BRK-B

Business Context and Reporting Period

This summary covers the Form 10-Q filed by Berkshire Hathaway Inc. for the quarterly period ended September 30, 2008. The filing details the company's financial performance during a period of significant global economic volatility, including the onset of the credit crisis and major hurricane activity in the third quarter.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Earnings Decline: Net earnings dropped significantly, primarily due to a shift from investment gains to losses. Q3 2008 earnings were $1.057 billion compared to $4.553 billion in Q3 2007.
• Investment and Derivative Losses: The company reported pre-tax losses of $1.557 billion in Q3 2008 from investments and derivatives, compared to gains of $3.063 billion in Q3 2007. This was driven by a $1.261 billion loss on derivative contracts (credit default and equity index puts) and a $298 million loss on investment securities.
• Catastrophe Losses: Insurance underwriting results included estimated losses of approximately $1.05 billion from Hurricanes Gustav and Ike in the third quarter.
• Underwriting Performance: While insurance underwriting remained profitable, gains were lower than 2007 due to increased price competition and catastrophe losses. GEICO reported a pre-tax underwriting gain of $246 million in Q3 2008, down from $335 million in 2007.
• Acquisitions: Berkshire acquired a 60% interest in Marmon Holdings, Inc. for $4.5 billion in March 2008, which contributed to revenues and earnings in the current period.

Guidance, Outlook, and Risks

• Market Volatility: Management noted that subsequent to September 30, 2008, equity and debt markets declined significantly. Based on prices as of October 31, 2008, management estimated a potential $9 billion decline in consolidated shareholders' equity.
• Derivative Valuation: Management emphasized that periodic gains/losses on long-term derivative contracts (equity index puts and credit defaults) are volatile and may not reflect ultimate cash outcomes, which will not be known for years.
• Operating Outlook:
  • GEICO: Management anticipates a higher loss ratio in Q4 2008 compared to 2007, resulting in lower underwriting gains.
  • Shaw Industries: Sales volume and earnings are expected to remain low into 2009 due to the weak residential real estate market.
  • Manufacturing: Revenues and earnings for other manufacturing businesses are likely to decline further in Q4 2008 and into 2009 due to difficult economic conditions and higher raw material costs.
• Liquidity: Despite market turmoil, Berkshire maintains significant liquidity with approximately $28.4 billion in cash and cash equivalents (excluding finance businesses) and a strong capital base.
• Legal Contingencies: Ongoing government investigations regarding non-traditional reinsurance products (specifically involving General Re and AIG) continue, with potential fines or penalties that cannot currently be estimated.

Investor Verification Checklist

• Derivative Exposure: Verify the fair value of $9.6 billion in derivative liabilities (credit default and equity index puts) and understand the long-term nature of these contracts versus short-term earnings volatility.
• Investment Portfolio: Review the composition of the $76 billion equity portfolio and $34 billion fixed maturity portfolio for unrealized losses and potential impairment risks.
• Catastrophe Reserves: Assess the adequacy of loss reserves following the $1.05 billion in hurricane losses and the potential for further reserve strengthening.
• Recent Investments: Confirm the terms and impact of post-quarter investments in Goldman Sachs ($5 billion), General Electric ($3 billion), and Wrigley ($6.5 billion) made in October 2008.
• Float Cost: Monitor the cost of float, which remained negative (profitable) in 2008, but could be impacted by future underwriting losses.