg,
Senior
Vice President and
Principal
Financial Officer
|
35