Berkshire Hathaway Inc. 10-Q Summary
Business Context and Reporting Period
This filing covers the quarterly period ended June 30, 1999. Berkshire Hathaway Inc. operates a diversified portfolio including insurance (GEICO, General Re, Reinsurance Group), manufacturing, retail, and service businesses. The period reflects the full integration of General Re Corporation, acquired in December 1998, and Executive Jet, Inc., acquired in August 1998.
Key Financial Metrics
| Metric | Q2 1999 | Q2 1998 | YTD 1999 | YTD 1998 |
|---|---|---|---|---|
| Total Revenues | $5,461M | $3,936M | $10,907M | $7,261M |
| Net Earnings | $572M | $1,176M | $1,113M | $1,898M |
| EPS (Class A equiv.) | $376 | $947 | $733 | $1,529 |
| Realized Investment Gains | $396M | $1,351M | $799M | $2,074M |
| Underwriting Gain/Loss | ($76M) | $57M | ($162M) | $88M |
| Cash & Equivalents | $4,229M | $13,582M (Dec '98) | Significant decline due to investment purchases | |
| Shareholders' Equity | $58,041M | $57,403M (Dec '98) | $38,189 per Class A share |
Liquidity & Debt: Cash and cash equivalents dropped from $13.58 billion at year-end 1998 to $4.23 billion at June 30, 1999, primarily due to $13.5 billion in investment purchases. Total borrowings under investment agreements and other debt were $2.59 billion.
Material Changes vs. Prior Period
- Net Earnings Decline: Net earnings fell 51% in Q2 and 41% YTD compared to 1998. This is primarily driven by a significant reduction in realized investment gains ($396M vs $1.35B in Q2) and a shift from underwriting profit to loss.
- Underwriting Loss: Insurance segments reported a net underwriting loss of $76M in Q2 and $162M YTD, compared to gains of $57M and $88M in 1998. General Re contributed a $190M underwriting loss in Q2.
- Revenue Growth: Despite lower earnings, total revenues increased 39% in Q2 and 50% YTD, driven by the inclusion of General Re premiums and growth in non-insurance segments (notably Executive Jet).
- Goodwill Amortization: Charges increased significantly to $119M in Q2 (from $24M in 1998) due to the General Re acquisition.
Outlook, Risks, and Management Commentary
- General Re Integration: Management notes that General Re's underwriting results were adversely affected by property losses and reserve strengthening in life/health lines. A new retroactive reinsurance agreement entered in July 1999 is expected to increase float but will result in deferred charges amortized over time.
- GEICO Performance: GEICO saw policy growth of 23.3% over the last 12 months but faced lower underwriting gains due to rate reductions and higher claim frequency/costs.
- Year 2000 (Y2K) Risk: Management anticipates minor disruptions but believes critical systems will be compliant by year-end. Estimated total cost is $60 million, with $51 million incurred by June 30. Risks include potential failures in partner systems or catastrophic insurance claims related to Y2K failures.
- Investment Volatility: Earnings remain highly sensitive to the timing and magnitude of realized investment gains, which are not indicative of recurring operating performance.
Investor Verification Checklist
- Underwriting Loss Drivers: Verify the specific impact of the General Re life/health reserve strengthening ($275M provision established in 1998) and property loss events on the Q2 underwriting loss.
- Float Stability: Confirm that the $22.8 billion float remains stable despite the underwriting loss, as this is a key driver of investment income.
- Y2K Contingency: Assess the adequacy of contingency plans for third-party vendors and business partners, as Berkshire cannot control their readiness.
- Investment Portfolio: Review the composition of the $38.9 billion equity portfolio, noting unrealized gains of $28.7 billion, to understand the potential for future realized gains or losses.
- Goodwill Amortization: Monitor the ongoing impact of the $124 million goodwill restatement and subsequent amortization on future earnings.