e10vq
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(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, 2005
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
BERKSHIRE HATHAWAY INC.
(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
incorporation or organization)
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(I.R.S. Employer Identification Number) |
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 an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). YES þ NO o
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). YES o NO þ
Number of shares of common stock outstanding as of October 28, 2005:
Class A 1,261,219
Class B 8,370,898
BERKSHIRE HATHAWAY INC.
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Page No. |
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2 |
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3 |
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4 |
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5-14 |
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15-26 |
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26 |
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26 |
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27-30 |
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31 |
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31 |
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32-33 |
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34-35 |
1
Part I Financial Information
Item 1. Financial Statements
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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2005 |
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2004 |
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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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$ |
41,143 |
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$ |
40,020 |
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Investments: |
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Fixed maturity securities |
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24,807 |
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22,846 |
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Equity securities |
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45,263 |
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37,717 |
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Other |
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1,999 |
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2,346 |
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Receivables |
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13,104 |
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11,291 |
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Inventories |
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4,031 |
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3,842 |
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Property, plant and equipment |
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7,026 |
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6,516 |
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Goodwill of acquired businesses |
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23,652 |
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23,012 |
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Deferred charges reinsurance assumed |
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2,431 |
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2,727 |
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Other |
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4,615 |
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4,508 |
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168,071 |
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154,825 |
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Investments in MidAmerican Energy Holdings Company |
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4,075 |
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3,967 |
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Finance and Financial Products: |
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Cash and cash equivalents |
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4,889 |
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3,407 |
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Investments in fixed maturity securities |
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3,531 |
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8,459 |
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Trading account assets |
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954 |
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4,234 |
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Funds provided as collateral |
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635 |
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1,649 |
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Loans and finance receivables |
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11,175 |
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9,175 |
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Other |
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3,380 |
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3,158 |
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24,564 |
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30,082 |
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$ |
196,710 |
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$ |
188,874 |
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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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$ |
48,206 |
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$ |
45,219 |
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Unearned premiums |
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6,882 |
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6,283 |
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Life and health insurance benefits |
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3,186 |
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3,154 |
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Other policyholder liabilities |
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3,887 |
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3,955 |
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Accounts payable, accruals and other liabilities |
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8,968 |
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7,500 |
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Income taxes, principally deferred |
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11,409 |
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12,247 |
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Notes payable and other borrowings |
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3,465 |
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3,450 |
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86,003 |
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81,808 |
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Finance and Financial Products: |
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Securities sold under agreements to repurchase |
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1,302 |
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5,773 |
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Trading account liabilities |
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5,206 |
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4,794 |
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Funds held as collateral |
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414 |
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1,619 |
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Notes payable and other borrowings |
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10,693 |
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5,387 |
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Other |
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2,773 |
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2,835 |
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20,388 |
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20,408 |
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Total liabilities |
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106,391 |
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102,216 |
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Minority shareholders interests |
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801 |
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758 |
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Shareholders equity: |
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Common stock Class A, $5 par value and Class B, $0.1667 par value |
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8 |
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8 |
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Capital in excess of par value |
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26,362 |
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26,268 |
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Accumulated other comprehensive income |
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20,561 |
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20,435 |
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Retained earnings |
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42,587 |
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39,189 |
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Total shareholders equity |
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89,518 |
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85,900 |
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$ |
196,710 |
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$ |
188,874 |
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See accompanying Notes to Interim Consolidated Financial Statements
2
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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2005 |
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2004 |
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2005 |
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2004 |
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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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$ |
5,779 |
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$ |
5,354 |
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$ |
16,306 |
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$ |
15,837 |
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Sales and service revenues |
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11,947 |
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11,396 |
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33,793 |
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32,508 |
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Interest, dividend and other investment income |
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903 |
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708 |
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2,539 |
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2,032 |
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Investment gains/losses |
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269 |
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331 |
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667 |
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1,010 |
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18,898 |
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17,789 |
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53,305 |
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51,387 |
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Finance and Financial Products: |
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Interest income |
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376 |
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262 |
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1,144 |
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|
938 |
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Investment gains/losses |
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458 |
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435 |
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(306 |
) |
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141 |
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Other |
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801 |
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686 |
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2,152 |
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1,886 |
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1,635 |
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1,383 |
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2,990 |
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2,965 |
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20,533 |
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19,172 |
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56,295 |
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54,352 |
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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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6,444 |
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4,590 |
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13,459 |
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11,756 |
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Insurance underwriting expenses |
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1,132 |
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1,090 |
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3,574 |
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3,460 |
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Cost of sales and services |
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9,973 |
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9,529 |
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28,086 |
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27,145 |
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Selling, general and administrative expenses |
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1,289 |
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1,231 |
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3,822 |
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3,654 |
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Interest expense |
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39 |
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31 |
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|
109 |
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|
100 |
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18,877 |
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16,471 |
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49,050 |
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46,115 |
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Finance and Financial Products: |
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Interest expense |
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|
154 |
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|
81 |
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|
445 |
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|
490 |
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Other |
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|
808 |
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|
688 |
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2,220 |
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1,810 |
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|
962 |
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|
769 |
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|
2,665 |
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|
2,300 |
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19,839 |
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17,240 |
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|
51,715 |
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|
48,415 |
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Earnings before income taxes and equity in earnings of
MidAmerican Energy Holdings Company |
|
|
694 |
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|
1,932 |
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|
4,580 |
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|
5,937 |
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Equity in earnings of MidAmerican Energy Holdings Company |
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|
141 |
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(138 |
) |
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|
382 |
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|
71 |
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Earnings before income taxes and minority interests |
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|
835 |
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1,794 |
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4,962 |
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|
6,008 |
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Income taxes |
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|
232 |
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|
649 |
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1,523 |
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1,999 |
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Minority shareholders interests |
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|
17 |
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8 |
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|
41 |
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|
40 |
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Net earnings |
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$ |
586 |
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$ |
1,137 |
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$ |
3,398 |
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$ |
3,969 |
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Average common shares outstanding * |
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1,539,898 |
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1,537,904 |
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1,539,554 |
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1,537,538 |
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Net earnings per common share * |
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$ |
381 |
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$ |
739 |
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$ |
2,207 |
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$ |
2,581 |
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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
3
BERKSHIRE HATHAWAY INC.
and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
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First Nine Months |
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|
2005 |
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2004 |
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|
(Unaudited) |
|
Net cash flows from operating activities |
|
$ |
5,704 |
|
|
$ |
5,077 |
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|
Cash flows from investing activities: |
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Purchases of securities with fixed maturities |
|
|
(6,343 |
) |
|
|
(4,348 |
) |
Purchases of equity securities |
|
|
(6,303 |
) |
|
|
(1,147 |
) |
Proceeds from sales of securities with fixed maturities |
|
|
2,142 |
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|
|
3,931 |
|
Proceeds from redemptions and maturities of securities with fixed maturities |
|
|
3,969 |
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|
|
2,974 |
|
Proceeds from sales of equity securities |
|
|
1,112 |
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|
|
1,466 |
|
Finance loans and other investments purchased |
|
|
(1,982 |
) |
|
|
(2,184 |
) |
Principal collections on finance loans and other investments |
|
|
1,448 |
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|
|
2,486 |
|
Acquisitions of businesses, net of cash acquired |
|
|
(1,822 |
) |
|
|
(377 |
) |
Additions of property, plant and equipment |
|
|
(972 |
) |
|
|
(857 |
) |
Other |
|
|
327 |
|
|
|
152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from investing activities |
|
|
(8,424 |
) |
|
|
2,096 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from borrowings of finance businesses |
|
|
5,246 |
|
|
|
1,627 |
|
Proceeds from other borrowings |
|
|
469 |
|
|
|
258 |
|
Repayments of borrowings of finance businesses |
|
|
(74 |
) |
|
|
(1,233 |
) |
Repayments of other borrowings |
|
|
(572 |
) |
|
|
(448 |
) |
Change in short term borrowings of finance businesses |
|
|
89 |
|
|
|
84 |
|
Change in other short term borrowings |
|
|
123 |
|
|
|
(398 |
) |
Other |
|
|
44 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from financing activities |
|
|
5,325 |
|
|
|
(113 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents |
|
|
2,605 |
|
|
|
7,060 |
|
Cash and cash equivalents at beginning of year * |
|
|
43,427 |
|
|
|
35,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of first nine months * |
|
$ |
46,032 |
|
|
$ |
43,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
2,595 |
|
|
$ |
1,724 |
|
Interest of finance and financial products businesses |
|
|
379 |
|
|
|
384 |
|
Other interest |
|
|
121 |
|
|
|
115 |
|
|
|
|
|
|
|
|
|
|
* Cash and cash equivalents are comprised of the following: |
|
|
|
|
|
|
|
|
Beginning
of year
Insurance and Other |
|
$ |
40,020 |
|
|
$ |
31,262 |
|
Finance and Financial Products |
|
|
3,407 |
|
|
|
4,695 |
|
|
|
|
|
|
|
|
|
|
$ |
43,427 |
|
|
$ |
35,957 |
|
|
|
|
|
|
|
|
End of
first nine months
Insurance and Other |
|
$ |
41,143 |
|
|
$ |
38,130 |
|
Finance and Financial Products |
|
|
4,889 |
|
|
|
4,887 |
|
|
|
|
|
|
|
|
|
|
$ |
46,032 |
|
|
$ |
43,017 |
|
|
|
|
|
|
|
|
See accompanying Notes to Interim Consolidated Financial Statements
4
BERKSHIRE HATHAWAY INC.
and Subsidiaries
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
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 2004 have been reclassified to conform with 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 certain instances, as required by 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
power, good returns on equity, able and honest management and at sensible prices. Businesses with
these characteristics typically have market values that exceed net asset values, thus producing
goodwill for accounting purposes.
Effective June 30, 2005, Berkshire acquired 100% of Medical Protective Corporation (Med Pro)
from GE Insurance Solutions. Med Pro is one of the nations premier professional liability insurers for
physicians, dentists and other primary health care providers. On August 31, 2005, Berkshire
acquired 100% of Forest River, Inc., (Forest River) a leading manufacturer of leisure vehicles in
the U.S. The company manufactures a complete line of motorized and towable recreational vehicles,
utility trailers, buses, boats and manufactured houses.
Operating results of Med Pro and Forest River are consolidated with Berkshires results
beginning as of July 1, 2005 and September 1, 2005, respectively. Inclusion of Med Pros and
Forest Rivers results as of the beginning of 2004 would not have materially impacted Berkshires
consolidated results of operations as reported.
Note 3. Investments in MidAmerican Energy Holdings Company
Berkshire owns 900,942 shares of common stock and 41,263,395 shares of convertible preferred
stock of MidAmerican Energy Holdings Company (MidAmerican). Such investments were acquired for
an aggregate cost of $1,645 million and currently give Berkshire a 9.9% voting interest and an
83.8% economic interest in the equity of MidAmerican (80.5% on a diluted basis). As of September
30, 2005, Berkshire and certain of its subsidiaries also owned $1,356 million of MidAmericans 11%
non-transferable trust preferred securities. Walter Scott, Jr., a member of Berkshires Board of
Directors, controls approximately 88% of the voting interest in MidAmerican. While the convertible
preferred stock does not vote generally with the common stock in the election of directors, it does
give Berkshire the right to elect 20% of MidAmericans Board of Directors. See Note 3 to
Berkshires 2004 Consolidated Financial Statements for additional information concerning these
securities. Through the investments in common and convertible preferred stock of MidAmerican,
Berkshire has the ability to exercise significant influence on the operations of MidAmerican and
because the convertible preferred stock is, in substance, substantially equivalent to common stock,
Berkshire accounts for its investments in MidAmerican pursuant to the equity method.
The Energy Policy Act of 2005 (Act) was signed into law on August 8, 2005 and includes the
repeal of the Public Utility Holding Company Act of 1935 (PUHCA), effective in the first quarter
of 2006. Berkshire intends to convert its convertible preferred stock investment to common stock
upon the effective date (six months after the Act was signed into law) of the repeal of PUHCA and
after all regulatory approvals are obtained. Upon conversion, Berkshire will possess approximately
83.8% of the voting common stock interest and economic interests in MidAmerican. Thus, the accounts
of MidAmerican are presently expected to be consolidated in Berkshires Consolidated Financial
Statements no later than the first quarter of 2006. However, there will be no changes in
MidAmericans operations, management or capital structure as a result of the consolidation of
MidAmerican. Specifically, MidAmericans debt is currently not guaranteed by Berkshire and the
Company has no intention of guaranteeing any debt or obligations of MidAmerican in the future.
5
Notes To Interim Consolidated Financial Statements (Continued)
Note 3. Investments in MidAmerican Energy Holdings Company (Continued)
Equity in earnings of MidAmerican includes Berkshires proportionate share (83.8%) of
MidAmericans undistributed net earnings reduced by deferred taxes on such undistributed earnings
in accordance with SFAS 109, reflecting Berkshires expectation that such deferred taxes will be
payable as a consequence of dividends from MidAmerican. However, upon conversion of Berkshires
convertible preferred stock to voting common stock, Berkshire will include MidAmerican in its
consolidated Federal Income Tax Return and income taxes will not be payable as a consequence of
dividends from MidAmerican. No dividends from MidAmerican are likely for some time. Berkshires
share of MidAmericans interest expense (after-tax) on Berkshires investments in MidAmericans
trust preferred (debt) securities has been eliminated.
MidAmerican owns a combined electric and natural gas utility company in the United States, two
interstate natural gas pipeline companies in the United States, two electricity distribution
companies in the United Kingdom, a diversified portfolio of domestic and international electric
power projects and the second largest residential real estate brokerage firm in the United States.
In May 2005, MidAmerican reached a definitive agreement with Scottish Power plc to acquire its
indirect subsidiary, PacifiCorp, a regulated electric utility providing service to 1.6 million
customers in California, Idaho, Oregon, Utah, Washington and Wyoming. MidAmerican will purchase
all of the outstanding shares of PacifiCorp common stock for approximately $5.1 billion in cash.
It is currently expected that MidAmerican will issue $3.4 billion of additional capital stock to Berkshire.
The proceeds from the issuance of the capital stock by MidAmerican along with proceeds from the
planned issuance by MidAmerican of $1.7 billion of long-term
debt or other securities will be used to fund the
purchase. The acquisition is subject to customary closing conditions, including the approval of
the transaction by the shareholders of Scottish Power plc, which was received on July 22, 2005, and
the receipt of required state and federal approvals. The transaction is expected to be completed
in March 2006.
Condensed consolidated balance sheets of MidAmerican are as follows (in millions).
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Assets: |
|
|
|
|
|
|
|
|
Properties, plants, and equipment, net |
|
$ |
11,727 |
|
|
$ |
11,607 |
|
Goodwill |
|
|
4,190 |
|
|
|
4,307 |
|
Other assets |
|
|
4,219 |
|
|
|
3,990 |
|
|
|
|
|
|
|
|
|
|
$ |
20,136 |
|
|
$ |
19,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders equity: |
|
|
|
|
|
|
|
|
Debt, except debt owed to Berkshire |
|
$ |
10,280 |
|
|
$ |
10,528 |
|
Debt owed to Berkshire |
|
|
1,356 |
|
|
|
1,478 |
|
Other liabilities and minority interests |
|
|
5,254 |
|
|
|
4,927 |
|
|
|
|
|
|
|
|
|
|
|
16,890 |
|
|
|
16,933 |
|
Shareholders equity |
|
|
3,246 |
|
|
|
2,971 |
|
|
|
|
|
|
|
|
|
|
$ |
20,136 |
|
|
$ |
19,904 |
|
|
|
|
|
|
|
|
Condensed consolidated statements of earnings of MidAmerican for the third quarter and first
nine months of 2005 and 2004 are as follows (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
First Nine Months |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Operating revenue and other income |
|
$ |
1,783 |
|
|
$ |
1,576 |
|
|
$ |
5,285 |
|
|
$ |
4,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales and operating expenses |
|
|
1,188 |
|
|
|
999 |
|
|
|
3,559 |
|
|
|
3,231 |
|
Depreciation and amortization |
|
|
166 |
|
|
|
165 |
|
|
|
463 |
|
|
|
496 |
|
Interest expense debt held by Berkshire |
|
|
39 |
|
|
|
42 |
|
|
|
120 |
|
|
|
129 |
|
Other interest expense |
|
|
177 |
|
|
|
176 |
|
|
|
543 |
|
|
|
533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,570 |
|
|
|
1,382 |
|
|
|
4,685 |
|
|
|
4,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before taxes |
|
|
213 |
|
|
|
194 |
|
|
|
600 |
|
|
|
562 |
|
Income taxes and minority interests |
|
|
60 |
|
|
|
68 |
|
|
|
198 |
|
|
|
212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations |
|
|
153 |
|
|
|
126 |
|
|
|
402 |
|
|
|
350 |
|
Gain (loss) on discontinued operations |
|
|
2 |
|
|
|
(347 |
) |
|
|
5 |
|
|
|
(366 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
(loss) |
|
$ |
155 |
|
|
$ |
(221 |
) |
|
$ |
407 |
|
|
$ |
(16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
6
Notes To Interim Consolidated Financial Statements (Continued)
Note 3. Investments in MidAmerican Energy Holdings Company (Continued)
On September 10, 2004, MidAmericans management decided to cease operations of mineral
extraction facilities installed near certain geothermal energy generation sites (the Project), at
which proprietary processes were used to extract zinc, manganese, silica, and other elements from
geothermal brine and fluids. MidAmericans management concluded that the Project could not become
commercially viable. Consequently, a non-cash impairment charge of approximately $340 million,
after tax, was required to write-down assets of the Project, rights to quantities of extractable
minerals, and allocated goodwill to estimated net realizable value. MidAmerican incurred net
after-tax losses attributed to the Project of $27 million for the nine-month period ended September
30, 2004. Berkshires share of the non-cash impairment charge was $255 million after tax, and is
included in equity in earnings of MidAmerican Energy Holdings Company.
Note 4. Investments in fixed maturity securities
Data with respect to investments in fixed maturity securities, which are classified as
available-for-sale, are shown in the tabulation below (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance and other |
|
|
Finance and financial products |
|
|
|
Sept. 30, 2005 |
|
|
Dec. 31, 2004 |
|
|
Sept. 30, 2005 |
|
|
Dec. 31, 2004 |
|
Amortized cost |
|
$ |
23,102 |
|
|
$ |
20,600 |
|
|
$ |
1,925 |
|
|
$ |
6,315 |
|
Gross unrealized gains |
|
|
1,776 |
|
|
|
2,275 |
|
|
|
116 |
|
|
|
701 |
|
Gross unrealized losses |
|
|
(71 |
) |
|
|
(29 |
) |
|
|
(2 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
24,807 |
|
|
$ |
22,846 |
|
|
$ |
2,039 |
|
|
$ |
7,015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $1,421 million and $1,617 million at September 30, 2005, respectively. At
December 31, 2004, the carrying value and fair value of held-to-maturity securities totaled $1,424
million and $1,614 million, respectively. Gross unrealized losses at September 30, 2005 and
December 31, 2004 consisted primarily of securities whose amortized cost exceeded fair value for
less than twelve months.
Note 5. Investments in equity securities
Data with respect to investments in equity securities are shown in the tabulation below (in
millions).
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Total cost |
|
$ |
15,083 |
|
|
$ |
9,337 |
|
Gross unrealized gains |
|
|
30,536 |
|
|
|
28,380 |
|
Gross unrealized losses |
|
|
(356 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value |
|
$ |
45,263 |
|
|
$ |
37,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value: |
|
|
|
|
|
|
|
|
American Express Company |
|
$ |
7,623 |
|
|
$ |
8,546 |
|
The Coca-Cola Company |
|
|
8,638 |
|
|
|
8,328 |
|
Other equity securities |
|
|
29,002 |
|
|
|
20,843 |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
45,263 |
|
|
$ |
37,717 |
|
|
|
|
|
|
|
|
The fair value of American Express Company (AXP) as of September 30, 2005 excludes the value
associated with Ameriprise Financial Corporation (AMP), which was spun-off by AXP on September
30, 2005. At September 30, 2005, the fair value of AMP common stock ($1,086 million) is included
in other equity securities.
Effective October 1, 2005, Procter & Gamble (PG) completed its acquisition of The Gillette
Company (Gillette). In connection with the acquisition, Berkshire received 0.975 shares of PG in
exchange for each share of Gillette common stock held. Thus, Berkshire will record a non-cash
pre-tax investment gain of approximately $5 billion ($3.2 billion after deferred tax) during the
fourth quarter, which will be offset by a corresponding decrease in net unrealized appreciation of
investments included in shareholders equity as a component of accumulated other comprehensive
income. Accordingly, there will effectively be no change in Berkshires consolidated shareholders
equity as a result of this transaction.
Gross unrealized losses at September 30, 2005 consisted of securities whose cost exceeded fair
value for less than twelve months.
7
Notes To Interim Consolidated Financial Statements (Continued)
Note 6. Loans and Receivables
Receivables of insurance and other businesses are comprised of the following (in millions).
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Insurance premiums receivable |
|
$ |
4,690 |
|
|
$ |
3,968 |
|
Reinsurance recoverables |
|
|
2,830 |
|
|
|
2,556 |
|
Trade and other receivables |
|
|
5,926 |
|
|
|
5,225 |
|
Allowances for uncollectible accounts |
|
|
(342 |
) |
|
|
(458 |
) |
|
|
|
|
|
|
|
|
|
$ |
13,104 |
|
|
$ |
11,291 |
|
|
|
|
|
|
|
|
Loans and finance receivables of finance and financial products businesses are comprised of
the following (in millions).
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Consumer installment loans and finance receivables |
|
$ |
9,739 |
|
|
$ |
7,740 |
|
Commercial loans and finance receivables |
|
|
1,498 |
|
|
|
1,496 |
|
Allowances for uncollectible loans |
|
|
(62 |
) |
|
|
(61 |
) |
|
|
|
|
|
|
|
|
|
$ |
11,175 |
|
|
$ |
9,175 |
|
|
|
|
|
|
|
|
Note 7. Deferred income tax liabilities
The tax effects of temporary differences that give rise to significant portions of deferred
tax assets and deferred tax liabilities are shown below (in millions).
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Unrealized appreciation of investments |
|
$ |
11,252 |
|
|
$ |
11,020 |
|
Deferred charges reinsurance assumed |
|
|
854 |
|
|
|
955 |
|
Property, plant and equipment |
|
|
1,226 |
|
|
|
1,201 |
|
Investments |
|
|
540 |
|
|
|
497 |
|
Other |
|
|
831 |
|
|
|
677 |
|
|
|
|
|
|
|
|
|
|
|
14,703 |
|
|
|
14,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Unpaid losses and loss adjustment expenses |
|
|
(982 |
) |
|
|
(1,129 |
) |
Unearned premiums |
|
|
(419 |
) |
|
|
(388 |
) |
Other |
|
|
(1,686 |
) |
|
|
(1,659 |
) |
|
|
|
|
|
|
|
|
|
|
(3,087 |
) |
|
|
(3,176 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability |
|
$ |
11,616 |
|
|
$ |
11,174 |
|
|
|
|
|
|
|
|
Note 8. Notes payable and other borrowings
Notes payable and other borrowings of Berkshire and its subsidiaries are summarized below.
Amounts are in millions.
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Insurance and other: |
|
|
|
|
|
|
|
|
Issued by Berkshire: |
|
|
|
|
|
|
|
|
SQUARZ notes due 2007 |
|
$ |
336 |
|
|
$ |
400 |
|
Investment agreements due 2007-2033 |
|
|
668 |
|
|
|
406 |
|
Issued by subsidiaries and guaranteed by Berkshire: |
|
|
|
|
|
|
|
|
Commercial paper and other short-term borrowings |
|
|
1,258 |
|
|
|
1,139 |
|
Other debt due 2006-2035 |
|
|
315 |
|
|
|
315 |
|
Issued by subsidiaries and not guaranteed by Berkshire due 2005-2041 |
|
|
888 |
|
|
|
1,190 |
|
|
|
|
|
|
|
|
|
|
$ |
3,465 |
|
|
$ |
3,450 |
|
|
|
|
|
|
|
|
8
Notes To Interim Consolidated Financial Statements (Continued)
Note
8. Notes payable and other borrowings (Continued)
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Finance and financial products: |
|
|
|
|
|
|
|
|
Issued by Berkshire Hathaway Finance Corporation and guaranteed by Berkshire: |
|
|
|
|
|
|
|
|
Issued prior to 2005: |
|
|
|
|
|
|
|
|
Notes due 2007-2014 |
|
$ |
3,595 |
|
|
$ |
3,594 |
|
Issued in 2005: |
|
|
|
|
|
|
|
|
Floating rate notes due 2008 |
|
|
2,046 |
|
|
|
|
|
4.125% notes due 2010 |
|
|
1,494 |
|
|
|
|
|
4.75% notes due 2012 |
|
|
695 |
|
|
|
|
|
4.85% notes due 2015 |
|
|
994 |
|
|
|
|
|
Issued by other subsidiaries and guaranteed by Berkshire due 2005-2027 |
|
|
449 |
|
|
|
344 |
|
Issued by subsidiaries and not guaranteed by Berkshire due 2005-2030 |
|
|
1,420 |
|
|
|
1,449 |
|
|
|
|
|
|
|
|
|
|
$ |
10,693 |
|
|
$ |
5,387 |
|
|
|
|
|
|
|
|
On January 4, 2005, Berkshire Hathaway Finance Corporation issued $3.75 billion aggregate par
amount of medium term notes. The proceeds from the notes were used to finance a loan portfolio
acquisition by Clayton Homes that occurred on December 30, 2004. On May 11, 2005, Berkshire
Hathaway Finance Corporation issued $1.5 billion aggregate par amount of medium term notes. The
proceeds were used to finance loan portfolio acquisitions and originations by Clayton Homes during
2005.
Note 9. Common stock
The following table summarizes Berkshires common stock activity during the first nine months
of 2005.
|
|
|
|
|
|
|
|
|
|
|
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, 2004 |
|
|
1,268,783 |
|
|
|
8,099,175 |
|
Conversions of Class A common stock
to Class B common stock and other |
|
|
(7,418 |
) |
|
|
261,486 |
|
|
|
|
|
|
|
|
Balance at September 30, 2005 |
|
|
1,261,365 |
|
|
|
8,360,661 |
|
|
|
|
|
|
|
|
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
1,540,054 shares outstanding at September 30, 2005 and 1,538,756 shares outstanding at December 31,
2004. 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.
Note 10. Comprehensive income
Berkshires comprehensive income for the third quarter and first nine months of 2005 and 2004
is shown in the table below (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
First Nine Months |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Net earnings |
|
$ |
586 |
|
|
$ |
1,137 |
|
|
$ |
3,398 |
|
|
$ |
3,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in unrealized appreciation of investments |
|
|
1,230 |
|
|
|
(1,495 |
) |
|
|
658 |
|
|
|
(1,466 |
) |
Applicable income taxes and minority interests |
|
|
(436 |
) |
|
|
543 |
|
|
|
(242 |
) |
|
|
528 |
|
Other |
|
|
40 |
|
|
|
42 |
|
|
|
(246 |
) |
|
|
(23 |
) |
Applicable income taxes and minority interests |
|
|
(10 |
) |
|
|
(4 |
) |
|
|
(44 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
824 |
|
|
|
(914 |
) |
|
|
126 |
|
|
|
(965 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
1,410 |
|
|
$ |
223 |
|
|
$ |
3,524 |
|
|
$ |
3,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
Notes To Interim Consolidated Financial Statements (Continued)
Note 11. Pension plans
The components of net periodic pension expense for the third quarter and first nine months of
2005 and 2004 are as follows (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
First Nine Months |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Service cost |
|
$ |
31 |
|
|
$ |
23 |
|
|
$ |
83 |
|
|
$ |
81 |
|
Interest cost |
|
|
47 |
|
|
|
47 |
|
|
|
142 |
|
|
|
141 |
|
Expected return on plan assets |
|
|
(46 |
) |
|
|
(42 |
) |
|
|
(137 |
) |
|
|
(128 |
) |
Net amortization, deferral and other |
|
|
1 |
|
|
|
2 |
|
|
|
4 |
|
|
|
8 |
|
Curtailment gain |
|
|
|
|
|
|
(70 |
) |
|
|
|
|
|
|
(70 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
33 |
|
|
$ |
(40 |
) |
|
$ |
92 |
|
|
$ |
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected contributions to defined benefit plans in 2005 are not expected to differ
significantly from amounts disclosed in Note 19 to the Consolidated Financial Statements included
in the 2004 Annual Report. During the third quarter of 2004 a Berkshire subsidiary amended its
defined benefit plan to freeze benefits as of the end of 2005. Such an event is considered a
curtailment and the curtailment gain included in the table above represents the elimination of
projected plan benefits beyond the end of 2005 and the recognition of unamortized prior service
costs and actuarial losses as of the amendment date.
Note 12. Contingencies
a) Governmental Investigations
General Reinsurance Corporation (General Reinsurance), a wholly owned subsidiary of General
Re Corporation (General Re) and an indirect wholly owned subsidiary of Berkshire, is continuing
to cooperate fully with the U.S. Attorney for the Eastern District of Virginia, Richmond Division
(the EDVA U.S. Attorney) and the Department of Justice in Washington (the DOJ) in their ongoing
investigation regarding Reciprocal of America (ROA) and, in part, its transactions with General
Reinsurance. The EDVA U.S. Attorney and the DOJ have continued to request additional information
from General Reinsurance regarding ROA and its affiliate, First Virginia Reinsurance, Ltd (FVR)
and General Reinsurances transactions with ROA and FVR. The EDVA U.S. Attorney and the DOJ have
also interviewed a number of current and former officers and employees of General Re and General
Reinsurance. General Reinsurance and four of its current and former employees, including a former
president, originally received subpoenas for documents from the EDVA U.S. Attorney in connection
with the EDVA U.S. Attorneys investigation in October 2003. The EDVA U.S. Attorney recently
issued an additional subpoena to General Reinsurance regarding General Reinsurances transactions
with ROA and FVR. One of the individuals originally subpoenaed in October 2003 has been informed
by the EDVA U.S. Attorney that this individual is a target of the EDVA U.S. Attorneys
investigation. General Reinsurance has also been sued in a number of civil actions related to ROA,
as described below.
General
Re, Berkshire, and certain of Berkshires other insurance subsidiaries, including National
Indemnity Company (NICO) have also been continuing to cooperate fully with the U.S. Securities
and Exchange Commission (SEC), the DOJ and the New York State Attorney General (NYAG) in their
ongoing investigations of non-traditional products. The EDVA U.S. Attorney and the DOJ have also
been working with the SEC and the NYAG in connection with these investigations. General Re
originally received subpoenas from the SEC and NYAG in January 2005. General Re, Berkshire and
NICO have been providing information to the government relating to transactions between General
Reinsurance or NICO (or their 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, General Re and Berkshire
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 reviewing the
role of General Re and its subsidiaries, as well as that of their counterparties, in these
transactions. The SEC, NYAG, DOJ and the EDVA U.S. Attorney have 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, and have indicated they plan to interview additional such
individuals.
Berkshire believes that the government is reviewing the role of General Re and its
subsidiaries, as well as that of their counterparties, in certain finite transactions, including
whether General Re or its subsidiaries conspired with others to misstate counterparty financial
statements or aided and abetted such misstatements by the counterparties. In one case, a
transaction initially effected with American International Group (AIG) in late 2000, AIG has
corrected its prior
10
Notes To Interim Consolidated Financial Statements (Continued)
Note
12. Contingencies (Continued)
accounting for the transaction on the grounds, as stated in AIGs 2004 10K, 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 described below. 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 transactions.
In May 2005, General Re terminated the consulting services of its former Chief Executive
Officer, Ronald Ferguson, after Mr. Ferguson invoked the Fifth Amendment in response to questions
from the SEC and DOJ relating to their investigations. Mr. Ferguson had been subpoenaed to provide
testimony in connection with these investigations. In June 2005, John Houldsworth, the former Chief
Executive Officer of Cologne Reinsurance Company (Dublin) Limited (CRD), a subsidiary of General
Re, pleaded guilty to a federal criminal charge of conspiring with others to misstate certain AIG
financial statements and entered into a partial settlement agreement with the SEC with respect to
such matters. Mr. Houldsworth, who had been on administrative leave, was terminated following this
announcement. In June 2005, Richard Napier, a former Senior Vice President of General Re who had
served as an account representative for AIG, also pleaded guilty to a federal criminal charge of
conspiring with others to misstate certain AIG financial statements and entered into a partial
settlement agreement with the SEC with respect to such matters. General Re terminated Mr. Napier
following the announcement of these actions.
In September 2005, Ronald Ferguson, Joseph Brandon, the Chief Executive Officer of General Re,
Christopher Garand, a recently retired Senior Vice President of General Reinsurance, and Robert
Graham, a recently retired Senior Vice President and Assistant General Counsel of General
Reinsurance, each received a Wells notice from the SEC. In addition to Messrs. Houldsworth,
Napier, Brandon, Ferguson, Garand and Graham, Elizabeth Monrad, the former Chief Financial Officer
of General Re, also received a Wells notice from the SEC in May 2005 in connection with its
investigation.
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.
On April 14, 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 appointed by APRA
under section 52 of the Insurance Act 1973 has been conducting an investigation including a request
for the production of documents of GRAs financial or finite reinsurance business. GRA has been
cooperating fully with this investigation.
In December 2004, the Financial Services Authority (FSA) advised General Reinsurances
affiliate Faraday Group (Faraday) that it was investigating Milan Vukelic, the then Chief
Executive Officer of Faraday with respect to transactions entered into between GRA and companies
affiliated with FAI Insurance Limited in 1998. Mr. Vukelic previously served as the head of General
Res international finite business unit. In April 2005, the FSA advised General Reinsurance that it
was investigating Mr. Vukelic and a former officer of CRD with respect to certain finite risk
reinsurance transactions, including transactions between CRD and several other insurers. In
addition, the FSA has requested that General Reinsurance affiliates based in the United Kingdom
provide information relating to the transactions involved in their investigations, including
transactions with AIG. General Reinsurance and its affiliates are cooperating fully with the FSA in
these matters. In May 2005, Mr. Vukelic was placed on administrative leave and in July 2005 his
employment was terminated.
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.
General Reinsurances subsidiary, Kolnische Ruckversicherungs-Gesellschaft AG (Cologne Re),
is also cooperating fully with requests for information 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 AIG. General
Reinsurance is also providing information to and cooperating fully with the Office of the
Superintendent of Financial Institutions Canada in its inquiries regarding the activities of
General Re and its affiliates relating to finite reinsurance.
11
Notes To Interim Consolidated Financial Statements (Continued)
Note
12. Contingencies (Continued)
b) Civil Litigation
Litigation Related to ROA
General Reinsurance and four of its current and former employees, along with numerous other
defendants, have been sued in a number of civil actions related to ROA. Plaintiffs assert various
claims in these civil actions, including breach of contract, unjust enrichment, fraud and
conspiracy, against General Reinsurance and others, arising from various reinsurance coverages
General Reinsurance provided to ROA and related entities.
Seven putative class actions were initiated by doctors, hospitals and lawyers that purchased
insurance through ROA or certain of its Tennessee-based risk retention groups. These complaints
seek compensatory, treble, and punitive damages in an amount plaintiffs contend is just and
reasonable. General Reinsurance is also subject to actions brought by the Virginia Commissioner of
Insurance, as Deputy Receiver of ROA, the Tennessee Commissioner of Insurance, as Liquidator for
three Tennessee risk retention groups, and a federal lawsuit filed by a Missouri-based hospital
group. The first of these actions was filed in March 2003 and additional actions were filed in
April 2003 through July 2004. In the action filed by the Virginia Commissioner of Insurance, the
Commissioner asserts in several of its claims that the alleged damages being sought exceed $200
million in the aggregate as against all defendants. These ten cases are collectively assigned to
the U.S. District Court for the Western District of Tennessee for pretrial proceedings. General
Reinsurance has filed motions to dismiss all of the claims against it in these ten cases and the
court has not yet ruled on these motions. No discovery has been initiated in these cases.
General Reinsurance is also a defendant in two lawsuits filed in Alabama state courts. The
first suit was filed in the Circuit Court of Montgomery County by a group of Alabama hospitals that
are former members of the Alabama Hospital Association Trust (AHAT). This suit (the AHA Action)
alleged violations of the Alabama Securities Act, conspiracy, fraud, suppression, unjust enrichment
and breach of contract against General Reinsurance and virtually all of the defendants in the
federal suits based on an alleged business combination between AHAT and ROA in 2001 and subsequent
capital contributions to ROA in 2002 by the Alabama hospitals. The allegations of the AHA Action
are largely identical to those set forth in the complaint filed by the Virginia receiver for ROA.
General Reinsurance previously filed a motion to dismiss all of the claims in the AHA Action. The
motion was granted in part by an order in March 2005, which dismissed the Alabama Securities Act
claim against General Reinsurance and ordered plaintiffs to amend their allegations of fraud and
suppression. Plaintiffs in the AHA Action filed their Amended and Restated Complaint in April 2005,
alleging claims of conspiracy, fraud, suppression and aiding and abetting breach of fiduciary duty
against General Reinsurance. General Reinsurance filed a motion to dismiss all counts of the
Amended and Restated Complaint in May 2005. The Special Master appointed by the court heard
arguments on July 13, 2005 and recommended denial of the motion on July 22, 2005. On July 22,
2005, the Court denied General Reinsurances motion to dismiss. General Reinsurance filed and
served its answer and affirmative defenses to the Amended and Restated Complaint on September 1,
2005. Discovery has begun. The second suit, also filed in the Circuit Court of Montgomery County,
was initiated by Baptist Health Systems, Inc., a former member of AHAT, and alleged claims
identical to those in the initial AHA Complaint, plus claims for breach of fiduciary duty and
wantonness. These cases have been consolidated for pretrial purposes. Baptist filed its First
Amended Complaint in April 2005, alleging violations of the Alabama Securities Act, conspiracy,
fraud, suppression, breach of fiduciary duty, wantonness and unjust enrichment against General
Reinsurance. General Reinsurance filed a motion to dismiss all counts of the Amended and Restated
Complaint in May 2005. The Special Master heard arguments on July 13, 2005, and on July 22, 2005,
recommended dismissal of the claim under the Alabama Securities Act, but recommended denial of the
motion to dismiss the remaining claims. On July 22, 2005, the Court denied General Reinsurances
motion to dismiss. General Reinsurance filed and served its answer and affirmative defenses to the
Amended and Restated Complaint on September 1, 2005. Discovery has begun. The AHA Action and the
Baptist action claim damages in excess of $60 million in the aggregate as against all defendants.
Actions related to AIG
General Reinsurance received a Summons and a Consolidated Amended Class Action Complaint on
April 29, 2005, in the matter captioned In re American International Group Securities Litigation,
Case No. 04-CV-8141-(LTS), United States District Court, Southern District of New York. This is a
putative class action asserted on behalf of investors who purchased publicly-traded securities of
AIG between October 1999 and March 2005. On June 7, 2005, General Reinsurance received a second
Summons and Class Action Complaint in a putative class action asserted on behalf of investors who
purchased AIG securities between October 1999 and March 2005, captioned San Francisco Employees
Retirement System, et al. vs. American International Group, Inc., et al., Case No. 05-CV-4270,
United States District Court, Southern District of New York. At a July 2005 conference, the court
ruled that the plaintiffs in case no. 04-CV-8141 would be lead plaintiffs. On
12
Notes To Interim Consolidated Financial Statements (Continued)
Note
12. Contingencies (Continued)
September 27, 2005, the plaintiffs in case no. 04-CV-8141 filed a Consolidated Second Amended
Complaint (the Complaint). The Complaint asserts various claims against AIG, and various of its
officers, directors, investment banks and other parties. Included among the defendants are General
Reinsurance and Messrs. Ferguson, Napier and Houldsworth (whom the Complaint defines as the General
Re Defendants). The Complaint alleges that the General Re Defendants violated Section 10(b) of
the Securities Exchange Act and SEC Rule 10b-5 through their activities in connection with the AIG
transaction described in Governmental Investigations, above. The Complaint seeks damages and
other relief in unspecified amounts. The General Re Defendants pleadings in response to the
Complaint are due to be filed on December 14, 2005. No discovery has taken place.
On July 27, 2005, General Reinsurance received a Summons and a Verified and Amended
Shareholder Derivative Complaint in In re American International Group, Inc. Derivative Litigation,
Case No. 04-CV-08406, United States District Court, Southern District of New York, naming Gen Re
Corporation as a defendant. It is unclear whether the plaintiffs are asserting claims against
General Reinsurance or its parent, General Re. This case is assigned to the same judge as the class
actions described above. The complaint, brought by several alleged shareholders of AIG, seeks
damages, injunctive and declaratory relief against various officers and directors of AIG as well as
a variety of individuals and entities with whom AIG did business, relating to a wide variety of
allegedly wrongful practices by AIG. The allegations against Gen Re Corporation focus on the late
2000 transaction with AIG described above, and the complaint purports to assert causes of action
against Gen Re Corporation for aiding and abetting other defendants breaches of fiduciary duty
and for unjust enrichment. The complaint does not specify the amount of damages or the nature of
any other relief sought against Gen Re Corporation. In August 2005, General Reinsurance received
a Summons and First Amended Consolidated Shareholders Derivative Complaint in In re American
International Group, Inc. Consolidated Derivative Litigation, Case No. 769-N, Delaware Chancery
Court. The claims asserted in the Delaware complaint are substantially similar to those asserted
in the New York derivative complaint described earlier in this paragraph, except that the Delaware
complaint makes clear that the plaintiffs are asserting claims against both General Reinsurance and
General Re. Proceedings in both the New York derivative suit and the Delaware derivative suit are
stayed until January 10, 2006.
FAI/HIH Matter
In December 2003, the Liquidators of both FAI Insurance Limited (FAI) and HIH Insurance
Limited (HIH) advised GRA and Cologne Re that they intended to assert claims arising from
insurance transactions GRA entered into with FAI in May and June 1998. In August 2004, the
Liquidators filed claims in the Supreme Court of New South Wales in order to avoid the expiration
of a statute of limitations for certain plaintiffs but neither GRA nor Cologne Re have been served
with legal process by the Liquidators. The focus of the Liquidators allegations against GRA and
Cologne Re are the 1998 transactions GRA entered into with FAI (which was acquired by HIH in 1999).
The Liquidators contend, among other things, that GRA and Cologne Re engaged in deceptive conduct
that assisted FAI in improperly accounting for such transactions as reinsurance, and that such
deception led to HIHs acquisition of FAI and caused various losses to FAI and HIH.
Insurance Brokerage Antitrust Litigation
Berkshire, General Re and General Reinsurance are defendants in this multi-district
litigation, In Re: Insurance Brokerage Antitrust Litigation, MDL No. 1663 (D.N.J.). In February
2005, the Judicial Panel on Multidistrict Litigation transferred several different cases to the
District of New Jersey for coordination and consolidation. Each consolidated case concerned
allegations of 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. Berkshire, General Re and General Reinsurance were not parties to the
original, transferred cases. On August 1, 2005, the named plaintiffsfourteen businesses, two
municipalities, and three individualsfiled their First Consolidated Amended Commercial Class
Action Complaint, and Berkshire, General Re and General Reinsurance
(along with a large number of
insurance companies and insurance brokers) were named as defendants in the Amended Complaint. The plaintiffs claim that
all defendants engaged in a pattern of racketeering activity, in violation of RICO, and that they
conspired to restrain trade. They further allege that the broker defendants breached fiduciary
duties to the plaintiffs, that the insurer defendants aided and abetted that breach, and that all
defendants were unjustly enriched in the process. Plaintiffs seek treble damages in an unspecified
amount, together with interest and attorneys fees and expenses. They also seek a declaratory
judgment of wrongdoing as well as an injunction against future anticompetitive practices.
Berkshire cannot at this time predict the outcome of these matters, is unable to estimate a
range of possible loss, if any, 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.
13
Notes To Interim Consolidated Financial Statements (Continued)
Note 13. Business segment data
A disaggregation of Berkshires consolidated data for the third quarter and first nine months
of 2005 and 2004 is as follows. Amounts are in millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
Third Quarter |
|
|
First Nine Months |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Operating Businesses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance group: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GEICO |
|
$ |
2,575 |
|
|
$ |
2,262 |
|
|
$ |
7,453 |
|
|
$ |
6,550 |
|
General Re |
|
|
1,566 |
|
|
|
1,720 |
|
|
|
4,839 |
|
|
|
5,593 |
|
Berkshire Hathaway Reinsurance Group |
|
|
1,195 |
|
|
|
1,042 |
|
|
|
2,962 |
|
|
|
2,780 |
|
Berkshire Hathaway Primary Group |
|
|
443 |
|
|
|
330 |
|
|
|
1,052 |
|
|
|
914 |
|
Investment income |
|
|
905 |
|
|
|
715 |
|
|
|
2,553 |
|
|
|
2,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total insurance group |
|
|
6,684 |
|
|
|
6,069 |
|
|
|
18,859 |
|
|
|
17,899 |
|
Apparel |
|
|
596 |
|
|
|
591 |
|
|
|
1,752 |
|
|
|
1,682 |
|
Building products |
|
|
1,264 |
|
|
|
1,175 |
|
|
|
3,618 |
|
|
|
3,250 |
|
Finance and financial products |
|
|
1,180 |
|
|
|
952 |
|
|
|
3,305 |
|
|
|
2,832 |
|
Flight services |
|
|
854 |
|
|
|
797 |
|
|
|
2,538 |
|
|
|
2,249 |
|
McLane Company |
|
|
6,388 |
|
|
|
6,117 |
|
|
|
17,909 |
|
|
|
17,352 |
|
Retail |
|
|
641 |
|
|
|
596 |
|
|
|
1,881 |
|
|
|
1,782 |
|
Shaw Industries |
|
|
1,512 |
|
|
|
1,340 |
|
|
|
4,238 |
|
|
|
3,892 |
|
Other businesses |
|
|
808 |
|
|
|
785 |
|
|
|
2,271 |
|
|
|
2,313 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,927 |
|
|
|
18,422 |
|
|
|
56,371 |
|
|
|
53,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of segments to consolidated amount: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment gains/losses |
|
|
727 |
|
|
|
766 |
|
|
|
361 |
|
|
|
1,151 |
|
Other revenues |
|
|
11 |
|
|
|
8 |
|
|
|
36 |
|
|
|
22 |
|
Eliminations and other |
|
|
(132 |
) |
|
|
(24 |
) |
|
|
(473 |
) |
|
|
(72 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
20,533 |
|
|
$ |
19,172 |
|
|
$ |
56,295 |
|
|
$ |
54,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before taxes and minority interests |
|
|
|
Third Quarter |
|
|
First Nine Months |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Operating Businesses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance group: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting gain (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GEICO |
|
$ |
237 |
|
|
$ |
226 |
|
|
$ |
907 |
|
|
$ |
678 |
|
General Re |
|
|
(389 |
) |
|
|
(105 |
) |
|
|
(327 |
) |
|
|
(24 |
) |
Berkshire Hathaway Reinsurance Group |
|
|
(1,635 |
) |
|
|
(463 |
) |
|
|
(1,352 |
) |
|
|
(68 |
) |
Berkshire Hathaway Primary Group |
|
|
(10 |
) |
|
|
16 |
|
|
|
45 |
|
|
|
35 |
|
Net investment income |
|
|
900 |
|
|
|
713 |
|
|
|
2,538 |
|
|
|
2,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total insurance group |
|
|
(897 |
) |
|
|
387 |
|
|
|
1,811 |
|
|
|
2,671 |
|
Apparel |
|
|
100 |
|
|
|
94 |
|
|
|
264 |
|
|
|
239 |
|
Building products |
|
|
214 |
|
|
|
192 |
|
|
|
608 |
|
|
|
503 |
|
Finance and financial products |
|
|
207 |
|
|
|
171 |
|
|
|
605 |
|
|
|
495 |
|
Flight services |
|
|
42 |
|
|
|
51 |
|
|
|
100 |
|
|
|
117 |
|
McLane Company |
|
|
53 |
|
|
|
62 |
|
|
|
181 |
|
|
|
176 |
|
Retail |
|
|
37 |
|
|
|
25 |
|
|
|
105 |
|
|
|
81 |
|
Shaw Industries |
|
|
145 |
|
|
|
116 |
|
|
|
372 |
|
|
|
354 |
|
Other businesses |
|
|
93 |
|
|
|
102 |
|
|
|
287 |
|
|
|
284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6 |
) |
|
|
1,200 |
|
|
|
4,333 |
|
|
|
4,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of segments to consolidated amount: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment gains/losses |
|
|
741 |
|
|
|
767 |
|
|
|
376 |
|
|
|
1,139 |
|
Equity in earnings of MidAmerican Energy Holdings Company |
|
|
141 |
|
|
|
(138 |
) |
|
|
382 |
|
|
|
71 |
|
Interest expense, excluding interest allocated to business segments |
|
|
(24 |
) |
|
|
(22 |
) |
|
|
(63 |
) |
|
|
(69 |
) |
Eliminations and other |
|
|
(17 |
) |
|
|
(13 |
) |
|
|
(66 |
) |
|
|
(53 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
835 |
|
|
$ |
1,794 |
|
|
$ |
4,962 |
|
|
$ |
6,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 2005 and 2004 are disaggregated in
the table that follows. Amounts are after deducting minority interests and income taxes. Dollar
amounts are in millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
First Nine Months |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Insurance underwriting |
|
$ |
(1,170 |
) |
|
$ |
(215 |
) |
|
$ |
(475 |
) |
|
$ |
399 |
|
Insurance investment income |
|
|
601 |
|
|
|
484 |
|
|
|
1,740 |
|
|
|
1,418 |
|
Non-insurance businesses |
|
|
555 |
|
|
|
509 |
|
|
|
1,580 |
|
|
|
1,395 |
|
Equity in earnings of MidAmerican Energy Holdings Company |
|
|
141 |
|
|
|
(138 |
) |
|
|
382 |
|
|
|
71 |
|
Interest expense, unallocated |
|
|
(16 |
) |
|
|
(14 |
) |
|
|
(40 |
) |
|
|
(44 |
) |
Other |
|
|
(5 |
) |
|
|
(7 |
) |
|
|
(32 |
) |
|
|
(31 |
) |
Investment gains/losses |
|
|
480 |
|
|
|
518 |
|
|
|
243 |
|
|
|
761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
586 |
|
|
$ |
1,137 |
|
|
$ |
3,398 |
|
|
$ |
3,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Berkshires operating businesses are managed on a 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.
Accordingly, Berkshires reportable business segments are organized in a manner that reflects
how Berkshires top management views those business activities. Certain businesses have been
grouped based upon similar products or product lines, marketing, selling and distribution
characteristics even though those businesses are operated by separate local management. There are
over 40 separate reporting units. Reference is made to Note 13 to the Interim Consolidated
Financial Statements in this report and Note 21 to the Consolidated Financial Statements included
in Berkshires Annual Report for the year ended December 31, 2004.
Insurance Underwriting
A summary follows of underwriting results from Berkshires insurance businesses for the third
quarter and first nine months of 2005 and 2004. Dollar amounts are in millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
First Nine Months |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Underwriting gain (loss) attributable to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GEICO |
|
$ |
237 |
|
|
$ |
226 |
|
|
$ |
907 |
|
|
$ |
678 |
|
General Re |
|
|
(389 |
) |
|
|
(105 |
) |
|
|
(327 |
) |
|
|
(24 |
) |
Berkshire Hathaway Reinsurance Group |
|
|
(1,635 |
) |
|
|
(463 |
) |
|
|
(1,352 |
) |
|
|
(68 |
) |
Berkshire Hathaway Primary Group |
|
|
(10 |
) |
|
|
16 |
|
|
|
45 |
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting gain (loss) pre-tax |
|
|
(1,797 |
) |
|
|
(326 |
) |
|
|
(727 |
) |
|
|
621 |
|
Income taxes and minority interests |
|
|
(627 |
) |
|
|
(111 |
) |
|
|
(252 |
) |
|
|
222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net underwriting gain (loss) |
|
$ |
(1,170 |
) |
|
$ |
(215 |
) |
|
$ |
(475 |
) |
|
$ |
399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the third quarter of 2005, Hurricanes Katrina and Rita struck the Gulf coast region of
the Unites States producing the largest catastrophe losses for any quarter in the history of the
property/casualty insurance industry. Berkshire presently estimates the total industry losses from
the two hurricanes to be in the range of $60 billion to $70 billion although the final figure could
vary significantly. Estimates of Berkshires losses from these events were recorded in the third
quarter of 2005 and are subject to change as additional information concerning the nature and
amount of losses becomes known. Losses incurred as of September 30, 2005, are summarized in the
following table. Dollar amounts are in millions.
|
|
|
|
|
GEICO |
|
$ |
118 |
|
General Re |
|
|
602 |
|
Berkshire Hathaway Reinsurance Group |
|
|
2,268 |
|
|
|
|
|
|
|
$ |
2,988 |
|
|
|
|
|
15
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Insurance Underwriting (Continued)
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 have subjected themselves to in their own insuring activities. Berkshires principal
insurance businesses are: (1) GEICO, one of the five largest auto insurers in the U.S., (2) General
Re, (3) Berkshire Hathaway Reinsurance Group (BHRG) and (4) Berkshire Hathaway Primary Group.
Effective June 30, 2005, Berkshire acquired Medical Protective Corporation, a provider of
professional liability insurance to physicians, dentists and other healthcare providers.
Underwriting results from this business are included in Berkshires consolidated results beginning
July 1, 2005 and are reflected in the Berkshire Hathaway Primary Group. Berkshires management
views insurance businesses as possessing two distinct operations underwriting and investing.
Underwriting is the responsibility of the unit managers; investing, with limited exceptions at
GEICO and 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.
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.
Reference is made to the Critical Accounting Policies in Managements Discussion and Analysis
section of Berkshires Annual Report for the year ended December 31, 2004 for information
concerning the loss reserve estimation process. In addition, the timing and amount of catastrophe
losses can produce significant volatility in periodic underwriting results.
A significant marketing strategy followed by all these businesses is the maintenance of
extraordinary capital strength. Statutory surplus of Berkshires insurance businesses totaled
approximately $48 billion at December 31, 2004. 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 sophisticated
insurance and reinsurance buyers. Additional information regarding Berkshires insurance and
reinsurance operations follows.
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 2005 and
2004 are summarized in the table below. Dollar amounts are in millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
First Nine Months |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
Premiums earned |
|
$ |
2,575 |
|
|
|
100.0 |
|
|
$ |
2,262 |
|
|
|
100.0 |
|
|
$ |
7,453 |
|
|
|
100.0 |
|
|
$ |
6,550 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss expenses |
|
|
1,882 |
|
|
|
73.1 |
|
|
|
1,652 |
|
|
|
73.0 |
|
|
|
5,247 |
|
|
|
70.4 |
|
|
|
4,744 |
|
|
|
72.4 |
|
Underwriting expenses |
|
|
456 |
|
|
|
17.7 |
|
|
|
384 |
|
|
|
17.0 |
|
|
|
1,299 |
|
|
|
17.4 |
|
|
|
1,128 |
|
|
|
17.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and expenses |
|
|
2,338 |
|
|
|
90.8 |
|
|
|
2,036 |
|
|
|
90.0 |
|
|
|
6,546 |
|
|
|
87.8 |
|
|
|
5,872 |
|
|
|
89.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax underwriting gain |
|
$ |
237 |
|
|
|
|
|
|
$ |
226 |
|
|
|
|
|
|
$ |
907 |
|
|
|
|
|
|
$ |
678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned in 2005 exceeded amounts earned in 2004 by $313 million (13.8%) for the third
quarter and $903 million (13.8%) for the first nine months.
Voluntary auto policies-in-force increased
12.6% over the past year and significant market share was gained. Policies-in-force over the last
twelve months increased 12.0% in the preferred risk auto line and increased 14.5% in the standard
and nonstandard auto lines. Voluntary auto new business sales in the first nine months of 2005
increased 16.1% compared to 2004. Voluntary auto policies-in-force at September 30, 2005 were
584,000 greater than at December 31, 2004. During the third quarter of 2004, GEICO began selling
auto insurance in New Jersey, which contributed to in-force policy growth. Since late 2004, GEICO
has reduced premium rates in several markets and underwriting guidelines have been adjusted to
better align prices with underlying risk, which will result in
moderately lower average premiums per policy.
Losses and loss adjustment expenses incurred in 2005 exceeded 2004 by $230 million for the
third quarter and $503 million for the first nine months. The loss ratio was 70.4% in the first
nine months of 2005 compared to 72.4% in 2004. Losses incurred in the first nine months of 2005
included approximately $140 million from catastrophes, including $118 million from Hurricanes
Katrina and Rita. In 2005, catastrophes represented approximately 4.7 loss ratio points for the
third quarter and 1.9 points for the first nine months. Catastrophe losses for the first nine
months of 2004 totaled approximately $73 million, arising primarily from third quarter hurricanes.
Otherwise, the loss ratio in 2005 reflects lower claim frequencies
(up to seven percent), partially
offset by increased average claim severity (up to 5 percent for injury claims
16
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
GEICO (Continued)
and 8 percent for physical damage claims), depending on the coverage type. Underwriting expenses
increased 15.2% in the first nine months of 2005 to $1,299 million, primarily reflecting the
increase in costs associated with issuing policies arising from new business, as well as increased
advertising expense.
Despite the catastrophe losses in the third quarter, GEICOs underwriting results for the
first nine months of 2005 were exceptional. Premium rate reductions, when fully effective, are
expected to gradually reduce underwriting profitability over time. In the absence of additional
significant catastrophe losses, GEICOs underwriting results are expected to remain favorable in
the fourth quarter of 2005, consistent with underwriting results of the auto insurance industry as
a whole.
General Re
General Re conducts a reinsurance business offering property and casualty and life and health
coverages to clients worldwide. In North America, property and casualty reinsurance is written on
a direct basis through General Reinsurance Corporation. Internationally, property and casualty
reinsurance is written on a direct basis through 91% owned Cologne Re (based in Germany) and other
wholly-owned affiliates as well as through brokers with respect to Faraday in London. Life and
health reinsurance is written for clients worldwide through Cologne Re.
General Res pre-tax underwriting results for the third quarter and first nine months of 2005
and 2004 are summarized below. Dollar amounts are in millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned |
|
|
Pre-tax underwriting gain (loss) |
|
|
|
Third Quarter |
|
|
First Nine Months |
|
|
Third Quarter |
|
|
First Nine Months |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Property/casualty: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American |
|
$ |
531 |
|
|
$ |
705 |
|
|
$ |
1,669 |
|
|
$ |
2,459 |
|
|
$ |
(300 |
) |
|
$ |
(54 |
) |
|
$ |
(259 |
) |
|
$ |
(10 |
) |
International |
|
|
466 |
|
|
|
536 |
|
|
|
1,485 |
|
|
|
1,718 |
|
|
|
(119 |
) |
|
|
(69 |
) |
|
|
(128 |
) |
|
|
(59 |
) |
Life/health |
|
|
569 |
|
|
|
479 |
|
|
|
1,685 |
|
|
|
1,416 |
|
|
|
30 |
|
|
|
18 |
|
|
|
60 |
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,566 |
|
|
$ |
1,720 |
|
|
$ |
4,839 |
|
|
$ |
5,593 |
|
|
$ |
(389 |
) |
|
$ |
(105 |
) |
|
$ |
(327 |
) |
|
$ |
(24 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax property/casualty underwriting results in 2005 included losses from Hurricanes Katrina
and Rita ($602 million) and in 2004 included losses from the four hurricanes that struck the United
States and Caribbean ($255 million) in the third quarter.
General Re strives to generate long-term 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. In general, net premiums written in the first
nine months of 2005 decreased due to maintaining underwriting
discipline, as price competition was increasing in most property/casualty markets.
North American property/casualty
General Res North American property/casualty operations underwrite predominantly excess
reinsurance across essentially all lines of property and casualty business. Excess reinsurance
provides indemnification of losses above a stated retention on either an individual claim basis or
in the aggregate across all claims in a portfolio. Reinsurance contracts are written on both a
treaty (group of risks) and facultative (individual risk) basis.
Premiums earned in the third quarter of 2005 decreased $174 million
(24.7%) from 2004 and for
the first nine months of 2005 decreased $549 million (24.8%) from 2004, after excluding premiums of
$241 million from a retroactive reinsurance contract written in
the second quarter of 2004. There were no
premiums from retroactive contracts in 2005. Generally, the decline in premiums earned reflects a
net reduction of business written, as cancellations/non-renewals exceeded new contracts, and a
minimal effect from premium rate changes. Excluding retroactive reinsurance contracts, premiums
written in the first nine months of 2005 declined 22.6% from amounts written in the comparable 2004
period and may continue to decline over the remainder of 2005.
In 2005, the North American property/casualty business produced pre-tax underwriting losses of
$300 million in the third quarter and $259 million in the first nine months. Losses incurred in
the third quarter included $427 million from Hurricanes Katrina and Rita. Otherwise, results for
the first nine months of 2005 consisted of a $131 million gain attributed to the current accident
year (excluding losses from Hurricanes Katrina and Rita), primarily related to gains generated from
property coverages and favorable development of prior
accident years losses ($126 million), offset by workers compensation reserve discount accrual
and deferred charge amortization ($89 million). Underwriting results for the first nine months of
2004 included a net gain of $114 million for the current accident year offset by a net loss of $124
million from prior years losses. Prior years losses reflected increased casualty loss reserves ($95
million), discount accrual and deferred charge amortization ($83 million), partially offset by a
$54 million decrease in
17
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
North American property/casualty (Continued)
reserves for property losses. Current accident year
underwriting results in 2004 included
losses of $145 million from third quarter hurricanes, partially offset by a $70 million one time
gain in the third quarter from the reduction of defined benefit pension liabilities associated with
the curtailment of a benefit plan.
International property/casualty
Premiums earned in the third quarter and nine months of 2005 declined $70 million (13.1%) and
$233 million (13.6%) from the comparable 2004 periods. In local currencies, premiums earned in the
first nine months of 2005 declined 15.5% compared to 2004. The decline in premiums earned in 2005
was attributed to maintaining disciplined underwriting, which included the non-renewal of
unprofitable business. Premiums written in the first nine months of 2005, in local currencies,
declined 9.9% compared to the first nine months of 2004.
In 2005, the international property/casualty business produced pre-tax underwriting losses in
the third quarter of $119 million and $128 million for the first nine months. Losses incurred in
2005 included $175 million in the third quarter from Hurricanes Katrina and Rita as well as $31
million from winter storm Erwin. Partially offsetting these losses were gains from other property
and aviation lines. In 2004, international business generated a pre-tax underwriting loss of $69
million in the third quarter and a loss of $59 million for the first nine months. Underwriting
results for 2004 included $110 million of U.S. and Caribbean hurricane related losses. Partially
offsetting these losses were gains in other property and aviation lines.
Life/health
Life/health premiums earned in the third quarter and first nine months of 2005 increased $90
million (18.8%) and $269 million (19.0%) compared with the same periods in 2004. Adjusting for the
effects of foreign currency, premiums earned increased 18.5% in the third quarter and
17.1% in the first nine months of 2005 versus the comparable 2004 periods. Premium volume increases
in 2005 were primarily attributed to the life business in North America, Australia, Asia and Europe.
For the first nine months of 2005, underwriting results included a $112 million net gain from life
business and a $52 million net loss attributed to reserve increases on certain U.S. health business
in run-off.
Berkshire Hathaway Reinsurance Group
The Berkshire Hathaway Reinsurance Group (BHRG) underwrites excess-of-loss reinsurance and
quota-share coverages for insurers and reinsurers around the world. 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 reinsurance refers to other contracts that are written on both a
quota-share and excess basis, and includes participations in and contracts with Lloyds syndicates.
In addition, during the past twelve months BHRG has written workers compensation insurance
through agents in selected states. BHRGs pre-tax underwriting results for the third quarter and
first nine months of 2005 and 2004 are summarized in the table below. Dollar amounts are in
millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned |
|
|
Pre-tax underwriting gain (loss) |
|
|
|
Third Quarter |
|
|
First Nine Months |
|
|
Third Quarter |
|
|
First Nine Months |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Catastrophe and
individual risk |
|
$ |
589 |
|
|
$ |
517 |
|
|
$ |
1,233 |
|
|
$ |
1,110 |
|
|
$ |
(1,486 |
) |
|
$ |
(294 |
) |
|
$ |
(1,216 |
) |
|
$ |
160 |
|
Retroactive reinsurance |
|
|
10 |
|
|
|
69 |
|
|
|
10 |
|
|
|
89 |
|
|
|
(74 |
) |
|
|
(96 |
) |
|
|
(218 |
) |
|
|
(403 |
) |
Other multi-line |
|
|
596 |
|
|
|
456 |
|
|
|
1,719 |
|
|
|
1,581 |
|
|
|
(75 |
) |
|
|
(73 |
) |
|
|
82 |
|
|
|
175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,195 |
|
|
$ |
1,042 |
|
|
$ |
2,962 |
|
|
$ |
2,780 |
|
|
$ |
(1,635 |
) |
|
$ |
(463 |
) |
|
$ |
(1,352 |
) |
|
$ |
(68 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned from catastrophe and individual risk contracts in the third quarter and first
nine months of 2005 were $589 million and $1,233 million, respectively. Premiums written during
the first nine months of 2005 were $1,362 million versus $1,196 million in 2004.
The underwriting results from catastrophe and individual risk business in 2005 included
estimated losses of $2,059 million from Hurricanes Katrina and Rita. Results for the first nine
months of 2004 included estimated catastrophe losses and other large individual property losses of
approximately $800 million, arising primarily from U.S. and Caribbean hurricanes. The timing and
magnitude of losses may produce extraordinary volatility in periodic underwriting results of BHRGs
catastrophe and individual risk business. On a consolidated basis (including General Re, GEICO and
other Berkshire subsidiaries including BHRG), a single event could potentially produce a pre-tax
gross loss to Berkshire of approximately 3% to 5% of the insured industry loss. Over the three
years ending December 31, 2004, catastrophe and individual risk business generated pre-tax net
underwriting gains of $2.5 billion. Management accepts such volatility, however, provided that the
long-term prospect of achieving underwriting profits is reasonable.
18
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Berkshire Hathaway Reinsurance Group (Continued)
Retroactive policies normally provide very large, but limited, indemnification of unpaid
losses and loss adjustment expenses with respect to past loss events, which are generally expected
to be paid over long periods of time. The underwriting losses from retroactive reinsurance are
primarily attributed to the amortization of deferred charges established on retroactive reinsurance
contracts written in previous years. The deferred charges, which represent the difference between
the policy premium and the estimated ultimate claim reserves, are amortized over the expected claim
payment period using the interest method. The amortization charges are recorded as losses incurred
and, therefore, produce underwriting losses. The level of amortization in a given period is based
upon estimates of the timing and amount of future loss payments.
Underwriting losses for the first nine months of 2005 from retroactive contracts included a
pre-tax gain of approximately $46 million related to the second quarter settlement of remaining
unpaid losses under a certain retroactive reinsurance agreement. During the first nine months of
2005, loss payments for all retroactive contracts, including the aforementioned settlement totaled
approximately $764 million. During the first quarter of 2004 the estimated timing of future loss
payments with respect to one large contract was accelerated which produced an incremental pre-tax amortization charge of approximately
$100 million. Unamortized deferred charges at September 30, 2005
totaled approximately $2,172 million. Management believes that these charges are reasonable
relative to the large amounts of float related to these policies, which totaled about $7.05 billion
at September 30, 2005. Income generated from the investment of float is reflected in net
investment income and investment gains.
Premiums earned in the third quarter and first nine months of 2005 from other multi-line
reinsurance increased approximately $140 million over the corresponding 2004 periods. In 2005,
increased premiums were earned from workers compensation and aviation programs and were partially
offset by declines in quota-share contracts. Other multi-line reinsurance premiums written declined
approximately 9% in the first nine months of 2005 versus 2004. Net underwriting results in the
first nine months of 2005 included estimated losses of approximately $209 million from Hurricanes
Katrina and Rita. Estimated catastrophe losses for the third quarter of 2004 totaled approximately
$145 million. Underwriting results for first nine months of 2004 also included a gain of about
$150 million related to reduction of liabilities settled in connection with commutations of
contracts.
Berkshire Hathaway Primary Group
Premiums earned in 2005 by Berkshires primary insurers increased $113 million for the third
quarter and $138 million for the first nine months compared with the corresponding 2004 amounts.
Berkshires primary insurers include Med Pro, which was acquired as of June 30, 2005. See Note 2
to the Interim Consolidated Financial Statements for additional information concerning this
acquisition. Premiums earned by Med Pro accounted for most of the increases in total premiums
earned by the group. In 2005, Berkshires primary insurers produced underwriting losses of $10
million for the third quarter and an underwriting gain of $45 million for the first nine months.
The underwriting loss in the third quarter reflected a net increase in loss reserve estimates for
pre-2005 loss events including an increase in medical malpractice claim estimates and a decrease in
auto and general liability estimates.
Insurance Investment Income
Net investment income produced by Berkshires insurance and reinsurance businesses for the
third quarter and first nine months of 2005 and 2004 is summarized in the table below. Dollar
amounts are in millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
First Nine Months |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Investment income before taxes |
|
$ |
900 |
|
|
$ |
713 |
|
|
$ |
2,538 |
|
|
$ |
2,050 |
|
Applicable income taxes and minority interests |
|
|
299 |
|
|
|
229 |
|
|
|
798 |
|
|
|
632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income after taxes and minority interests |
|
$ |
601 |
|
|
$ |
484 |
|
|
$ |
1,740 |
|
|
$ |
1,418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax investment income earned in 2005 by Berkshires insurance businesses exceeded amounts
earned in 2004 by $187 million (26.2%) in the third quarter and $488 million (23.8%) in the first
nine months. The increase in investment income in 2005 primarily reflects higher short-term
interest rates in the United States in 2005 as compared to 2004. Cash and cash equivalents has
grown from $36.6 billion at September 30, 2004 ($38.7 billion at December 31, 2004) to about $39.7
billion at September 30, 2005. An additional comparative increase in investment income is expected
in the fourth quarter of 2005 as compared with 2004.
19
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Insurance Investment Income (Continued)
A summary of investments held in Berkshires insurance businesses follows. Dollar amounts are
in millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sept. 30, |
|
|
Dec. 31, |
|
|
Sept. 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2004 |
|
Cash and cash equivalents |
|
$ |
39,707 |
|
|
$ |
38,706 |
|
|
$ |
36,605 |
|
Marketable equity securities |
|
|
44,966 |
|
|
|
37,420 |
|
|
|
34,777 |
|
Fixed maturity securities |
|
|
24,784 |
|
|
|
22,831 |
|
|
|
23,376 |
|
Other |
|
|
1,913 |
|
|
|
2,059 |
|
|
|
2,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
111,370 |
|
|
$ |
101,016 |
|
|
$ |
97,025 |
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities as of September 30, 2005 were as follows. Dollar amounts are in
millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
|
|
|
|
Cost |
|
|
Gains |
|
|
Fair Value |
|
U.S. Treasury, government corporations and agencies |
|
$ |
4,238 |
|
|
$ |
1 |
|
|
$ |
4,239 |
|
States, municipalities and political subdivisions |
|
|
4,126 |
|
|
|
89 |
|
|
|
4,215 |
|
Foreign governments |
|
|
7,456 |
|
|
|
81 |
|
|
|
7,537 |
|
Corporate bonds and redeemable preferred stocks, investment grade |
|
|
3,192 |
|
|
|
216 |
|
|
|
3,408 |
|
Corporate bonds and redeemable preferred stocks, non-investment grade |
|
|
2,433 |
|
|
|
1,261 |
|
|
|
3,694 |
|
Mortgage-backed securities |
|
|
1,633 |
|
|
|
58 |
|
|
|
1,691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
23,078 |
|
|
$ |
1,706 |
|
|
$ |
24,784 |
|
|
|
|
|
|
|
|
|
|
|
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 are 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 of insurance businesses derive from shareholder capital, including reinvested
earnings, as well net liabilities assumed under insurance contracts or float. The major
components of float are unpaid losses, unearned premiums and other liabilities to policyholders
reduced by premiums and reinsurance receivables, deferred charges assumed under retroactive
reinsurance contracts and deferred policy acquisition costs. Float totaled approximately $48.9
billion at September 30, 2005, $46.5 billion at June 30, 2005 and $46.1 billion at December 31, 2004.
Non-Insurance Businesses
Results of operations of Berkshires diverse non-insurance businesses for the third quarter
and first nine months of 2005 and 2004 are summarized in the following table. Dollar amounts are
in millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
First Nine Months |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Pre-tax earnings |
|
$ |
891 |
|
|
$ |
813 |
|
|
$ |
2,522 |
|
|
$ |
2,249 |
|
Income taxes and minority interests |
|
|
336 |
|
|
|
304 |
|
|
|
942 |
|
|
|
854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
555 |
|
|
$ |
509 |
|
|
$ |
1,580 |
|
|
$ |
1,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A comparison of third quarter and first nine months revenues and pre-tax earnings for the
non-insurance business segments follows. Dollar amounts are in millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
First Nine Months |
|
|
|
Revenues |
|
|
Pre-tax Earnings |
|
|
Revenues |
|
|
Pre-tax Earnings |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Apparel |
|
$ |
596 |
|
|
$ |
591 |
|
|
$ |
100 |
|
|
$ |
94 |
|
|
$ |
1,752 |
|
|
$ |
1,682 |
|
|
$ |
264 |
|
|
$ |
239 |
|
Building products |
|
|
1,264 |
|
|
|
1,175 |
|
|
|
214 |
|
|
|
192 |
|
|
|
3,618 |
|
|
|
3,250 |
|
|
|
608 |
|
|
|
503 |
|
Finance and financial products |
|
|
1,180 |
|
|
|
952 |
|
|
|
207 |
|
|
|
171 |
|
|
|
3,305 |
|
|
|
2,832 |
|
|
|
605 |
|
|
|
495 |
|
Flight services |
|
|
854 |
|
|
|
797 |
|
|
|
42 |
|
|
|
51 |
|
|
|
2,538 |
|
|
|
2,249 |
|
|
|
100 |
|
|
|
117 |
|
McLane Company |
|
|
6,388 |
|
|
|
6,117 |
|
|
|
53 |
|
|
|
62 |
|
|
|
17,909 |
|
|
|
17,352 |
|
|
|
181 |
|
|
|
176 |
|
Retail |
|
|
641 |
|
|
|
596 |
|
|
|
37 |
|
|
|
25 |
|
|
|
1,881 |
|
|
|
1,782 |
|
|
|
105 |
|
|
|
81 |
|
Shaw Industries |
|
|
1,512 |
|
|
|
1,340 |
|
|
|
145 |
|
|
|
116 |
|
|
|
4,238 |
|
|
|
3,892 |
|
|
|
372 |
|
|
|
354 |
|
Other businesses |
|
|
808 |
|
|
|
785 |
|
|
|
93 |
|
|
|
102 |
|
|
|
2,271 |
|
|
|
2,313 |
|
|
|
287 |
|
|
|
284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
13,243 |
|
|
$ |
12,353 |
|
|
$ |
891 |
|
|
$ |
813 |
|
|
$ |
37,512 |
|
|
$ |
35,352 |
|
|
$ |
2,522 |
|
|
$ |
2,249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Non-Insurance Businesses (Continued)
Aggregate apparel sales for the third quarter of 2005 were $596 million and were relatively
unchanged from the third quarter of 2004. For the first nine months of 2005, apparel segment sales
totaled $1,752 million, an increase of $70 million (4.2%) over the first nine months of 2004.
Sales of clothing products for the third quarter totaled $454 million in 2005 and $459 million in
2004 and for the first nine months totaled $1,371 million in 2005 and $1,317 million in 2004. The
increase in sales for the first nine months of 2005 was primarily attributed to a 3.7% increase in
unit volume and changes in sales mix of Fruit of the Loom products. Improved pre-tax earnings in
2005 periods reflected increases in both the clothing and the footwear businesses.
The comparative increase in building products revenues for the first nine months reflected
increases in all significant product lines including connector plates and truss machinery (24%),
insulation, roofing and engineered products (11%), bricks and blocks (10%) and paint and coatings
(5%). Berkshires building products businesses have benefited in recent periods by relatively
strong residential housing market conditions, which include relatively low interest rates. The
increases in revenues in 2005 were primarily attributed to higher average selling prices for most
products, which in most instances were driven by comparatively higher raw material costs,
particularly for steel, petrochemicals and energy. Pre-tax earnings from building products from
the third quarter and first nine months of 2005 exceeded earnings for the corresponding 2004
periods by $22 million (11.5%) and $105 million (20.9%), respectively. The increase in first nine
months 2005 pre-tax earnings was principally driven by increased earnings from the insulation,
roofing and engineered products business and the connector plate and truss machinery business.
Over the past year, Berkshires building products businesses have instituted price increases
to compensate for rising raw material and energy related production and transportation costs.
Nevertheless, certain costs essential to the production processes, including natural gas (brick and
insulation), steel (connector plates) and petrochemicals (paint and coatings) are increasingly
subject to rapid price changes and constraints in availability for a variety of reasons. In
addition, rapid rises in interest rates could adversely affect housing construction which could
result in declining sales for Berkshires building products businesses.
Revenues from flight services for the third quarter and first nine months of 2005 exceeded
revenues in the corresponding 2004 periods by $57 million (7.2%) and $289 million (12.9%),
respectively. The revenue increase for the first nine months of 2005 reflected a 19% increase in
flight operations and management fee revenue, and a 15% increase in pilot training revenues and
related product sales. The increase in flight operations revenue primarily resulted from a 7%
increase in occupied flight hours, rate increases and a higher mix of larger cabin aircraft usage, which generate
higher operating revenue.
Pre-tax earnings of the flight services segment for the third quarter of 2005 decreased $9
million (17.6%) from the third quarter of 2004. For the first nine months of 2005, pre-tax
earnings declined $17 million (14.5%) from 2004. Pre-tax earnings for the first nine months of
2005 from FlightSafety increased $9 million (7.2%) as compared with 2004. The increase was due to
increased training revenues and simulator sales. NetJets incurred a loss of about $40 million for
the first nine months of 2005. In the first half of 2005, NetJets experienced unusually high
shortages of available aircraft in the NetJets program due to peaks in customer usage. Shortages
of aircraft also occurred during the third quarter of 2005. Consequently, incremental costs were
incurred to charter additional aircraft to meet peak demand. Such costs are not fully recoverable
from clients and produced incremental costs of approximately $65 million during the first nine
months of 2005. Additionally, interest expense for the first nine
months of 2005 increased $16 million due to higher rates. NetJets and FlightSafety continue to be leaders in the aircraft
fractional ownership and training markets.
Revenues for the third quarter and first nine months of 2005 from the McLane distribution
business were $6,388 million and $17,909 million, respectively, increases of $271 million (4.4%)
and $557 million (3.2%), respectively, over the corresponding 2004 periods. Sales growth is
primarily attributed to new customers for grocery products, partially offset by a small decline
from foodservice sales, which reflect the loss of one large customer in the first half of 2005 and
reduced sales resulting from the third quarter hurricanes. McLanes business is marked by high
sales volume and low profit margins. Approximately one-third of McLanes total sales are to
Wal-Mart Stores, Inc. Pre-tax earnings for the third quarter of 2005 of $53 million declined $9
million versus the third quarter of 2004, due to lower gross margins
and higher fuel costs. Pre-tax earnings for the first nine months
of 2005 included a $10 million gain in the first quarter from a tax litigation settlement.
Revenues from Berkshires various home furnishing and jewelry retailers for the third quarter
of 2005 increased $45 million (7.6%) over 2004 and for the first nine months of 2005 revenues
increased $99 million (5.6%) over 2004. Nine month revenues of the home furnishings businesses
were $1,401 million in 2005 and $1,326 million in 2004 and jewelry revenues were $480 million for
the first nine months of 2005 as compared to $455 million in the first nine months of 2004.
Aggregate same store sales in the first nine months of 2005 increased 1.7% compared to 2004.
Pre-tax earnings of the retailing group for the first nine months of 2005 totaled $105 million, an
increase of $24 million (29.6%) over the first nine months of 2004. Essentially all of the
comparative increase in pre-tax earnings was produced by the home furnishings businesses.
21
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Non-Insurance Businesses (Continued)
Revenues of Shaw Industries for the third quarter and first nine months of 2005 increased over
the corresponding 2004 periods by $172 million (12.8%) and $346 million (8.9%), respectively.
Overall revenue levels in 2005 reflected an increase in average net selling prices for carpet.
Yards of carpet sold in 2005 were relatively unchanged on a comparative year to date basis but
increased 7.7% on a quarter to date basis as volume for the month of September 2005 increased 23%
over September of 2004. Management believes that unit volume increase in the month of September
was partially caused by increased orders and shipments in anticipation of price increases effective
in early October. Pre-tax earnings for the third quarter of 2005 increased $29 million from 2004
and for the first nine months of 2005 increased $18 million from 2004. Despite the increases in
selling prices, operating margins were adversely affected by repeated increases in petroleum-based
raw material costs. Consequently, increases in production costs have outpaced increases in average
net selling prices. In addition, product sample costs pertaining to the introduction of new
products increased approximately $20 million during the first nine months of 2005 as compared to
2004.
A summary of revenues and pre-tax earnings from Berkshires finance and financial products
businesses follows. Dollar amounts are in millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
First Nine Months |
|
|
|
Revenues |
|
|
Pre-tax earnings |
|
|
Revenues |
|
|
Pre-tax earnings |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Manufactured housing and finance |
|
$ |
829 |
|
|
$ |
578 |
|
|
$ |
107 |
|
|
$ |
53 |
|
|
$ |
2,260 |
|
|
$ |
1,434 |
|
|
$ |
311 |
|
|
$ |
143 |
|
Furniture/equipment leasing |
|
|
222 |
|
|
|
206 |
|
|
|
46 |
|
|
|
34 |
|
|
|
625 |
|
|
|
586 |
|
|
|
115 |
|
|
|
68 |
|
Other |
|
|
129 |
|
|
|
168 |
|
|
|
54 |
|
|
|
84 |
|
|
|
420 |
|
|
|
812 |
|
|
|
179 |
|
|
|
284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,180 |
|
|
$ |
952 |
|
|
$ |
207 |
|
|
$ |
171 |
|
|
$ |
3,305 |
|
|
$ |
2,832 |
|
|
$ |
605 |
|
|
$ |
495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in revenues for the first nine months of 2005 over 2004 from manufactured housing
and finance activities of Clayton Homes (Clayton) was primarily attributed to increased sales of
manufactured homes ($342 million) and increased interest income ($405 million) from comparatively
higher installment loan balances. Installment loan balances have increased approximately $5.9
billion over the past twelve months to $9.7 billion as of September 30, 2005, reflecting the impact
of several loan portfolio acquisitions as well as loan originations. Other finance revenues in the
first nine months of 2004 included $290 million from the consolidation of Value Capital L.P. As a
result of a significant decline in the percentage of Berkshires economic interest in Value
Capital, Berkshire ceased consolidation of Value Capital effective July 1, 2004 and thereafter
reported its investment in Value Capital pursuant to the equity method. Additional information
concerning Berkshires investment in Value Capital is contained in Note 15 to the Consolidated
Financial Statements in the 2004 Annual Report.
Pre-tax earnings from Claytons manufactured housing and finance activities increased $54 million
for the third quarter and $168 million for the first nine months due primarily to increased net
interest earned from lending and finance activities, as well as modest improvement in pre-tax
earnings from manufacturing activities. Pre-tax earnings in the third quarter of 2005 included a
loss of $14 million associated with Hurricanes Katrina and Rita. Pre-tax earnings from furniture
and transportation equipment leasing activities in the first nine months of 2005 increased $47
million over 2004, reflecting higher lease revenues and lower general administrative and interest
expenses.
Pre-tax earnings from other finance activities in the first nine months decreased $105
million. Other finance activities include Berkshires investment in Value Capital and the General
Re Securities business which is being run off. Berkshires investment in Value Capital generated a
pre-tax loss of $34 million in the first nine months of 2005 compared to pre-tax earnings of $39
million in 2004. The run-off of business activities of Gen Re Securities generated pre-tax losses
of $63 million for the first nine months of 2005 and $25 million for the first nine months of 2004.
Equity in Earnings of MidAmerican Energy Holdings Company
Earnings from MidAmerican represent Berkshires share of MidAmericans net earnings as
determined under the equity method. In 2005, earnings from MidAmerican were $141 million for the
third quarter and $382 million for the first nine months as compared to a loss of $138
million for the third quarter and earnings of $71 million for the first nine months of 2004. Berkshires
earnings for the third quarter and first nine months of 2004 included its share of after-tax losses
of $347 million and $366 million, respectively, from an operation that was discontinued in the
third quarter of 2004. During the first nine months of 2005, MidAmerican benefited from favorable
comparative results at most of its domestic businesses and from gains on sales of non-strategic
assets and investments. These improvements were partially offset by lower earnings from the U.K.
electricity business. See Note 3 to the Interim Consolidated Financial Statements for additional
information regarding Berkshires investments in MidAmerican.
22
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Investment Gains/Losses
A summary of investment gains and
losses follows. Dollar amounts are in millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
First Nine Months |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Investment gains/losses from - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of investments - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance and other |
|
$ |
270 |
|
|
$ |
303 |
|
|
$ |
698 |
|
|
$ |
813 |
|
Finance and financial products |
|
|
341 |
|
|
|
35 |
|
|
|
544 |
|
|
|
58 |
|
Other-than-temporary impairments |
|
|
(10 |
) |
|
|
(3 |
) |
|
|
(55 |
) |
|
|
(15 |
) |
Foreign currency forward contracts |
|
|
29 |
|
|
|
412 |
|
|
|
(897 |
) |
|
|
207 |
|
Life settlement contracts |
|
|
(16 |
) |
|
|
(22 |
) |
|
|
(68 |
) |
|
|
(154 |
) |
Other |
|
|
127 |
|
|
|
42 |
|
|
|
154 |
|
|
|
230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment gains/losses before income taxes and minority interests |
|
|
741 |
|
|
|
767 |
|
|
|
376 |
|
|
|
1,139 |
|
Income taxes and minority interests |
|
|
261 |
|
|
|
249 |
|
|
|
133 |
|
|
|
378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment gains/losses |
|
$ |
480 |
|
|
$ |
518 |
|
|
$ |
243 |
|
|
$ |
761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior to January 1, 2004, Berkshire accounted for investments in life settlement contracts on
the cost basis. Therefore, the cost of the investment included the initial purchase price plus
periodic maintenance costs. Beginning in 2004, as a result of obtaining information which
suggested that the SEC believed that a different accounting method should be used, these
investments are being accounted for under FASB Technical Bulletin (FTB) 85-4 Accounting for
Purchases of Life Insurance. Under FTB 85-4, the carrying value of each contract at purchase and
at the end of each reporting period is equal to the cash surrender value of the contract. Cash
paid to purchase these contracts that is in excess of the cash surrender value at the date of
purchase is recognized as a loss immediately and periodic maintenance costs, such as premiums
necessary to keep the underlying policy in force, are charged to earnings immediately. The life
insurance benefits are payable to the Company. The pre-tax loss in the first nine months of 2004
included $73 million related to life settlement contracts held at December 31, 2003. Despite the
accounting loss recorded for these contracts, management views these contracts to have a current
value no less than the cost paid for the policies plus any subsequent maintenance costs and
believes these contracts will produce satisfactory earnings. In 2005 the
FASB proposed a staff position (FSP) which addresses investments in life settlement contracts.
If the proposed FSP is adopted, Berkshires accounting for life settlement contracts will change to
the cost method, which would result in the reversal of essentially all of the losses recorded in
2004 and 2005.
Gains and losses from foreign currency forward contracts arise as the value of the U.S. dollar changes
against certain foreign currencies. Small changes in certain foreign currency exchange rates can
produce material changes in the fair value of these contracts given the relatively large net
notional value of Berkshires open contracts ($16.5 billion as of September 30, 2005) and
consequently, may produce exceptional volatility in reported earnings in a given period.
During the first nine months of 2005, the value of most foreign currencies decreased relative to
the U.S. dollar. Thus, forward contracts produced pre-tax losses in 2005 of $897 million for the
first nine months. Correspondingly, over the first nine months of 2004, the value of many foreign
currencies rose relative to the U.S. dollar, and Berkshires contract positions produced a pre-tax
gain of $207 million. Berkshire first began shorting the U.S. dollar in 2002 and since inception
in 2002 through September 30, 2005, has recognized pre-tax gains of $2.1 billion from foreign
currency forward contracts.
For many years, Berkshire has held an investment in common stock of The Gillette Company
(Gillette). On January 28, 2005, The Procter & Gamble Company (PG) announced it had signed an
agreement to acquire 100% of Gillette. Under the terms of the agreement, PG agreed to issue 0.975
shares of its common stock for each outstanding share of Gillette common stock. The transaction
closed on October 1, 2005. Accordingly, Berkshire will recognize a non-cash pre-tax investment
gain of approximately $5 billion upon the conversion of the Gillette shares for PG shares.
Berkshires management does not regard the gain that will be recorded, as required by GAAP, as
meaningful. Berkshire intends to hold the shares of PG just as it has held the Gillette shares.
The gain recognized for financial reporting purposes will be deferred for income tax purposes. The transaction will have no effect on Berkshires
consolidated shareholders equity because the gain included in earnings in the fourth quarter will
be accompanied by a corresponding reduction of unrealized investment gains included in accumulated
other comprehensive income as of September 30, 2005.
23
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Financial Condition
Berkshires balance sheet continues to reflect significant liquidity and a strong capital
base. Consolidated shareholders equity at September 30, 2005 totaled $89.5 billion. Consolidated
cash and invested assets, excluding assets of finance and financial products businesses, totaled
approximately $113.2 billion at September 30, 2005 (including cash and cash equivalents of $41.1
billion) and $102.9 billion at December 31, 2004 (including $40.0 billion in cash and cash
equivalents).
Effective June 30, 2005, Berkshire acquired Medical Protective Corporation (Med Pro)
from an affiliate of General Electric Company (GE). Med Pro is a primary medical malpractice
insurer. In July 2005, Berkshire agreed to acquire Forest River, Inc. (Forest River), a manufacturer of
recreational vehicles in the United States and Canada. The Forest River acquisition closed as of
August 31, 2005. In addition, a few other smaller add on acquisitions were completed by Berkshire
subsidiaries during 2005. Aggregate consideration paid for all acquisitions in 2005 totaled $1.8
billion, most of which was attributable to Med Pro and Forest River.
Berkshires consolidated notes payable and other borrowings, excluding borrowings of finance
businesses, totaled $3,465 million at September 30, 2005 and $3,450 million at December 31, 2004.
During the first nine months of 2005 subsidiary debt declined $183 million due to maturities and
early redemptions and investment contract borrowings increased $262 million.
Berkshires SQUARZ securities originally consisted of $400 million par amount of senior notes due in
November 2007 together with warrants to purchase 4,464 Class A equivalent shares of Berkshire
common stock, which expire in May 2007. A warrant premium is payable to Berkshire at an annual
rate of 3.75% and interest is payable to note holders at a rate of 3.00%. Each warrant provides
the holder the right to purchase either 0.1116 shares of Class A or 3.348 shares of Class B stock
for $10,000. In May 2005, $64 million par amount of senior notes were tendered at the option of
the holders for redemption at par, together with a corresponding amount of warrants. In addition,
holders of the senior notes have the option to require Berkshire to repurchase the senior notes at
par on May 15, 2006, provided that the holders also surrender a corresponding amount of warrants
for cancellation. As of September 30, 2005, $336 million par amount of notes were outstanding.
Assets of the finance and financial products businesses totaled $24.6 billion at September 30,
2005 and $30.1 billion at December 31, 2004. Cash and cash equivalents of finance and financial
products businesses increased $1.5 billion during the first nine months to $4.9 billion.
Manufactured housing loans of Clayton increased approximately $2 billion to about $9.7 billion as
of September 30, 2005, which primarily resulted from loan portfolio acquisitions. Clayton is a
leading builder of manufactured housing, provides financing to customers, and acquires other
installment loan portfolios. Additionally, during the third
quarter of 2005, a portfolio of fixed income securities was liquidated with the proceeds, after the
repayment of related liabilities for securities sold under agreements to repurchase, invested in
cash equivalents.
Liabilities of finance businesses totaled approximately $20.4 billion at September 30, 2005
and at December 31, 2004. Notes payable and other borrowings of Berkshires finance and financial
products businesses totaled $10.7 billion at September 30, 2005 and $5.4 billion at December 31,
2004. During the first nine months of 2005, Berkshire Hathaway Finance Corporation (BHFC) issued
a total of $5.25 billion par amount of medium term notes. The proceeds of these issues were used
to finance new and existing loans of Clayton. Principal and interest due under the BHFC medium
term notes are guaranteed by Berkshire.
Berkshire believes that it currently maintains sufficient liquidity to cover its existing
contractual obligations and provide for contingent liquidity.
Contractual Obligations
Berkshire and its subsidiaries have contractual obligations associated with ongoing business
and financing activities, which will result in cash payments in future periods. Certain of those
obligations, such as notes payable and other borrowings and related interest payments, are
reflected in the Consolidated Financial Statements. In addition, Berkshire and its subsidiaries
have entered into long-term contracts to acquire goods or services in the future, which are not
currently reflected in the financial statements and will be reflected in future periods as the
goods are delivered or services provided. As discussed in the Financial Condition section above,
Berkshire Hathaway Finance Corporation issued $5.25 billion par amount of notes during the first
nine months of 2005. Principal and interest with respect to such notes are expected to be paid as
follows: 2005$115 million; 2006/2007$420 million; 2008/2009$2,361 million; after 2009$3,581
million.
24
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Contractual Obligations (Continued)
Effective June 30, 2005 Berkshire completed the acquisition of Med Pro. Gross
unpaid losses and loss adjustment expenses of Med Pro totaled approximately $1.8 billion as of September 30, 2005. The timing and amount of loss payments by Med Pro are contingent
upon the ultimate outcome of claims settlements that will occur over
several years and accordingly, considerable judgment is
involved in making such estimates. The actual timing and amount of loss payments may differ
materially from current estimates, consistent with Berkshires other property and casualty
insurance businesses. Otherwise, there were no material changes in Berkshires estimated
contractual obligations at September 30, 2005 from those reported in Berkshires Form 10-K for the
year ended December 31, 2004.
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. The balance
sheet items most significantly affected by these estimates are property and casualty insurance and
reinsurance related liabilities, deferred charges on retroactive reinsurance, and goodwill of
businesses acquired.
Berkshires Consolidated Balance Sheet as of September 30, 2005 includes estimated liabilities
for unpaid losses from property and casualty insurance and reinsurance contracts of $48.2 billion
($45.2 billion at December 31, 2004) and reinsurance receivables of $2.8 billion ($2.6 billion at
December 31, 2004). Due to the inherent uncertainties in the process of establishing these
amounts, the actual ultimate claim amounts will differ from the currently recorded amounts. A
small percentage change in estimates of this magnitude will result in a material effect on reported
earnings. For instance, a 5% change in the September 30, 2005 net estimate would produce a $2.3
billion change to pre-tax earnings. Future effects from changes in these estimates will be
recorded as a component of losses incurred in the period of the change.
Unamortized deferred charges on retroactive reinsurance policies assumed totaled $2.4 billion
at September 30, 2005 ($2.7 billion at December 31, 2004). Significant changes in either the
timing or ultimate amount of loss payments may have a significant effect on unamortized deferred
charges and the amount of periodic amortization.
Berkshires Consolidated Balance Sheet as of September 30, 2005 includes goodwill of acquired
businesses of approximately $23.7 billion ($23.0 billion at December 31, 2004). These amounts were
recorded as a result of Berkshires numerous business acquisitions accounted for under the purchase
method. Under SFAS No. 142, which was adopted by Berkshire
as of January 1, 2002, goodwill is required to be reviewed for impairment at least annually. Berkshire will be conducting its annual
review of goodwill for impairment during the fourth quarter.
For additional information on Berkshires critical accounting estimates, reference is made to
Critical Accounting Policies in Managements Discussion and Analysis of Financial Condition and
Results of Operations contained in Berkshires Annual Report for the year ending December 31,
2004.
Accounting Pronouncements to be Adopted
In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151 (SFAS
151), Inventory Costs-an amendment of ARB No. 43, Chapter 4. SFAS 151 discusses the general
principles applicable to the pricing of inventory. This Statement amends ARB 43, Chapter 4, and
provides that abnormal amounts of idle facility expense, freight, handling costs, and wasted
materials (spoilage) should be recognized as current-period charges. In addition, this Statement
requires that allocation of fixed production overheads to the costs of conversion be based on the
normal capacity of production facilities. The provisions of this Statement are effective for
inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of SFAS
151 is not expected to have a material effect on Berkshires financial statements.
In May 2005, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 154 (SFAS 154), Accounting Changes and Error Corrections. SFAS 154 changes the
requirements for the accounting for and reporting of a change in accounting principle. Previously,
voluntary changes in accounting principle were required to be recognized by including in net income
of the period of change the cumulative effect of changing to the new accounting principle. SFAS
154 requires retrospective application to prior periods financial statements of changes in
accounting principle, unless it is impractical to determine either the period-specific effects or
the cumulative effect of the change. When it is impractical to determine the cumulative effect of
applying a change in accounting principle to all prior periods, this Statement requires that the
new accounting principle be applied as if it were adopted prospectively from the earliest date
practicable. The provisions of this Statement are effective for accounting changes and corrections
of errors made in fiscal years beginning after December 15, 2005, with early adoption permitted.
The adoption of SFAS 154 is not expected to have a material effect on Berkshires financial
statements.
25
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
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 or hurricane 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, especially those affecting the property and casualty
insurance industry.
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, 2005, there have been no material changes in the
market risks described in Berkshires most recently issued Annual Report.
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 third quarter, there has been no change in the Corporations internal control over financial
reporting that has materially affected, or is likely to materially affect, the Corporations internal control over
financial reporting.
26
Part II Other Information
Item 1. Legal Proceedings
a) Governmental Investigations
General Reinsurance Corporation (General Reinsurance), a wholly owned subsidiary of General
Re Corporation (General Re) and an indirect wholly owned subsidiary of Berkshire, is continuing
to cooperate fully with the U.S. Attorney for the Eastern District of Virginia, Richmond Division
(the EDVA U.S. Attorney) and the Department of Justice in Washington (the DOJ) in their ongoing
investigation regarding Reciprocal of America (ROA) and, in part, its transactions with General
Reinsurance. The EDVA U.S. Attorney and the DOJ have continued to request additional information
from General Reinsurance regarding ROA and its affiliate, First Virginia Reinsurance, Ltd (FVR)
and General Reinsurances transactions with ROA and FVR. The EDVA U.S. Attorney and the DOJ have
also interviewed a number of current and former officers and employees of General Re and General
Reinsurance. General Reinsurance and four of its current and former employees, including a former
president, originally received subpoenas for documents from the EDVA U.S. Attorney in connection
with the EDVA U.S. Attorneys investigation in October 2003. The EDVA U.S. Attorney recently
issued an additional subpoena to General Reinsurance regarding General Reinsurances transactions
with ROA and FVR. One of the individuals originally subpoenaed in October 2003 has been informed
by the EDVA U.S. Attorney that this individual is a target of the EDVA U.S. Attorneys
investigation. General Reinsurance has also been sued in a number of civil actions related to ROA,
as described below.
General
Re, Berkshire, and certain of Berkshires other insurance subsidiaries, including National
Indemnity Company (NICO) have also been continuing to cooperate fully with the U.S. Securities
and Exchange Commission (SEC), the DOJ and the New York State Attorney General (NYAG) in their
ongoing investigations of non-traditional products. The EDVA U.S. Attorney and the DOJ have also
been working with the SEC and the NYAG in connection with these investigations. General Re
originally received subpoenas from the SEC and NYAG in January 2005. General Re, Berkshire and
NICO have been providing information to the government relating to transactions between General
Reinsurance or NICO (or their 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, General Re and Berkshire
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 reviewing the
role of General Re and its subsidiaries, as well as that of their counterparties, in these
transactions. The SEC, NYAG, DOJ and the EDVA U.S. Attorney have 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, and have indicated they plan to interview additional such
individuals.
Berkshire believes that the government is reviewing the role of General Re and its
subsidiaries, as well as that of their counterparties, in certain finite transactions, including
whether General Re or its subsidiaries conspired with others to misstate counterparty financial
statements or aided and abetted such misstatements by the counterparties. In one case, a
transaction initially effected with American International Group (AIG) in late 2000, AIG has
corrected its prior accounting for the transaction on the grounds, as stated in AIGs 2004 10K,
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 described below. 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 transactions.
In May 2005, General Re terminated the consulting services of its former Chief Executive
Officer, Ronald Ferguson, after Mr. Ferguson invoked the Fifth Amendment in response to questions
from the SEC and DOJ relating to their investigations. Mr. Ferguson had been subpoenaed to provide
testimony in connection with these investigations. In June 2005, John Houldsworth, the former Chief
Executive Officer of Cologne Reinsurance Company (Dublin) Limited (CRD), a subsidiary of General
Re, pleaded guilty to a federal criminal charge of conspiring with others to misstate certain AIG
financial statements and entered into a partial settlement agreement with the SEC with respect to
such matters. Mr. Houldsworth, who had been on administrative leave, was terminated following this
announcement. In June 2005, Richard Napier, a former Senior Vice President of General Re who had
served as an account representative for AIG, also pleaded guilty to a federal criminal charge of
conspiring with others to misstate certain AIG financial statements and entered into a partial
settlement agreement with the SEC with respect to such matters. General Re terminated Mr. Napier
following the announcement of these actions.
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Item 1. Legal Proceedings (Continued)
In September 2005, Ronald Ferguson, Joseph Brandon, the Chief Executive Officer of General Re,
Christopher Garand, a recently retired Senior Vice President of General Reinsurance, and Robert
Graham, a recently retired Senior Vice President and Assistant General Counsel of General
Reinsurance, each received a Wells notice from the SEC. In addition to Messrs. Houldsworth,
Napier, Brandon, Ferguson, Garand and Graham, Elizabeth Monrad, the former Chief Financial Officer
of General Re, also received a Wells notice from the SEC in May 2005 in connection with its
investigation.
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.
On April 14, 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 appointed by APRA
under section 52 of the Insurance Act 1973 has been conducting an investigation including a request
for the production of documents of GRAs financial or finite reinsurance business. GRA has been
cooperating fully with this investigation.
In December 2004, the Financial Services Authority (FSA) advised General Reinsurances
affiliate Faraday Group (Faraday) that it was investigating Milan Vukelic, the then Chief
Executive Officer of Faraday with respect to transactions entered into between GRA and companies
affiliated with FAI Insurance Limited in 1998. Mr. Vukelic previously served as the head of General
Res international finite business unit. In April 2005, the FSA advised General Reinsurance that it
was investigating Mr. Vukelic and a former officer of CRD with respect to certain finite risk
reinsurance transactions, including transactions between CRD and several other insurers. In
addition, the FSA has requested that General Reinsurance affiliates based in the United Kingdom
provide information relating to the transactions involved in their investigations, including
transactions with AIG. General Reinsurance and its affiliates are cooperating fully with the FSA in
these matters. In May 2005, Mr. Vukelic was placed on administrative leave and in July 2005 his
employment was terminated.
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.
General Reinsurances subsidiary, Kolnische Ruckversicherungs-Gesellschaft AG (Cologne Re),
is also cooperating fully with requests for information 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 AIG. General
Reinsurance is also providing information to and cooperating fully with the Office of the
Superintendent of Financial Institutions Canada in its inquiries regarding the activities of
General Re and its affiliates relating to finite reinsurance.
b) Civil Litigation
Litigation Related to ROA
General Reinsurance and four of its current and former employees, along with numerous other
defendants, have been sued in a number of civil actions related to ROA. Plaintiffs assert various
claims in these civil actions, including breach of contract, unjust enrichment, fraud and
conspiracy, against General Reinsurance and others, arising from various reinsurance coverages
General Reinsurance provided to ROA and related entities.
Seven putative class actions were initiated by doctors, hospitals and lawyers that purchased
insurance through ROA or certain of its Tennessee-based risk retention groups. These complaints
seek compensatory, treble, and punitive damages in an amount plaintiffs contend is just and
reasonable. General Reinsurance is also subject to actions brought by the Virginia Commissioner of
Insurance, as Deputy Receiver of ROA, the Tennessee Commissioner of Insurance, as Liquidator for
three Tennessee risk retention groups, and a federal lawsuit filed by a Missouri-based hospital
group. The first of these actions was filed in March 2003 and additional actions were filed in
April 2003 through July 2004. In the action filed by the Virginia Commissioner of Insurance, the
Commissioner asserts in several of its claims that the alleged damages being sought exceed $200
million in the aggregate as against all defendants. These ten cases are collectively assigned to
the U.S. District Court for the Western District of Tennessee for pretrial proceedings. General
Reinsurance has filed motions to dismiss all of the claims against it in these ten cases and the
court has not yet ruled on these motions. No discovery has been initiated in these cases.
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Item 1. Legal Proceedings (Continued)
General Reinsurance is also a defendant in two lawsuits filed in Alabama state courts. The
first suit was filed in the Circuit Court of Montgomery County by a group of Alabama hospitals that
are former members of the Alabama Hospital Association Trust (AHAT). This suit (the AHA Action)
alleged violations of the Alabama Securities Act, conspiracy, fraud, suppression, unjust enrichment
and breach of contract against General Reinsurance and virtually all of the defendants in the
federal suits based on an alleged business combination between AHAT and ROA in 2001 and subsequent
capital contributions to ROA in 2002 by the Alabama hospitals. The allegations of the AHA Action
are largely identical to those set forth in the complaint filed by the Virginia receiver for ROA.
General Reinsurance previously filed a motion to dismiss all of the claims in the AHA Action. The
motion was granted in part by an order in March 2005, which dismissed the Alabama Securities Act
claim against General Reinsurance and ordered plaintiffs to amend their allegations of fraud and
suppression. Plaintiffs in the AHA Action filed their Amended and Restated Complaint in April 2005,
alleging claims of conspiracy, fraud, suppression and aiding and abetting breach of fiduciary duty
against General Reinsurance. General Reinsurance filed a motion to dismiss all counts of the
Amended and Restated Complaint in May 2005. The Special Master appointed by the court heard
arguments on July 13, 2005 and recommended denial of the motion on July 22, 2005. On July 22,
2005, the Court denied General Reinsurances motion to dismiss. General Reinsurance filed and
served its answer and affirmative defenses to the Amended and Restated Complaint on September 1,
2005. Discovery has begun. The second suit, also filed in the Circuit Court of Montgomery County,
was initiated by Baptist Health Systems, Inc., a former member of AHAT, and alleged claims
identical to those in the initial AHA Complaint, plus claims for breach of fiduciary duty and
wantonness. These cases have been consolidated for pretrial purposes. Baptist filed its First
Amended Complaint in April 2005, alleging violations of the Alabama Securities Act, conspiracy,
fraud, suppression, breach of fiduciary duty, wantonness and unjust enrichment against General
Reinsurance. General Reinsurance filed a motion to dismiss all counts of the Amended and Restated
Complaint in May 2005. The Special Master heard arguments on July 13, 2005, and on July 22, 2005,
recommended dismissal of the claim under the Alabama Securities Act, but recommended denial of the
motion to dismiss the remaining claims. On July 22, 2005, the Court denied General Reinsurances
motion to dismiss. General Reinsurance filed and served its answer and affirmative defenses to the
Amended and Restated Complaint on September 1, 2005. Discovery has begun. The AHA Action and the
Baptist action claim damages in excess of $60 million in the aggregate as against all defendants.
Actions related to AIG
General Reinsurance received a Summons and a Consolidated Amended Class Action Complaint on
April 29, 2005, in the matter captioned In re American International Group Securities Litigation,
Case No. 04-CV-8141-(LTS), United States District Court, Southern District of New York. This is a
putative class action asserted on behalf of investors who purchased publicly-traded securities of
AIG between October 1999 and March 2005. On June 7, 2005, General Reinsurance received a second
Summons and Class Action Complaint in a putative class action asserted on behalf of investors who
purchased AIG securities between October 1999 and March 2005, captioned San Francisco Employees
Retirement System, et al. vs. American International Group, Inc., et al., Case No. 05-CV-4270,
United States District Court, Southern District of New York. At a July 2005 conference, the court
ruled that the plaintiffs in case no. 04-CV-8141 would be lead plaintiffs. On September 27, 2005,
the plaintiffs in case no. 04-CV-8141 filed a Consolidated Second Amended Complaint (the
Complaint). The Complaint asserts various claims against AIG, and various of its officers,
directors, investment banks and other parties. Included among the defendants are General
Reinsurance and Messrs. Ferguson, Napier and Houldsworth (whom the Complaint defines as the General
Re Defendants). The Complaint alleges that the General Re Defendants violated Section 10(b) of
the Securities Exchange Act and SEC Rule 10b-5 through their activities in connection with the AIG
transaction described in Governmental Investigations, above. The Complaint seeks damages and
other relief in unspecified amounts. The General Re Defendants pleadings in response to the
Complaint are due to be filed on December 14, 2005. No discovery has taken place.
On July 27, 2005, General Reinsurance received a Summons and a Verified and Amended
Shareholder Derivative Complaint in In re American International Group, Inc. Derivative Litigation,
Case No. 04-CV-08406, United States District Court, Southern District of New York, naming Gen Re
Corporation as a defendant. It is unclear whether the plaintiffs are asserting claims against
General Reinsurance or its parent, General Re. This case is assigned to the same judge as the class
actions described above. The complaint, brought by several alleged shareholders of AIG, seeks
damages, injunctive and declaratory relief against various officers and directors of AIG as well as
a variety of individuals and entities with whom AIG did business, relating to a wide variety of
allegedly wrongful practices by AIG. The allegations against Gen Re Corporation focus on the late
2000 transaction with AIG described above, and the complaint purports to assert causes of action
against Gen Re Corporation for aiding and abetting other defendants breaches of fiduciary duty
and for unjust enrichment. The complaint does not specify the amount of damages or the nature of
any other relief sought against Gen Re Corporation. In August 2005, General Reinsurance received
a Summons and First Amended Consolidated Shareholders
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Item 1. Legal Proceedings (Continued)
Derivative Complaint in In re American International Group, Inc. Consolidated Derivative
Litigation, Case No. 769-N, Delaware Chancery Court. The claims asserted in the Delaware complaint
are substantially similar to those asserted in the New York derivative complaint described earlier
in this paragraph, except that the Delaware complaint makes clear that the plaintiffs are asserting
claims against both General Reinsurance and General Re. Proceedings in both the New York
derivative suit and the Delaware derivative suit are stayed until January 10, 2006.
FAI/HIH Matter
In December 2003, the Liquidators of both FAI Insurance Limited (FAI) and HIH Insurance
Limited (HIH) advised GRA and Cologne Re that they intended to assert claims arising from
insurance transactions GRA entered into with FAI in May and June 1998. In August 2004, the
Liquidators filed claims in the Supreme Court of New South Wales in order to avoid the expiration
of a statute of limitations for certain plaintiffs but neither GRA nor Cologne Re have been served
with legal process by the Liquidators. The focus of the Liquidators allegations against GRA and
Cologne Re are the 1998 transactions GRA entered into with FAI (which was acquired by HIH in 1999).
The Liquidators contend, among other things, that GRA and Cologne Re engaged in deceptive conduct
that assisted FAI in improperly accounting for such transactions as reinsurance, and that such
deception led to HIHs acquisition of FAI and caused various losses to FAI and HIH.
Insurance Brokerage Antitrust Litigation
Berkshire, General Re and General Reinsurance are defendants in this multi-district
litigation, In Re: Insurance Brokerage Antitrust Litigation, MDL No. 1663 (D.N.J.). In February
2005, the Judicial Panel on Multidistrict Litigation transferred several different cases to the
District of New Jersey for coordination and consolidation. Each consolidated case concerned
allegations of 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. Berkshire, General Re and General Reinsurance were not parties to the
original, transferred cases. On August 1, 2005, the named plaintiffsfourteen businesses, two
municipalities, and three individualsfiled their First Consolidated Amended Commercial Class
Action Complaint, and Berkshire, General Re and General Reinsurance
(along with a large number of
insurance companies and insurance brokers) were named as defendants in the Amended Complaint. The plaintiffs claim that
all defendants engaged in a pattern of racketeering activity, in violation of RICO, and that they
conspired to restrain trade. They further allege that the broker defendants breached fiduciary
duties to the plaintiffs, that the insurer defendants aided and abetted that breach, and that all
defendants were unjustly enriched in the process. Plaintiffs seek treble damages in an unspecified
amount, together with interest and attorneys fees and expenses. They also seek a declaratory
judgment of wrongdoing as well as an injunction against future anticompetitive practices.
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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. |
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(Registrant) |
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Date November 4, 2005
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/s/ Marc D. Hamburg
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(Signature) |
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Marc D. Hamburg, Vice President |
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and Principal Financial Officer |
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