Berkshire Hathaway Inc. 10-Q Summary: Period Ended September 30, 2005
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for Berkshire Hathaway Inc. for the period ended September 30, 2005. The company operates as a diversified holding company with major segments in insurance (GEICO, General Re, Berkshire Hathaway Reinsurance Group), manufacturing, retail, and service businesses, as well as finance and financial products. The reporting period includes the impact of Hurricanes Katrina and Rita, which struck the Gulf Coast in the third quarter of 2005.
Key Financial Metrics
| Metric | Q3 2005 | Q3 2004 | 9 Months 2005 | 9 Months 2004 |
|---|---|---|---|---|
| Total Revenues | $20,533 million | $19,172 million | $56,295 million | $54,352 million |
| Net Earnings | $586 million | $1,137 million | $3,398 million | $3,969 million |
| Net Earnings Per Share (Class A equiv.) | $381 | $739 | $2,207 | $2,581 |
| Operating Cash Flow (9 Months) | $5,704 million (vs. $5,077 million in 2004) | |||
| Cash and Cash Equivalents (Total) | $46,032 million (as of Sept 30, 2005) | |||
| Total Shareholders' Equity | $89,518 million (as of Sept 30, 2005) | |||
| Notes Payable (Excl. Finance Biz) | $3,465 million |
Material Changes vs. Prior Period
- Catastrophe Losses: The third quarter of 2005 was significantly impacted by Hurricanes Katrina and Rita. Berkshire estimated total industry losses from these events at $60 billion to $70 billion. Berkshire's estimated losses totaled approximately $2.99 billion for the quarter ($118 million for GEICO, $602 million for General Re, and $2.27 billion for the Berkshire Hathaway Reinsurance Group).
- Underwriting Results: Due to catastrophe losses, the insurance group reported a pre-tax underwriting loss of $1.80 billion for the quarter and $727 million for the first nine months, compared to a gain of $621 million for the first nine months of 2004.
- Investment Gains: Net investment gains for the first nine months of 2005 were $243 million, down from $761 million in 2004. This decline was largely due to a pre-tax loss of $897 million on foreign currency forward contracts, driven by the strengthening of the U.S. dollar.
- Acquisitions: Berkshire acquired Medical Protective Corporation (Med Pro) effective June 30, 2005, and Forest River, Inc. effective August 31, 2005. Aggregate consideration for 2005 acquisitions totaled $1.8 billion.
- MidAmerican Energy: Equity in earnings of MidAmerican Energy Holdings Company was $382 million for the first nine months of 2005, a significant improvement over the $71 million in 2004, which included a $366 million loss from discontinued operations.
Guidance, Outlook, and Risks
- Outlook: Management notes that interim results are not normally indicative of full-year results due to the timing of catastrophe losses and investment gains. GEICO's underwriting results are expected to remain favorable in the fourth quarter absent additional significant catastrophes, though premium rate reductions may gradually reduce profitability over time.
- MidAmerican Consolidation: Berkshire expects to consolidate MidAmerican Energy Holdings Company into its financial statements no later than the first quarter of 2006, following the repeal of the Public Utility Holding Company Act of 1935. This will not change MidAmerican's operations or capital structure.
- Legal and Regulatory Risks: General Reinsurance and other subsidiaries are cooperating with ongoing investigations by the SEC, DOJ, and various state and international authorities regarding "non-traditional products" and finite reinsurance transactions (specifically involving Reciprocal of America and AIG). Several former executives have pleaded guilty to criminal charges or received Wells notices. Berkshire cannot predict the outcome or estimate potential losses.
- Accounting Changes: Berkshire expects to record a non-cash pre-tax investment gain of approximately $5 billion in the fourth quarter related to the Procter & Gamble acquisition of Gillette. This will be offset by a reduction in unrealized appreciation in shareholders' equity, resulting in no net change to consolidated equity.
Key Facts for Investor Verification
- Catastrophe Reserve Adequacy: Verify the sufficiency of the $2.99 billion loss estimate for Hurricanes Katrina and Rita, as final figures may vary significantly.
- Legal Exposure: Monitor the status of investigations into General Re's finite reinsurance transactions and the potential for civil or criminal penalties.
- Foreign Currency Volatility: Note the $897 million loss on currency forwards; future earnings may be volatile based on exchange rate fluctuations.
- MidAmerican Integration: Confirm the timeline and accounting impact of the expected consolidation of MidAmerican Energy in Q1 2006.
- Investment Portfolio: Review the composition of the $45.3 billion equity portfolio, noting the pending conversion of Gillette shares to Procter & Gamble shares.