Business Context and Reporting Period
Company: Berkshire Hathaway Inc.
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended December 31, 2009
Business Overview: Berkshire is a holding company with diverse operations including insurance (GEICO, General Re, BHRG), utilities and energy (MidAmerican), manufacturing, service, retailing, and finance. The company operates on a decentralized basis with minimal corporate involvement in day-to-day activities. A significant event occurring shortly after the reporting period was the completion of the acquisition of Burlington Northern Santa Fe Corporation (BNSF) on February 12, 2010, for approximately $26.5 billion.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Total Revenues | $112,493 million | $107,786 million |
| Net Earnings (Attributable to Berkshire) | $8,055 million | $4,994 million |
| Net Earnings Per Share (Class A Equivalent) | $5,193 | $3,224 |
| Total Assets | $297,119 million | $267,399 million |
| Shareholders' Equity | $131,102 million | $109,267 million |
| Cash and Cash Equivalents | $30,558 million | $25,539 million |
| Notes Payable and Other Borrowings | $37,909 million | $36,882 million |
| Insurance Float | ~$62 billion | ~$58 billion |
Material Changes vs. Prior Period
- Earnings Growth: Net earnings attributable to Berkshire increased 61% to $8.055 billion, driven primarily by a reversal of investment and derivative losses. In 2008, the company reported a $4.6 billion after-tax loss in this category; in 2009, it reported a $486 million after-tax gain.
- Investment Performance: The 2009 results included a $2.7 billion gain on equity index put option contracts (vs. a $5.0 billion loss in 2008) and a $789 million gain on credit default contracts (vs. a $1.8 billion loss in 2008). However, the company recorded $3.155 billion in other-than-temporary impairment losses on investments in 2009, primarily related to ConocoPhillips.
- Operating Segments:
- Insurance Underwriting: Pre-tax underwriting gain declined to $1.559 billion from $2.792 billion in 2008. GEICO's loss ratio increased to 77.0% from 74.8% due to higher claim frequencies and severities.
- Manufacturing/Service/Retailing: Pre-tax earnings dropped significantly to $1.113 billion from $2.283 billion, reflecting the impact of the global economic recession on consumer spending and industrial activity.
- Utilities and Energy: Earnings attributable to Berkshire fell to $1.071 billion from $1.704 billion, largely due to lower natural gas and electricity sales volumes and foreign currency translation effects.
- Balance Sheet: Total assets increased by $29.7 billion, and shareholders' equity grew by $21.8 billion. Cash and cash equivalents rose by $5.0 billion.
Guidance, Outlook, and Risks
- Economic Outlook: Management noted that while the economic recession continued to impact operating businesses in 2009, they believe the economic franchises of their operating businesses remain intact. They anticipate operating results will improve as the economy recovers, though the timing is unpredictable.
- Insurance Market: Management expects premium volume in catastrophe and individual risk reinsurance to remain constrained in the first half of 2010 due to soft market conditions and increased industry capacity.
- Key Risks:
- Derivative Contracts: Significant exposure remains in credit default and equity index put option contracts. While fair value gains were recorded in 2009, future market volatility could result in significant losses.
- Key Personnel: Major investment and capital allocation decisions rely heavily on Warren Buffett (age 79) and Charles Munger (age 86). The Board has identified successors, but the loss of key personnel could have a material adverse effect.
- Regulatory and Environmental: Utilities and energy businesses face risks from climate change legislation and regulatory changes. Railroad operations (BNSF) are subject to extensive environmental and safety regulations.
- Legal Proceedings: General Re settled investigations with the DOJ and SEC regarding non-traditional products (AIG transaction) in January 2010, paying $19.5 million to the DOJ and $12.2 million to the SEC. Other litigation regarding ROA and FAI/HIH remains pending or in settlement phases.
Important Facts for Investor Verification
- BNSF Acquisition: Verify the final purchase price allocation and pro forma financial impact of the $26.5 billion BNSF acquisition completed in February 2010, which was not fully consolidated in the 2009 results.
- Derivative Liability Exposure: Review the fair value of equity index put option liabilities ($7.3 billion) and credit default liabilities ($1.1 billion) and the assumptions used in their valuation models, as these are Level 3 measurements subject to significant judgment.
- Insurance Reserve Adequacy: Assess the $59.4 billion in gross unpaid loss reserves and the $905 million in favorable development from prior years. Management notes that reserve estimates are inherently uncertain and could develop adversely.
- Concentration of Investments: Approximately 60% of the fair value of equity investments was concentrated in five issuers (including American Express, Coca-Cola, Kraft, P&G, and Wells Fargo) as of year-end 2009.
- Other-Than-Temporary Impairments: Confirm the rationale for holding securities with significant unrealized losses (e.g., ConocoPhillips) and the potential for future impairment charges if market conditions deteriorate.