BRK-B

Business Context and Reporting Period

Company: Berkshire Hathaway Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2004
Overview: Berkshire Hathaway is a holding company with diverse operations, primarily focused on insurance and reinsurance (GEICO, General Re, Berkshire Hathaway Reinsurance Group, and Primary Group). Non-insurance segments include apparel, building products, finance, flight services, retail, and manufacturing. The company is managed by Warren E. Buffett (Chairman) and Charles T. Munger (Vice Chairman).

Key Financial Metrics

Material Changes vs. Prior Period

• Net Earnings Decline: Net earnings decreased 10.4% to $7.3 billion, primarily due to lower investment gains ($2.26 billion in 2004 vs. $2.73 billion in 2003) and a significant impairment charge at MidAmerican Energy Holdings Company ($255 million after-tax share).
• Revenue Growth: Total revenues increased 16.5% to $74.4 billion, driven largely by the full-year inclusion of McLane Company (acquired May 2003) and Clayton Homes (acquired August 2003).
• Insurance Underwriting: Pre-tax underwriting gain was $1.55 billion, down from $1.72 billion in 2003. GEICO reported a strong gain of $970 million, while General Re reported a minimal gain of $3 million due to prior year reserve increases and catastrophe losses.
• Investment Portfolio: Cash and cash equivalents increased significantly to $40.0 billion (excluding finance businesses) as management held more liquidity to await acquisition opportunities. Fixed maturity securities decreased from $26.1 billion to $22.8 billion.
• Segment Performance:
  • McLane Company: Revenues of $23.4 billion (full year) contributed significantly to the top line.
  • Flight Services: Revenues increased 33% to $3.2 billion, driven by NetJets aircraft sales and flight operations.
  • Building Products: Revenues rose 13% to $4.3 billion, though margins were pressured by rising raw material costs (steel, petroleum).

Guidance, Outlook, and Risks

• Management Commentary: Management emphasized maintaining high liquidity ($40 billion cash) to capitalize on future business acquisitions. Investment income is expected to remain relatively low in the near term due to the shift toward cash and low-yielding short-term instruments.
• Insurance Outlook: General Re expects written premiums to decline in 2005 due to disciplined underwriting in a price-competitive market. Berkshire maintains that its insurance subsidiaries have adequate reserves, though inherent uncertainties in long-tail liability claims remain.
• Legal Contingencies:
  • General Re/ROA Investigation: Ongoing investigation by the U.S. Attorney and DOJ regarding Reciprocal of America (ROA). Berkshire cannot estimate potential losses or predict outcomes.
  • SEC/NY AG Inquiry: General Re and affiliates are cooperating with inquiries regarding non-traditional products.
  • FAI/HIH Claims: Potential claims from the liquidators of FAI and HIH Insurance regarding transactions in 1998; outcome and loss range are unpredictable.
• Market Risks: Significant exposure to equity price volatility (65% of equity portfolio concentrated in four investees) and interest rate fluctuations. Foreign currency forward contracts have a notional value of $21.4 billion.

Investor Verification Checklist

• Insurance Reserve Adequacy: Verify the stability of loss reserves, particularly for General Re's prior accident year liabilities and BHRG's retroactive reinsurance contracts.
• Investment Concentration: Assess the impact of the top four equity holdings (American Express, Coca-Cola, Gillette, Wells Fargo) on portfolio volatility.
• MidAmerican Impairment: Review the details of the $340 million after-tax charge related to the mineral extraction project shutdown.
• Legal Exposure: Monitor developments in the ROA investigation and SEC inquiries for potential material financial impact.
• Float Cost: Confirm that the cost of float remains negative (i.e., underwriting gains exceed losses) to maintain the economic benefit of insurance operations.