a6089935.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 September 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 October 29, 2009:
Class A
— 1,056,884
Class
B — 14,845,356
BERKSHIRE
HATHAWAY INC.
|
Page No.
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
3
|
|
|
4
|
|
|
5-21
|
|
|
22-34
|
|
|
34
|
|
|
34
|
|
|
|
|
|
|
|
|
|
35
|
|
|
35
|
|
|
35
|
|
|
35
|
|
|
35
|
|
|
35
|
|
|
35
|
|
|
|
35
|
BERKSHIRE
HATHAWAY INC.
and
Subsidiaries
(dollars
in millions)
|
|
September
30,
2009
|
|
|
December 31,
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Insurance
and Other:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
23,840 |
|
|
$ |
24,302 |
|
Investments:
|
|
|
|
|
|
|
|
|
Fixed
maturity securities
|
|
|
32,586 |
|
|
|
27,115 |
|
Equity
securities
|
|
|
55,084 |
|
|
|
49,073 |
|
Other
|
|
|
31,927 |
|
|
|
21,535 |
|
Receivables
|
|
|
16,047 |
|
|
|
14,925 |
|
Inventories
|
|
|
6,051 |
|
|
|
7,500 |
|
Property,
plant and equipment
|
|
|
16,567 |
|
|
|
16,703 |
|
Goodwill
|
|
|
27,617 |
|
|
|
27,477 |
|
Other
|
|
|
13,258 |
|
|
|
13,257 |
|
|
|
|
222,977 |
|
|
|
201,887 |
|
|
|
|
|
|
|
|
|
|
Utilities
and Energy:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
744 |
|
|
|
280 |
|
Property,
plant and equipment
|
|
|
30,432 |
|
|
|
28,454 |
|
Goodwill
|
|
|
5,333 |
|
|
|
5,280 |
|
Other
|
|
|
7,550 |
|
|
|
7,556 |
|
|
|
|
44,059 |
|
|
|
41,570 |
|
|
|
|
|
|
|
|
|
|
Finance
and Financial Products:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
2,335 |
|
|
|
957 |
|
Investments
in fixed maturity securities
|
|
|
4,765 |
|
|
|
4,517 |
|
Loans
and finance receivables
|
|
|
13,514 |
|
|
|
13,942 |
|
Goodwill
|
|
|
1,024 |
|
|
|
1,024 |
|
Other
|
|
|
3,336 |
|
|
|
3,502 |
|
|
|
|
24,974 |
|
|
|
23,942 |
|
|
|
$ |
292,010 |
|
|
$ |
267,399 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Insurance
and Other:
|
|
|
|
|
|
|
|
|
Losses
and loss adjustment expenses
|
|
$ |
59,603 |
|
|
$ |
56,620 |
|
Unearned
premiums
|
|
|
8,753 |
|
|
|
7,861 |
|
Life
and health insurance benefits
|
|
|
4,012 |
|
|
|
3,619 |
|
Accounts
payable, accruals and other liabilities
|
|
|
15,420 |
|
|
|
14,987 |
|
Notes
payable and other borrowings
|
|
|
3,815 |
|
|
|
4,349 |
|
|
|
|
91,603 |
|
|
|
87,436 |
|
|
|
|
|
|
|
|
|
|
Utilities
and Energy:
|
|
|
|
|
|
|
|
|
Accounts
payable, accruals and other liabilities
|
|
|
5,703 |
|
|
|
6,175 |
|
Notes
payable and other borrowings
|
|
|
19,564 |
|
|
|
19,145 |
|
|
|
|
25,267 |
|
|
|
25,320 |
|
|
|
|
|
|
|
|
|
|
Finance
and Financial Products:
|
|
|
|
|
|
|
|
|
Accounts
payable, accruals and other liabilities
|
|
|
2,561 |
|
|
|
2,656 |
|
Derivative
contract liabilities
|
|
|
10,352 |
|
|
|
14,612 |
|
Notes
payable and other borrowings
|
|
|
14,642 |
|
|
|
13,388 |
|
|
|
|
27,555 |
|
|
|
30,656 |
|
Income
taxes, principally deferred
|
|
|
16,903 |
|
|
|
10,280 |
|
Total
liabilities
|
|
|
161,328 |
|
|
|
153,692 |
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|
Common
stock and capital in excess of par value
|
|
|
27,086 |
|
|
|
27,141 |
|
Accumulated
other comprehensive income
|
|
|
15,816 |
|
|
|
3,954 |
|
Retained
earnings
|
|
|
83,171 |
|
|
|
78,172 |
|
Berkshire
Hathaway shareholders’ equity
|
|
|
126,073 |
|
|
|
109,267 |
|
Noncontrolling
interests
|
|
|
4,609 |
|
|
|
4,440 |
|
Total
shareholders’ equity
|
|
|
130,682 |
|
|
|
113,707 |
|
|
|
$ |
292,010 |
|
|
$ |
267,399 |
|
See
accompanying Notes to Consolidated Financial Statements
and
Subsidiaries
CONSOLIDATED
STATEMENTS OF EARNINGS
(dollars
in millions except per share amounts)
|
|
Third
Quarter |
|
|
First
Nine Months
|
|
|
|
2009
|
|
|
2008 |
|
|
2009
|
|
|
2008 |
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
and Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
premiums earned
|
|
$ |
6,595 |
|
|
$ |
6,465 |
|
|
$ |
21,263 |
|
|
$ |
18,905 |
|
Sales
and service revenues
|
|
|
16,178 |
|
|
|
17,323 |
|
|
|
46,075 |
|
|
|
49,415 |
|
Interest,
dividend and other investment income
|
|
|
1,361 |
|
|
|
1,143 |
|
|
|
4,133 |
|
|
|
3,588 |
|
Investment
gains/losses
|
|
|
115 |
|
|
|
(48 |
) |
|
|
(314 |
) |
|
|
738 |
|
Other-than-temporary
impairment losses on investments
|
|
|
(25 |
) |
|
|
(250 |
) |
|
|
(3,151 |
) |
|
|
(679 |
) |
|
|
|
24,224 |
|
|
|
24,633 |
|
|
|
68,006 |
|
|
|
71,967 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilities
and Energy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
|
2,741 |
|
|
|
3,240 |
|
|
|
8,212 |
|
|
|
9,588 |
|
Other
|
|
|
71 |
|
|
|
58 |
|
|
|
204 |
|
|
|
139 |
|
|
|
|
2,812 |
|
|
|
3,298 |
|
|
|
8,416 |
|
|
|
9,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance
and Financial Products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
420 |
|
|
|
464 |
|
|
|
1,257 |
|
|
|
1,360 |
|
Investment
gains/losses
|
|
|
(5 |
) |
|
|
2 |
|
|
|
57 |
|
|
|
6 |
|
Derivative
gains/losses
|
|
|
1,732 |
|
|
|
(1,261 |
) |
|
|
2,572 |
|
|
|
(2,213 |
) |
Other
|
|
|
721 |
|
|
|
790 |
|
|
|
1,987 |
|
|
|
2,347 |
|
|
|
|
2,868 |
|
|
|
(5 |
) |
|
|
5,873 |
|
|
|
1,500 |
|
|
|
|
29,904 |
|
|
|
27,926 |
|
|
|
82,295 |
|
|
|
83,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
and Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
losses and loss adjustment expenses
|
|
|
4,125 |
|
|
|
4,796 |
|
|
|
14,211 |
|
|
|
12,531 |
|
Life
and health insurance benefits
|
|
|
435 |
|
|
|
441 |
|
|
|
1,320 |
|
|
|
1,383 |
|
Insurance
underwriting expenses
|
|
|
1,475 |
|
|
|
1,102 |
|
|
|
4,708 |
|
|
|
4,023 |
|
Cost
of sales and services
|
|
|
13,614 |
|
|
|
14,316 |
|
|
|
38,700 |
|
|
|
40,530 |
|
Selling,
general and administrative expenses
|
|
|
2,015 |
|
|
|
1,861 |
|
|
|
6,051 |
|
|
|
5,770 |
|
Interest
expense
|
|
|
29 |
|
|
|
42 |
|
|
|
101 |
|
|
|
115 |
|
|
|
|
21,693 |
|
|
|
22,558 |
|
|
|
65,091 |
|
|
|
64,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilities
and Energy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales and operating expenses
|
|
|
2,080 |
|
|
|
2,468 |
|
|
|
6,390 |
|
|
|
7,462 |
|
Interest
expense
|
|
|
291 |
|
|
|
304 |
|
|
|
880 |
|
|
|
894 |
|
|
|
|
2,371 |
|
|
|
2,772 |
|
|
|
7,270 |
|
|
|
8,356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance
and Financial Products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
174 |
|
|
|
168 |
|
|
|
511 |
|
|
|
474 |
|
Other
|
|
|
827 |
|
|
|
926 |
|
|
|
2,336 |
|
|
|
2,586 |
|
|
|
|
1,001 |
|
|
|
1,094 |
|
|
|
2,847 |
|
|
|
3,060 |
|
|
|
|
25,065 |
|
|
|
26,424 |
|
|
|
75,208 |
|
|
|
75,768 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
before income taxes and equity method earnings
|
|
|
4,839 |
|
|
|
1,502 |
|
|
|
7,087 |
|
|
|
7,426 |
|
Income
tax expense
|
|
|
1,601 |
|
|
|
294 |
|
|
|
2,107 |
|
|
|
2,145 |
|
Earnings
from equity method investments
|
|
|
111 |
|
|
|
— |
|
|
|
307 |
|
|
|
— |
|
Net
earnings
|
|
|
3,349 |
|
|
|
1,208 |
|
|
|
5,287 |
|
|
|
5,281 |
|
Less:
Earnings attributable to noncontrolling interests
|
|
|
111 |
|
|
|
151 |
|
|
|
288 |
|
|
|
404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings attributable to Berkshire Hathaway
|
|
$ |
3,238 |
|
|
$ |
1,057 |
|
|
$ |
4,999 |
|
|
$ |
4,877 |
|
Average
common shares outstanding *
|
|
|
1,551,727 |
|
|
|
1,549,226 |
|
|
|
1,550,986 |
|
|
|
1,548,871 |
|
Net
earnings per share attributable to Berkshire Hathaway shareholders
*
|
|
$ |
2,087 |
|
|
$ |
682 |
|
|
$ |
3,223 |
|
|
$ |
3,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
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 Consolidated Financial Statements
and
Subsidiaries
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(dollars
in millions)
|
|
First
Nine Months
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
5,287 |
|
|
$ |
5,281 |
|
Adjustments
to reconcile net earnings to operating cash flows:
|
|
|
|
|
|
|
|
|
Investment
(gains) losses and other-than-temporary impairment losses
|
|
|
3,408 |
|
|
|
(65 |
) |
Depreciation
|
|
|
2,315 |
|
|
|
2,071 |
|
Other
|
|
|
(101 |
) |
|
|
(241 |
) |
Changes
in operating assets and liabilities before business
acquisitions:
|
|
|
|
|
|
|
|
|
Losses
and loss adjustment expenses
|
|
|
2,244 |
|
|
|
988 |
|
Deferred
charges reinsurance assumed
|
|
|
(8 |
) |
|
|
362 |
|
Unearned
premiums
|
|
|
802 |
|
|
|
1,551 |
|
Receivables
and originated loans
|
|
|
(252 |
) |
|
|
(2,564 |
) |
Derivative
contract assets and liabilities
|
|
|
(4,315 |
) |
|
|
3,182 |
|
Income
taxes
|
|
|
693 |
|
|
|
(904 |
) |
Other
assets and liabilities
|
|
|
1,953 |
|
|
|
(1,233 |
) |
Net
cash flows from operating activities
|
|
|
12,026 |
|
|
|
8,428 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of fixed maturity securities
|
|
|
(8,939 |
) |
|
|
(32,601 |
) |
Purchases
of equity securities
|
|
|
(3,204 |
) |
|
|
(9,449 |
) |
Purchases
of other investments
|
|
|
(6,068 |
) |
|
|
— |
|
Sales
of fixed maturity securities
|
|
|
3,222 |
|
|
|
13,166 |
|
Redemptions
and maturities of fixed maturity securities
|
|
|
4,003 |
|
|
|
15,675 |
|
Sales
of equity securities
|
|
|
2,126 |
|
|
|
2,067 |
|
Purchases
of loans and finance receivables
|
|
|
(227 |
) |
|
|
(1,359 |
) |
Principal
collections on loans and finance receivables
|
|
|
618 |
|
|
|
558 |
|
Acquisitions
of businesses
|
|
|
(75 |
) |
|
|
(5,860 |
) |
Purchases
of property, plant and equipment
|
|
|
(3,803 |
) |
|
|
(4,201 |
) |
Other
|
|
|
1,218 |
|
|
|
(17 |
) |
Net
cash flows from investing activities
|
|
|
(11,129 |
) |
|
|
(22,021 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from borrowings of finance businesses
|
|
|
1,550 |
|
|
|
5,149 |
|
Proceeds
from borrowings of utilities and energy businesses
|
|
|
1,241 |
|
|
|
2,147 |
|
Proceeds
from other borrowings
|
|
|
79 |
|
|
|
102 |
|
Repayments
of borrowings of finance businesses
|
|
|
(328 |
) |
|
|
(2,698 |
) |
Repayments
of borrowings of utilities and energy businesses
|
|
|
(383 |
) |
|
|
(2,215 |
) |
Repayments
of other borrowings
|
|
|
(674 |
) |
|
|
(174 |
) |
Change
in short term borrowings
|
|
|
(721 |
) |
|
|
532 |
|
Acquisitions
of noncontrolling interests and other
|
|
|
(377 |
) |
|
|
(87 |
) |
Net
cash flows from financing activities
|
|
|
387 |
|
|
|
2,756 |
|
Effects
of foreign currency exchange rate changes
|
|
|
96 |
|
|
|
(123 |
) |
Increase
(decrease) in cash and cash equivalents
|
|
|
1,380 |
|
|
|
(10,960 |
) |
Cash
and cash equivalents at beginning of year *
|
|
|
25,539 |
|
|
|
44,329 |
|
Cash
and cash equivalents at end of first nine months *
|
|
$ |
26,919 |
|
|
$ |
33,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
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 nine months—
|
|
|
|
|
|
|
|
|
Insurance
and Other
|
|
$ |
23,840 |
|
|
$ |
27,899 |
|
Utilities
and Energy
|
|
|
744 |
|
|
|
531 |
|
Finance
and Financial Products
|
|
|
2,335 |
|
|
|
4,939 |
|
|
|
$ |
26,919 |
|
|
$ |
33,369 |
|
See
accompanying Notes to Consolidated Financial Statements
and
Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2009
Note
1. General
The
accompanying unaudited 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 impairment losses on
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
During
the third quarter of 2009, the FASB Accounting Standards Codification (“the
Codification” or “ASC”) became effective and superseded prior existing Financial
Accounting Standards and is now the single source of authoritative
GAAP. The Codification does not change previous GAAP and accordingly,
its adoption did not have a material impact on Berkshire’s consolidated
financial statements.
As of
January 1, 2009, Berkshire adopted certain provisions of “ASC 810
Consolidation” which require that noncontrolling interests (formerly known as
“minority interests”) be displayed in the balance sheet as a separate component
of shareholders’ equity and that net earnings attributable to the noncontrolling
interests be clearly indentified and presented in the 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 reportable as additional investment purchases
(potentially resulting in recognition of additional other assets, including
goodwill, or liabilities) or sales. During the first nine 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 guidance issued by the FASB in April 2009
relating to financial instruments. The following three paragraphs
further discuss this guidance, the adoption of which was not material to
Berkshire’s Consolidated Financial Statements.
The FASB
amended standards included in “ASC 320 Investments—Debt and Equity Securities”
related to recognition, measurement and presentation for other-than-temporary
impairments of debt securities and changed the 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 the
security before amortized cost is recovered, (b) will more likely than not be
required to sell the security 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 the security. Under (a) and (b) the entire other-than-temporary
impairment 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.
Notes To Consolidated Financial
Statements (Continued)
Note
2. Accounting pronouncements adopted in 2009 (Continued)
The FASB
amended “ASC 820 Fair Value Measurements and Disclosures” to clarify that
adjustments to quoted market prices may be required in illiquid or disorderly
markets in order to estimate fair value and to provide guidance on the
circumstances indicating whether markets are illiquid or disorderly. This
amendment 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 FASB also amended “ASC
825 Financial Instruments” to require 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 financial
statements. See Note 10.
In May
2009, the FASB amended “ASC 855 Subsequent Events” to set forth general
accounting and disclosure requirements for events that occur subsequent to the
balance sheet date but before the company’s financial statements are issued and
is effective for the periods ending after June 15, 2009. Events that occurred
subsequent to September 30, 2009 have been evaluated by Berkshire’s management
through the time of filing this report on November 6, 2009.
Note
3. Accounting pronouncements to be adopted
In June
2009, the FASB issued revised standards relating to securitizations and
special-purpose entities. The guidance eliminates the concept of a
qualifying special-purpose entity (“QSPE”) and the exemption for QSPE’s from
previous consolidation guidance and also modifies the derecognition criteria for
transfers of financial assets. The guidance 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. The guidance also
requires additional disclosures and is effective for financial statements issued
for fiscal periods beginning after November 15, 2009. Berkshire is currently
evaluating the impact these changes in accounting standards will have on its
consolidated financial statements.
In August
2009, the FASB issued Accounting Standards Update 2009-05, “Measuring
Liabilities at Fair Value” (“ASU 2009-05”). ASU 2009-05 provides
guidance on valuing a liability when a quoted price in an active market is not
available and is effective October 1, 2009. Berkshire does not anticipate that
the adoption of ASU 2009-05 will have a material impact on its consolidated
financial statements.
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 the year ended December 31, 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 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 nine months of 2008 as if each acquisition occurring during
2008 was consummated on the same terms at the beginning of the year. Amounts are
in millions, except earnings per share.
|
|
|
2008
|
|
|
Total
revenues
|
|
$ |
84,601 |
|
|
Net
earnings attributable to Berkshire Hathaway
|
|
|
4,961 |
|
|
Earnings
per equivalent Class A common share attributable to Berkshire
Hathaway shareholders
|
|
|
3,203 |
|
Note
5. Investments in fixed maturity securities
Investments
in securities with fixed maturities as of September 30, 2009 and December 31,
2008 are shown below (in millions).
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses *
|
|
|
Value
|
|
September
30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury, U.S. government corporations and agencies
|
|
$ |
2,358 |
|
|
$ |
59 |
|
|
$ |
— |
|
|
$ |
2,417 |
|
States,
municipalities and political subdivisions
|
|
|
3,904 |
|
|
|
286 |
|
|
|
(1 |
) |
|
|
4,189 |
|
Foreign
governments
|
|
|
11,197 |
|
|
|
406 |
|
|
|
(34 |
) |
|
|
11,569 |
|
Corporate
bonds
|
|
|
13,473 |
|
|
|
1,897 |
|
|
|
(637 |
) |
|
|
14,733 |
|
Mortgage-backed
securities
|
|
|
4,130 |
|
|
|
342 |
|
|
|
(29 |
) |
|
|
4,443 |
|
|
|
$ |
35,062 |
|
|
$ |
2,990 |
|
|
$ |
(701 |
) |
|
$ |
37,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
and other
|
|
$ |
30,814 |
|
|
$ |
2,420 |
|
|
$ |
(648 |
) |
|
$ |
32,586 |
|
Finance
and financial products
|
|
|
4,248 |
|
|
|
570 |
|
|
|
(53 |
) |
|
|
4,765 |
|
|
|
$ |
35,062 |
|
|
$ |
2,990 |
|
|
$ |
(701 |
) |
|
$ |
37,351 |
|
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
|
|
|
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 $659 million at September 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
September 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
|
|
$ |
4,507 |
|
|
$ |
16,246 |
|
|
$ |
6,532 |
|
|
$ |
3,647 |
|
|
$ |
4,130 |
|
|
$ |
35,062 |
|
Fair
value
|
|
|
4,632 |
|
|
|
17,101 |
|
|
|
6,854 |
|
|
|
4,321 |
|
|
|
4,443 |
|
|
|
37,351 |
|
Notes To Consolidated Financial
Statements (Continued)
Note
6. Investments in equity securities
Investments
in equity securities as of September 30, 2009 and December 31, 2008 are
summarized below (in millions).
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost Basis
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
September
30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
American
Express Company
|
|
$ |
1,287 |
|
|
$ |
3,853 |
|
|
$ |
— |
|
|
$ |
5,140 |
|
The
Coca-Cola Company
|
|
|
1,299 |
|
|
|
9,441 |
|
|
|
— |
|
|
|
10,740 |
|
ConocoPhillips
|
|
|
2,249 |
|
|
|
345 |
|
|
|
— |
|
|
|
2,594 |
|
Johnson
& Johnson
|
|
|
2,322 |
|
|
|
70 |
|
|
|
(60 |
) |
|
|
2,332 |
|
Kraft
Foods Inc.
|
|
|
4,330 |
|
|
|
— |
|
|
|
(908 |
) |
|
|
3,422 |
|
The
Procter & Gamble Company
|
|
|
5,484 |
|
|
|
3 |
|
|
|
(162 |
) |
|
|
5,325 |
|
Wells
Fargo & Company
|
|
|
7,194 |
|
|
|
2,878 |
|
|
|
(843 |
) |
|
|
9,229 |
|
Other
|
|
|
14,758 |
|
|
|
5,458 |
|
|
|
(1,591 |
) |
|
|
18,625 |
|
|
|
$ |
38,923 |
|
|
$ |
22,048 |
|
|
$ |
(3,564 |
) |
|
$ |
57,407 |
|
Insurance
and other
|
|
$ |
38,255 |
|
|
$ |
20,393 |
|
|
$ |
(3,564 |
) |
|
$ |
55,084 |
|
Finance
and financial products *
|
|
|
436 |
|
|
|
33 |
|
|
|
— |
|
|
|
469 |
|
Utilities
and energy *
|
|
|
232 |
|
|
|
1,622 |
|
|
|
— |
|
|
|
1,854 |
|
|
|
$ |
38,923 |
|
|
$ |
22,048 |
|
|
$ |
(3,564 |
) |
|
$ |
57,407 |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Included
in Other assets.
|
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 September 30, 2009 included $575 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 September 30, 2009 were concentrated in
six issuers. Unrealized losses generally ranged from 3% to 40% 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 September 30, 2009 and December 31, 2008 follows (in
millions).
|
|
Cost
|
|
|
Unrealized
Gains
|
|
|
Fair
Value
|
|
|
Carrying
Value
|
|
September
30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturity and equity
|
|
$ |
20,089 |
|
|
$ |
6,198 |
|
|
$ |
26,287 |
|
|
$ |
25,451 |
|
Equity
method
|
|
|
5,851 |
|
|
|
278 |
|
|
|
6,129 |
|
|
|
6,476 |
|
|
|
$ |
25,940 |
|
|
$ |
6,476 |
|
|
$ |
32,416 |
|
|
$ |
31,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Consolidated Financial
Statements (Continued)
Note 7. Other
Investments (Continued)
Fixed
maturity and equity investments in the preceding table include Berkshire’s
investments in The Goldman Sachs Group, Inc. (“GS”), The General Electric
Company (“GE”) and the Wm. Wrigley Jr. Company (“Wrigley”), which were acquired
in the fourth quarter of 2008. In 2009, investments were also made in the Swiss
Reinsurance Company Limited (“Swiss Re”) and The Dow Chemical Company
(“Dow”). Additional information regarding these investments
follows.
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 at
Berkshire’s option 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 Dow (“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. Beginning in
April 2014, if the Dow common stock price exceeds $53.72 per share for any 20
trading days in a consecutive 30-day window, Dow, at its option, at any time, in
whole or in part, may convert the Dow Preferred into Dow common stock at the
then applicable conversion rate. The Dow Preferred is entitled to dividends at a
rate of 8.5% per annum.
As of
December 31, 2008, equity method investments included 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. 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.
As of
September 30, 2009, Berkshire owned 22.6% of BNSF’s outstanding common stock.
See Note 20 for additional information regarding Berkshire’s investment in BNSF.
During the third quarter of 2009, Berkshire sold shares of Moody’s common stock,
which reduced its ownership interest to about 16.6% as of September
30. As a result, Berkshire discontinued the use of the equity method
with respect to its investment in Moody’s as of the beginning of the third
quarter of 2009. As of September 30, 2009, Berkshire’s remaining
investment in Moody’s common stock is carried at fair value and is included as a
component of investments in equity securities in the Consolidated Balance
Sheet. This change did not have a material impact on Berkshire’s
Consolidated Financial Statements.
Note
8. Investment gains/losses
Investment
gains/losses are summarized below (in millions).
|
|
Third
Quarter
|
|
|
First
Nine Months
|
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Fixed
maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
gains from sales and other disposals
|
|
$ |
44 |
|
|
$ |
46 |
|
|
$ |
216 |
|
|
$ |
152 |
|
Gross
losses from sales and other disposals
|
|
|
(8 |
) |
|
|
(4 |
) |
|
|
(17 |
) |
|
|
(5 |
) |
Equity
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
gains from sales
|
|
|
94 |
|
|
|
9 |
|
|
|
189 |
|
|
|
686 |
|
Gross
losses from sales
|
|
|
(7 |
) |
|
|
(100 |
) |
|
|
(566 |
) |
|
|
(104 |
) |
Other
|
|
|
(13 |
) |
|
|
3 |
|
|
|
(79 |
) |
|
|
15 |
|
|
|
$ |
110 |
|
|
$ |
(46 |
) |
|
$ |
(257 |
) |
|
$ |
744 |
|
Notes To Consolidated Financial
Statements (Continued)
Note
8. Investment gains/losses (Continued)
Net
investment gains/losses are reflected in the Consolidated Statements of Earnings
as follows (in millions).
|
|
Third
Quarter
|
|
|
First
Nine Months
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Insurance
and other
|
|
$ |
115 |
|
|
$ |
(48 |
) |
|
$ |
(314 |
) |
|
$ |
738 |
|
Finance
and financial products
|
|
|
(5 |
) |
|
|
2 |
|
|
|
57 |
|
|
|
6 |
|
|
|
$ |
110 |
|
|
$ |
(46 |
) |
|
$ |
(257 |
) |
|
$ |
744 |
|
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 September 30,
2009 and December 31, 2008 follows (in millions).
|
|
September 30,
2009
|
|
|
December 31,
2008
|
|
|
|
Assets (3)
|
|
|
Liabilities
|
|
|
Notional
Value
|
|
|
Assets (3)
|
|
|
Liabilities
|
|
|
Notional
Value
|
|
Equity
index put options
|
|
$ |
— |
|
|
$ |
8,012 |
|
|
$ |
38,592 |
(1) |
|
$ |
— |
|
|
$ |
10,022 |
|
|
$ |
37,134 |
(1) |
Credit
default obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
yield indexes
|
|
|
— |
|
|
|
1,213 |
|
|
|
5,855 |
(2) |
|
|
— |
|
|
|
3,031 |
|
|
|
7,892 |
(2) |
States/municipalities
|
|
|
— |
|
|
|
657 |
|
|
|
16,042 |
(2) |
|
|
— |
|
|
|
958 |
|
|
|
18,364 |
(2) |
Individual
corporate
|
|
|
11 |
|
|
|
— |
|
|
|
3,690 |
(2) |
|
|
— |
|
|
|
105 |
|
|
|
3,900 |
(2) |
Other
|
|
|
449 |
|
|
|
500 |
|
|
|
|
|
|
|
503 |
|
|
|
528 |
|
|
|
|
|
Counterparty
netting and funds held as collateral
|
|
|
(238 |
) |
|
|
(30 |
) |
|
|
|
|
|
|
(295 |
) |
|
|
(32 |
) |
|
|
|
|
|
|
$ |
222 |
|
|
$ |
10,352 |
|
|
|
|
|
|
$ |
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 Consolidated Statements of Earnings
are as follows (in millions).
|
|
Third
Quarter
|
|
|
First
Nine Months
|
|
|
|
2009 |
|
|
2008 |
|
|
2009
|
|
|
2008 |
|
Equity
index put options
|
|
$ |
220 |
|
|
$ |
(880 |
) |
|
$ |
2,010 |
|
|
$ |
(1,731 |
) |
Credit
default obligations
|
|
|
1,443 |
|
|
|
(342 |
) |
|
|
483 |
|
|
|
(478 |
) |
Other
|
|
|
69 |
|
|
|
(39 |
) |
|
|
79 |
|
|
|
(4 |
) |
|
|
$ |
1,732 |
|
|
$ |
(1,261 |
) |
|
$ |
2,572 |
|
|
$ |
(2,213 |
) |
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
September 30, 2009, the aggregate intrinsic value (the undiscounted liability
assuming the contracts are settled on their future expiration dates based on the
September 30, 2009 index values) was approximately $6.3 billion. Aggregate
intrinsic value was approximately $9.3 billion at June 30, 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 Consolidated Financial
Statements (Continued)
Note
9. Derivative contracts of finance and financial products
businesses (Continued)
In 2009,
Berkshire agreed with certain counterparties to amend six equity index put
option contracts. The amendments reduced the related contract
expiration dates between 3.5 and 9.5 years. Also, the amendments reduced
the strike prices of those contracts between 29% and 39%. 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. Other changes in notional amounts
occur from quarter to quarter because of foreign exchange
fluctuations. The remaining weighted average life of all contracts
was approximately 12 years at September 30, 2009.
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 on these contracts at September 30, 2009 was
approximately 2 years. State and municipality contracts are comprised of over
500 state and municipality issuers. The weighted average contract life at
September 30, 2009 was approximately 11 years. Potential obligations related to
approximately 50% of the notional amount of the state and municipality contracts
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 of the in-force individual corporate
issuer contracts expire in 2013.
With
limited exceptions, 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 ratings. Under certain conditions, a few contracts require
that Berkshire post collateral. As of September 30, 2009, Berkshire’s collateral
posting requirement under such contracts was approximately $50 million compared
to about $650 million at June 30, 2009. If Berkshire’s credit ratings are
downgraded, as much as an additional $1.1 billion could be required to be posted
as collateral in addition to the amounts otherwise required depending on the
degree of the downgrade.
Note
10. Fair value measurements
The fair
values of Berkshire’s financial assets and liabilities as of September 30, 2009
and December 31, 2008 are shown in the following table (in millions). The
carrying values of cash and cash equivalents, accounts receivable, accounts
payable, accruals and other liabilities are deemed to be reasonable estimates of
their fair values.
|
|
Carrying Value |
|
|
Fair Value |
|
|
|
Sept. 30, 2009 |
|
|
Dec. 31, 2008 |
|
|
Sept. 30, 2009 |
|
|
Dec. 31, 2008 |
|
Insurance
and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
in fixed maturity securities
|
|
$ |
32,586 |
|
|
$ |
27,115 |
|
|
$ |
32,586 |
|
|
$ |
27,115 |
|
Investments
in equity securities
|
|
|
55,084 |
|
|
|
49,073 |
|
|
|
55,084 |
|
|
|
49,073 |
|
Other
investments
|
|
|
31,927 |
|
|
|
21,535 |
|
|
|
32,416 |
|
|
|
20,759 |
|
Notes
payable and other borrowings
|
|
|
3,815 |
|
|
|
4,349 |
|
|
|
3,824 |
|
|
|
4,300 |
|
Finance
and financial products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
in fixed maturity securities
|
|
|
4,765 |
|
|
|
4,517 |
|
|
|
4,765 |
|
|
|
4,517 |
|
Investments
in equity securities (1) |
|
|
469 |
|
|
|
— |
|
|
|
469 |
|
|
|
— |
|
Derivative
contract assets (1)
|
|
|
222 |
|
|
|
208 |
|
|
|
222 |
|
|
|
208 |
|
Loans
and finance receivables
|
|
|
13,514 |
|
|
|
13,942 |
|
|
|
13,549 |
|
|
|
14,016 |
|
Notes
payable and other borrowings
|
|
|
14,642 |
|
|
|
13,388 |
|
|
|
15,366 |
|
|
|
13,820 |
|
Derivative
contract liabilities
|
|
|
10,352 |
|
|
|
14,612 |
|
|
|
10,352 |
|
|
|
14,612 |
|
Utilities
and energy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
in equity securities (1) |
|
|
1,854 |
|
|
|
— |
|
|
|
1,854 |
|
|
|
— |
|
Derivative
contract assets (1)
|
|
|
199 |
|
|
|
324 |
|
|
|
199 |
|
|
|
324 |
|
Notes
payable and other borrowings
|
|
|
19,564 |
|
|
|
19,145 |
|
|
|
21,360 |
|
|
|
19,144 |
|
Derivative
contract liabilities (2)
|
|
|
533 |
|
|
|
729 |
|
|
|
533 |
|
|
|
729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Included in Other
assets
|
(2)
|
Included in Accounts payable,
accruals and other
liabilities
|
Notes To 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.
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.
A
hierarchy for measuring fair value consists 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 Consolidated Financial
Statements (Continued)
Note 10. Fair
value measurements (Continued)
Financial
assets and liabilities measured and carried at fair value on a recurring basis
in the financial statements as of September 30, 2009 and December 31, 2008
are summarized according to the hierarchy previously described as follows (in
millions).
September
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
|
|
$ |
32,586 |
|
|
$ |
5,346 |
|
|
$ |
26,660 |
|
|
$ |
580 |
|
Investments
in equity securities
|
|
|
55,084 |
|
|
|
54,654 |
|
|
|
89 |
|
|
|
341 |
|
Other
investments
|
|
|
18,999 |
|
|
|
— |
|
|
|
— |
|
|
|
18,999 |
|
Finance
and financial products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
in fixed maturity securities
|
|
|
4,765 |
|
|
|
— |
|
|
|
4,360 |
|
|
|
405 |
|
Investments
in equity securities
|
|
|
469 |
|
|
|
469 |
|
|
|
— |
|
|
|
— |
|
Net
derivative contract liabilities
|
|
|
10,130 |
|
|
|
— |
|
|
|
248 |
|
|
|
9,882 |
|
Utilities
and energy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
in equity securities
|
|
|
1,854 |
|
|
|
1,854 |
|
|
|
— |
|
|
|
— |
|
Net
derivative contract (assets)/liabilities
|
|
|
334 |
|
|
|
7 |
|
|
|
(6 |
) |
|
|
333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 and carried at fair value on a recurring
basis with the use of significant unobservable inputs (Level 3) for the first
nine 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
*
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
2,584 |
|
Other
comprehensive income
|
|
|
54 |
|
|
|
15 |
|
|
|
5,139 |
|
|
|
(1 |
) |
Regulatory
assets and liabilities
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
67 |
|
Purchases,
sales, issuances and settlements
|
|
|
291 |
|
|
|
(1 |
) |
|
|
5,637 |
|
|
|
1,677 |
|
Transfers
into (out of) Level 3
|
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
|
|
(23 |
) |
Balance
at September 30, 2009
|
|
$ |
985 |
|
|
$ |
341 |
|
|
$ |
18,999 |
|
|
$ |
(10,215 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Gains and losses related to
changes in valuations are included in the 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 September 30, 2009.
|
Notes To 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 |
|
|
|
— |
|
|
|
(2,193 |
) |
Other
comprehensive income
|
|
|
(15 |
) |
|
|
(33 |
) |
|
|
1 |
|
Regulatory
assets and liabilities
|
|
|
— |
|
|
|
— |
|
|
|
(66 |
) |
Purchases,
sales, issuances and settlements
|
|
|
(33 |
) |
|
|
— |
|
|
|
(578 |
) |
Transfers
into Level 3
|
|
|
5 |
|
|
|
— |
|
|
|
— |
|
Balance
at September 30, 2008
|
|
$ |
359 |
|
|
$ |
323 |
|
|
$ |
(9,620 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Gains and losses related to
changes in valuations are included in the 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 September 30, 2008.
|
Note
11. Receivables
Receivables
of insurance and other businesses are comprised of the following (in
millions).
|
|
September
30,
2009
|
|
|
December 31,
2008
|
|
Insurance
premiums receivable
|
|
$ |
5,933 |
|
|
$ |
4,961 |
|
Reinsurance
recoverables
|
|
|
3,177 |
|
|
|
3,235 |
|
Trade
and other receivables
|
|
|
7,400 |
|
|
|
7,141 |
|
Allowances
for uncollectible accounts
|
|
|
(463 |
) |
|
|
(412 |
) |
|
|
$ |
16,047 |
|
|
$ |
14,925 |
|
Loans and
finance receivables of finance and financial products businesses are comprised
of the following (in millions).
|
|
September
30,
2009
|
|
|
December 31,
2008
|
|
Consumer
installment loans and finance receivables
|
|
$ |
12,847 |
|
|
$ |
13,190 |
|
Commercial
loans and finance receivables
|
|
|
997 |
|
|
|
1,050 |
|
Allowances
for uncollectible loans
|
|
|
(330 |
) |
|
|
(298 |
) |
|
|
$ |
13,514 |
|
|
$ |
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
|
|
|
September
30,
2009
|
|
|
December 31,
2008
|
|
Land
|
|
— |
|
|
$ |
753 |
|
|
$ |
751 |
|
Buildings
and improvements
|
|
3 – 40 years
|
|
|
|
4,559 |
|
|
|
4,351 |
|
Machinery
and equipment
|
|
3 – 25 years
|
|
|
|
11,478 |
|
|
|
11,009 |
|
Furniture,
fixtures and other
|
|
3 – 20 years
|
|
|
|
1,726 |
|
|
|
1,856 |
|
Assets
held for lease
|
|
12 – 30 years
|
|
|
|
5,658 |
|
|
|
5,311 |
|
|
|
|
|
|
|
|
24,174 |
|
|
|
23,278 |
|
Accumulated
depreciation
|
|
|
|
|
|
|
(7,607 |
) |
|
|
(6,575 |
) |
|
|
|
|
|
|
$ |
16,567 |
|
|
$ |
16,703 |
|
Notes To 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
|
|
|
September
30,
2009
|
|
|
December 31,
2008
|
|
Utility
generation, distribution and transmission system
|
|
5 – 85 years
|
|
|
$ |
35,084 |
|
|
$ |
32,795 |
|
Interstate
pipeline assets
|
|
3 – 67
years
|
|
|
|
5,710 |
|
|
|
5,649 |
|
Independent
power plants and other assets
|
|
3 – 30
years
|
|
|
|
1,284 |
|
|
|
1,228 |
|
Construction
in progress
|
|
— |
|
|
|
2,003 |
|
|
|
1,668 |
|
|
|
|
|
|
|
|
44,081 |
|
|
|
41,340 |
|
Accumulated
depreciation
|
|
|
|
|
|
|
(13,649 |
) |
|
|
(12,886 |
) |
|
|
|
|
|
|
$ |
30,432 |
|
|
$ |
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 September 30, 2009 and December 31, 2008, accumulated
depreciation related to regulated assets was $13.2 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).
|
|
September
30,
2009
|
|
|
December 31,
2008
|
|
Raw
materials
|
|
$ |
956 |
|
|
$ |
1,161 |
|
Work
in process and other
|
|
|
582 |
|
|
|
607 |
|
Finished
manufactured goods
|
|
|
2,072 |
|
|
|
2,580 |
|
Purchased
goods
|
|
|
2,441 |
|
|
|
3,152 |
|
|
|
$ |
6,051 |
|
|
$ |
7,500 |
|
Note
14. Income taxes
The
liability for income taxes as of September 30, 2009 and December 31, 2008 is as
follows (in millions).
|
|
September
30,
2009
|
|
|
December 31,
2008
|
|
Payable
currently
|
|
$ |
(769 |
) |
|
$ |
161 |
|
Deferred
|
|
|
16,682 |
|
|
|
9,316 |
|
Other
|
|
|
990 |
|
|
|
803 |
|
|
|
$ |
16,903 |
|
|
$ |
10,280 |
|
Note
15. Notes payable and other borrowings
Notes
payable and other borrowings of Berkshire and its subsidiaries are summarized
below (in millions).
|
|
September
30,
2009
|
|
|
December 31,
2008
|
|
Insurance
and other:
|
|
|
|
|
|
|
Issued
or guaranteed by Berkshire due 2009-2035
|
|
$ |
2,066 |
|
|
$ |
2,275 |
|
Issued
by subsidiaries and not guaranteed by Berkshire due 2009-2041
|
|
|
1,749 |
|
|
|
2,074 |
|
|
|
$ |
3,815 |
|
|
$ |
4,349 |
|
Debt issued or guaranteed by
Berkshire includes short term borrowings of $1.8 billion as of September 30,
2009 and December 31, 2008.
Notes To Consolidated Financial
Statements (Continued)
Note 15. Notes
payable and other borrowings (Continued)
|
|
September
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
|
|
$ |
5,371 |
|
|
$ |
5,121 |
|
Subsidiary
and other debt due 2009-2039
|
|
|
14,193 |
|
|
|
14,024 |
|
|
|
$ |
19,564 |
|
|
$ |
19,145 |
|
MidAmerican
senior debt is unsecured and has a weighted average interest rate of about 6.2%
as of September 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
September 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 September 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 obligations mature in 2019 and 2039
and have interest rates of 5.5% and 6.0%. MidAmerican issued $250 million par
amount 3.15% senior notes in the third quarter of 2009 that mature in
2012.
|
|
September
30,
2009
|
|
|
December 31,
2008
|
|
Finance
and financial products:
|
|
|
|
|
|
|
Issued
by Berkshire Hathaway Finance Corporation (“BHFC”) and guaranteed by
Berkshire
|
|
$ |
12,050 |
|
|
$ |
10,778 |
|
Issued
by other subsidiaries and guaranteed by Berkshire due
2009-2027
|
|
|
783 |
|
|
|
706 |
|
Issued
by other subsidiaries and not guaranteed by Berkshire due
2009-2036
|
|
|
1,809 |
|
|
|
1,904 |
|
|
|
$ |
14,642 |
|
|
$ |
13,388 |
|
Debt
issued by BHFC matures between 2010 and 2018 and has a weighted average interest
rate of approximately 4.3% as of September 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 nine 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
|
|
|
(1,951 |
) |
|
|
133,341 |
|
Balance
at September 30, 2009
|
|
|
1,057,050 |
|
|
|
14,840,337 |
|
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 1,551,728 shares
outstanding at September 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 Consolidated Financial
Statements (Continued)
Note
16. Shareholders’ equity (Continued)
Changes
in shareholders’ equity for the first nine 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
|
|
|
— |
|
|
|
— |
|
|
|
4,877 |
|
|
|
4,877 |
|
|
|
404 |
|
Other
comprehensive income, net
|
|
|
— |
|
|
|
(5,636 |
) |
|
|
— |
|
|
|
(5,636 |
) |
|
|
(71 |
) |
Issuance
of common stock and other transactions
|
|
|
181 |
|
|
|
— |
|
|
|
— |
|
|
|
181 |
|
|
|
— |
|
Changes
in noncontrolling interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
acquisitions
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,570 |
|
Interests
acquired and other transactions
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(222 |
) |
Balance
at September 30, 2008
|
|
$ |
27,141 |
|
|
$ |
15,984 |
|
|
$ |
77,030 |
|
|
$ |
120,155 |
|
|
$ |
4,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2008
|
|
$ |
27,141 |
|
|
$ |
3,954 |
|
|
$ |
78,172 |
|
|
$ |
109,267 |
|
|
$ |
4,440 |
|
Net
earnings
|
|
|
— |
|
|
|
— |
|
|
|
4,999 |
|
|
|
4,999 |
|
|
|
288 |
|
Other
comprehensive income, net
|
|
|
— |
|
|
|
11,753 |
|
|
|
— |
|
|
|
11,753 |
|
|
|
183 |
|
Issuance
of common stock and other transactions
|
|
|
172 |
|
|
|
— |
|
|
|
— |
|
|
|
172 |
|
|
|
— |
|
Changes
in noncontrolling interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interests
acquired and other transactions
|
|
|
(227 |
) |
|
|
109 |
|
|
|
— |
|
|
|
(118 |
) |
|
|
(302 |
) |
Balance
at September 30, 2009
|
|
$ |
27,086 |
|
|
$ |
15,816 |
|
|
$ |
83,171 |
|
|
$ |
126,073 |
|
|
$ |
4,609 |
|
Berkshire’s
comprehensive income for the third quarter and first nine months of 2009 and
2008 is shown in the table below (in millions).
|
|
Third
Quarter
|
|
|
First
Nine Months
|
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Comprehensive
income attributable to Berkshire:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
3,238 |
|
|
$ |
1,057 |
|
|
$ |
4,999 |
|
|
$ |
4,877 |
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in unrealized appreciation of investments
|
|
|
12,723 |
|
|
|
3,184 |
|
|
|
17,283 |
|
|
|
(7,504 |
) |
Applicable
income taxes
|
|
|
(4,534 |
) |
|
|
(1,113 |
) |
|
|
(6,136 |
) |
|
|
2,626 |
|
Foreign
currency translation and other
|
|
|
221 |
|
|
|
(1,039 |
) |
|
|
624 |
|
|
|
(864 |
) |
Applicable
income taxes
|
|
|
(99 |
) |
|
|
71 |
|
|
|
(18 |
) |
|
|
106 |
|
Other
comprehensive income, net
|
|
|
8,311 |
|
|
|
1,103 |
|
|
|
11,753 |
|
|
|
(5,636 |
) |
Comprehensive
income attributable to Berkshire
|
|
$ |
11,549 |
|
|
$ |
2,160 |
|
|
$ |
16,752 |
|
|
$ |
(759 |
) |
Comprehensive
income of noncontrolling interests
|
|
$ |
272 |
|
|
$ |
135 |
|
|
$ |
471 |
|
|
$ |
333 |
|
Notes To Consolidated Financial
Statements (Continued)
Note
17. Business segment data
Berkshire’s
consolidated segment data for the third quarter and first nine months of 2009
and 2008 is as follows (in millions).
|
|
Revenues
|
|
|
|
Third
Quarter
|
|
|
First
Nine Months
|
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Operating
Businesses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
group:
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
earned:
|
|
|
|
|
|
|
|
|
|
|
|
|
GEICO
|
|
$ |
3,448 |
|
|
$ |
3,150 |
|
|
$ |
10,103 |
|
|
$ |
9,268 |
|
General
Re
|
|
|
1,476 |
|
|
|
1,458 |
|
|
|
4,281 |
|
|
|
4,650 |
|
Berkshire
Hathaway Reinsurance Group
|
|
|
1,229 |
|
|
|
1,383 |
|
|
|
5,526 |
|
|
|
3,523 |
|
Berkshire
Hathaway Primary Group
|
|
|
442 |
|
|
|
474 |
|
|
|
1,353 |
|
|
|
1,464 |
|
Investment
income
|
|
|
1,362 |
|
|
|
1,080 |
|
|
|
4,109 |
|
|
|
3,400 |
|
Total
insurance group
|
|
|
7,957 |
|
|
|
7,545 |
|
|
|
25,372 |
|
|
|
22,305 |
|
Finance
and financial products
|
|
|
1,143 |
|
|
|
1,258 |
|
|
|
3,251 |
|
|
|
3,719 |
|
Marmon
|
|
|
1,306 |
|
|
|
1,878 |
|
|
|
3,846 |
|
|
|
4,044 |
|
McLane
|
|
|
8,170 |
|
|
|
7,634 |
|
|
|
23,027 |
|
|
|
21,892 |
|
MidAmerican
|
|
|
2,812 |
|
|
|
3,298 |
|
|
|
8,416 |
|
|
|
9,727 |
|
Shaw
|
|
|
1,056 |
|
|
|
1,357 |
|
|
|
3,088 |
|
|
|
3,918 |
|
Other
businesses
|
|
|
5,423 |
|
|
|
6,521 |
|
|
|
15,422 |
|
|
|
19,898 |
|
|
|
|
27,867 |
|
|
|
29,491 |
|
|
|
82,422 |
|
|
|
85,503 |
|
Reconciliation
of segments to consolidated amount:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
and derivative gains/losses *
|
|
|
1,817 |
|
|
|
(1,557 |
) |
|
|
(836 |
) |
|
|
(2,148 |
) |
Eliminations
and other
|
|
|
220 |
|
|
|
(8 |
) |
|
|
709 |
|
|
|
(161 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
29,904 |
|
|
$ |
27,926 |
|
|
$ |
82,295 |
|
|
$ |
83,194 |
|
|
|
Earnings before
income taxes and equity method earnings
|
|
|
|
Third
Quarter
|
|
|
First
Nine Months
|
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Operating
Businesses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
group:
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting:
|
|
|
|
|
|
|
|
|
|
|
|
|
GEICO
|
|
$ |
200 |
|
|
$ |
246 |
|
|
$ |
459 |
|
|
$ |
730 |
|
General
Re
|
|
|
186 |
|
|
|
54 |
|
|
|
446 |
|
|
|
198 |
|
Berkshire
Hathaway Reinsurance Group
|
|
|
167 |
|
|
|
(166 |
) |
|
|
79 |
|
|
|
(58 |
) |
Berkshire
Hathaway Primary Group
|
|
|
7 |
|
|
|
(8 |
) |
|
|
40 |
|
|
|
98 |
|
Net
investment income
|
|
|
1,348 |
|
|
|
1,074 |
|
|
|
4,068 |
|
|
|
3,367 |
|
Total
insurance group
|
|
|
1,908 |
|
|
|
1,200 |
|
|
|
5,092 |
|
|
|
4,335 |
|
Finance
and financial products
|
|
|
142 |
|
|
|
163 |
|
|
|
404 |
|
|
|
658 |
|
Marmon
|
|
|
194 |
|
|
|
247 |
|
|
|
526 |
|
|
|
536 |
|
McLane
|
|
|
64 |
|
|
|
68 |
|
|
|
273 |
|
|
|
209 |
|
MidAmerican
|
|
|
441 |
|
|
|
526 |
|
|
|
1,146 |
|
|
|
1,371 |
|
Shaw
|
|
|
51 |
|
|
|
49 |
|
|
|
136 |
|
|
|
182 |
|
Other
businesses
|
|
|
299 |
|
|
|
749 |
|
|
|
621 |
|
|
|
2,316 |
|
|
|
|
3,099 |
|
|
|
3,002 |
|
|
|
8,198 |
|
|
|
9,607 |
|
Reconciliation
of segments to consolidated amount:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
and derivative gains/losses *
|
|
|
1,817 |
|
|
|
(1,557 |
) |
|
|
(836 |
) |
|
|
(2,148 |
) |
Interest
expense, excluding interest allocated to operating businesses
|
|
|
(11 |
) |
|
|
(9 |
) |
|
|
(34 |
) |
|
|
(26 |
) |
Eliminations
and other
|
|
|
(66 |
) |
|
|
66 |
|
|
|
(241 |
) |
|
|
(7 |
) |
|
|
$ |
4,839 |
|
|
$ |
1,502 |
|
|
$ |
7,087 |
|
|
$ |
7,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Includes other-than-temporary
impairment losses on
investments.
|
Notes To 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. On or about
September 26, 2009, the United States District Court, Southern District of New
York, granted judgment in favor of the SEC and against each of these individuals
which, among other things, prohibits them from acting as an officer or director
of an issuer that has a class of securities registered pursuant to Section 12 of
the Securities Exchange Act of 1934 or that is required to file reports pursuant
to Section 15(d) of that Act. 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.
Notes To Consolidated Financial
Statements (Continued)
Note
18. Contingencies (Continued)
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.
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. Plaintiffs have appealed the judgment. General Re and General
Reinsurance are vigorously opposing that appeal.
Note
19. Supplemental cash flow information
A summary
of supplemental cash flow information for the first nine months of 2009 and 2008
is presented in the following table (in millions).
|
|
First
Nine Months
|
|
|
|
2009
|
|
|
2008
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
Income
taxes
|
|
$ |
1,861 |
|
|
$ |
2,921 |
|
Interest
of finance and financial products businesses
|
|
|
469 |
|
|
|
412 |
|
Interest
of utilities and energy businesses
|
|
|
850 |
|
|
|
872 |
|
Interest
of insurance and other businesses
|
|
|
99 |
|
|
|
127 |
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activity:
|
|
|
|
|
|
|
|
|
Liabilities
assumed in connection with acquisitions of businesses
|
|
|
240 |
|
|
|
4,127 |
|
Notes To Consolidated
Financial Statements (Continued)
Note
20. Subsequent event
On
November 3, 2009, Berkshire Hathaway Inc. announced that it had entered into a
definitive agreement to acquire for $100 per share the remaining 77.4% of BNSF’s
outstanding shares not currently owned by Berkshire. Based upon the
outstanding shares of BNSF not currently owned by Berkshire, the value of the
aggregate consideration to acquire the remaining BNSF shares is approximately
$26.4 billion of which approximately 60% will be paid in cash and 40% in
Berkshire Class A and Class B Common Stock. Berkshire expects to fund
about 50% of the total cash consideration of approximately $16 billion with
internally generated cash and the remainder with borrowings expected to be
repaid over a three year period. The acquisition requires approval by
holders of two-thirds of BNSF’s outstanding shares not currently held by
Berkshire and is subject to customary closing conditions. The closing
is expected to occur in the first quarter of 2010.
On
November 3, 2009, Berkshire also announced that its Board of Directors approved
a 50-for-1 split of its Class B Common Stock. The stock split is
subject to the approval of Berkshire’s shareholders who must approve an
amendment to Berkshire’s certificate of incorporation to increase Berkshire’s
total number of authorized shares of common stock. Berkshire’s Class
A Common Stock is not being split.
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.
|
|
Third
Quarter
|
|
|
First
Nine Months
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Insurance
– underwriting
|
|
$ |
363 |
|
|
$ |
81 |
|
|
$ |
665 |
|
|
$ |
622 |
|
Insurance
– investment income
|
|
|
976 |
|
|
|
809 |
|
|
|
3,168 |
|
|
|
2,495 |
|
Utilities
and energy
|
|
|
346 |
|
|
|
324 |
|
|
|
802 |
|
|
|
848 |
|
Manufacturing,
service and retailing
|
|
|
336 |
|
|
|
665 |
|
|
|
833 |
|
|
|
1,871 |
|
Finance
and financial products
|
|
|
92 |
|
|
|
91 |
|
|
|
252 |
|
|
|
397 |
|
Other
|
|
|
(58 |
) |
|
|
99 |
|
|
|
(180 |
) |
|
|
37 |
|
Investment
and derivative gains/losses
|
|
|
1,183 |
|
|
|
(1,012 |
) |
|
|
(541 |
) |
|
|
(1,393 |
) |
Net
earnings attributable to Berkshire
|
|
$ |
3,238 |
|
|
$ |
1,057 |
|
|
$ |
4,999 |
|
|
$ |
4,877 |
|
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
Consolidated Financial Statements) should be read in conjunction with this
discussion.
The
declines in global economic activity over the last half of 2008 continued
through the first nine months of 2009. Berkshire’s operating results in 2009
were 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 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 operating results have not been negatively impacted
in any significant way by the recession.
Investment
and derivative gains were $1,183 million in the third quarter of 2009, while in
the first nine months there were losses of $541 million. The gains and losses
primarily derived from credit default contracts, dispositions of certain equity
securities, 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 have caused and will likely continue to cause 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 believes such actions will be successful, the ultimate impact on
Berkshire is not clear at this time. Berkshire’s operating companies have taken
and will continue to take cost reduction actions as necessary 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 improve, although it cannot predict the timing of an economic
recovery that will be required to have this happen.
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
provides both primary insurance and reinsurance of property and casualty risks.
Through General Re, Berkshire also reinsures life and health risks. 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.
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.
Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations (Continued)
Insurance —Underwriting
(Continued)
A summary
follows of underwriting results from Berkshire’s insurance businesses. Amounts
are in millions.
|
|
Third
Quarter
|
|
|
First
Nine Months
|
|
|
|
2009
|
|
|
2008
|
|
|
2009 |
|
|
2008 |
|
Underwriting
gain (loss) attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
GEICO
|
|
$ |
200 |
|
|
$ |
246 |
|
|
$ |
459 |
|
|
$ |
730 |
|
General
Re
|
|
|
186 |
|
|
|
54 |
|
|
|
446 |
|
|
|
198 |
|
Berkshire
Hathaway Reinsurance Group
|
|
|
167 |
|
|
|
(166 |
) |
|
|
79 |
|
|
|
(58 |
) |
Berkshire
Hathaway Primary Group
|
|
|
7 |
|
|
|
(8 |
) |
|
|
40 |
|
|
|
98 |
|
Pre-tax
underwriting gain
|
|
|
560 |
|
|
|
126 |
|
|
|
1,024 |
|
|
|
968 |
|
Income
taxes and noncontrolling interests
|
|
|
197 |
|
|
|
45 |
|
|
|
359 |
|
|
|
346 |
|
Net
underwriting gain
|
|
$ |
363 |
|
|
$ |
81 |
|
|
$ |
665 |
|
|
$ |
622 |
|
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.
|
|
Third
Quarter
|
|
|
First
Nine Months
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Premiums
earned
|
|
$ |
3,448 |
|
|
|
100.0 |
|
|
$ |
3,150 |
|
|
|
100.0 |
|
|
$ |
10,103 |
|
|
|
100.0 |
|
|
$ |
9,268 |
|
|
|
100.0 |
|
Losses
and loss adjustment expenses
|
|
|
2,636 |
|
|
|
76.5 |
|
|
|
2,350 |
|
|
|
74.6 |
|
|
|
7,798 |
|
|
|
77.2 |
|
|
|
6,868 |
|
|
|
74.1 |
|
Underwriting
expenses
|
|
|
612 |
|
|
|
17.7 |
|
|
|
554 |
|
|
|
17.6 |
|
|
|
1,846 |
|
|
|
18.3 |
|
|
|
1,670 |
|
|
|
18.0 |
|
Total
losses and expenses
|
|
|
3,248 |
|
|
|
94.2 |
|
|
|
2,904 |
|
|
|
92.2 |
|
|
|
9,644 |
|
|
|
95.5 |
|
|
|
8,538 |
|
|
|
92.1 |
|
Pre-tax
underwriting gain
|
|
$ |
200 |
|
|
|
|
|
|
$ |
246 |
|
|
|
|
|
|
$ |
459 |
|
|
|
|
|
|
$ |
730 |
|
|
|
|
|
Premiums
earned in the third quarter and first nine months of 2009 increased $298 million
(9.5%) and $835 million (9.0%), respectively, over premiums earned in the
corresponding 2008 periods. The growth in premiums earned for voluntary auto was
9.0% for the first nine months of 2009, reflecting an increase in
policies-in-force of 10.1% offset somewhat by a decrease in average premiums per
policy. It is believed that the weak economic conditions have caused customers
to raise policy deductibles and reduce coverage in order to save money.
Voluntary auto new business sales in the first nine months of 2009 increased
18.2% versus 2008. Growth was particularly strong during the first quarter and
slowed to more normal rates in the second and third quarters. Voluntary auto
policies-in-force at September 30, 2009 were 662,000 greater than at
December 31, 2008.
Losses
and loss adjustment expenses incurred in the third quarter and first nine months
of 2009 increased $286 million (12.2%) and $930 million (13.5%), respectively,
over amounts incurred in 2008 periods. The loss ratio was 77.2% in
the first nine months of 2009 compared to 74.1% 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 two to four percent range, while frequencies for
injury coverages increased in the eight to ten percent range compared with the
very low frequency levels in 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 from 2008. Incurred losses from catastrophe
events for the first nine months of 2009 were $73 million compared to $88
million for the first nine months of 2008. Underwriting expenses in the first
nine months of 2009 increased 10.5% over 2008 to $1,846 million due primarily to
higher policy issuance costs and increased salary and employee benefit
expenses.
Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations (Continued)
Insurance —Underwriting
(Continued)
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/loss
|
|
|
|
Third
Quarter
|
|
|
First Nine
Months
|
|
|
Third
Quarter
|
|
|
First Nine
Months
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Property/casualty
|
|
$ |
820 |
|
|
$ |
819 |
|
|
$ |
2,397 |
|
|
$ |
2,678 |
|
|
$ |
107 |
|
|
$ |
(13 |
) |
|
$ |
298 |
|
|
$ |
57 |
|
Life/health
|
|
|
656 |
|
|
|
639 |
|
|
|
1,884 |
|
|
|
1,972 |
|
|
|
79 |
|
|
|
67 |
|
|
|
148 |
|
|
|
141 |
|
|
|
$ |
1,476 |
|
|
$ |
1,458 |
|
|
$ |
4,281 |
|
|
$ |
4,650 |
|
|
$ |
186 |
|
|
$ |
54 |
|
|
$ |
446 |
|
|
$ |
198 |
|
Property/casualty
Property/casualty
premiums earned in the third quarter of 2009 were relatively flat when compared
to the third quarter of 2008. Premiums earned in the first nine of months of
2009 declined $281 million (10.5%), versus the corresponding 2008
period. 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 nine
months of 2009 increased $91 million (3.7%). The increase was due
primarily to increased volume in Europe and lower retrocessions of Lloyd’s
market business.
In 2009,
underwriting gains were $107 million in the third quarter and $298 million for
the first nine months. Underwriting gains for the first nine months
of 2009 included gains of $260 million from property business and $38 million
from casualty/workers’ compensation business. The property results in
2009 were net of $80 million of losses from catastrophes, primarily from 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.
In 2008,
underwriting losses were $13 million in the third quarter and underwriting gains
were $57 million for the first nine months. Underwriting gains
for the first nine months of 2008 included gains of $126 million from property
business and losses of $69 million from casualty/workers’ compensation
business. Property results for the first nine months of 2008 included
$186 million of catastrophe losses arising primarily from Hurricanes Ike and
Gustav in the third quarter, and winter storm Emma in Germany and hailstorms in
Europe, which occurred in the first half of 2008. Casualty losses
were adversely impacted by legal costs incurred in connection with the
regulatory investigations of finite reinsurance.
Life/health
Premiums
earned in the third quarter and first nine months of 2009 were $656 million and
$1,884 million, respectively, an increase of $17 million (2.7%) and a decrease
of $88 million (4.5%) from the 2008 comparable periods. Excluding the
effects of changes in foreign currency translation rates, premiums earned in the
first nine months of 2009 increased by $46 million (2.3%) due to increased
international business. The life/health operations produced
underwriting gains of $79 million and $148 million in the third quarter and
first nine months of 2009, respectively, an increase of $12 million (17.9%) and
$7 million (5.0%) over the corresponding 2008 periods. This 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
|
|
|
|
Third
Quarter
|
|
|
First Nine
Months
|
|
|
Third
Quarter
|
|
|
First Nine
Months
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Catastrophe
and individual risk
|
|
$ |
197 |
|
|
$ |
292 |
|
|
$ |
692 |
|
|
$ |
731 |
|
|
$ |
271 |
|
|
$ |
(102 |
) |
|
$ |
593 |
|
|
$ |
248 |
|
Retroactive
reinsurance
|
|
|
— |
|
|
|
— |
|
|
|
1,886 |
|
|
|
3 |
|
|
|
(137 |
) |
|
|
(104 |
) |
|
|
(339 |
) |
|
|
(337 |
) |
Other
multi-line
|
|
|
1,032 |
|
|
|
1,091 |
|
|
|
2,948 |
|
|
|
2,789 |
|
|
|
33 |
|
|
|
40 |
|
|
|
(175 |
) |
|
|
31 |
|
|
|
$ |
1,229 |
|
|
$ |
1,383 |
|
|
$ |
5,526 |
|
|
$ |
3,523 |
|
|
$ |
167 |
|
|
$ |
(166 |
) |
|
$ |
79 |
|
|
$ |
(58 |
) |
Premiums
earned in the first nine months of 2009 from catastrophe and individual risk
contracts declined $39 million (5%) versus the first nine months 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 early 2009, management constrained the volume of business
written in response to the decline in Berkshire’s net worth that occurred in the
first quarter of 2009. Though net worth has recovered significantly since then,
management will continue to constrain the volume of business written in light of
the pending BNSF acquisition (see Note 20 to the Consolidated Financial
Statements for information regarding the pending acquisition). Also, premium
rates have not been attractive enough to actually warrant increasing volume thus
far in 2009. Underwriting results in 2009 reflected no significant catastrophe
losses, while underwriting results in 2008 included approximately $350 million
of estimated losses from third quarter hurricanes (Gustav and Ike). Underwriting
results in the third quarter of 2009 reflect reductions of loss reserves
primarily due to lower estimated ultimate losses from hurricanes in 2004 and
2005.
Premiums
earned in the first nine 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 September 30,
2009, unamortized deferred charges were approximately $3.7 billion.
Premiums
earned in the third quarter of 2009 from other multi-line business declined $59
million (5%) compared to 2008 and in the first nine months of 2009 increased
$159 million (6%) versus 2008. Premiums earned in the third quarter and first
nine months of 2009 included $717 million and $2,034 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 $496 million in the third quarter and $1,169 million in the first nine
months. Excluding the Swiss Re quota-share contract, other multi-line business
premiums earned in 2009 declined $280 million (47%) in the third quarter and
$706 million (44%) versus 2008 periods, primarily due to significant reductions
in aviation, property, workers’ compensation and Lloyd’s market
volume.
Pre-tax
underwriting results from other multi-line reinsurance in 2009 included foreign
currency transaction gains of $60 million for the third quarter and $305 million
of losses for the first nine months. The 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). The value of these currencies rose relative to the U.S. Dollar over the
first nine months of 2009, resulting in losses. In 2008, underwriting
results included foreign currency transaction gains of approximately $360
million in the third quarter and approximately $315 million for the first nine
months, resulting from declines in the Euro and U.K. Pound Sterling versus the
U.S. Dollar. Underwriting results in the third quarter and first nine months of
2008 included estimated catastrophe losses of $535 million attributable to
Hurricanes Gustav and Ike.
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 $442 million in the
third quarter and $1,353 million in the first nine months, representing declines
of $32 million (7%) and $111 million (8%) compared to the corresponding 2008
periods, resulting from increased competition across virtually all market
segments. For the first nine months, Berkshire’s primary insurers produced
underwriting gains of $40 million in 2009 and $98 million in 2008. Underwriting
results in 2009 were lower than 2008 for most of the primary insurance
operations due to higher loss ratios as increased price competition narrowed
profit margins, and higher 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.
|
|
Third
Quarter
|
|
|
First
Nine Months
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Investment
income before taxes, noncontrolling interests and equity method
earnings
|
|
$ |
1,348 |
|
|
$ |
1,074 |
|
|
$ |
4,068 |
|
|
$ |
3,367 |
|
Income
taxes and noncontrolling interests
|
|
|
483 |
|
|
|
265 |
|
|
|
1,207 |
|
|
|
872 |
|
Net
investment income before equity method earnings
|
|
|
865 |
|
|
|
809 |
|
|
|
2,861 |
|
|
|
2,495 |
|
Equity
method earnings
|
|
|
111 |
|
|
|
— |
|
|
|
307 |
|
|
|
— |
|
Net
investment income
|
|
$ |
976 |
|
|
$ |
809 |
|
|
$ |
3,168 |
|
|
$ |
2,495 |
|
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 third quarter and first nine months of 2009 exceeded
amounts earned in 2008 periods by $274 million and $701 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 Consolidated Financial Statements. Interest and
dividends from these securities will be approximately $2 billion per annum,
which will produce comparative increases in investment income in 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
(BNSF and Moody’s). Equity method earnings represents Berkshire’s proportionate
share of the net earnings of these companies. As a result of a reduction of
ownership of Moody’s in July of 2009, Berkshire discontinued the use of the
equity method for its investment in Moody’s as of the beginning of the third
quarter. Dividends earned on equity method investments are not reflected in
Berkshire’s earnings. Dividends earned on equity method investments
for the first nine months of 2009 were $102 million.
A summary
of cash and investments held in Berkshire’s insurance businesses follows.
Amounts are in millions.
|
|
Sept.
30,
2009
|
|
|
Dec.
31,
2008
|
|
|
Sept.
30,
2008
|
|
Cash
and cash equivalents
|
|
$ |
16,147 |
|
|
$ |
18,845 |
|
|
$ |
21,957 |
|
Equity
securities
|
|
|
54,829 |
|
|
|
48,892 |
|
|
|
75,775 |
|
Fixed
maturity securities
|
|
|
32,510 |
|
|
|
26,932 |
|
|
|
29,408 |
|
Other
*
|
|
|
31,927 |
|
|
|
21,535 |
|
|
|
— |
|
|
|
$ |
135,413 |
|
|
$ |
116,204 |
|
|
$ |
127,140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Other investments include the
investments in Wrigley, Goldman Sachs, General Electric, Swiss Re and Dow
Chemical as well as the investment in BNSF, which beginning as of
December 31, 2008 is accounted for under the equity method.
Berkshire’s investment in Moody’s was accounted for under the equity
method at December 31, 2008 but included in equity securities at September
30, 2009 and 2008. At September 30, 2008, the investment in BNSF was
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 September 30, 2009 were as follows. Amounts are in
millions.
|
|
Amortized
Cost
|
|
|
Unrealized
Gains/Losses
|
|
|
Fair
Value
|
|
U.S.
Treasury, U.S. government corporations and agencies
|
|
$ |
2,352 |
|
|
$ |
59 |
|
|
$ |
2,411 |
|
States,
municipalities and political subdivisions
|
|
|
3,904 |
|
|
|
285 |
|
|
|
4,189 |
|
Foreign
governments
|
|
|
11,124 |
|
|
|
374 |
|
|
|
11,498 |
|
Corporate
bonds, investment grade
|
|
|
4,647 |
|
|
|
493 |
|
|
|
5,140 |
|
Corporate
bonds, non-investment grade
|
|
|
6,331 |
|
|
|
491 |
|
|
|
6,822 |
|
Mortgage-backed
securities
|
|
|
2,378 |
|
|
|
72 |
|
|
|
2,450 |
|
|
|
$ |
30,736 |
|
|
$ |
1,774 |
|
|
$ |
32,510 |
|
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 recoverables, deferred charges
assumed under retroactive reinsurance contracts and deferred policy acquisition
costs. Float was approximately $62 billion at September 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.
|
|
Third
Quarter
|
|
|
First
Nine Months
|
|
|
|
Revenues |
|
|
Earnings |
|
|
Revenues |
|
|
Earnings |
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
MidAmerican
Energy Company
|
|
$ |
818 |
|
|
$ |
1,115 |
|
|
$ |
81 |
|
|
$ |
119 |
|
|
$ |
2,724 |
|
|
$ |
3,586 |
|
|
$ |
229 |
|
|
$ |
320 |
|
PacifiCorp
|
|
|
1,171 |
|
|
|
1,260 |
|
|
|
231 |
|
|
|
200 |
|
|
|
3,343 |
|
|
|
3,436 |
|
|
|
575 |
|
|
|
527 |
|
Natural
gas pipelines
|
|
|
210 |
|
|
|
279 |
|
|
|
67 |
|
|
|
140 |
|
|
|
770 |
|
|
|
867 |
|
|
|
337 |
|
|
|
423 |
|
U.K.
utilities
|
|
|
216 |
|
|
|
247 |
|
|
|
72 |
|
|
|
67 |
|
|
|
608 |
|
|
|
780 |
|
|
|
202 |
|
|
|
260 |
|
Real
estate brokerage
|
|
|
323 |
|
|
|
334 |
|
|
|
29 |
|
|
|
6 |
|
|
|
791 |
|
|
|
926 |
|
|
|
42 |
|
|
|
2 |
|
Other
|
|
|
74 |
|
|
|
63 |
|
|
|
40 |
|
|
|
80 |
|
|
|
180 |
|
|
|
132 |
|
|
|
(1 |
) |
|
|
97 |
|
|
|
$ |
2,812 |
|
|
$ |
3,298 |
|
|
|
|
|
|
|
|
|
|
$ |
8,416 |
|
|
$ |
9,727 |
|
|
|
|
|
|
|
|
|
Earnings
before corporate interest and income taxes
|
|
|
|
|
|
|
|
|
|
|
520 |
|
|
|
612 |
|
|
|
|
|
|
|
|
|
|
|
1,384 |
|
|
|
1,629 |
|
Interest,
other than to Berkshire
|
|
|
|
|
|
|
|
|
|
|
(79 |
) |
|
|
(86 |
) |
|
|
|
|
|
|
|
|
|
|
(238 |
) |
|
|
(258 |
) |
Interest
on Berkshire junior debt
|
|
|
|
|
|
|
|
|
|
|
(13 |
) |
|
|
(22 |
) |
|
|
|
|
|
|
|
|
|
|
(47 |
) |
|
|
(67 |
) |
Income
taxes and noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
(52 |
) |
|
|
(154 |
) |
|
|
|
|
|
|
|
|
|
|
(235 |
) |
|
|
(392 |
) |
Net
earnings
|
|
|
|
|
|
|
|
|
|
$ |
376 |
|
|
$ |
350 |
|
|
|
|
|
|
|
|
|
|
$ |
864 |
|
|
$ |
912 |
|
Earnings
attributable to Berkshire *
|
|
|
|
|
|
|
|
|
|
$ |
346 |
|
|
$ |
324 |
|
|
|
|
|
|
|
|
|
|
$ |
802 |
|
|
$ |
848 |
|
Debt
owed to others at September 30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
19,564 |
|
|
$ |
18,995 |
|
Debt
owed to Berkshire at September 30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
420 |
|
|
$ |
1,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
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 third quarter and first nine months
of 2009 declined $297 million (27%) and $862 million (24%), respectively, from
the same periods in 2008. The revenue decreases in both periods reflect lower
regulated natural gas and lower regulated electricity
revenues. Regulated natural gas revenues decreased by $107 million in
the third quarter and $452 million in the first nine months primarily due to a
lower average per-unit cost of gas sold, which is directly passed through to
customers. MEC’s regulated electricity revenues declined $101 million in the
third quarter and $241 million in the first nine 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 as well as mild temperatures.
Declines in MEC’s 2009 earnings before corporate interest and income taxes
(“EBIT”) of $38 million (32%) for the third quarter and $91 million (28%) for
the first nine months primarily reflect the lower regulated electricity
revenues, partially offset by lower cost of sales and operating
costs.
PacifiCorp’s
2009 revenues decreased $89 million (7%) in the third quarter and $93 million
(3%) in the first nine months compared to 2008. Revenues in 2009 reflect
an overall decrease in sales volume (both wholesale and retail) of approximately
3% and lower wholesale prices, somewhat offset by higher retail prices approved
by regulators. The increases in PacifiCorp’s EBIT of $31 million (15%) for
the third quarter and $48 million (9%) for the first nine months reflect lower
energy costs as a result of reduced prices and amounts 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 third quarter and first nine 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 $31 million (13%) in the third quarter and $172 million (22%) in the
first nine months of 2009, principally due to the impact from foreign currency
exchange rates as a result of a stronger U.S. Dollar in 2009 as compared
with 2008. EBIT of the U.K. utilities in 2009 was relatively
unchanged in the third quarter and decreased $58 million (22%) in the first
nine months as compared to 2008 periods. The decline in EBIT reflects
foreign currency exchange rate changes as well as higher depreciation
expense.
Real
estate brokerage revenues declined $11 million (3%) and $135 million
(15%) in the third quarter and first nine months of 2009 as compared to
corresponding 2008 periods. The decline in the third quarter reflects
lower sales prices somewhat offset by higher transaction volume. The decline in
revenues for the first nine months reflects declines in both sales prices and
transaction volume 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.
Other
revenues and EBIT in 2009 included a gain of $37 million in the first nine
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.
|
|
Third
Quarter
|
|
|
First
Nine Months
|
|
|
|
Revenues
|
|
|
Earnings
|
|
|
Revenues
|
|
|
Earnings
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Marmon
|
|
$ |
1,306 |
|
|
$ |
1,878 |
|
|
$ |
194 |
|
|
$ |
247 |
|
|
$ |
3,846 |
|
|
$ |
4,044 |
|
|
$ |
526 |
|
|
$ |
536 |
|
McLane
|
|
|
8,170 |
|
|
|
7,634 |
|
|
|
64 |
|
|
|
68 |
|
|
|
23,027 |
|
|
|
21,892 |
|
|
|
273 |
|
|
|
209 |
|
Shaw
|
|
|
1,056 |
|
|
|
1,357 |
|
|
|
51 |
|
|
|
49 |
|
|
|
3,088 |
|
|
|
3,918 |
|
|
|
136 |
|
|
|
182 |
|
Other
manufacturing
|
|
|
3,244 |
|
|
|
3,723 |
|
|
|
293 |
|
|
|
478 |
|
|
|
8,851 |
|
|
|
11,198 |
|
|
|
640 |
|
|
|
1,458 |
|
Other
service
|
|
|
1,538 |
|
|
|
2,094 |
|
|
|
(5 |
) |
|
|
260 |
|
|
|
4,616 |
|
|
|
6,496 |
|
|
|
(67 |
) |
|
|
786 |
|
Retailing
|
|
|
641 |
|
|
|
704 |
|
|
|
11 |
|
|
|
11 |
|
|
|
1,955 |
|
|
|
2,204 |
|
|
|
48 |
|
|
|
72 |
|
|
|
$ |
15,955 |
|
|
$ |
17,390 |
|
|
|
|
|
|
|
|
|
|
$ |
45,383 |
|
|
$ |
49,752 |
|
|
|
|
|
|
|
|
|
Pre-tax
earnings
|
|
|
|
|
|
|
|
|
|
$ |
608 |
|
|
$ |
1,113 |
|
|
|
|
|
|
|
|
|
|
$ |
1,556 |
|
|
$ |
3,243 |
|
Income
taxes and noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
272 |
|
|
|
448 |
|
|
|
|
|
|
|
|
|
|
|
723 |
|
|
|
1,372 |
|
|
|
|
|
|
|
|
|
|
|
$ |
336 |
|
|
$ |
665 |
|
|
|
|
|
|
|
|
|
|
$ |
833 |
|
|
$ |
1,871 |
|
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. For both the third quarter and nine months ended
September 30, 2009, Marmon’s revenues declined approximately 30% from the
revenues of the comparable 2008 periods (including periods in 2008 prior to
Berkshire’s acquisition). Pre-tax earnings for the third quarter and
first nine months of 2009 declined approximately 21% and 28%, respectively, from
2008 comparable periods reflecting the revenue declines, partially offset by the
impact of ongoing cost reduction efforts across all business
sectors. For the third quarter of 2009, the Retail Store Fixtures,
Food Service Equipment, Industrial Products, Water Treatment and Highway
Technologies sectors produced comparable or improved earnings versus the third
quarter of 2008. For the first nine months of 2009, the Retail Store
Fixtures and Food Service Equipment sectors generated increased earnings
compared to the nine months ended September 30, 2008. The remaining
nine sectors experienced lower earnings compared to the comparable nine month
period in 2008.
McLane
McLane’s
revenues for the third quarter of 2009 increased $536 million (7%) over 2008 and
for the first nine months increased $1,135 million (5%) over
2008. The increase in year-to-date revenues reflected a 9% increase
in the grocery business, partially offset by a 9% decline from the foodservice
business. Pre-tax earnings for the third quarter of 2009 declined $4
million (6%) from 2008 and for the first nine months increased $64 million (31%)
over 2008. Earnings for the first nine months of 2009 included the
impact of a substantial inventory price change gain associated with an increase
in federal excise tax 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 increase in earnings from
the inventory price change gain was partially offset by a federally mandated
one-time floor stock tax on related inventory held and by lower earnings from
the foodservice business.
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 overall
gross margin rate was 5.81% for the first nine months of 2009 compared to 5.93%
in 2008. Cigarette excise tax inflation has a negative impact on margins by
inflating gross sales while providing only marginal increases in profit since
most markups are on a fixed amount per unit as opposed to a percentage of gross
sales. 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 third quarter and first nine months of 2009 declined $301
million (22%) and $830 million (21%) from revenues in the corresponding 2008
periods. The revenue declines in 2009 were primarily due to lower
unit sales. Pre-tax earnings for the third quarter of 2009 were $51
million, a slight increase over 2008. Earnings were $136 million for
the first nine months of 2009, a decrease of $46 million (25%) 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 manufacturing costs attributable to significant
declines in sales volume, which decreased plant operating levels and
manufacturing efficiencies. During 2009, Shaw incurred costs of $8 million in
the third quarter and $62 million in the first nine months related to plant
closures. Comparable costs in corresponding 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.
Nearly
all of the businesses in the manufacturing group are experiencing the adverse
effects of the global economic recession as consumers and customers dramatically
cut purchases. Revenues from other manufacturing activities for the third
quarter of 2009 were $3,244 million, a decrease of $479 million (13%) from 2008.
Revenues for the first nine months of 2009 were $8,851 million, a decrease of
$2,347 million (21%) from 2008. During the first nine months of 2009, revenues
were lower for apparel (13%), building products (23%) and other businesses (25%)
as compared to the first nine months of 2008.
Pre-tax
earnings of the other manufacturing businesses were $293 million in the third
quarter of 2009, a decrease of $185 million (39%) versus 2008. Earnings for the
first nine months of 2009 were $640 million, which were $818 million (56%) lower
than the comparable 2008 period. The declines in earnings reflected the lower
revenues as well as relatively higher costs resulting from lower manufacturing
efficiencies. These businesses have taken actions to reduce costs and reduce or
delay capital spending until the economy improves. Although revenues and
earnings for the third quarter were lower than the comparable 2008 periods,
revenues increased 9% and earnings increased 30% versus the second quarter of
2009.
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 $1,538 million in the third quarter of
2009, a decrease of $556 million (27%) compared to 2008. For the first nine
months of 2009, revenues of $4,616 million declined $1,880 million (29%) versus
2008. In 2009, pre-tax losses were $5 million for the third quarter and $67
million for the first nine months. Other service businesses generated
pre-tax earnings in 2008 of $260 million for the third quarter and $786 million
for the first nine months. The decreases in revenues and pre-tax earnings
reflected 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 $471 million (41%) for the third quarter and $1,495
million (42%) for the first nine months as compared to 2008. The declines
reflected a 79% decline in aircraft sales as well as lower flight operations
revenues primarily due to a 24% decline in flight revenue hours. NetJets
produced pre-tax losses in 2009 of $183 million for the third quarter and $531
million for the first nine months. The pre-tax losses in 2009 included asset
writedowns and other downsizing costs of $181 million for the third quarter and
$436 million for the first nine months. NetJets owns more planes than is
required for its present level of operations and further downsizing costs will
be incurred in the fourth quarter. However, management believes that
NetJets is likely to operate at a modest profit in 2010, absent any further
deterioration in the U.S. economy or negative actions directed at the ownership
of private aircraft.
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 $641 million in the third quarter of 2009 and
$1,955 million for the first nine months, reflecting decreases of $63 million
(9%) and $249 million (11%) compared with the corresponding 2008 periods.
Pre-tax earnings in the third quarter of 2009 were unchanged versus 2008 and in
the first nine months declined $24 million (33%) to $48 million. 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 have
continued into 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.
|
|
Third
Quarter
|
|
|
First
Nine Months
|
|
|
|
Revenues
|
|
|
Earnings
|
|
|
Revenues
|
|
|
Earnings
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Manufactured
housing and finance
|
|
$ |
872 |
|
|
$ |
904 |
|
|
$ |
53 |
|
|
$ |
7 |
|
|
$ |
2,420 |
|
|
$ |
2,658 |
|
|
$ |
142 |
|
|
$ |
208 |
|
Furniture/transportation
equipment leasing
|
|
|
164 |
|
|
|
198 |
|
|
|
5 |
|
|
|
25 |
|
|
|
504 |
|
|
|
584 |
|
|
|
10 |
|
|
|
65 |
|
Other
|
|
|
107 |
|
|
|
156 |
|
|
|
84 |
|
|
|
131 |
|
|
|
327 |
|
|
|
477 |
|
|
|
252 |
|
|
|
385 |
|
|
|
$ |
1,143 |
|
|
$ |
1,258 |
|
|
|
|
|
|
|
|
|
|
$ |
3,251 |
|
|
$ |
3,719 |
|
|
|
|
|
|
|
|
|
Pre-tax
earnings
|
|
|
|
|
|
|
|
|
|
$ |
142 |
|
|
$ |
163 |
|
|
|
|
|
|
|
|
|
|
$ |
404 |
|
|
$ |
658 |
|
Income
taxes and noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
50 |
|
|
|
72 |
|
|
|
|
|
|
|
|
|
|
|
152 |
|
|
|
261 |
|
|
|
|
|
|
|
|
|
|
|
$ |
92 |
|
|
$ |
91 |
|
|
|
|
|
|
|
|
|
|
$ |
252 |
|
|
$ |
397 |
|
Revenues
from manufactured housing and finance activities (Clayton Homes) in 2009
declined $32 million (4%) for the third quarter and $238 million (9%) for the
first nine months compared to 2008. The declines were due primarily to a 20%
decline in year-to-date home unit sales, partially offset by a 7% increase in
average selling price due primarily to mix changes. Interest from
installment loans and other investments for the third quarter of 2009 was
relatively unchanged from 2008 and for the first nine months of 2009 increased
approximately 4% over 2008. Installment loan balances were approximately $12.3
billion as of September 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 third quarter of 2009 increased $46 million to
$53 million and for the first nine months of 2009 declined $66 million to $142
million from the corresponding 2008 periods. Provisions for loan losses in the
first nine months of 2009 exceeded 2008 by $75 million. 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 the third quarter of 2008 included losses
of approximately $22 million from Hurricanes Ike and Gustav.
Revenues
and pre-tax earnings from furniture and transportation equipment leasing
activities for the first nine months of 2009 declined $80 million and $55
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 long-held 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
impairment losses on investments follows. Amounts are in millions.
|
|
Third Quarter |
|
|
First Nine
Months |
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Investment
gains/losses
|
|
$ |
110 |
|
|
$ |
(46 |
) |
|
$ |
(257 |
) |
|
$ |
744 |
|
Other-than-temporary
impairment losses on investments
|
|
|
(25 |
) |
|
|
(250 |
) |
|
|
(3,151 |
) |
|
|
(679 |
) |
Derivative
gains/losses
|
|
|
1,732 |
|
|
|
(1,261 |
) |
|
|
2,572 |
|
|
|
(2,213 |
) |
Gains/losses
before income taxes and noncontrolling interests
|
|
|
1,817 |
|
|
|
(1,557 |
) |
|
|
(836 |
) |
|
|
(2,148 |
) |
Income
taxes and noncontrolling interests
|
|
|
634 |
|
|
|
(545 |
) |
|
|
(295 |
) |
|
|
(755 |
) |
Net
gains/losses
|
|
$ |
1,183 |
|
|
$ |
(1,012 |
) |
|
$ |
(541 |
) |
|
$ |
(1,393 |
) |
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. Over the first nine months of 2009, Berkshire sold
approximately 27.5 million shares of ConocoPhillips. 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
fully recovers. Sales in 2009 were or may be in anticipation of other investment
opportunities, to increase overall liquidity and to realize capital losses that
can be carried back 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 were paid on capital
gains in 2006 and 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 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, particularly with respect to the
equity index put option contracts.
Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations (Continued)
Investment and Derivative
Gains/Losses (Continued)
The fair
values of Berkshire’s credit default contracts are impacted by changes in credit
default spreads, which have been volatile in recent periods. Pre-tax
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 pre-tax gain of
approximately $400 million. During the third quarter of 2009, credit default
spreads narrowed further resulting in a pre-tax gain of approximately $1.44
billion. 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 half of 2009. For the first nine months of 2009, credit default
loss payments were approximately $1.9 billion compared with $56 million for the
first nine months of 2008.
In the
third quarter and first nine months of 2009, gains from equity index put option
contracts were $220 million and $2,010 million, respectively. The gains in the
third quarter of 2009 reflected increases in the equity indexes partially offset
by the impact of a weaker U.S. Dollar on non-U.S. contracts and lower
interest rates. In 2008, equity index put option contracts produced losses of
$880 million in the third quarter and $1,731 million for the first nine months.
The losses in 2008 reflected declines in the equity indexes. 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. As
previously noted, management does not believe that the gains or losses reflected
in earnings in the past two years to be meaningful relative to evaluating
Berkshire’s ultimate payment obligations, if any.
Financial
Condition
Berkshire’s
balance sheet continues to reflect significant liquidity and a strong capital
base. Consolidated Berkshire shareholders’ equity at September 30, 2009 was
$126.1 billion, an increase of $16.8 billion from December 31, 2008.
Consolidated cash and investments of insurance and other businesses were
approximately $143.4 billion at September 30, 2009, an increase of about $21.4
billion from December 31, 2008. Cash and cash equivalents of
insurance and other businesses were $23.8 billion as of September 30, 2009.
Investments are held predominantly in Berkshire’s insurance
businesses.
During
the first nine months of 2009, Berkshire acquired a 12% convertible perpetual
security issued by Swiss Re for $2.7 billion and an 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.
Capital
expenditures of the utilities and energy businesses in the first nine months of
2009 were approximately $2.6 billion. Forecasted capital expenditures for the
fourth quarter of 2009 are estimated at $0.8 billion. MidAmerican intends to
fund future capital expenditures with cash flows from operations and debt
proceeds. MidAmerican’s borrowings were $19.6 billion at September 30, 2009, an
increase of $419 million from December 31, 2008. In 2009, MidAmerican
operating subsidiaries issued $350 million of 5.5% bonds maturing in 2019 and
$650 million of 6.0% bonds maturing in 2039 and MidAmerican also issued $250
million of 3.15% notes maturing in 2012. MidAmerican and its operating
subsidiaries currently have no significant debt maturities until 2011, when
about $1.1 billion matures. 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 $25.0 billion as of September 30, 2009 and $23.9
billion at December 31, 2008. Liabilities were $27.6 billion as of
September 30, 2009 and $30.7 billion at December 31, 2008. As of September
30, 2009, notes payable and other borrowings of $14.6 billion included
approximately $12.1 billion par amount 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 the first part of 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. However, management believes that the credit crisis has abated and
interest rates for investment grade issuers relative to government obligations
have declined. Nevertheless, restricted access to credit markets at affordable
rates in the future could have a significant negative impact on operations,
particularly the utilities and energy 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)
Financial Condition (Continued)
On
November 3, 2009, Berkshire announced that it had entered into a definitive
agreement to acquire for $100 per share the remaining 77.4% of BNSF’s
outstanding shares not currently owned by Berkshire. Based upon the
outstanding shares of BNSF, the value of the aggregate consideration to acquire
the remaining BNSF shares is approximately $26.4 billion. Approximately 60% of
the aggregate consideration will be paid in cash and 40% in Berkshire Class A
and Class B Common Stock. Berkshire expects to fund about 50% of the
cash consideration with internally generated cash and the remainder with
borrowings expected to be repaid over a three year period. The acquisition is
subject to BNSF shareholder approval and customary closing
conditions. The closing is expected to occur in the first quarter of
2010.
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 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 September 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
Consolidated Balance Sheet as of September 30, 2009 includes estimated
liabilities for unpaid losses from property and casualty insurance and
reinsurance contracts of $59.6 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
Consolidated Balance Sheet as of September 30, 2009 includes goodwill of
acquired businesses of $34.0 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, if available, asset and liability fair
values and other valuation techniques, such as discounted projected future net
earnings or cash flows 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. Berkshire performs an annual evaluation of goodwill for impairment in the
fourth quarter. Although Berkshire management 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 ongoing recession is producing a lesser impact and in some
instances enhancing the long-term economic value of certain of Berkshire’s
reporting units.
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 other observable market inputs. In instances when
market prices are not available, values may be based upon fair value pricing
matrices or models. These models may incorporate observable inputs as well as
unobservable inputs, which require judgments by management. Derivative
contract values reflect estimates of the amounts at which the contracts could be
exchanged based upon varying levels of observable market information as well as
other assumptions by management. 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.
Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations (Continued)
Critical
Accounting Policies (Continued)
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 Consolidated Financial Statements. Berkshire is
currently evaluating the impact of these accounting
pronouncements.
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 September 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 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
Not
applicable.
None
|
a.
31.1
|
Exhibits
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 September 30, 2009, formatted in
XBRL (Extensible Business Reporting Language) includes: (i) the
Consolidated Balance Sheets as of September 30, 2009 and December 31,
2008, (ii) the Consolidated Statements of Earnings for each of the
three-month and nine-month periods ended September 30, 2009 and 2008,
(iii) the Consolidated Statements of Cash Flows for each of the nine-month
periods ended September 30, 2009 and 2008, and (iv) the Notes to
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
November 6, 2009
|
/S/ MARC D. HAMBURG
|
|
(Signature)
|
|
Marc
D. Hamburg,
Senior
Vice President and
Principal
Financial Officer
|
35