Berkshire Hathaway Inc. 10-Q Summary
Business Context and Reporting Period
This Quarterly Report (Form 10-Q) covers the period ended September 30, 1999. Berkshire Hathaway operates a diversified portfolio including insurance (GEICO, General Re, Berkshire Hathaway Reinsurance Group), manufacturing, retail, and service businesses. The reporting period includes the full impact of the General Re acquisition, which closed on December 21, 1998.
Key Financial Metrics
| Metric | Q3 1999 | Q3 1998 | 9 Months 1999 | 9 Months 1998 |
|---|---|---|---|---|
| Total Revenues | $7,051M | $2,909M | $17,958M | $10,170M |
| Net Earnings | $420M | $365M | $1,533M | $2,263M |
| EPS (Class A equiv.) | $276 | $293 | $1,009 | $1,822 |
| Operating Cash Flow (9mo) | $1,328M (vs. $14M in 1998) | |||
| Cash & Equivalents | $4,715M | Down from $13,582M at year-end 1998 | ||
| Shareholders' Equity | $55,305M | Down from $57,403M at year-end 1998 | ||
| Total Debt | $2,448M | Includes borrowings under investment agreements |
Material Changes vs. Prior Period
- Net Earnings Decline (9 Months): Net earnings decreased by approximately 32% to $1.533 billion compared to $2.263 billion in the prior year. This was primarily driven by a significant drop in realized investment gains ($784M in 1999 vs. $1,435M in 1998) and substantial underwriting losses in the insurance segments.
- Insurance Underwriting Losses: The insurance segments reported a net underwriting loss of $407 million for the first nine months of 1999, compared to a gain of $140 million in 1998.
- General Re: Contributed a pre-tax underwriting loss of $603 million for the nine-month period due to inadequate premium rates and unfavorable loss development.
- GEICO: Underwriting profits declined significantly due to rate reductions, higher loss ratios (79.6% vs. 73.0% in 1998), and increased marketing expenses.
- Non-Insurance Growth: Non-insurance business segments saw revenue growth of 32.3% and net earnings growth of 11.3% year-over-year, largely driven by the Executive Jet acquisition.
- Liquidity Position: Cash and cash equivalents decreased by approximately $8.9 billion during the first nine months, primarily due to net investment purchases of $18.2 billion.
Guidance, Outlook, and Risks
- MidAmerican Energy Acquisition: On October 24, 1999, Berkshire entered an agreement to acquire MidAmerican Energy Holdings Company, investing approximately $1.25 billion for a 75% economic interest. The transaction is expected to close in the first half of 2000.
- Year 2000 (Y2K) Issues: Management expects minor disruptions but believes significant IT and non-IT systems are compliant. Total Y2K costs are estimated at $60 million, with $56 million incurred by September 30, 1999. Risks include potential failures in critical telecommunications or utilities.
- Insurance Risks: Management notes that periodic underwriting results for catastrophe reinsurance can be extremely volatile. General Re's underwriting losses are attributed to industry-wide inadequate premium rates.
- Investment Volatility: Realized investment gains are a recurring but volatile element of earnings, dependent on the timing of sales and market conditions.
Investor Verification Checklist
- General Re Underwriting Performance: Verify the sustainability of General Re's underwriting losses and the adequacy of loss reserves, particularly regarding the $275 million provision for GCL business.
- GEICO Loss Ratios: Monitor the trend of GEICO's loss ratios (79.6% for 9 months 1999) to ensure rate reductions do not permanently impair profitability.
- Investment Portfolio Valuation: Review the composition of equity securities (e.g., Coca-Cola, American Express) and fixed maturities, noting the $24 billion in gross unrealized gains on equity securities.
- MidAmerican Transaction: Confirm regulatory approvals and closing terms for the MidAmerican Energy acquisition.
- Float Dynamics: Assess the stability of the $24.5 billion in insurance float, noting the increase driven by retroactive reinsurance contracts.