Business Context and Reporting Period
This Form 10-Q covers Berkshire Hathaway Inc. for the quarterly period ended March 31, 2002. The company operates a diversified portfolio including insurance (GEICO, General Re, BHRG), manufacturing (Shaw Industries, Johns Manville), retail, and finance businesses. Notable activity in the quarter included the acquisition of the remaining shares of Shaw Industries and Albecca Inc., and the adoption of SFAS No. 142, which eliminated goodwill amortization effective January 1, 2002.
Key Financial Metrics
| Metric | Q1 2002 | Q1 2001 |
|---|---|---|
| Total Revenues | $9,255 million | $8,142 million |
| Net Earnings | $916 million | $606 million |
| Net Earnings Per Share (Class A equiv.) | $598 | $397 |
| Operating Cash Flow | $3,427 million | $733 million |
| Cash and Cash Equivalents | $7,374 million | $5,313 million |
| Total Shareholders' Equity | $60,498 million | $57,950 million |
| Debt (Excl. Finance Businesses) | $3,724 million | $3,485 million |
| Insurance Float | $37.3 billion | $29.2 billion |
Material Changes vs. Prior Period
- Profitability Surge: Net earnings increased 51% to $916 million, driven by a shift from an underwriting loss to a gain and higher non-insurance earnings.
- Underwriting Turnaround: Consolidated insurance underwriting moved from a $145 million loss in Q1 2001 to a $13 million gain in Q1 2002. GEICO posted a $109 million underwriting gain, a significant improvement from a $21 million loss.
- Accounting Change: The adoption of SFAS No. 142 eliminated $142 million in goodwill amortization expense recorded in Q1 2001, directly boosting reported earnings.
- Investment Income: Pre-tax investment income from insurance operations rose 4.5% to $716 million, supported by a larger asset base ($75 billion vs. $67 billion).
- Acquisitions: Revenues in the building products segment grew 82.4% due to the full-quarter inclusion of Johns Manville and MiTek, though organic sales at Johns Manville declined.
Outlook, Risks, and Management Commentary
- General Re Strategy: Management indicated that while Q1 results improved, further underwriting actions are required to align premium rates with coverage terms to achieve long-term profitability. The estimate of net losses from the September 11th attacks remains at $1.9 billion.
- Run-off Activities: General Re Securities (GRS) is being run off in an orderly manner, incurring a $89 million pre-tax loss in Q1 2002. Future losses may occur during restructuring.
- Catastrophe Risk: Management emphasized that property catastrophe results are volatile. While Q1 2002 saw minimal catastrophe losses, large losses are expected to occur eventually.
- Float Cost: The cost of float was less than zero in Q1 2002 due to the underwriting gain, a stark contrast to the 12.8% cost in 2001.
- Goodwill Impairment: Berkshire will complete its initial assessment of goodwill for impairment in Q2 2002. Management currently believes no transitional impairment charges will be recorded.
- Argentina Exposure: General Re has reduced business volume in Argentina due to the country's economic and political crisis and currency devaluation.
Investor Verification Checklist
- Underwriting Sustainability: Verify if the Q1 2002 underwriting gain is sustainable or driven by favorable loss development and rate increases that may not persist.
- Deferred Charge Amortization: Monitor the $109 million amortization of deferred charges on retroactive reinsurance; management expects this to exceed $300 million annually for the next two years.
- GRS Run-off Costs: Track future losses associated with the run-off of General Re Securities, which already incurred significant charges in Q1.
- Goodwill Assessment: Review the Q2 2002 filing for the results of the initial SFAS No. 142 goodwill impairment test on the $22 billion goodwill balance.
- Investment Portfolio: Assess the impact of unrealized gains/losses on the $31.2 billion equity portfolio, particularly given the volatility in the broader market.