BRK-B

Berkshire Hathaway Inc. 10-Q Summary

Business Context and Reporting Period

This filing is a Quarterly Report (Form 10-Q) for Berkshire Hathaway Inc. for the period ended September 30, 2002. The company operates a diversified portfolio including insurance (GEICO, General Re, BHRG), manufacturing (Shaw Industries, Fruit of the Loom, Garan), finance (Berkadia, BH Finance), and energy (MidAmerican Energy). The report highlights the adoption of SFAS No. 142, which eliminated goodwill amortization effective January 1, 2002.

Key Financial Metrics (First Nine Months 2002)

Material Changes vs. Prior Period

• Profitability Surge: Net earnings for the first nine months of 2002 were $3.1 billion, a dramatic increase from a net loss of $679 million in the same period of 2001. This reversal is largely due to the absence of September 11th losses and significant goodwill amortization charges in 2001.
• Insurance Underwriting: Pre-tax underwriting losses improved significantly to $78 million (YTD 2002) from $3.1 billion (YTD 2001). The 2001 figure included $1.7 billion in losses from the September 11th attacks and large reserve increases at General Re.
• Goodwill Accounting: The elimination of goodwill amortization under SFAS No. 142 added approximately $476 million (after-tax) to reported earnings compared to the prior year.
• Acquisitions: Berkshire completed three significant acquisitions in the first nine months of 2002: Albecca Inc. ($225M), Fruit of the Loom ($730M), and Garan Inc. ($270M).
• Investment Portfolio: Equity securities fair value decreased slightly to $27.9 billion from $28.7 billion, while fixed maturity securities increased to $55.6 billion (combined insurance and finance).

Outlook, Risks, and Management Commentary

• Insurance Outlook: Management notes that underwriting results improved due to higher rates and the absence of major catastrophes. However, General Re continues to face challenges with prior-year loss reserve increases in North American property/casualty lines. The cost of float is expected to remain very low absent major catastrophes.
• Finance Segment: Earnings from BH Finance and Berkadia were strong, driven by favorable market conditions and loan prepayments. However, General Re Securities (GRS) is being run off, incurring restructuring and trading losses.
• MidAmerican Energy: Berkshire increased its economic interest in MidAmerican to 83.0% through additional preferred stock purchases. Income from MidAmerican rose significantly due to new investments and the elimination of goodwill amortization.
• Risks: Key risks include the volatility of catastrophe losses, the uncertainty of long-tail liability estimates (a 5% change in estimates could impact earnings by $2.0 billion), and the potential for goodwill impairment charges under the new accounting standard.
• Liquidity: The company maintains a strong capital base with $10.4 billion in cash and equivalents. Borrowings increased slightly to fund acquisitions and the issuance of SQUARZ securities.

Investor Verification Checklist

• Reserve Adequacy: Verify the stability of General Re's prior-year loss reserve estimates, which increased by $447 million in the first nine months of 2002.
• Goodwill Impairment: Monitor future annual impairment tests for the $22.3 billion goodwill balance, as any write-downs will directly hit earnings.
• Float Cost: Track the annualized cost of float, which was 0.3% YTD 2002, to ensure it remains low and does not spike due to unexpected catastrophe losses.
• Acquisition Integration: Assess the performance of recent acquisitions (Fruit of the Loom, Garan, Albecca) in subsequent quarters.
• Investment Valuation: Review the unrealized gains/losses on the $27.9 billion equity portfolio, which includes significant holdings in Coca-Cola, American Express, and Gillette.