Business Context and Reporting Period
Company: Berkshire Hathaway Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2007
Overview: Berkshire is a holding company with diverse operations, primarily in insurance (primary and reinsurance), utilities and energy (MidAmerican), and a wide array of manufacturing, service, and retailing businesses. The company operates on a highly decentralized basis with minimal corporate involvement in day-to-day operations.
Key Financial Metrics
| Metric | 2007 | 2006 |
|---|---|---|
| Total Revenues | $118,245 million | $98,539 million |
| Net Earnings | $13,213 million | $11,015 million |
| Net Earnings Per Share (Class A equiv.) | $8,548 | $7,144 |
| Total Assets | $273,160 million | $248,437 million |
| Shareholders' Equity | $120,733 million | $108,419 million |
| Book Value Per Share (Class A equiv.) | $78,008 | $70,281 |
| Insurance Float | $59 billion | $51 billion |
| Notes Payable & Borrowings | $33,826 million | $32,605 million |
Note: Borrowings include $19,002 million for utilities/energy and $12,144 million for finance/financial products.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 20% to $118.2 billion, driven by a 33% increase in insurance premiums earned (partially due to a $7.1 billion Equitas reinsurance transaction) and a 19% increase in sales and service revenues.
- Earnings Increase: Net earnings rose 20% to $13.2 billion. This was significantly aided by investment and derivative gains of $5.5 billion (pre-tax), compared to $2.6 billion in 2006.
- Underwriting Performance: The insurance group generated a pre-tax underwriting gain of $3.4 billion in 2007, down slightly from $3.8 billion in 2006. GEICO reported a pre-tax underwriting gain of $1.1 billion.
- Utilities & Energy: Revenues from MidAmerican increased 19% to $12.6 billion, and earnings applicable to Berkshire rose to $1.1 billion, reflecting the full-year impact of the PacifiCorp acquisition and higher energy prices.
- Manufacturing & Retailing: Revenues increased 12% to $59.1 billion. However, Shaw Industries saw a decline in revenues and earnings due to the slowdown in residential housing construction.
Guidance, Outlook, and Risks
- Management Commentary: Management emphasizes that investment gains have no predictive value. The company maintains a strategy of holding equity investments for the long term and prefers to invest in businesses with excellent economics and able management.
- Outlook:
- GEICO: Average premiums per policy are expected to remain relatively unchanged in 2008.
- Shaw Industries: Revenues and earnings are likely to decline further in 2008 due to the continued weakness in residential housing construction.
- Utilities: Capital expenditures are forecasted to be approximately $3.9 billion in 2008.
- Risks & Contingencies:
- Legal Proceedings: Ongoing investigations by the SEC, DOJ, and state authorities regarding "non-traditional products" and finite reinsurance transactions (specifically the AIG Transaction). Several former General Re executives were convicted in early 2008; the company cannot predict the outcome of potential legal actions against the entity.
- Insurance Reserves: Significant estimation error is inherent in property and casualty loss reserves ($56 billion gross). Adjustments can materially affect periodic earnings.
- Key Personnel: The company is dependent on Warren Buffett (CEO) and Charles Munger (Vice Chairman) for investment and capital allocation decisions.
- Market Risk: Significant exposure to equity price risk (49% of equity portfolio concentrated in four investees) and interest rate risk.
Investor Verification Checklist
- Equitas Transaction Impact: Verify the long-term amortization of the $2.2 billion deferred charge asset and the $9.3 billion liability associated with the Equitas reinsurance deal.
- Investment Gains Volatility: Confirm that the $5.5 billion in investment gains is not indicative of recurring operating earnings.
- Legal Exposure: Monitor the status of the SEC and DOJ investigations into General Re's finite reinsurance practices and potential fines or penalties.
- Reserve Adequacy: Review the "Loss Development" tables for prior years to assess the trend of reserve strengthening or weakening.
- Succession Planning: Evaluate the company's stated succession plan for Warren Buffett and Charles Munger.
- Marmon Acquisition: Track the closing of the $4.5 billion acquisition of 60% of Marmon Holdings, Inc., expected in Q1 2008.