BRK-B

Berkshire Hathaway Inc. Q1 2009 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2009. Berkshire Hathaway Inc. operates as a diversified holding company with major segments in Insurance, Utilities and Energy, Manufacturing/Service/Retailing, and Finance and Financial Products. The reporting period coincides with a severe global economic recession and financial market crisis, significantly impacting operating results and investment valuations.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Loss: The company reported a net loss of $1.534 billion, a reversal from the $940 million profit in Q1 2008. This was primarily driven by a $3.2 billion after-tax loss from investments and derivatives.
• Investment Portfolio: Equity securities fair value dropped from $49.1 billion to $37.6 billion. Significant unrealized losses were recorded, including a $3.1 billion other-than-temporary impairment charge, predominantly related to ConocoPhillips stock.
• Derivatives: Derivative losses of $1.5 billion were recorded, largely due to defaults in high-yield credit default contracts and widening credit spreads, contrasting with Q1 2008 losses which were driven by equity index put options.
• Operating Segments:
  • Insurance: Underwriting gains remained positive ($219 million), though loss ratios increased slightly. Investment income rose due to new high-yield investments (Goldman Sachs, GE, Wrigley, Swiss Re).
  • Manufacturing/Service: Earnings declined sharply across most sectors (e.g., NetJets, Shaw Industries, Retailing) due to reduced consumer spending and economic contraction.
  • Utilities: Earnings declined $113 million year-over-year, impacted by lower energy prices and foreign currency exchange rates.

Guidance, Outlook, and Risks

• Outlook: Management expects current economic conditions to persist through 2009 before meaningful improvement. Operating companies are implementing cost reductions. Management believes the economic franchises of its businesses remain intact.
• Capital Allocation: Berkshire continues to deploy capital into high-yield opportunities, including a $3 billion investment in Dow Chemical preferred stock (April 2009) and a $2.7 billion investment in Swiss Re (March 2009).
• Liquidity: The company maintains ample liquidity with over $25 billion in cash and equivalents. MidAmerican Energy has committed capital support of up to $3.5 billion from Berkshire.
• Risks:
  • Market Risk: Continued volatility in equity and credit markets could lead to further unrealized losses or impairment charges.
  • Derivative Obligations: Significant liabilities exist for equity index put options (intrinsic value $13.3 billion) and credit default contracts, though many are long-dated.
  • Legal Proceedings: Ongoing government investigations regarding non-traditional reinsurance products (General Re/AIG transactions) remain unresolved; potential fines or penalties cannot be estimated.
  • Goodwill Impairment: The depth of the recession could trigger future goodwill impairment charges if reporting unit fair values decline further.

Investor Verification Checklist

• Verify the magnitude of the $3.1 billion other-than-temporary impairment charge and its specific allocation to ConocoPhillips and other equities.
• Review the derivative liability exposure, specifically the $13.3 billion intrinsic value of equity index put options and the status of high-yield credit default contracts.
• Assess the impact of the General Re/AIG litigation and ongoing government investigations on potential future liabilities.
• Monitor GEICO's loss ratio trends, which increased to 77.1% in Q1 2009, and management's guidance on future underwriting profitability.
• Confirm the liquidity position of MidAmerican Energy and the sufficiency of the $3.5 billion capital commitment from Berkshire.