1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
[ ] 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)
Delaware 47-0813844
------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification number)
incorporation or organization)
1440 Kiewit Plaza, Omaha, Nebraska 68131
----------------------------------------
(Address of principal executive office)
(Zip Code)
(402) 346-1400
--------------
(Registrant's 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.
[X] [ ]
YES NO
Number of shares of common stock outstanding as of August 1, 2001:
Class A -- 1,334,635
Class B -- 5,778,866
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FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 6/30/01
PAGE NO.
--------
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets --
June 30, 2001 and December 31, 2000 2
Consolidated Statements of Earnings --
Second Quarter and First Half 2001 and 2000 3
Condensed Consolidated Statements of Cash Flows --
First Half 2001 and 2000 4
Notes to Interim Consolidated Financial Statements 5 - 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 12 - 18
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
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FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 6/30/01
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(dollars in millions except per share amounts)
June 30, December 31,
2001 2000
-------- ------------
ASSETS
Cash and cash equivalents .................................. $ 7,143 $ 5,263
Investments:
Securities with fixed maturities ........................ 31,233 32,567
Equity securities ....................................... 29,160 37,619
Other ................................................... 1,924 1,637
Receivables ................................................ 11,789 11,764
Inventories ................................................ 2,270 1,275
Investments in MidAmerican Energy Holdings Company ......... 1,771 1,719
Assets of finance and financial products businesses ........ 30,885 16,829
Property, plant and equipment .............................. 4,597 2,699
Goodwill of acquired businesses ............................ 21,244 18,875
Other assets ............................................... 6,760 5,545
-------- --------
$148,776 $135,792
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and loss adjustment expenses ........................ $ 35,929 $ 33,022
Unearned premiums .......................................... 4,753 3,885
Accounts payable, accruals and other liabilities ........... 9,503 8,374
Income taxes, principally deferred ......................... 7,098 10,125
Borrowings under investment agreements and other debt ...... 3,660 2,663
Liabilities of finance and financial products businesses ... 27,763 14,730
-------- --------
88,706 72,799
-------- --------
Minority shareholders' interests ........................... 1,340 1,269
-------- --------
Shareholders' equity:
Common Stock:*
Class A Common Stock, $5 par value
and Class B Common Stock, $0.1667 par value ......... 8 8
Capital in excess of par value .......................... 25,555 25,524
Accumulated other comprehensive income .................. 13,139 17,543
Retained earnings ....................................... 20,028 18,649
-------- --------
Total shareholders' equity .......................... 58,730 61,724
-------- --------
$148,776 $135,792
======== ========
* 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 1,527,140 shares outstanding at June
30, 2001 versus 1,526,230 shares outstanding at December 31, 2000.
See accompanying Notes to Interim Consolidated Financial Statements
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FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 6/30/01
CONSOLIDATED STATEMENTS OF EARNINGS
(dollars in millions except per share amounts)
Second Quarter First Half
------------------------- -------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
REVENUES:
Insurance premiums earned ............................... $ 5,382 $ 3,408 $ 9,108 $ 6,628
Sales and service revenues .............................. 3,812 1,696 7,090 3,303
Interest, dividend and other investment income .......... 680 627 1,358 1,256
Income from MidAmerican Energy Holdings Company ......... 38 22 85 27
Income from finance and financial products businesses ... 84 94 255 376
Realized investment gain ................................ 660 717 902 1,453
---------- ---------- ---------- ----------
10,656 6,564 18,798 13,043
---------- ---------- ---------- ----------
COST AND EXPENSES:
Insurance losses and loss adjustment expenses ........... 4,989 2,975 8,014 5,652
Insurance underwriting expenses ......................... 797 807 1,724 1,683
Cost of products and services sold ...................... 2,646 1,133 4,947 2,221
Selling, general and administrative expenses ............ 756 378 1,486 756
Goodwill amortization ................................... 144 123 286 245
Interest expense ........................................ 57 34 117 67
---------- ---------- ---------- ----------
9,389 5,450 16,574 10,624
---------- ---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST ......... 1,267 1,114 2,224 2,419
Income taxes ............................................ 473 395 812 859
Minority interest ....................................... 21 79 33 113
---------- ---------- ---------- ----------
NET EARNINGS ............................................... $ 773 $ 640 $ 1,379 $ 1,447
========== ========== ========== ==========
Average common shares outstanding * ..................... 1,527,028 1,521,057 1,526,785 1,520,869
NET EARNINGS PER COMMON SHARE * ............................ $ 506 $ 421 $ 903 $ 951
========== ========== ========== ==========
* 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
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FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 6/30/01
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
First Half
----------------------
2001 2000
-------- --------
Net cash flows from operating activities .................................. $ 2,614 $ 943
-------- --------
Cash flows from investing activities:
Purchases of investments ............................................... (4,757) (14,508)
Proceeds from sales and maturities of investments ...................... 8,627 12,337
Loans and investments originated in finance businesses ................. (1,548) (363)
Principal collection on loans and investments
originated in finance businesses ..................................... 772 872
Acquisitions of businesses, net of cash acquired ....................... (3,720) (381)
Other .................................................................. (371) (242)
-------- --------
Net cash flows from investing activities ............................. (997) (2,285)
-------- --------
Cash flows from financing activities:
Proceeds from borrowings of finance businesses ......................... 347 99
Proceeds from other borrowings ......................................... 335 369
Repayments of borrowings of finance businesses ......................... (15) (45)
Repayments of other borrowings ......................................... (331) (428)
Change in short term borrowings of finance businesses .................. 998 --
Changes in other short term borrowings ................................. (338) 169
Other .................................................................. (6) (67)
-------- --------
Net cash flows from financing activities ............................. 990 97
-------- --------
Increase (decrease) in cash and cash equivalents ..................... 2,607 (1,245)
Cash and cash equivalents at beginning of year* ........................... 5,604 4,458
-------- --------
Cash and cash equivalents at end of first half* ........................... $ 8,211 $ 3,213
======== ========
Supplemental cash flow information:
Cash paid during the period for:
Income taxes ......................................................... $ 863 $ 641
Interest of finance and financial products businesses ................ 335 473
Other interest ....................................................... 119 72
Non-cash investing activity:
Liabilities assumed in connection with acquisitions of businesses ...... 2,639 162
Contingent value of Exchange Notes recognized in earnings .............. 44 90
Value of equity securities used to redeem Exchange Notes ............... 87 224
* Cash and cash equivalents are comprised of the following:
Beginning of year --
Finance and financial products businesses ............................ $ 341 $ 623
Other ................................................................ 5,263 3,835
-------- --------
$ 5,604 $ 4,458
======== ========
End of first half --
Finance and financial products businesses ............................ $ 1,068 $ 1,306
Other ................................................................ 7,143 1,907
-------- --------
$ 8,211 $ 3,213
======== ========
See accompanying Notes to Interim Consolidated Financial Statements
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FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 6/30/01
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. GENERAL
The accompanying unaudited Consolidated Financial Statements include the
accounts of Berkshire consolidated with the accounts of all its subsidiaries.
Reference is made to Berkshire's most recently issued Annual Report that
included information necessary or useful to understanding of Berkshire's
businesses and financial statement presentations. In particular, Berkshire's
significant accounting policies and practices were presented as Note 1 to the
Consolidated Financial Statements included in that Report.
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"). Certain
amounts in 2000 have been reclassified to conform with current year
presentation.
For a number of reasons, Berkshire's 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. Realized investment
gains/losses are recorded when investments are sold, other-than-temporarily
impaired or in certain situations, as required by GAAP, when investments are
marked-to-market with the corresponding gain or loss included in earnings.
Variations in amount and timing of realized investment gains/losses can cause
significant variations in periodic net earnings.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
two Statements of Financial Accounting Standards ("SFAS"). SFAS No. 141
"Business Combinations" requires usage of the purchase method for all business
combinations initiated after June 30, 2001, and prohibits the usage of the
pooling of interests method of accounting for business combinations. The
provisions of SFAS No. 141 relating to the application of the purchase method
are generally effective for business combinations completed after July 1, 2001.
Such provisions include guidance on the identification of the acquiring entity,
the recognition of intangible assets other than goodwill acquired in a business
combination and the accounting for negative goodwill.
SFAS No. 142 "Goodwill and Other Intangible Assets" changes the current
accounting model that requires amortization of goodwill, supplemented by
impairment tests, to an accounting model that is based solely upon impairment
tests. SFAS No. 142 also provides guidance on accounting for identifiable
intangible assets that may or may not require amortization. The provisions of
SFAS No. 142 related to accounting for goodwill and intangible assets will be
generally effective for Berkshire at the beginning of 2002, except that certain
provisions related to goodwill and other intangible assets are effective for
business combinations completed after July 1, 2001.
Berkshire has not completed its assessment of these new accounting
standards, although it expects that the provisions of SFAS No. 142 related to
accounting for goodwill will have a significant impact on its consolidated
earnings in 2002 when compared to consolidated earnings for years prior to 2002.
NOTE 2. SIGNIFICANT BUSINESS ACQUISITIONS
During the first quarter of 2001, Berkshire completed two significant
business acquisitions. In addition, Berkshire completed six significant
acquisitions in 2000. Information concerning seven of these acquisitions
follows. Information concerning the other acquisition is contained in Note 4
(Investments in MidAmerican Energy Holdings Company).
Shaw Industries, Inc. ("Shaw")
On January 8, 2001, Berkshire acquired approximately 87.3% of the common
stock of Shaw for $19 per share. An investment group consisting of Robert E.
Shaw, Chairman and CEO of Shaw, Julian D. Saul, President of Shaw, certain
family members and related family interests of Messrs. Shaw and Saul, and
certain other directors and members of management acquired the remaining 12.7%
of Shaw.
Shaw is the world's largest manufacturer of tufted broadloom carpet and
rugs for residential and commercial applications throughout the United States
and exports to most markets worldwide. Shaw markets its residential and
commercial products under a variety of brand names.
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FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 6/30/01
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SIGNIFICANT BUSINESS ACQUISITIONS (CONTINUED)
Johns Manville Corporation ("Johns Manville")
On February 27, 2001, Berkshire acquired Johns Manville. Under the terms
of the Merger Agreement, Berkshire purchased all of the outstanding shares of
Johns Manville common stock for $13 per share.
Johns Manville is a leading manufacturer of insulation and building
products. Johns Manville manufactures and markets products for building and
equipment insulation, commercial and industrial roofing systems, high-efficiency
filtration media, and fibers and non-woven mats used as reinforcements in
building and industrial applications.
Berkshire paid approximately $3,830 million in cash to shareholders of
Shaw and Johns Manville in connection with the acquisitions.
CORT Business Services Corporation ("CORT")
Effective February 18, 2000, Wesco Financial Corporation, an indirect
80.1% owned subsidiary of Berkshire, acquired CORT. CORT is a leading national
provider of rental furniture, accessories and related services in the
"rent-to-rent" segment of the furniture industry.
Ben Bridge Jeweler ("Ben Bridge")
Effective July 3, 2000, Berkshire acquired Ben Bridge. Ben Bridge is the
leading operator of upscale jewelry stores based in major shopping malls in the
Western United States.
Justin Industries, Inc. ("Justin")
Effective August 1, 2000, Berkshire acquired Justin. Principal
businesses of Justin include: Acme Building Brands, a leading manufacturer and
producer of face brick, concrete masonry products and ceramic and marble floor
and wall tile and Justin Brands, a leading manufacturer of Western footwear
under a number of brand names.
U.S. Investment Corporation ("USIC")
Effective August 8, 2000, Berkshire acquired USIC. USIC is the parent of
the United States Liability Insurance Group, one of the premier U.S. writers of
specialty insurance.
Benjamin Moore & Co. ("Benjamin Moore")
Effective December 18, 2000, Berkshire acquired Benjamin Moore. Benjamin
Moore is a formulator, manufacturer and retailer of a broad range of
architectural and industrial coatings, available principally in the United
States and Canada.
Aggregate consideration paid for the five business acquisitions
consummated in 2000 totaled $2,370 million, consisting of $2,146 million in cash
and the remainder in Berkshire Class A and Class B common stock.
The results of operations for each of these entities are included in
Berkshire's consolidated results of operations from the effective date of each
merger. The following table sets forth certain unaudited consolidated earnings
data for the first half of 2000, as if each of the seven acquisitions discussed
above were consummated on the same terms at the beginning of 2000. Pro forma
results for the first half of 2001 were not materially different from reported
results. Dollars are in millions except per share amount.
2000
-------
Total revenues ................................... $16,841
Net earnings ..................................... 1,519
Earnings per equivalent Class A Common Share ..... 996
NOTE 3. BUSINESS ACQUISITIONS SUBSEQUENT TO JUNE 30, 2001
On June 12, 2001, Berkshire entered into agreements to acquire for cash
consideration of approximately $400 million a 90% equity interest in MiTek Inc.
("MiTek") from Rexam PLC. Existing MiTek management agreed to acquire the
remaining 10% interest. The acquisition was completed on July 31, 2001. MiTek,
headquartered in Chesterfield, Missouri, produces steel connector products,
design engineering software and ancillary services for the building components
market.
On July 30, 2001, Berkshire entered into an Agreement and Plan of Merger
with XTRA Corporation ("XTRA"). Pursuant to the merger agreement, Berkshire will
offer to purchase through a cash tender offer all of the outstanding shares of
XTRA for $55.00 per share (approximately $590 million in the aggregate). The
tender offer is expected to commence on August 14, 2001. The offer is
conditioned on, among other things, there being tendered and not withdrawn prior
to the expiration date of the offer a majority of the outstanding shares of XTRA
common stock and is subject to certain regulatory approvals. Following the
tender offer, a Berkshire subsidiary will merge with XTRA. XTRA, headquartered
in Westport, Connecticut, is a leading operating lessor of transportation
equipment. It leases over-the-road trailers, marine containers and intermodal
equipment.
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FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 6/30/01
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. INVESTMENTS IN MIDAMERICAN ENERGY HOLDINGS COMPANY
On March 14, 2000, Berkshire invested approximately $1.24 billion in
common stock and a non-dividend paying convertible preferred stock of a newly
formed entity that merged with and into MidAmerican Energy Holdings Company
("MidAmerican"). Such investment gives Berkshire about a 9.7% voting interest
and a 76% economic interest in MidAmerican on a fully-diluted basis. Berkshire
subsidiaries also acquired approximately $455 million of an 11% non-transferable
trust preferred security. Mr. Walter Scott, Jr., a member of Berkshire's Board
of Directors, controls approximately 86% of the voting interest in MidAmerican.
MidAmerican is a global leader in the production of energy from
diversified fuel sources including geothermal, natural gas, hydroelectric,
nuclear and coal. MidAmerican also is a leader in the supply and distribution of
energy in the U.S. and U.K. consumer markets.
Berkshire's aggregate investments in MidAmerican are included in the
Consolidated Balance Sheets as Investments in MidAmerican Energy Holdings
Company. Berkshire is accounting for the common and non-dividend paying
convertible preferred stock pursuant to the equity method. The carrying value of
these equity method investments totaled $1,316 million at June 30, 2001 and
$1,264 million at December 31, 2000.
The Consolidated Statements of Earnings reflect, as Income from
MidAmerican Energy Holdings Company, Berkshire's proportionate share of
MidAmerican's net income with respect to the investments accounted for pursuant
to the equity method, as well as interest earned on the 11% trust preferred
security. Income derived from equity method investments totaled $60 million for
the first half of 2001 and $12 million for the period beginning on March 14,
2000 and ending June 30, 2000.
NOTE 5. INVESTMENTS IN SECURITIES WITH FIXED MATURITIES
Data with respect to investments in securities with fixed maturities
(other than securities with fixed maturities held by finance and financial
products businesses -- See Note 10) are shown in the tabulation below (in
millions).
June 30, December 31,
2001 2000
-------- ------------
Amortized cost ............................ $ 30,735 $ 32,420
Gross unrealized gains .................... 723 512
Gross unrealized losses ................... (225) (365)
-------- --------
Estimated fair value ...................... $ 31,233 $ 32,567
======== ========
NOTE 6. INVESTMENTS IN EQUITY SECURITIES
Data with respect to investments in equity securities are shown in the
tabulation below (in millions).
June 30, December 31,
2001 2000
-------- ------------
Total cost ................................. $ 9,103 $ 10,402
Gross unrealized gains ..................... 20,236 27,294
Gross unrealized losses .................... (179) (77)
-------- --------
Total fair value ........................... $ 29,160 $ 37,619
======== ========
Fair value:
American Express Company ................... $ 5,882 $ 8,329
The Coca-Cola Company ...................... 9,000 12,188
The Gillette Company ....................... 2,783 3,468
Wells Fargo & Company ...................... 2,473 3,067
Other equity securities .................... 9,022 10,567
-------- --------
Total ...................................... $ 29,160 $ 37,619
======== ========
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FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 6/30/01
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. DEFERRED INCOME TAX LIABILITIES
The tax effects of significant items comprising Berkshire's net deferred tax
liabilities as of June 30, 2001 and December 31, 2000 are as follows (in
millions).
June 30, December 31,
2001 2000
-------- ------------
Deferred tax liabilities:
Relating to unrealized appreciation of investments ......... $ 7,193 $ 9,571
Deferred charges reinsurance assumed ....................... 1,116 916
Investments ................................................ 498 441
Other ...................................................... 1,011 717
-------- --------
9,818 11,645
-------- --------
Deferred tax assets:
Unpaid losses and loss adjustment expenses ................. (889) (1,061)
Unearned premiums .......................................... (258) (227)
Other ...................................................... (1,636) (754)
-------- --------
(2,783) (2,042)
-------- --------
Net deferred tax liability .................................... $ 7,035 $ 9,603
======== ========
NOTE 8. COMMON STOCK
The following table summarizes Berkshire's common stock activity during
the first half of 2001.
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, 2000 ................... 1,343,904 5,469,786
Conversions of Class A Common Stock
To Class B Common Stock and other ......... (6,385) 218,843
---------- ----------
Balance at June 30, 2001 ....................... 1,337,519 5,688,629
========== ==========
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 1,527,140
shares outstanding at June 30, 2001 and 1,526,230 shares outstanding at December
31, 2000.
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 9. COMPREHENSIVE INCOME
Berkshire's comprehensive income for the second quarter and first half
of 2001 and 2000 is shown in the table below (in millions). Other comprehensive
income consists principally of unrealized gains and losses on investments and
foreign currency translation adjustments associated with foreign-based business
operations.
Second Quarter First Half
-------------------- -------------------
2001 2000 2001 2000
------- ------- ------- -------
Net earnings .................................................... $ 773 $ 640 $ 1,379 $ 1,447
------- ------- ------- -------
Other comprehensive income:
Increase (decrease) in unrealized appreciation of investments ... (732) 975 (6,780) (2,561)
Applicable income taxes and minority interests ............. 268 (289) 2,420 963
Other, principally foreign currency translation adjustments ..... 6 (66) (72) (91)
Applicable income taxes and minority interests ............. 15 15 28 35
------- ------- ------- -------
(443) 635 (4,404) (1,654)
------- ------- ------- -------
Comprehensive income ............................................ $ 330 $ 1,275 $(3,025) $ (207)
======= ======= ======= =======
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FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 6/30/01
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. FINANCE AND FINANCIAL PRODUCTS BUSINESSES
Assets and liabilities of Berkshire's finance and financial products
businesses are summarized below (in millions).
June 30, December 31,
2001 2000
-------- ------------
ASSETS
Cash and cash equivalents ................................ $ 1,068 $ 341
Investments in securities with fixed maturities:
Held-to-maturity, at cost ........................... 1,741 1,664
Trading, at fair value .............................. 17,444 5,244
Available-for-sale, at fair value ................... 831 880
Trading account assets ................................... 5,894 5,429
Loans and other receivables .............................. 1,872 1,186
Securities purchased under agreements to resell .......... 675 680
Other .................................................... 1,360 1,405
------- -------
$30,885 $16,829
======= =======
LIABILITIES
Securities sold under agreements to repurchase ........... $15,297 $ 3,386
Securities sold but not yet purchased .................... 716 715
Trading account liabilities .............................. 5,003 4,974
Notes payable and other borrowings ....................... 3,591 2,116
Annuity reserves and policyholder liabilities ............ 881 868
Other .................................................... 2,275 2,671
------- -------
$27,763 $14,730
======= =======
NOTE 11. BUSINESS SEGMENT DATA
A disaggregation of Berkshire's consolidated data for the second quarter
and first half of each of the two most recent years is as follows. Amounts are
in millions.
Second Quarter First Half
---------------------- ----------------------
2001 2000 2001 2000
-------- -------- -------- --------
REVENUES
--------
OPERATING BUSINESSES:
Insurance group:
Premiums earned:
GEICO .................................................. $ 1,504 $ 1,383 $ 2,966 $ 2,691
General Re ............................................. 2,092 1,815 4,090 3,495
Berkshire Hathaway Reinsurance Group ................... 1,671 141 1,831 305
Berkshire Hathaway Primary Insurance Group ............. 115 69 221 137
Interest, dividend and other investment income ........... 724 666 1,426 1,327
-------- -------- -------- --------
Total insurance group ....................................... 6,106 4,074 10,534 7,955
Shaw Industries ............................................. 1,064 -- 2,031 --
Building products * ......................................... 916 -- 1,382 --
Flight services ............................................. 593 539 1,240 1,047
Retail ...................................................... 456 401 893 794
Scott Fetzer Companies ...................................... 231 239 477 502
Other ....................................................... 650 613 1,363 1,334
-------- -------- -------- --------
10,016 5,866 17,920 11,632
RECONCILIATION OF SEGMENTS TO CONSOLIDATED AMOUNT:
Realized investment gain ................................. 660 717 902 1,453
Other .................................................... 7 13 19 26
Eliminations ............................................. (4) -- (4) --
Purchase-accounting adjustments .......................... (23) (32) (39) (68)
-------- -------- -------- --------
$ 10,656 $ 6,564 $ 18,798 $ 13,043
======== ======== ======== ========
* Building products businesses include Johns Manville, Benjamin Moore and Acme
Building Brands. See Note 2.
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FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 6/30/01
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. BUSINESS SEGMENT DATA (CONTINUED)
Second Quarter First Half
-------------------- --------------------
2001 2000 2001 2000
------- ------- ------- -------
OPERATING PROFIT BEFORE TAXES
OPERATING BUSINESSES:
Insurance group operating profit:
Underwriting profit (loss):
GEICO ........................................................... $ 21 $ (65) $ -- $ (151)
General Re ...................................................... (369) (242) (502) (520)
Berkshire Hathaway Reinsurance Group ............................ (60) (68) (138) (36)
Berkshire Hathaway Primary Insurance Group ...................... 3 2 9 1
Interest, dividend and other investment income .................... 719 659 1,416 1,317
------- ------- ------- -------
Total insurance group operating profit ............................... 314 286 785 611
Shaw Industries ...................................................... 85 -- 136 --
Building products .................................................... 140 -- 192 --
Flight services ...................................................... 56 56 105 114
Retail ............................................................... 33 32 59 60
Scott Fetzer Companies ............................................... 31 26 61 61
Other ................................................................ 140 164 376 460
------- ------- ------- -------
799 564 1,714 1,306
RECONCILIATION OF SEGMENTS TO CONSOLIDATED AMOUNT:
Realized investment gain .......................................... 648 717 861 1,453
Interest expense * ................................................ (19) (23) (41) (47)
Corporate and other ............................................... 6 12 15 21
Goodwill amortization and other purchase-accounting adjustments ... (167) (156) (325) (314)
------- ------- ------- -------
$ 1,267 $ 1,114 $ 2,224 $ 2,419
======= ======= ======= =======
* Excludes interest allocated to certain businesses.
NOTE 12. COMMITMENTS
On February 26, 2001, Berkshire and Leucadia National Corporation
("Leucadia"), through Berkadia LLC, a newly formed and jointly owned entity
formed for this purpose, committed to loan up to $6 billion on a senior secured
basis (the "Term Loan") to FINOVA Capital Corporation, ("FNV Capital") a
subsidiary of The FINOVA Group ("FNV"). The loan commitment was made in
connection with a proposed restructuring of all of FNV Capital's outstanding
bank debt and publicly traded debt securities. FNV, FNV Capital and other
affiliates filed for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code on
March 7, 2001. The bankruptcy court approved an amended reorganization plan on
June 14, 2001. The amended reorganization plan was confirmed by the bankruptcy
court on August 10, 2001. The reorganization is expected to become effective on
or about August 21, 2001.
Berkadia received a $60 million commitment fee upon execution of the
commitment letter. Berkadia is due an additional $60 million commitment fee on
the funding date of the Term Loan. The Term Loan, which must be repaid in full
five years from the date of issuance, will be secured by all assets of FNV
Capital and will bear interest at a floating rate of LIBOR plus 2.25% (225 basis
points). Under the provisions of the Term Loan, mandatory quarterly prepayments
will be required to the extent FNV has available cash.
Berkadia's commitment to fund the Term Loan is guaranteed by Berkshire
and Leucadia and expires on August 31, 2001. Berkadia expects to finance the
Term Loan through a third party lending facility. Berkshire will provide
Berkadia's lenders with a 90% primary guaranty of such financing and will also
provide a secondary guaranty to the 10% primary guaranty provided by Leucadia.
The FNV bankruptcy plan ("Plan") provides that the proceeds from the
Berkadia Loan and FNV's available cash at the effective date of the Plan will be
used to repay 70% of the principal amount outstanding of all FNV Capital debt
that was outstanding at the date of the FNV bankruptcy filing. The Plan also
provides that the FNV obligations with respect to the remaining 30% of the
principal outstanding will be replaced by newly issued 7.5% Senior Secured Notes
due November 15, 2009 with Contingent Interest due 2016 ("Senior Notes").
At the time of the FNV bankruptcy filing, Berkshire subsidiaries held
approximately $1.43 billion par amount of FNV Capital bonds and bank loans.
Accordingly, upon consummation of the Plan, Berkshire will receive approximately
$1 billion in cash and $430 million principal of the Senior Notes. In addition
upon the issuance of the Senior Notes, Berkshire will commence a tender offer
for up to $500 million principal amount of the Senior Notes at a price equal to
70% of the principal amount. Berkshire has agreed to hold the Senior Notes for a
minimum of four years.
10
12
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 6/30/01
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Net earnings for the second quarter and first half of 2001 and 2000 are
disaggregated in the table that follows. Amounts are after deducting minority
interests and income taxes. Dollar amounts are in millions.
Second Quarter First Half
-------------------- --------------------
2001 2000 2001 2000
------- ------- ------- -------
Insurance segments - underwriting ....................................... $ (274) $ (257) $ (419) $ (473)
Insurance - investment income ........................................... 495 475 978 932
Non-insurance businesses ................................................ 299 180 581 445
Interest expense ........................................................ (12) (17) (28) (31)
Goodwill amortization and other purchase-accounting adjustments ......... (157) (143) (307) (285)
Other ................................................................... 2 7 10 11
------- ------- ------- -------
Earnings before realized investment gain ............................. 353 245 815 599
Realized investment gain ................................................ 420 395 564 848
------- ------- ------- -------
Net earnings ......................................................... $ 773 $ 640 $ 1,379 $ 1,447
======= ======= ======= =======
INSURANCE SEGMENTS -- UNDERWRITING
A summary follows of underwriting results from Berkshire's insurance
segments for the second quarter and first half of 2001 and 2000. Dollar amounts
are in millions.
Second Quarter First Half
---------------- ----------------
2001 2000 2001 2000
----- ----- ----- -----
Underwriting gain (loss) attributable to:
GEICO .............................................. $ 21 $ (65) $ -- $(151)
General Re ......................................... (369) (242) (502) (520)
Berkshire Hathaway Reinsurance Group ............... (60) (68) (138) (36)
Berkshire Hathaway Primary Insurance Group ......... 3 2 9 1
----- ----- ----- -----
Pre-tax underwriting loss ............................. (405) (373) (631) (706)
Income taxes and minority interest .................... (131) (116) (212) (233)
----- ----- ----- -----
Net underwriting loss .............................. $(274) $(257) $(419) $(473)
===== ===== ===== =====
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.
Berkshire's principal insurance businesses are: (1) GEICO, the sixth largest
auto insurer in the United States, (2) General Re, one of the four largest
reinsurers in the world, (3) Berkshire Hathaway Reinsurance Group ("BHRG") and
(4) Berkshire Hathaway Primary Insurance Group.
GEICO CORPORATION
GEICO Corporation through its affiliates ("GEICO") provides private
passenger auto insurance to customers in 48 states and the District of Columbia.
GEICO policies are marketed mainly through direct response methods, in which
insureds apply directly to the company for insurance coverage over the
telephone, through the mail or via the Internet. This is a significant element
in GEICO's strategy to be a low cost insurer and, yet, provide high value to
policyholders.
GEICO's pre-tax underwriting results for the second quarter and first
half of 2001 and 2000 are summarized in the table below. Dollar amounts are in
millions.
Second Quarter First Half
---------------------------------------- ---------------------------------------
2001 2000 2001 2000
----------------- ----------------- ----------------- -----------------
Amount % Amount % Amount % Amount %
------ ------ ------ ------ ------ ------ ------ ------
Premiums earned ................ $1,504 100.0 $1,383 100.0 $2,966 100.0 $2,691 100.0
------ ------ ------ ------ ------ ------ ------ ------
Losses and loss expenses ....... 1,238 82.3 1,192 86.2 2,474 83.4 2,323 86.3
Underwriting expenses .......... 245 16.3 256 18.5 492 16.6 519 19.3
------ ------ ------ ------ ------ ------ ------ ------
Total losses and expenses ...... 1,483 98.6 1,448 104.7 2,966 100.0 2,842 105.6
------ ====== ------ ====== ------ ====== ------ ======
Net underwriting gain (loss) ... $ 21 $ (65) $ -- $ (151)
====== ====== ====== ======
11
13
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 6/30/01
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
INSURANCE SEGMENTS - UNDERWRITING (CONTINUED)
GEICO CORPORATION (CONTINUED)
Premiums earned in the second quarter of 2001 were $1,504 million, an
increase of 8.7% from $1,383 million in 2000. For the first half of 2001,
premiums earned were $2,966 million, an increase of 10.2% from $2,691 million in
2000. The growth in premiums earned reflects increased rates for voluntary auto
business and a slight reduction in policies-in-force during the past year.
In response to increased losses in 2000, GEICO implemented premium rate
increases in many states and tightened underwriting standards. Additional rate
increases will be taken, as necessary, to maintain reasonable underwriting
profitability. It takes six to twelve months for the full effect of a rate
increase to be reflected in premiums earned.
Policies-in-force over the last twelve months increased 2.7% in the
preferred risk auto market and decreased 12.4% in the standard and nonstandard
auto lines. Voluntary auto new business sales in the first six months of 2001
decreased 41.1% compared to 2000 due to decreased advertising and a lower
closure ratio (policies written to quotes). Voluntary auto policies-in-force at
June 30, 2001 were 37,000 (0.8%) less than at December 31, 2000 and are not
expected to change significantly over the remainder of 2001.
Losses and loss adjustment expenses incurred increased 3.9% to $1,238
million in the second quarter of 2001 and 6.5% to $2,474 million for the first
half of 2001. The loss ratio for property and casualty insurance, which measures
the portion of premiums earned that is paid or reserved for losses and related
claims handling expenses, was 83.4% for the first six months of 2001 compared to
86.3% in 2000. The lower ratio reflects the effect of premium rate increases
begun in 2000. Additionally, the rate of increase in claim severity slowed over
the first half of 2001 and the frequency of accidents decreased in certain
coverages compared to the prior year. Incurred losses from catastrophe events
for the first half of 2001 totaled approximately $40.2 million, compared to
$33.7 million in 2000. In 2001, most of the catastrophe losses occurred during
the second quarter, primarily flood claims from Tropical Storm Allison and hail
damage claims in the Midwest.
Underwriting expenses for the second quarter of 2001 declined $11
million (4.3%) from the second quarter of 2000. For the first six months of
2001, underwriting expenses declined $27 million (5.2%) from the expenses for
the comparable period in 2000. Policy acquisition expenses of $306 million
decreased 4.6% in the first six months of 2001 as compared to 2000 due to lower
advertising expenditures. However, the unit cost of acquiring new business has
continued to increase in 2001 reflecting a lower closure ratio. In addition,
underwriting expenses reflect no employee profit sharing expense in the first
six months of 2001 versus an expense accrual of $43 million in 2000.
GENERAL RE
General Re and its affiliates conduct a global reinsurance business with
operations in the United States and 129 other countries around the world.
General Re's principal reinsurance operations are: (1) North American
property/casualty, (2) international property/casualty, and (3) global
life/health. The international property/casualty operations include the direct
reinsurance operations of Germany-based Cologne Re and certain wholly-owned
subsidiaries of General Re, including the broker-market reinsurance operations
(Faraday / DP Mann). At June 30, 2001, General Re held an 88% economic ownership
interest in Cologne Re.
The reinsurance industry continues to contend with difficult
underwriting conditions. While pricing improvements are occurring in certain
markets, price increases in many property/casualty insurance and reinsurance
markets have generally not kept pace with claims inflation in recent years.
Many markets remain under-priced relative to the risks assumed.
General Re's consolidated underwriting results for the first half of
2001 and 2000 were generally unsatisfactory. During the first quarter 2001,
consolidated results improved over the same period in 2000 and prior years'
claims reserves developed in line with expectations. However, results for the
second quarter of 2001 were negatively affected by catastrophe losses and
adverse loss reserve development in the North American property/casualty
operations. Results in the international property/casualty operations continued
to improve in the second quarter and first half of 2001. Global life/health
reinsurance results for the second quarter and first half of 2001 also improved
over the comparable periods of 2000.
12
14
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 6/30/01
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
GENERAL RE (CONTINUED)
The underwriting results for each of General Re's business segments
follow. Dollar amounts are in millions.
North American property/casualty
General Re's North American property/casualty pre-tax underwriting
results for the second quarter and first half of 2001 and 2000 are shown below.
Dollar amounts are in millions.
Second Quarter First Half
---------------------------------------------- --------------------------------------------
2001 2000 2001 2000
-------------------- -------------------- ------------------- --------------------
Amount % Amount % Amount % Amount %
------- ------- ------- ------- ------- ------- ------- -------
Premiums earned .............. $ 1,093 100.0 $ 739 100.0 $ 1,998 100.0 $ 1,408 100.0
------- ------- ------- ------- ------- ------- ------- -------
Losses and loss expenses ..... 1,178 107.8 612 82.8 1,866 93.4 1,182 83.9
Underwriting expenses ........ 212 19.4 208 28.2 484 24.2 399 28.4
------- ------- ------- ------- ------- ------- ------- -------
Total losses and expenses .... 1,390 127.2 820 111.0 2,350 117.6 1,581 112.3
------- ======= ------- ======= ------- ======= ------- =======
Net underwriting loss ........ $ (297) $ (81) $ (352) $ (173)
======= ======= ======= =======
North American property/casualty operations underwrite predominantly
excess reinsurance across multiple lines of business. For the second quarter and
first half of 2001, North American property/casualty earned premiums exceeded
amounts earned during the comparable 2000 periods by $354 million (47.9%) and
$590 million (41.9%), respectively. Premiums earned in the second quarter of
2001 include $275 million from a single retroactive reinsurance contract that
had no significant impact on underwriting results (there were no similar
contracts written in 2000). Earned premium growth in 2001, excluding the
retroactive contract, reflects new business and significant premium rate
increases in individual risk, national accounts and regional/specialty lines of
business.
The North American property/casualty operations produced net
underwriting losses of $297 million and $352 million for the second quarter and
first half of 2001, respectively. These results include $96 million (8.8 loss
ratio points) and $96 million (4.8 loss ratio points) of claims from
catastrophes and other large individual property losses ($20 million per loss or
greater) during the second quarter and first half of 2001, respectively.
Underwriting results for first half of 2000, included $27 million (1.9 loss
ratio points) of claims arising from catastrophes and other large individual
property losses. The catastrophic event affecting the 2001 results was Tropical
Storm Allison in June. While the potential impact of catastrophe and other
large property losses is normally factored into prices established for
reinsurance coverage, the timing and magnitude of such losses can produce
volatility in periodic underwriting results.
The North American property/casualty underwriting results for the second
quarter of 2001 were also adversely affected by unfavorable reserve development
of prior years' claim estimates. This development increased the first half of
2001 underwriting loss by approximately $137 million, and occurred principally
in the casualty treaty, commercial umbrella and casualty individual risk
reinsurance lines, and primarily for accident years from 1998 through 2000.
Underwriting losses for the first half of 2000 included approximately $40
million from adverse loss development. This adverse development primarily
related to business that has since been non-renewed or renewed with improved
pricing and coverage terms.
Over time if the property/casualty business is properly priced, it is
expected the business will generate about breakeven underwriting results.
However, this has not occurred over the period subsequent to Berkshire's
acquisition of General Re at the end of 1998. Management is continuing to take
actions to improve pricing, terms and conditions so as to achieve the targeted
underwriting breakeven results.
International property/casualty
General Re's international property/casualty pre-tax underwriting
results for the second quarter and first half of 2001 and 2000 are shown below.
Dollar amounts are in millions.
Second Quarter First Half
---------------------------------------------- --------------------------------------------
2001 2000 2001 2000
-------------------- -------------------- ------------------- --------------------
Amount % Amount % Amount % Amount %
------- ------- ------- ------- ------- ------- ------- -------
Premiums earned ............ $ 522 100.0 $ 617 100.0 $ 1,110 100.0 $ 1,228 100.0
------- ------- ------- ------- ------- ------- ------- -------
Losses and loss expenses ... 439 84.1 547 88.7 882 79.5 1,110 90.4
Underwriting expenses ...... 160 30.7 195 31.6 350 31.5 409 33.3
------- ------- ------- ------- ------- ------- ------- -------
Total losses and expenses .. 599 114.8 742 120.3 1,232 111.0 1,519 123.7
------- ======= ------- ======= ------- ======= ------- =======
Net underwriting loss ...... $ (77) $ (125) $ (122) $ (291)
======= ======= ======= =======
13
15
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 6/30/01
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
GENERAL RE (CONTINUED)
The international property/casualty operations write quota-share and
excess reinsurance on risks around the world. In recent years, the largest
international markets have been in Germany and other parts of Western Europe.
For the second quarter and first half of 2001, international property/casualty
earned premiums decreased from 2000 levels by $95 million (15.4%) and $118
million (9.6%), respectively. Adjusting for the effect of foreign exchange,
earned premiums decreased 5.6% during the second quarter and grew 0.7% for the
first half of 2001, respectively. For the first half, increased premiums from DP
Mann's Syndicate 435 at Lloyd's and growth in U.K. casualty treaty business were
substantially offset by decreased premiums in Latin America. At Cologne Re,
premium rate increases and new business substantially offset the effects of the
elimination of under-performing business that was not renewed.
Underwriting results of the international property/casualty operations
for the second quarter and first half of 2001 improved over very poor results in
corresponding periods in 2000. Results in 2001 benefited from lower catastrophe
and other large individual property losses and the effects of recent
underwriting initiatives in the direct reinsurance operations. The loss ratio
for the first half of 2001 was 79.5%, compared to 90.4% for the first half of
2000. There were no losses arising from catastrophes and other large individual
property losses for the first half of 2001, compared to $104 million (8.5 loss
ratio points) for the same period of 2000. In 2000, additional losses emerged
from the late December 1999 European winter storms. Partially offsetting
improvements in the direct reinsurance operations were deteriorating results in
the broker-market operations. The broker-market results in 2001 were adversely
affected by large losses, including D.P. Mann's share of losses from the sinking
of an oil rig off South America.
Global life/health
General Re's global life/health pre-tax underwriting results for the
second quarter and first half of 2001 and 2000 are shown below. Dollar amounts
are in millions.
Second Quarter First Half
----------------------------------------- ----------------------------------------
2001 2000 2001 2000
----------------- ------------------ ----------------- ------------------
Amount % Amount % Amount % Amount %
------ ------ ------ ------ ------ ------ ------ ------
Premiums earned ................ $ 477 100.0 $ 459 100.0 $ 982 100.0 $ 859 100.0
------ ------ ------ ------ ------ ------ ------ ------
Losses and loss expenses ....... 367 77.0 410 89.3 793 80.8 730 85.0
Underwriting expenses .......... 105 22.0 85 18.5 217 22.1 185 21.5
------ ------ ------ ------ ------ ------ ------ ------
Total losses and expenses ...... 472 99.0 495 107.8 1,010 102.9 915 106.5
------ ====== ------ ====== ------ ====== ------ ======
Net underwriting gain (loss) ... $ 5 $ (36) $ (28) $ (56)
====== ====== ====== ======
General Re's global life/health affiliates reinsure such risks
worldwide. Second quarter and first half 2001 global life/health earned premiums
grew 3.9% and 14.3%, respectively over the same periods in 2000. Adjusting for
the effect of foreign exchange, earned premiums increased 8.6% during the second
quarter and 19.5% for the first half of 2001. The growth in earned premiums was
primarily due to the life reinsurance business in the U.S., Australia, Asia and
Western Europe. In addition, growth in the U.S. individual health operations,
resulting primarily from the acquisition of two Medicare supplement blocks of
business in 2000, offset decreases in premiums earned in the international
health segment.
The global life/health underwriting results for the first half of 2001
improved significantly from the same period in 2000 and produced a modest
underwriting profit in the second quarter of 2001. The improvement in the first
half of 2001 was primarily attributable to general improvement in the life and
health units of the U.S. operations and improved results in the international
life operations, which reported unsatisfactory results in the first half of
2000. The underwriting profit of $5 million in the second quarter of 2001
resulted from $8 million of underwriting profit earned by the global life
reinsurance operations, offset by $3 million of underwriting losses in the
health business. Underwriting results in the health reinsurance business, while
not yet at acceptable levels, benefited in the second quarter from the more
favorable effects of seasonality in the Medicare supplement business, as
compared to the first quarter of 2001.
14
16
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 6/30/01
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
BERKSHIRE HATHAWAY REINSURANCE GROUP
The Berkshire Hathaway Reinsurance Group ("BHRG") underwrites
principally excess-of-loss reinsurance coverages for insurers and reinsurers
around the world. BHRG is believed to be one of the leaders in providing
catastrophe excess-of-loss reinsurance. In addition, BHRG has generated
significant premium volume from a few very sizable retroactive reinsurance
contracts in recent years. Retroactive reinsurance policies indemnify ceding
companies with respect to loss events that occurred in previous years. Such
policies can provide exceptionally large, but limited, amounts of
indemnification in exchange for significant premiums. Premium amounts reflect,
in part, discounting for time, because the claim payments are estimated to occur
over lengthy time periods. Considerable amounts of asbestos and environmental
liability are often present from claims incurred under these policies.
Premiums earned from retroactive reinsurance policies for the first half
were $1,566 million in 2001 and $25 million in 2000. In 2001, substantially all
of these amounts were earned during the second quarter from two policies.
Underwriting losses attributed to retroactive reinsurance policies for the
second quarter totaled $104 million in 2001 and $38 million in 2000. For the
first half, retroactive policies produced underwriting losses of $202 million in
2001 and $79 million in 2000. The underwriting losses resulted from the
amortization of deferred charges that are established at the inception of
retroactive reinsurance contracts. The deferred charges, which represent the
difference between the policy premium and the ultimate estimated claim reserves,
are subsequently amortized over the estimated claim payment period.
The amortization charges are recorded as losses incurred and therefore,
produce underwriting losses. The increase in amortization charges in 2001 over
2000 periods relates to the significant amount of new business written during
the past two years. Unamortized deferred charges at June 30, 2001 totaled
approximately $3.1 billion, an increase of $1.7 billion from June 30, 2000. As a
result, comparatively higher amortization charges will occur over the remainder
of 2001.
Premiums earned under catastrophe and other non-catastrophe reinsurance
businesses for the second quarter were $115 million in 2001 and $116 million in
2000. For the first half premiums earned from these businesses were $265 million
in 2001 and $280 million in 2000. Premiums earned from catastrophe policies
declined in 2001, whereas premiums earned from non-catastrophe policies
increased. Collectively, catastrophe and other non-catastrophe policies
generated a second quarter underwriting gain of $44 million in 2001 compared to
a $30 million underwriting loss for the second quarter of 2000. For the first
half, these businesses produced underwriting gains of $64 million in 2001 and
$43 million in 2000. Overall, the catastrophe reinsurance business produced
substantial underwriting gains, whereas non-catastrophe policies generated
underwriting losses.
BERKSHIRE HATHAWAY PRIMARY INSURANCE
Premiums earned by Berkshire's numerous other primary insurers of $115
million and $221 million in the second quarter and first half of 2001,
respectively, exceeded the corresponding prior year amounts by $46 million
(66.7%) and $84 million (61.3%), respectively. Most of the increase in premiums
earned derived from the inclusion of the insurance affiliates of U.S. Investment
Corporation ("USIC"), specialty insurers which were acquired by Berkshire in
August 2000. Otherwise, premium increases in 2001 periods at National Indemnity
were partially offset by small premium declines at Central States. Underwriting
results for these businesses in 2001 include net underwriting gains at USIC,
National Indemnity and Kansas Bankers'.
INSURANCE - INVESTMENT INCOME
After-tax net investment income produced by Berkshire's insurance and
reinsurance businesses for the second quarter and first half of 2001 and 2000 is
summarized in the table below. Dollars are in millions.
Second Quarter First Half
------------------- -------------------
2001 2000 2001 2000
------ ------ ------ ------
Net investment income before income taxes and minority interests ..... $ 719 $ 659 $1,416 $1,317
Income taxes and minority interests .................................. 224 184 438 385
------ ------ ------ ------
Net investment income ................................................ $ 495 $ 475 $ 978 $ 932
====== ====== ====== ======
Pre-tax net investment income earned by Berkshire's insurance businesses
for the second quarter of 2001 increased $60 million (9.1%) over the second
quarter of 2000. Investment income for the first six months of 2001 increased
$99 million (7.5%) over the corresponding period in 2000. Essentially all of the
increase in pre-tax investment income in 2001 derives from growth in the
portfolio of fixed maturity investments.
15
17
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 6/30/01
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
INSURANCE - INVESTMENT INCOME (CONTINUED)
Berkshire's insurance operations maintain large levels of invested
assets, derived from shareholder capital, as well as policyholder float.
Policyholder float is an estimate of the net amount temporarily available for
investment from funds provided by policyholders. Such amounts will be eventually
returned to policyholders, primarily in the form of claim and benefit payments
and other refunds arising out of the insurance contracts.
Policyholder float at June 30, 2001 totaled approximately $30.8 billion,
compared to about $ 27.9 billion at December 31, 2000 and $25.8 billion at June
30, 2000. BHRG and General Re produced most of the increase in float over the
past year, a significant portion of which, derived from retroactive reinsurance
and other large excess reinsurance contracts. While there is no certainty as to
the timing or amount of ultimate liabilities under these policies, Berkshire
estimates that the float generated will be held over a long period of time.
NON-INSURANCE BUSINESSES
Results of operations of Berkshire's diverse non-insurance businesses
for the second quarter and first half of 2001 and 2000 are shown in the
following table. Dollar amounts are in millions.
Second Quarter First Half
----------------------------------------- ----------------------------------------
2001 2000 2001 2000
----------------- ------------------ ----------------- ------------------
Amount % Amount % Amount % Amount %
------ ------ ------ ------ ------ ------ ------ ------
Revenues ....................... $3,910 100.0 $1,792 100.0 $7,386 100.0 $3,677 100.0
Costs and expenses ............. 3,425 87.6 1,514 84.5 6,457 87.4 2,982 81.1
------ ------ ------ ------ ------ ------ ------ ------
Earnings before income
taxes/minority interest ...... 485 12.4 278 15.5 929 12.6 695 18.9
Applicable income
taxes/minority interest ...... 186 4.8 98 5.5 348 4.7 250 6.8
------ ------ ------ ------ ------ ------ ------ ------
Net earnings ................... $ 299 7.6 $ 180 10.0 $ 581 7.9 $ 445 12.1
====== ====== ====== ====== ====== ====== ====== ======
Berkshire's numerous non-insurance businesses grew significantly through
the acquisition of several businesses in 2000 and 2001. As a result, in 2001
there are two new significant non-insurance business segments. One new segment
is Shaw Industries ("Shaw"), in which Berkshire acquired an approximately 87.3%
interest on January 8, 2001. In addition, the building products segment consists
of three recently acquired businesses (Johns Manville, acquired February 27,
2001, Benjamin Moore, acquired in December 2000 and Acme Building Brands,
acquired in August 2000). Berkshire also acquired Ben Bridge Jeweler in July
2000, which is included as part of Berkshire's retailing segment. Other
significant businesses acquired in 2000 were CORT Business Services (February
2000) and Justin Brands (August 2000). The results for each of these businesses
are included in Berkshire's earnings from their respective acquisition dates.
Additional information regarding each of these acquisitions is contained in Note
2 of the accompanying interim Consolidated Financial Statements.
Berkshire's non-insurance businesses generated second quarter revenues
totaling $3,910 million in 2001, an increase of 118.2% over the second quarter
of 2000. For the first six months of 2001, these businesses produced revenues of
$7,386 million, an increase of 100.9% over the corresponding period in 2000.
Pre-tax earnings of Berkshire's non-insurance businesses for 2001 exceeded
earnings of the corresponding prior year by $207 million (74.5%) for the second
quarter and $234 million (33.7%) for the first half. The increases in revenues
and pre-tax earnings were largely attributed to the aforementioned new
businesses.
Shaw's carpet and floor coverings business generated revenues of $1,064
million for the second quarter of 2001 and $2,031 million for the first half. On
a comparable year-to-date basis, Shaw's revenues declined about 5% in the first
half of 2001 as compared to 2000, primarily due to lower volume of carpet sold.
For the second quarter and first half of 2001, pre-tax earnings of Shaw totaled
$85 million and $136 million, respectively.
The building products businesses generated second quarter and first
half revenues in 2001 of $ 916 million and $1,382 million, respectively. On a
comparable year-to-date basis, revenues of the building products group declined
about 3% in the first half of 2001 from 2000. Lower revenues from insulation and
engineered products at Johns Manville more than offset a small increase in sales
from paint and coatings at Benjamin Moore. Pre-tax earnings for 2001 were $140
million for the second quarter and $192 million for the first half.
Berkshire's retail businesses generated revenues of $456 million for the
second quarter of 2001 and $893 million for the first half as compared to $401
million and $794 million in the comparable 2000 periods. The comparative
increase in revenues in 2001 was due to business acquisitions occurring during
the second half of 2000. Pre-tax earnings in 2001 of $33 million for the second
quarter and $59 million for the first half were essentially unchanged as
earnings from businesses acquired in the second half of 2000 were offset by an
aggregate earnings decline of the other retail businesses.
16
18
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 6/30/01
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
NON-INSURANCE BUSINESSES (CONTINUED)
Second quarter revenues of $593 million from flight service businesses
increased $54 million (10.0%) in 2001 as compared to 2000 and first half
revenues of $1,240 million increased $193 million (18.4%) in 2001 as compared to
2000. The revenue gains in each period of 2001 reflect increased revenues from
training at FlightSafety and aircraft sales and flight operations management at
Executive Jet. Pre-tax earnings of $56 million from the flight services
businesses for the second quarter of 2001 were unchanged from 2000 and pre-tax
earnings of $105 million for the first half of 2001 declined $9 million (7.9%)
as compared to 2000. A modest increase in comparative pre-tax earnings from
FlightSafety was offset by a decrease in comparative pre-tax earnings from
Executive Jet.
Other non-insurance businesses include several finance and financial
products businesses, which generated pre-tax earnings in the second quarter of
$68 million in 2001 and $87 million in 2000. For the first half, pre-tax
earnings of the finance businesses were $227 million in 2001 and $362 million in
2000. Earnings of Berkshire's finance and financial products businesses are
expected to be volatile due, in part, to the magnitude of investments acquired
under proprietary investment strategies and to changes in their relative fair
values. Other non-insurance businesses also include Berkshire's proportionate
share of net earnings of MidAmerican, which for the first six months were $60
million in 2001 and $12 million in 2000. Berkshire acquired a 76% economic
interest in MidAmerican Energy in March of 2000. See Note 4 to the interim
Consolidated Financial Statements for additional information regarding
MidAmerican.
GOODWILL AMORTIZATION AND OTHER PURCHASE-ACCOUNTING ADJUSTMENTS
Goodwill amortization and other purchase-accounting adjustments reflect
the after-tax effect on net earnings with respect to the amortization of
goodwill of acquired businesses and the amortization of fair value adjustments
to certain assets and liabilities which were recorded at the business
acquisition dates.
Amortization of goodwill was $286 million for the first six months of
2001 and $245 million for the corresponding period in 2000. As a result of new
accounting standards issued by the FASB in June 2001, accounting for goodwill
has changed. Goodwill arising from business acquisitions completed after July 1,
2001, is not subject to systematic amortization. In addition, the systematic
amortization of goodwill related to businesses acquired before June 30, 2001,
will be discontinued effective January 1, 2002. The new accounting standards
require that goodwill of acquired businesses continue to be tested for
impairment. Berkshire has not fully completed an assessment of the new
standards, however, adoption of the new standards is expected to have a
significant impact on periodic consolidated statements of earnings reported
beginning in 2002.
Other purchase-accounting adjustments consist primarily of the
amortization of the excess of market value over historical cost of fixed
maturity investments that existed as of the date of certain business
acquisitions, primarily General Re. Such excess is included in Berkshire's cost
of the investments and is being amortized over the remaining lives of the
investments. The unamortized excess remaining in the cost of fixed maturity
investments totaled $621 million at June 30, 2001.
REALIZED INVESTMENT GAIN/LOSS
Realized investment gain/loss has been a recurring element in
Berkshire's net earnings for many years. Such amounts -- recorded (1) when
investments are sold; (2) other-than-temporarily impaired; and (3) in certain
situations, as provided under GAAP, when investments are marked-to-market with a
corresponding gain or loss included in earnings --may fluctuate significantly
from period to period, resulting in a meaningful effect on reported net
earnings. The Consolidated Statements of Earnings include after-tax realized
investment gains of $420 million and $395 million for the second quarter of 2001
and 2000, respectively. For the first six months, after-tax realized investment
gains totaled $564 million in 2001 and $848 million in 2000.
FINANCIAL CONDITION
Berkshire's balance sheet continues to reflect significant liquidity and
a strong capital base. Shareholders' equity at June 30, 2001, was $58.7 billion.
Consolidated cash and invested assets, excluding assets of finance and financial
products businesses totaled approximately $69.5 billion at June 30, 2001.
Berkshire deployed approximately $3.8 billion in cash for business acquisitions
in the first quarter of 2001. Cash utilized in these acquisitions was generated
internally.
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FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 6/30/01
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
FINANCIAL CONDITION (CONTINUED)
Berkshire's consolidated borrowings under investment agreements and
other debt totaled $3,660 million at June 30, 2001 compared to $4,056 million at
March 31, 2001 and $2,663 million at December 31, 2000. The increase in
borrowings during 2001 relates primarily to the pre-acquisition debt of Shaw and
Johns Manville. Approximately $480 million of the debt of Shaw and Johns
Manville was repaid during the second quarter. During the second quarter of
2001, Berkshire filed a shelf registration to issue up to $700 million in new
debt securities at a future date. The intended purpose of the future issuance of
debt is to fund the repayment of currently outstanding borrowings of certain
Berkshire subsidiaries. The timing and amount of the debt to be issued under the
shelf registration has not yet been determined.
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 Berkshire's 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
Berkshire's significant equity investees, the occurrence of one or more
catastrophic events, such as an earthquake or hurricane that causes losses
insured by Berkshire's 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.
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FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 6/30/01
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of shareholders of Berkshire Hathaway Inc.
("Berkshire"), held April 28, 2001, Berkshire's shareholders reelected
Berkshire's directors in an uncontested election. Proxies for the meeting had
previously been solicited pursuant to Regulation 14A under the Securities
Exchange Act of 1934.
Following are the votes cast in favor and against each director. There
were no votes withheld, abstentions or broker non-votes.
Directors For Against
--------- --- -------
Warren E. Buffett 1,148,258 8,909
Howard G. Buffett 1,153,026 4,140
Susan T. Buffett 1,153,094 4,073
Malcolm G. Chace 1,153,289 3,878
Charles T. Munger 1,148,296 8,871
Ronald L. Olson 1,137,688 19,478
Walter Scott, Jr. 1,143,508 13,658
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
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.
BERKSHIRE HATHAWAY INC.
(Registrant)
Date August 13, 2001 /s/ Marc D. Hamburg
------------------- ------------------------------------
(Signature)
Marc D. Hamburg, Vice President and
Principal Financial Officer
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