Berkshire Hathaway Inc. 10-Q Summary
Business Context and Reporting Period
This filing is a Quarterly Report (Form 10-Q) for Berkshire Hathaway Inc. for the period ended September 30, 2007. The company operates through three primary segments: Insurance and Other, Utilities and Energy (MidAmerican), and Finance and Financial Products. The report highlights a significant reinsurance transaction with Equitas effective March 30, 2007, which materially impacted balance sheet liabilities and premiums earned.
Key Financial Metrics
| Metric | Q3 2007 | Q3 2006 | 9 Months 2007 | 9 Months 2006 |
|---|---|---|---|---|
| Total Revenues | $29,937 million | $25,360 million | $90,202 million | $72,308 million |
| Net Earnings | $4,553 million | $2,772 million | $10,266 million | $7,432 million |
| EPS (Class A equiv.) | $2,942 | $1,797 | $6,644 | $4,821 |
| Operating Cash Flow (9mo) | $11,351 million (vs. $7,882 million in 2006) | |||
| Cash & Equivalents (Total) | $47,083 million (as of Sept 30, 2007) | |||
| Total Shareholders' Equity | $119,903 million (as of Sept 30, 2007) | |||
| Total Debt (Notes Payable) | $34,724 million (as of Sept 30, 2007) |
Material Changes vs. Prior Period
- Investment Gains: Net earnings were significantly boosted by investment and derivative gains/losses, which totaled $3,063 million in Q3 2007 compared to $267 million in Q3 2006. For the first nine months, gains were $4,579 million versus $1,531 million in 2006.
- Equitas Transaction: The reinsurance agreement with Equitas added $7.1 billion in premiums earned and $7.1 billion in losses incurred in the first nine months of 2007. This transaction increased unpaid loss reserves by approximately $8.7 billion compared to year-end 2006.
- Insurance Underwriting: Pre-tax underwriting gains decreased to $752 million in Q3 2007 from $1,427 million in Q3 2006. However, for the first nine months, gains increased to $2,653 million from $2,515 million in 2006.
- Utilities and Energy: Revenues increased 10.6% in Q3 and 22.7% for the first nine months, driven by the full-year impact of the PacifiCorp acquisition and higher energy sales volumes/prices.
- Manufacturing: Shaw Industries reported a 9% decline in revenues and a 29% decline in pre-tax earnings for the first nine months due to the slowdown in residential housing construction.
Outlook, Risks, and Management Commentary
- Capital Allocation: Management continues to maintain extraordinary capital strength, with statutory surplus in insurance businesses totaling approximately $59 billion. The cost of float remained negative (profitable) for the first nine months.
- Derivatives: Berkshire's exposure under equity index and credit default derivative contracts increased to approximately $35 billion as of September 30, 2007. These contracts are marked-to-market, creating volatility in earnings.
- Legal Proceedings: Ongoing governmental investigations regarding "non-traditional products" (finite reinsurance) involving General Re and its subsidiaries continue. A trial regarding the AIG transaction is set to begin in January 2008. Berkshire settled the Insurance Brokerage Antitrust Litigation in May 2007 without payment or admission of liability.
- Accounting Changes: The company adopted FIN 48 (Accounting for Uncertainty in Income Taxes) and AUG AIR-1 (Planned Major Maintenance Activities) in 2007, resulting in minor adjustments to retained earnings.
- Guidance: Berkshire does not provide specific financial guidance. Management notes that interim results are not necessarily indicative of full-year results due to the timing of catastrophe losses and investment gains.
Investor Verification Checklist
- Equitas Reserve Adequacy: Verify the assumptions used for the $9.3 billion in loss reserves assumed from Equitas, as these are long-tailed liabilities with significant uncertainty.
- Investment Portfolio Valuation: Review the composition of the $77.9 billion equity portfolio and the $26.7 billion fixed maturity portfolio for concentration risks and unrealized gains/losses.
- Derivative Exposure: Assess the $35 billion maximum exposure on derivative contracts and the potential impact of market volatility on future earnings.
- MidAmerican Debt: Monitor the $19.4 billion in debt held by the Utilities and Energy segment and the company's commitment to provide up to $3.5 billion in additional capital.
- Legal Contingencies: Track the outcome of the AIG-related trial and ongoing regulatory investigations into finite reinsurance practices.