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| BRK-A > SEC Filings for BRK-A > Form 10-Q on 8-May-2009 | All Recent SEC Filings |
8-May-2009
Quarterly Report
Results of Operations
Net earnings (loss) attributable to Berkshire are disaggregated in the table
that follows. Amounts are after deducting income taxes and exclude earnings
attributable to noncontrolling interests. Amounts are in millions.
First Quarter
2009 2008
Insurance - underwriting $ 219 $ 181
Insurance - investment income 1,033 802
Utilities and energy 203 316
Manufacturing, service and retailing 258 487
Finance and financial products 78 147
Other (86 ) (2 )
Investment and derivative gains/losses (3,239 ) (991 )
Net earnings (loss) attributable to Berkshire $ (1,534 ) $ 940
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Berkshire's 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 Berkshire's corporate headquarters in the day-to-day business activities of the operating businesses. Berkshire's 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 15 to the Interim Condensed Consolidated Financial Statements) should be read in conjunction with this discussion.
The declines in global economic activity over the last half of 2008 (and in the fourth quarter in particular) continued through the first quarter of 2009. Berkshire's operating results for the first quarter reflect those declines. Earnings of most of Berkshire's diverse group of manufacturing, service and retailing businesses for the first quarter of 2009 declined compared to the first quarter of 2008. The effects from the current worldwide economic recession resulted in lower sales volume, revenues and profit margins as consumers have significantly curtailed spending, particularly for discretionary items.
Prices for equity securities also experienced significant declines over the first quarter of 2009, which negatively impacted the fair value of Berkshire's equity investments (particularly in financial institutions). After-tax investment and derivative losses of $3.2 billion were included in earnings and primarily related to high yield credit default contracts, dispositions of certain equity securities and non-cash other-than-temporary impairment charges with respect to certain equity securities. The unrealized appreciation in Berkshire's equity investment portfolio declined approximately $4.9 billion, after-tax, during the first quarter of 2009. However, as of May 7, the unrealized appreciation of such investments increased approximately $5.0 billion, after-tax, from the amount as of March 31. Berkshire also experienced a number of losses under its high yield credit default contracts as underlying issuers (who are usually highly leveraged) defaulted as a result of the slumping economy.
In response to the crises in the financial and capital markets and global recession, the U.S. and other governments around the world are taking measures to stabilize financial institutions, regulate markets (including over-the-counter derivatives markets) and stimulate economic activity. While management hopes such actions will prove successful, the potential impact on Berkshire is not clear at this time. It is expected that the current economic conditions will persist at least through 2009 before meaningful improvements become evident. Berkshire's operating companies have taken and will continue to take cost reduction actions to manage through the current economic situation. Management believes that the economic franchises of Berkshire's business operations remain intact and that operating results will ultimately return to more normal historical levels, although it cannot predict the timing of a recovery.
Insurance -Underwriting
Berkshire's management views insurance businesses as possessing two distinct operations - underwriting and investing. Underwriting decisions are the responsibility of the unit managers; investing, with limited exception, is the responsibility of Berkshire's Chairman and CEO, Warren E. Buffett. Accordingly, Berkshire evaluates performance of underwriting operations without any allocation of investment income.
Berkshire's principal insurance and reinsurance underwriting units are:
(1) GEICO, (2) General Re, (3) Berkshire Hathaway Reinsurance Group and
(4) Berkshire Hathaway Primary Group. Through General Re, Berkshire also
reinsures life and health risks.
Item 2. Management's 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 produce significant volatility in periodic underwriting results. A key marketing strategy followed by all of the insurance businesses is the maintenance of extraordinary capital strength. Statutory surplus of Berkshire's insurance businesses was approximately $51 billion at December 31, 2008. 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 the unique needs of insurance and reinsurance buyers.
A summary follows of underwriting results from Berkshire's insurance businesses. Amounts are in millions.
First Quarter
2009 2008
Underwriting gain (loss) attributable to:
GEICO $ 148 $ 186
General Re (16 ) 42
Berkshire Hathaway Reinsurance Group 203 29
Berkshire Hathaway Primary Group 4 25
Pre-tax underwriting gain 339 282
Income taxes and noncontrolling interests 120 101
Net underwriting gain $ 219 $ 181
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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 GEICO's 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. GEICO's underwriting results are summarized in the table below. Dollar amounts are in millions.
First Quarter
2009 2008
Amount % Amount %
Premiums earned $ 3,261 100.0 $ 3,032 100.0
Losses and loss adjustment expenses 2,514 77.1 2,285 75.4
Underwriting expenses 599 18.4 561 18.5
Total losses and expenses 3,113 95.5 2,846 93.9
Pre-tax underwriting gain $ 148 $ 186
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Premiums earned in the first quarter of 2009 were $3,261 million, an increase of $229 million (7.6%) over the first quarter of 2008. The growth in premiums earned for voluntary auto was 7.4%, reflecting a 10.3% increase in policies-in-force, partially offset by a slight decline in average premiums per policy compared to 2008. The number of policies-in-force increased in 2009 as more consumers switched to GEICO to save money, which management believes is in response to the economic recession. The weakening economy is also believed to be causing customers to raise policy deductibles and reduce coverage in order to save money. Policies-in-force over the last twelve months increased 8% in the preferred risk auto markets and 16% in the standard and nonstandard auto markets. Voluntary auto new business sales in the first quarter of 2009 increased 32% versus 2008. Voluntary auto policies-in-force at March 31, 2009 were 430,000 greater than at December 31, 2008.
Losses and loss adjustment expenses incurred in the first quarter of 2009 were $2,514 million, an increase of $229 million (10.0%) over the first quarter of 2008. The loss ratio was 77.1% in the first quarter of 2009 compared to 75.4% in 2008. The higher loss ratio in 2009 reflected an overall increase in average claim severities and the effect of lower average premiums per policy, partially offset by overall declines in claim frequencies. Average injury severities in 2009 increased in the four to seven
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Insurance-Underwriting (Continued)
GEICO (Continued)
percent range while average physical damage severities increased in the three to five percent range over 2008. Claims frequencies in 2009 for physical damage coverages decreased in the five to seven percent range from 2008 while frequencies for injury coverages decreased in the two to four percent range. Incurred losses from catastrophe events for the first quarter of 2009 and 2008 were insignificant. Management anticipates that loss ratios over the remainder of 2009 will be generally higher than in 2008, resulting in comparatively lower underwriting gains. Underwriting expenses in the first quarter of 2009 increased 6.8% over 2008 to $599 million due to higher policy issuance costs and increased salary and employee benefit expenses.
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 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 underwriting gains in essentially all product lines. Underwriting performance is not evaluated based upon market share and underwriters are instructed to reject inadequately priced risks. General Re's underwriting results are summarized in the following table. Amounts are in millions.
First Quarter
Premiums earned Pre-tax underwriting gain (loss)
2009 2008 2009 2008
Property/casualty $ 763 $ 1,038 $ (23 ) $ 15
Life/health 616 666 7 27
$ 1,379 $ 1,704 $ (16 ) $ 42
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Property/casualty
Property/casualty premiums earned in the first quarter of 2009 and 2008 were $763 million and $1,038 million, respectively. Premiums earned in the first quarter of 2008 included $205 million with respect to a reinsurance-to-close transaction that increased General Re's economic interest in the runoff of Lloyd's Syndicate 435's 2000 year of account from 39% to 100%. Under this transaction, General Re also assumed a corresponding amount of net loss reserves. As a result, the transaction had no impact on net underwriting gains in the first quarter of 2008. There was no similar transaction in 2009.
Excluding the effect of the reinsurance-to-close transaction mentioned above and the effects of currency rate changes, premiums earned in the first quarter of 2009 were relatively unchanged from 2008. Premium volume in 2009 may remain flat or slightly increase over 2008 if current market conditions continue.
Underwriting results in the first quarter of 2009 included $34 million of underwriting losses from property business partially offset by $11 million of underwriting gains from casualty/workers' compensation business. The property results in 2009 included $71 million of catastrophe losses primarily from winter storm Klaus in Europe and the Victoria bushfires in Australia. The timing and magnitude of catastrophe and large individual losses produces significant volatility in periodic underwriting results. The pre-tax underwriting gains from casualty/workers' compensation business reflects favorable run-off of prior years' loss reserves.
Underwriting results in the first quarter of 2008 produced an underwriting gain of $15 million which included $46 million of property gains and $31 million of casualty and workers' compensation losses. Property results for the first quarter of 2008 included a $32 million loss from winter storm Emma in Germany.
Life/health
Premiums earned in the first quarter of 2009 were $616 million, a decrease of $50 million (7.5%) from 2008. Excluding the effects of changes in foreign currency exchange rates, premiums earned in 2009 increased by 3.9% over the first quarter of 2008. The increase in premium volume was primarily due to increased life business in the international segment. Underwriting results for the life/health operations produced underwriting gains of $7 million and $27 million in the first quarter of 2009 and 2008, respectively. The decline in underwriting gains in 2009 was primarily due to higher mortality rates in the life business.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Insurance-Underwriting (Continued)
Berkshire Hathaway Reinsurance Group
The Berkshire Hathaway Reinsurance Group ("BHRG") underwrites excess-of-loss reinsurance and quota-share coverages for insurers and reinsurers worldwide. BHRG's 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 Lloyd's syndicates, as well as property, aviation and workers' compensation programs. BHRG's underwriting results are summarized in the table below. Amounts are in millions.
First Quarter
Premiums earned Pre-tax underwriting gain (loss)
2009 2008 2009 2008
Catastrophe and individual risk $ 254 $ 217 $ 153 $ 174
Retroactive reinsurance 1,809 - (107 ) (121 )
Other multi-line 1,024 767 157 (24 )
$ 3,087 $ 984 $ 203 $ 29
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Premiums earned in the first quarter of 2009 from catastrophe and individual risk contracts increased $37 million (17%) versus the first quarter of 2008. The level of business written in a given period will vary significantly due to changes in market conditions and management's assessment of the adequacy of premium rates. Underwriting results for the first quarter of 2009 and 2008 reflected no significant catastrophe losses.
Premiums from retroactive reinsurance in the first quarter of 2009 included 2 billion Swiss Francs ("CHF") (approximately $1.7 billion) from an adverse loss development contract with Swiss Reinsurance Company Limited and its affiliates ("Swiss Re") covering substantially all of Swiss Re's non-life insurance losses and allocated loss adjustment expenses for loss events occurring prior to January 1, 2009. The Swiss Re contract provides aggregate limits of indemnification of 5 billion CHF in excess of a retention of Swiss Re's reported loss reserves (58.725 billion CHF) less 2 billion CHF. The impact on underwriting results from this contract was negligible as the premiums earned were offset by a corresponding amount of losses incurred.
Retroactive policies generally provide very large, but limited, indemnification of unpaid losses and loss adjustment expenses with respect to past loss events that are generally expected to be paid over long periods of time. The underwriting losses from retroactive policies primarily represent the periodic amortization of deferred charges established at the inception of the contracts. At March 31, 2009, unamortized deferred charges for all of BHRG's retroactive contracts were approximately $3.8 billion and gross unpaid losses were approximately $18.4 billion.
Premiums earned in the first quarter of 2009 from other multi-line business were $1,024 million, an increase of $257 million over the first quarter of 2008. Premiums earned in the first quarter included $665 million in 2009 and $139 million in 2008 from the five-year 20% quota-share contract with Swiss Re covering substantially all of Swiss Re's property/casualty risks incepting from January 1, 2008. Excluding the Swiss Re quota-share contract, other multi-line business premiums earned declined $269 million (43%) versus 2008, primarily due to lower property volume. Other multi-line reinsurance produced an underwriting gain of $157 million in the first quarter of 2009 versus a $24 million loss in 2008. Underwriting results in 2009 reflected underwriting gains under the Swiss Re quota-share contract, improved loss ratios for property business and increased foreign currency transaction gains on reinsurance liabilities denominated in foreign currencies.
Berkshire Hathaway Primary Group
Premiums earned in the first quarter by Berkshire's various primary insurers were $456 million in 2009 and $489 million in 2008. For the first quarter, Berkshire's primary insurers produced underwriting gains of $4 million in 2009 and $25 million in 2008. Underwriting results in the first quarter of 2009 were lower for most of the primary insurance operations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Insurance-Investment Income
A summary of net investment income of Berkshire's insurance operations follows.
Amounts are in millions.
First Quarter
2009 2008
Investment income before taxes, noncontrolling interests and equity
method earnings $ 1,298 $ 1,089
Income taxes and noncontrolling interests 348 287
Net investment income before equity method earnings 950 802
Equity method earnings 83 -
Net investment income $ 1,033 $ 802
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Investment income consists of interest and dividends earned on cash equivalents and fixed maturity and equity investments of Berkshire's insurance businesses. Pre-tax investment income earned in the first quarter of 2009 exceeded amounts earned in 2008 by $209 million. The increase in investment income in 2009 primarily reflected earnings from several large investments made during the fourth quarter of 2008, partially offset by lower earnings on cash and cash equivalents due to lower interest rates and lower average cash balances in 2009.
In October 2008, Berkshire subsidiaries acquired the Wrigley, Goldman Sachs and General Electric securities for an aggregate cost of $14.5 billion and in March 2009 Berkshire invested 3 billion CHF in a 12% convertible perpetual instrument of Swiss Re. In addition, on April 1, 2009, Berkshire invested $3 billion in an 8.5% Cumulative Convertible Perpetual Preferred Stock of The Dow Chemical Company. See Note 6 to the Interim Condensed Consolidated Financial Statements. Interest and dividends from these securities will be approximately $2 billion per annum, which is expected to produce comparative increases in investment income over the remainder of 2009. However, dividends from Berkshire's investments in Wells Fargo and U.S. Bancorp common stock will be comparatively lower in 2009 as a result of dividend rate cuts announced by those companies.
Beginning in 2009, investment income also includes earnings from equity method investments (BNSF and Moody's). Equity method earnings represents Berkshire's proportionate share of the net earnings of these companies. Dividends earned on these investments in the first quarter of 2009 were $36 million, but were not reflected in Berkshire's earnings through the application of the equity method. For the first quarter of 2008, dividends earned from these investments ($25 million) were included in investment income.
A summary of cash and investments held in Berkshire's insurance businesses follows. Amounts are in millions.
March 31, Dec. 31, March 31,
2009 2008 2008
Cash and cash equivalents $ 16,828 $ 18,845 $ 26,086
Equity securities 37,464 48,892 72,283
Fixed maturity securities 29,138 26,932 31,098
Other * 25,152 21,535 -
$ 108,582 $ 116,204 $ 129,467
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* Other investments include the investments in Wrigley, Goldman Sachs, General Electric and Swiss Re as well as investments in BNSF and Moody's, which beginning as of December 31, 2008 are accounted for under the equity method. At March 31, 2008, investments in BNSF and Moody's are included in equity securities.
Fixed maturity securities as of March 31, 2009 were as follows. Amounts are in millions.
Amortized Unrealized Fair
Cost Gains/Losses Value
U.S. Treasury, government corporations and agencies $ 2,522 $ 95 $ 2,617
States, municipalities and political subdivisions 4,050 268 4,318
Foreign governments 9,274 299 9,573
Corporate bonds, investment grade 5,456 76 5,532
Corporate bonds, non-investment grade 5,340 (1,006 ) 4,334
Mortgage-backed securities 2,765 (1 ) 2,764
$ 29,407 $ (269 ) $ 29,138
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Insurance-Investment Income (Continued)
All U.S. government obligations are rated AAA by the major rating agencies and approximately 85% of all state, municipal and political subdivisions, foreign government obligations and mortgage-backed securities were rated AA or higher. Non-investment grade securities represent securities that are rated below BBB- or Baa3.
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 was approximately $60 billion at March 31, 2009 and $58 billion as of December 31, 2008. The cost of float, as represented by the ratio of pre-tax underwriting gain or loss to average float, was negative in 2009 and 2008, as Berkshire's insurance businesses generated underwriting gains in each period.
Utilities and Energy ("MidAmerican")
Revenues and earnings from MidAmerican are summarized below. Amounts are in millions.
First Quarter
Revenues Earnings
2009 2008 2009 2008
MidAmerican Energy Company $ 1,138 $ 1,378 $ 108 $ 134
PacifiCorp 1,131 1,107 184 168
Natural gas pipelines 340 344 192 192
U.K. utilities 193 289 68 120
Real estate brokerage 178 245 (13 ) (19 )
Other (31 ) 31 (156 ) 4
$ 2,949 $ 3,394
Earnings before corporate interest and income taxes 383 599
Interest, other than to Berkshire (80 ) (83 )
Interest on Berkshire junior debt (18 ) (23 )
Income taxes and noncontrolling interests (68 ) (151 )
Net earnings $ 217 $ 342
Earnings attributable to Berkshire * $ 203 $ 316
Debt owed to others at March 31 $ 19,731 $ 19,640
Debt owed to Berkshire at March 31 $ 587 $ 821
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* Net of noncontrolling interests and includes interest earned by Berkshire (net of related income taxes).
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