BERKSHIRE HATHAWAY INC annual report, FY2012

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Berkshire Hathaway Inc. 2012 Annual Report (10-K) Summary

Business Context and Reporting Period

This filing covers the fiscal year ended December 31, 2012. Berkshire Hathaway Inc. is a holding company with a highly decentralized management structure, operating diverse businesses including insurance (GEICO, General Re, BHRG), freight rail (BNSF), utilities and energy (MidAmerican), and various manufacturing, service, and retailing operations. The company employs approximately 288,500 people worldwide.

Key Financial Metrics

  • Total Revenues: $162.5 billion (up from $143.7 billion in 2011).
  • Net Earnings Attributable to Shareholders: $14.8 billion (up from $10.3 billion in 2011).
  • Net Earnings Per Share (Class A equivalent): $8,977.
  • Total Assets: $427.5 billion.
  • Shareholders' Equity: $187.6 billion.
  • Cash and Cash Equivalents: $47.0 billion (including $10.6 billion at the parent company).
  • Insurance Float: Approximately $73 billion.
  • Debt: Total notes payable and borrowings were approximately $62.7 billion across all segments.

Material Changes vs. Prior Period

  • Insurance Underwriting: Pre-tax underwriting gain improved significantly to $1.6 billion in 2012 compared to $248 million in 2011. This was driven by favorable loss experience in GEICO and General Re, partially offset by $1.1 billion in pre-tax losses from Hurricane Sandy.
  • Investment and Derivative Gains: After-tax gains were $2.2 billion in 2012, a reversal from a $521 million loss in 2011. The 2012 gain included $1.0 billion from equity index put option contracts and $894 million from credit default contracts.
  • Operating Segments:
    • BNSF (Railroad): Net earnings rose to $3.4 billion (from $3.0 billion) due to higher revenue per car and volume increases in consumer and industrial products, despite a decline in coal volume.
    • Manufacturing, Service, and Retailing: Earnings increased to $3.7 billion (from $3.0 billion), largely due to the full-year impact of the Lubrizol acquisition completed in late 2011.
    • Utilities and Energy: Earnings were $1.3 billion, relatively flat compared to 2011.
  • Accounting Changes: Adoption of new GAAP standards regarding deferred policy acquisition costs (DPAC) in 2012 accelerated the recognition of GEICO's advertising expenses, increasing reported underwriting expenses by approximately $410 million compared to prior year methodology.

Guidance, Outlook, and Risks

  • Capital Allocation: Management continues to prioritize maintaining a cash balance of at least $20 billion. A stock repurchase program was amended in December 2012 to allow purchases up to a 20% premium over book value (previously 10%). In December 2012, the company repurchased approximately $1.3 billion of its own stock.
  • Major Commitment: On February 13, 2013, Berkshire committed to invest $12.12 billion (common and preferred stock) in a holding company to acquire H.J. Heinz Company, subject to regulatory and shareholder approval.
  • Key Risks:
    • Insurance: Significant exposure to catastrophic events (e.g., Hurricane Sandy) and estimation errors in loss reserves ($64 billion in gross unpaid losses).
    • Derivatives: Significant liabilities ($7.9 billion) related to equity index put options and credit default contracts, which are sensitive to market volatility and interest rates.
    • Key Personnel: Heavy reliance on Warren Buffett (CEO) and Charlie Munger (Vice Chairman) for investment and capital allocation decisions.
    • Regulatory: Extensive regulation of insurance, railroad, and utility operations, including potential impacts from climate change legislation and the Dodd-Frank Act.

Investor Verification Checklist

  • Verify the adequacy of the $64 billion in gross unpaid loss reserves, particularly regarding long-tail casualty and retroactive reinsurance contracts.
  • Monitor the fair value of derivative liabilities ($7.9 billion) and their sensitivity to equity market declines and interest rate changes.
  • Assess the integration and performance of the Lubrizol acquisition and the pending Heinz acquisition.
  • Review the impact of the new DPAC accounting standard on GEICO's reported expense ratios versus its cash basis performance.
  • Track the company's cash balance relative to the $20 billion threshold for stock repurchases.