e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2007
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-14905
(Exact name of registrant as specified in its charter)
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Delaware
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47-0813844 |
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(State or other jurisdiction of
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(I.R.S. Employer Identification Number) |
incorporation or organization) |
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1440 Kiewit Plaza, Omaha, Nebraska 68131
(Address of principal executive office)(Zip Code)
(402) 346-1400
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2)
has been subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Act).
Yes o No þ
Number of shares of common stock outstanding as of October 26, 2007:
Class A 1,085,703
Class B 13,855,629
BERKSHIRE HATHAWAY INC.
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Page No. |
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2-3 |
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4 |
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5 |
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6-14 |
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15-26 |
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26 |
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26 |
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27 |
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27 |
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27 |
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27 |
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Exhibit 31 Rule 13a-14(a)/15d-14(a) Certifications |
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28-29 |
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Exhibit 32 Section 1350 Certifications |
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30-31 |
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1
Part I Financial Information
Item 1. Financial Statements
BERKSHIRE HATHAWAY INC.
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(dollars in millions)
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September 30, |
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December 31, |
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2007 |
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2006 |
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(Unaudited) |
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ASSETS |
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Insurance and Other: |
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Cash and cash equivalents |
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$ |
38,606 |
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$ |
37,977 |
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Investments: |
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Fixed maturity securities |
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26,669 |
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25,300 |
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Equity securities |
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77,866 |
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61,533 |
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Other |
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691 |
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905 |
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Receivables |
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14,171 |
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12,881 |
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Inventories |
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5,928 |
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5,257 |
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Property, plant and equipment |
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9,863 |
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9,303 |
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Goodwill |
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26,125 |
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25,678 |
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Deferred charges reinsurance assumed |
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3,921 |
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1,964 |
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Other |
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7,200 |
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6,538 |
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211,040 |
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187,336 |
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Utilities and Energy: |
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Cash and cash equivalents |
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1,978 |
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343 |
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Property, plant and equipment |
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25,544 |
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24,039 |
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Goodwill |
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5,591 |
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5,548 |
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Other |
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6,395 |
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6,560 |
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39,508 |
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36,490 |
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Finance and Financial Products: |
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Cash and cash equivalents |
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6,499 |
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5,423 |
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Investments in fixed maturity securities |
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2,888 |
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3,012 |
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Loans and finance receivables |
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11,876 |
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11,498 |
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Goodwill |
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1,013 |
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1,012 |
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Other |
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3,692 |
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3,666 |
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25,968 |
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24,611 |
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$ |
276,516 |
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$ |
248,437 |
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See accompanying Notes to Interim Consolidated Financial Statements
2
BERKSHIRE HATHAWAY INC.
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(dollars in millions except per share amounts)
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September 30, |
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December 31, |
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2007 |
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2006 |
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(Unaudited) |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Insurance and Other: |
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Losses and loss adjustment expenses |
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$ |
56,337 |
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$ |
47,612 |
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Unearned premiums |
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7,567 |
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7,058 |
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Life and health insurance benefits |
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3,733 |
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3,600 |
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Other policyholder liabilities |
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4,125 |
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3,938 |
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Accounts payable, accruals and other liabilities |
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10,825 |
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9,654 |
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Income taxes, principally deferred |
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21,517 |
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19,170 |
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Notes payable and other borrowings |
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3,087 |
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3,698 |
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107,191 |
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94,730 |
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Utilities and Energy: |
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Accounts payable, accruals and other liabilities |
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6,260 |
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6,693 |
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Notes payable and other borrowings |
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19,393 |
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16,946 |
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25,653 |
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23,639 |
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Finance and Financial Products: |
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Accounts payable, accruals and other liabilities |
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2,889 |
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3,543 |
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Notes payable and other borrowings |
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12,244 |
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11,961 |
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Derivative contract liabilities |
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6,074 |
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3,883 |
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21,207 |
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19,387 |
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Total liabilities |
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154,051 |
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137,756 |
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Minority shareholders interests |
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2,562 |
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2,262 |
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Shareholders equity: |
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Common stock: |
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Class A, $5 par value; Class B, $0.1667 par value |
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8 |
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8 |
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Capital in excess of par value |
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26,946 |
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26,522 |
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Accumulated other comprehensive income |
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23,743 |
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22,977 |
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Retained earnings |
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69,206 |
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58,912 |
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Total shareholders equity |
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119,903 |
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108,419 |
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$ |
276,516 |
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$ |
248,437 |
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See accompanying Notes to Interim Consolidated Financial Statements
3
BERKSHIRE HATHAWAY INC.
and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(dollars in millions except per share amounts)
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Third Quarter |
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First Nine Months |
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2007 |
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2006 |
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2007 |
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2006 |
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(Unaudited) |
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(Unaudited) |
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Revenues: |
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Insurance and Other: |
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Insurance premiums earned |
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$ |
6,020 |
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$ |
6,359 |
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$ |
25,484 |
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$ |
17,717 |
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Sales and service revenues |
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15,092 |
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13,514 |
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43,073 |
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38,242 |
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Interest, dividend and other investment income |
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1,274 |
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1,117 |
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3,678 |
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3,272 |
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Investment gains/losses |
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3,001 |
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278 |
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4,048 |
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887 |
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25,387 |
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21,268 |
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76,283 |
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60,118 |
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Utilities and Energy: |
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Operating revenues |
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3,067 |
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2,780 |
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9,294 |
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7,452 |
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Other revenues |
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83 |
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69 |
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189 |
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278 |
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3,150 |
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2,849 |
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9,483 |
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7,730 |
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Finance and Financial Products: |
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Interest income |
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433 |
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400 |
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1,283 |
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1,200 |
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Investment gains/losses |
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186 |
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191 |
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108 |
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Derivative gains/losses |
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(122 |
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(11 |
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340 |
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|
534 |
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Other |
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903 |
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854 |
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2,622 |
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2,618 |
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1,400 |
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1,243 |
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4,436 |
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4,460 |
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29,937 |
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25,360 |
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90,202 |
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72,308 |
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Costs and expenses: |
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Insurance and Other: |
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Insurance losses and loss adjustment expenses |
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3,337 |
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3,204 |
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17,372 |
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10,071 |
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Life and health insurance benefits |
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432 |
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356 |
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1,247 |
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1,152 |
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Insurance underwriting expenses |
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1,499 |
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1,372 |
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4,212 |
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3,979 |
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Cost of sales and services |
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12,319 |
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11,110 |
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35,169 |
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31,530 |
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Selling, general and administrative expenses |
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1,732 |
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1,560 |
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5,134 |
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4,378 |
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Interest expense |
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42 |
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60 |
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122 |
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150 |
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19,361 |
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17,662 |
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63,256 |
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51,260 |
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Utilities and Energy: |
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Cost of sales and operating expenses |
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2,373 |
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2,167 |
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7,269 |
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5,908 |
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Interest expense |
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296 |
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266 |
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848 |
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|
710 |
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2,669 |
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2,433 |
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8,117 |
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6,618 |
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Finance and Financial Products: |
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Interest expense |
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143 |
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|
137 |
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|
443 |
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|
411 |
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Other |
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|
917 |
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|
827 |
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2,651 |
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2,503 |
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1,060 |
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|
964 |
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3,094 |
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2,914 |
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23,090 |
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21,059 |
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74,467 |
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60,792 |
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Earnings before income taxes and minority interests |
|
|
6,847 |
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4,301 |
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15,735 |
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|
11,516 |
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Income taxes |
|
|
2,197 |
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|
|
1,451 |
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|
5,202 |
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|
3,901 |
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Minority shareholders interests |
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|
97 |
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|
78 |
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|
267 |
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|
183 |
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Net earnings |
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$ |
4,553 |
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|
$ |
2,772 |
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$ |
10,266 |
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$ |
7,432 |
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Average common shares outstanding * |
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1,547,368 |
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1,542,173 |
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1,545,128 |
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1,541,581 |
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Net earnings per common share * |
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$ |
2,942 |
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$ |
1,797 |
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$ |
6,644 |
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$ |
4,821 |
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* |
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Average shares outstanding include average Class A common shares and average Class B common
shares determined on an equivalent Class A common stock basis. Net earnings per share shown
above represents net earnings per equivalent Class A common share. Net earnings per Class B
common share is equal to one-thirtieth (1/30) of such amount. |
See accompanying Notes to Interim Consolidated Financial Statements
4
BERKSHIRE HATHAWAY INC.
and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
First Nine Months |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Unaudited) |
|
Net cash flows from operating activities |
|
$ |
11,351 |
|
|
$ |
7,882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchases of securities with fixed maturities |
|
|
(9,057 |
) |
|
|
(6,341 |
) |
Purchases of equity securities |
|
|
(16,850 |
) |
|
|
(6,430 |
) |
Sales of securities with fixed maturities |
|
|
6,781 |
|
|
|
1,886 |
|
Redemptions and maturities of securities with fixed maturities |
|
|
7,408 |
|
|
|
8,577 |
|
Sales of equity securities |
|
|
5,791 |
|
|
|
2,527 |
|
Purchases of loans and finance receivables |
|
|
(448 |
) |
|
|
(246 |
) |
Principal collections on loans and finance receivables |
|
|
1,039 |
|
|
|
801 |
|
Acquisitions of businesses, net of cash acquired |
|
|
(1,628 |
) |
|
|
(10,137 |
) |
Purchases of property, plant and equipment |
|
|
(3,917 |
) |
|
|
(3,141 |
) |
Other |
|
|
482 |
|
|
|
742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from investing activities |
|
|
(10,399 |
) |
|
|
(11,762 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from borrowings of finance businesses |
|
|
1,149 |
|
|
|
65 |
|
Proceeds from borrowings of utilities and energy businesses |
|
|
2,939 |
|
|
|
2,065 |
|
Proceeds from other borrowings |
|
|
91 |
|
|
|
203 |
|
Repayments of borrowings of finance businesses |
|
|
(1,021 |
) |
|
|
(268 |
) |
Repayments of borrowings of utilities and energy businesses |
|
|
(250 |
) |
|
|
(257 |
) |
Repayments of other borrowings |
|
|
(616 |
) |
|
|
(954 |
) |
Change in short term borrowings |
|
|
(414 |
) |
|
|
245 |
|
Other |
|
|
510 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from financing activities |
|
|
2,388 |
|
|
|
1,111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
3,340 |
|
|
|
(2,769 |
) |
Cash and cash equivalents at beginning of year * |
|
|
43,743 |
|
|
|
45,018 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of first nine months * |
|
$ |
47,083 |
|
|
$ |
42,249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
3,096 |
|
|
$ |
3,600 |
|
Interest of finance and financial products businesses |
|
|
441 |
|
|
|
397 |
|
Interest of utilities and energy businesses |
|
|
795 |
|
|
|
633 |
|
Interest of insurance and other businesses |
|
|
148 |
|
|
|
162 |
|
Non-cash investing activity: |
|
|
|
|
|
|
|
|
Investments received in connection with the Equitas reinsurance transaction |
|
|
6,529 |
|
|
|
|
|
Liabilities assumed in connection with acquisitions of businesses |
|
|
448 |
|
|
|
10,954 |
|
|
|
|
|
|
|
|
|
|
* Cash and cash equivalents are comprised of the following: |
|
|
|
|
|
|
|
|
Beginning of year |
|
|
|
|
|
|
|
|
Insurance and Other |
|
$ |
37,977 |
|
|
$ |
40,471 |
|
Utilities and Energy |
|
|
343 |
|
|
|
358 |
|
Finance and Financial Products |
|
|
5,423 |
|
|
|
4,189 |
|
|
|
|
|
|
|
|
|
|
$ |
43,743 |
|
|
$ |
45,018 |
|
|
|
|
|
|
|
|
End of first nine months |
|
|
|
|
|
|
|
|
Insurance and Other |
|
$ |
38,606 |
|
|
$ |
36,905 |
|
Utilities and Energy |
|
|
1,978 |
|
|
|
433 |
|
Finance and Financial Products |
|
|
6,499 |
|
|
|
4,911 |
|
|
|
|
|
|
|
|
|
|
$ |
47,083 |
|
|
$ |
42,249 |
|
|
|
|
|
|
|
|
See accompanying Notes to Interim Consolidated Financial Statements
5
BERKSHIRE HATHAWAY INC.
and Subsidiaries
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
Note 1. General
The accompanying unaudited Consolidated Financial Statements include the accounts of Berkshire
Hathaway Inc. (Berkshire or Company) consolidated with the accounts of all its subsidiaries and
affiliates in which Berkshire holds a controlling financial interest as of the financial statement
date. Reference is made to Berkshires most recently issued Annual Report on Form 10-K (Annual
Report) that included information necessary or useful to understanding Berkshires businesses and
financial statement presentations. In particular, Berkshires significant accounting policies and
practices were presented as Note 1 to the Consolidated Financial Statements included in the Annual
Report. Certain amounts in 2006 have been reclassified to conform with the current year
presentation. Financial information in this Report reflects any adjustments (consisting only of
normal recurring adjustments) that are, in the opinion of management, necessary to a fair statement
of results for the interim periods in accordance with generally accepted accounting principles
(GAAP).
For a number of reasons, Berkshires results for interim periods are not normally indicative
of results to be expected for the year. The timing and magnitude of catastrophe losses incurred by
insurance subsidiaries and the estimation error inherent to the process of determining liabilities
for unpaid losses of insurance subsidiaries can be relatively more significant to results of
interim periods than to results for a full year. Investment gains/losses are recorded when
investments are sold, other-than-temporarily impaired or in instances as required under GAAP, when
investments are marked-to-market. Variations in the amounts and timing of investment gains/losses
can cause significant variations in periodic net earnings.
Note 2. Business acquisitions
Berkshires long-held acquisition strategy is to purchase businesses with consistent earnings,
good returns on equity, able and honest management and at sensible prices. In 2006, Berkshire
completed several business acquisitions. On March 21, 2006, the acquisition of PacifiCorp, a
regulated electric utility providing service to customers in six Western states, was completed for
approximately $5.1 billion in cash through 88%-owned MidAmerican Energy Holdings Company
(MidAmerican). On July 5, 2006, Berkshire acquired 80% of the Iscar Metalworking Companies
(IMC) for cash in a transaction that valued IMC at $5 billion. IMC is an industry leader in the
metal cutting tools business through its Iscar, TaeguTec, Ingersoll and other IMC companies. IMC
provides a comprehensive range of tools for metalworking applications.
In 2006, Berkshire also acquired three relatively smaller businesses. On February 28, 2006,
the acquisition of Business Wire, a leading global distributor of corporate news, multimedia and
regulatory filings, was completed. On May 19, 2006, the acquisition of 85% of Applied Underwriters
(Applied), an industry leader in integrated workers compensation solutions, was completed.
Under certain conditions, existing minority shareholders of Applied may acquire up to an additional
4% interest in Applied from Berkshire. On August 2, 2006, the acquisition of Russell Corporation,
a leading branded athletic apparel and sporting goods business, was completed. The aggregate
consideration paid for these three businesses was approximately $1.4 billion.
On March 30, 2007, Berkshire completed the acquisition of TTI, Inc., a privately held
electronic components distributor headquartered in Fort Worth, Texas. TTI, Inc. is a leading
distributor specialist of passive, interconnect and electromechanical components. Effective April
1, 2007, Berkshire acquired the intimate apparel business of VF Corporation. During 2007,
Berkshire also acquired several other relatively smaller businesses. Aggregate consideration paid
for all businesses acquired in 2007 was approximately $1.7 billion.
The results of operations for each of these businesses are included in Berkshires
consolidated results from the effective date of each acquisition. The following table sets forth
certain unaudited pro forma consolidated earnings data for the first nine months of 2006, as if
each acquisition was consummated on the same terms at the beginning of that year. Pro forma
consolidated revenues and net earnings for the first nine months of 2007 were not materially
different from the amounts reported. Amounts are in millions, except earnings per share.
|
|
|
|
|
|
|
2006 |
Total revenues |
|
$ |
76,790 |
|
Net earnings |
|
|
7,552 |
|
Earnings per equivalent Class A common share |
|
|
4,899 |
|
6
Notes to Interim Consolidated Financial Statements (Continued)
Note 3. Investments in fixed maturity securities
Data with respect to investments in fixed maturity securities follows (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance and other |
|
|
Finance and financial products |
|
|
|
Sept. 30, 2007 |
|
|
Dec. 31, 2006 |
|
|
Sept. 30, 2007 |
|
|
Dec. 31, 2006 |
|
Amortized cost |
|
$ |
25,506 |
|
|
$ |
23,796 |
|
|
$ |
1,222 |
|
|
$ |
1,439 |
|
Gross unrealized gains |
|
|
1,284 |
|
|
|
1,636 |
|
|
|
100 |
|
|
|
102 |
|
Gross unrealized losses |
|
|
(121 |
) |
|
|
(132 |
) |
|
|
(3 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
26,669 |
|
|
$ |
25,300 |
|
|
$ |
1,319 |
|
|
$ |
1,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain other fixed maturity investments of finance businesses are classified as
held-to-maturity, which are carried at amortized cost. The carrying value and fair value of these
investments totaled $1,569 million and $1,691 million at September 30, 2007, respectively. At
December 31, 2006, the carrying value and fair value of held-to-maturity securities totaled $1,475
million and $1,627 million, respectively. Unrealized losses at September 30, 2007 and December 31,
2006 included $66 million and $69 million, respectively, related to securities that have been in an
unrealized loss position for 12 months or more. Berkshire has the ability and intent to hold these
securities until fair value recovers.
Note 4. Investments in equity securities
Data with respect to investments in equity securities are shown in the tabulation below (in
millions).
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Total cost |
|
$ |
43,813 |
|
|
$ |
28,353 |
|
Gross unrealized gains |
|
|
34,344 |
|
|
|
33,217 |
|
Gross unrealized losses |
|
|
(291 |
) |
|
|
(37 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value |
|
$ |
77,866 |
|
|
$ |
61,533 |
|
|
|
|
|
|
|
|
Unrealized losses at September 30, 2007 and December 31, 2006 consisted primarily of
securities whose cost exceeded fair value for less than twelve months.
Note 5. Loans and receivables
Receivables of insurance and other businesses are comprised of the following (in millions).
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Insurance premiums receivable |
|
$ |
4,457 |
|
|
$ |
4,418 |
|
Reinsurance recoverables |
|
|
3,157 |
|
|
|
2,961 |
|
Trade and other receivables |
|
|
6,967 |
|
|
|
5,884 |
|
Allowances for uncollectible accounts |
|
|
(410 |
) |
|
|
(382 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
14,171 |
|
|
$ |
12,881 |
|
|
|
|
|
|
|
|
Loans and finance receivables of finance and financial products businesses are comprised of
the following (in millions).
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Consumer installment loans and finance receivables |
|
$ |
11,014 |
|
|
$ |
10,325 |
|
Commercial loans and finance receivables |
|
|
1,007 |
|
|
|
1,336 |
|
Allowances for uncollectible loans |
|
|
(145 |
) |
|
|
(163 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,876 |
|
|
$ |
11,498 |
|
|
|
|
|
|
|
|
7
Notes to Interim Consolidated Financial Statements (Continued)
Note 6. Property, plant and equipment of utilities and energy businesses
Property, plant and equipment of utilities and energy businesses follow (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ranges of |
|
|
September 30, |
|
|
December 31, |
|
|
|
estimated useful life |
|
|
2007 |
|
|
2006 |
|
Cost: |
|
|
|
|
|
|
|
|
|
|
|
|
Utility generation and distribution system |
|
5-85 years |
|
$ |
29,679 |
|
|
$ |
27,687 |
|
Interstate pipeline assets |
|
3-67 years |
|
|
5,375 |
|
|
|
5,329 |
|
Independent power plants and other assets |
|
3-30 years |
|
|
1,326 |
|
|
|
1,770 |
|
Construction in progress |
|
|
|
|
|
|
1,810 |
|
|
|
1,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,190 |
|
|
|
36,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation and amortization |
|
|
|
|
|
|
(12,646 |
) |
|
|
(12,716 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
25,544 |
|
|
$ |
24,039 |
|
|
|
|
|
|
|
|
|
|
|
|
The utility generation and distribution system and interstate pipeline assets are the
regulated assets of public utility and natural gas pipeline subsidiaries. At September 30, 2007
and December 31, 2006, accumulated depreciation and amortization related to regulated assets
totaled $12.2 billion and $11.9 billion, respectively. Substantially all of the construction in
progress at September 30, 2007 and December 31, 2006 relates to the construction of regulated
assets.
Note 7. Inventories
Inventories are comprised of the following (in millions).
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Raw materials |
|
$ |
892 |
|
|
$ |
700 |
|
Work in process and other |
|
|
486 |
|
|
|
402 |
|
Finished manufactured goods |
|
|
1,766 |
|
|
|
1,817 |
|
Purchased goods |
|
|
2,784 |
|
|
|
2,338 |
|
|
|
|
|
|
|
|
|
|
$ |
5,928 |
|
|
$ |
5,257 |
|
|
|
|
|
|
|
|
Note 8. Income taxes, principally deferred
A summary of income tax liabilities follows (in millions).
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Payable currently |
|
$ |
1,247 |
|
|
$ |
189 |
|
Deferred |
|
|
19,352 |
|
|
|
18,271 |
|
Other |
|
|
918 |
|
|
|
710 |
|
|
|
|
|
|
|
|
|
|
$ |
21,517 |
|
|
$ |
19,170 |
|
|
|
|
|
|
|
|
Berkshire and its subsidiaries income tax returns are continuously under audit by Federal and
various state, local and foreign taxing authorities. Berkshires consolidated Federal income tax
return liabilities have been settled with the Internal Revenue Service (IRS) through 1998. The
IRS has completed its audits of the 1999 through 2004 tax returns and has proposed adjustments to
increase Berkshires tax liabilities which Berkshire has protested. The examinations are in the
IRS appeals process. The unsettled issues primarily relate to the timing of deductions for unpaid
losses and loss adjustment expenses and other liabilities of property and casualty insurance
subsidiaries. Berkshire does not currently believe that the potential audit adjustments will have a
material effect on its Consolidated Financial Statements. See Note 14 for additional information
regarding Berkshires estimated liabilities for uncertainties/unrecognized tax benefits which are
shown as other in the preceding table above.
8
Notes to Interim Consolidated Financial Statements (Continued)
Note 9. Notes payable and other borrowings
Notes payable and other borrowings of Berkshire and its subsidiaries are summarized below (in
millions).
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Insurance and other: |
|
|
|
|
|
|
|
|
Issued by parent company due 2007-2033 |
|
$ |
591 |
|
|
$ |
894 |
|
Issued by subsidiaries and guaranteed by Berkshire: |
|
|
|
|
|
|
|
|
Commercial paper and other short-term borrowings |
|
|
1,254 |
|
|
|
1,355 |
|
Other debt due 2009-2035 |
|
|
240 |
|
|
|
240 |
|
Issued by subsidiaries and not guaranteed by Berkshire due 2007-2041 |
|
|
1,002 |
|
|
|
1,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,087 |
|
|
$ |
3,698 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilities and energy: |
|
|
|
|
|
|
|
|
Issued by MidAmerican and not guaranteed by Berkshire: |
|
|
|
|
|
|
|
|
MidAmerican senior unsecured debt due 2007-2037 |
|
$ |
6,020 |
|
|
$ |
4,479 |
|
Operating subsidiary and project debt due 2007-2037 |
|
|
13,069 |
|
|
|
12,014 |
|
Other |
|
|
304 |
|
|
|
453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
19,393 |
|
|
$ |
16,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance and financial products: |
|
|
|
|
|
|
|
|
Issued by Berkshire Hathaway Finance Corporation (BHFC) and guaranteed by Berkshire: |
|
|
|
|
|
|
Notes due 2007 |
|
$ |
|
|
|
$ |
700 |
|
Notes due 2008 |
|
|
3,099 |
|
|
|
3,098 |
|
Notes due 2010 |
|
|
1,995 |
|
|
|
1,994 |
|
Notes due 2012-2015 |
|
|
3,790 |
|
|
|
3,039 |
|
Issued by other subsidiaries and guaranteed by Berkshire due 2007-2027 |
|
|
852 |
|
|
|
398 |
|
Issued by other subsidiaries and not guaranteed by Berkshire due 2007-2030 |
|
|
2,508 |
|
|
|
2,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,244 |
|
|
$ |
11,961 |
|
|
|
|
|
|
|
|
During the first nine months of 2007, MidAmerican issued $2.95 billion par amount of bonds and
senior notes with maturities ranging from 2012 to 2037. The proceeds were used to repay existing
debt or otherwise are intended to be used to repay debt maturing subsequent to September 30, 2007,
to finance planned capital expenditures or for general corporate purposes. During the third quarter
of 2007, BHFC issued $750 million of senior notes due in 2012. The proceeds will be used to
provide financing for installment loans issued or acquired by a subsidiary of Clayton Homes.
Note 10. Common stock
The following table summarizes Berkshires common stock activity during the first nine months
of 2007.
|
|
|
|
|
|
|
|
|
|
|
Class A common stock |
|
Class B common stock |
|
|
(1,650,000 shares authorized) |
|
(55,000,000 shares authorized) |
|
|
Issued and Outstanding |
|
Issued and Outstanding |
Balance at December 31, 2006 |
|
|
1,117,568 |
|
|
|
12,752,431 |
|
Issuance of shares on exercise of SQUARZ warrants |
|
|
2,325 |
|
|
|
41,706 |
|
Conversions of Class A common stock
to Class B common stock and other |
|
|
(31,353 |
) |
|
|
974,219 |
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2007 |
|
|
1,088,540 |
|
|
|
13,768,356 |
|
|
|
|
|
|
|
|
|
|
Each share of Class A common stock is convertible, at the option of the holder, into thirty
shares of Class B common stock. Class B common stock is not convertible into Class A common stock.
Class B common stock has economic rights equal to one-thirtieth (1/30) of the economic rights of
Class A common stock. Accordingly, on an equivalent Class A common stock basis, there are
1,547,485 shares outstanding at September 30, 2007 and 1,542,649 shares outstanding at December 31,
2006. Each Class A common share is entitled to one vote per share. Each Class B common share
possesses the voting rights of one-two-hundredth (1/200) of the voting rights of a Class A share.
Class A and Class B common shares vote together as a single class.
During 2007, holders of all outstanding SQUARZ securities exercised the warrant component of
the securities and received Class A and Class B shares. In connection with these exercises,
Berkshire received $333 million.
9
Notes to Interim Consolidated Financial Statements (Continued)
Note 11. Comprehensive income
Berkshires comprehensive income for the third quarter and first nine months of 2007 and 2006
is shown in the table below (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
First Nine Months |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Net earnings |
|
$ |
4,553 |
|
|
$ |
2,772 |
|
|
$ |
10,266 |
|
|
$ |
7,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in unrealized appreciation of investments |
|
|
(236 |
) |
|
|
2,740 |
|
|
|
535 |
|
|
|
4,106 |
|
Applicable income taxes and minority interests |
|
|
71 |
|
|
|
(973 |
) |
|
|
(199 |
) |
|
|
(1,451 |
) |
Other |
|
|
269 |
|
|
|
93 |
|
|
|
534 |
|
|
|
478 |
|
Applicable income taxes and minority interests |
|
|
(45 |
) |
|
|
(23 |
) |
|
|
(104 |
) |
|
|
(84 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59 |
|
|
|
1,837 |
|
|
|
766 |
|
|
|
3,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
4,612 |
|
|
$ |
4,609 |
|
|
$ |
11,032 |
|
|
$ |
10,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 12. Equitas reinsurance agreement
In November 2006, the Berkshire Hathaway Reinsurance Groups lead insurance entity, National
Indemnity Company (NICO) and Equitas, a London based entity established to reinsure and manage
the 1992 and prior years non-life insurance and reinsurance liabilities of the Names or
Underwriters at Lloyds of London, entered into an agreement for NICO to initially provide up to
$5.7 billion and potentially provide up to an additional $1.3 billion of reinsurance to Equitas in
excess of its undiscounted loss and allocated loss adjustment expense reserves as of March 31,
2006. The transaction became effective on March 30, 2007.
NICO received substantially all of Equitas assets as consideration under the arrangement.
The fair value of such consideration was $7.1 billion and included approximately $540 million in
cash and miscellaneous receivables plus a combination of fixed maturity and equity securities which
were delivered in April 2007. The cash and miscellaneous receivables received are included in the
accompanying Condensed Consolidated Statement of Cash Flows for 2007 as components of operating
cash flows. The investment securities received are reported as a non-cash investing activity.
Under the transaction, NICO has agreed to pay all claims and related costs that arise from the
underlying insurance and reinsurance contracts of Equitas, subject to the aforementioned aggregate
limit of indemnification. On the effective date, the aggregate limit of indemnification, which
does not include unallocated loss adjustment expenses, was $13.8 billion.
The Equitas agreement was accounted for as reinsurance in accordance with SFAS No. 113
Accounting for short duration and long duration reinsurance contracts. Accordingly, premiums
earned of $7.1 billion and losses incurred of $7.1 billion were reflected in the Consolidated
Statement of Earnings for the first quarter of 2007. Losses incurred consisted of an estimated
liability for unpaid losses and loss adjustment expenses of $9.3 billion less an asset for
unamortized deferred charges on reinsurance assumed of $2.2 billion. The deferred charge asset is
being amortized over the expected remaining loss settlement period using the interest method and
the periodic amortization is being charged to earnings as a component of losses and loss adjustment
expenses incurred.
Note 13. Pension plans
The components of net periodic pension expense for the third quarter and first nine months of
2007 and 2006 are as follows (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
First Nine Months |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Service cost |
|
$ |
49 |
|
|
$ |
65 |
|
|
$ |
150 |
|
|
$ |
151 |
|
Interest cost |
|
|
110 |
|
|
|
105 |
|
|
|
329 |
|
|
|
281 |
|
Expected return on plan assets |
|
|
(114 |
) |
|
|
(102 |
) |
|
|
(332 |
) |
|
|
(286 |
) |
Amortization of prior service costs and gains/losses |
|
|
16 |
|
|
|
20 |
|
|
|
50 |
|
|
|
54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
61 |
|
|
$ |
88 |
|
|
$ |
197 |
|
|
$ |
200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
Notes to Interim Consolidated Financial Statements (Continued)
Note 14. Accounting pronouncements adopted during 2007
Berkshire adopted FASB Interpretation No.48 Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109 (FIN 48) as of January 1, 2007. Under FIN 48, a tax
position taken is recognized if it is determined that the position will more-likely-than-not be
sustained upon examination. FIN 48 also establishes measurement guidance with respect to positions
that have met the recognition threshold. Upon adoption of FIN 48, Berkshire increased its
aggregate income tax liability by $12 million. The cumulative net effect of adopting FIN 48 was
recorded as a reduction to retained earnings of $24 million, partially offset by adjustments to
items that are not recognized in net earnings. As of January 1, 2007, the income tax liability for
uncertainties/unrecognized tax benefits was $857 million, which included interest and penalties of
$124 million. As of the adoption date, the liability included $672 million which if recognized
would have an impact on Berkshires effective tax rate. Berkshire classifies interest and
penalties associated with income tax liabilities as a component of income tax expense.
Berkshire adopted FASB Staff Position No. AUG AIR-1, Accounting for Planned Major Maintenance
Activities (AUG AIR-1) in the first quarter of 2007. AUG AIR-1 prohibits the use of the
accrue-in-advance method of accounting for planned major maintenance activities in which such
maintenance costs are ratably recognized by accruing a liability in periods before the maintenance
is performed. Upon the adoption of AUG AIR-1, Berkshire elected to use the direct expense method
where maintenance costs are expensed as incurred. Previously, certain maintenance costs related to
the fractional aircraft ownership business were accrued in advance. As of January 1, 2007, accrued
liabilities of $83 million were reduced to zero and the cumulative net after-tax effect of $52
million was recorded as a credit to retained earnings. AUG AIR-1 is to be applied retrospectively.
However, the net impact of retrospectively adopting AUG AIR-1 was not significant in each of the
past three years and in the aggregate. Accordingly, Berkshires Consolidated Financial Statements
for prior periods have not been restated.
Note 15. Accounting pronouncements to be adopted in the future
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS
157 defines fair value as the price received to transfer an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date. SFAS 157
establishes a framework for measuring fair value by creating a hierarchy for observable independent
market inputs and unobservable market assumptions. SFAS 157 further expands disclosures about such
fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007
and may be adopted earlier but only if the adoption is in the first quarter of the fiscal year.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities Including an amendment of FASB Statement No. 115 (SFAS 159). SFAS
159 permits entities to elect to measure many financial instruments and certain other items at fair
value. Upon adoption of SFAS 159, an entity may elect the fair value option for eligible items
that exist at the adoption date. Subsequent to the initial adoption, the election of the fair
value option should only be made at initial recognition of the asset or liability or upon a
remeasurement event that gives rise to new-basis accounting. SFAS 159 does not affect any existing
accounting literature that requires certain assets and liabilities to be carried at fair value nor
does it eliminate disclosure requirements included in other accounting standards. SFAS 159 is
effective for fiscal years beginning after November 15, 2007 and may be adopted earlier but only if
the adoption is in the first quarter of the fiscal year.
Berkshire is continuing to evaluate the impact that the adoption of SFAS 157 and SFAS 159 will
have on its consolidated financial statements but currently does not anticipate that the adoption
of these accounting pronouncements will have a material effect on its consolidated financial
position.
Note 16. Contingencies
Berkshire and its subsidiaries are parties in a variety of legal actions arising out of the
normal course of business. In particular, such legal actions affect Berkshires insurance and
reinsurance businesses. Such litigation generally seeks to establish liability directly through
insurance contracts or indirectly through reinsurance contracts issued by Berkshire subsidiaries.
Plaintiffs occasionally seek punitive or exemplary damages. Berkshire does not believe that such
normal and routine litigation will have a material effect on its financial condition or results of
operations. Berkshire and certain of its subsidiaries are also involved in other kinds of legal
actions, some of which assert or may assert claims or seek to impose fines and penalties in
substantial amounts.
a) Governmental Investigations
Berkshire, General Re Corporation (General Re) and certain of Berkshires insurance
subsidiaries, including General Reinsurance Corporation (General Reinsurance) and National
Indemnity Company (NICO) have been continuing to cooperate fully with the U.S. Securities and
Exchange Commission (SEC), the U.S. Department of Justice, the U.S.
11
Notes to Interim Consolidated Financial Statements (Continued)
Note 16. Contingencies (Continued)
Attorney for the Eastern District of Virginia and the New York State Attorney General (NYAG) in
their ongoing investigations of non-traditional products. General Re originally received subpoenas
from the SEC and NYAG in January 2005. Berkshire, General Re, General Reinsurance and NICO have
been providing information to the government relating to transactions between General Reinsurance
or NICO (or their respective subsidiaries or affiliates) and other insurers in response to the
January 2005 subpoenas and related requests and, in the case of General Reinsurance (or its
subsidiaries or affiliates), in response to subpoenas from other U.S. Attorneys conducting
investigations relating to certain of these transactions. In particular, Berkshire and General Re
have been responding to requests from the government for information relating to certain
transactions that may have been accounted for incorrectly by counterparties of General Reinsurance
(or its subsidiaries or affiliates). Berkshire understands that the government is evaluating the
actions of General Re and its subsidiaries, as well as those of their counterparties, to determine
whether General Re or its subsidiaries conspired with others to misstate counterparty financial
statements or aided and abetted such misstatements by the counterparties. The government has
interviewed a number of current and former officers and employees of General Re and General
Reinsurance as well as Berkshires Chairman and CEO, Warren E. Buffett, in connection with these
investigations.
In one case, a transaction initially effected with American International Group (AIG) in
late 2000 (the AIG Transaction), AIG has corrected its prior accounting for the transaction on
the grounds, as stated in AIGs 2004 10-K, that the transaction was done to accomplish a desired
accounting result and did not entail sufficient qualifying risk transfer to support reinsurance
accounting. General Reinsurance has been named in related civil actions brought against AIG. As
part of their ongoing investigations, governmental authorities have also inquired about the
accounting by certain of Berkshires insurance subsidiaries for certain assumed and ceded finite
reinsurance transactions.
In June 2005, John Houldsworth, the former Chief Executive Officer of Cologne Reinsurance
Company (Dublin) Limited (CRD), a subsidiary of General Re, and Richard Napier, a former Senior
Vice President of General Re who had served as an account representative for the AIG account, each
pleaded guilty to a federal criminal charge of conspiring with others to misstate certain AIG
financial statements in connection with the AIG Transaction and entered into a partial settlement
agreement with the SEC with respect to such matters. In addition, Ronald Ferguson, General Res
former Chief Executive Officer, Elizabeth Monrad, General Res former Chief Financial Officer,
Christopher Garand, a former General Reinsurance Senior Vice President and Robert Graham, a former
General Reinsurance Senior Vice President and Assistant General Counsel are awaiting trial in
the U.S. District Court for the District of Connecticut on charges of conspiracy to violate
securities laws and to commit mail fraud, securities fraud, making false statements to the SEC and
mail fraud in connection with the AIG Transaction. The trial is currently set to begin on January
7, 2008. Each has pleaded not guilty to all charges. Each of these individuals, who had
previously received a Wells notice in 2005 from the SEC, is also the subject of an SEC
enforcement action for allegedly aiding and abetting AIGs violations of the antifraud provisions
and other provisions of the federal securities laws in connection with the AIG Transaction. The
SEC case is presently stayed. Joseph Brandon, the Chief Executive Officer of General Re, also
received a Wells notice from the SEC in 2005.
Various state insurance departments have issued subpoenas or otherwise requested that General
Reinsurance, NICO and their affiliates provide documents and information relating to
non-traditional products. The Office of the Connecticut Attorney General has also issued a subpoena
to General Reinsurance for information relating to non-traditional products. General Reinsurance,
NICO and their affiliates have been cooperating fully with these subpoenas and requests.
Kolnische Ruckversicherungs-Gesellschaft AG (Cologne Re) is cooperating fully with requests
for information and orders to produce documents from the German Federal Financial Supervisory
Authority regarding the activities of Cologne Re relating to finite reinsurance and regarding
transactions between Cologne Re or its subsidiaries, including CRD, and certain counterparties.
In April 2005, the Australian Prudential Regulation Authority (APRA) announced an
investigation involving financial or finite reinsurance transactions by General Reinsurance
Australia Limited (GRA), a subsidiary of General Reinsurance. An inspector was appointed by APRA
under section 52 of the Insurance Act 1973 to conduct an investigation of GRAs financial or finite
reinsurance business. GRA and General Reinsurance cooperated fully with this investigation. On
June 28, 2007, APRA announced that it had concluded its investigation and imposed a condition on
GRAs license that requires it to maintain a majority of independent directors on its local board.
CRD is also providing information to and cooperating fully with the Irish Financial Services
Regulatory Authority in its inquiries regarding the activities of CRD. The Office of the Director
of Corporate Enforcement in Ireland is conducting a preliminary evaluation in relation to CRD
concerning, in particular, transactions between CRD and AIG. CRD is cooperating fully with this
preliminary evaluation.
12
Notes to Interim Consolidated Financial Statements (Continued)
Note 16. Contingencies (Continued)
Berkshire cannot at this time predict the outcome of these matters and is unable to estimate a
range of possible loss and cannot predict whether or not the outcomes will have a material adverse
effect on Berkshires business or results of operations for at least the quarterly period when
these matters are completed or otherwise resolved.
b) Civil Litigation
Reference is made to Note 21 to the Consolidated Financial Statements included in the Annual
Report on Form 10-K for the year ended December 31, 2006 for detailed discussion of such actions.
Material developments related to such actions since December 31, 2006 are discussed below.
Insurance Brokerage Antitrust Litigation Berkshire, General Re and General Reinsurance were
named as defendants in this multidistrict litigation (In Re: Insurance Brokerage Antitrust
Litigation, MDL No. 1663 (D.N.J.)) in which plaintiffs alleged an industry-wide scheme on the part
of commercial insurance brokers and insurance companies to defraud a purported class of insurance
purchasers through bid-rigging and contingent commission arrangements. On April 5, 2007, the Court
dismissed all federal antitrust and RICO claims against Berkshire, General Re and General
Reinsurance. On May 21, 2007, the plaintiffs concluded a settlement agreement with Berkshire,
General Re and General Reinsurance that fully and finally resolved this litigation, as between
these settling parties, without payment or admission of any liability on the part of these settling
defendants.
Note 17. Business segment data
Berkshires consolidated segment data for the third quarter and first nine months of 2007 and
2006 is as follows (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
Third Quarter |
|
|
First Nine Months |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Operating Businesses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance group: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GEICO |
|
$ |
2,999 |
|
|
$ |
2,816 |
|
|
$ |
8,796 |
|
|
$ |
8,191 |
|
General Re |
|
|
1,491 |
|
|
|
1,493 |
|
|
|
4,587 |
|
|
|
4,414 |
|
Berkshire Hathaway Reinsurance Group |
|
|
1,033 |
|
|
|
1,570 |
|
|
|
10,635 |
|
|
|
3,735 |
|
Berkshire Hathaway Primary Group |
|
|
497 |
|
|
|
480 |
|
|
|
1,466 |
|
|
|
1,377 |
|
Investment income |
|
|
1,220 |
|
|
|
1,107 |
|
|
|
3,554 |
|
|
|
3,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total insurance group |
|
|
7,240 |
|
|
|
7,466 |
|
|
|
29,038 |
|
|
|
20,957 |
|
Finance and financial products |
|
|
1,343 |
|
|
|
1,256 |
|
|
|
3,917 |
|
|
|
3,823 |
|
McLane Company |
|
|
7,293 |
|
|
|
6,671 |
|
|
|
20,849 |
|
|
|
19,069 |
|
MidAmerican |
|
|
3,150 |
|
|
|
2,849 |
|
|
|
9,483 |
|
|
|
7,730 |
|
Shaw Industries |
|
|
1,392 |
|
|
|
1,515 |
|
|
|
4,084 |
|
|
|
4,493 |
|
Other businesses |
|
|
6,515 |
|
|
|
5,531 |
|
|
|
18,681 |
|
|
|
15,208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,933 |
|
|
|
25,288 |
|
|
|
86,052 |
|
|
|
71,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of segments to consolidated amount: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment and derivative gains/losses |
|
|
3,063 |
|
|
|
267 |
|
|
|
4,579 |
|
|
|
1,531 |
|
Eliminations and other |
|
|
(59 |
) |
|
|
(195 |
) |
|
|
(429 |
) |
|
|
(503 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
29,937 |
|
|
$ |
25,360 |
|
|
$ |
90,202 |
|
|
$ |
72,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
Notes to Interim Consolidated Financial Statements (Continued)
Note 17. Business segment data (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before taxes |
|
|
|
and minority interests |
|
|
|
Third Quarter |
|
|
First Nine Months |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Operating Businesses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance group: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GEICO |
|
$ |
335 |
|
|
$ |
407 |
|
|
$ |
955 |
|
|
$ |
1,006 |
|
General Re |
|
|
157 |
|
|
|
177 |
|
|
|
417 |
|
|
|
357 |
|
Berkshire Hathaway Reinsurance Group |
|
|
183 |
|
|
|
735 |
|
|
|
1,092 |
|
|
|
966 |
|
Berkshire Hathaway Primary Group |
|
|
77 |
|
|
|
108 |
|
|
|
189 |
|
|
|
186 |
|
Net investment income |
|
|
1,217 |
|
|
|
1,103 |
|
|
|
3,531 |
|
|
|
3,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total insurance group |
|
|
1,969 |
|
|
|
2,530 |
|
|
|
6,184 |
|
|
|
5,738 |
|
Finance and financial products |
|
|
273 |
|
|
|
282 |
|
|
|
792 |
|
|
|
876 |
|
McLane Company |
|
|
50 |
|
|
|
50 |
|
|
|
180 |
|
|
|
161 |
|
MidAmerican |
|
|
481 |
|
|
|
416 |
|
|
|
1,366 |
|
|
|
1,112 |
|
Shaw Industries |
|
|
125 |
|
|
|
138 |
|
|
|
327 |
|
|
|
462 |
|
Other businesses |
|
|
895 |
|
|
|
686 |
|
|
|
2,431 |
|
|
|
1,787 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,793 |
|
|
|
4,102 |
|
|
|
11,280 |
|
|
|
10,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of segments to consolidated amount: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment and derivative gains/losses |
|
|
3,063 |
|
|
|
267 |
|
|
|
4,579 |
|
|
|
1,531 |
|
Interest expense, excluding interest allocated to business segments |
|
|
(14 |
) |
|
|
(21 |
) |
|
|
(41 |
) |
|
|
(60 |
) |
Eliminations and other |
|
|
5 |
|
|
|
(47 |
) |
|
|
(83 |
) |
|
|
(91 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,847 |
|
|
$ |
4,301 |
|
|
$ |
15,735 |
|
|
$ |
11,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Net earnings for the third quarter and first nine months of 2007 and 2006 are disaggregated in
the table that follows. Amounts are after deducting minority interests and income taxes. Amounts
are in millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
First Nine Months |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Insurance underwriting |
|
$ |
486 |
|
|
$ |
917 |
|
|
$ |
1,719 |
|
|
$ |
1,618 |
|
Insurance investment income |
|
|
922 |
|
|
|
759 |
|
|
|
2,532 |
|
|
|
2,244 |
|
Utilities and energy |
|
|
354 |
|
|
|
261 |
|
|
|
878 |
|
|
|
652 |
|
Manufacturing, service and retailing |
|
|
647 |
|
|
|
534 |
|
|
|
1,738 |
|
|
|
1,466 |
|
Finance and financial products |
|
|
171 |
|
|
|
183 |
|
|
|
499 |
|
|
|
555 |
|
Other |
|
|
(19 |
) |
|
|
(56 |
) |
|
|
(82 |
) |
|
|
(97 |
) |
Investment and derivative gains/losses |
|
|
1,992 |
|
|
|
174 |
|
|
|
2,982 |
|
|
|
994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
4,553 |
|
|
$ |
2,772 |
|
|
$ |
10,266 |
|
|
$ |
7,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Berkshires operating businesses are managed on an unusually decentralized basis. There are
essentially no centralized or integrated business functions (such as sales, marketing, purchasing,
legal or human resources) and there is minimal involvement by Berkshires corporate headquarters in
the day-to-day business activities of the operating businesses. Berkshires corporate office
management participates in and is ultimately responsible for significant capital allocation
decisions, investment activities and the selection of the Chief Executive to head each of the
operating businesses. The business segment data (Note 17 to the Interim Consolidated Financial
Statements) should be read in conjunction with this discussion.
Insurance Underwriting
Underwriting results from Berkshires insurance businesses for the third quarter and first
nine months of 2007 and 2006 are summarized below. Amounts are in millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
First Nine Months |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Underwriting gain/loss attributable to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GEICO |
|
$ |
335 |
|
|
$ |
407 |
|
|
$ |
955 |
|
|
$ |
1,006 |
|
General Re |
|
|
157 |
|
|
|
177 |
|
|
|
417 |
|
|
|
357 |
|
Berkshire Hathaway Reinsurance Group |
|
|
183 |
|
|
|
735 |
|
|
|
1,092 |
|
|
|
966 |
|
Berkshire Hathaway Primary Group |
|
|
77 |
|
|
|
108 |
|
|
|
189 |
|
|
|
186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting gain/loss pre-tax |
|
|
752 |
|
|
|
1,427 |
|
|
|
2,653 |
|
|
|
2,515 |
|
Income taxes and minority interests |
|
|
266 |
|
|
|
510 |
|
|
|
934 |
|
|
|
897 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net underwriting gain/loss |
|
$ |
486 |
|
|
$ |
917 |
|
|
$ |
1,719 |
|
|
$ |
1,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Berkshire engages in both primary insurance and reinsurance of property and casualty risks.
Through General Re, Berkshire also reinsures life and health risks. In primary insurance
activities, Berkshire subsidiaries assume defined portions of the risks of loss from persons or
organizations that are directly subject to the risks. In reinsurance activities, Berkshire
subsidiaries assume defined portions of similar or dissimilar risks that other insurers or
reinsurers subject themselves to in their own insuring activities. Berkshires principal insurance
and reinsurance businesses are: (1) GEICO, one of the four largest auto insurers in the U.S., (2)
General Re, (3) Berkshire Hathaway Reinsurance Group and (4) Berkshire Hathaway Primary Group.
Berkshires management views insurance businesses as possessing two distinct operations
underwriting and investing. Underwriting decisions are the responsibility of the unit managers;
investing, with limited exceptions at GEICO and at General Res international operations, is the
responsibility of Berkshires Chairman and CEO, Warren E. Buffett. Accordingly, Berkshire evaluates
performance of underwriting operations without any allocation of investment income.
A significant marketing strategy followed by all of these businesses is the maintenance of
extraordinary capital strength. Statutory surplus of Berkshires insurance businesses totaled
approximately $59 billion at December 31, 2006. This superior capital strength creates
opportunities, especially with respect to reinsurance activities, to negotiate and enter into
insurance and reinsurance contracts specially designed to meet unique needs of insurance and
reinsurance buyers.
15
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Insurance Underwriting (Continued)
Periodic underwriting results can be affected significantly by changes in estimates for unpaid
losses and loss adjustment expenses, including amounts established for occurrences in prior years.
In addition, the timing and amount of catastrophe losses can produce significant volatility in
periodic underwriting results. Hurricanes and tropical storms affecting the United States and
Caribbean tend to occur between June and December.
GEICO
GEICO provides primarily private passenger automobile coverages to insureds in 49 states and
the District of Columbia. GEICO policies are marketed mainly by direct response methods in which
customers apply for coverage directly to the company via the Internet, over the telephone or
through the mail. This is a significant element in GEICOs strategy to be a low cost insurer. In
addition, GEICO strives to provide excellent service to customers, with the goal of establishing
long-term customer relationships.
GEICOs pre-tax underwriting results for the third quarter and first nine months of 2007 and
2006 are summarized in the table below. Dollar amounts are in millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
First Nine Months |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
Premiums earned |
|
$ |
2,999 |
|
|
|
100.0 |
|
|
$ |
2,816 |
|
|
|
100.0 |
|
|
$ |
8,796 |
|
|
|
100.0 |
|
|
$ |
8,191 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss expenses |
|
|
2,089 |
|
|
|
69.6 |
|
|
|
1,892 |
|
|
|
67.2 |
|
|
|
6,227 |
|
|
|
70.8 |
|
|
|
5,694 |
|
|
|
69.5 |
|
Underwriting expenses |
|
|
575 |
|
|
|
19.2 |
|
|
|
517 |
|
|
|
18.4 |
|
|
|
1,614 |
|
|
|
18.3 |
|
|
|
1,491 |
|
|
|
18.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and expenses |
|
|
2,664 |
|
|
|
88.8 |
|
|
|
2,409 |
|
|
|
85.6 |
|
|
|
7,841 |
|
|
|
89.1 |
|
|
|
7,185 |
|
|
|
87.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax underwriting gain |
|
$ |
335 |
|
|
|
|
|
|
$ |
407 |
|
|
|
|
|
|
$ |
955 |
|
|
|
|
|
|
$ |
1,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned in 2007 exceeded amounts earned in 2006 by $183 million (6.5%) for the third
quarter and $605 million (7.4%) for the first nine months. The growth in premiums earned for
voluntary auto for the first nine months was 7.2%, which was less than the 9.0% increase in
policies-in-force during the past year as average premiums per policy continue to slowly decline.
Further declines in average premiums per policy are expected over the remainder of 2007 as rate
decreases are applied to policy renewals. Policies-in-force over the last twelve months increased
9.1% in the preferred risk auto line and 8.8% in the standard and nonstandard auto lines.
Voluntary auto new business sales in the first nine months of 2007 increased 4.7% compared to 2006.
Voluntary auto policies-in-force at September 30, 2007 were 536,000 greater than at December 31,
2006.
Losses and loss adjustment expenses incurred in 2007 exceeded 2006 amounts by $197 million for
the third quarter and $533 million for the first nine months. The ratio of losses and loss
adjustment expenses incurred to earned premiums was 70.8% in the first nine months of 2007 compared
to 69.5% in 2006. Comparatively higher loss ratios are expected over the remainder of 2007 versus
2006 due to the decline in average premiums per policy. During the first nine months of 2007,
claims frequencies for physical damage coverages increased in the two to four percent range from
2006 while frequencies for injury coverages decreased in the two to four percent range. Injury and
physical damage average severities in 2007 have been comparable with 2006. Catastrophe losses in
the first nine months of 2007 were $33 million compared to $48 million in 2006. Underwriting
expenses for the first nine months of 2007 increased 8.2% versus 2006 primarily due to increased
advertising.
General Re
General Re conducts a reinsurance business offering property and casualty and life and health
coverages to clients worldwide. Property and casualty reinsurance is written in North America on a
direct basis through General Reinsurance Corporation and internationally through 95% owned Cologne
Re (based in Germany) and other wholly-owned affiliates. Property and casualty reinsurance is also
written through brokers with respect to Faraday in London. Life and health reinsurance is written
worldwide through Cologne Re. General Re strives to generate pre-tax underwriting gains in
essentially all of its product lines. Underwriting performance is not evaluated based upon market
share and underwriters are instructed to reject inadequately priced risks. General Res
underwriting results for the third quarter and first nine months of 2007 and 2006 are summarized
below. Amounts are in millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned |
|
|
Pre-tax underwriting gain |
|
|
|
Third Quarter |
|
|
First Nine Months |
|
|
Third Quarter |
|
|
First Nine Months |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Property/casualty |
|
$ |
885 |
|
|
$ |
923 |
|
|
$ |
2,750 |
|
|
$ |
2,706 |
|
|
$ |
117 |
|
|
$ |
128 |
|
|
$ |
294 |
|
|
$ |
244 |
|
Life/health |
|
|
606 |
|
|
|
570 |
|
|
|
1,837 |
|
|
|
1,708 |
|
|
|
40 |
|
|
|
49 |
|
|
|
123 |
|
|
|
113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,491 |
|
|
$ |
1,493 |
|
|
$ |
4,587 |
|
|
$ |
4,414 |
|
|
$ |
157 |
|
|
$ |
177 |
|
|
$ |
417 |
|
|
$ |
357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
General Re (Continued)
Property/casualty
Premiums earned in the third quarter of 2007 decreased $38 million (4.1%) from the third
quarter of 2006 and increased $44 million (1.6%) for the first nine months compared to the
corresponding 2006 period. Premiums earned in the first nine months of 2007 included $114 million
with respect to a first quarter reinsurance to close transaction that increased General Res
economic interest in the runoff of the Lloyds Syndicate 435s 2001 year of account from 60% to
100%. There was no similar transaction in 2006. Excluding the impact of the reinsurance to close
transaction and the effects of foreign exchange rate changes, premiums earned in the first nine
months of 2007 decreased by approximately $195 million (7.2%) versus 2006. The decline in premium
volume was primarily attributable to policy cancellations/non-renewals exceeding new contracts.
Competition has increased in most markets which could result in further declines in written and
earned premiums over the remainder of 2007 when compared with 2006.
The property/casualty business produced pre-tax underwriting gains in the third quarter and
first nine months of 2007 of $117 million and $294 million, respectively, compared to pre-tax
underwriting gains of $128 million and $244 million in the corresponding 2006 periods. Pre-tax
underwriting gains for the first nine months of 2007 included $352 million of profits from property
lines and $58 million of losses from casualty lines. The results for the first nine months of 2006
consisted of $424 million in gains from property lines and $180 million of losses from casualty
lines. Property results for the first nine months of 2007 included a $110 million loss from
windstorm Kyrill that swept through northern Europe in January 2007. There were no large
individual property losses or significant catastrophe losses in the first nine months of 2006. The
casualty underwriting losses for the first nine months of 2007 and 2006 include $96 million and
$105 million, respectively, in workers compensation reserve discount accretion and deferred charge
amortization. Casualty results for both periods were also negatively affected by legal costs
associated with various ongoing regulatory investigations of finite reinsurance.
Life/health
Premiums earned in the third quarter of 2007 increased $36 million (6.3%) from the third
quarter of 2006 and increased $129 million (7.6%) for the first nine months of 2007 compared to
2006. Excluding the effects of changes in foreign currency exchange rates, premiums earned in the
first nine months of 2007 increased 3.5% over 2006. The increase was primarily due to
comparatively higher life volume in international markets. Life/health operations produced pre-tax
underwriting gains in the third quarter and first nine months of 2007 of $40 million and $123
million, respectively, compared to $49 million and $113 million for the corresponding periods in
2006. For the first nine months of 2007, underwriting results included gains of $114 million from
international business and $9 million from North American business and were driven by favorable
mortality for life coverages. The first nine months of 2006 underwriting results included gains of
$99 million from international business (primarily life business) and $14 million from North
American business.
Berkshire Hathaway Reinsurance Group
The Berkshire Hathaway Reinsurance Group (BHRG) underwrites excess-of-loss reinsurance and
quota-share coverages for insurers and reinsurers worldwide. BHRGs business includes catastrophe
excess-of-loss reinsurance and excess direct and facultative reinsurance for large or otherwise
unusual discrete property risks referred to as individual risk. Retroactive reinsurance policies
provide indemnification of losses and loss adjustment expenses with respect to past loss events.
Other multi-line refers to other business written on both a quota-share and excess basis,
participations in and contracts with Lloyds syndicates as well as property, aviation and workers
compensation programs. The timing and amount of catastrophe losses can produce extraordinary
volatility in BHRGs periodic underwriting results. BHRGs pre-tax underwriting results for the
third quarter and first nine months of 2007 and 2006 are summarized in the table below. Amounts
are in millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned |
|
|
Pre-tax underwriting gain/loss |
|
|
|
Third Quarter |
|
|
First Nine Months |
|
|
Third Quarter |
|
|
First Nine Months |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Catastrophe and
individual risk |
|
$ |
370 |
|
|
$ |
671 |
|
|
$ |
1,236 |
|
|
$ |
1,579 |
|
|
$ |
379 |
|
|
$ |
656 |
|
|
$ |
1,183 |
|
|
$ |
1,095 |
|
Retroactive reinsurance |
|
|
|
|
|
|
105 |
|
|
|
7,394 |
|
|
|
179 |
|
|
|
(125 |
) |
|
|
(5 |
) |
|
|
(315 |
) |
|
|
(164 |
) |
Other multi-line |
|
|
663 |
|
|
|
794 |
|
|
|
2,005 |
|
|
|
1,977 |
|
|
|
(71 |
) |
|
|
84 |
|
|
|
224 |
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,033 |
|
|
$ |
1,570 |
|
|
$ |
10,635 |
|
|
$ |
3,735 |
|
|
$ |
183 |
|
|
$ |
735 |
|
|
$ |
1,092 |
|
|
$ |
966 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Berkshire Hathaway Reinsurance Group (Continued)
Premiums earned from catastrophe and individual risk contracts in the third quarter and first
nine months of 2007 decreased from amounts earned in the corresponding 2006 periods by $301 million
(45%) and $343 million (22%), respectively. Since premiums are earned over the policy period,
premiums earned in 2007 included meaningful amounts from business written in the prior year.
Premiums written in the first nine months of 2007 declined approximately 50% compared to the first
nine months of 2006. The decrease in written premiums was principally attributable to increased
industry capacity for catastrophe reinsurance which has produced increased price competition and
fewer opportunities to write business. The level of catastrophe and individual risk business
written in a given period will vary significantly based upon market conditions and managements
assessment of the adequacy of premium rates. Catastrophe and individual risk business produced
pre-tax underwriting gains of $1,183 million for the first nine months of 2007 versus $1,095
million in 2006. Pre-tax underwriting gains in 2007 periods reflected no significant catastrophe
loss events in 2007 and a net reduction in estimated losses related to pre-2007 events of about
$300 million. The underwriting results for the first nine months of 2006 included losses incurred
of approximately $230 million attributed to pre-2006 catastrophes, primarily Hurricane Wilma.
Premiums earned from retroactive reinsurance for the first nine months of 2007 included $7.1
billion from the Equitas reinsurance agreement which became effective on March 30, 2007. See Note
12 to the accompanying Interim Consolidated Financial Statements. Retroactive policies generally
provide very large, but limited, indemnification of unpaid losses and loss adjustment expenses with
respect to past loss events, and losses are generally expected to be paid over long periods of
time. There was no net underwriting gain or loss recognized in connection with the Equitas
reinsurance agreement as of its effective date. At the inception of the contract, the difference
between the loss reserves established and the consideration received was recorded as a deferred
charge ($2.2 billion) which is being amortized over the expected claim payment period. Periodic
amortization charges are recorded as losses incurred. At September 30, 2007, unamortized deferred
charges for all of BHRGs retroactive contracts (including the Equitas agreement) were
approximately $3.7 billion and gross unpaid losses were approximately $17.1 billion. The
underwriting loss from retroactive policies for the third quarter and first nine months of 2007
increased $120 million and $151 million, respectively, over the corresponding 2006 periods. The
increases were primarily attributable to deferred charge amortization in 2007 related to the
Equitas agreement and to approximately $70 million in gains in the third quarter of 2006 from
contracts amended during the quarter and from reduced expected losses on another contract.
Other multi-line premiums earned in the third quarter of 2007 were $663 million, a decrease of
$131 million versus the third quarter of 2006. For the first nine months of 2007, multi-line
premiums earned were $2,005 million, an increase of $28 million over the first nine months of 2006.
Premiums earned in 2007 reflect significant increases in property business and significant
decreases in casualty excess reinsurance and workers compensation programs. Multi-line business
produced a pre-tax underwriting gain of $224 million in the first nine months of 2007 versus $35
million in 2006. The improved underwriting results in the first nine months of 2007 were primarily
attributable to lower loss ratios on property business.
Berkshire Hathaway Primary Group
Premiums earned in the third quarter and first nine months of 2007 by Berkshires various
primary insurers were $497 million and $1,466 million, respectively, compared to $480 million and
$1,377 million in the comparable prior year periods. Berkshires primary insurers produced
underwriting gains of $77 million and $189 million for the third quarter and first nine months of
2007, respectively, compared to $108 million and $186 million in the comparable prior year periods.
Underwriting gains were achieved in 2007 and 2006 by all of the significant primary insurers.
Insurance Investment Income
Net investment income of Berkshires insurance businesses for the third quarter and first nine
months of 2007 and 2006 is summarized in the table below. Amounts are in millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
First Nine Months |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Investment income before taxes and minority interests |
|
$ |
1,217 |
|
|
$ |
1,103 |
|
|
$ |
3,531 |
|
|
$ |
3,223 |
|
Income taxes and minority interests |
|
|
295 |
|
|
|
344 |
|
|
|
999 |
|
|
|
979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income after taxes and minority interests |
|
$ |
922 |
|
|
$ |
759 |
|
|
$ |
2,532 |
|
|
$ |
2,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Insurance Investment Income (Continued)
Pre-tax investment income consists of interest earned on cash equivalents and fixed maturity
investments and dividends earned on equity investments held by Berkshires insurance businesses.
Pre-tax investment income earned in 2007 by Berkshires insurance businesses exceeded amounts
earned in 2006 by $114 million (10%) in the third quarter and $308 million (10%) in the first nine
months. The increases in investment income in 2007 primarily reflect increased invested balances,
as well as slightly higher short-term interest rates in the United States and increased dividend
income from equity investments.
A summary of investments held in Berkshires insurance businesses follows. Amounts are in
millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sept. 30, |
|
|
Dec. 31, |
|
|
Sept. 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2006 |
|
Cash and cash equivalents |
|
$ |
34,323 |
|
|
$ |
34,590 |
|
|
$ |
35,525 |
|
Equity securities |
|
|
77,495 |
|
|
|
61,168 |
|
|
|
55,220 |
|
Fixed maturity securities |
|
|
26,219 |
|
|
|
25,272 |
|
|
|
24,255 |
|
Other |
|
|
597 |
|
|
|
812 |
|
|
|
835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
138,634 |
|
|
$ |
121,842 |
|
|
$ |
115,835 |
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities as of September 30, 2007 were as follows. Amounts are in millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
|
|
|
|
Cost |
|
|
Gains/Losses |
|
|
Fair Value |
|
U.S. Treasury, government corporations and agencies |
|
$ |
3,345 |
|
|
$ |
29 |
|
|
$ |
3,374 |
|
States, municipalities and political subdivisions |
|
|
2,354 |
|
|
|
49 |
|
|
|
2,403 |
|
Foreign governments |
|
|
9,695 |
|
|
|
4 |
|
|
|
9,699 |
|
Corporate bonds and redeemable preferred stocks, investment grade |
|
|
4,101 |
|
|
|
52 |
|
|
|
4,153 |
|
Corporate bonds and redeemable preferred stocks, non-investment grade |
|
|
1,938 |
|
|
|
1,004 |
|
|
|
2,942 |
|
Mortgage-backed securities |
|
|
3,622 |
|
|
|
26 |
|
|
|
3,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
25,055 |
|
|
$ |
1,164 |
|
|
$ |
26,219 |
|
|
|
|
|
|
|
|
|
|
|
All U.S. government obligations are rated AAA by the major rating agencies and approximately
95% of all state, municipal and political subdivisions, foreign government obligations and
mortgage-backed securities were rated AA or higher by the major rating agencies. Non-investment
grade securities represent securities that are rated below BBB- or Baa3. Fair value reflects
quoted market prices where available or, if not available, prices obtained from independent pricing
services.
Invested assets derive from shareholder capital and reinvested earnings as well as net
liabilities assumed under insurance contracts or float. The major components of float are unpaid
losses, unearned premiums and other liabilities to policyholders less premiums and reinsurance
receivables, deferred charges assumed under retroactive reinsurance contracts and deferred policy
acquisition costs. Float totaled approximately $59 billion at September 30, 2007 versus
approximately $51 billion at December 31, 2006. The increase in float in 2007 was principally due
to the Equitas reinsurance transaction. The cost of float, as represented by the ratio of pre-tax
underwriting gain or loss to average float, was negative for the first nine months of 2007 and
2006, as Berkshires insurance businesses generated pre-tax underwriting gains in each period.
19
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Utilities and Energy (MidAmerican)
Revenues and earnings from MidAmerican for the third quarter and first nine months of 2007 and
2006 are summarized below. Amounts are in millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
First Nine Months |
|
|
|
Revenues |
|
|
Earnings |
|
|
Revenues |
|
|
Earnings |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
MidAmerican Energy Company |
|
$ |
1,002 |
|
|
$ |
781 |
|
|
$ |
144 |
|
|
$ |
111 |
|
|
$ |
3,236 |
|
|
$ |
2,611 |
|
|
$ |
356 |
|
|
$ |
281 |
|
PacifiCorp |
|
|
1,150 |
|
|
|
1,047 |
|
|
|
215 |
|
|
|
146 |
|
|
|
3,231 |
|
|
|
1,993 |
|
|
|
534 |
|
|
|
237 |
|
Natural gas pipelines |
|
|
232 |
|
|
|
192 |
|
|
|
78 |
|
|
|
56 |
|
|
|
778 |
|
|
|
683 |
|
|
|
330 |
|
|
|
240 |
|
U.K. utilities |
|
|
282 |
|
|
|
251 |
|
|
|
68 |
|
|
|
89 |
|
|
|
801 |
|
|
|
693 |
|
|
|
224 |
|
|
|
235 |
|
Real estate brokerage |
|
|
415 |
|
|
|
468 |
|
|
|
23 |
|
|
|
25 |
|
|
|
1,228 |
|
|
|
1,352 |
|
|
|
58 |
|
|
|
70 |
|
Other |
|
|
69 |
|
|
|
110 |
|
|
|
36 |
|
|
|
59 |
|
|
|
209 |
|
|
|
398 |
|
|
|
93 |
|
|
|
238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,150 |
|
|
$ |
2,849 |
|
|
|
|
|
|
|
|
|
|
$ |
9,483 |
|
|
$ |
7,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before corporate interest
and taxes |
|
|
564 |
|
|
|
486 |
|
|
|
|
|
|
|
|
|
|
|
1,595 |
|
|
|
1,301 |
|
Interest, other than to Berkshire |
|
|
(83 |
) |
|
|
(70 |
) |
|
|
|
|
|
|
|
|
|
|
(229 |
) |
|
|
(189 |
) |
Interest on Berkshire junior debt |
|
|
(26 |
) |
|
|
(32 |
) |
|
|
|
|
|
|
|
|
|
|
(84 |
) |
|
|
(103 |
) |
Income taxes and minority interests ** |
|
|
(71 |
) |
|
|
(112 |
) |
|
|
|
|
|
|
|
|
|
|
(344 |
) |
|
|
(335 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
$ |
384 |
|
|
$ |
272 |
|
|
|
|
|
|
|
|
|
|
$ |
938 |
|
|
$ |
674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings applicable to Berkshire * |
|
$ |
354 |
|
|
$ |
261 |
|
|
|
|
|
|
|
|
|
|
$ |
878 |
|
|
$ |
652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt owed to others at September 30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
19,393 |
|
|
$ |
16,485 |
|
Debt owed to Berkshire at September 30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
888 |
|
|
$ |
1,122 |
|
|
|
|
* |
|
Net of minority interests and includes interest earned by Berkshire (net of related income
taxes). |
|
** |
|
Net of $61 million deferred income tax benefit as a result of the reduction in the United
Kingdom corporate income tax rate from 30% to 28% which was enacted during the third quarter of 2007 and will be effective in 2008. |
Revenues and earnings of the utilities and energy businesses are, to some extent, seasonal
depending on weather-induced demand. Revenues from U.S. electricity sales are generally higher in
the summer when air conditioning use is greatest and revenues from gas sales and pipelines are
generally higher in the winter when heating needs are higher. Real estate brokerage revenues tend
to be higher in the second and third quarters.
Revenues in 2007 from MidAmerican Energy Company (MEC) increased $221 million (28%) in the
third quarter and $625 million (24%) for the first nine months over the comparable 2006 periods.
During 2007, MECs electricity generation assets in service increased which allowed for increased
sales volume in both the retail and wholesale markets. MECs non-regulated energy sales in 2007
exceeded 2006 by $182 million in the third quarter and $433 million for the first nine months
primarily due to increased electric sales volume and prices driven by improved market
opportunities, partially offset by lower gas sales volume and prices. MECs regulated natural gas
sales in the first nine months of 2007 exceeded 2006 by $76 million, which was attributable to
higher unit sales resulting from colder temperatures during the first half of the year and a higher
average per-unit cost of gas sold. MECs regulated retail and wholesale electricity sales in the
first nine months of 2007 exceeded 2006 by $114 million, which reflected higher unit sales
attributable to warmer summer temperatures and increases in the average number of retail customers.
Earnings before corporate interest and taxes (EBIT) from MEC increased $33 million (30%) in the
third quarter and $75 million (27%) for the first nine months over the comparable 2006 periods.
The increases were mainly due to higher gross margins of $68 million in the third quarter and $127 million for the first nine months on both regulated and non regulated energy
sales, partially offset by higher facilities operating and maintenance costs.
Revenues in 2007 from PacifiCorp increased $103 million (10%) in the third quarter and $1,238
million (62%) for the first nine months versus 2006. Revenues and EBIT of PacifiCorp for 2006 in
the preceding table are included beginning as of the acquisition date (March 21, 2006). On a pro
forma basis, PacifiCorp revenues for the first nine months of 2007 increased $75 million over 2006. The third quarter comparative
increase in revenues reflects increased retail revenues ($100 million), primarily from
regulatory-approved rate increases and higher customer usage, as well as increased wholesale electricity
sales. EBIT from PacifiCorp increased $69 million (47%) in the third quarter and $297 million
(125%) for the first nine months versus 2006. On a pro forma basis, EBIT for the first nine months of 2007 increased $86 million
over 2006. The third quarter increase in EBIT was primarily due to the higher retail and wholesale
revenues discussed above and increased net unrealized gains on energy purchase and sales contracts,
partially offset by higher fuel and purchased power costs. Fuel costs increased to satisfy the
higher volumes and because of higher average unit costs.
20
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Utilities and Energy (MidAmerican) (Continued)
Revenues from natural gas pipelines increased $40 million (21%) in the third quarter and $95
million (14%) for the first nine months over the comparable 2006 periods. The increases were
primarily due to higher demand and rates resulting from favorable market conditions in 2007 and the
impact of estimated rate case refunds to customers in the third quarter of 2006 with respect to an
order that the Federal Energy Regulatory Commission issued in 2006. EBIT from natural gas
pipelines increased $22 million (39%) in the third quarter and $90 million (37%) for the first nine
months over the comparable 2006 periods. The increases in EBIT were mainly due to comparatively
higher revenue and lower depreciation and amortization due to expected changes in depreciation
rates in connection with a current rate proceeding.
Revenues from U.K. utilities in the third quarter and the first nine months of 2007 increased
over the comparable 2006 periods. The increases were primarily attributable to the strengthening
of the Pound Sterling versus the U.S. dollar as well as higher gas production and distribution
revenues. EBIT from the U.K. utilities in 2007 decreased $21 million for the third quarter and $11
million for the first nine months versus 2006 periods. The EBIT decreases resulted from higher
maintenance and depreciation costs and the write-off of unsuccessful gas exploration costs.
Revenues and EBIT from real estate brokerage decreased in the third quarter and first nine
months of 2007 from the comparable 2006 periods primarily due to lower transaction volume as a
result of the slowdown in U.S. residential real estate activity. Revenues and EBIT from other
activities in the first nine months of 2006 included pre-tax gains of $117 million from the
disposal of equity securities. There were no significant securities gains in 2007.
Manufacturing, Service and Retailing
A comparison of third quarter and first nine months revenues and pre-tax earnings of 2007 and
2006 for the manufacturing, service and retailing businesses follows. Amounts are in millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
First Nine Months |
|
|
|
Revenues |
|
|
Earnings |
|
|
Revenues |
|
|
Earnings |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
McLane Company |
|
$ |
7,293 |
|
|
$ |
6,671 |
|
|
$ |
50 |
|
|
$ |
50 |
|
|
$ |
20,849 |
|
|
$ |
19,069 |
|
|
$ |
180 |
|
|
$ |
161 |
|
Shaw Industries |
|
|
1,392 |
|
|
|
1,515 |
|
|
|
125 |
|
|
|
138 |
|
|
|
4,084 |
|
|
|
4,493 |
|
|
|
327 |
|
|
|
462 |
|
Other manufacturing |
|
|
3,832 |
|
|
|
3,347 |
|
|
|
567 |
|
|
|
477 |
|
|
|
10,862 |
|
|
|
8,840 |
|
|
|
1,578 |
|
|
|
1,218 |
|
Other service |
|
|
1,933 |
|
|
|
1,439 |
|
|
|
295 |
|
|
|
173 |
|
|
|
5,501 |
|
|
|
4,138 |
|
|
|
716 |
|
|
|
442 |
|
Retailing |
|
|
750 |
|
|
|
745 |
|
|
|
33 |
|
|
|
36 |
|
|
|
2,318 |
|
|
|
2,230 |
|
|
|
137 |
|
|
|
127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
15,200 |
|
|
$ |
13,717 |
|
|
|
|
|
|
|
|
|
|
$ |
43,614 |
|
|
$ |
38,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax earnings |
|
|
|
|
|
|
|
|
|
$ |
1,070 |
|
|
$ |
874 |
|
|
|
|
|
|
|
|
|
|
$ |
2,938 |
|
|
$ |
2,410 |
|
Income taxes and minority interests |
|
|
|
|
|
|
|
|
|
|
423 |
|
|
|
340 |
|
|
|
|
|
|
|
|
|
|
|
1,200 |
|
|
|
944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
647 |
|
|
$ |
534 |
|
|
|
|
|
|
|
|
|
|
$ |
1,738 |
|
|
$ |
1,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
McLane Company
Revenues from McLanes grocery and food service wholesale distribution business for the third
quarter and first nine months of 2007 increased $622 million (9%) and $1,780 million (9%),
respectively, over revenues in the corresponding 2006 periods. A portion of the revenue increases
was attributable to manufacturer price increases and state excise tax increases. In addition, both
the grocery and foodservice divisions added new customers. For the first nine months of 2007,
pre-tax earnings increased $19 million (12%) compared to 2006. The gross margin rate for the first
nine months of 2007 was 5.77% versus 5.84% in 2006. In 2007, the gross margin rate has been
negatively impacted by the aforementioned excise tax increases as well as the effects of increased
competition. The impact of the reduced gross margin rate was partially offset by a decline in
other operating expenses. Pre-tax earnings in the first nine months of 2007 also included a $10
million gain from a litigation settlement. Approximately
1/3 of McLanes annual revenues are from
sales to Wal-Mart. A curtailment of purchasing by Wal-Mart could have a material adverse impact on
the earnings of McLane.
Shaw Industries
Revenues of Shaw Industries in the third quarter and first nine months of 2007 declined $123
million (8%) and $409 million (9%), respectively, as compared with the same periods in 2006. For
the first nine months of 2007, unit sales volume decreased 11% versus 2006 due primarily to lower
sales in residential markets as a result of the continued slowdown in new housing construction. In
2007, pre-tax earnings decreased $13 million (9%) for the third quarter and $135 million (29%)
21
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Manufacturing, Service and Retailing (Continued)
Shaw Industries (Continued)
for the first nine months as compared to 2006. The declines in pre-tax earnings reflect the
aforementioned decline in sales volume and higher product costs due primarily to comparatively
higher raw material prices and lower manufacturing efficiencies from decreased production. These
factors combined to produce declines in gross margin of 10% and 19% for the third quarter and first
nine months, respectively, of 2007 versus 2006. Selling, general and administrative costs in the
third quarter and first nine months of 2007 declined approximately 10% and 8%, respectively,
compared with 2006, reflecting lower sales volume and expense control efforts. Residential housing
construction is expected to remain low for the remainder of 2007 and into 2008.
Other manufacturing
Berkshires other manufacturing businesses include a wide array of businesses. Included in
this group are several manufacturers of building products (Acme Building Brands, Benjamin Moore,
Johns Manville and MiTek) and apparel (Fruit of the Loom (including the athletic apparel and
sporting goods business acquired from Russell Corporation in August 2006 and the womens intimate
apparel business acquired from VF Corporation in April 2007), Garan, Fechheimers, Justin Brands and
the H.H. Brown Shoe Group). Also included in this group are Forest River, a leading manufacturer
of leisure vehicles and the Iscar Metalworking Companies (IMC), an industry leader in the metal
cutting tools business with operations worldwide that was acquired on July 5, 2006. There are
numerous other manufacturers of consumer and commercial products in this diverse group.
Revenues in 2007 of other manufacturing businesses increased $485 million (14%) for the third
quarter and $2,022 million (23%) for the first nine months as compared to the corresponding 2006
periods. The comparative increase in first nine month revenues was primarily attributable to
businesses acquired since mid-2006, partially offset by a decline in revenues of the building
products businesses. Pre-tax earnings of the other manufacturing businesses were $567 million in
the third quarter and $1,578 million in the first nine months of 2007, representing increases of
$90 million (19%) and $360 million (30%), respectively, over 2006. The increases were primarily
due to IMC and increased earnings of the apparel businesses, partially offset by comparatively
lower earnings of the building products businesses. The revenue and earnings declines of the
building products businesses were primarily attributable to the general slowdown in residential
housing construction activity.
Other service
Berkshires other service businesses include NetJets, the worlds leading provider of
fractional ownership programs for general aviation aircraft and FlightSafety, a provider of high
technology training to operators of aircraft and ships. Among other businesses included in this
group are: TTI, a leading electronic components distributor acquired March 31, 2007; Business Wire,
a leading distributor of corporate news, multimedia and regulatory filings acquired February 28,
2006; The Pampered Chef, a direct seller of high quality kitchen tools; International Dairy Queen,
a licensor and service provider to about 6,000 stores that offer prepared dairy treats and food;
The Buffalo News, a publisher of a daily and Sunday newspaper; and businesses that provide
management and other services to insurance companies.
Revenues from the other service businesses in the third quarter and first nine months of 2007
increased $494 million (34%) and $1,363 million (33%), respectively, compared to 2006. Pre-tax
earnings in the third quarter and first nine months of 2007 increased $122 million (71%) and $274
million (62%), respectively, compared to 2006. The increases in revenues and pre-tax earnings in
2007 were due primarily to business acquisitions in 2006 and 2007 (primarily TTI and Business Wire)
and to improved results from flight services (NetJets and FlightSafety).
Retailing
Berkshires retailing operations consist of several home furnishings (Nebraska Furniture Mart,
R.C. Willey, Star Furniture and Jordans) and jewelry (Borsheims, Helzberg and Ben Bridge)
retailers. Sees Candies is also included in this group. Revenues of the retailing businesses in
the third quarter of 2007 were relatively unchanged from the third quarter of 2006 and increased
$88 million (4%) for the first nine months of 2007 over the corresponding 2006 period. The
comparative revenue increase was principally attributable to a comparative increase in home
furnishings sales in the first half of the year. Pre-tax earnings in 2007 of the retailing
businesses decreased $3 million (8%) in the third quarter and increased $10 million (8%) in the
first nine months as compared to 2006.
22
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Finance and Financial Products
A summary of revenues and pre-tax earnings from Berkshires finance and financial products
businesses follows. Amounts are in millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
First Nine Months |
|
|
|
Revenues |
|
|
Earnings |
|
|
Revenues |
|
|
Earnings |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Manufactured housing and finance |
|
$ |
970 |
|
|
$ |
884 |
|
|
$ |
129 |
|
|
$ |
129 |
|
|
$ |
2,824 |
|
|
$ |
2,655 |
|
|
$ |
391 |
|
|
$ |
388 |
|
Furniture/transportation equipment
leasing |
|
|
205 |
|
|
|
229 |
|
|
|
25 |
|
|
|
52 |
|
|
|
611 |
|
|
|
659 |
|
|
|
87 |
|
|
|
131 |
|
Other |
|
|
168 |
|
|
|
143 |
|
|
|
119 |
|
|
|
101 |
|
|
|
482 |
|
|
|
509 |
|
|
|
314 |
|
|
|
357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,343 |
|
|
$ |
1,256 |
|
|
|
|
|
|
|
|
|
|
$ |
3,917 |
|
|
$ |
3,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax earnings |
|
|
|
|
|
|
|
|
|
$ |
273 |
|
|
$ |
282 |
|
|
|
|
|
|
|
|
|
|
$ |
792 |
|
|
$ |
876 |
|
Income taxes and minority interests |
|
|
|
|
|
|
|
|
|
|
102 |
|
|
|
99 |
|
|
|
|
|
|
|
|
|
|
|
293 |
|
|
|
321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
171 |
|
|
$ |
183 |
|
|
|
|
|
|
|
|
|
|
$ |
499 |
|
|
$ |
555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues in the third quarter and first nine months of 2007 from manufactured housing and
finance activities (Clayton Homes) increased $86 million (10%) and $169 million (6%), respectively,
over the comparable 2006 periods. Revenues from home sales in 2007 increased approximately $74
million for the third quarter and $137 million for the first nine months. Unit sales of homes in
the first nine months of 2007 decreased approximately 5% from 2006, but the impact of the decline
was more than offset by higher average selling prices.
Pre-tax earnings from Clayton Homes in the third quarter and first nine months of 2007 were
relatively unchanged from the corresponding periods in 2006. For the first nine months of 2007,
earnings from manufacturing, retail and community activities declined primarily due to reduced unit
sales. Earnings from financing activities in 2007 benefited from increased net interest income and
lower credit losses versus 2006. During the third quarter of 2007, Berkshire Hathaway Finance
Corporation (BHFC) issued $750 million 5.125% notes due 2012 and repaid $700 million par amount
of 3.4% notes. Accordingly, the higher interest rate on the new BHFC borrowings will have a
negative effect on net interest earned from financing activities because substantially all
installment loans have fixed interest rates. Installment loan balances were approximately $10.7
billion as of September 30, 2007 and $10.0 billion as of September 30, 2006.
Revenues from furniture/transportation equipment leasing activities for the third quarter and
first nine months of 2007 decreased $24 million (10%) and $48 million (7%), respectively, as
compared to 2006. Pre-tax earnings for the third quarter and first nine months of 2007 declined
$27 million (52%) and $44 million (34%), respectively, compared to 2006. The declines primarily
reflect lower rental income driven by lower utilization rates for over-the-road trailer and storage
units. Due to significant cost components of this business being fixed (depreciation and facility
expenses), pre-tax earnings declined disproportionately to revenues. Revenues and pre-tax earnings
of other finance businesses in the first nine months of 2006 included an equity commitment fee of
$67 million.
Investment and Derivative Gains/Losses
A summary of investment and derivative gains and losses follows. Amounts are in millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
First Nine Months |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Investment gains/losses - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and other disposals of investments - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance and other |
|
$ |
2,984 |
|
|
$ |
262 |
|
|
$ |
3,976 |
|
|
$ |
990 |
|
Finance and financial products |
|
|
184 |
|
|
|
|
|
|
|
187 |
|
|
|
5 |
|
Other-than-temporary impairments |
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(141 |
) |
Other |
|
|
19 |
|
|
|
17 |
|
|
|
77 |
|
|
|
141 |
|
Derivative gains/losses - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts |
|
|
26 |
|
|
|
2 |
|
|
|
55 |
|
|
|
240 |
|
Other derivative contracts |
|
|
(150 |
) |
|
|
(13 |
) |
|
|
285 |
|
|
|
296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains/losses before income taxes and minority interests |
|
|
3,063 |
|
|
|
267 |
|
|
|
4,579 |
|
|
|
1,531 |
|
Income taxes and minority interests |
|
|
1,071 |
|
|
|
93 |
|
|
|
1,597 |
|
|
|
537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gains/losses |
|
$ |
1,992 |
|
|
$ |
174 |
|
|
$ |
2,982 |
|
|
$ |
994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Investment and Derivative Gains/Losses (Continued)
Investment gains or losses are recognized upon the sales of investments or as otherwise
required under GAAP. The increases in investment gains realized during the third quarter and first
nine months of 2007 over 2006 periods were primarily attributable to the sale of equity securities.
The timing of realized gains or losses from sales can have a material effect on periodic earnings.
However, such gains or losses usually have little, if any, impact on total shareholders equity
because most equity and fixed maturity investments are carried at fair value with the unrealized
gain or loss included in shareholders equity as a component of accumulated other comprehensive
income. Other-than-temporary impairment losses represent the adjustment of cost to fair value
when, as required by GAAP, management concludes that an investments decline in value below cost is
other than temporary. Impairment losses represent a non-cash charge to earnings.
Other derivative contracts primarily pertain to credit default risks of other entities as well
as equity price risks associated with major worldwide equity indices. Such contracts are carried
at estimated fair value and changes in estimated fair value are included in earnings in the period
of the change. The gains/losses from other derivative contracts are principally attributable to
non-cash changes in the fair values of the related contracts and reflect changes in equity index
values, interest rates and foreign currency exchange rates among other factors. These contracts
generally may not be settled before the expiration date (up to 20 years in the future with respect
to equity index contracts) and therefore the amount of cash basis gains or losses will not be known
for years. Nevertheless, the fair values on any given reporting date and the resulting gains and
losses reflected in earnings will likely be volatile, reflecting the volatility of equity and
credit markets. The estimated fair value of equity index and credit default derivative contracts
at September 30, 2007 was approximately $5.6 billion, an increase of approximately $2.3 billion
from December 31, 2006. The increase was primarily due to new contracts entered into during the
year for which Berkshire received premiums of approximately $2.5 billion. As of September 30,
2007, Berkshires maximum exposure under these contracts was approximately $35 billion, an increase
of approximately $12 billion from December 31, 2006.
Financial Condition
Berkshires balance sheet continues to reflect significant liquidity and a strong capital
base. Consolidated shareholders equity at September 30, 2007 was $119.9 billion. Cash and
invested assets, excluding assets of finance and financial products businesses, was $145.8 billion
at September 30, 2007 (including cash and cash equivalents of $40.6 billion) and $126.1 billion at
December 31, 2006 (including cash and cash equivalents of $38.3 billion). Berkshires invested
assets are held predominantly in insurance subsidiaries. A large amount of capital is maintained
in the insurance subsidiaries for strategic and marketing purposes and in support of reserves for
unpaid losses.
Notes payable and other borrowings of the insurance and other businesses were $3.1 billion
(includes about $2.1 billion issued or guaranteed by Berkshire Hathaway Inc.) at September 30,
2007, a decrease of $611 million from December 31, 2006, reflecting maturities and prepayments of
$303 million of parent company debt, reductions in commercial paper (principally NetJets) and
repayments of other borrowings of subsidiaries. An additional $334 million of parent company
borrowings will mature on November 15, 2007, representing the outstanding senior notes issued as
part of the SQUARZ securities in 2002. The SQUARZ securities also included warrants that expired
on May 15, 2007. Berkshire issued 3,715 Class A equivalent shares of common stock during 2007 in
connection with the SQUARZ warrant exercises in exchange for $333 million.
Capital expenditures of the utilities and energy businesses were approximately $2.5 billion in
the first nine months of 2007. Capital expenditures, construction and other development costs for
the year ending December 31, 2007 are forecasted to be approximately $3.7 billion. MidAmerican
expects to fund these capital expenditures with cash flows from operations and debt proceeds.
Certain of its borrowings are secured by certain assets of its regulated utility subsidiaries.
During the first nine months of 2007, MidAmerican issued $2.95 billion par amount of new term debt
and repaid $596 million of previously issued debt including net repayments of short-term
borrowings. MidAmerican borrowed an additional $600 million par amount of notes early in the
fourth quarter of 2007. Term debt of MidAmerican maturing over the remainder of 2007 and 2008 is
$2.8 billion with an additional $1.7 billion due before 2012. Berkshire has committed until March
2011 to provide up to $3.5 billion of additional capital to MidAmerican to permit the repayment of
its debt obligations or to fund its regulated utility subsidiaries. Berkshire has not and does not
intend to guarantee the repayment of debt by MidAmerican or any of its subsidiaries.
Assets of the finance and financial products businesses were $26.0 billion as of September 30,
2007 and $24.6 billion at December 31, 2006, which consisted primarily of loans and finance
receivables, fixed maturity securities and cash and cash equivalents. Liabilities were $21.2
billion as of September 30, 2007 and $19.4 billion at December 31, 2006 and included notes payable
and other borrowings of $12.2 billion at September 30, 2007. Notes payable as of September 30, 2007
included $8.9 billion par amount of medium-term notes issued by BHFC. During the third quarter of
2007, BHFC issued $750 million par amount of notes due 2012 and repaid $700 million par amount of
notes that matured. BHFC notes are
24
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Financial Condition (Continued)
unsecured and mature at various dates extending through 2015, including $3.1 billion due in 2008.
The proceeds from these notes are being used to finance originated and acquired loans of Clayton
Homes. Full and timely payment of principal and interest on the notes issued by BHFC is guaranteed
by Berkshire. In addition, Clayton Homes has outstanding borrowings of $1.4 billion which are
secured by portfolios of manufactured housing loans and are not guaranteed by Berkshire. These
borrowings are repaid as the underlying collateralized loans are repaid.
Contractual Obligations
Berkshire and its subsidiaries are parties to contracts associated with ongoing business and
financing activities, which will result in cash payments to counterparties in future periods.
Certain obligations reflected in the Consolidated Balance Sheets, such as notes payable, require
future payments on contractually specified dates and in fixed and determinable amounts. The timing
and amount of the payment of other obligations, such as unpaid property and casualty loss reserves,
are contingent upon the outcome of future events. Other obligations pertain to the acquisition of
goods or services in the future and are not currently reflected in the financial statements.
Berkshires consolidated contractual obligations as of September 30, 2007 did not change materially
from those disclosed in Contractual Obligations, included in Managements Discussion and
Analysis of Financial Condition and Results of Operations contained in Berkshires Annual Report
on Form 10-K for the year ended December 31, 2006 except as discussed in the following paragraphs.
On March 30, 2007, a reinsurance transaction became effective with Equitas that provides for
the payment of losses and loss adjustment expenses of Equitas with respect to non-life insurance
and reinsurance exposures. Loss reserves assumed as of the effective date of the transaction were
$9.3 billion. The payment of such losses commenced at that time and will continue over a
significant period of time, likely decades, until the underlying insurance and reinsurance policy
obligations are extinguished or the reinsurance limits of indemnification are exhausted. The
ultimate timing and amount of these payments are contingent on various factors discussed in the
following section on Critical Accounting Policies. As of March 31, 2007, the estimated loss and
loss adjustment payments to be made over the next five years were as follows (in millions):
2007$800; 2008$700; 2009$600; 2010$600 and 2011$500. To date, actual payments under the
Equitas agreement have been lower than originally projected. Management does not believe that the
differences in the amounts of payments from projections over this short period of time to be
meaningful in evaluating either the timing or amount of expected future payments under this
contract. Management expects to review the timing and amount of future loss payments during the
fourth quarter of 2007. Actual payments over the succeeding decades will likely vary, perhaps
significantly, from the original estimates.
In the first nine months of 2007, Berkshire subsidiaries issued $4.1 billion par amount fixed
interest rate debt, of which $1.15 billion matures in 2012, $650 million in 2017 and $2.3 billion
in 2037. Annual interest payments on such debt will be approximately $237 million.
Critical Accounting Policies
In applying certain accounting policies, Berkshires management is required to make estimates
and judgments regarding transactions that have occurred and ultimately will be settled several
years in the future. Amounts recognized in the financial statements from such estimates are
necessarily based on assumptions about numerous factors involving varying, and possibly
significant, degrees of judgment and uncertainty. Accordingly, the amounts currently recorded in
the financial statements may prove, with the benefit of hindsight, to be inaccurate. Reference is
made to Critical Accounting Policies discussed in Managements Discussion and Analysis of
Financial Condition and Results of Operations included in Berkshires Annual Report on Form 10-K
for the year ended December 31, 2006 for additional discussion regarding these estimates.
Berkshires Consolidated Balance Sheet as of September 30, 2007 includes estimated liabilities
for unpaid losses from property and casualty insurance and reinsurance contracts of $56.3 billion,
an increase of $8.7 billion from December 31, 2006. The increase in unpaid loss reserves was
principally due to the Equitas reinsurance transaction that became effective on March 30, 2007.
The reserves associated with this reinsurance transaction are considered to be long-tailed and
include significant amounts related to asbestos, environmental, mass tort as well as other losses.
Due to the inherent uncertainties in the process of establishing loss reserve amounts, the actual
ultimate claim amounts will likely differ from the currently recorded amounts. A very small
percentage change in estimates of this magnitude will result in a material effect on reported
earnings. The effects from changes in these estimates are recorded as a component of losses
incurred in the period of the change.
Unamortized deferred charges on retroactive reinsurance policies assumed totaled $3.9 billion
at September 30, 2007. Significant changes in either the timing or ultimate amount of loss payments
related to retroactive reinsurance contracts may have a significant effect on unamortized deferred
charges and the amount of periodic amortization.
25
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Critical Accounting Policies (Continued)
Berkshires Consolidated Balance Sheet as of September 30, 2007 includes goodwill of acquired
businesses of $32.7 billion. A significant amount of judgment is required in performing goodwill
impairment tests. Such tests include periodically determining or reviewing the estimated fair
value of Berkshires reporting units. There are several methods of estimating a reporting units
fair value, including market quotations, asset and liability fair values and other valuation
techniques, such as discounted projected future net earnings and multiples of earnings. If the
carrying amount of a reporting unit, including goodwill, exceeds the estimated fair value, then
individual assets, including identifiable intangible assets, and liabilities of the reporting unit
are estimated at fair value. The excess of the estimated fair value of the reporting unit over the
estimated fair value of net assets would establish the implied value of goodwill. The excess of
the recorded amount of goodwill over the implied value is then charged to earnings as an impairment
loss.
Berkshires consolidated financial position reflects very significant amounts of invested
assets and derivative contract assets and liabilities that are measured at fair value. A
substantial portion of invested assets are carried at fair value based upon current market
quotations and, when not available, based upon fair value pricing matrices or models. Derivative
contract values reflect estimates of the amounts at which the contracts could be settled based upon
varying levels of observable market information. Certain of Berkshires fixed maturity securities
are not actively traded in the securities markets and loans and finance receivables of Berkshires
finance businesses are not traded at all. Considerable judgment is required in determining the
assumptions used in certain pricing models, including interest rate, loan prepayment speed, credit
risk and liquidity risk assumptions. Significant changes in these assumptions may have a
significant effect on fair values.
Information concerning recently issued accounting pronouncements which are not yet effective
is included in Note 15 to the Interim Consolidated Financial Statements. Berkshire does not
currently expect any of the recently issued accounting pronouncements to have a material effect on
its financial condition.
Forward-Looking Statements
Investors are cautioned that certain statements contained in this document as well as some
statements in periodic press releases and some oral statements of Berkshire officials during
presentations about Berkshire are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 (the Act). Forward-looking statements include
statements which are predictive in nature, which depend upon or refer to future events or
conditions, which include words such as expects, anticipates, intends, plans, believes,
estimates or similar expressions. In addition, any statements concerning future financial
performance (including future revenues, earnings or growth rates), ongoing business strategies or
prospects and possible future Berkshire actions, which may be provided by management, are also
forward-looking statements as defined by the Act. Forward-looking statements are based on current
expectations and projections about future events and are subject to risks, uncertainties and
assumptions about Berkshire, economic and market factors and the industries in which Berkshire does
business, among other things. These statements are not guaranties of future performance and
Berkshire has no specific intention to update these statements.
Actual events and results may differ materially from those expressed or forecasted in
forward-looking statements due to a number of factors. The principal important risk factors that
could cause Berkshires actual performance and future events and actions to differ materially from
such forward-looking statements include, but are not limited to, changes in market prices of
Berkshires significant equity investees, the occurrence of one or more catastrophic events, such
as an earthquake, hurricane or act of terrorism that causes losses insured by Berkshires insurance
subsidiaries, changes in insurance laws or regulations, changes in Federal income tax laws and
changes in general economic and market factors that affect the prices of securities or the
industries in which Berkshire and its affiliates do business.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Reference is made to Berkshires most recently issued Annual Report and in particular the
Market Risk Disclosures included in Managements Discussion and Analysis of Financial Condition
and Results of Operations. As of September 30, 2007, management believes there are no material
changes in the market risks described in Berkshires most recently issued Annual Report on Form
10-K for the year ended December 31, 2006.
Item 4. Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, the Corporation
carried out an evaluation, under the supervision and with the participation of the Corporations
management, including the Chairman (Chief Executive Officer) and the Vice President-Treasurer
(Chief Financial Officer), of the effectiveness of the design and operation of the Corporations
disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that
evaluation, the Chairman (Chief Executive Officer) and the Vice President-Treasurer (Chief
Financial Officer) concluded that the Corporations disclosure controls and procedures are
effective in timely alerting them to material information relating to the Corporation (including
its consolidated subsidiaries) required to be included in the Corporations periodic SEC filings.
During the quarter, there have been no significant changes in the Corporations internal control
over financial reporting or in other factors that could significantly affect internal control over
financial reporting.
26
Part II Other Information
Item 1. Legal Proceedings
Berkshire and its subsidiaries are parties in a variety of legal actions arising out of the
normal course of business. In particular, such legal actions affect Berkshires insurance and
reinsurance businesses. Such litigation generally seeks to establish liability directly through
insurance contracts or indirectly through reinsurance contracts issued by Berkshire subsidiaries.
Plaintiffs occasionally seek punitive or exemplary damages. Berkshire does not believe that such
normal and routine litigation will have a material effect on its financial condition or results of
operations. Berkshire and certain of its subsidiaries are also involved in other kinds of legal
actions, some of which assert or may assert claims or seek to impose fines and penalties in
substantial amounts. Reference is made to Note 21 to the Consolidated Financial Statements
included in the Annual Report on Form 10-K for the year ended December 31, 2006 for detailed
discussion of such actions. Material developments related to such actions since December 31, 2006
are discussed below.
Governmental Investigations In April 2005, the Australian Prudential Regulation Authority
(APRA) announced an investigation involving financial or finite reinsurance transactions by
General Reinsurance Australia Limited (GRA), a subsidiary of General Reinsurance. An inspector
was appointed by APRA under section 52 of the Insurance Act 1973 to conduct an investigation of
GRAs financial or finite reinsurance business. GRA and General Reinsurance cooperated fully with
this investigation. On June 28, 2007, APRA announced that it had concluded its investigation and
imposed a condition on GRAs license that requires it to maintain a majority of independent
directors on its local board.
Civil Litigation Insurance Brokerage Antitrust Litigation Berkshire, General Re and
General Reinsurance were named as defendants in this multidistrict litigation (In Re: Insurance
Brokerage Antitrust Litigation, MDL No. 1663 (D.N.J.)) in which plaintiffs alleged an industry-wide
scheme on the part of commercial insurance brokers and insurance companies to defraud a purported
class of insurance purchasers through bid-rigging and contingent commission arrangements. On April
5, 2007, the Court dismissed all federal antitrust and RICO claims against Berkshire, General Re
and General Reinsurance. On May 21, 2007, the plaintiffs concluded a settlement agreement with
Berkshire, General Re and General Reinsurance that fully and finally resolved this litigation, as
between these settling parties, without payment or admission of any liability on the part of these
settling defendants.
Item 1A. Risk Factors
Berkshires significant business risks are described in Item 1A to Form 10-K for the year
ended December 31, 2006 to which reference is made herein. Management believes there are no
significant changes in risk factors since December 31, 2006.
Item 6. Exhibits
a. Exhibits
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31.1 |
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Rule 13a-14(a)/15d-14(a) Certifications |
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31.2 |
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Rule 13a-14(a)/15d-14(a) Certifications |
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32.1 |
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Section 1350 Certifications |
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32.2 |
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Section 1350 Certifications |
SIGNATURE
Pursuant to the requirement of the Securities Exchange Act of 1934, the Registrant has duly
caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
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BERKSHIRE HATHAWAY INC.
(Registrant)
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Date November 2, 2007 |
/s/ Marc D. Hamburg
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(Signature) |
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Marc D. Hamburg, Vice President
and Principal Financial Officer |
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