e10vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
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
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(I.R.S. Employer |
incorporation or organization
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Identification Number) |
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1440 Kiewit Plaza, Omaha, Nebraska
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68131 |
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(Address of principal executive office)
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(Zip Code) |
Registrants telephone number, including area code (402) 346-1400
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered |
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Class A Common Stock, $5.00 Par Value
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New York Stock Exchange |
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Class B Common Stock, $0.1667 Par Value
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes þ No o
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o Noþ
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 Noo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of
Registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
State the aggregate market value of the voting stock held by non-affiliates of the Registrant as of
June 30, 2006 $92,040,990,000*
Indicate number of shares outstanding of each of the Registrants classes of common stock:
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February 21, 2007 Class A Common Stock, $5 par value
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1,113,649 shares |
February 21, 2007 Class B Common Stock, $0.1667 par value
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12,875,477 shares |
DOCUMENTS INCORPORATED BY REFERENCE
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Document
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Incorporated In |
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Proxy Statement for Registrants |
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Annual Meeting to be held May 5, 2007
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Part III |
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This aggregate value is computed at the last sale price of the common stock on June 30, 2006. It
does not include the value of Class A Common Stock (414,371 shares) and Class B Common Stock
(3,691,820 shares) held by Directors and Executive Officers of the Registrant and members of their
immediate families, some of whom may not constitute affiliates for purpose of the Securities
Exchange Act of 1934. |
TABLE OF CONTENTS
Part I
Item 1. Business
Berkshire Hathaway Inc. (Berkshire, Company or Registrant) is a holding company owning
subsidiaries engaged in a number of diverse business activities. The most important of these are
insurance businesses conducted on both a primary basis and a reinsurance basis. Berkshire also
owns and operates a large number of other businesses engaged in a variety of activities, as
identified herein. Berkshire is domiciled in the state of Delaware, and its corporate headquarters
are located in Omaha, Nebraska.
Berkshires operating businesses are managed on an unusually decentralized basis. There are
essentially no centralized or integrated business functions (such as sales, marketing, purchasing,
legal or human resources) and there is minimal involvement by Berkshires corporate headquarters in
the day-to-day business activities of the operating businesses. Berkshires corporate office
management participates in and is ultimately responsible for significant capital allocation
decisions, investment activities and the selection of the Chief Executive to head each of the
operating businesses.
Insurance and Reinsurance Businesses
Berkshires insurance and reinsurance business activities are conducted through over 60
domestic and foreign-based insurance entities. Berkshires insurance businesses provide insurance
and reinsurance of property and casualty risks world-wide and also reinsure life, accident and
health risks world-wide.
In primary (or direct) insurance activities, the insurer assumes the risk of loss from persons
or organizations that are directly subject to the risks. Such risks may relate to property,
casualty (or liability), life, accident, health, financial or other perils that may arise from an
insurable event. In reinsurance activities, the reinsurer assumes defined portions of risks that
other primary insurers or reinsurers have assumed in their own insuring activities.
Reinsurance contracts are normally classified as treaty or facultative contracts. Treaty
reinsurance refers to reinsurance coverage for all or a portion of a specified class of risks ceded
by the primary insurer, while facultative reinsurance involves coverage of specific individual
risks. Coverage of risks assumed under reinsurance contracts may be classified as quota-share or
excess. Under quota-share (proportional or pro-rata) reinsurance, the reinsurer shares
proportionally in the original premiums, losses and expenses of the primary insurer or reinsurer.
Excess (or non-proportional) reinsurance provides for the indemnification of the primary insurer or
reinsurer for all or a portion of the loss in excess of an agreed upon amount or retention. Both
quota-share and excess reinsurance may provide for aggregate limits of indemnification.
Except for regulatory considerations, there are virtually no barriers to entry into the
insurance and reinsurance industry. Competitors may be domestic or foreign, as well as licensed or
unlicensed. The number of competitors within the industry is not known. Insurers and reinsurers
compete on the basis of reliability, financial strength and stability, ratings, underwriting
consistency, service, business ethics, price, performance, capacity, policy terms and coverage
conditions.
Insurers and reinsurers based in the United States are subject to regulation by their states
of domicile and by those states in which they are licensed or write policies on a non-admitted
basis. The primary focus of regulation is to assure that insurers are financially solvent and that
policyholder interests are otherwise protected. States establish minimum capital levels for
insurance companies and establish guidelines for permissible business and investment activities.
States have the authority to suspend or revoke a companys authority to do business, as conditions
warrant. States regulate the payment of dividends by insurance companies to their shareholders.
Dividends and capital distributions of extraordinary amounts are subject to prior regulatory
approval.
Insurers may market, sell and service insurance policies in the states that they are licensed.
These insurers are referred to as admitted insurers. Admitted insurers are, among other things,
generally required to obtain regulatory approval of policy forms issued and premium rates charged.
Non-admitted insurance markets have developed to provide insurance that is otherwise unavailable
from the admitted insurance markets for a state. Non-admitted insurance, often referred to as
excess and surplus lines, is procured by state-licensed surplus lines brokers who place risks
with insurers not licensed in that state. Non-admitted insurance is subject to considerably less
regulation with respect to policy rates and forms. Reinsurers are normally not required to obtain
approval of premium rates and policy forms.
The insurance regulators of every state participate in the National Association of Insurance
Commissioners (NAIC). The NAIC adopts forms, instructions and accounting procedures for use by
U.S. insurers and reinsurers in preparing and filing annual statutory financial statements.
However, an insurers state of domicile has ultimate authority over these matters. In addition to
its activities relating to the annual statement, the NAIC develops or adopts statutory accounting
principles, model laws, regulations and programs for use by its members. Such matters deal with
regulatory oversight of solvency, compliance with financial regulation standards and risk-based
capital reporting requirements.
1
Item 1. Business
Insurance and Reinsurance Businesses (Continued)
Berkshires insurance companies maintain capital strength at exceptionally high levels. This
strength differentiates Berkshires insurance companies from their competitors. Collectively, the
aggregate statutory surplus of Berkshires U.S. based insurers was approximately $59 billion at
December 31, 2006. All of Berkshires major insurance subsidiaries are rated AAA by Standard &
Poors Corporation, the highest Financial Strength Rating assigned by Standard & Poors, and nearly
all are rated A++ (superior) by A.M. Best with respect to their financial condition and operating
performance.
The insurance industry experienced severe losses from the September 11, 2001 terrorist attack.
On November 26, 2002, President Bush signed into law the Terrorism Risk Insurance Act of 2002,
which established within the Department of the Treasury a Terrorism Insurance Program (Program)
for commercial property and casualty insurers by providing Federal reinsurance of insured terrorism
losses. In December 2005, the Program was extended to December 31, 2007 through the passage of the
Terrorism Risk Insurance Extension Act of 2005. Hereinafter the 2002 and 2005 Acts are
collectively referred to as TRIA. Under TRIA, the Department of the Treasury is charged with
certifying acts of terrorism as having been a terrorist act undertaken on behalf of a foreign
person or interest which resulted in an insured loss in excess of $5 million. After December 31,
2006, TRIA also establishes that the industry insured loss for a certified event must exceed $100 million. To be eligible for Federal reinsurance, insurers must
make available insurance coverage for acts of terrorism, by providing policyholders with clear and
conspicuous notice of the amount of premium that will be charged for this coverage and of the
Federal share of any insured losses resulting from any act of terrorism. Assumed reinsurance is
specifically excluded from TRIA participation. Beginning in 2006, TRIA also excludes certain forms
of direct insurance (commercial auto, burglary, theft, surety and certain professional liability
lines). Terrorism exclusions that were contained within reinsurance contracts remain in effect.
Reinsurers are not required to offer terrorism coverage and are not eligible for Federal
reinsurance of terrorism losses.
In the event of a certified act of terrorism, the Federal government will reimburse insurers
(conditioned on their satisfaction of policyholder notification requirements) for 85% of
their insured losses in excess of a company deductible. The companys deductible is calculated based on the direct earned premium for relevant
commercial lines written by the insurers entire insurance group for the immediately preceding calendar year. Berkshires deductible is 20% in 2007 of the insurance groups 2006 primary
(direct) subject earned premium and is approximately $550 million. There is also an
aggregate limit of $100 billion on the amount of the Federal government coverage for each Program
year.
For many years, the insurance industry has been subject to claims arising from the manufacture
of asbestos and its use in products. The magnitude of such losses has caused many manufacturers to
file for protection under the U.S. Bankruptcy Code. In recent years, increasing numbers of claims
have been filed against users of such products, including claims based upon exposure to asbestos,
even though no related illness has been identified. Consequently, the U.S. Congress has introduced
legislation to assure that resources are available to indemnify claimants suffering from
asbestos-related illnesses and to manage the overall cost of those claims. To date, no legislation
has passed. It is highly uncertain as to whether or not any legislation will be enacted and, if
enacted, how the provisions of such laws will affect Berkshire.
In general, regulation of the insurance industry outside of the United States is subject to
the differing laws and regulations of each country in which the insurer has operations or writes
premiums. Some jurisdictions impose complex regulatory requirements on insurance businesses, while
other jurisdictions impose fewer requirements. In certain foreign countries, reinsurers are
required to be licensed by governmental authorities. These licenses may be subject to
modification, suspension or revocation dependent on such factors as amount and types of reserves
and minimum capital and solvency tests. The violation of regulatory requirements may result in
fines, censures and/or criminal sanctions in various jurisdictions. Berkshire subsidiaries have
historically provided insuring capacity to several syndicates at Lloyds of London. Such capacity
entitles Berkshire to a share of the risks and rewards of the activities of the syndicates in
proportion to the amount of capacity provided. This business is subject to regulation by the
U.K.s Financial Services Authority which maintains comprehensive rules and regulations covering
the legal, financial and operating activities of managing agents and syndicates.
2
Item 1. Business
Insurance and Reinsurance Businesses (Continued)
Berkshires insurance underwriting operations are comprised of the following
sub-groups: (1) GEICO and its subsidiaries, (2) General Re and its subsidiaries, (3) Berkshire
Hathaway Reinsurance Group and (4) Berkshire Hathaway Primary Group. Except for certain
reinsurance products that generate a significant amount of up-front premiums along with estimated
claims expected to be paid over very long periods of time, Berkshire expects to achieve a net
underwriting profit over time and to reject inadequately priced risks. Additional information
related to each of these four underwriting groups follows.
GEICO Berkshire acquired GEICO in January 1996. GEICO is headquartered in Chevy Chase,
Maryland and its principal insurance subsidiaries include: Government Employees Insurance Company,
GEICO General Insurance Company, GEICO Indemnity Company and GEICO Casualty Company. Over the
past five years, these companies have primarily offered private passenger automobile insurance to
individuals in 49 states and the District of Columbia. The subsidiaries market their policies
primarily through direct response methods in which applications for insurance are submitted
directly to the companies via the Internet, by telephone or through the mail.
GEICO competes for private passenger auto insurance customers with other companies that sell
directly to the customer, as well as with companies that use a traditional agency sales force.
Private passenger automobile insurance business is highly competitive in the areas of price and
service. Some insurance companies exacerbate price competition by selling their products for a
period of time at less than adequate rates. This arises as a result of underestimating ultimate
claim costs and/or overestimating the amount of investment income expected to be earned from the
cash flow generated as a result of premiums being received before claims are paid. GEICO will not
knowingly follow that strategy.
As a result of an aggressive advertising campaign and competitive rates, new business sales
and voluntary policies-in-force increased each year from 2002 through 2006. Voluntary auto
policies-in-force have increased about 65% over the past five years. GEICO is currently
the fourth largest auto insurer, in terms of premium volume, in the United States.
Seasonal variations in GEICOs insurance business are not significant. However, extraordinary
weather conditions or other factors may have a significant effect upon the frequency or severity of
automobile claims.
Private passenger auto insurance is stringently regulated by state insurance departments. As
a result, it is difficult for insurance companies to differentiate their products. Competition for
preferred-risk private passenger automobile insurance, which is substantial, tends to focus on
price and level of customer service provided, whereas price tends to be the primary focus for other
risks. GEICO places great emphasis on customer satisfaction. GEICOs cost-efficient direct
response marketing methods and emphasis on customer satisfaction enable it to offer competitive
rates and value to customers.
Management believes that the name and reputation of GEICO is a material asset and protects its
name and other service marks through appropriate registrations.
General Re Berkshire acquired General Re in December 1998. General Re was established in
1980 to serve as the holding company of General Reinsurance Corporation and its affiliates.
General Re affiliates include Kölnische Rückversicherungs Gesellschaft AG (Cologne Re), a
major international reinsurer based in Germany. General Re currently holds a 95% ownership
interest in Cologne Re and in 2006 initiated a plan to acquire the remaining outstanding shares.
General Re subsidiaries currently conduct global reinsurance business in 61 cities and provide
reinsurance coverage world-wide. General Re operates the following reinsurance businesses: North
American property/casualty, International property/casualty, which principally consists of Cologne
Re and the Faraday operations, and life/health reinsurance. General Res reinsurance operations
are primarily based in Stamford, Connecticut and Cologne, Germany. General Re is one of the
largest reinsurers in the world based on capital.
Property/Casualty Reinsurance
General Res North American property/casualty business is marketed directly to clients located
throughout the United States and Canada without involving a broker or intermediary. The North
American property/casualty business underwrites predominantly excess coverages. The operations are
headquartered in Stamford, Connecticut, and are also conducted through 16 branch offices. The
business is domiciled in Delaware and licensed in the District of Columbia and all states but
Hawaii, where it is an accredited reinsurer.
Casualty reinsurance represented approximately 33% of North American property/casualty net
premiums written in 2006 and property reinsurance represented approximately 43%. North American
property/casualty business also includes a few smaller specialty insurers. These insurers,
domiciled in Connecticut, North Dakota and Ohio, underwrite primarily liability and workers
compensation coverages on an excess and surplus basis. Also, they underwrite excess insurance for
self-insured programs. These insurers together represented approximately 24% of General Res North
American property/casualty net premiums written in 2006.
3
Item 1. Business
Insurance and Reinsurance Businesses (Continued)
General Re (Continued)
Property/Casualty Reinsurance (continued)
General Res International property/casualty reinsurance business operations are conducted on
a direct basis and through brokers. Cologne Re as well as several other General Re subsidiaries in
25 countries provide multiple lines of property and casualty reinsurance coverage world-wide.
Coverages are written on both a quota-share and excess basis. In 2006, the International
property/casualty operations principally wrote direct reinsurance in the form of treaties with
lesser amounts written on a facultative basis. International business through brokers is primarily
written through Faraday, which owns the managing agent of Syndicate 435 at Lloyds of London and
provides capacity and participates in the results of Syndicate 435. Through Faraday, General Re
participates in 100% of the results of Syndicate 435. Faraday writes property, casualty and
aviation business on risks world-wide.
Life/Health Reinsurance
In 2006, approximately 45%
of life/health net premiums were written in the United States, 27%
were written in Western Europe and the remaining 28% were written throughout the rest of the
world. These operations provide life, health, long-term care and disability reinsurance on an
individual and group basis. Most of this business is written on a proportional treaty basis, with
the exception of U.S. group health and disability business which is predominately written on an
excess treaty basis. Lesser amounts of life and disability business are also written on a
facultative basis. The life/health business is marketed on a direct basis.
Berkshire Hathaway Reinsurance Group The Berkshire Hathaway Reinsurance Group (BHRG)
operates from offices located in Stamford, Connecticut. Business activities are conducted through
a group of subsidiary companies, led by National Indemnity Company (NICO) and Columbia Insurance
Company. BHRG provides principally excess and quota-share reinsurance to other property and
casualty insurers and reinsurers. The level of BHRGs underwriting activities often fluctuates
significantly from year to year depending on the perceived level of price adequacy in specific
insurance and reinsurance markets. Also, BHRGs mix of business tends to change rapidly as a
result of quickly entering or exiting markets in response to changes in managements perception of
price adequacy or inadequacy.
For many years BHRG has written catastrophe excess of loss treaty reinsurance contracts. In
recent years, BHRG has also written individual policies for primarily excess property risks on both
a primary and facultative reinsurance basis, referred to as individual risk, which are subject to
losses from catastrophe events. Individual risk business includes policies covering terrorism,
natural catastrophe and aviation risks. A catastrophe excess policy provides protection to the
counterparty from the accumulation of primarily property losses arising from a single loss event or
series of events. Catastrophe and individual risk policies may provide significant amounts of
indemnification per contract and a single loss event may produce losses under a number of
contracts.
BHRG cedes essentially none of the risks assumed under catastrophe excess reinsurance
contracts or individual risk contracts, due to perceived uncertainties in recovering amounts from
other reinsurers that are financially weaker. As a result, this business can produce extreme
volatility in periodic underwriting results. Accounting consequences, however, do not influence
decisions of Berkshires management with respect to this or any other business. This factor and
the extraordinary financial strength of BHRG are believed to be the primary reasons why BHRG has
become a major provider of such coverages.
The volume of
quota-share business has declined in recent years reflecting changing market
conditions. However, in 2004 and 2005, BHRG increased its overall volume of aviation and
workers compensation business. Much of BHRGs workers compensation insurance business in recent
years was generated by managing general agencies. The volume of future business conducted in these
markets, like all other markets, is dependent on changes in market conditions, including changes in
prevailing premium rates and coverage terms.
BHRG has entered into several retroactive reinsurance contracts over the past five years.
Coverage under such contracts is usually provided on an excess basis and amounts of indemnification
are subject to a large aggregate limit of indemnification. Retroactive reinsurance contracts
afford protection to ceding companies against the adverse development of claims arising under
policies issued in prior years. Significant amounts of environmental and latent injury claims may
arise under the contracts. In addition, NICO acquired the North American property and casualty
insurance subsidiaries of Converium Holdings AG in December 2006 which have been in run-off since 2004.
In November 2006, Berkshire and Equitas, a London based entity established to reinsure and
manage the 1992 and prior years non-life liabilities of the Names or Underwriters at Lloyds of
London, entered into an agreement for BHRG to provide potentially up to $7 billion of new excess
reinsurance to Equitas. Berkshire will also employ the current staff of Equitas and manage the
run-off of Equitas liabilities. The agreement is subject to the approval by certain regulatory
authorities in the United States and the United Kingdom as well as various other conditions, which
must be obtained by March 31, 2007. Consideration payable under the
arrangement would initially consist of all of Equitas assets less 100 million Pounds Sterling.
4
Item 1. Business
Insurance and Reinsurance Businesses (Continued)
Berkshire Hathaway Reinsurance Group (Continued)
In BHRGs retroactive reinsurance business, the concept of time-value-of-money is an important
element in establishing prices and contract terms, since the payment of losses under the insurance
contracts are often expected to occur over lengthy periods of time. Losses payable under the
contracts are normally expected to exceed premiums and therefore, produce underwriting losses.
This business is accepted, in part, because of the large amounts of policyholder funds (float)
generated for investment, the economic benefit of which will be reflected through investment income
in future periods.
Berkshire Hathaway Primary Group The Berkshire Hathaway Primary Group is a collection of
primary insurance operations that provide a wide variety of insurance coverages to insureds located
principally in the United States. National Indemnity Company and certain affiliates underwrite
motor vehicle and general liability insurance to commercial enterprises on both an admitted and
excess and surplus basis. This business is written nationwide primarily through insurance agents
and brokers and is based in Omaha, Nebraska.
In 2000, Berkshire acquired U.S. Investment Corporation (USIC). USIC, through its three
subsidiaries led by U.S. Liability Insurance Company, is a specialty insurer that underwrites
commercial, professional and personal lines of insurance on an admitted and excess and surplus
basis. Policies are marketed in all 50 states and the District of Columbia through wholesale
insurance agents. USIC companies underwrite and market approximately 90 distinct
specialty property and casualty insurance products.
In 2005, Berkshire acquired Medical Protective Corporation (MedPro) which is based in Ft.
Wayne Indiana. Through its subsidiary, the Medical Protective Company, MedPro is one of the
nations premier professional liability insurers for physicians, dentists and other primary health
care providers. MedPro is a national leader in primary medical professional liability coverage and
risk solutions to physicians, dentists, professional corporations and health care facilities. As
one of the nations first providers of medical professional liability insurance, MedPro has
provided insurance coverage to healthcare providers for over 100 years. Its offerings include
professional liability insurance on both claims-made and occurrence forms, risk management
consulting and education, premium finance solutions, insurance support services, and through
affiliates and partners additional financial products and services for its insureds. MedPros
insurance policies are distributed through a nationwide network of employee market managers and
appointed agents.
Other insurance operations include several companies referred to as the Homestate Companies,
based in California, Colorado and Nebraska and with branch offices in several other states. These
companies market various commercial coverages for standard risks to insureds in their state of
domicile and an increasing number of other states. Also included is Central States Indemnity
Company of Omaha located in Omaha, Nebraska, which provides credit and income protection insurance
marketed primarily to credit and debit card holders nationwide. The Kansas Bankers Surety Company
is an insurer of primarily crime, fidelity, errors and omissions, officers and directors
liability and related insurance coverages directed toward small and medium-sized banks throughout
the Midwest United States.
Berkshire acquired Applied Underwriters, Inc. (Applied) in May 2006. Applied, based in
Omaha, Nebraska, is a leading provider of payroll and insurance services to small and medium sized
employers. Applied, through its subsidiaries, including two workers compensation insurance
companies, principally markets SolutionOne®, a product that bundles
a variety of related
insurance coverages and business services into a seamless package that is designed to reduce the
risks and remove the burden of administrative and regulatory requirements faced by small to medium
sized employers. The buyer of SolutionOne® receives an integrated product that is higher in
quality and more cost effective than traditional multi-provider solutions.
5
Item 1. Business
Insurance and Reinsurance Businesses (Continued)
Property and casualty loss reserves
Berkshires property and casualty insurance companies establish reserves for the estimated
unpaid losses and loss expenses with respect to claims occurring on or before the balance sheet
date. Such estimates include provisions for reported claims, or case estimates, provisions for
incurred-but-not-reported (IBNR) claims and legal and administrative costs to settle claims. The
estimates of unpaid losses and amounts recoverable under reinsurance are established and
continually reviewed by using a variety of actuarial, statistical and analytical techniques.
Reference is made to Critical Accounting Policies, included in Item 7 of this Report.
The following table presents the development of Berkshires consolidated net unpaid losses for
property/casualty contracts from 1996 through 2006. Data in the table related to businesses
acquired is included from the acquisition date forward. General Re is included beginning in 1998,
USIC beginning in 2000, MedPro beginning in 2005 and Converium beginning in 2006.
The first section of
the table reconciles the estimated liability for unpaid losses and
loss adjustment expenses recorded at the balance sheet date for each of the indicated years. The
net liability represents the estimated amount of claims and claim expenses, including IBNR,
outstanding as of the balance sheet date, reduced by estimates of amounts recoverable under ceded
reinsurance, deferred charges on retroactive reinsurance contracts, and reserve discounts.
Certain North American workers compensation loss reserves of General Re are discounted for
both statutory and GAAP reporting purposes at an interest rate of 4.5% per annum for claims
occurring before 2003 and at 1% per annum for claims occurring after 2002. Such discount rates
were approved by the insurance department of General Res domiciliary state. The discount
accretion is included as a component of insurance losses and loss adjustment expenses.
In addition, incurred losses from property and casualty reinsurance include amortization of
deferred charges established on retroactive reinsurance contracts. At inception of these
contracts, unpaid losses are recorded at the estimated ultimate payment amount. However, a
deferred charge asset is also recorded at the inception of the contract. The deferred charges are
subsequently amortized over the expected claim payment period, with such charges recorded as a
component of insurance losses and loss adjustment expenses.
The second section of the table shows the re-estimated amount of the previously recorded net
liability based on experience as of the end of each succeeding year. The estimate is increased or
decreased as losses are paid and more information becomes known about the frequency and severity of
unpaid claims. The line labeled cumulative deficiency (redundancy) represents the aggregate
change in the initial estimates from the original balance sheet date through December 31, 2006.
These amounts have been reported in earnings over time as a component of losses and loss adjustment
expenses and include accumulated reserve discount accruals and deferred charge amortization.
The redundancies or deficiencies shown in each column should be viewed independently of the
other columns, because such adjustments made in earlier years may also be included as a component
of the adjustments in the more recent years. Liabilities assumed under retroactive reinsurance
contracts are treated as occurrences in the year the transaction was entered into, as opposed to
when the underlying losses actually occurred, which is, by definition, prior to the contract date.
Due to the significance of the deferred charges and reserve discounts, the cumulative changes in
such balances, which are included in the cumulative deficiency/redundancy amounts, are also
provided.
The third part of the table shows the cumulative amount of net losses and loss adjustment
expenses paid with respect to recorded net liabilities as of the end of each succeeding year.
While the information in the table provides a historical perspective on the adequacy of unpaid
losses and loss adjustment expenses established in previous years, readers are cautioned against
extrapolating redundancies or deficiencies of the past on current unpaid loss balances. Berkshire
management believes that the reserves established as of the end of 2006 are reasonable and
adequate. However, due to the inherent uncertainties in the reserving process, it cannot be assured
that such balances will ultimately prove to be adequate. Dollar amounts are in millions.
6
Item 1. Business
Insurance and Reinsurance Businesses (Continued)
Property and casualty loss reserves (Continued)
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1996 |
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1997 |
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1998 |
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1999 |
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2000 |
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2001 |
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2002 |
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2003 |
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2004 |
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2005 |
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2006 |
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Unpaid losses per |
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Consolidated Balance Sheet |
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$ |
6,059 |
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$ |
6,637 |
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$ |
22,804 |
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$ |
26,600 |
|
|
$ |
32,868 |
|
|
$ |
40,562 |
|
|
$ |
43,771 |
|
|
$ |
45,393 |
|
|
$ |
45,219 |
|
|
$ |
48,034 |
|
|
$ |
47,612 |
|
Reserve discounts |
|
|
|
|
|
|
|
|
|
|
1,666 |
|
|
|
1,663 |
|
|
|
1,675 |
|
|
|
2,022 |
|
|
|
2,405 |
|
|
|
2,435 |
|
|
|
2,611 |
|
|
|
2,798 |
|
|
|
2,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid losses before discounts |
|
|
6,059 |
|
|
|
6,637 |
|
|
|
24,470 |
|
|
|
28,263 |
|
|
|
34,543 |
|
|
|
42,584 |
|
|
|
46,176 |
|
|
|
47,828 |
|
|
|
47,830 |
|
|
|
50,832 |
|
|
|
50,405 |
|
Ceded reserves |
|
|
(248 |
) |
|
|
(274 |
) |
|
|
(2,167 |
) |
|
|
(2,331 |
) |
|
|
(2,997 |
) |
|
|
(2,957 |
) |
|
|
(2,623 |
) |
|
|
(2,597 |
) |
|
|
(2,405 |
) |
|
|
(2,812 |
) |
|
|
(2,869 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unpaid losses |
|
|
5,811 |
|
|
|
6,363 |
|
|
|
22,303 |
|
|
|
25,932 |
|
|
|
31,546 |
|
|
|
39,627 |
|
|
|
43,553 |
|
|
|
45,231 |
|
|
|
45,425 |
|
|
|
48,020 |
|
|
|
47,536 |
|
Reserve discounts |
|
|
|
|
|
|
|
|
|
|
(1,666 |
) |
|
|
(1,663 |
) |
|
|
(1,675 |
) |
|
|
(2,022 |
) |
|
|
(2,405 |
) |
|
|
(2,435 |
) |
|
|
(2,611 |
) |
|
|
(2,798 |
) |
|
|
(2,793 |
) |
Deferred charges |
|
|
(338 |
) |
|
|
(480 |
) |
|
|
(560 |
) |
|
|
(1,518 |
) |
|
|
(2,593 |
) |
|
|
(3,232 |
) |
|
|
(3,379 |
) |
|
|
(3,087 |
) |
|
|
(2,727 |
) |
|
|
(2,388 |
) |
|
|
(1,964 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unpaid losses, net of
discounts/deferred charges |
|
$ |
5,473 |
|
|
$ |
5,883 |
|
|
$ |
20,077 |
|
|
$ |
22,751 |
|
|
$ |
27,278 |
|
|
$ |
34,373 |
|
|
$ |
37,769 |
|
|
$ |
39,709 |
|
|
$ |
40,087 |
|
|
$ |
42,834 |
|
|
$ |
42,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability re-estimated: |
|
1 year later |
|
|
5,324 |
|
|
|
5,673 |
|
|
|
19,663 |
|
|
|
22,239 |
|
|
|
28,569 |
|
|
|
36,289 |
|
|
|
39,206 |
|
|
|
40,618 |
|
|
|
39,002 |
|
|
|
42,723 |
|
|
|
|
|
|
|
2 years later |
|
|
5,220 |
|
|
|
5,540 |
|
|
|
18,132 |
|
|
|
22,829 |
|
|
|
30,667 |
|
|
|
38,069 |
|
|
|
40,663 |
|
|
|
39,723 |
|
|
|
39,456 |
|
|
|
|
|
|
|
|
|
|
|
3 years later |
|
|
5,093 |
|
|
|
5,386 |
|
|
|
18,464 |
|
|
|
24,079 |
|
|
|
32,156 |
|
|
|
40,023 |
|
|
|
40,517 |
|
|
|
40,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 years later |
|
|
4,973 |
|
|
|
5,293 |
|
|
|
19,750 |
|
|
|
25,158 |
|
|
|
33,532 |
|
|
|
40,061 |
|
|
|
41,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 years later |
|
|
4,906 |
|
|
|
5,304 |
|
|
|
20,581 |
|
|
|
26,894 |
|
|
|
34,096 |
|
|
|
41,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 years later |
|
|
4,920 |
|
|
|
5,246 |
|
|
|
21,172 |
|
|
|
26,676 |
|
|
|
35,566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 years later |
|
|
4,891 |
|
|
|
5,311 |
|
|
|
21,244 |
|
|
|
27,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 years later |
|
|
4,958 |
|
|
|
5,268 |
|
|
|
22,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 years later |
|
|
4,931 |
|
|
|
5,276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 years later |
|
|
4,940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative deficiency (redundancy) |
|
|
(533 |
) |
|
|
(607 |
) |
|
|
2,093 |
|
|
|
5,174 |
|
|
|
8,288 |
|
|
|
7,075 |
|
|
|
4,041 |
|
|
|
1,207 |
|
|
|
(631 |
) |
|
|
(111 |
) |
|
|
|
|
|
Cumulative foreign exchange effect* |
|
|
|
|
|
|
|
|
|
|
(678 |
) |
|
|
(983 |
) |
|
|
(2,137 |
) |
|
|
(1,937 |
) |
|
|
(1,410 |
) |
|
|
(429 |
) |
|
|
89 |
|
|
|
(501 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deficiency (redundancy) |
|
$ |
(533 |
) |
|
$ |
(607 |
) |
|
$ |
1,415 |
|
|
$ |
4,191 |
|
|
$ |
6,151 |
|
|
$ |
5,138 |
|
|
$ |
2,631 |
|
|
$ |
778 |
|
|
$ |
(542 |
) |
|
$ |
(612 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative payments: | |
1 year later |
|
$ |
1,385 |
|
|
$ |
1,811 |
|
|
$ |
4,509 |
|
|
$ |
5,825 |
|
|
$ |
5,352 |
|
|
$ |
6,653 |
|
|
$ |
8,092 |
|
|
$ |
8,828 |
|
|
$ |
7,793 |
|
|
$ |
9,345 |
|
|
|
|
|
|
|
2 years later |
|
|
2,379 |
|
|
|
2,463 |
|
|
|
7,596 |
|
|
|
8,289 |
|
|
|
8,744 |
|
|
|
11,396 |
|
|
|
14,262 |
|
|
|
13,462 |
|
|
|
12,666 |
|
|
|
|
|
|
|
|
|
|
|
3 years later |
|
|
2,891 |
|
|
|
3,330 |
|
|
|
9,384 |
|
|
|
9,889 |
|
|
|
11,625 |
|
|
|
16,378 |
|
|
|
18,111 |
|
|
|
17,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 years later |
|
|
3,372 |
|
|
|
3,507 |
|
|
|
10,436 |
|
|
|
11,513 |
|
|
|
15,608 |
|
|
|
19,658 |
|
|
|
21,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 years later |
|
|
3,465 |
|
|
|
3,598 |
|
|
|
11,421 |
|
|
|
13,840 |
|
|
|
18,504 |
|
|
|
22,438 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 years later |
|
|
3,518 |
|
|
|
3,694 |
|
|
|
12,221 |
|
|
|
15,855 |
|
|
|
20,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 years later |
|
|
3,586 |
|
|
|
3,752 |
|
|
|
13,870 |
|
|
|
17,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 years later |
|
|
3,635 |
|
|
|
4,254 |
|
|
|
14,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 years later |
|
|
4,060 |
|
|
|
4,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 years later |
|
|
4,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deficiency (redundancy) above |
|
$ |
(533 |
) |
|
$ |
(607 |
) |
|
$ |
1,415 |
|
|
$ |
4,191 |
|
|
$ |
6,151 |
|
|
$ |
5,138 |
|
|
$ |
2,631 |
|
|
$ |
778 |
|
|
$ |
(542 |
) |
|
$ |
(612 |
) |
|
|
|
|
Deferred charge changes and reserve discounts |
|
|
307 |
|
|
|
437 |
|
|
|
619 |
|
|
|
1,013 |
|
|
|
1,298 |
|
|
|
1,252 |
|
|
|
1,493 |
|
|
|
838 |
|
|
|
604 |
|
|
|
466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Redundancy) deficiency before deferred
charges and reserve discounts |
|
$ |
(840 |
) |
|
$ |
(1,044 |
) |
|
$ |
796 |
|
|
$ |
3,178 |
|
|
$ |
4,853 |
|
|
$ |
3,886 |
|
|
$ |
1,138 |
|
|
$ |
(60 |
) |
|
$ |
(1,146 |
) |
|
$ |
(1,078 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
The cumulative foreign exchange effect relates to the International property and
casualty business of General Re, which was acquired in 1998. The amounts of re-estimated
liabilities in the table above related to these operations are based on the applicable foreign
currency exchange rates as of the end of the re-estimation period. The cumulative foreign exchange
effect represents the cumulative effect of changes in foreign exchange rates from the original
balance sheet date to the end of the re-estimation period. |
7
Item 1. Business
Insurance and Reinsurance Businesses (Continued)
Investments Investments associated with insurance activities derive from shareholder
capital, including amounts acquired in business acquisitions, as well as funds provided from
policyholders through insurance and reinsurance business (float). Float is an approximation of the amount of net policyholder funds available for investment.
That term denotes the sum of unpaid losses and loss adjustment expenses, unearned premiums and
other policyholder liabilities, less the aggregate amount of premium balances receivable, losses
recoverable from reinsurance ceded, deferred policy acquisition costs, deferred charges on
reinsurance contracts and related deferred income taxes.
The amount of float has grown from
approximately $7 billion at the end of 1996 to $51 billion at the end of 2006, through internal
growth as well as through business acquisitions, particularly of General Re in 1998. BHRG and
General Re accounted for approximately 78% of total float as of December 31, 2006. Equally
important as the size of the float balance is its cost, which is represented by the periodic net
underwriting gain or loss of the overall Insurance Group. The increases in the amount of float
plus the substantial amounts of shareholder capital devoted to insurance and reinsurance activities
have generated meaningful increases in the levels of investments and investment income over the
past five years.
Investment portfolios of insurance subsidiaries include ownership of equity securities of
other publicly traded companies, which are concentrated in relatively few companies. Investment
portfolios of Berkshires insurance businesses also include large amounts of fixed income
securities, which consist of obligations of the U.S. Government, U.S. states and municipalities,
mortgage-backed securities issued primarily by the three major U.S. Government and
Government-sponsored agencies, as well as obligations of foreign governments and corporate
obligations. Investment portfolios are primarily managed by Berkshires corporate office.
Generally, there are no targeted investment allocation rates established by management with respect
to investment activities. Rather, management may increase or decrease investments in response to
perceived changes in opportunities for income or capital growth relative to risks associated with
the issuers of the securities.
Utilities and Energy Businesses
In 2000 and 2002, Berkshire acquired both voting common stock and non-voting convertible
preferred stock in MidAmerican Energy Holdings Company (MidAmerican), an international energy
company headquartered in Des Moines, Iowa, giving Berkshire a 9.7% voting interest and an 83.4%
(80.5% diluted) economic interest at December 31, 2005. The Energy Policy Act of 2005 included the
repeal of the Public Utility Holding Company Act of 1935 (PUHCA or the Act). The repeal of
PUHCA enabled Berkshire to convert its non-voting convertible preferred stock investment to common
stock on February 9, 2006, without triggering holding company registration under the Act. The
transaction was approved by the appropriate federal and state regulatory authorities. Accordingly,
including the additional MidAmerican common stock acquired after February 9, 2006, Berkshire
currently owns an 87.8% (86.6% diluted) voting common stock interest in MidAmerican.
Each of MidAmericans businesses are managed as separate operating units. MidAmericans
domestic, regulated energy interests are comprised of two regulated utility companies serving
approximately 3.1 million retail customers and two natural gas pipeline companies with over 17,600
miles of pipeline in operation and design capacity of 6.7 billion cubic feet of natural gas per
day. Its United Kingdom (UK) electricity distribution subsidiaries serve about 3.8 million
electricity end users. In addition, MidAmericans interests include a diversified portfolio of
international and domestic independent power projects and the second largest residential real
estate brokerage firm in the United States.
Regulated Energy Businesses
General Matters
PacifiCorp, acquired by MidAmerican in March 2006, is a public utility company headquartered
in Portland, Oregon, serving regulated retail electric customers in portions of Utah, Oregon,
Wyoming, Washington, Idaho and California. The combined service territorys diverse regional
economy ranges from rural, agricultural and mining areas to urbanized, manufacturing and government
service centers. No single segment of the economy dominates the service territory, which mitigates
PacifiCorps exposure to economic fluctuations. In addition to retail sales, PacifiCorp sells
electric energy to other utilities, marketers and municipalities on a wholesale basis.
As a vertically integrated electric utility, PacifiCorp owns 8,588 net megawatts (MW) of
generation capacity. There are seasonal variations in PacifiCorps business. Customer demand is
typically highest in the eastern portion of their service territory in the summer when air
conditioning and irrigation systems are heavily used. Customer demand also peaks in the winter
months due to heating requirements.
8
Item 1. Business
Utilities and Energy Businesses (Continued)
Regulated Energy Businesses (Continued)
General Matters (Continued)
MidAmerican Energy Company is a utility company headquartered in Des Moines, Iowa, serving
regulated retail electric and natural gas customers primarily in Iowa and also in portions of
Illinois, South Dakota and Nebraska. MidAmerican Energy Company has a diverse customer base
consisting of residential, agricultural and a variety of commercial and industrial customer
groups. In addition to retail sales, MidAmerican Energy Company sells electric energy and natural
gas to other utilities, marketers and municipalities on a wholesale basis.
As a vertically integrated electric and gas utility business, MidAmerican Energy Company owns
5,079 net MW of generation capacity. There are seasonal variations in MidAmerican Energy Companys
business that are principally related to the use of electricity for air conditioning and natural
gas for heating. Historically, 35-40% of MidAmerican Energy Companys regulated electric revenues
are reported in the summer months while 45-55% of MidAmerican Energy Companys regulated natural
gas revenue is reported in the winter months.
Northern Natural Gas Company, acquired by MidAmerican in August 2002, is based in Omaha,
Nebraska and operates 15,900 miles of natural gas pipeline with a design capacity of 4.9 billion
cubic feet of natural gas per day making it one of the largest interstate natural gas pipeline
systems in the United States reaching from Texas to Michigans Upper Peninsula. Northern Natural
Gas Company has access to supplies from every major mid-continent basin, as well as the Rocky
Mountain and Western Canadian basins and provides transportation to utilities and numerous other
end-use customers. Northern Natural Gas Company also operates three natural gas storage facilities.
Northern Natural Gas Companys system experiences significant seasonal swings in demand, with the
highest demand occurring during the months of November through March.
Kern River Gas Transmission Company, acquired by MidAmerican in March 2002, is based in Salt
Lake City, Utah and operates approximately 1,700 miles of natural gas pipeline with a design
capacity of 1.8 billion cubic feet of natural gas per day. Kern River Gas Transmission Company
transports natural gas from the supply areas in the Rocky Mountains to consuming markets in Utah,
Nevada and California.
MidAmerican, through Northern Electric Distribution Limited and Yorkshire Electricity
Distribution plc, owns a substantial United Kingdom electricity distribution network that delivers
electricity to end users in the North and East of England covering almost 10,000 square miles. The
distribution companies primarily earn regulated tariffs from the use of their electrical
infrastructure charged to supply companies.
Regulatory Matters
PacifiCorp and MidAmerican Energy are subject to comprehensive regulation by federal agencies,
state utility commissions and other state and local regulatory agencies. The Federal Energy
Regulatory Commission (FERC), an independent agency with broad authority under the Federal Power
Act and the Energy Policy Act, regulates rates for interstate sales at wholesale, transmission of
electric power, accounting and other matters, including construction and operation of hydroelectric
projects. MidAmerican Energy is also subject to regulation by the Nuclear Regulatory Commission
pursuant to the Atomic Energy Act of 1954, as amended, with respect to the operation of the Quad
Cities Station.
Both PacifiCorp and MidAmerican Energy have a right to serve retail customers within their
service territories and, in turn, the obligation to provide service to those customers.
Historically, state utility commissions have established service rates on a cost-of-service basis,
which is designed to allow a utility an opportunity to recover its costs of providing services and
to earn a reasonable return on its investment used in providing that service. The rates of
MidAmericans public utility subsidiaries are generally based on the cost of providing traditional
bundled service, including generation, transmission and distribution services.
Northern Natural Gas and Kern River are subject to regulation by various Federal and state
agencies. As owners of interstate natural gas pipelines, their rates, services and operations are
subject to regulation by the FERC. The FERC administers, among other things, the Natural Gas Act
and the Natural Gas Policy Act of 1978 giving it jurisdiction over the construction and operation
of pipelines and related facilities used in the transportation, storage and sale of natural gas in
interstate commerce, including the modification or abandonment of such facilities. The FERC also
has jurisdiction over the rates, terms and conditions of service for the transportation of natural
gas in interstate commerce. Additionally, interstate pipeline companies are subject to regulation
by the United States Department of Transportation pursuant to the Natural Gas Pipeline Safety Act
of 1968, which establishes safety requirements in the design, construction, operations and
maintenance of interstate natural gas transmission facilities, and the Pipeline Safety Integrity
Act of 2002, which implemented additional safety and pipeline integrity regulations for high
consequence areas.
9
Item 1. Business
Utilities
and Energy Businesses (Continued)
Regulatory Matters (Continued)
Northern Electric and Yorkshire Electricity charge fees for use of their distribution systems
that are controlled by a formula prescribed by the British electricity regulatory body, the Office
of Gas and Electricity Markets, and was last reset on April 1, 2005. The distribution price control
formula is generally reviewed and reset at five-year intervals.
Environmental Matters
MidAmerican and its businesses are subject to extensive federal, state, local, and foreign
laws and regulations with regard to air quality and other environmental matters. In addition to
imposing continuing compliance obligations, these laws and regulations authorize the imposition of
substantial penalties for noncompliance. In particular, the federal Clean Air Act, as well as
states laws and regulations impacting air emissions, provides a framework to protect and improve
the nations air quality, and control mobile and stationary sources of air emissions. These laws
and rules will likely impact the operation of MidAmericans generating facilities and will require
them to either reduce emissions from those facilities through the installation of emission controls
or purchase additional emission allowances, or some combination thereof.
As a result of increased attention to climate change issues in the United States, numerous
bills have been introduced in the current session of the United States Congress that would reduce
greenhouse gas emissions in the United States. Congressional leadership has made climate change
legislation a priority and many congressional observers expect to see the passage of climate change
legislation within the next several years. While debate continues at the national level over the
direction of domestic climate policy, several states have developed state-specific or regional
legislative initiatives to reduce greenhouse gas emissions. The outcome of federal and state
climate change legislation cannot be determined at this time; however, adoption of stringent limits
on greenhouse emissions could significantly impact MidAmericans fossil-fueled facilities, and,
therefore, its financial results.
Non-Regulated Energy Businesses
MidAmerican has ownership interests in independent power projects including a combined
irrigation and hydroelectric power project and two geothermal facilities in the Philippines; ten
geothermal power projects located in Southern California; four natural gas-fueled combined-cycle
generation plants located in New York, Illinois, Texas and Arizona, and one hydroelectric power
project in Hawaii with 1,443 aggregate net megawatts of generation capacity.
Non-Energy Businesses
MidAmerican also owns HomeServices of America, Inc. (HomeServices), the second largest
residential real estate brokerage firm in the United States. HomeServices is a full-service,
independent residential real estate brokerage firm and settlement services provider offering
integrated real estate services, including mortgage origination, title and closing services,
property and casualty insurance, home warranties and other home-related services. It
operates under 20 residential real estate brand names with over 20,000 agents and more than 385
broker offices in 19 states. HomeServices principal sources of revenue are dependent on
residential real estate sales, which are generally lower in the first and last quarters of each
year.
Manufacturing, Service and Retailing Businesses
The Registrants
numerous and diverse manufacturing, service and retailing businesses are
described below.
McLane Company Berkshire acquired McLane Company, Inc. (McLane) in 2003 from Wal-Mart
Stores, Inc. (Wal-Mart). McLane provides wholesale distribution and logistics services in all 50
states and internationally in Brazil to customers that include discount retailers, convenience
stores, quick service restaurants, drug stores and movie theatre complexes. For about 13 years
prior to Berkshires acquisition, McLane had been an integral part of the Wal-Mart distribution
network and under Berkshires ownership continues to provide wholesale distribution services to
Wal-Mart which accounted for approximately 1/3 of McLanes revenues during 2006. McLanes business
model is based on a high volume of sales, low profit margins, rapid inventory turnover and tight
expense control, with operations divided into two business units: grocery distribution and
foodservice operations.
McLanes grocery distribution unit, based in Temple, Texas, enjoys the dominant market share
within the convenience store industry and serves most of the national convenience store chains and
major oil company retail outlets. Grocery operations provide products to more than 38,500 retail
locations nationwide, including Wal-Mart. McLanes grocery distribution unit operates 22 facilities
in 18 states, which average approximately 390,000 square feet per facility.
10
Item 1. Business
Manufacturing, Service and Retailing Businesses (Continued)
McLane Company (Continued)
McLanes foodservice operations, based in Carrollton, Texas, focus on serving the quick
service restaurant industry with high quality, timely-delivered products. Operations are conducted
through 18 facilities in 16 states which average approximately 170,000 square feet per facility.
The foodservice distribution unit is considered one of the five largest restaurant systems
suppliers in the United States, servicing more than 17,500 chain restaurants nationwide.
Shaw Industries Berkshire acquired Shaw Industries Group, Inc. (Shaw) in 2001. Shaw,
headquartered in Dalton, Georgia, is the worlds largest carpet manufacturer based on both revenue
and volume of production. Shaw designs and manufactures over 3,000 styles of tufted and woven
carpet and laminate flooring for residential and commercial use under about 30 brand and trade
names and under certain private labels. Shaws manufacturing operations are fully integrated from
the processing of raw materials used to make fiber through the finishing of carpet. Shaws carpet
and laminate are sold in a broad range of prices, patterns, colors and textures.
Shaw sells its wholesale products to over 40,000 retailers, distributors and commercial users
throughout the United States, Canada and Mexico; through its own residential and commercial sales
personnel to various residential and commercial end-users in the United States and, to a lesser
degree, exports to additional overseas markets. Shaw also provides installation services and sells
ceramic tile and hardwood flooring. Shaws wholesale products are marketed domestically by over
1,750 salaried and commissioned sales personnel directly to retailers and distributors and to large
national accounts. Shaws twelve carpet full-service distribution facilities, five hard surface
and four rug full-service distribution facilities and 30 redistribution centers, along with
centralized management information systems, enable it to provide prompt delivery of its products to
both its retail customers and wholesale distributors.
Substantially all carpet manufactured by Shaw is tufted carpet made from nylon, polypropylene
and polyester. In the tufting process, yarn is inserted by multiple needles into a synthetic
backing, forming loops which may be cut or left uncut, depending on the desired texture or
construction. During 2006 Shaw processed approximately 97% of its requirements for carpet yarn in
its own yarn processing facilities.
The floor covering industry is highly competitive with more than 100 companies engaged in the
manufacture and sale of carpet in the United States and numerous manufacturers engaged in hard
surface floor covering production and sales. According to industry estimates, carpet accounts for
approximately 60% of the total United States production of all flooring types. The principal
competitive measures within the floor covering industry are quality, style, price and service.
Other Manufacturing, Service, and Retailing Businesses
Apparel Manufacturing Berkshires apparel manufacturing businesses include
manufacturers of a variety of clothing and footwear. Businesses engaged in the manufacture and
distribution of clothing include Fruit of the Loom (FOL), Russell Corporation (Russell), Garan
and Fechheimer Brothers. Berkshires footwear businesses include H.H. Brown Shoe Group and Justin
Brands.
Berkshire acquired FOL in 2002 and Russell in August 2006. As a combined business,
headquartered in Bowling Green, Kentucky, FOL and Russell (FOL Inc.) is primarily a vertically
integrated manufacturer and distributor of basic apparel products sold principally under the Fruit
of the Loom®, JERZEES®, Cross Creek® and Discus® labels in both the mass merchandise and wholesale
markets. FOL Inc. also markets and sells athletic uniforms, apparel, sports equipment and balls to
team dealers; college licensed tee shirts and fleecewear to college bookstores and mid-tier
merchants; and athletic apparel, sports equipment and balls to sporting goods retailers under the
Russell Athletic® and Spalding® brands. In addition, FOL Inc. markets and sells running footwear
and apparel to specialty retailers under the Brooks® brand. Other brands include American
Athletic®, Huffy Sports®, Mossy Oak®, Moving Comfort®, Bike®, Dudley® and Sherrin®.
In the mass merchandise segment, FOL Inc. maintains the number one market share brand of mens
underwear and in the wholesale segment maintains the number one market share brand of fleecewear.
FOL Inc., under the Spalding® brand, is the official basketball licensee of the NBA and is the
worlds leading seller of basketballs.
For basic and certain athletic apparel products FOL Inc. performs most of its own spinning,
knitting, cloth finishing, cutting, sewing and packaging. For the North American market which
comprised more than 90% of 2006 consolidated net sales, the majority of capital-intensive spinning
and cloth manufacturing operations are located in highly automated facilities in the United States
with a portion of cloth manufacturing performed offshore. Labor-intensive sewing and finishing
operations are located in lower labor cost facilities in Central America and the
11
Item 1. Business
Manufacturing, Service and Retailing Businesses (Continued)
Caribbean. For the European market, products are either outsourced to third-party contractors in
Europe or Asia or sewn in Morocco from textiles internally produced in the Caribbean. A new
textile facility under construction in Morocco is planned to replace the Caribbean textile
production in early 2008. FOL Inc.s athletic equipment, footwear, sporting goods and other
athletic apparel lines are generally sourced from third-party contractors outside the United
States, primarily Asia.
Berkshire acquired Garan in 2002. Based in New York City, Garan designs, manufactures, and
sells apparel primarily for children and to a lesser degree for men and women. Products are sold
under private labels of its customers as well as its own trademarks, including Garanimals®.
Garans production facilities are primarily located in Central America. Substantially all of
Garans products are sold through its distribution centers in the U.S. to major national chain
stores, department stores and specialty stores. In 2006, over 90% of Garans sales were to
Wal-Mart.
FOL Inc.s and Garans markets are highly competitive, consisting of many domestic and foreign
manufacturers and distributors. Competition is generally based upon price, product style, quality
and customer service.
Fechheimer Brothers manufactures, distributes and sells uniforms, principally for the public
service and safety markets, including police, fire, postal and military markets. Fechheimer
Brothers was acquired by Berkshire in 1986 and is based in Cincinnati, Ohio.
Justin Brands and H.H. Brown Shoe Group have been owned by Berkshire for more than the past
five years. Collectively, Berkshires footwear businesses purchase or manufacture and distribute
work, rugged outdoor and casual shoes (H.H. Brown Shoe Group) and western-style footwear (Justin
Brands) under a number of brand names. Significant portions of the shoes sold by Berkshires shoe
businesses are manufactured or purchased from sources outside the United States. Products are
principally sold in the United States through a variety of channels including department stores,
footwear chains, specialty stores, catalogs and the Internet, as well as through company-owned
retail stores.
Building Products Manufacturing Berkshire entered the building products business in
2000 with the acquisition of Acme Building Brands (Acme). Acme, headquartered in Fort Worth,
Texas, manufactures and distributes clay bricks (Acme Brick), concrete block (Featherlite) and cut
limestone (Texas Quarries). In addition, Acme distributes a number of other building products of
other manufacturers, including glass block, brick, floor and wall tile and other masonry products.
Acme also sells ceramic floor and wall tile, as well as marble, granite and other stones through
its subsidiary, American Tile. Products are sold primarily in the Southwest United States through
company-operated sales offices. Acme distributes products primarily to homebuilders and masonry
and general contractors.
Acme operates 23 clay brick manufacturing facilities located in six states, seven concrete
block facilities in Texas and one stone quarry fabrication facility in Texas. The demand for
Acmes products is seasonal, with higher sales in the warmer weather months and is subject to the
level of construction which can be cyclical. Acme also owns and leases properties and mineral
rights that supply raw materials used in many of its manufactured products. Raw materials supply is
believed to be adequate into the foreseeable future.
Berkshire acquired Benjamin Moore & Co. (Benjamin Moore) at the end of 2000. Benjamin
Moore, headquartered in Montvale, New Jersey, is a leading formulator, manufacturer and retailer of
a broad range of primarily architectural coatings, available principally in the United States and
Canada. Products include water-thinnable and solvent-thinnable general purpose coatings (paints,
stains and clear finishes) for use by the general public, contractors and industrial and commercial
users. Products are marketed under various registered brand names, including Regal®, Superspec®,
Superhide®, Moorgard® and
Aura.
Benjamin Moore relies primarily on an independent dealer network for the distribution of its
products. The network consists of over 3,800 retailers with over 4,900 storefronts in the United
States and Canada. Benjamin Moore also owns and manages several multiple-outlet stores and
stand-alone stores in various parts of the United States and Canada serving primarily contractors
and general consumers. Included in the 4,900 storefronts at December 31, 2006 were 129 Benjamin
Moore majority-owned stores positioned in the market as independent retailers that offer a broad
array of products including Benjamin Moore® brands and other competitor coatings, wallcoverings,
window treatments and sundries.
12
Item 1. Business
Manufacturing, Service and Retailing Businesses (Continued)
The architectural coatings industry is highly competitive and has historically been subject to
intense price competition. It is estimated that there are less than 300 coatings manufacturers in
the United States, many of which are small companies that compete regionally and locally. The top
four companies in the industry, including Benjamin Moore positioned fourth, comprise about 64% of
the total market. Benjamin Moore is positioned in the top three in the Canadian marketplace.
Berkshire acquired Johns Manville (JM) in 2001. JM has been serving the building products
industry for nearly 150 years and is the only manufacturer of a complete line of formaldehyde-free
fiber glass building insulation products. JM also manufacturers fiber glass insulation products
for pipe and duct systems and use by original equipment manufacturers of automotive, appliance,
marine and other industrial product producers. JM is also a leading full-line supplier of roofing
systems and components for low-slope commercial and industrial roofs in North America. In
addition, JM manufactures nonwoven mats, fabrics and fibers used as reinforcements in building and
industrial applications, and high efficiency air and liquid filtration media. Fiber glass is the
basic material in a majority of JMs products, although JM also manufactures a significant portion
of its products with other materials to satisfy the broader needs of its customers. The raw
materials in JMs products are readily available in sufficient quantities from various sources to
maintain and expand JMs current production levels. JM regards its patents and licenses as
valuable, however it does not consider any of its businesses to be materially dependent on any
single patent or license. JM is headquartered in Denver, Colorado, and operates 43 manufacturing
facilities in North America, Europe and China and conducts research and development at several
other facilities.
JM sells its products through a wide variety of channels including contractors, distributors,
retailers, manufacturers and fabricators. JM has leading market positions in each of its
businesses and typically competes with a few large national competitors and several smaller,
regional competitors. JMs products compete primarily on the basis of value, product
differentiation and customization and breadth of product line.
Berkshire acquired a 90% equity interest in MiTek Inc. (MiTek) in 2001. MiTek is
headquartered in Chesterfield, Missouri and is a leading provider of engineered connector products,
engineering software and services and computer-driven manufacturing machinery to the truss
fabrication segment of the building components industry. Primary customers are truss fabricators
who manufacture pre-fabricated roof and floor trusses and wall panels for the residential building
market as well as the light commercial and institutional construction industry. MiTek also
participates in the light gauge steel framing market under the Ultra-Span® name. MiTek operates 20
manufacturing facilities located in 10 countries and 29 sales/engineering offices located in 14
countries. Products are sold to customers in approximately 90 countries.
The building products businesses are subject to a variety of federal, state and local
environmental laws and regulations. These laws and regulations regulate the discharge of materials
into the air, land, and water and govern the use and disposal of hazardous substances. These
businesses are also subject to seasonal and cyclical changes in the overall housing industry.
Other Manufacturing Businesses
Berkshire acquired an 80% interest in ISCAR Metalworking Companies (IMC) on July 5, 2006.
IMC, based in Tefen, Israel, is one of the worlds three largest multinational manufacturers of
consumable precision carbide metal cutting tools for applications in a broad range of industrial
end markets through its Iscar, TaeguTec, Ingersoll and other IMC subsidiaries. IMCs manufacturing
facilities are located in Israel, United States, Germany, Italy, France, Switzerland, South
Korea, China, India, Japan and Brazil.
IMC has five primary product lines: milling tools, gripping tools, turning/thread tools,
drilling tools and tooling. The main products are split within each product line between consumable
cemented tungsten carbide inserts and steel tool holders. Inserts comprise the vast majority of
sales and earnings. Metal cutting inserts are used by industrial manufactures to cut metals and are
consumed during their use in cutting applications.
IMCs products are sold through a global sales and marketing network with representatives in
virtually every major manufacturing center around the world staffed with highly skilled engineers
and technical personnel. IMCs customer base is very diverse, with its primary customers
being large, multinational businesses in the automotive, aerospace, engineering and machines
industries. IMC operates a regional central warehouse system with locations in Israel, United
States, Belgium and Brazil. Additional small quantities of products are maintained at local IMC
offices in order to provide on-time customer support and inventory management. As a general rule
IMC provides on-time delivery that results in almost all deliveries of standard items worldwide
within 24 hours.
13
Item 1. Business
Manufacturing, Service and Retailing Businesses (Continued)
In 2002, Berkshire acquired Albecca Inc. (Albecca) and CTB International Corp. (CTB).
Albecca is headquartered in Norcross, Georgia, and primarily does business under the Larson-Juhl
name. Albecca designs, manufactures and distributes a complete line of high quality, branded
custom framing products, including wood and metal moulding, matboard, foamboard, glass, equipment
and other framing supplies in the U.S., Canada, and fourteen countries outside of North America.
CTB, headquartered in Milford, Indiana, is a leading designer, manufacturer and marketer of systems
used in the grain industry and in the production of poultry, hogs and eggs.
Berkshire acquired Forest River, Inc. (Forest River) in August 2005. Forest River is a
manufacturer of recreational vehicles, utility cargo and office trailers, busses and pontoon boats,
and is headquartered in Elkhart, Indiana. Its products are sold in the United States and Canada
through an independent dealer network. Forest River has manufacturing facilities in Indiana,
California, Georgia, Michigan, Oregon and Texas.
The Scott Fetzer Companies are a diversified group of 21 businesses that manufacture and
distribute a wide variety of products for residential, industrial and institutional use. The two
most significant of these businesses are Kirby home cleaning systems and Campbell Hausfeld
products.
Service Businesses
Berkshire acquired FlightSafety International Inc. (FSI) in 1996. FSI is headquartered at
LaGuardia Airport in Flushing, New York. FSI engages primarily in the business of providing high
technology training to operators of aircraft and ships. FSIs training activities include:
advanced pilot training in the operation of aircraft and air traffic control procedures; aircrew
training for military and other government personnel; aircraft maintenance technician training;
ab-initio (primary) pilot training to qualify individuals for private and commercial pilots
licenses; and ship handling and related training services. FSI also develops classroom
instructional systems and materials for use in its training business and for sale to others.
A significant part of FSIs training programs derives from the use of simulators, which
incorporate computer-based technology to replicate the operation of particular aircraft or
ocean-going vessels. Simulators reproduce, with a high degree of accuracy, certain sights,
movements, and aircraft or vessel control responses experienced by the operator of the aircraft or
ship. FSI utilizes 350 training devices, including 260 civil aviation simulators. FSIs training
businesses are conducted primarily in the United States, with facilities located in 20 states. FSI
also operates training facilities in Australia, Brazil, Canada, France and the United Kingdom. FSI
also designs and manufactures full motion flight simulators, visual displays and other training
equipment for use in its training business and for sale to others. Manufacturing facilities are
located in Oklahoma and Missouri.
Berkshire acquired NetJets Inc. (NJ) in 1998. NJ is the worlds leading provider of
fractional ownership programs for general aviation aircraft. At December 31, 2006, the NetJets®
program operated 15 aircraft types. The fractional ownership of aircraft concept permits customers
to acquire a specific percentage of a certain aircraft type and allows them to utilize the aircraft
for a specified number of flight hours per annum. In addition, NJ provides management, ground
support and flight operation services to customers after the sale. NJ as an owner and
operator of aircraft in the United States is subject to the rules and regulations of the Federal
Aviation Administration, which address aircraft registration and maintenance requirements, pilot
qualifications and airport operations, including flight planning and scheduling as well as security
issues. In 2001, NJ entered into an exclusive alliance with an independent company, Marquis Jet
Partners, Inc. (Marquis). Under this alliance, Marquis leases and purchases fractional interests
and management services from NJ and resells them to its customers in the form of a prepaid
Marquis Jet Card, which entitles the customer to 25 hours of flight time. This element of NJs
business continues to grow and currently approximates 20% of total NJ revenues.
The fractional ownership concept is designed to meet the needs of customers who cannot justify
the purchase of an entire aircraft based upon expected usage. In addition, fractional ownership
programs are available for corporate flight departments seeking to outsource their general aviation
needs or looking for additional capacity for peak periods and for others that previously chartered
aircraft. NJ places great emphasis on safety and customer service. Its programs are designed to
offer customers guaranteed availability of aircraft, lower and predictable operating costs and
increased liquidity.
14
Item 1. Business
Manufacturing, Service and Retailing Businesses (Continued)
NJ is currently believed to be the worlds largest purchaser of general aviation aircraft.
The company maintained approximately 580 aircraft in its fleet as of December 31, 2006. The market
for fractional ownership of aircraft programs is large and growing and should contribute to NJs
continued growth over the foreseeable future. NJs executive offices are located in New Jersey,
while most of its logistical and flight operations are based at Port Columbus International Airport
in Columbus, Ohio. NJs European operations are based in Lisbon, Portugal.
Berkshire acquired Business Wire, headquartered in San Francisco, California, in February
2006. Business Wires core business is the electronic dissemination of full-text news releases
daily to the media, the Internet, online services and databases and the global investment community
in 150 countries and 45 languages. Roughly 90% of the companys revenue comes from the core
business of news distribution. This is not a seasonal business, but rather shows peaks during
quarterly earnings periods.
The Pampered Chef, LTD (TPC) is the largest direct seller of high quality kitchen tools in
the United States. Products are researched, designed and tested by TPC, and manufactured by third
party suppliers. The Buffalo News publishes three editions on Saturday and Sunday and five
editions each weekday from its headquarters in Buffalo, New York. International Dairy Queen
services a system of about 6,000 stores operating under the names Dairy Queen, Orange Julius and
Karmelkorn that offer various dairy desserts, beverages, prepared foods, blended fruit drinks,
popcorn and other snack foods.
In December 2006, Berkshire agreed to acquire TTI, Inc., a privately held electronic component
distributor headquartered in Fort Worth, Texas. TTI, Inc. is the largest distributor specialist of
passive, interconnect electromechanical components. TTI has approximately 1,700 employees and more
than 50 locations throughout North America, Europe and Asia.
Retailing Businesses Berkshires retailing businesses principally consist of several
independently managed home furnishings and jewelry operations. Information regarding each of these
operations follows.
The home furnishings businesses are the Nebraska Furniture Mart (NFM), R.C. Willey Home
Furnishings (R.C. Willey), Star Furniture Company (Star), and Jordans Furniture, Inc.
(Jordans). NFM is 80% owned by Berkshire, whereas R.C. Willey, Star and Jordans are 100% owned
by Berkshire. Berkshire has owned its interest in NFM since 1983, acquired R.C. Willey in 1995,
Star in 1997 and Jordans in 1999.
NFM, R.C. Willey, Star and Jordans each offer a wide selection of furniture, bedding and
accessories. In addition, NFM and R.C. Willey sell a full line of major household appliances,
electronics, computers and other home furnishings. NFM, R.C. Willey, Star and Jordans also offer
customer financing to complement their retail operations. An important feature of each of these
businesses is their ability to control costs and to produce high business volume from offering
significant value to their customers.
NFM operates its business from a very large retail complex with over 500,000 square feet of
retail space and sizable warehouse and administrative facilities in Omaha, Nebraska. NFMs
customers are drawn from a radius around Omaha of approximately 300 miles and is the largest
furniture retailer in the area. In 2000, NFM acquired Homemakers Furniture located in Des Moines,
Iowa. Homemakers has two facilities that include approximately 225,000 square feet of retail
space. In 2003, NFM opened a new store in Kansas City, Kansas. This store, which anchors a retail
and entertainment district, includes approximately 445,000 square feet of retail space with a
sizable warehouse and draws customers form a significant radius around Kansas City.
R.C. Willey, based in Salt Lake City, is the dominant home furnishings retailer in the
Intermountain West region of the United States. R.C. Willey operates eleven retail stores,
two retail clearance facilities and three distribution centers. These facilities include
approximately 1.5 million square feet of retail space with eight stores located in Utah, one
store in Idaho, three stores in Nevada and one store in California. In June 2006, R.C. Willey
opened a store in Rocklin, California to serve the Sacramento, California market. R.C. Willey also
opened a new distribution center during 2006 in Roseville, California to serve the northern
California and Reno, Nevada markets.
15
Item 1. Business
Manufacturing, Service and Retailing Businesses (Continued)
Stars retail facilities include about 700,000 square feet of retail space in eleven
locations. Stars retail facilities are located in Texas with eight in Houston. Star maintains a
dominant position in each of its markets. Jordans operates a furniture retail business from four
locations with approximately 520,000 square feet of retail space in Massachusetts and New
Hampshire. Jordans is believed to be the largest furniture retailer, as measured by sales, in the
Massachusetts and New Hampshire areas. Jordans is well known in its markets for its unique store
arrangements and advertising campaigns.
Since 1989, Berkshire has owned an interest (currently 93%) in Borsheim Jewelry Company, Inc.
(Borsheims). From its single store located in Omaha, Nebraska, Borsheims is a high volume
retailer of fine jewelry, watches, crystal, china, stemware, flatware, gifts and collectibles. In
1995, Berkshire acquired Helzbergs Diamond Shops, Inc. (Helzbergs). Helzbergs, based in North
Kansas City, Missouri, operates a chain of 269 retail jewelry stores in 38 states. Most of
Helzbergs stores are located in malls or power strip centers, and all stores operate under the
name Helzberg Diamonds. In 2000, Berkshire acquired The Ben Bridge Corporation (Ben Bridge
Jeweler). Ben Bridge Jeweler, based in Seattle, Washington, operates a chain of 77 upscale retail
jewelry stores in 12 states, primarily in the Western United States. Ben Bridge Jeweler stores are
located primarily in major shopping malls. Berkshires retail jewelry operations are subject to
seasonality with approximately 40% of annual revenues being earned in the fourth quarter.
Also included in
Berkshires group of retailing businesses is Sees Candies (Sees), which produces
boxed chocolates and other confectionery products with an emphasis on quality and distinctiveness
in two large kitchens in California. Sees revenues are highly seasonal with approximately 50% of
total annual revenues being earned in the months of November and December.
Finance and Financial Products
Berkshires finance and financial products businesses engage in a variety of finance related
activities. BH Finance invests in fixed-income financial instruments, often on a leveraged basis,
pursuant to proprietary strategies with the objective of earning above average returns. BH Finance
also enters into derivative contracts and assumes foreign currency, equity price, and credit
default risk. Management recognizes and accepts that losses may occur due to the nature of these
activities as well as the markets in general. In addition, the level of investments and derivative
contracts will vary over time depending on the magnitude and number of strategies employed based on
managements perception of market conditions and opportunities. This business is conducted from
Berkshires corporate headquarters.
Berkshire acquired Clayton Homes, Inc. (Clayton) in 2003. Clayton, headquartered near
Knoxville, Tennessee, is a vertically integrated manufactured housing company. At December 31,
2006, Clayton operated 41 manufacturing plants in 14 states. Claytons homes are marketed in 48
states through a network of 1,691 retailers, including 447 company-owned sales centers.
Installment financing is offered to purchasers of Claytons manufactured homes as well as those
purchasing homes from selected independent retailers. Such financing is provided through its
wholly owned finance subsidiaries. Clayton also develops, owns and manages 70 manufactured housing
communities located in 12 states and operates 14 housing subdivisions in 3 states.
Clayton competes
at the manufacturing, retail and finance levels on the basis of price,
service, delivery capabilities and product performance and considers the ability to make financing
available to retail purchasers a major factor affecting the market acceptance of its product.
Retail sales are facilitated by Claytons offering of various finance and insurance programs.
Finance programs include installment contract originations at company owned sales centers and
select independent retailers. Also included are bulk purchases of manufactured housing contracts
from banks and other lenders. Clayton also provides inventory financing to certain
independent retailers and services manufactured housing contracts that were not purchased or
originated by them. These purchases and servicing arrangements may relate to the portfolios of
other lenders or finance companies, governmental agencies, or other entities that purchase and hold
manufactured housing contracts. Clayton also acts as agent on physical damage insurance policies,
home buyer protection plan policies and other programs.
16
Item 1. Business
Finance and Financial Products (Continued)
Berkshire acquired XTRA in 2001. XTRA, headquartered in St. Louis, Missouri, is a leading
transportation equipment lessor operating under the XTRA Lease brand name. XTRA manages a diverse
fleet of approximately 126,000 units located at 75 facilities throughout the United States and 5
facilities in Canada. The fleet includes over-the-road and storage trailers, chassis, temperature
controlled vans, flatbeds, and intermodal trailers. XTRA is one of the two largest lessors (in
terms of units available) of over-the-road trailers in North America. Transportation equipment
customers lease equipment to cover cyclical, seasonal and geographic needs and as a substitute for
purchasing. In addition, transportation providers often use leasing to maximize their asset
utilization and reduce capital expenditures. By maintaining a large fleet, XTRA is able to provide
customers with a broad selection of equipment and quick response times.
CORT Business Services Corporation was acquired in 2000 by an 80.1% owned subsidiary of
Berkshire and is the leading national provider of rental furniture, accessories and related
services in the rent-to-rent segment of the furniture rental industry. General Re Securities and
affiliates (GRS), a dealer in a full line of derivative instruments covering interest rate,
currency and equity price risks was acquired by Berkshire as part of the 1998 acquisition of
General Re. In January 2002, the run-off of GRSs business commenced and as of the end of 2006 was
substantially completed.
Berkshire and its subsidiaries employed approximately 217,000 persons at December
31, 2006.
Additional information with respect to Berkshires businesses
The amounts of revenue, earnings before taxes and identifiable assets attributable to the
aforementioned business segments are included in Note 20 to Registrants Consolidated Financial
Statements contained in Item 8, Financial Statements and Supplementary Data. Additional
information regarding Registrants investments in fixed maturity and marketable equity securities
is included in Notes 5 and 6 to Registrants Consolidated Financial Statements.
Berkshire Hathaway Inc. maintains a website (http://www.berkshirehathaway.com) where its
annual reports, certain corporate governance documents, press releases, interim shareholder reports
and links to its subsidiaries websites can be found. Berkshires periodic reports filed with the
SEC, which include Form 10-K, Form 10-Q, Form 8-K and amendments thereto, may be accessed by the
public free of charge from the SEC and through Berkshire. Electronic copies of these reports can
be accessed at the SECs website (http://www.sec.gov) and indirectly through Berkshires website
(http://www.berkshirehathaway.com). Copies of these reports may also be obtained, free of charge,
upon written request to: Berkshire Hathaway Inc., 1440 Kiewit Plaza, Omaha, NE 68131, Attn:
Corporate Secretary. The public may read or obtain copies of these reports from the SEC at the
SECs Public Reference Room at 450 Fifth Street N.W., Washington, D.C. 20549 (1-800-SEC-0330).
17
Item 1A. Risk Factors
Berkshire is subject to certain risks in its business operations which are described below.
Careful consideration of these risks should be made before making an investment decision. The
risks and uncertainties described below are not the only ones facing Berkshire. Additional risks
and uncertainties not presently known or that are currently deemed immaterial may also impair our
business operations.
The Companys tolerance for risk in its insurance businesses may result in a high degree of
volatility in periodic reported earnings.
Berkshire has been and continues to be willing to assume more risk than any other insurer has
knowingly assumed. Berkshire estimates it could incur a probable maximum loss of $6 billion from a
single loss event and does so willingly if properly paid for the risk assumed. Berkshire has also
written some coverages for losses arising from acts of terrorism. In all cases, however, Berkshire
attempts to avoid writing groups of policies from which losses might seriously aggregate, though it
is possible that despite Berkshires efforts, losses may aggregate in ways that were not
anticipated. The tolerance for huge losses may in certain future periods result in huge losses,
which may result in a high degree of volatility in periodic reported earnings.
The degree of estimation error inherent in the process of estimating property and casualty
insurance loss reserves may result in a high degree of volatility in periodic reported
earnings.
In the insurance business, premiums are charged today for promises to pay covered losses in
the future. The principal cost associated with premium revenue is claims. However, it will
literally take decades before all losses that have occurred as of the balance sheet date will be
reported and settled. Although Berkshire believes that loss reserve balances are adequate to cover
losses, Berkshire will not truly know whether the premiums charged for the coverages provided were
sufficient until well after the balance sheet date. Except for certain product lines, Berkshires
objective is to generate underwriting profits over the long term. Estimating insurance claim costs
is inherently imprecise. Reserve estimates are large ($48 billion at December 31, 2006) so
adjustments to reserve estimates can have a material effect on periodic reported earnings.
Insurance subsidiaries investments are unusually concentrated.
Compared to other insurers, Berkshires insurance subsidiaries keep an unusually high
percentage of their assets in common stocks and diversify their portfolios far less than is
conventional. A significant decline in the general stock market or in the price of major
investments may produce a large decrease in Berkshires shareholders equity, and may precipitate
recognition of such losses in the statement of earnings. Decreases in values of equity investments
could have a material adverse effect on Berkshires book value per share.
Berkshire is dependent for its investment and capital allocation decisions on a few key
people.
Investment decisions and all major capital allocation decisions are made for Berkshires
businesses by Warren E. Buffett, chairman of the board of directors and CEO, age 76, in
consultation with Charles T. Munger, vice chairman of the board of directors, age 83. If for any
reason the services of Berkshires key personnel, particularly Mr. Buffett, were to become
unavailable to Berkshire, there could be a material adverse effect on the Company. However,
Berkshires Board of Directors has identified three current Berkshire subsidiary managers who are
capable of being CEO. Berkshires Board has agreed on a replacement for Mr. Buffett should a
replacement be needed currently. The Board continually monitors this matter and could alter its
current view in the future. Management believes that the Boards succession plan, together with the
outstanding managers running Berkshires numerous and highly diversified operating units helps to
mitigate this risk.
The past growth rate in Berkshire stock is not an indication of future results.
In the years since Berkshires present management acquired control of Berkshire, its book
value per share has grown at a highly satisfactory rate. Because of the large size of Berkshires
capital base (shareholders equity of approximately $108.4 billion as of December 31, 2006),
Berkshires book value per share very likely will not increase in the future at a rate even close to its past
rate.
18
Item 1A. Risk Factors (Continued)
Competition
Each of Berkshires operating businesses faces intense competitive pressures within its
respective markets. Such competition may come from domestic operators and international operators.
While Berkshires businesses are managed with the objective of achieving sustainable growth over
the long-term through developing and strengthening competitive advantages, many factors, including
market and technology changes, may erode competitive advantages or prevent their strengthening.
Accordingly, future operating results will depend to some degree on whether the operating units are
successful in protecting or enhancing their competitive advantages.
Berkshires class B common stock is not convertible and has a lower vote and stock price than
its class A common stock.
Each share of class A common stock is convertible into thirty shares of class B common stock,
but shares of class B common stock are not convertible into shares of class A common stock or any
other security. Although a share of class B common stock may sell below one-thirtieth of the
market price for a share of class A common stock, it is unlikely that a share of class B common
stock will sell significantly above one-thirtieth of the market price for a share of class A common
stock because higher prices than that would cause arbitrage activity to ensue. Also, holders of
class A common stock are entitled to one vote, but holders of class B common stock are entitled to
only one two-hundredth of a vote for each Class B share on matters submitted to a vote of Berkshire
stockholders.
Unfavorable economic and political conditions in international markets could hurt Berkshires
businesses.
Historically, Berkshire has derived a relatively small amount of its revenues and earnings
from international markets. In recent years, international business was concentrated in the
insurance businesses, which are conducted primarily in Western Europe, United Kingdom, Japan,
Australia and other regions where relatively stable political and economic conditions have
prevailed. As a result of Berkshires recent business acquisitions including 80% of IMC on July 5,
2006, Berkshire may be subject to increased risks from unstable political conditions and civil
unrest in international markets. IMCs headquarters are located in Israel and substantial business
operations are conducted in Israel and Korea.
Unstable economic and political conditions, civil unrest and political activism, particularly
in the Middle East, could adversely impact Berkshires businesses, including internationally based
businesses. Further, terrorism activities deriving from unstable conditions could produce
significant losses to Berkshires worldwide operations, including manufacturing, service, utility
and insurance operations based in the United States. Business operations could be adversely
affected directly through the loss of human resources and destruction of production facilities.
Risks unique to utilities and energy businesses.
For the most part, Berkshires utilities and energy businesses, which generate, transmit and
distribute electricity and transport and distribute natural gas, are highly regulated by numerous
federal, state and local governmental authorities in the United States, United Kingdom and other
jurisdictions in which operations are conducted. The regulatory process determines the terms and
conditions of providing utility service, including the rates that may be charged to customers. The
results of this process may not permit the recovery of all costs incurred by the utilities.
Regulations also concern safety, environmental and operational compliance or remediation as well as
other matters. Adverse new regulations or reinterpretations of existing regulations as well as the
nature of the regulatory process may have a significant impact on periodic results of operations.
The nature of the utilities and energy business is that significant amounts of capital are
employed to construct, operate and maintain sufficient generation, transmission and distribution
systems. Usually, large amounts of borrowed funds are employed in the process. Such systems may
need to be operational for very long periods of time in order to justify the financial cost. The
risk of financial failure of capital projects is not necessarily recoverable through rates that are
charged to customers.
Governmental Investigations.
Certain of Berkshires insurance subsidiaries, particularly General Re Corporation and some of
its subsidiaries, are subject to ongoing investigations by U.S. federal and state governmental
authorities, including the U.S. Department of Justice, the Securities and Exchange Commission, the
U.S. Attorney for the Eastern District of Virginia, the New York State Attorney General, the Office
of the Connecticut Attorney General and various state insurance departments, and by certain foreign
governmental authorities, relating to non-traditional products and in some cases to transactions
with other insurers. These investigations are described under Item 3 Legal Proceedings.
Berkshire cannot at this time predict the outcomes of these investigations, is unable to estimate a
range of possible loss, and cannot predict whether or not the outcomes will have a material adverse
effect on Berkshires business or results of operations for at least the quarterly period when
these matters are completed or otherwise resolved.
Item 1B. Unresolved Staff Comments
None.
19
Item 2. Description of Properties
The physical properties used by the Registrant and its significant business segments are
summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number |
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|
|
Approx. |
|
|
|
|
|
|
|
|
|
of |
|
Owned/ |
|
Square |
|
Business |
|
Country |
|
Location |
|
Type of Property |
|
Properties |
|
Leased |
|
Footage |
|
Berkshire |
|
U.S. |
|
Omaha, NE |
|
Corporate Offices |
|
1 |
|
Leased |
|
|
10,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance and
Reinsurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GEICO |
|
U.S. |
|
Chevy Chase, MD and locations in 6 |
|
Offices |
|
14 |
|
Owned |
|
|
3,152,000 |
|
|
|
|
|
other states |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offices and drive-in |
|
|
|
|
|
|
|
|
|
|
|
|
Various locations throughout the U.S. |
|
claims facilities |
|
67 |
|
Leased |
|
|
790,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Re |
|
U.S. |
|
Stamford, CT |
|
Offices |
|
3 |
|
Owned |
|
|
191,000 |
|
|
|
|
|
|
|
Other |
|
5 |
|
Owned |
|
|
43,000 |
|
|
|
|
|
Stamford, CT, various U.S. locations |
|
Offices |
|
35 |
|
Leased |
|
|
1,098,000 |
|
|
|
|
Non-U.S. |
|
Cologne, Germany |
|
Offices |
|
7 |
|
Owned |
|
|
161,000 |
|
|
|
|
|
Various locations in 25 countries |
|
Offices |
|
35 |
|
Leased |
|
|
354,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Berkshire
Hathaway
Reinsurance Group |
|
U.S. |
|
Stamford, CT and 4 other locations |
|
Offices |
|
6 |
|
Leased |
|
|
112,000 |
|
|
|
Non-U.S. |
|
United Kingdom |
|
Offices |
|
4 |
|
Leased |
|
|
21,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Berkshire
Hathaway Primary
Group |
|
U.S. |
|
Omaha, NE and Fort Wayne, IN |
|
Offices |
|
4 |
|
Owned |
|
|
209,000 |
|
|
|
U.S. |
|
Various locations in 17 states |
|
Offices |
|
45 |
|
Leased |
|
|
657,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance & Financial |
|
U.S. |
|
Various locations throughout the U.S. |
|
Mfg plants |
|
41 |
|
Owned |
|
|
5,460,000 |
|
Products
|
|
|
|
|
|
Mfg plants |
|
3 |
|
Leased |
|
|
276,000 |
|
|
|
|
|
|
|
Offices |
|
5 |
|
Owned |
|
|
279,000 |
|
|
|
|
|
|
|
Offices |
|
26 |
|
Leased |
|
|
137,000 |
|
|
|
|
|
|
|
Retail locations |
|
47 |
|
Owned |
|
|
770,000 |
|
|
|
|
|
|
|
Retail locations |
|
152 |
|
Leased |
|
|
1,776,000 |
|
|
|
|
|
|
|
Warehouses |
|
3 |
|
Owned |
|
|
122,000 |
|
|
|
|
|
|
|
Warehouses |
|
44 |
|
Leased |
|
|
1,467,000 |
|
|
|
|
|
|
|
Retail centers |
|
179 |
|
Owned |
|
|
1,481 (acres) |
|
|
|
|
|
|
|
Retail centers |
|
268 |
|
Leased |
|
|
1,082 (acres) |
|
|
|
|
|
|
|
Housing communities |
|
84 |
|
Owned |
|
|
4,779 (acres) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
McLane Company |
|
U.S. |
|
Various locations |
|
Distribution |
|
30 |
|
Owned |
|
|
9,248,000 |
|
|
|
|
|
throughout the U.S. |
|
centers/Offices |
|
16 |
|
Leased |
|
|
2,776,000 |
|
|
|
|
Non-U.S. |
|
Brazil |
|
Distribution |
|
1 |
|
Owned |
|
|
159,000 |
|
|
|
|
|
|
|
centers/Offices |
|
3 |
|
Leased |
|
|
1,150,000 |
|
20
Item 2. Description of Properties (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
|
Approx. |
|
|
|
|
|
|
|
|
|
of |
|
Owned/ |
|
Square |
|
Business |
|
Country |
|
Location |
|
Type of Property |
|
Properties |
|
Leased |
|
Footage |
|
Shaw Industries |
|
U.S. |
|
Various locations |
|
Mfg plants/Offices |
|
77 |
|
Owned |
|
|
21,558,000 |
|
|
|
|
|
throughout the U.S. |
|
Mfg plants/Offices |
|
18 |
|
Leased |
|
|
1,707,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warehouses |
|
22 |
|
Owned |
|
|
6,421,000 |
|
|
|
|
|
|
|
Warehouses |
|
71 |
|
Leased |
|
|
4,992,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Showroom/Retail |
|
1 |
|
Owned |
|
|
55,000 |
|
|
|
|
|
|
|
Showroom/Retail |
|
32 |
|
Leased |
|
|
309,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S. |
|
London, Shanghai and |
|
Offices |
|
4 |
|
Leased |
|
|
7,000 |
|
|
|
|
|
Singapore |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other businesses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing |
|
U.S. |
|
Various locations |
|
Mfg plants |
|
192 |
|
Owned |
|
|
28,750,000 |
|
|
|
|
|
in the U.S. |
|
Mfg plants |
|
29 |
|
Leased |
|
|
1,850,000 |
|
|
|
|
|
|
|
Offices/Warehouses |
|
114 |
|
Owned |
|
|
9,825,000 |
|
|
|
|
|
|
|
Offices/Warehouses |
|
147 |
|
Leased |
|
|
5,750,000 |
|
|
|
|
|
|
|
Retail locations |
|
36 |
|
Owned |
|
|
269,000 |
|
|
|
|
|
|
|
Retail locations |
|
126 |
|
Leased |
|
|
839,000 |
|
|
|
Non-U.S. |
|
Various locations |
|
Mfg plants |
|
84 |
|
Owned |
|
|
10,519,000 |
|
|
|
|
|
in 51 countries |
|
Mfg plants |
|
66 |
|
Leased |
|
|
4,384,000 |
|
|
|
|
|
|
|
Offices/Warehouses |
|
37 |
|
Owned |
|
|
1,073,000 |
|
|
|
|
|
|
|
Offices/Warehouses |
|
158 |
|
Leased |
|
|
2,022,000 |
|
|
|
|
|
|
|
Retail locations |
|
3 |
|
Owned |
|
|
9,000 |
|
|
|
|
|
|
|
Retail locations |
|
43 |
|
Leased |
|
|
116,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retailing |
|
U.S. |
|
Various locations |
|
Offices/Warehouses/ |
|
|
|
|
|
|
|
|
|
|
|
|
throughout the U.S. |
|
Mfg plants |
|
25 |
|
Owned |
|
|
5,181,000 |
|
|
|
|
|
|
|
Offices/Warehouses/ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mfg plants |
|
41 |
|
Leased |
|
|
3,086,000 |
|
|
|
|
|
|
|
Retail stores |
|
31 |
|
Owned |
|
|
3,178,000 |
|
|
|
|
|
|
|
Retail stores |
|
545 |
|
Leased |
|
|
1,785,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service |
|
U.S. |
|
Various locations |
|
Training facilities/ |
|
|
|
|
|
|
|
|
|
|
|
|
in 10 states |
|
Hangars |
|
2 |
|
Owned |
|
|
823,000 |
|
|
|
|
|
|
|
Training facilities/ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hangars |
|
15 |
|
Leased |
|
|
242,000 |
|
|
|
|
|
Various locations |
|
Offices/Warehouses |
|
15 |
|
Owned |
|
|
791,000 |
|
|
|
|
|
throughout the U.S. |
|
Offices/Warehouses |
|
86 |
|
Leased |
|
|
1,790,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Various locations |
|
Mfg plants |
|
8 |
|
Owned |
|
|
601,000 |
|
|
|
|
|
in 7 states |
|
Mfg plants |
|
8 |
|
Leased |
|
|
123,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Various locations |
|
Retail locations |
|
39 |
|
Owned |
|
|
126,000 |
|
|
|
|
|
in 7 states |
|
Retail locations |
|
40 |
|
Leased |
|
|
120,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S. |
|
Various locations |
|
Offices/Training |
|
3 |
|
Owned |
|
|
74,000 |
|
|
|
|
|
in 7 countries |
|
facilities/Hangars |
|
18 |
|
Leased |
|
|
279,000 |
|
21
Item 2. Description of Properties (Continued)
Utilities and Energy Businesses
MidAmericans energy properties consist of the physical assets necessary and appropriate to
generate, transmit, store, distribute and supply energy and consist mainly of electric generation,
transmission and distribution facilities and gas distribution plants, natural gas pipelines,
storage facilities, compressor stations and meter stations, along with the related rights-of-way. A
majority of these properties are pledged or encumbered to support or otherwise provide the security
for the related project or subsidiary debt. MidAmerican or its affiliates owns or has interests
in, the following types of electricity generating plants at December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility |
|
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
|
|
Capacity |
|
Net MW |
Energy Source |
|
Entity |
|
Location |
|
(MW)(1) |
|
Owned(2) |
Coal
|
|
PacifiCorp,
MidAmerican Energy
|
|
Wyoming, Iowa, Utah, Montana,
Colorado and Arizona
|
|
|
13,377 |
|
|
|
8,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas and
other
|
|
PacifiCorp,
MidAmerican Energy,
CalEnergy
|
|
Iowa, Utah, Illinois, Oregon, New
York, Texas, Arizona and Washington
|
|
|
3,783 |
|
|
|
3,265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hydroelectric
|
|
PacifiCorp,
MidAmerican Energy,
CalEnergy
|
|
Washington, Oregon, Idaho,
California, Utah, Montana,
Illinois, Wyoming, The Philippines
and Hawaii
|
|
|
1,323 |
|
|
|
1,318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geothermal
|
|
CalEnergy and
PacifiCorp
|
|
The Philippines, California and Utah
|
|
|
720 |
|
|
|
553 |
|
Nuclear
|
|
MidAmerican Energy
|
|
Illinois
|
|
|
1,748 |
|
|
|
437 |
|
Wind
|
|
MidAmerican Energy
and PacifiCorp
|
|
Iowa, Oregon and Wyoming
|
|
|
602 |
|
|
|
593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
21,553 |
|
|
|
15,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Facility Net Capacity megawatts (MW) represents either: 1) PacifiCorp
the total capability of a generating unit as based by actual operating experience or test
experience, less power generated and used for auxiliaries and other station uses, and is
determined using average annual temperatures; 2) MidAmerican Energy the total plant
accredited net generating capacity from the summer of 2006 (except for wind-powered generation
facilities, which are nameplate ratings) where MW may vary depending on operating conditions
and plant design; or 3) CalEnergy the contract capacity for most facilities. |
|
(2) |
|
Net MW Owned indicates MidAmericans ownership of Facility Net Capacity
(MW). |
As of December 31, 2006,
MidAmerican had an estimated 241.7 million tons of recoverable coal reserves in
mines owned or leased in Wyoming, Utah and Colorado based on the most recent engineering studies.
Coal reserve estimates are subject to adjustment as a result of the development of additional
engineering and geological data, new mining technology and changes in regulation and economic
factors affecting the utilization of such reserves. Collective electric transmission and
distribution systems included approximately 17,900 miles of transmission lines and approximately
1,300 substations at December 31, 2006. Gas distribution facilities included approximately 22,000
miles of gas mains and service pipelines at December 31, 2006.
22
Item 2. Description of Properties (Continued)
Utilities and Energy Businesses (Continued)
Northern Natural Gas operates approximately 15,900 miles of natural gas pipelines, consisting
of approximately 6,900 miles of mainline transmission pipelines and approximately 9,000 miles of
lateral pipelines. The Northern Natural Gas system includes delivery points in the northern end of the
system (Michigan, Illinois, Iowa, Minnesota, Nebraska, Wisconsin and South Dakota) and the natural
gas supply and service area is at the southern end of the system (Kansas, Oklahoma, Texas and New
Mexico). The Northern Natural Gas supply area is interconnected with many interstate and intrastate
pipelines in the national grid system. Storage services are provided through the operation of one
underground storage field in Iowa, two underground storage facilities in Kansas and one liquefied
natural gas storage peaking unit each in Garner, Iowa and Wrenshall, Minnesota.
Kern River operates approximately 1,700 miles of natural gas pipelines consisting of a
mainline section and common facilities. Kern River owns the entire mainline section, which extends
from the pipelines point of origination near Opal, Wyoming to Daggett, California. The mainline
section consists of the original approximately 700 miles of 36-inch diameter pipeline,
approximately 600 miles of 36-inch diameter loop pipeline related to an expansion project and
approximately 100 miles of various laterals that connect to the mainline. The common facilities
consist of an approximately 200 mile section of original pipeline that extends from the point of
interconnection with the mainline in Daggett to Bakersfield, California and an additional
approximately 100 miles related to the expansion project. The common facilities are jointly owned
by Kern River (approximately 76.8% as of December 31, 2006) and Mojave Pipeline Company, a wholly
owned subsidiary of El Paso Corporation, (approximately 23.2% as of December 31, 2006) as
tenants-in-common.
At December 31, 2006, Northern Electrics and Yorkshire Electricitys electricity distribution
network (excluding service connections to consumers) on a combined basis included approximately
34,000 kilometers of overhead lines and approximately 65,000 kilometers of underground cables.
Northern Electrics and Yorkshire Electricitys distribution facilities also included approximately
700 major substations.
23
Item 3. Legal Proceedings
Berkshire and its subsidiaries are parties in a variety of legal actions arising out of the
normal course of business. In particular, such legal actions affect Berkshires insurance and
reinsurance businesses. Such litigation generally seeks to establish liability directly through
insurance contracts or indirectly through reinsurance contracts issued by Berkshire subsidiaries.
Plaintiffs occasionally seek punitive or exemplary damages. Berkshire does not believe that such
normal and routine litigation will have a material effect on its financial condition or results of
operations. Berkshire and certain of its subsidiaries are also involved in other kinds of legal
actions, some of which assert or may assert claims or seek to impose fines and penalties in
substantial amounts and are described below.
a) Governmental Investigations
Berkshire, General Re Corporation (General Re) and certain of Berkshires insurance
subsidiaries, including General Reinsurance Corporation (General Reinsurance) and National
Indemnity Company (NICO) have been continuing to cooperate fully with the U.S. Securities and
Exchange Commission (SEC), the U.S. Department of Justice, the U.S. Attorney for the Eastern
District of Virginia and the New York State Attorney General (NYAG) in their ongoing
investigations of non-traditional products. General Re originally received subpoenas from the SEC
and NYAG in January 2005. Berkshire, General Re, General Reinsurance and NICO have been providing
information to the government relating to transactions between General Reinsurance or NICO (or
their respective subsidiaries or affiliates) and other insurers in response to the January 2005
subpoenas and related requests and, in the case of General Reinsurance (or its subsidiaries or
affiliates), in response to subpoenas from other U.S. Attorneys conducting investigations relating
to certain of these transactions. In particular, Berkshire and General Re have been responding to
requests from the government for information relating to certain transactions that may have been
accounted for incorrectly by counterparties of General Reinsurance (or its subsidiaries or
affiliates). Berkshire understands that the government is evaluating the actions of General Re and
its subsidiaries, as well as those of their counterparties, to determine whether General Re or its
subsidiaries conspired with others to misstate counterparty financial statements or aided and
abetted such misstatements by the counterparties. The government has interviewed a number of
current and former officers and employees of General Re and General Reinsurance as well as
Berkshires Chairman and CEO, Warren E. Buffett, in connection with these investigations.
In one case, a transaction initially effected with American International Group (AIG) in
late 2000 (the AIG Transaction), AIG has corrected its prior accounting for the transaction on
the grounds, as stated in AIGs 2004
10-K, that the transaction was done to accomplish a desired accounting result and did not entail
sufficient qualifying risk transfer to support reinsurance accounting. General Reinsurance has
been named in related civil actions brought against AIG, as 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 reinsurance
transactions.
In June 2005, John Houldsworth, the former Chief Executive Officer of Cologne Reinsurance
Company (Dublin) Limited (CRD), a subsidiary of General Re, and Richard Napier, a former Senior
Vice President of General Re who had served as an account representative for the AIG account, each
pleaded guilty to a federal criminal charge of conspiring with others to misstate certain AIG
financial statements in connection with the AIG Transaction and entered into a partial settlement
agreement with the SEC with respect to such matters. In addition, Ronald Ferguson, General Res
former Chief Executive Officer, Elizabeth Monrad, General Res former Chief Financial Officer,
Christopher Garand, a former General Reinsurance Senior Vice President and Robert Graham, a former
General Reinsurance Senior Vice President and Assistant General Counsel are awaiting trial in
the U.S. District Court for the District of Connecticut on charges of conspiracy to violate
securities laws and to commit mail fraud, securities fraud, making false statements to the SEC and
mail fraud in connection with the AIG Transaction. The trial is currently set for December 2007.
Each has pleaded not guilty to all charges. Each of these individuals, who had previously received
a Wells notice in 2005 from the SEC, is also the subject of an SEC enforcement action for
allegedly aiding and abetting AIGs violations of the antifraud provisions and other provisions of
the federal securities laws in connection with the AIG Transaction. The SEC case is presently
stayed. Joseph Brandon, the Chief Executive Officer of General Re, also received a Wells notice
from the SEC in 2005.
Various state insurance departments have issued subpoenas or otherwise requested that General
Reinsurance, NICO and their affiliates provide documents and information relating to
non-traditional products. The Office of the Connecticut Attorney General has also issued a subpoena
to General Reinsurance for information relating to non-traditional products. General Reinsurance,
NICO and their affiliates have been cooperating fully with these subpoenas and requests.
In November 2006, two subsidiaries of General Re, General Reinsurance UK Limited (Gen Re UK)
and Kolnische Ruckversicherungs-Gesellschaft AG (Cologne Re), entered into a settlement agreement
with the Financial Services Authority (FSA) with respect to the FSAs previously disclosed
investigation of the role of these entities in certain transactions that were alleged to involve no
or insufficient risk transfer to be treated for accounting and regulatory purposes as reinsurance.
Pursuant to the settlement agreement, Gen Re UK paid the FSA a penalty of $2.3 million.
24
Item 3. Legal Proceedings (Continued)
Cologne Re is also cooperating fully with requests for information and orders to produce
documents from the German Federal Financial Supervisory Authority (the BaFin) regarding the
activities of Cologne Re relating to finite reinsurance and regarding transactions between
Cologne Re or its subsidiaries, including CRD, and certain counterparties. In particular, Cologne
Re is cooperating fully with a BaFin order to produce documents received on October 24, 2006. The
order stated that it is part of the BaFins continuing investigation into financial reinsurance
agreements and that Cologne Re, and possibly one or more of its senior executives, is suspected of
violating legal provisions in regard to such agreements.
In April 2005, the Australian Prudential Regulation Authority (APRA) announced an
investigation involving financial or finite reinsurance transactions by General Reinsurance
Australia Limited (GRA), a subsidiary of General Reinsurance. An inspector was appointed by APRA
under section 52 of the Insurance Act 1973 to conduct an investigation of GRAs financial or finite
reinsurance business. GRA and General Reinsurance have cooperated fully with this investigation.
The inspector has submitted its final investigative report to APRA.
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 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 several current and former employees, along with numerous other
defendants, have been sued in thirteen federal lawsuits involving Reciprocal of America (ROA) and
related entities. Nine are putative class actions initiated by doctors, hospitals and lawyers that
purchased insurance through ROA or certain of its Tennessee-based risk retention groups. ROA was a
Virginia-based reciprocal insurer and reinsurer of physician, hospital and lawyer professional
liability risks. 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 Receiver for purposes of liquidating three Tennessee risk retention groups, a state
lawsuit filed by a Missouri-based hospital group that was removed to federal court and another
state lawsuit filed by an Alabama doctor that was also removed to federal court. The first of
these actions was filed in March 2003 and additional actions were filed in April 2003 through June
2006. In the action filed by the Virginia Commissioner of Insurance, the Commissioner asserts in
several of its claims that the alleged damages are believed to exceed $200 million in the aggregate
as against all defendants. All of these cases are collectively assigned to the U.S. District Court
for the Western District of Tennessee for pretrial proceedings. General Reinsurance filed motions
to dismiss all of the claims against it in these cases and, in June 2006, the court granted General
Reinsurances motion to dismiss the complaints of the Virginia and Tennessee receivers. The court
granted the Tennessee receiver leave to amend her complaint, and the Tennessee receiver filed her
amended complaint on August 7, 2006. General Reinsurance has filed a motion to dismiss the amended
complaint in its entirety and awaits a ruling by the court. The Virginia receiver has moved for
reconsideration of the dismissal and for leave to amend his complaint. General Reinsurance has
filed its opposition to that motion and awaits a ruling by the court. In September 2006, the court
also dismissed the complaint filed by the Missouri-based hospital group. The Missouri-based
hospital group has filed a motion for reconsideration of the dismissal and for leave to file an
amended complaint. General Reinsurance has filed its opposition to that motion and awaits a ruling
by the court. The court has also not yet ruled on General Reinsurances motions to dismiss the
complaints of the other plaintiffs. The parties have commenced discovery.
In December 2006, General Reinsurance entered into settlement agreements with respect to two
lawsuits filed in Alabama state courts that related to ROA and related entities, and these lawsuits
have been dismissed.
Actions related to AIG
General Reinsurance is a defendant in In re American International Group Securities
Litigation, Case No. 04-CV-8141-(LTS), United States District Court, Southern District of New York,
a putative class action asserted on behalf of investors who purchased publicly-traded securities of
AIG between October 1999 and March 2005. The complaint, originally filed in April 2005, asserts
various claims against AIG and certain of its officers, directors,
25
Item 3. Legal Proceedings (Continued)
investment banks and other parties, including Messrs. Ferguson, Napier and Houldsworth (whom
the Complaint defines, together with General Reinsurance, as the General Re Defendants). The
Complaint alleges that the General Re Defendants violated Section 10(b) of the Securities Exchange
Act and Rule 10b-5 in connection with the AIG Transaction. The Complaint seeks damages and other
relief in unspecified amounts. General Reinsurance has answered the Complaint, denying liability
and asserting various affirmative defenses. Document production has begun, but no other discovery
has taken place. No trial date has been scheduled.
A member of the putative class in the litigation described in the preceding paragraph has
asserted similar claims against General Re and Mr. Ferguson in a separate complaint, Florida State
Board of Administration v. General Re Corporation, et al., Case No. 06-CV-3967, United States
District Court, Southern District of New York. The claims against General Re and Mr. Ferguson
closely resemble those asserted in the class action. The complaint does not specify the amount of
damages sought. General Re has answered the Complaint, denying liability and asserting various
affirmative defenses. No trial date has been established. The parties are coordinating discovery
and other proceedings among this action, a similar action filed by the same plaintiff against AIG
and others, the class action described in the preceding paragraph, and the shareholder derivative
actions described in the next paragraph.
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. 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 relating to General Reinsurance focus on the AIG Transaction, and the complaint
purports to assert causes of action in connection with that transaction 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. 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, 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
March 14, 2007.
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. 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.
The Liquidator of HIH served its Complaint on GRA and Cologne Re in June 2006. The FAI Liquidator
has until March 30, 2007 to serve his complaint on GRA and Cologne Re.
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 which
plaintiffs allege 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. 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. In November 2006, General Re, General
Reinsurance and Berkshire, together with the other defendants, filed motions to dismiss the
complaint which are awaiting resolution.
26
Item 4. Submission of Matters to a Vote of Security Holders
None
Executive Officers of the Registrant
Following is a list of the Registrants executive officers:
|
|
|
|
|
|
|
|
|
|
|
Name |
|
Age |
|
Position with Registrant |
|
Since |
Warren E. Buffett
|
|
|
76 |
|
|
Chairman of the Board
|
|
|
1970 |
|
Marc D. Hamburg
|
|
|
57 |
|
|
Vice President
|
|
|
1992 |
|
Charles T. Munger
|
|
|
83 |
|
|
Vice Chairman of the Board
|
|
|
1978 |
|
Each executive officer serves, in accordance with the by-laws of the Registrant, until the
first meeting of the Board of Directors following the next annual meeting of shareholders and until
his respective successor is chosen and qualified or until he sooner dies, resigns, is removed or
becomes disqualified. Mr. Buffett and Mr. Munger also serve as directors of the Registrant.
Part II
Item 5. Market for Registrants Common Stock and Related Security Holder Matters
Market Information
Berkshires Class A and Class B Common Stock are listed for trading on the New York Stock
Exchange, trading symbol: BRK.A and BRK.B. The following table sets forth the high and low sales
prices per share, as reported on the New York Stock Exchange Composite List during the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
|
Class A |
|
Class B |
|
Class A |
|
Class B |
|
|
High |
|
Low |
|
High |
|
Low |
|
High |
|
Low |
|
High |
|
Low |
First Quarter |
|
$ |
90,600 |
|
|
$ |
86,200 |
|
|
$ |
3,013 |
|
|
$ |
2,860 |
|
|
$ |
92,000 |
|
|
$ |
84,500 |
|
|
$ |
3,067 |
|
|
$ |
2,805 |
|
Second Quarter |
|
|
93,100 |
|
|
|
85,400 |
|
|
|
3,099 |
|
|
|
2,839 |
|
|
|
88,900 |
|
|
|
82,000 |
|
|
|
2,948 |
|
|
|
2,733 |
|
Third Quarter |
|
|
97,100 |
|
|
|
89,400 |
|
|
|
3,238 |
|
|
|
2,978 |
|
|
|
85,450 |
|
|
|
78,800 |
|
|
|
2,848 |
|
|
|
2,612 |
|
Fourth Quarter |
|
|
114,500 |
|
|
|
95,200 |
|
|
|
3,825 |
|
|
|
3,165 |
|
|
|
91,200 |
|
|
|
82,100 |
|
|
|
3,032 |
|
|
|
2,728 |
|
Shareholders
Berkshire had approximately 5,100 record holders of its Class A Common Stock and 14,000 record
holders of its Class B Common Stock at February 15, 2007. Record owners included nominees holding
at least 500,000 shares of Class A Common Stock and 12,500,000 shares of Class B Common Stock on
behalf of beneficial-but-not-of-record owners.
Dividends
Berkshire has not declared a cash dividend since 1967.
Securities authorized for issuance under equity plans
In connection with certain business acquisitions, Berkshire has issued Class B common stock
options to replace outstanding options held by employees of the acquired entity. The terms of the
Berkshire stock options are essentially equivalent to the terms of the options of the acquired
entity, except that exercise prices were adjusted to give effect to the common stock exchange rate
applicable to each acquisition. Berkshire has granted no other stock options. A summary of the
Registrants equity compensation plans under which equity securities are authorized for issuance as
of December 31, 2006 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Class B |
|
Weighted-average |
|
Number of Class B shares remaining |
|
|
shares to be issued |
|
exercise price of |
|
available for issuance under equity |
|
|
upon exercise of |
|
outstanding options |
|
compensation plans (excluding shares |
Plan category |
|
options (a) |
|
(b) |
|
reflected in column (a)) |
Plans not approved
by security holders |
|
|
59,195 |
|
|
$ |
1,977 |
|
|
None |
27
Item 6. Selected Financial Data
Selected Financial Data for the Past Five Years
(dollars in millions except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance premiums earned |
|
$ |
23,964 |
|
|
$ |
21,997 |
|
|
$ |
21,085 |
|
|
$ |
21,493 |
|
|
$ |
19,182 |
|
Sales and service revenues |
|
|
51,803 |
|
|
|
46,138 |
|
|
|
43,222 |
|
|
|
32,098 |
|
|
|
16,958 |
|
Revenues of utilities and energy businesses (1) |
|
|
10,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, dividend and other investment income |
|
|
4,382 |
|
|
|
3,487 |
|
|
|
2,816 |
|
|
|
3,098 |
|
|
|
2,943 |
|
Interest and other revenues of finance and financial
products businesses |
|
|
5,111 |
|
|
|
4,633 |
|
|
|
3,788 |
|
|
|
3,087 |
|
|
|
2,314 |
|
Investment and derivative gains/losses (2) |
|
|
2,635 |
|
|
|
5,408 |
|
|
|
3,471 |
|
|
|
4,083 |
|
|
|
838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
98,539 |
|
|
$ |
81,663 |
|
|
$ |
74,382 |
|
|
$ |
63,859 |
|
|
$ |
42,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (2) (3) |
|
$ |
11,015 |
|
|
$ |
8,528 |
|
|
$ |
7,308 |
|
|
$ |
8,151 |
|
|
$ |
4,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share |
|
$ |
7,144 |
|
|
$ |
5,538 |
|
|
$ |
4,753 |
|
|
$ |
5,309 |
|
|
$ |
2,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-end data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
248,437 |
|
|
$ |
198,325 |
|
|
$ |
188,874 |
|
|
$ |
180,559 |
|
|
$ |
169,544 |
|
Notes payable and other borrowings
of insurance and other non-finance businesses |
|
|
3,698 |
|
|
|
3,583 |
|
|
|
3,450 |
|
|
|
4,182 |
|
|
|
4,775 |
|
Notes payable and other borrowings of
utilities and energy businesses (1) |
|
|
16,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable and other borrowings of
finance and financial products businesses |
|
|
11,961 |
|
|
|
10,868 |
|
|
|
5,387 |
|
|
|
4,937 |
|
|
|
4,513 |
|
Shareholders equity |
|
|
108,419 |
|
|
|
91,484 |
|
|
|
85,900 |
|
|
|
77,596 |
|
|
|
64,037 |
|
Class A equivalent common shares
outstanding, in thousands |
|
|
1,543 |
|
|
|
1,541 |
|
|
|
1,539 |
|
|
|
1,537 |
|
|
|
1,535 |
|
Shareholders equity per outstanding
Class A equivalent common share |
|
$ |
70,281 |
|
|
$ |
59,377 |
|
|
$ |
55,824 |
|
|
$ |
50,498 |
|
|
$ |
41,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
On February 9, 2006, Berkshire Hathaway converted its non-voting preferred
stock of MidAmerican Energy Holdings Company (MidAmerican) to common stock and upon
conversion, owned approximately 83.4% (80.5% diluted) of the voting common stock interests.
Accordingly, the 2006 Consolidated Financial Statements reflect the consolidation of the
accounts of MidAmerican. During the period between 2002 and 2005, Berkshires investment in
MidAmerican was accounted for pursuant to the equity method. |
|
(2) |
|
The amount of investment and derivative gains and losses for any given period has
no predictive value, and variations in amount from period to period have no practical
analytical value in view of the unrealized appreciation in
Berkshires investment portfolio. After-tax investment and derivative gains
were $1,709 million in 2006, $3,530 million in 2005, $2,259 million in 2004, $2,729 million
in 2003 and $566 million in 2002. Investment gains in 2005 include a non-cash pre-tax gain
of $5.0 billion ($3.25 billion after-tax) relating to the exchange of Gillette stock for
Procter & Gamble stock. |
|
(3) |
|
Net earnings for the year ending December 31, 2005 includes a pre-tax underwriting loss of $3.4 billion in connection with Hurricanes Katrina, Rita and Wilma that struck the
Gulf coast and Southeast regions of the United States. Such loss reduced net earnings by
approximately $2.2 billion and earnings per share by $1,446. |
28
Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
Net
earnings for each of the past three years are disaggregated in the table that follows.
Amounts are after deducting income taxes and minority interests and are in millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Insurance underwriting |
|
$ |
2,485 |
|
|
$ |
27 |
|
|
$ |
1,008 |
|
Insurance investment income |
|
|
3,120 |
|
|
|
2,412 |
|
|
|
2,045 |
|
Utilities and energy |
|
|
885 |
|
|
|
523 |
|
|
|
237 |
|
Manufacturing, service and retailing |
|
|
2,131 |
|
|
|
1,646 |
|
|
|
1,540 |
|
Finance and financial products |
|
|
732 |
|
|
|
514 |
|
|
|
373 |
|
Other |
|
|
(47 |
) |
|
|
(124 |
) |
|
|
(154 |
) |
Investment and derivative gains/losses |
|
|
1,709 |
|
|
|
3,530 |
|
|
|
2,259 |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
11,015 |
|
|
$ |
8,528 |
|
|
$ |
7,308 |
|
|
|
|
|
|
|
|
|
|
|
Berkshires operating businesses are managed on an unusually decentralized basis. There are
essentially no centralized or integrated business functions (such as sales, marketing, purchasing,
legal or human resources) and there is minimal involvement by Berkshires corporate headquarters in
the day-to-day business activities of the operating businesses. Berkshires corporate office
management participates in and is ultimately responsible for significant capital allocation
decisions, investment activities and the selection of the Chief Executive to head each of the
operating businesses. The business segment data (Note 20 to the Consolidated Financial Statements) should
be read in conjunction with this discussion.
Insurance Underwriting
A summary follows of underwriting results from Berkshires insurance businesses for the past
three years. Amounts are in millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Underwriting gain (loss) attributable to: |
|
|
|
|
|
|
|
|
|
|
|
|
GEICO |
|
$ |
1,314 |
|
|
$ |
1,221 |
|
|
$ |
970 |
|
General Re |
|
|
526 |
|
|
|
(334 |
) |
|
|
3 |
|
Berkshire Hathaway Reinsurance Group |
|
|
1,658 |
|
|
|
(1,069 |
) |
|
|
417 |
|
Berkshire Hathaway Primary Group |
|
|
340 |
|
|
|
235 |
|
|
|
161 |
|
|
|
|
|
|
|
|
|
|
|
Pre-tax underwriting gain |
|
|
3,838 |
|
|
|
53 |
|
|
|
1,551 |
|
Income taxes and minority interests |
|
|
1,353 |
|
|
|
26 |
|
|
|
543 |
|
|
|
|
|
|
|
|
|
|
|
|
Net underwriting gain |
|
$ |
2,485 |
|
|
$ |
27 |
|
|
$ |
1,008 |
|
|
|
|
|
|
|
|
|
|
|
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 and reinsurance businesses are: (1) GEICO, one of the four largest auto insurers in the
U.S., (2) General Re, (3) Berkshire Hathaway Reinsurance Group and (4) Berkshire Hathaway Primary
Group.
On June 30, 2005, Berkshire acquired Medical Protective Corporation (MedPro), a provider
of professional liability insurance to physicians, dentists and other healthcare providers. On May 19, 2006, Berkshire acquired 85% of Applied Underwriters, a provider of integrated workers
compensation solutions. Underwriting results for these businesses are included in the Berkshire Hathaway Primary Group results beginning on their respective acquisition dates.
Berkshires management views insurance businesses as possessing two distinct operations
underwriting and investing. Underwriting decisions are the responsibility of the unit managers;
investing, with limited exceptions at GEICO and 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.
See the Critical Accounting Policies section of this discussion 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. During the third quarter of 2005, Hurricanes Katrina and Rita struck the Gulf Coast region of
the United States producing the largest catastrophe losses for any quarter in the history of the
property/casualty insurance industry. In the fourth quarter of 2005, Hurricane Wilma struck the
Southeast U.S. Estimated pre-tax losses from these events of $3.4 billion were recorded in 2005. In contrast, there were no major hurricanes in 2006.
29
Insurance Underwriting (Continued)
A key marketing strategy
followed by all of these businesses is the maintenance of extraordinary
capital strength. Statutory surplus of Berkshires insurance businesses was approximately $59 billion at December 31, 2006. This superior capital strength creates opportunities, especially
with respect to reinsurance activities, to negotiate and enter into insurance and reinsurance
contracts specially designed to meet unique needs of insurance and reinsurance buyers. 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 underwriting results for the past three years are summarized below. Dollars are in
millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
Premiums written |
|
$ |
11,303 |
|
|
|
|
|
|
$ |
10,285 |
|
|
|
|
|
|
$ |
9,212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned |
|
$ |
11,055 |
|
|
|
100.0 |
|
|
$ |
10,101 |
|
|
|
100.0 |
|
|
$ |
8,915 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses |
|
|
7,749 |
|
|
|
70.1 |
|
|
|
7,128 |
|
|
|
70.6 |
|
|
|
6,360 |
|
|
|
71.3 |
|
Underwriting expenses |
|
|
1,992 |
|
|
|
18.0 |
|
|
|
1,752 |
|
|
|
17.3 |
|
|
|
1,585 |
|
|
|
17.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and expenses |
|
|
9,741 |
|
|
|
88.1 |
|
|
|
8,880 |
|
|
|
87.9 |
|
|
|
7,945 |
|
|
|
89.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax underwriting gain |
|
$ |
1,314 |
|
|
|
|
|
|
$ |
1,221 |
* |
|
|
|
|
|
$ |
970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Net of losses of $200 million from Hurricanes Katrina, Rita and Wilma. |
Premiums earned in 2006 and 2005 increased 9.4% and 13.3%, respectively, over the
corresponding prior year amounts. The growth in premiums earned in 2006 for voluntary auto was 9.3%
and reflects a 10.7% increase in policies-in-force during the past year. During 2006,
policies-in-force increased 11.3% in the preferred risk markets and 8.6% in the standard and
nonstandard markets. Voluntary auto new business sales in 2006 increased 8.8% compared to 2005.
Voluntary auto policies-in-force at December 31, 2006 were 721,000 higher than at December 31,
2005. Premium rates have been reduced and underwriting guidelines have been adjusted in certain
markets to better match price with the underlying risk resulting in relatively lower premiums per
policy.
Losses and loss
adjustment expenses in 2006 were $7,749 million, an increase of 8.7% over
2005. The loss ratio declined to 70.1% in 2006 compared to 70.6% in 2005 and 71.3% in 2004 primarily due
to decreasing claim frequencies across all markets and most coverage types. In 2006, claims
frequencies for physical damage coverages decreased in the two to five percent range from 2005
while frequencies for injury coverages decreased in the two to five percent range. Injury severity
in 2006 increased in the two to five percent range over 2005 while physical damage severity
increased in the four to seven percent range. Incurred losses from catastrophe events were
approximately $54 million in 2006, $227 million in 2005 (primarily from the hurricanes in the third
and fourth quarters) and $71 million in 2004.
Underwriting expenses in 2006 were $1,992 million, an increase of 13.7% over 2005, which
increased 10.5% over 2004. The increase in expenses in 2006 reflected higher advertising costs as
well as incremental underwriting and policy issuance costs associated with new business sales.
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 95% 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 are summarized for the past three years in the following table. Amounts are
in millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax underwriting |
|
|
|
Premiums written |
|
|
Premiums earned |
|
|
gain (loss) |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Property/casualty: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American |
|
$ |
1,731 |
|
|
$ |
1,988 |
|
|
$ |
2,747 |
|
|
$ |
1,799 |
|
|
$ |
2,201 |
|
|
$ |
3,012 |
|
|
$ |
127 |
|
|
$ |
(307 |
) |
|
$ |
11 |
|
International |
|
|
1,850 |
|
|
|
1,864 |
|
|
|
2,091 |
|
|
|
1,912 |
|
|
|
1,939 |
|
|
|
2,218 |
|
|
|
246 |
|
|
|
(138 |
) |
|
|
(93 |
) |
Life/health |
|
|
2,368 |
|
|
|
2,303 |
|
|
|
2,022 |
|
|
|
2,364 |
|
|
|
2,295 |
|
|
|
2,015 |
|
|
|
153 |
|
|
|
111 |
|
|
|
85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,949 |
|
|
$ |
6,155 |
|
|
$ |
6,860 |
|
|
$ |
6,075 |
|
|
$ |
6,435 |
|
|
$ |
7,245 |
|
|
$ |
526 |
|
|
$ |
(334) |
* |
|
$ |
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Includes losses of $685 million related to Hurricanes Katrina, Rita and Wilma. |
30
Managements Discussion (Continued)
Insurance Underwriting (Continued)
Property/casualty
Premiums written declined in 2006 from amounts written in 2005 which declined from amounts
written in 2004. The declines in North America were attributable to significant reductions in
finite risk business and to a lesser extent lower casualty treaty volume. International premiums
written in 2006 were essentially unchanged from 2005. In local currencies, international premiums
written increased 2% over 2005 primarily due to increased volume of property business at Faraday
offset by a significant reduction in finite risk business. The overall comparative declines in
written premiums in the past three years reflected continued underwriting discipline by rejecting
transactions where pricing is deemed inadequate with respect to the risk.
Approximately half of the comparative declines in the North American premiums earned in 2006
and 2005 versus the previous year were attributable to policy cancellations and non-renewals
exceeding new contracts as well as a slight impact from rate changes. The remainder of the
comparative declines were primarily due to the significant decreases in finite risk business. In
local currencies, 2006 international premiums earned declined 3.5% from 2005, which declined 12.3%
compared with 2004. Similar to North America, the decline in premiums earned in the international
segment over the past three years generally reflects reductions in premium volume due to the
non-renewal of unprofitable business and the decrease in finite risk business.
The North American business produced
an underwriting gain of $127 million in 2006
compared with an underwriting loss of $307 million in 2005 and an underwriting gain of $11 million
in 2004. Underwriting results in 2006 included $348 million in underwriting gains from property
business partially offset by $221 million in underwriting losses from casualty/workers
compensation business and includes legal and estimated settlement costs associated with the ongoing
regulatory investigations of the finite risk business. The property business
produced underwriting gains of $209 million for
the 2006 accident year, and $139 million from favorable run-off of prior year property losses. The
current accident year results benefited from a lack of catastrophe losses. The underwriting losses
from casualty/workers compensation business in 2006 included (1) $137 million in discount accretion and deferred charge
amortization, (2) increases in prior years workers compensation reserves of $103 million arising from
the continuing escalation of medical utilization and cost inflation and (3) increases in
asbestos and environmental reserves of $58 million. These losses were somewhat offset by net decreases in
prior years reserves for other casualty coverages.
The 2005 underwriting loss included approximately $480 million in losses from three major
hurricanes in 2005 (Katrina, Rita and Wilma). Otherwise, underwriting results for the 2005
accident year generally benefited from re-pricing efforts and improved coverage terms and
conditions put into place over the preceding few years. Underwriting results in 2005 also included
losses attributable to prior accident years consisting of net reserve increases on workers
compensation of $228 million, asbestos and environmental mass tort exposures of $102 million and
$136 million in discount accretion on workers compensation reserves and deferred charge
amortization on retroactive reinsurance coverages. Offsetting these prior years losses were $419
million in gains from net reserve decreases in other casualty lines and property lines.
The net underwriting gain of $11 million in 2004 consisted of current accident year gains of
$166 million partially offset by $155 million in prior accident years losses. The 2004 current
accident year results benefited from a one-time reduction of $70 million in underwriting expenses
from the curtailment of certain pension benefits. In 2004, prior accident years losses included
reserve increases on casualty and workers compensation claims of $729 million and $110 million in
discount accretion and deferred charge amortization offset by $307 million of reserve reductions
for prior years property losses (primarily in World Trade Center loss exposures) and $377 million of
gains from contract commutations and settlements.
The International
property/casualty businesses produced an underwriting gain of $246 million in 2006 compared with underwriting losses of $138 million and $93 million in 2005 and 2004, respectively.
Underwriting results for 2006 benefited from $360 million of net gains in property and aviation
lines of business and the lack of catastrophe losses. Partially offsetting these gains were $114
million in net losses in casualty business, including costs associated with the finite risk business regulatory
investigations. Underwriting results for both 2005 and 2004 included catastrophe losses from the
U.S. hurricanes of $205 million and $110 million, respectively. Additionally, 2005 results
included $29 million in losses from windstorm Erwin. Underwriting results for each of the last
three years benefited from favorable results of the aviation and non-catastrophe property
businesses. The International property and casualty underwriting
results included gains associated with prior accident years of $235 million in 2006 compared with
gains of $108 million in 2005 and losses of $102 million in 2004. Prior years losses in 2004 were
primarily in motor excess, workers compensation and other casualty lines and increases for
operations placed in run-off.
Life/health
Premiums earned in 2006 increased 3.0% over 2005, which increased 13.9% over 2004. Adjusting
for the effects of foreign currency, premiums earned increased 2.3% in 2006 and 14.2% in 2005. The
increase in premiums earned in 2006 was primarily from European life business and in 2005 was
primarily due to an increase in both North American and European life business.
The global
life/health operations produced underwriting gains
of $153 million in 2006, $111 million in 2005 and $85 million in 2004. Both the U.S. and
international life/health operations were profitable in each of the past three years primarily due
to favorable mortality; however, most of the gains were earned in the international life business.
Additionally, included in the underwriting results for 2006, 2005 and 2004 were $31 million, $66
million and $46 million, respectively, of net losses attributable to reserve increases on certain
U.S. health business in run-off.
31
Insurance Underwriting (Continued)
Berkshire Hathaway Reinsurance Group
The Berkshire Hathaway Reinsurance Group (BHRG) underwrites excess-of-loss reinsurance and
quota share coverages for insurers and reinsurers worldwide. BHRGs business includes catastrophe
excess-of-loss reinsurance and excess direct and facultative reinsurance for large or otherwise
unusual discrete property risks referred to as individual risk. Retroactive reinsurance policies
provide indemnification of losses and loss adjustment expenses with respect to past loss events.
Other multi-line refers to other business written on both a quota-share and excess basis,
participations in and contracts with Lloyds syndicates, as well as aviation business and workers
compensation programs. The timing and amount of catastrophe losses can produce extraordinary
volatility in the periodic underwriting results of the BHRG, and, in particular, in the catastrophe
and individual risk business. The pre-tax probable maximum loss from a single event is currently
estimated to be approximately $6 billion. BHRGs pre-tax underwriting results are summarized
below. Amounts are in millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned |
|
|
Pre-tax underwriting gain (loss) |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Catastrophe and individual risk |
|
$ |
2,196 |
|
|
$ |
1,663 |
|
|
$ |
1,462 |
|
|
$ |
1,588 |
|
|
$ |
(1,178 |
) |
|
$ |
385 |
|
Retroactive reinsurance |
|
|
146 |
|
|
|
10 |
|
|
|
188 |
|
|
|
(173 |
) |
|
|
(214 |
) |
|
|
(412 |
) |
Other multi-line |
|
|
2,634 |
|
|
|
2,290 |
|
|
|
2,064 |
|
|
|
243 |
|
|
|
323 |
|
|
|
444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,976 |
|
|
$ |
3,963 |
|
|
$ |
3,714 |
|
|
$ |
1,658 |
|
|
$ |
(1,069) |
* |
|
$ |
417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Includes losses of $2.5 billion from Hurricanes Katrina, Rita and Wilma. |
Catastrophe and individual risk contracts may provide exceptionally large limits of
indemnification, often several hundred million dollars and occasionally in excess of $1 billion,
and cover catastrophe risks (such as hurricanes, earthquakes or other natural disasters) or other
property risks (such as aviation and aerospace, commercial multi-peril or terrorism). Catastrophe
and individual risk premiums written were approximately $2.4 billion in 2006, $1.8 billion in 2005
and $1.5 billion in 2004. The increase in volume in 2006 was principally attributable to improved
rates in the U.S. and limited industry capacity for catastrophe reinsurance which led to more
opportunities to write new business. The level of business written in future periods may vary
significantly based upon market conditions and managements assessment of the adequacy of premium
rates.
Pre-tax underwriting
results in 2006 reflect no significant losses from catastrophe events and
incurred losses of approximately $200 million attributable to prior years events, primarily
Hurricane Wilma which occurred in the fourth quarter of 2005. Underwriting results from
catastrophe and individual risk business in 2005 included estimated losses of approximately $2.4
billion from Hurricanes Katrina, Rita and Wilma. In 2004, underwriting results from catastrophe
and individual risk business included estimated catastrophe losses of $790 million from four
hurricanes that struck the U.S. and Caribbean during the third quarter. The timing and magnitude
of losses produce extraordinary volatility in periodic underwriting results of BHRGs catastrophe
and individual risk business. BHRG generally does not cede catastrophe and individual risks to mitigate the
volatility. Management accepts such
potential volatility provided that the long-term prospect of achieving underwriting
profits is reasonable.
Retroactive policies normally provide very large, but limited, indemnification of unpaid
losses and loss adjustment expenses with respect to past loss events that are 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
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, generate underwriting losses. The level of amortization in a given period is based upon
estimates of the timing and amount of future loss payments. To the extent there are changes in
these estimates, deferred charge balances are adjusted on a retrospective basis via a cumulative
adjustment.
Underwriting losses from retroactive reinsurance in 2006 are net of gains of approximately
$145 million which primarily derived from contracts that were commuted or amended during the last
half of 2006. Underwriting losses in 2005 from retroactive reinsurance are net of a gain
of approximately $46 million related to the final settlement of remaining unpaid losses under a
retroactive reinsurance agreement. In addition, estimates of unpaid losses were reviewed during
the fourth quarter of 2005 which resulted in a net reduction of $75 million in loss reserves and the
rates of deferred charge amortization on certain other contracts were decreased due to
slower than expected loss payments. During 2004 the estimated timing of future loss payments with
respect to one large contract was accelerated which produced an incremental amortization
charge of approximately $100 million. Unamortized deferred charges at December 31, 2006 were
approximately $1.74 billion compared to $2.13 billion at December 31, 2005. Management believes
that these charges are reasonable with respect to the large amounts of float related to these
policies. Float was approximately $6.5 billion at December 31, 2006.
Premiums earned from other multi-line reinsurance increased in 2006 as compared to 2005 due to
the continued growth in workers compensation programs. Increased premiums were earned in 2005 as
compared to 2004 from new workers compensation and ongoing aviation programs and were partially
offset by declines in quota-share contracts. Underwriting
results from other multi-line reinsurance in 2006 reflected favorable comparative underwriting results from property
contracts which benefited from low catastrophe losses. These favorable comparative results were somewhat
offset by a deterioration in underwriting results
from aviation business. Underwriting results in 2005 included estimated losses of approximately
$100 million from Hurricanes Katrina, Rita and Wilma, while results in 2004 included losses of
approximately $175 million arising from the third quarter hurricanes affecting the U.S. and
Caribbean. However, underwriting gains from aviation coverages and approximately $160 million in
gains from the commutations of several reinsurance contracts during 2004 more than offset the
losses arising from catastrophes.
32
Managements Discussion (Continued)
Insurance Underwriting (Continued)
Berkshire Hathaway Reinsurance Group (Continued)
In November 2006,
BHRG and Equitas, a London based entity established to reinsure and
manage the 1992 and prior years non-life liabilities of the Names or Underwriters at Lloyds of
London, entered into an agreement for BHRG to provide potentially up to $7 billion of new excess
reinsurance to Equitas. BHRG will also employ the current staff of Equitas and manage the
run-off of Equitas liabilities. The agreement is subject to the approval by certain regulatory
authorities in the United States and the United Kingdom as well as various other conditions which
must be obtained by March 31, 2007. Consideration payable to BHRG under the
arrangement would initially consist of all of Equitas assets less 100 million Pounds Sterling.
Berkshire Hathaway Primary Group
Berkshires primary insurance group consists of a wide variety of smaller insurance businesses
that principally write liability coverages for commercial accounts. These businesses include:
National Indemnity Companys primary group operation (NICO Primary Group), a writer of motor
vehicle and general liability coverages; U.S. Investment Corporation (USIC), whose subsidiaries
underwrite specialty insurance coverages; a group of companies referred to internally as
Homestate operations, providers of standard multi-line insurance; Central States Indemnity
Company (CSI), a provider of credit and disability insurance to individuals nationwide through
financial institutions; and MedPro and Applied Underwriters, which as previously noted were
acquired in June 2005 and May 2006, respectively.
Collectively, Berkshires primary insurance businesses produced earned premiums of
$1,858 million in 2006, $1,498 million in 2005 and $1,211 million in 2004. The increase in
premiums earned in 2006 was primarily attributable to the impact of the MedPro and Applied
Underwriters acquisitions partially offset by a decline in volume of the NICO Primary Group.
Premiums earned in the last half of 2005 by MedPro accounted for most of the increase in total
premiums earned by the primary group in 2005 compared with 2004. Pre-tax underwriting gains as
percentages of premiums earned were approximately 18% in 2006, 16% in 2005 and 13% in 2004.
Underwriting gains in 2006 were achieved in all of the businesses. The underwriting gain in 2005
reflected a decrease in loss reserve estimates for pre-2005 loss events in the NICO Primary Group
business, improved results of Homestate, USIC and CSI operations partially offset by losses
incurred from increases in medical malpractice reserves.
Insurance Investment Income
Following is a summary of the net investment income of Berkshires insurance operations for
the past three years. Amounts are in millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Investment income before taxes |
|
$ |
4,316 |
|
|
$ |
3,480 |
|
|
$ |
2,824 |
|
Income taxes and minority interests |
|
|
1,196 |
|
|
|
1,068 |
|
|
|
779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income after taxes and minority interests |
|
$ |
3,120 |
|
|
$ |
2,412 |
|
|
$ |
2,045 |
|
|
|
|
|
|
|
|
|
|
|
Investment income consists of interest and dividends earned on cash equivalents and fixed
maturity and equity investments of Berkshires insurance businesses. Pre-tax investment income
earned in 2006 by Berkshires insurance businesses increased $836 million (24%) over 2005, which
increased $656 million (23%) over 2004. The increase in 2006 reflects higher short-term interest
rates in the United States and increased dividends as compared to 2005. The increase in investment
income in 2005 primarily reflects higher short-term interest rates in the United States as compared
to 2004.
A summary of investments held in Berkshires insurance businesses follows. Amounts are
in millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec. 31, |
|
|
Dec. 31, |
|
|
Dec. 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Cash and cash equivalents |
|
$ |
34,590 |
|
|
$ |
38,814 |
|
|
$ |
38,706 |
|
Equity securities |
|
|
61,168 |
|
|
|
46,412 |
|
|
|
37,420 |
|
Fixed maturity securities |
|
|
25,272 |
|
|
|
27,385 |
|
|
|
22,831 |
|
Other |
|
|
812 |
|
|
|
918 |
|
|
|
2,059 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
121,842 |
|
|
$ |
113,529 |
|
|
$ |
101,016 |
|
|
|
|
|
|
|
|
|
|
|
33
Insurance Investment Income (Continued)
Fixed maturity investments as of December 31, 2006 were as follows. Dollar amounts are in
millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Amortized cost |
|
|
gains/losses |
|
|
Fair value |
|
U.S. Treasury, government corporations and agencies |
|
$ |
4,941 |
|
|
$ |
(2 |
) |
|
$ |
4,939 |
|
States, municipalities and political subdivisions |
|
|
2,967 |
|
|
|
56 |
|
|
|
3,023 |
|
Foreign governments |
|
|
8,444 |
|
|
|
(28 |
) |
|
|
8,416 |
|
Corporate bonds and redeemable preferred stocks, investment grade |
|
|
3,610 |
|
|
|
150 |
|
|
|
3,760 |
|
Corporate bonds and redeemable preferred stocks, non-investment grade |
|
|
1,858 |
|
|
|
1,300 |
|
|
|
3,158 |
|
Mortgage-backed securities |
|
|
1,948 |
|
|
|
28 |
|
|
|
1,976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
23,768 |
|
|
$ |
1,504 |
|
|
$ |
25,272 |
|
|
|
|
|
|
|
|
|
|
|
All U.S. government obligations are rated AAA by the major rating agencies and 96% of all
state, municipal and political subdivisions, foreign government obligations and mortgage-backed
securities were rated AA or higher. Non-investment grade securities represent securities that are
rated below BBB- or Baa3.
Invested assets derive from shareholder capital and reinvested earnings as well as net
liabilities assumed under insurance contracts or float. The major components of float are unpaid
losses, unearned premiums and other liabilities to policyholders less premiums and reinsurance
receivables, deferred charges assumed under retroactive reinsurance contracts and deferred policy
acquisition costs. Float approximated $50.9 billion at December 31, 2006, $49.3 billion at
December 31, 2005 and $46.1 billion at December 31, 2004. The cost of float, as represented by
the ratio of pre-tax underwriting gain or loss to average float, was negative for the last three
years, as Berkshires insurance businesses generated pre-tax underwriting gains in each year.
Utilities and energy (MidAmerican)
Revenues and earnings from MidAmerican for each of the past three years are summarized below.
Amounts are in millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
Earnings |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
MidAmerican Energy Company |
|
$ |
3,519 |
|
|
$ |
3,200 |
|
|
$ |
2,731 |
|
|
$ |
348 |
|
|
$ |
288 |
|
|
$ |
268 |
|
PacifiCorp |
|
|
2,971 |
|
|
|
|
|
|
|
|
|
|
|
356 |
|
|
|
|
|
|
|
|
|
Natural gas pipelines |
|
|
972 |
|
|
|
909 |
|
|
|
884 |
|
|
|
376 |
|
|
|
309 |
|
|
|
289 |
|
U.K. utilities |
|
|
961 |
|
|
|
921 |
|
|
|
955 |
|
|
|
338 |
|
|
|
308 |
|
|
|
326 |
|
Real estate brokerage |
|
|
1,724 |
|
|
|
1,894 |
|
|
|
1,777 |
|
|
|
74 |
|
|
|
148 |
|
|
|
130 |
|
Other |
|
|
497 |
|
|
|
356 |
|
|
|
380 |
|
|
|
226 |
|
|
|
115 |
|
|
|
(406 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,644 |
|
|
$ |
7,280 |
|
|
$ |
6,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before corporate interest and taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,718 |
|
|
|
1,168 |
|
|
|
607 |
|
Interest, other than to Berkshire |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(261 |
) |
|
|
(200 |
) |
|
|
(212 |
) |
Interest on Berkshire junior debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(134 |
) |
|
|
(157 |
) |
|
|
(170 |
) |
Income tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(407 |
) |
|
|
(248 |
) |
|
|
(55 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
916 |
|
|
$ |
563 |
|
|
$ |
170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings applicable to Berkshire * |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
885 |
|
|
$ |
523 |
* |
|
$ |
237 |
* |
Debt owed to others |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,946 |
|
|
|
10,296 |
|
|
|
10,528 |
|
Debt owed to Berkshire |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,055 |
|
|
|
1,289 |
|
|
|
1,478 |
|
|
|
|
* |
|
Net of minority interests and includes interest earned by Berkshire (net of related income
taxes). Also includes
additional income tax charges of $49 million and $15 million in 2005 and 2004, respectively, related to
Berkshires accounting for MidAmerican under the equity method. |
Berkshires 2005 and 2004 Consolidated Financial Statements reflect Berkshires share of
MidAmericans net earnings as determined under the equity method. In 2006, MidAmericans revenues
and expenses are consolidated in Berkshires financial statements. For
comparative purposes, revenues and earnings of MidAmerican for 2005 and 2004 are provided in the
table above. Revenues and earnings of the utilities and energy businesses are, to some extent,
seasonal depending on weather-induced demand. Revenues from U.S. electricity sales are generally higher in
the summer when air conditioning use is greatest and revenues from gas sales and pipelines are generally higher
in the winter when
heating needs are higher. Real estate brokerage revenues tend to be highest in the second and
third quarters.
MidAmericans revenues of $10,644 million in 2006 increased $3,364 million (46%) and earnings
before corporate interest and taxes (EBIT) of $1,718 million in 2006 increased $550 million (47%)
as compared to 2005. The increases in
revenues and EBIT were largely attributable to the acquisition of PacifiCorp on March 21,
2006. Revenues of MidAmerican
34
Managements Discussion (Continued)
Utilities and Energy (MidAmerican) (Continued)
Energy Company (MEC) of $3,519 million increased $319 million (10%) as compared to 2005.
Major factors giving rise to MECs revenue increase were a change in strategy related to certain end
use natural gas contracts that resulted in revenues and costs being recorded on a gross rather than
net basis and higher wholesale electricity sales due to both price and volume increases. Somewhat offsetting these increases
were lower natural gas sales due to mild temperatures in 2006. EBIT of MEC increased $60 million (21%) as compared to 2005. About 2/3 of the increase
was due to improved margins on regulated electricity sales.
Revenues from
natural gas pipelines of $972 million in 2006 increased $63 million (7%) and
EBIT of $376 million in 2006 increased $67 million (22%) as compared to 2005. The comparative
improvement in revenues and EBIT was primarily due to favorable market conditions resulting in
higher demand and rates as well as additional transportation and storage services. EBIT of the U.K.
utilities business of $338 million in 2006 increased $30 million (10%) as compared to 2005. The
increase was due to an increase in regulated revenues as well as a favorable impact from the
strengthening of the Pound Sterling versus the U.S. dollar.
Revenues from the real estate brokerage business of $1,724 million in 2006 decreased $170
million (9%) and EBIT of $74 million in 2006 decreased $74 million (50%) as compared to 2005. The
declines were due to a significant reduction in the number of closed transactions due to the
significant slowdown in U.S. residential real estate activity.
EBIT from other activities of $226 million in 2006 increased $111 million as compared to 2005.
Most of this increase arose from a gain on the sale of a security that was received in connection
with a bankruptcy claim award as well as from sales of other investments. In 2004, EBIT includes an impairment
charge of $579 million related to the discontinuance of the operations of MidAmericans mineral
extraction facility.
Manufacturing, Service and Retailing
A comparison of revenues and
pre-tax earnings between 2006, 2005 and 2004 for the
manufacturing, service and retailing businesses follows. Amounts are in millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
Earnings |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
McLane Company |
|
$ |
25,693 |
|
|
$ |
24,074 |
|
|
$ |
23,373 |
|
|
$ |
229 |
|
|
$ |
217 |
|
|
$ |
228 |
|
Shaw Industries |
|
|
5,834 |
|
|
|
5,723 |
|
|
|
5,174 |
|
|
|
594 |
|
|
|
485 |
|
|
|
466 |
|
Other manufacturing |
|
|
11,988 |
|
|
|
9,260 |
|
|
|
8,152 |
|
|
|
1,756 |
|
|
|
1,335 |
|
|
|
1,160 |
|
Other service * |
|
|
5,811 |
|
|
|
4,728 |
|
|
|
4,507 |
|
|
|
658 |
|
|
|
329 |
|
|
|
412 |
|
Retailing |
|
|
3,334 |
|
|
|
3,111 |
|
|
|
2,936 |
|
|
|
289 |
|
|
|
257 |
|
|
|
215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
52,660 |
|
|
$ |
46,896 |
|
|
$ |
44,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,526 |
|
|
$ |
2,623 |
|
|
$ |
2,481 |
|
Income taxes and minority interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,395 |
|
|
|
977 |
|
|
|
941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,131 |
|
|
$ |
1,646 |
|
|
$ |
1,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
In 2004, Berkshire adopted the provisions of EITF 00-21 (Accounting for Revenue Arrangements
with Multiple Deliverables). As a result, for consolidated reporting purposes, the method of
recognizing revenue related to NetJets fractional aircraft sales was changed. Management
continues to evaluate the results of NetJets under the prior revenue recognition criteria and
thus has shown revenues and pre-tax earnings for the other services businesses using the prior
revenue recognition method. Revenues shown in this table are greater than the amounts
reported in Berkshires consolidated financial statements by $781 million in 2006, $704
million in 2005 and $902 million in 2004. Pre-tax earnings included in this table for 2006,
2005 and 2004 exceed the amounts included in the consolidated financial statements by $79
million, $63 million and $74 million, respectively. |
McLane Company
McLane Company, Inc., (McLane) is a distributor of grocery and food products to retailers,
convenience stores and restaurants. McLanes business is marked by high sales volume and very low
profit margins. McLanes revenues in 2006 increased $1,619 million (7%) as compared to 2005, which
increased $701 million (3%) as compared to 2004. The comparative revenue increases in both 2006 and 2005 were
due to increased grocery business partially offset by comparative reductions in restaurant food
service revenues primarily due to the loss of a large customer in mid-2005.
Pre-tax earnings in 2006 increased $12 million over 2005 which reflects the increase in sales
volume. Pre-tax earnings in 2006 were negatively affected by a comparative 0.13% reduction in
gross margin percentage which was primarily attributable to increased competition in the grocery
business. The impact from the decline in gross margin in 2006 was largely offset by comparatively
lower operating expenses that were primarily attributable to lower insurance costs. About 1/3 of
McLanes annual revenues are to Wal-Mart. A curtailment of purchasing by Wal-Mart could have a
material adverse impact on revenues and pre-tax earnings of McLane.
Shaw Industries
Shaw Industries (Shaw) is the worlds largest manufacturer of tufted broadloom carpets and is a
full-service flooring company. Shaws revenues of $5,834 million in 2006 increased $111 million
(2%) and pre-tax earnings of $594 million in 2006 increased $109 million (22%) as compared to 2005.
The increase in revenues reflected a 7% increase in average selling price for carpet, partially
offset by a 6% reduction in square yards sold. The comparative decline in 2006 square yards sold
versus 2005
accelerated during the third and fourth quarters, which is attributed to a slowing of single-family
housing construction and the acceleration of customer purchases during the second half of 2005 in
anticipation of price increases. The increase in pre-tax earnings was primarily generated in the
first six months of the year and was mainly attributable to a reduction in manufacturing
35
Manufacturing,
Service and Retailing (Continued)
Shaw Industries (Continued)
cost per unit deriving from the integration of carpet backing and nylon-fiber manufacturing
operations acquired by Shaw in the fourth quarter of 2005. These two acquisitions allow Shaw to
internally produce most of its carpet backing needs and to secure a more stable raw material
source. As a result of the continued slowdown in housing construction activity,
the decline in volume is expected to continue at least during the first half of 2007.
Revenues of $5,723 million in 2005 increased $549 million (11%) and pre-tax earnings of $485
million in 2005 increased $19 million (4%) as compared to 2004. Despite increases in selling
prices, operating margins in 2005 were adversely affected by repeated increases in petroleum-based
raw material costs. Consequently, increases in production costs outpaced increases in selling
prices. In addition, product sample costs pertaining to the introduction of new products increased
approximately $29 million in 2005 as compared to 2004.
Other manufacturing
Berkshires other manufacturing businesses include a wide array of businesses. Included in
this group are several manufacturers of building products (Acme Building Brands,
Benjamin Moore, Johns Manville and MiTek) and apparel (Fruit of the Loom, Garan, Russell
Corporation, Fechheimers, Justin Brands and the H.H. Brown Shoe Group). Also included in this
group are Forest River, a leading manufacturer of leisure vehicles that was acquired on August 31,
2005 and the Iscar Metalworking Companies (IMC), an industry leader in the metal cutting tools
business with operations worldwide that was acquired on July 5, 2006. Additionally, there are
numerous other manufacturers of consumer and commercial products in this diverse group.
Revenues from this group of manufacturing businesses of $11,988 million in 2006 increased $2,728
million (29%) and pre-tax earnings of $1,756 million in 2006 increased $421 million (32%) as
compared to 2005. The acquisitions of Forest River in August 2005, IMC in July 2006 and Russell
Corporation in August 2006 account for a substantial portion of these increases. Revenues from
other manufacturing businesses of $9,260 million in 2005 increased $1,108 million (14%) and pre-tax
earnings increased $175 million (15%) as compared to 2004. The aforementioned acquisition of
Forest River accounted for a significant portion of the increase. Additionally, the building
products group of businesses reported significant increases in revenues and pre-tax earnings in
both 2006 and 2005 as compared to the prior year. However, due to the continued slowdown in
housing construction activity in the United States, earnings of the building products businesses
are expected to be negatively impacted in 2007 as compared to 2006.
Other service
Berkshires other
service businesses include NetJets, the worlds leading provider of fractional ownership
programs for general aviation aircraft and FlightSafety, a provider of high technology training to
operators of aircraft and ships. Among other businesses included in this group are Pampered Chef,
a direct seller of high quality kitchen tools; International Dairy Queen, a licensor and service
provider to about 6,000 stores that offer prepared dairy treats and food; the Buffalo News, a
publisher of a daily and Sunday newspaper; and Business Wire, a leading distributor of corporate
news, multimedia and regulatory filings.
Revenues from
the service businesses of $5,811 million in 2006 increased
$1,083 million (23%) and pre-tax earnings of $658 million in 2006 increased $329 million (100%) as
compared to 2005. The largest portion of these increases arose from greatly improved comparative
operating results at NetJets where revenues increased $759 million over 2005. NetJets generated pre-tax earnings
of $143 million in 2006 as compared to a pre-tax loss of $80 million in 2005
reflecting a 23% increase in flight operations and management service revenues and increased
fractional aircraft sales. In 2006, occupied flight hours increased 19% and average hourly rates
increased as well. The number of aircraft managed within the NetJets program over the past twelve
months increased 13%. The improvement in operating results at NetJets also reflected a
substantial decline in subcontracted flights that are necessary to meet peak customer demand, which
resulted in a $77 million improvement in pre-tax earnings. Comparative results in 2006 also
benefited from the inclusion of Business Wire which was acquired in February 2006 as well as
comparative increases in revenues and earnings for FlightSafety.
Revenues from other service businesses of $4,728 million in 2005 increased $221 million (5%)
and pre-tax earnings of $329 million in 2005 declined $83 million (20%) as compared to 2004.
NetJets incurred a pre-tax loss of about $80 million in 2005 compared to pre-tax earnings of about
$10 million in 2004. Several factors contributed to the loss in 2005. Throughout 2005, NetJets
experienced unusually high shortages of available aircraft due to increases in owner demand
outpacing increases in capacity. Consequently, NetJets subcontracted additional aircraft capacity
through charter services. The costs associated with subcontracted flights were not fully
recoverable from clients and caused an incremental cost of approximately $85 million in
2005. NetJets has added aircraft to the core fleet and has developed strategies to address
capacity issues and restore profitability as the results in 2006 reflect. NetJets also recorded a
special charge of $20 million in the fourth quarter of 2005 for prior periods compensation related
to a new labor contract with its pilots and flight attendants.
Retailing
Berkshires retailing
operations consist of several home furnishings (Nebraska Furniture Mart,
R.C. Willey, Star Furniture and Jordans) and jewelry (Borsheims, Helzbergs and Ben
Bridge) retailers. Also included in this group is Sees Candies. Revenues from this group of
businesses of $3,334 million in 2006 increased $223 million (7%) and pre-tax earnings of $289 million
increased $32 million (12%) as compared to 2005. Revenues of the home furnishings
businesses were $2,144 million in
2006 and $1,958 million in 2005 and jewelry revenues were $815 million in 2006 and $801
million in 2005. Home furnishings revenues in 2006 included sales from two new R.C. Willey stores
of $77 million. In addition, same store home furnishings sales in 2006 increased approximately 6%
compared to 2005. A significant portion of the increase in pre-tax earnings was due to Sees
Candies which reported an increase of approximately $27 million.
36
Managements Discussion (Continued)
Manufacturing, Service and Retailing (Continued)
Retailing (Continued)
Revenues from the
retailing group of $3,111 million in 2005 increased $175 million
(6%) and pre-tax earnings of $257 million in 2005 increased $42 million (20%) in 2005 as compared
to 2004. Same store sales as well as new stores opened at R.C. Willey and Jordans and increased
earnings at Sees contributed to these favorable comparative results.
Finance and Financial Products
A summary of revenues and pre-tax earnings from Berkshires finance and financial products
businesses follows. Amounts are in millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
Earnings |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Manufactured housing and finance |
|
$ |
3,570 |
|
|
$ |
3,175 |
|
|
$ |
2,024 |
|
|
$ |
513 |
|
|
$ |
416 |
|
|
$ |
192 |
|
Furniture/transportation equipment leasing |
|
|
880 |
|
|
|
856 |
|
|
|
789 |
|
|
|
182 |
|
|
|
173 |
|
|
|
92 |
|
Other |
|
|
674 |
|
|
|
528 |
|
|
|
961 |
|
|
|
462 |
|
|
|
233 |
|
|
|
300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,124 |
|
|
$ |
4,559 |
|
|
$ |
3,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,157 |
|
|
|
822 |
|
|
|
584 |
|
Income taxes and minority interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
425 |
|
|
|
308 |
|
|
|
211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
732 |
|
|
$ |
514 |
|
|
$ |
373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues and pre-tax earnings from manufactured housing and finance activities (Clayton Homes)
increased 12% and 23%, respectively, as compared to 2005. In 2006, manufactured home sales
increased $302 million as compared to 2005 which was primarily due to slightly increased sales of
higher priced homes and an increase in total units sold. However, unit sales during the second
half of 2006 declined as compared to 2005. Interest income from
installment loans in 2006 increased $104 million as compared to 2005 due to higher average
installment loan balances primarily from loan portfolio acquisitions during 2005. The balance of
installment loans has stabilized after significant increases in recent years. Absent major new
loan portfolio acquisitions or significant increases in loan originations, installment loan
balances are expected to gradually decline as loan portfolios acquired in 2004 and 2005 are repaid.
Consequently, the rate of growth in interest income may decline over the next year and amounts may
eventually decline in comparison with amounts earned in 2006.
The increase in revenues in 2005 as
compared to 2004 from Clayton Homes was primarily
attributable to increased sales of manufactured homes of $491 million and increased interest income
of $583 million from higher installment loan balances. Installment loan balances at the end of 2005
increased
approximately $8.5 billion since Berkshires acquisition of Clayton Homes in 2003, reflecting the
impact of several loan portfolio acquisitions as well as loan originations. Pre-tax earnings from
Clayton Homes of $416 million in 2005, increased $224 million (117%) as compared to 2004. The
significant increase in pre-tax earnings was primarily due to higher interest income from the loan
portfolios acquired during 2004 and 2005, partially offset by higher interest expenses.
Pre-tax earnings from other finance activities of $462 million, increased $229 million as
compared to 2005. Other finance activities include the General Re derivatives business, which has
completed a major portion of its run-off, and Berkshires earnings from its investment in Value
Capital, a partnership that was substantially liquidated as of June 30, 2006. These two
activities generated breakeven results in 2006 compared to pre-tax losses of $137 million in 2005.
Other pre-tax earnings for 2006 also include a fee of $67 million in connection with an Equity
Commitment Agreement that Berkshire entered into with USG Corporation (USG). Under the Equity
Commitment Agreement, Berkshire agreed to purchase no less than 6.5 million and up to 44.9 million
additional shares of USG common stock to facilitate an equity rights offering.
Investment and Derivative Gains/Losses
A summary of investment and derivative gains and losses follows. Amounts are in
millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Investment gains/losses from - |
|
|
|
|
|
|
|
|
|
|
|
|
Sales and other disposals of investments - |
|
|
|
|
|
|
|
|
|
|
|
|
Insurance and other |
|
$ |
1,782 |
|
|
$ |
5,831 |
|
|
$ |
1,527 |
|
Finance and financial products |
|
|
6 |
|
|
|
544 |
|
|
|
61 |
|
Other-than-temporary impairments |
|
|
(142 |
) |
|
|
(114 |
) |
|
|
(19 |
) |
Life settlement contracts |
|
|
92 |
|
|
|
(82 |
) |
|
|
(207 |
) |
Other |
|
|
73 |
|
|
|
17 |
|
|
|
267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,811 |
|
|
|
6,196 |
|
|
|
1,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative gains/losses from - |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts |
|
|
186 |
|
|
|
(955 |
) |
|
|
1,839 |
|
Other |
|
|
638 |
|
|
|
253 |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
824 |
|
|
|
(702 |
) |
|
|
1,860 |
|
|
|
|
|
|
|
|
|
|
|
Gains/losses before income taxes and minority interests |
|
|
2,635 |
|
|
|
5,494 |
|
|
|
3,489 |
|
Income taxes and minority interests |
|
|
926 |
|
|
|
1,964 |
|
|
|
1,230 |
|
|
|
|
|
|
|
|
|
|
|
Net gains/losses |
|
$ |
1,709 |
|
|
$ |
3,530 |
|
|
$ |
2,259 |
|
|
|
|
|
|
|
|
|
|
|
37
Investment and Derivative Gains/Losses (Continued)
Investment gains or losses are recognized upon the sales of investments or as otherwise
required under GAAP. The timing of realized gains or losses from sales can have a material effect
on periodic earnings. However, such gains or losses usually have little, if any, impact on total
shareholders equity because most equity and fixed maturity investments are carried at fair value,
with the unrealized gain or loss included as a component of other comprehensive income.
Other-than-temporary impairment losses represent the adjustment of cost to fair value when, as
required by GAAP, management concludes that an investments decline in value below cost is other
than temporary. The impairment loss represents a non-cash charge to earnings.
For many years, Berkshire held an investment in common stock of The Gillette Company
(Gillette). On October 1, 2005, The Procter & Gamble Company (PG) completed its acquisition of
Gillette and issued 0.975 shares of its common stock for each outstanding share of Gillette common
stock. Berkshire recognized a non-cash pre-tax investment gain of approximately $5 billion upon
the exchange of the Gillette shares for PG shares. Berkshires management does not regard the gain
that was recorded, as required by GAAP, as meaningful. Berkshire intends to hold the shares of PG
just as it held the Gillette shares. The gain recognized for financial reporting purposes is
deferred for income tax purposes. The transaction essentially had no effect on Berkshires
consolidated shareholders equity because the gain included in earnings in the fourth quarter of
2005 was accompanied by a corresponding reduction of unrealized investment gains included in
accumulated other comprehensive income.
In 2004 and 2005, life settlement investments were carried at the cash surrender value
pursuant to FASB Technical Bulletin (FTB) 85-4 Accounting for Purchases
of Life Insurance. The
excess of the cash paid to purchase these contracts over the cash surrender value at the date of
purchase was recognized as a loss immediately and periodic maintenance costs, such as premiums
necessary to keep the underlying policies in force, were charged to earnings. Effective January 1,
2006, Berkshire adopted the new accounting pronouncement FTB 85-4-1 and elected to use the
investment method, whereby the aforementioned costs were capitalized. The cumulative effect of the
accounting change which increased the carrying value of the contracts owned as of the adoption date
was recorded, net of applicable income tax, as an increase to retained earnings of $180 million.
In 2006, Berkshire disposed of most of the life settlement contracts. The excess of the proceeds
over the carrying value of the contracts disposed of represents most of the gain from these contracts
in 2006.
Derivative 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 produce material changes in the fair value of these contracts and consequently can
produce volatility in reported earnings. The notional values of open foreign currency
forward contracts were approximately $1 billion and $14 billion as of December 31, 2006 and 2005,
respectively. During 2005, the value of most foreign currencies decreased relative to the U.S.
dollar and these contracts produced losses. Conversely, the value of many foreign currencies rose
relative to the U.S. dollar in 2004, and Berkshires contract positions produced significant gains.
Over the past three
years, Berkshire has also entered into several other derivative contracts
pertaining to credit default risks of other entities as well as equity price risk associated with
major equity indices. Such contracts are carried at estimated fair value and the change in
estimated fair value is included in earnings in the period of the change. Other derivative
contract gains in 2006 derived primarily from credit default contracts. Management attributes the
gains to tightening of interest rate spreads and market perceptions that the creditworthiness of
many of the underlying credit issuers has improved.
Financial Condition
Berkshires balance sheet continues to reflect significant liquidity and a strong capital
base. Consolidated shareholders equity at December 31, 2006 was $108.4 billion. Consolidated
cash and invested assets, excluding assets of finance and financial products businesses, was
approximately $126.1 billion at December 31, 2006 (including cash and cash equivalents of $38.3
billion) and $115.6 billion at December 31, 2005 (including cash and cash equivalents of $40.5
billion). Berkshires invested assets are held predominantly in its insurance businesses.
Berkshire believes that it currently maintains sufficient liquidity to cover its contractual
obligations and provide for contingent liquidity.
During 2006, Berkshire made several business acquisitions for aggregate cash consideration of
$10.1 billion. See
Note 3 to the Consolidated Financial Statements for more information concerning these
acquisitions. Berkshire maintains a large amount of capital in its insurance subsidiaries for
strategic purposes and in support of reserves for unpaid losses. In the United States, in
particular, dividend payments by insurance companies are subject to prior approval by state
regulators. For the year ending December 31, 2006, Berkshires insurance subsidiaries paid
dividends of $7.1 billion.
Capital
expenditures of the utilities and energy businesses were $2.4 billion in 2006.
Capital expenditures, construction and other development costs for the year ending
December 31, 2007 are forcasted to be approximately $3.0 billion. MidAmerican expects to fund these capital
expenditures with cash flows from operations and the issuance of debt. MidAmerican utilizes
debt to finance the construction of long-lived regulated electric and gas utility assets, including
power plants, transmission and distribution assets and natural gas pipelines and may also issue
debt to finance operations. Certain borrowings of its regulated utility subsidiaries are secured
by the assets of those subsidiaries. As of December 31, 2006, outstanding debt of MidAmerican
maturing in 2007 and 2008 was $3.6 billion, with an additional $1.7 billion due before 2012.
During 2006, Berkshire made a five year commitment to provide up to $3.5 billion of additional
capital to MidAmerican to permit the repayment of its debt obligations or to fund its regulated
utility subsidiaries. Berkshire has not and does not intend to guarantee the repayment of debt by
MidAmerican or any of its subsidiaries.
38
Managements Discussion (Continued)
Financial Condition (Continued)
Berkshires consolidated notes payable and other borrowings of insurance and other businesses,
was $3.7 billion at December 31, 2006 and $3.6 billion at December 31, 2005. As of December 31,
2006, outstanding borrowings include parent company borrowings of $612 million that mature in 2007,
including senior notes issued as part of the SQUARZ securities in 2002. The outstanding SQUARZ
securities consist of $334 million principal amount of senior notes due in November 2007 and
outstanding warrants that expire in May 2007 to purchase 3,716 Class A equivalent shares of
Berkshire common stock. 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.
Short-term borrowings consist primarily of commercial paper and bank loans of NetJets, which are
used in the ordinary course of business. The full and timely payment of such borrowings is
guaranteed by Berkshire.
Assets of the finance and financial products businesses were $24.6 billion as of December 31,
2006 and $24.5 billion as of December 31, 2005, consisting primarily of loans and finance
receivables, fixed maturity securities and cash and cash equivalents. Liabilities were $19.4
billion as of December 31, 2006 and $20.3 billion as of December 31, 2005 and include notes and
other borrowings of $12.0 billion at December 31, 2006 and $10.9 billion at December 31, 2005.
Notes payable include $8.85 billion par amount of medium-term notes issued by Berkshire Hathaway
Finance Corporation (BHFC). The notes mature at various dates beginning in 2007 ($700 million)
through 2015. The proceeds from these notes were used to finance originated and acquired
loans of Clayton Homes. Full and timely payment of principal and interest on the notes issued by BHFC is
guaranteed by Berkshire. In addition, during the fourth quarter of 2006, Clayton Homes borrowed $1.3
billion under non-public pass-through arrangements having an expected weighted average life of
approximately eight years. Such borrowings are secured by portfolios of manufactured housing loans
and are not guaranteed by Berkshire. The proceeds from these borrowings will be used to repay
certain debt of BHFC.
Contractual Obligations
Berkshire and its subsidiaries are parties to contracts associated with ongoing business and
financing activities, which will result in cash payments to counterparties in future periods.
Notes payable are reflected in the Consolidated
Financial Statements along with accrued but unpaid interest as of the balance sheet date. In
addition, Berkshire is obligated to pay interest under debt obligations for periods subsequent
to the balance sheet date. Although certain principal balances may be prepaid in advance of the
maturity date, thus reducing future interest obligations, it is assumed that no principal
prepayments will occur for purposes of this disclosure. Further, while short-term borrowings and
repurchase agreements are currently expected to be renewed as they mature, such amounts are not
assumed to renew for purposes of this disclosure.
Berkshire and subsidiaries are also parties to long-term contracts to acquire goods or
services in the future, which are not currently reflected in the financial statements. Such
obligations, including future minimum rentals under operating leases, will be reflected in future
periods as the goods are delivered or services provided. Amounts due as of the balance sheet date
for purchases where the goods and services have been received and a liability incurred are not
included to the extent that such amounts are due within one year of the balance sheet date.
Contractual obligations for unpaid losses and loss adjustment expenses arising under property
and casualty insurance contracts are estimates. The timing and amount of such payments are
contingent upon the ultimate outcome of claim settlements that will occur over many years. The
amounts presented in the following table have been estimated based upon past claim settlement
activities. The timing and amount of such payments are subject to significant estimation error.
The factors affecting the ultimate amount of claims are discussed in the following section
regarding Berkshires critical accounting policies. Accordingly, the actual timing and amount of
payments may differ materially from the amounts shown in the table.
A summary of long-term contractual obligations as of December 31, 2006 follows. Amounts
represent estimates of gross undiscounted amounts payable over time. In addition, certain losses
and loss adjustment expenses for property and casualty loss reserves are ceded to others under
reinsurance contracts and therefore are recoverable. Such recoverables are not reflected
in the table. Amounts are in millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated payments due by period |
|
|
|
Total |
|
|
2007 |
|
|
2008-2009 |
|
|
2010-2011 |
|
|
After 2011 |
|
Notes payable and other borrowings (1) |
|
$ |
51,189 |
|
|
$ |
6,794 |
|
|
$ |
9,125 |
|
|
$ |
5,765 |
|
|
$ |
29,505 |
|
Operating leases |
|
|
2,314 |
|
|
|
503 |
|
|
|
757 |
|
|
|
453 |
|
|
|
601 |
|
Purchase obligations (2) |
|
|
25,017 |
|
|
|
6,441 |
|
|
|
6,436 |
|
|
|
4,848 |
|
|
|
7,292 |
|
Unpaid losses and loss expenses (3) |
|
|
50,405 |
|
|
|
11,679 |
|
|
|
13,156 |
|
|
|
7,291 |
|
|
|
18,279 |
|
Other long-term policyholder liabilities |
|
|
4,050 |
|
|
|
130 |
|
|
|
178 |
|
|
|
336 |
|
|
|
3,406 |
|
Other (4) |
|
|
11,797 |
|
|
|
1,072 |
|
|
|
983 |
|
|
|
1,133 |
|
|
|
8,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
144,772 |
|
|
$ |
26,619 |
|
|
$ |
30,635 |
|
|
$ |
19,826 |
|
|
$ |
67,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes interest. |
|
(2) |
|
Principally relates to NetJets aircraft purchases and MidAmerican purchases
of coal, electricity and natural gas. |
|
(3) |
|
Before reserve discounts of $2,793 million. |
|
(4) |
|
Principally annuity reserves, employee benefits and derivative contract liabilities. |
39
Critical Accounting Policies
Certain accounting policies require management to make estimates and judgments concerning
transactions that will be settled several years in the future. Amounts recognized in the financial
statements from such estimates are necessarily based on numerous assumptions involving varying and
potentially significant degrees of judgment and uncertainty. Accordingly, the amounts currently
reflected in the financial statements will likely increase or decrease in the future as additional
information becomes available.
Property and casualty losses
A summary of Berkshires consolidated liabilities for unpaid property and casualty losses is
presented in the table below. Except for certain workers compensation reserves, liabilities for
unpaid property and casualty losses (referred to in this section as gross unpaid losses) are
reflected in the Consolidated Balance Sheets without discounting for time value, regardless of the
length of the claim-tail. Amounts are in millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unpaid losses |
|
|
Net unpaid losses* |
|
|
|
Dec. 31, 2006 |
|
|
Dec. 31, 2005 |
|
|
Dec. 31, 2006 |
|
|
Dec. 31, 2005 |
|
GEICO |
|
$ |
6,095 |
|
|
$ |
5,578 |
|
|
$ |
5,814 |
|
|
$ |
5,285 |
|
General Re |
|
|
20,444 |
|
|
|
21,524 |
|
|
|
18,361 |
|
|
|
20,429 |
|
BHRG |
|
|
16,832 |
|
|
|
17,202 |
|
|
|
14,255 |
|
|
|
14,577 |
|
Berkshire
Hathaway Primary Group |
|
|
4,241 |
|
|
|
3,730 |
|
|
|
3,741 |
|
|
|
3,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
47,612 |
|
|
$ |
48,034 |
|
|
$ |
42,171 |
|
|
$ |
43,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Net of reinsurance recoverable and deferred charges reinsurance assumed and before foreign
currency translation effects. |
Berkshire records liabilities for unpaid losses and loss adjustment expenses under property
and casualty insurance and reinsurance contracts based upon estimates of the ultimate amounts
payable under the contracts with respect to losses occurring on or before the balance sheet date.
Depending on the type of loss being estimated, the timing and amount of loss
payments are subject to a great degree of variability and are contingent, among other things, upon
the timing of the claim reporting from insureds and cedants and the determination and payment of
the ultimate loss amount through the loss adjustment process. A variety of techniques are used to
establish and review the liabilities for unpaid losses recorded as of the balance sheet date.
While techniques may vary, significant judgments and assumptions are necessary in projecting the
ultimate amount payable in the future with respect to loss events that have occurred. As a result,
uncertainties are imbedded in and permeate the actuarial loss reserving techniques and processes
for all of Berkshires property and casualty insurance and reinsurance businesses.
As of any balance sheet date, claims that have occurred have not all been reported, and if
reported may not have been settled. Loss and loss adjustment expense reserves include provisions
for those claims that have been reported (referred to as case reserves) and for those claims that
have not been reported, referred to as incurred but not yet reported (IBNR) reserves. The time
period between the occurrence date and payment date of a loss is referred to as the claim-tail.
Property claims usually have fairly short claim-tails and, absent litigation, are reported and
settled within no more than a few years after occurrence. Casualty losses usually have very long
claim-tails, occasionally extending for decades. Casualty claims are more susceptible to
litigation and can be significantly affected by changing contract interpretations and the legal
environment which contributes to the extended claim-tails.
Receivables recorded with respect to insurance losses ceded to other reinsurers under
reinsurance contracts are estimated in a manner similar to liabilities for insurance losses and,
therefore, are also subject to estimation error. In addition to the factors cited above,
reinsurance recoverables may ultimately prove to be uncollectible if the reinsurer is unable to
perform under the contract. Reinsurance contracts do not relieve the ceding company of its
obligations to indemnify its own policyholders.
Each of Berkshires
insurance businesses utilize loss reserving techniques that are
believed to best fit the business. Additional information regarding reserves established by each
of the significant businesses (GEICO, General Re and BHRG) follows.
GEICO
GEICOs gross unpaid losses and loss adjustment expense reserves as of December 31, 2006 were
$6,095 million and net of reinsurance recoverables were $5,814 million. As of December 31, 2006,
gross reserves included $4,315 million of reported average, case and case development reserves and
$1,780 million of IBNR reserves.
GEICO predominantly writes private passenger auto insurance which has a relatively short
claim-tail. Accordingly, the risk of estimation error is thought to be much less at GEICO than for
either General Re or BHRG. The key assumptions affecting GEICOs reserves include projections of
ultimate claim counts (frequency) and average loss per claim (severity), which includes loss
adjustment expenses.
GEICOs reserving methodologies produce reserve estimates based upon the individual claims (or
a ground-up approach), which in the aggregate yields a point estimate of the ultimate losses and
loss adjustment expenses. Ranges of loss estimates are not determined in the aggregate. A
detailed discussion of the process and significant factors considered in establishing reserves
follows.
40
Managements Discussion (Continued)
Property and casualty losses (Continued)
GEICO (Continued)
Actuaries establish and evaluate unpaid loss reserves using recognized standard statistical
loss development methods and techniques. The significant reserve components (and percentage of
gross reserves) are: (1) average reserves (20%), (2) case and case development reserves (50%), and
(3) IBNR reserves (30%). Each component of loss reserves is affected by the expected frequency and
average severity of claims. Such amounts are analyzed using statistical techniques on historical
claims data and adjusted when appropriate to reflect perceived changes in loss patterns. Data is
analyzed by policy coverage, rated state, reporting date and occurrence date, among other factors.
A brief discussion of each component follows.
Average reserve amounts are established for reported auto damage claims and new liability
claims prior to the development of an individual case reserve. The average reserves are
established as a reasonable estimate for incurred claims for which claims adjusters have
insufficient time and information to make a specific claim estimate. It also includes a large
number of minor physical damage claims that are paid within a reasonably short time after being
reported. Average reserve amounts are driven by the estimated average severity per claim and the
number of new claims opened. The average severity per claim amount is developed by projecting the
ultimate severity for each accident quarter and weighting with both reported claims and estimated
unreported claims.
Claims adjusters generally establish
individual liability claim case loss and loss adjustment
expense reserve estimates as soon as the specific facts and merits of each claim can be evaluated.
Case reserves represent the amounts that in the judgment of the adjusters are reasonably expected
to be paid in the future to completely settle the claim, including expenses. Individual case
reserves are revised as more information becomes known.
For most liability coverages, case reserves alone are an insufficient measure of the ultimate
cost due in part to the longer claim-tail, the greater chance of protracted litigation and the
incompleteness of facts available at the time the case reserve is established. Therefore,
additional case development reserve estimates are established, usually as a percentage of the case
reserve. As of December 31, 2006, case development reserves averaged approximately 20% of total
established case reserves. In general, case development factors are selected by a retrospective
analysis of the overall adequacy of historical case reserves. Case development factors are
reviewed and revised periodically.
For unreported claims, IBNR reserve estimates are calculated by first projecting the ultimate
number of claims expected (reported and unreported) for each significant coverage by using
historical quarterly and monthly claim counts, to develop age-to-age projections of the ultimate
counts by accident quarter. Reported claims are subtracted from the ultimate claim projections to
produce an estimate of the number of unreported claims. The number of unreported claims is
multiplied by an estimate of the average cost per unreported claim to produce the IBNR reserve
amount. Actuarial techniques are difficult to apply reliably in certain situations, such as to new
legal precedents, class action suits or recent catastrophes. Consequently, supplemental IBNR
reserves for these types of events may be established through the collaborative effort of
actuarial, claims and other management.
For each of its major coverages, GEICO tests the adequacy of the total loss reserves using one
or more actuarial projections based on claim closure models, paid loss triangles and incurred loss
triangles. Each type of projection analyzes loss occurrence data for claims occurring in a given
period and projects the ultimate cost.
In 2006, claim frequencies were generally lower than expected and severity increases were
generally not as great as originally projected. Loss reserve estimates recorded at the end of 2005
developed downward by approximately $410 million when reevaluated at December 31, 2006 producing a
corresponding increase to pre-tax earnings in 2006. These downward reserve developments
represented approximately 4% of earned premiums in 2006 and approximately 7% of the prior year-end
reserve amount. Reserving assumptions at December 31, 2006 were modified appropriately to reflect
the most recent frequency and severity results. Future reserve development will depend on whether
frequency and severity turn out to be more or less than anticipated. Within the automobile line of
business the reserves with the most uncertainty are for automobile liability, due to the longer
claim-tails for most of these coverages. Approximately 90% of GEICOs reserves as of December 31,
2006 were for automobile liability, of which bodily injury (BI) coverage accounted for nearly 60%
of the automobile liability reserves. Management believes it is reasonably possible that the
average BI severity will change by at least one percentage point from the severity used. If actual
BI severity changes one percentage point from what was used in establishing the reserves, the
reserves would develop up or down by approximately $90 million resulting in a corresponding
decrease or increase in pre-tax earnings. Many of the same economic forces that would likely cause
BI severity to be different from expected would likely also cause severities for other injury
coverages to differ in the same direction.
GEICOs exposure to highly uncertain losses is believed to be limited to certain commercial
excess umbrella policies written during a period from 1981 to 1984. Remaining reserves associated
with such exposure are currently a relatively insignificant component of GEICOs total reserves
(less than 3%) and there is little, if any, apparent asbestos or environmental liability exposure.
Related claim activity over the past year was insignificant.
General
Re and BHRG
General Res and BHRGs property and casualty loss reserves derive primarily from assumed
reinsurance. Additional uncertainties unique to loss reserving processes for reinsurance are
described below. The nature, extent, timing and perceived reliability of information received from
ceding companies varies widely depending on the type of coverage, the contractual reporting terms
(which are affected by market conditions and practices) and other factors. Due to the lack of
standardization of the terms and conditions of reinsurance contracts, the wide variability of
coverage needs of individual clients and the tendency for those needs to change rapidly in response
to market conditions, the ongoing economic impact of such uncertainties, in and of themselves,
cannot be reliably measured.
41
Property and casualty losses (Continued)
General Re and BHRG (Continued)
The nature and extent of loss information provided under many facultative, per occurrence
excess contracts or retroactive contracts where company personnel work closely with the ceding
company in settling individual claims may not differ significantly from the information received
under a primary insurance contract. Loss information from aggregate excess of loss contracts,
including catastrophe losses and quota-share treaties, is often less detailed. Occasionally
such information is reported in summary format rather than on an individual claim basis. Loss data
is provided through periodic reports and may include the amount of ceded losses paid where
reimbursement is sought as well as case loss reserve estimates. Ceding companies infrequently
provide IBNR estimates to reinsurers.
Each of Berkshires reinsurance businesses has established practices to identify and gather
needed information from clients. These practices include, for example, comparison of expected
premiums to reported premiums to help identify delinquent client periodic reports, and claim
reviews to facilitate loss reporting and identify inaccurate or incomplete claim reporting. These
practices are periodically evaluated and changed as conditions, risk factors, and unanticipated
areas of exposures are identified.
The timing of claim reporting to reinsurers is delayed in comparison with primary insurance.
In some instances there are multiple reinsurers assuming and ceding parts of an underlying risk
causing multiple contractual intermediaries between General Re or BHRG and the primary insured. In
these instances, the delays in reporting can be compounded. The relative impact of reporting
delays on the reinsurer varies depending on the type of coverage, contractual reporting terms and
other factors. Contracts covering casualty losses on a per occurrence excess basis may experience
longer delays in reporting due to the length of the claim tail as regards to the underlying claim.
In addition, ceding companies may not report claims to the reinsurer until it becomes reasonably
possible that the reinsurer will be affected, usually determined as a function of its estimate of
the claim amount as a percentage of the reinsurance contract retention. On the other hand, the
timing of reporting large per occurrence excess property losses or property catastrophe losses may
not vary significantly from primary insurance.
Under contracts where periodic premium and claims reports are required from ceding companies,
such reports are generally required at quarterly intervals which in the U.S. range from 30 to 90
days after the end of the accounting period. In continental Europe, reinsurance reporting
practices vary. Fewer clients report premiums, losses, and case reserves on a quarterly basis. In
certain countries, clients report on an annual basis and generally not until 90 to 180 days after
the end of the annual period. Estimates of premiums and losses are accrued based on expected
results supplemented when necessary for estimates of significant known events occurring in the
interim. To monitor the timing and receipt of information due, client reporting requirements are
tracked. When clients miss reporting deadlines, the clients are contacted.
Premium and loss data is provided through at least one intermediary (the primary insurer), so
there is a greater risk that the loss data provided is incomplete, inaccurate or outside the
coverage terms. Information provided by ceding companies is reviewed for completeness and
compliance with the contract terms. Reinsurance contracts generally allow for Berkshires
reinsurance subsidiaries to have access to the cedants books and records as regards to the subject
business and provide them the ability to conduct audits to determine the accuracy and completeness
of information. Such audits are conducted when management deems it appropriate.
In the regular course of business, disputes with clients may arise concerning whether certain
claims are covered under the reinsurance policies. Most disputes are resolved by the claims
departments by discussing coverage aspects with the appropriate client personnel or independent
outside counsel review and determination. If disputes cannot be resolved, contracts generally
specify whether arbitration, litigation, or alternative dispute resolution will be invoked. There
are no coverage disputes at this time for which an adverse resolution would likely have a material
impact on Berkshires results of operations or financial condition.
In summary, the scope, number and potential variability of assumptions required in estimating
ultimate losses from reinsurance contracts of General Re and BHRG are more uncertain than primary
property and casualty insurers due to the factors previously discussed. Additional information
concerning General Re and BHRG follows.
General Re
General Res gross and net unpaid losses and loss adjustment expenses and gross reserves by
major line of businesses as of December 31, 2006 are summarized below. Amounts are in millions.
|
|
|
|
|
Type |
|
|
|
|
Reported case reserves |
|
$ |
11,074 |
|
IBNR reserves |
|
|
9,370 |
|
|
|
|
|
Gross reserves |
|
|
20,444 |
|
Ceded reserves and deferred charges |
|
|
(2,083 |
) |
|
|
|
|
Net reserves |
|
$ |
18,361 |
|
|
|
|
|
|
|
|
|
|
Line of business |
|
|
|
|
Workers compensation (1) |
|
$ |
3,206 |
|
Professional liability (2) |
|
|
1,832 |
|
Mass tort asbestos/environmental |
|
|
1,853 |
|
Auto liability |
|
|
2,902 |
|
Other casualty (3) |
|
|
4,129 |
|
Other general liability |
|
|
3,588 |
|
Property |
|
|
2,934 |
|
|
|
|
|
Total |
|
$ |
20,444 |
|
|
|
|
|
|
|
|
(1) |
|
Net of discounts of $2,761 million. |
|
(2) |
|
Includes directors and officers and errors and omissions coverage. |
|
(3) |
|
Includes medical malpractice and umbrella coverage. |
42
Managements Discussion (Continued)
Property and casualty losses (Continued)
General Re (Continued)
General Res process of establishing loss reserve estimates is based upon a ground-up
approach, beginning with case estimates and supplemented by additional case reserves (ACRs) and
IBNR reserves. Critical judgments in the establishment of these loss reserves may involve the
establishment of ACRs by claim examiners, the expectation of ultimate loss ratios which drive IBNR
reserve amounts and the case reserve reporting trends compared to the expected loss reporting
patterns. Recorded reserve amounts are subject to tail risk where reported losses develop beyond
the maximum expected loss emergence pattern time period.
The company
does not routinely determine loss reserve ranges because it believes that the
techniques necessary have not sufficiently developed and the myriad of assumptions required render
such resulting ranges to be unreliable. In addition, counts of claims or average amounts per claim
are not utilized because clients do not consistently provide reliable data in sufficient detail.
Upon notification of a reinsurance claim from a ceding company, claim examiners make
independent evaluations of loss amounts. In some cases, examiners estimates differ from amounts
reported by ceding companies. If the examiners estimates are significantly greater than the
ceding companys estimates, the claims are further investigated. If deemed appropriate, ACRs are
established above the amount reported by the ceding company. As of December 31, 2006, ACRs of
$3.4 billion before discounts were concentrated in workers compensation and to a lesser
extent in professional liability reserves. Examiners also periodically conduct claim reviews at
client companies and case reserves are often increased as a result. In 2006, claim examiners
conducted about 450 claim reviews.
Actuaries classify all loss and premium data into segments (reserve cells) primarily based on
product (e.g., treaty, facultative, and program) and line of business (e.g., auto liability,
property, etc.). For each reserve cell, losses are aggregated by accident year and analyzed over
time. Depending on client reporting practices, some losses and premiums are aggregated by policy
year. These loss aggregations are internally called loss triangles, which serve as the primary
basis for IBNR reserve calculations. Over 300 reserve cells are reviewed for North American business and
approximately 900 reserve cells are reviewed with respect to international business.
Loss triangles are used to determine the expected case loss emergence patterns for most
coverages and, in conjunction with expected loss ratios by accident year, are further used to
determine IBNR reserves. Additional calculations form the basis for estimating the expected loss
emergence pattern. The determination of the expected loss emergence pattern is not strictly a
mechanical process. In instances where the historical loss data is insufficient, estimation
formulas are used along with reliance on other loss triangles and judgment. Factors affecting loss
development triangles include but are not limited to the following: changing client claims
practices, changes in claim examiners use of ACRs or the frequency of client company claim
reviews, changes in policy terms and coverage (such as client loss retention levels and occurrence
and aggregate policy limits), changes in loss trends and changes in legal trends that result in
unanticipated losses, as well as other sources of statistical variability. These items influence
the selection of the expected loss emergence patterns.
Expected loss ratios are selected by reserve cell, by accident year, based upon reviewing
forecasted losses and indicated ultimate loss ratios predicted from aggregated pricing statistics.
Indicated ultimate loss ratios are calculated using the selected loss emergence pattern, reported
losses and earned premium. If the selected emergence pattern is not accurate, then the indicated
ultimate loss ratios will not be accurate and this can affect the selected loss ratios and hence
the IBNR reserve. As with selected loss emergence patterns, selecting expected loss ratios is not
a strictly mechanical process and judgment is used in the analysis of indicated ultimate loss
ratios and department pricing loss ratios.
IBNR reserves are estimated by reserve cell, by accident year, using the expected loss
emergence patterns and the expected loss ratios. The expected loss emergence patterns and expected
loss ratios are the critical IBNR reserving assumptions and are updated annually. Once the annual
IBNR reserves are determined, actuaries calculate expected case loss emergence for the upcoming
calendar year. This calculation does not involve new assumptions and uses the prior year-end
expected loss emergence patterns and expected loss ratios. The expected losses are then allocated
into interim estimates that are compared to actual reported losses in the subsequent year. This
comparison provides a test of the adequacy of prior year-end IBNR reserves and forms the basis for
possibly changing IBNR reserve assumptions during the course of the year.
In 2006, reported losses for North American workers compensation risks (primarily pre-2002
occurrences) exceeded expectations. Claims data continued to show increased costs of long-term
medical care and prescription drug costs and increased medical care utilization by claimants.
These developments produced changes in expectations for future development of reported claims and
resulted in increases in nominal ACRs. For prior years workers compensation losses, reported
claims exceeded expected claims in 2006 by $19 million. These developments further precipitated a
$132 million net increase in nominal IBNR reserve estimates for unreported occurrences. After
deducting $33 million for the change in net reserve discounts during the year, workers
compensation losses from prior years reduced pre-tax earnings in 2006 by $118 million. To
illustrate the sensitivity of changes in expected loss emergence patterns and expected loss ratios
for General Res significant excess of loss workers compensation reserve cells, an increase of ten
points in the tail of the expected emergence pattern and an increase of ten percent in the expected
loss ratios would produce a net increase in nominal IBNR reserves of approximately $548 million and
$278 million on a discounted basis as of December 31, 2006. The increase in discounted reserves
would produce a corresponding decrease in pre-tax earnings. Management believes it is reasonably
possible for the tail of the expected loss emergence patterns and expected loss ratios to increase
at these rates.
43
Property and casualty losses (Continued)
General Re (Continued)
Other casualty and general liability reported losses (excluding mass tort losses) were
favorable in 2006 relative to expectations after several years of relatively higher reported
losses. Casualty losses tend to be long-tail and it should not be assumed that favorable loss
experience in a single year (2006) means that loss reserve amounts currently established will
continue to develop favorably. For General Res significant other casualty and general liability
reserve cells (including medical malpractice, umbrella, auto and general liability), an increase of
five points in the tails of the expected emergence patterns and an increase of five percent in
expected loss ratios would produce a net increase in nominal IBNR reserves and a corresponding
reduction in pre-tax earnings of approximately $550 million. Management believes it is reasonably
possible for the tail of the expected loss emergence patterns and expected loss ratios to increase
at these rates in any of the aforementioned reserve cells. However, given the diversification in
worldwide business, more likely outcomes are believed to be less than $550 million.
Property losses were lower than expected (including losses related to the World Trade Center)
but the nature of property loss experience tends to be more volatile because of the effect of
catastrophes and large individual property losses. In response to favorable claim developments and
another year of information, estimated remaining World Trade Center losses were reduced by $62
million in 2006, producing a corresponding increase in pre-tax earnings.
In certain reserve cells within excess directors and
officers and errors and omissions (D&O
and E&O) coverages, IBNR reserves are based on estimated ultimate losses without consideration of
expected emergence patterns. These cells often involve a spike in loss activity arising from
recent industry developments making it difficult to select an expected loss emergence pattern. For
example, the recent wave of corporate scandals has caused an increase in reported losses. For
General Res large D&O and E&O reserve cells an increase of ten points in the tail of the expected
emergence pattern (for those cells where emergence patterns are considered) and an increase of ten
percent in the expected loss ratios would produce a net increase in nominal IBNR reserves and a
corresponding reduction in pre-tax earnings of approximately $133 million. Management believes it
is reasonably possible for the tail of the expected loss emergence patterns and expected loss
ratios to increase at these rates.
Overall industry-wide loss experience data and informed judgment are used when internal loss
data is of limited reliability, such as in setting the estimates for mass tort, asbestos and
hazardous waste (collectively, mass tort) claims. Unpaid mass tort reserves at December 31, 2006
were approximately $1.9 billion gross and $1.2 billion net of reinsurance. Such reserves were
approximately $1.8 billion gross and $1.3 billion net of reinsurance as of December 31, 2005.
Claims paid attributable to such losses were about $97 million in 2006. In 2006, reserves for mass
tort claims were increased in response to continued reports of losses and the increased uncertainty
of how, when and how much these types of losses will develop over time. In 2006, IBNR reserve
estimates for asbestos and environmental claims were increased by $58 million, which decreased
pre-tax earnings by $58 million. In addition to the previously described methodologies, General Re
considers survival ratios based on net claim payments in recent years versus net unpaid losses as
a rough guide to reserve adequacy. The survival ratio was approximately 13 years as of December 31, 2006. The
insurance industrys comparable survival ratio for asbestos and pollution reserves was
approximately nine years. Estimating mass tort losses is very difficult due to the changing legal
environment. Although such reserves are believed to be adequate, significant reserve increases may
be required in the future if new exposures or claimants are identified, new claims are reported or
new theories of liability emerge.
BHRG
BHRGs unpaid losses and loss adjustment expenses as of December 31, 2006 are summarized as
follows. Amounts are in millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property |
|
|
Casualty |
|
|
Total |
|
Reported case reserves |
|
$ |
2,385 |
|
|
$ |
2,244 |
|
|
$ |
4,629 |
|
IBNR reserves |
|
|
1,082 |
|
|
|
3,067 |
|
|
|
4,149 |
|
Retroactive |
|
|
|
|
|
|
8,054 |
|
|
|
8,054 |
|
|
|
|
|
|
|
|
|
|
|
Gross reserves |
|
$ |
3,467 |
|
|
$ |
13,365 |
|
|
|
16,832 |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred charges and ceded reserves |
|
|
|
|
|
|
|
|
|
|
(2,577 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net reserves |
|
|
|
|
|
|
|
|
|
$ |
14,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
In general, the methodologies used to establish loss reserves vary widely and encompass many
of the common methodologies employed in the actuarial field today. Certain traditional
methodologies such as paid and incurred loss development techniques, incurred and paid loss
Bornhuetter-Ferguson techniques and frequency and severity techniques are utilized. Additional
judgments must also be employed to consider changes in contract conditions and terms as well as the
incidence of litigation or legal and regulatory change.
As of December 31, 2006, BHRGs gross loss reserves related to retroactive reinsurance
policies were attributed to casualty losses. Retroactive policies include excess-of-loss
contracts, in which losses (relating to loss events occurring before a specified date on or before
the contract date) above a contractual retention are indemnified or contracts that indemnify all
losses paid by the counterparty after the policy effective date. Retroactive losses paid in 2006
were $858 million, essentially all of which pertained to pre-2006 contracts. The classification
reported case reserves has no practical analytical value with respect to retroactive policies
since the amount is often derived from reports in bulk from ceding companies, who may have
inconsistent definitions of case reserves. Reserves are reviewed and established in the
aggregate by contract including provisions for IBNR reserves.
44
Managements Discussion (Continued)
Property and casualty losses (Continued)
BHRG (Continued)
In establishing retroactive reinsurance reserves, historical aggregate loss payment patterns
are analyzed and projected into the future under various scenarios. The claim-tail is expected to
be very long for many policies and may last several decades. Management assigns judgmental
probability factors to these aggregate loss payment scenarios and an expectancy outcome is
determined. Management monitors claim payment activity and reviews ceding company reports or other
information concerning the underlying losses. Since the claim-tail is expected to be very long for
such contracts, management reassesses expected ultimate losses as significant events related to the
underlying losses are reported or revealed during the monitoring and review process. During 2006,
retroactive reserves developed downward by approximately $235 million, due primarily to
commutations of contracts where final loss payments were less than the recorded reserves.
BHRGs liabilities for environmental, asbestos, and latent injury losses and loss adjustment
expenses are presently concentrated within retroactive reinsurance contracts. Reserves for such
losses were approximately $3.8 billion at December 31, 2006 and $4.0 billion at December 31, 2005.
Losses paid in 2006 were approximately $300 million. BHRG, as a reinsurer, does not regularly
receive reliable information regarding numbers of asbestos, environmental and latent injury claims
from ceding companies on a consistent basis, particularly with respect to multi-line treaty or
aggregate excess of loss policies. Periodically, a ground-up analysis of the underlying loss data
of the reinsured is conducted to make an estimate of ultimate reinsured losses. When detailed loss
information is unavailable, estimates can only be developed by applying recent industry trends and
projections to aggregate client data. Judgments in these areas necessarily include the stability
of the legal and regulatory environment under which these claims will be adjudicated. The
increasing number of bankruptcies of asbestos manufacturers has adversely impacted trends in recent
years. Potential legal reform and legislation could also have a significant impact on establishing
loss reserves for mass tort claims in the future.
The maximum losses payable by BHRG under retroactive policies are not expected to exceed
approximately $10.8 billion as of December 31, 2006. Absent significant judicial or legislative
changes affecting asbestos, environmental or latent injury exposures, management believes it
unlikely that unpaid losses as of December 31, 2006 ($8.1 billion) will develop upward to the maximum loss
payable or downward by more than 15%.
A significant number
of recent reinsurance contracts are expected to have a low frequency of
claim occurrence combined with a potential for high severity of claims. These include losses from
catastrophes, terrorism, and aviation risks under catastrophe and individual risk contracts. Loss
reserves related to catastrophe and individual risk contracts decreased from approximately $3.5
billion at year end 2005 to approximately $2.2 billion at year end 2006. The decrease in reserves
reflected loss payments in 2006 of approximately $1.7 billion that were primarily attributable to
the major hurricanes that occurred in 2005. Partially offsetting the effect of the loss payments
were increases in loss reserves on pre-2006 events of approximately $200 million that produced a
corresponding charge to pre-tax earnings in 2006. The reserve increases were primarily due to higher than
expected reported losses on Hurricane Wilma which occurred in the fourth quarter of 2005. Reserving
techniques for catastrophe and individual risk contracts generally rely more on a per-policy
assessment of the ultimate cost associated with the individual loss event rather than with an
analysis of the historical development patterns of past losses. Catastrophe loss reserves are
provided when it is probable that an insured loss has occurred and the amount can be reasonably
estimated. Absent litigation affecting the interpretation of coverage terms, the expected
claim-tail is relatively short and thus the estimation error in the initial reserve estimates
usually emerges within 24 months after the loss event.
Other reinsurance reserve amounts are generally based upon loss estimates reported by ceding
companies and IBNR reserves that are primarily a function of reported losses from ceding companies
and anticipated loss ratios established on an individual contract basis, supplemented by
managements judgment of the impact on each contract of major catastrophe events as they become
known. Anticipated loss ratios are based upon managements judgment considering the type of
business covered, analysis of each ceding companys loss history and evaluation of that portion of
the underlying contracts underwritten by each ceding company, which are in turn ceded to BHRG. A
range of reserve amounts as a result of changes in underlying assumptions is not prepared.
Other Critical Accounting Policies
Berkshire records as assets deferred charges with respect to liabilities assumed under
retroactive reinsurance contracts. At the inception of these contracts, the deferred charges
represent the difference between the consideration received and the estimated ultimate liability
for unpaid losses. Deferred charges are amortized using the interest method over an estimate of
the ultimate claim payment period and are reflected in earnings as a component of losses and loss
expenses. The deferred charge balances are adjusted periodically to reflect new projections of the
amount and timing of loss payments. Adjustments to these assumptions are applied retrospectively
from the inception of the contract. Unamortized deferred charges were
$2.0 billion at December 31,
2006. Significant changes in the amount and payment timing of estimated unpaid losses may have a
significant effect on unamortized deferred charges and the amount of periodic amortization.
Berkshires
Consolidated Balance Sheet as of December 31, 2006 includes goodwill of acquired
businesses of approximately $32.2 billion. A significant amount of judgment is required in
performing goodwill impairment tests. Such tests include periodically determining or reviewing the
estimated fair value of Berkshires reporting units. There are several methods of estimating a
reporting units fair value, including market quotations, asset and liability fair values and other
valuation techniques, such as discounted projected future net earnings and multiples of earnings.
If the carrying amount of a reporting unit, including goodwill, exceeds the estimated fair value,
then individual assets, including identifiable intangible assets, and liabilities of the reporting
unit are estimated at fair value. The excess of the estimated fair value of the reporting unit
over the estimated fair value of net assets would establish the implied value of goodwill. The
excess of the recorded amount of goodwill over the implied value is then charged to earnings as an
impairment loss.
45
Other Critical Accounting Policies (Continued)
Berkshires consolidated financial position reflects very significant amounts of invested
assets. A substantial portion of these assets are carried at fair values based upon current market
quotations and, when not available, based upon fair value pricing models. Certain of Berkshires
fixed maturity securities are not actively traded in the financial markets. Further, Berkshires
finance businesses maintain significant balances of finance receivables, which are carried at
amortized cost. Considerable judgment is required in determining the assumptions used in certain
valuation models, including interest rate, loan prepayment speed, credit risk and liquidity risk
assumptions. Significant changes in these assumptions can have a significant effect on carrying
values.
Information concerning recently issued accounting pronouncements which are not yet effective
is included in Note 1(r) to the Consolidated Financial Statements. Berkshire does not expect that the adoption of
any of the recently issued
accounting pronouncements will have a material effect on its financial condition.
Market Risk Disclosures
Berkshires Consolidated Balance Sheets include a substantial amount of assets and liabilities
whose fair values are subject to market risks. Berkshires significant market risks are primarily
associated with interest rates, equity prices, foreign currency
exchange rates and commodity prices. The following
sections address the significant market risks associated with Berkshires business activities.
Interest Rate Risk
Berkshires management prefers to invest in equity securities or to acquire entire businesses
based upon the principles discussed in the following section on equity price risk. When unable to
do so, management may alternatively invest in bonds, loans or other interest rate sensitive
instruments. Berkshires strategy is to acquire securities that are attractively priced in
relation to the perceived credit risk. Management recognizes and accepts that losses may occur.
Further, Berkshire strives to maintain the highest credit ratings so that the cost of debt is
minimized. Berkshire utilizes derivative products, such as interest rate swaps, to manage interest
rate risks on a limited basis.
The fair values of Berkshires fixed maturity investments and notes payable and other
borrowings will fluctuate in response to changes in market interest rates. Increases and decreases
in prevailing interest rates generally translate into decreases and increases in fair values of
those instruments. Additionally, fair values of interest rate sensitive instruments may be
affected by the creditworthiness of the issuer, prepayment options, relative values of alternative
investments, the liquidity of the instrument and other general market conditions. Fixed interest
rate investments may be more sensitive to interest rate changes than variable rate investments.
The following table summarizes the estimated effects of hypothetical increases and decreases
in interest rates on assets and liabilities that are subject to interest rate risk. It is assumed
that the changes occur immediately and uniformly to each category of instrument containing interest
rate risk. The hypothetical changes in market interest rates do not reflect what could be deemed
best or worst case scenarios. Variations in market interest rates could produce significant
changes in the timing of repayments due to prepayment options available. For these reasons, actual
results might differ from those reflected in the table. Dollars are in millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair Value after |
|
|
Hypothetical Change in Interest Rates |
|
|
(bp=basis points) |
|
|
|
|
|
|
100 bp |
|
100 bp |
|
200 bp |
|
300 bp |
Insurance and other businesses |
|
Fair Value |
|
decrease |
|
increase |
|
increase |
|
increase |
December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in fixed maturity securities |
|
$ |
25,300 |
|
|
$ |
25,939 |
|
|
$ |
24,663 |
|
|
$ |
24,079 |
|
|
$ |
23,558 |
|
Notes payable and other borrowings |
|
|
3,815 |
|
|
|
3,872 |
|
|
|
3,765 |
|
|
|
3,720 |
|
|
|
3,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in fixed maturity securities |
|
$ |
27,420 |
|
|
$ |
28,199 |
|
|
$ |
26,655 |
|
|
$ |
25,942 |
|
|
$ |
25,327 |
|
Notes payable and other borrowings |
|
|
3,653 |
|
|
|
3,693 |
|
|
|
3,616 |
|
|
|
3,584 |
|
|
|
3,553 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance and financial products businesses * |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in fixed maturity securities and loans and finance receivables |
|
$ |
14,987 |
|
|
$ |
15,994 |
|
|
$ |
13,986 |
|
|
$ |
13,062 |
|
|
$ |
12,224 |
|
Notes payable and other borrowings ** |
|
|
11,949 |
|
|
|
12,363 |
|
|
|
11,525 |
|
|
|
11,152 |
|
|
|
10,805 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in fixed maturity securities
and loans and finance receivables |
|
$ |
14,817 |
|
|
$ |
15,508 |
|
|
$ |
14,068 |
|
|
$ |
13,358 |
|
|
$ |
12,699 |
|
Notes payable and other borrowings ** |
|
|
11,476 |
|
|
|
11,902 |
|
|
|
11,004 |
|
|
|
10,607 |
|
|
|
10,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilities and energy businesses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable and other borrowings |
|
$ |
17,789 |
|
|
$ |
19,256 |
|
|
$ |
16,548 |
|
|
$ |
15,486 |
|
|
$ |
14,569 |
|
|
|
|
* |
|
Excludes General Re Securities. |
|
** |
|
Includes securities sold under agreements to repurchase and effects of interest rate swaps. |
46
Managements Discussion (Continued)
Equity Price Risk
Strategically, Berkshire strives to invest in businesses that possess excellent economics,
with able and honest management and at sensible prices. Berkshires management prefers to invest a
meaningful amount in each investee. Accordingly, Berkshires equity investments are generally concentrated in
relatively few investees. At December 31, 2006, 54% of the total fair value of equity investments
was concentrated in four investees.
Berkshires preferred strategy is to hold equity investments for very long periods of time.
Thus, Berkshires management is not troubled by short-term equity price volatility with respect to
its investments provided that the underlying business, economic and management characteristics of
the investees remain favorable. Berkshire strives to maintain above average levels of shareholder
capital to provide a margin of safety against short-term equity price volatility.
The carrying values of investments subject to equity price risk are, in almost all instances,
based on quoted market prices as of the balance sheet dates. Market prices are subject to
fluctuation and, consequently, the amount realized in the subsequent sale of an investment may
significantly differ from the reported market value. Fluctuation in the market price of a security
may result from perceived changes in the underlying economic characteristics of the investee, the
relative price of alternative investments and general market conditions. Furthermore, amounts
realized in the sale of a particular security may be affected by the relative quantity of the
security being sold.
The table which follows summarizes Berkshires equity price risk as of December 31, 2006 and
2005 and shows the effects of a hypothetical 30% increase and a 30% decrease in market prices as of
those dates. The selected hypothetical change does not reflect what could be considered the best
or worst case scenarios. Indeed, results could be far worse due both to the nature of equity
markets and the aforementioned concentrations existing in Berkshires equity investment portfolio.
Dollars are in millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
Hypothetical |
|
|
|
|
|
|
|
|
|
|
Fair Value after |
|
Percentage |
|
|
|
|
|
|
Hypothetical |
|
Hypothetical |
|
Increase (Decrease) in |
|
|
Fair Value |
|
Price Change |
|
Change in Prices |
|
Shareholders Equity |
As of December 31, 2006 |
|
$ |
61,533 |
|
|
30% increase |
|
$ |
79,993 |
|
|
|
11.0 |
|
|
|
|
|
|
|
30% decrease |
|
|
43,073 |
|
|
|
(11.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005 |
|
$ |
46,721 |
|
|
30% increase |
|
$ |
60,737 |
|
|
|
9.9 |
|
|
|
|
|
|
|
30% decrease |
|
|
32,705 |
|
|
|
(9.9 |
) |
Berkshire is also subject to equity price risk with respect to certain long duration equity
index option contracts. Berkshires maximum exposure with respect to such contracts was approximately
$21 billion and $14 billion at December 31, 2006 and 2005, respectively. These contracts generally
expire 15 to 20 years from inception and they may not be settled before their respective expiration
dates. The contracts have been written on four major equity indexes
including three that are foreign. While Berkshires ultimate potential loss with respect to these
contracts is directly correlated to the movement of the underlying stock index between contract
inception date and expiration, the change in fair value from current changes in the indices do not
produce a proportional change in the estimated fair value of the contracts. Other factors (such as
expected future interest rates, dividend rates and the remaining duration of the contract as well
as the general market assumptions) affect the estimates of fair value reflected in the financial
statements. Thus, if the underlying indices
declined 30% immediately, and absent changes in other factors, Berkshire estimates that it could incur a non-cash
pre-tax loss of approximately $2 billion from the change in the estimated fair value of open contracts as of
December 31, 2006.
Foreign Currency Risk
Market risks
associated with changes in foreign currency exchange rates are
currently concentrated in a portfolio of long duration equity index option contracts on foreign
equity indexes. In 2005, Berkshire also had significant exposure to foreign currency risk from
a portfolio of short duration forward contracts. The aggregate notional value of forward contracts
was approximately $1 billion as of December 31, 2006 compared to approximately $13.8 billion
as of December 31, 2005.
The following table summarizes the outstanding derivatives contracts as of December 31, 2006
and 2005 with foreign currency risk and shows the estimated changes in values of the contracts
assuming changes in the underlying exchange rates applied immediately and uniformly across all
currencies. The changes in value do not necessarily reflect the best
or worst case scenarios and
actual results may differ. Dollars are in millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair Value Assuming a Hypothetical |
|
|
Fair Value |
|
Percentage Increase (Decrease) in the Value of |
|
|
assets |
|
Foreign Currencies Versus the U.S. Dollar |
|
|
(liabilities) |
|
(20%) |
|
(10%) |
|
(1%) |
|
1% |
|
10% |
|
20% |
December 31, 2006 |
|
$ |
(2,041 |
) |
|
$ |
(1,819 |
) |
|
$ |
(1,936 |
) |
|
$ |
(2,031 |
) |
|
$ |
(2,051 |
) |
|
$ |
(2,131 |
) |
|
$ |
(2,200 |
) |
December 31, 2005 |
|
|
(1,603 |
) |
|
|
(3,789 |
) |
|
|
(2,752 |
) |
|
|
(1,724 |
) |
|
|
(1,481 |
) |
|
|
(305 |
) |
|
|
1,198 |
|
47
Commodity Price Risk
Berkshire, through its ownership of MidAmerican, is subject to commodity risk. Exposures
include variations in the price of wholesale electricity that is purchased and sold, fuel costs to
generate electricity, and natural gas supply for regulated retail gas customers. Electricity and
natural gas prices are subject to wide price swings as demand responds to, among many other items,
changing weather, limited storage, transmission and transportation constraints, and lack of
alternative supplies from other areas. To mitigate a portion of the risk, MidAmerican uses
derivative instruments, including forwards, futures, options, swaps and other over-the-counter
agreements, to effectively secure future supply or sell future production at fixed prices. The
settled cost of these contracts is generally recovered from customers in regulated rates.
Accordingly, the net unrealized gains and losses associated with interim price movements on such
contracts are recorded as regulatory assets or liabilities. Financial results may be negatively
impacted if the costs of wholesale electricity, fuel and or natural gas are higher than what is
permitted to be recovered in rates. MidAmerican also uses futures, options and swap agreements to
economically hedge gas and electric commodity prices for physical delivery to non-regulated
customers. MidAmerican does not engage in a material amount of proprietary trading activities.
The table that follows summarizes Berkshires commodity risk on energy derivative contracts as
of December 31, 2006 and shows the effects of a hypothetical 10% increase and a 10% decrease in
forward market prices by the expected volumes for these contracts as of that date. The selected
hypothetical change does not reflect what could be considered the best or worst case scenarios.
Dollars are in millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated FairValue |
|
|
|
|
|
|
|
|
|
|
after Hypothetical Change |
|
|
|
Fair Value |
|
|
Hypothetical Price Change |
|
|
in Price |
|
As of December 31, 2006 |
|
$ |
(273 |
) |
|
10% increase |
|
$ |
(220 |
) |
|
|
|
|
|
|
10% decrease |
|
$ |
(326 |
) |
Forward-Looking Statements
Investors are cautioned that certain statements contained in this document, as well as some
statements by the Company in periodic press releases and some oral statements of Company officials
during presentations about the Company, 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 Company 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 the Company, economic and market factors and the industries in which the Company
does business, among other things. These statements are not guaranties of future performance and
the Company 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 the Companys actual performance and future events and actions to differ materially
from such forward-looking statements, include, but are not limited to, changes in market prices of
Berkshires significant equity investees, the occurrence of one or more catastrophic events, such
as an earthquake, hurricane or an act of terrorism that causes losses insured by Berkshires
insurance subsidiaries, changes in insurance laws or regulations, changes in Federal income tax
laws, and changes in general economic and market factors that affect the prices of securities or
the industries in which Berkshire and its affiliates do business.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
See Market Risk Disclosures contained in Item 7 Managements Discussion and Analysis of
Financial Condition and Results of Operations.
48
Managements Report on Internal Control Over Financial Reporting
Management of Berkshire Hathaway Inc. is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in the Securities Exchange Act
of 1934 Rule 13a-15(f). Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of the Companys internal control over financial reporting as of
December 31, 2006 as required by the Securities Exchange Act of 1934 Rule 13a-15(c). In making
this assessment, we used the criteria set forth in the framework in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on
our evaluation under the framework in Internal Control Integrated Framework, our management
concluded that our internal control over financial reporting was effective as of December 31, 2006.
Our managements assessment of the effectiveness of our internal control over financial reporting
as of December 31, 2006 has been audited by Deloitte & Touche LLP, an independent registered public
accounting firm, as stated in their report which appears below.
Berkshire Hathaway Inc.
February 26, 2007
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Berkshire Hathaway Inc.
We have audited managements assessment, included in the accompanying, Managements Reports on
Internal Control Over Financial Reporting, that Berkshire Hathaway Inc. and subsidiaries (the
Company) maintained effective internal control over financial reporting as of December 31, 2006,
based on criteria established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Companys management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express an
opinion on managements assessment and an opinion on the effectiveness of the Companys internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinions.
A companys internal control over financial reporting is a process designed by, or under the
supervision of, the companys principal executive and principal financial officers, or persons
performing similar functions, and effected by the companys board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A companys internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements due to
error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that the Company maintained effective internal control over
financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on
the criteria established in Internal ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as of December 31,
2006, based on the criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated financial statements as of and for the year ended December
31, 2006 of the Company and our report dated February 28, 2007 expressed an unqualified opinion on
those financial statements with an explanatory paragraph relating
to the change in the Companys accounting for pension and other postretirement benefits to conform
to Statement of Financial Accounting Standards No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and
132(R).
DELOITTE & TOUCHE LLP
Omaha, Nebraska
February 28, 2007
49
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Berkshire Hathaway Inc.
We have audited the accompanying consolidated balance sheets of Berkshire Hathaway Inc. and
subsidiaries (the Company) as of December 31, 2006 and 2005, and the related consolidated
statements of earnings, cash flows and changes in shareholders equity and comprehensive income for
each of the three years in the period ended December 31, 2006. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects,
the financial position of Berkshire Hathaway Inc. and subsidiaries as of December 31, 2006 and
2005, and the results of their operations and their cash flows for each of the three years in the
period ended December 31, 2006, in conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note 18 to the consolidated financial statements, as of December 31, 2006, the
Company changed its accounting for pensions and other postretirement benefits to conform to
Statement of Financial Accounting Standards No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and
132(R).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of the Companys internal control over financial reporting
as of December 31, 2006, based on the criteria established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
February 28, 2007 expressed an unqualified opinion on managements assessment of the effectiveness
of the Companys internal control over financial reporting and an unqualified opinion on the
effectiveness of the Companys internal control over financial reporting.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
February 28, 2007
50
BERKSHIRE HATHAWAY INC.
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
Pro Forma * |
|
|
|
2006 |
|
|
2005 |
|
|
2005 |
|
ASSETS |
|
(audited) |
|
|
(unaudited) |
|
Insurance and Other: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
37,977 |
|
|
$ |
40,471 |
|
|
$ |
40,471 |
|
Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities |
|
|
25,300 |
|
|
|
27,420 |
|
|
|
27,420 |
|
Equity securities |
|
|
61,533 |
|
|
|
46,721 |
|
|
|
46,721 |
|
Other |
|
|
905 |
|
|
|
1,003 |
|
|
|
1,003 |
|
Receivables |
|
|
12,881 |
|
|
|
12,397 |
|
|
|
12,372 |
|
Inventories |
|
|
5,257 |
|
|
|
4,143 |
|
|
|
4,143 |
|
Property, plant and equipment |
|
|
9,303 |
|
|
|
7,500 |
|
|
|
7,500 |
|
Goodwill |
|
|
25,678 |
|
|
|
22,693 |
|
|
|
22,693 |
|
Deferred charges reinsurance assumed |
|
|
1,964 |
|
|
|
2,388 |
|
|
|
2,388 |
|
Other |
|
|
6,538 |
|
|
|
4,937 |
|
|
|
4,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
187,336 |
|
|
|
169,673 |
|
|
|
169,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilities and Energy: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
343 |
|
|
|
|
|
|
|
358 |
|
Property, plant and equipment |
|
|
24,039 |
|
|
|
|
|
|
|
11,915 |
|
Goodwill |
|
|
5,548 |
|
|
|
|
|
|
|
4,156 |
|
Other |
|
|
6,560 |
|
|
|
|
|
|
|
3,764 |
|
Investments in MidAmerican Energy Holdings Company |
|
|
|
|
|
|
4,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,490 |
|
|
|
4,125 |
|
|
|
20,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance and Financial Products: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
5,423 |
|
|
|
4,189 |
|
|
|
4,189 |
|
Investments in fixed maturity securities |
|
|
3,012 |
|
|
|
3,435 |
|
|
|
3,435 |
|
Loans and finance receivables |
|
|
11,498 |
|
|
|
11,087 |
|
|
|
11,087 |
|
Goodwill |
|
|
1,012 |
|
|
|
951 |
|
|
|
951 |
|
Other |
|
|
3,666 |
|
|
|
4,865 |
|
|
|
4,865 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,611 |
|
|
|
24,527 |
|
|
|
24,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
248,437 |
|
|
$ |
198,325 |
|
|
$ |
214,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
The Pro Forma Balance Sheet gives effect to the conversion on February 9, 2006 of
MidAmerican Energy Holdings Company (MidAmerican) non-voting cumulative convertible
preferred stock into MidAmerican voting common stock as if such conversion had occurred on
December 31, 2005. See Note 2 to the Consolidated Financial Statements for additional
information. |
See accompanying Notes to Consolidated Financial Statements
51
BERKSHIRE HATHAWAY INC.
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
Pro Forma * |
|
|
|
2006 |
|
|
2005 |
|
|
2005 |
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
(audited) |
|
|
(unaudited) |
|
Insurance and Other: |
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses |
|
$ |
47,612 |
|
|
$ |
48,034 |
|
|
$ |
48,034 |
|
Unearned premiums |
|
|
7,058 |
|
|
|
6,206 |
|
|
|
6,206 |
|
Life and health insurance benefits |
|
|
3,600 |
|
|
|
3,202 |
|
|
|
3,202 |
|
Other policyholder liabilities |
|
|
3,938 |
|
|
|
3,769 |
|
|
|
3,769 |
|
Accounts payable, accruals and other liabilities |
|
|
10,255 |
|
|
|
8,699 |
|
|
|
8,699 |
|
Income taxes, principally deferred |
|
|
18,460 |
|
|
|
12,252 |
|
|
|
13,649 |
|
Notes payable and other borrowings |
|
|
3,698 |
|
|
|
3,583 |
|
|
|
3,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94,621 |
|
|
|
85,745 |
|
|
|
87,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilities and Energy: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable, accruals and other liabilities |
|
|
6,802 |
|
|
|
|
|
|
|
3,780 |
|
Notes payable and other borrowings |
|
|
16,946 |
|
|
|
|
|
|
|
10,296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,748 |
|
|
|
|
|
|
|
14,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance and Financial Products: |
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contract liabilities |
|
|
3,883 |
|
|
|
5,061 |
|
|
|
5,061 |
|
Accounts payable, accruals and other liabilities |
|
|
3,543 |
|
|
|
4,351 |
|
|
|
4,351 |
|
Notes payable and other borrowings |
|
|
11,961 |
|
|
|
10,868 |
|
|
|
10,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,387 |
|
|
|
20,280 |
|
|
|
20,280 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
137,756 |
|
|
|
106,025 |
|
|
|
121,498 |
|
|
|
|
|
|
|
|
|
|
|
Minority shareholders interests |
|
|
2,262 |
|
|
|
816 |
|
|
|
1,386 |
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
Common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
Class A, $5 par value; Class B, $0.1667 par value |
|
|
8 |
|
|
|
8 |
|
|
|
8 |
|
Capital in excess of par value |
|
|
26,522 |
|
|
|
26,399 |
|
|
|
26,399 |
|
Accumulated other comprehensive income |
|
|
22,977 |
|
|
|
17,360 |
|
|
|
17,360 |
|
Retained earnings |
|
|
58,912 |
|
|
|
47,717 |
|
|
|
47,717 |
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
108,419 |
|
|
|
91,484 |
|
|
|
91,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
248,437 |
|
|
$ |
198,325 |
|
|
$ |
214,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
The Pro Forma Balance Sheet gives effect to the conversion on February 9, 2006 of
MidAmerican Energy Holdings Company (MidAmerican) non-voting cumulative convertible
preferred stock into MidAmerican voting common stock as if such conversion had occurred on
December 31, 2005. See Note 2 to the Consolidated Financial Statements for additional
information. |
See accompanying Notes to Consolidated Financial Statements
52
BERKSHIRE HATHAWAY INC.
and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(dollars in millions except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Insurance and Other: |
|
|
|
|
|
|
|
|
|
|
|
|
Insurance premiums earned |
|
$ |
23,964 |
|
|
$ |
21,997 |
|
|
$ |
21,085 |
|
Sales and service revenues |
|
|
51,803 |
|
|
|
46,138 |
|
|
|
43,222 |
|
Interest, dividend and other investment income |
|
|
4,382 |
|
|
|
3,487 |
|
|
|
2,816 |
|
Investment gains/losses |
|
|
1,697 |
|
|
|
5,728 |
|
|
|
1,746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81,846 |
|
|
|
77,350 |
|
|
|
68,869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilities and Energy: |
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues |
|
|
10,301 |
|
|
|
|
|
|
|
|
|
Other |
|
|
343 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance and Financial Products: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
1,610 |
|
|
|
1,554 |
|
|
|
1,202 |
|
Investment gains/losses |
|
|
114 |
|
|
|
468 |
|
|
|
(110 |
) |
Derivative gains/losses |
|
|
824 |
|
|
|
(788 |
) |
|
|
1,835 |
|
Other |
|
|
3,501 |
|
|
|
3,079 |
|
|
|
2,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,049 |
|
|
|
4,313 |
|
|
|
5,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98,539 |
|
|
|
81,663 |
|
|
|
74,382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Insurance and Other: |
|
|
|
|
|
|
|
|
|
|
|
|
Insurance losses and loss adjustment expenses |
|
|
13,068 |
|
|
|
15,482 |
|
|
|
13,462 |
|
Life and health insurance benefits |
|
|
1,618 |
|
|
|
1,634 |
|
|
|
1,361 |
|
Insurance underwriting expenses |
|
|
5,440 |
|
|
|
4,828 |
|
|
|
4,711 |
|
Cost of sales and services |
|
|
42,416 |
|
|
|
38,288 |
|
|
|
35,882 |
|
Selling, general and administrative expenses |
|
|
5,932 |
|
|
|
5,328 |
|
|
|
4,989 |
|
Interest expense |
|
|
195 |
|
|
|
144 |
|
|
|
137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,669 |
|
|
|
65,704 |
|
|
|
60,542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilities and Energy: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales and operating expenses |
|
|
8,189 |
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance and Financial Products: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
550 |
|
|
|
579 |
|
|
|
584 |
|
Other |
|
|
3,374 |
|
|
|
3,112 |
|
|
|
2,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,924 |
|
|
|
3,691 |
|
|
|
3,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81,761 |
|
|
|
69,395 |
|
|
|
63,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes and equity in earnings of
MidAmerican Energy Holdings Company |
|
|
16,778 |
|
|
|
12,268 |
|
|
|
10,699 |
|
Equity in earnings of MidAmerican Energy Holdings Company |
|
|
|
|
|
|
523 |
|
|
|
237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes and minority interests |
|
|
16,778 |
|
|
|
12,791 |
|
|
|
10,936 |
|
Income taxes |
|
|
5,505 |
|
|
|
4,159 |
|
|
|
3,569 |
|
Minority shareholders interests |
|
|
258 |
|
|
|
104 |
|
|
|
59 |
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
11,015 |
|
|
$ |
8,528 |
|
|
$ |
7,308 |
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding * |
|
|
1,541,807 |
|
|
|
1,539,775 |
|
|
|
1,537,716 |
|
Net earnings per common share * |
|
$ |
7,144 |
|
|
$ |
5,538 |
|
|
$ |
4,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
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 common 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 or $238 per share for 2006, $185 per share for 2005 and $158 per
share for 2004. |
See accompanying Notes to Consolidated Financial Statements
53
BERKSHIRE HATHAWAY INC.
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
11,015 |
|
|
$ |
8,528 |
|
|
$ |
7,308 |
|
Adjustments to reconcile net earnings to operating cash flows: |
|
|
|
|
|
|
|
|
|
|
|
|
Investment gains |
|
|
(1,811 |
) |
|
|
(6,196 |
) |
|
|
(1,636 |
) |
Depreciation |
|
|
2,066 |
|
|
|
982 |
|
|
|
941 |
|
Changes in operating assets and liabilities before business acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses |
|
|
(2,704 |
) |
|
|
2,086 |
|
|
|
(383 |
) |
Deferred charges reinsurance assumed |
|
|
424 |
|
|
|
339 |
|
|
|
360 |
|
Unearned premiums |
|
|
637 |
|
|
|
(239 |
) |
|
|
(52 |
) |
Receivables and originated loans |
|
|
(59 |
) |
|
|
(1,849 |
) |
|
|
102 |
|
Derivative contract assets and liabilities |
|
|
(563 |
) |
|
|
3,620 |
|
|
|
(367 |
) |
Income taxes |
|
|
303 |
|
|
|
1,602 |
|
|
|
860 |
|
Other assets and liabilities |
|
|
887 |
|
|
|
573 |
|
|
|
178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from operating activities |
|
|
10,195 |
|
|
|
9,446 |
|
|
|
7,311 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of securities with fixed maturities |
|
|
(7,747 |
) |
|
|
(13,937 |
) |
|
|
(5,924 |
) |
Purchases of equity securities |
|
|
(9,173 |
) |
|
|
(8,021 |
) |
|
|
(2,032 |
) |
Sales of securities with fixed maturities |
|
|
1,818 |
|
|
|
3,243 |
|
|
|
4,560 |
|
Redemptions and maturities of securities with fixed maturities |
|
|
10,313 |
|
|
|
7,142 |
|
|
|
5,637 |
|
Sales of equity securities |
|
|
3,778 |
|
|
|
1,629 |
|
|
|
2,610 |
|
Purchases of loans and finance receivables |
|
|
(365 |
) |
|
|
(1,987 |
) |
|
|
(6,314 |
) |
Principal collections on loans and finance receivables |
|
|
985 |
|
|
|
911 |
|
|
|
2,736 |
|
Acquisitions of businesses, net of cash acquired |
|
|
(10,132 |
) |
|
|
(2,387 |
) |
|
|
(414 |
) |
Purchases of property, plant and equipment |
|
|
(4,571 |
) |
|
|
(2,195 |
) |
|
|
(1,278 |
) |
Other |
|
|
1,017 |
|
|
|
1,761 |
|
|
|
734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from investing activities |
|
|
(14,077 |
) |
|
|
(13,841 |
) |
|
|
315 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from borrowings of finance businesses |
|
|
1,280 |
|
|
|
5,628 |
|
|
|
1,668 |
|
Proceeds from borrowings of utilities and energy businesses |
|
|
2,417 |
|
|
|
|
|
|
|
|
|
Proceeds from other borrowings |
|
|
215 |
|
|
|
521 |
|
|
|
339 |
|
Repayments of borrowings of finance businesses |
|
|
(244 |
) |
|
|
(319 |
) |
|
|
(1,267 |
) |
Repayments of borrowings of utilities and energy businesses |
|
|
(516 |
) |
|
|
|
|
|
|
|
|
Repayments of other borrowings |
|
|
(991 |
) |
|
|
(628 |
) |
|
|
(674 |
) |
Changes in short term borrowings |
|
|
245 |
|
|
|
361 |
|
|
|
(388 |
) |
Other |
|
|
201 |
|
|
|
65 |
|
|
|
166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from financing activities |
|
|
2,607 |
|
|
|
5,628 |
|
|
|
(156 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
(1,275 |
) |
|
|
1,233 |
|
|
|
7,470 |
|
Cash and cash equivalents at beginning of year ** |
|
|
45,018 |
|
|
|
43,427 |
|
|
|
35,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year * |
|
$ |
43,743 |
|
|
$ |
44,660 |
|
|
$ |
43,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Cash and cash equivalents at end of year are comprised of the following: |
|
|
|
|
|
|
|
|
|
|
|
|
Insurance and Other |
|
$ |
37,977 |
|
|
$ |
40,471 |
|
|
$ |
40,020 |
|
Utilities and Energy |
|
|
343 |
|
|
|
|
|
|
|
|
|
Finance and Financial Products |
|
|
5,423 |
|
|
|
4,189 |
|
|
|
3,407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
43,743 |
|
|
$ |
44,660 |
|
|
$ |
43,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
** |
|
The balance at beginning of 2006 includes $358 million related to MidAmerican. |
See accompanying Notes to Consolidated Financial Statements
54
BERKSHIRE HATHAWAY INC.
and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
AND COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Class A & B Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning and end of year |
|
$ |
8 |
|
|
$ |
8 |
|
|
$ |
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital in Excess of Par Value |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
26,399 |
|
|
$ |
26,268 |
|
|
$ |
26,151 |
|
Exercise of stock options issued in connection with business
acquisitions and SQUARZ warrant premiums |
|
|
123 |
|
|
|
131 |
|
|
|
117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
26,522 |
|
|
$ |
26,399 |
|
|
$ |
26,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained Earnings |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
47,717 |
|
|
$ |
39,189 |
|
|
$ |
31,881 |
|
Adoption of FTB 85-4-1 |
|
|
180 |
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
11,015 |
|
|
|
8,528 |
|
|
|
7,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
58,912 |
|
|
$ |
47,717 |
|
|
$ |
39,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized appreciation of investments |
|
$ |
9,278 |
|
|
$ |
2,081 |
|
|
$ |
2,599 |
|
Applicable income taxes |
|
|
(3,246 |
) |
|
|
(728 |
) |
|
|
(905 |
) |
Reclassification adjustment for appreciation
included in net earnings |
|
|
(1,646 |
) |
|
|
(6,261 |
) |
|
|
(1,569 |
) |
Applicable income taxes |
|
|
576 |
|
|
|
2,191 |
|
|
|
549 |
|
Foreign currency translation adjustments |
|
|
603 |
|
|
|
(359 |
) |
|
|
140 |
|
Applicable income taxes |
|
|
1 |
|
|
|
(26 |
) |
|
|
134 |
|
Minimum pension liability adjustment |
|
|
563 |
|
|
|
(62 |
) |
|
|
(38 |
) |
Applicable income taxes |
|
|
(196 |
) |
|
|
38 |
|
|
|
3 |
|
Other, including minority interests |
|
|
(13 |
) |
|
|
51 |
|
|
|
(34 |
) |
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
5,920 |
|
|
|
(3,075 |
) |
|
|
879 |
|
Adoption of SFAS 158 |
|
|
(303 |
) |
|
|
|
|
|
|
|
|
Accumulated other comprehensive income at beginning of year |
|
|
17,360 |
|
|
|
20,435 |
|
|
|
19,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income at end of year |
|
$ |
22,977 |
|
|
$ |
17,360 |
|
|
$ |
20,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
11,015 |
|
|
$ |
8,528 |
|
|
$ |
7,308 |
|
Other comprehensive income |
|
|
5,920 |
|
|
|
(3,075 |
) |
|
|
879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
16,935 |
|
|
$ |
5,453 |
|
|
$ |
8,187 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements
55
BERKSHIRE HATHAWAY INC.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
(1) |
|
Significant accounting policies and practices |
|
(a) |
|
Nature of operations and basis of consolidation |
Berkshire Hathaway Inc. (Berkshire or Company) is a holding company owning
subsidiaries engaged in a number of diverse business activities, including property
and casualty insurance and reinsurance, utilities and energy, finance,
manufacturing, retailing and services. Further information regarding these
businesses and Berkshires reportable business segments is contained in Note 20.
Berkshire consummated a number of business acquisitions over the past three years
which are discussed in Note 3.
The accompanying Consolidated Financial Statements include the accounts of
Berkshire consolidated with the accounts of all of its subsidiaries and affiliates
in which Berkshire holds a controlling financial interest as of the financial
statement date. Normally a controlling financial interest reflects ownership of a
majority of the voting interests. Other factors considered in determining whether a
controlling financial interest is held include whether Berkshire possesses the
authority to purchase or sell assets or make other operating decisions that
significantly affect the entitys results of operations and whether Berkshire bears
a majority of the financial risks of the entity. Intercompany accounts and
transactions have been eliminated. Certain amounts in prior year presentations have
been reclassified to conform with the current year presentation.
|
(b) |
|
Use of estimates in preparation of financial statements |
The preparation of the Consolidated Financial Statements in conformity with
generally accepted accounting principles (GAAP) requires management to make
estimates and assumptions that affect the reported amount of assets and liabilities
at the date of the financial statements and the reported amount of revenues and
expenses during the period. In particular, estimates of unpaid losses and loss
adjustment expenses and related recoverables under reinsurance for property and
casualty insurance are subject to considerable estimation error due to the inherent
uncertainty in projecting ultimate claim amounts that can be reported and settled
over a period of many years. In addition, estimates and assumptions associated with
the amortization of deferred charges reinsurance assumed, the determination of fair
value of certain invested assets and related impairments and the determination of
goodwill impairments require considerable judgment by management. Actual results
may differ from the estimates used in preparing the Consolidated Financial
Statements.
Cash equivalents consist of funds invested in U.S. Treasury Bills, money
market accounts, and in other investments with a maturity of three months or less
when purchased. Cash and cash equivalents exclude amounts where availability is
restricted by loan agreements or other contractual provisions. Restricted amounts
are included in other assets.
Berkshires management determines the appropriate classifications of investments in fixed
maturity and equity securities at the acquisition date and re-evaluates the
classifications at each balance sheet date. Berkshires investments in fixed
maturity and equity securities are primarily classified as available-for-sale,
except for certain securities held by finance businesses which are classified as
held-to-maturity.
Held-to-maturity investments are carried at amortized cost, reflecting Berkshires intent
and ability to hold the securities to maturity. Available-for-sale securities are
stated at fair value with net unrealized gains or losses reported as a component of
accumulated other comprehensive income.
Investment gains and losses arise when investments are sold (as determined on a specific
identification basis) or are other-than-temporarily impaired. If in managements
judgment a decline in the value of an investment below cost is other than temporary,
the cost of the investment is written down to fair value with a corresponding charge
to earnings. Factors considered in judging whether an impairment is other than
temporary include: the financial condition, business prospects and creditworthiness
of the issuer, the length of time that fair value has been less than cost, the
relative amount of the decline, and Berkshires ability and intent to hold the
investment until the fair value recovers.
Berkshire utilizes the equity method of accounting with respect to investments where it
exercises significant influence, but not control, over the operating and financial
policies of the investee. A voting interest of at least 20% and no greater than 50%
is normally a prerequisite for utilizing the equity method. However, Berkshire may
apply the equity method with less than 20% voting interests based upon the facts and
circumstances including representation on the investees Board of Directors,
contractual veto or approval rights, participation in policy making processes and
the existence or absence of other significant owners. Berkshire applies the equity
method to investments in common stock and other investments when such other
investments possess substantially identical subordinated interests to common stock.
56
Notes to Consolidated Financial Statements (Continued)
(1) |
|
Significant accounting policies and practices (Continued) |
|
(d) |
|
Investments (Continued) |
In applying the equity method, investments are recorded at cost and
subsequently increased or decreased by Berkshires proportionate share of the net
earnings or losses of the investee. Berkshire also records its proportionate share
of other comprehensive income items of the investee as a component of its
comprehensive income. Dividends or other equity distributions are recorded as a
reduction of the investment. In the event that net losses of the investee have
reduced the equity method investment to zero, additional net losses may be recorded
if other investments in the investee are at-risk, even if Berkshire has not
committed to provide financial support to the investee. Berkshire bases such
additional equity method loss amounts, if any, on the change in its claim on the
investees book value.
|
(e) |
|
Loans and finance receivables |
Loans and finance receivables consist of commercial and consumer loans
originated or purchased by Berkshires finance and financial products businesses.
Loans and finance receivables are stated at amortized cost less allowances for
uncollectible accounts based on Berkshires ability and intent to hold such loans
and receivables to maturity. Amortized cost represents acquisition cost, plus or
minus origination and commitment costs paid or fees received, which together with
acquisition premiums or discounts are deferred and amortized as yield adjustments
over the life of the loan.
Allowances for estimated losses from uncollectible loans are recorded when it is probable
that the counterparty will be unable to pay all amounts due according to the terms
of the loan. Allowances are provided on aggregations of consumer loans with similar
characteristics and terms based upon historical loss and recovery experience,
delinquency rates and current economic conditions. Provisions for loan losses are
included in the Consolidated Statements of Earnings.
Derivative instruments include interest rate, currency, equity and credit swaps and
options, interest rate caps and floors and futures and forward contracts.
Berkshire carries derivative contracts at estimated fair value classified as assets or
liabilities in the accompanying Consolidated Balance Sheets. Such balances reflect
reductions permitted under master netting agreements with counterparties. The fair
values of these instruments generally represent the present value of estimated
future cash flows under the contracts, which are a function of current underlying
interest rates, currency rates, security values, related volatility, counterparty
creditworthiness and duration of the contracts. Changes in these factors or a
combination thereof may affect the fair value of these instruments.
The changes in fair value of derivative contracts that do not qualify as
hedging instruments for financial reporting purposes are included in the
Consolidated Statements of Earnings as derivative gains/losses.
Derivative contracts may provide for Berkshire or the counterparty to post collateral as
security against the fair value of open or unsettled contracts. Cash collateral
received from or paid to counterparties to secure derivative contract assets or
liabilities is included in liabilities or assets of finance and financial products
businesses in the Consolidated Balance Sheets. Securities received from
counterparties as collateral are not recorded as assets and securities delivered to
counterparties as collateral continue to be reflected as assets in the Consolidated
Balance Sheets.
Inventories consist of manufactured goods and purchased goods acquired for resale.
Manufactured inventory costs include raw materials, direct and indirect labor and
factory overhead. Inventories are stated at the lower of cost or market. As of
December 31, 2006, approximately 53% of the total inventory cost was determined
using the last-in-first-out (LIFO) method, 41% using the first-in-first-out
(FIFO) method, with the remainder using the specific identification method. With
respect to inventories carried at LIFO cost, the aggregate difference in value
between LIFO cost and cost determined under FIFO methods was $263 million and $237
million as of December 31, 2006 and 2005, respectively.
|
(h) |
|
Property, plant and equipment |
Property, plant and equipment is recorded at cost. The cost of major additions and
betterments are capitalized, while replacements, maintenance and repairs that do
not improve or extend the useful lives of the related assets are expensed as
incurred. Interest over the construction period is capitalized as a component of
cost of constructed assets. In addition, the cost of constructed assets of certain
domestic regulated utility and energy subsidiaries that are subject to SFAS No. 71,
Accounting for the Effects of Certain Types of Regulation (SFAS 71) includes the
capitalization of the estimated cost of capital in addition to interest incurred
during the construction period. Also see Note 1(n).
Depreciation is provided principally on the straight-line method over estimated useful
lives. Depreciation of assets of certain regulated utility and energy
subsidiaries is provided over recovery periods based on composite asset class lives
as mandated by regulation.
57
(1) |
|
Significant accounting policies and practices (Continued) |
|
(h) |
|
Property, plant and equipment (Continued) |
Property, plant and equipment is evaluated for impairment when events or changes in
circumstances indicate that the carrying value of the assets may not be recoverable,
or the assets meet the criteria of held for sale. Upon the occurrence of a
triggering event, the asset is reviewed to assess whether the estimated undiscounted
cash flows expected from the use of the asset plus residual value from the ultimate
disposal exceeds the carrying value of the asset. If the carrying value exceeds the
estimated recoverable amounts, the asset is written down to the estimated discounted
present value of the expected future cash flows from using the asset. Impairment
losses are reflected in the Consolidated Statements of Earnings, except with respect
to impairments of assets of certain domestic regulated utility and energy
subsidiaries where losses are offset by the establishment of a regulatory asset to
the extent recovery in future rates is probable.
Goodwill represents the difference between purchase cost and the fair value of net assets
acquired in business acquisitions. Goodwill is tested for impairment using a
variety of methods at least annually and impairments, if any, are charged to
earnings. Key assumptions used in the testing include, but are not limited to, the
use of an appropriate discount rate and estimated future cash flows. In estimating
cash flows, the Company incorporates current market information as well as
historical factors.
Insurance premiums for prospective property/casualty insurance and reinsurance and health
reinsurance policies are earned in proportion to the level of insurance protection
provided. In most cases, premiums are recognized as revenues ratably over the term
of the contract with unearned premiums computed on a monthly or daily pro rata
basis. Premiums for retroactive reinsurance property/casualty policies are earned
at the inception of the contracts. Premiums for life reinsurance contracts are
earned when due.
Premiums earned are stated net of amounts ceded to reinsurers. Premiums are estimated
with respect to certain reinsurance contracts written during the period where
reports from ceding companies for the period are not contractually due until after
the balance sheet date. For policies containing experience rating provisions,
premiums are based upon estimated loss experience under the contract.
Sales revenues derive from the sales of manufactured products and goods
acquired for resale. Revenues from sales are recognized upon passage of title to
the customer, which generally coincides with customer pickup, product delivery or
acceptance, depending on terms of the sales arrangement.
Service revenues derive primarily from pilot training and flight operations and flight
management activities. Service revenues are recognized as the services are
performed. Services provided pursuant to a contract are either recognized over the
contract period, or upon completion of the elements specified in the contract,
depending on the terms of the contract.
Interest income from investments in bonds and loans is earned under the constant yield
method and includes accrual of interest due under terms of the bond or loan
agreement as well as amortization of acquisition premiums and accruable discounts.
In determining the constant yield for mortgage-backed securities, anticipated
counterparty prepayments are estimated and evaluated periodically. Dividends from
equity securities are earned on the ex-dividend date.
Operating
revenue of utilities and energy businesses resulting from the distribution and
sale of natural gas and electricity to customers is recognized when the service is
rendered or the energy is delivered. Amounts recognized include unbilled as well as
billed amounts. Rates charged are generally subject to Federal and state regulation
or established under contractual arrangements. When preliminary rates are permitted
to be billed prior to final approval by the applicable regulator, certain revenue
collected may be subject to refund and a provision for estimated refunds is accrued.
Commission revenue from real estate brokerage transactions and related amounts due to
agents which are included as components of operating revenues and expenses of
utilities and energy businesses are recognized when a real estate transaction is
closed.
|
(k) |
|
Losses and loss adjustment expenses |
Liabilities for unpaid losses and loss adjustment expenses represent estimated claim and
claim settlement costs of property/casualty insurance and reinsurance contracts with
respect to losses that have occurred as of the balance sheet date. The liabilities
for losses and loss adjustment expenses are recorded at the estimated ultimate
payment amounts, except that amounts arising from certain workers compensation
reinsurance business are discounted as discussed below. Estimated ultimate payment
amounts are based upon (1) individual case estimates, (2) reports of losses from
policyholders and (3) estimates of incurred but not reported (IBNR) losses.
Provisions for losses and loss adjustment expenses are reported in the accompanying
Consolidated Statements of Earnings after deducting amounts recovered and estimates
of amounts recoverable under reinsurance contracts. Reinsurance contracts do not
relieve the ceding company of its obligations to indemnify policyholders with
respect to the underlying insurance and reinsurance contracts.
58
Notes to Consolidated Financial Statements (Continued)
(1) |
|
Significant accounting policies and practices (Continued) |
|
(k) |
|
Losses and loss adjustment expenses (Continued) |
The estimated liabilities of workers compensation claims assumed under
certain reinsurance contracts are carried in the Consolidated Balance Sheets at
discounted amounts. Discounted amounts are based upon an annual discount rate of
4.5% for claims arising prior to 2003 and 1% for claims arising after 2002,
consistent with discount rates used under statutory accounting principles. The
periodic discount accretion is included in the Consolidated Statements of Earnings
as a component of losses and loss adjustment expenses.
|
(l) |
|
Deferred charges reinsurance assumed |
The excess of estimated liabilities for claims and claim costs over the
consideration received with respect to retroactive property and casualty reinsurance
contracts that provide for indemnification of insurance risk is established as a
deferred charge at inception of such contracts. The deferred charges are
subsequently amortized using the interest method over the expected claim settlement
periods. The periodic amortization charges are reflected in the accompanying
Consolidated Statements of Earnings as losses and loss adjustment expenses.
Changes to the expected timing and estimated amount of loss payments produce changes in
the unamortized deferred charge balance. Such changes in estimates are determined
retrospectively and included in insurance losses and loss adjustment expense in the
period of the change.
|
(m) |
|
Insurance premium acquisition costs |
Costs that vary and are related to the issuance of insurance policies are
deferred, subject to ultimate recoverability, and charged to underwriting expenses
as the related premiums are earned. Acquisition costs consist of commissions,
premium taxes, advertising and other underwriting costs. The recoverability of
premium acquisition costs, generally, reflects anticipation of investment income.
The unamortized balances of deferred premium acquisition costs are included in other
assets and were $1,432 million and $1,287 million at December 31, 2006 and 2005,
respectively.
|
(n) |
|
Regulated utilities and energy businesses |
Certain domestic energy subsidiaries prepare their financial statements in accordance
with SFAS No. 71, reflecting economic effects deriving from the ability to recover
certain costs from customers and the requirement to return revenues to customers in
the future through the regulated rate-setting process. Accordingly, certain costs
are deferred as regulatory assets and obligations are accrued as regulatory
liabilities, which will be amortized over various future periods. At December 31,
2006, MidAmerican had $1,827 million in regulatory assets and $1,839 million in
regulatory liabilities, which are components of other assets and other liabilities
of utilities and energy businesses.
Management continually assesses whether the regulatory assets are probable of future
recovery by considering factors such as applicable regulatory changes, recent rate
orders received by other regulated entities and the status of any pending or
potential deregulation legislation. If future recovery of costs ceases to be
probable, the amount no longer probable of recovery is charged to earnings.
Utilities and energy businesses recognize legal asset retirement obligations (ARO),
mainly related to the decommissioning of nuclear generation assets and the final
reclamation of leased coal mining property. The estimated fair value of a legal ARO
is recognized as a liability when a reasonable estimate of the expected future cash
flows can be made. This liability is added to the carrying amount of the associated
asset, which is then depreciated over the remaining useful life of the asset.
Subsequent to the initial recognition, the liability is periodically adjusted for
revisions to assumptions used in determining the present value of the retirement
obligation. The ARO as of December 31, 2006 was approximately $423 million and is
reflected in other liabilities of utilities and energy businesses.
The accounts of foreign-based subsidiaries are measured in most instances
using the local currency as the functional currency. Revenues and expenses of these
businesses are translated into U.S. dollars at the average exchange rate for the
period. Assets and liabilities are translated at the exchange rate as of the end of
the reporting period. Gains or losses from translating the financial statements of
foreign-based operations are included in shareholders equity as a component of
accumulated other comprehensive income. Unrealized gains or losses associated with
available-for-sale securities are included as a component of other comprehensive
income. Gains and losses arising from other transactions denominated in a foreign
currency are included in the Consolidated Statements of Earnings.
|
(q) |
|
Deferred income taxes |
Deferred income taxes are calculated under the liability method. Deferred tax assets and
liabilities are based on differences between the financial statement
and tax basis of assets and liabilities at the enacted tax rates. Changes in deferred income tax
assets and liabilities that are associated with components of other comprehensive
income (primarily unrealized investment gains and losses) are charged or credited
directly to other comprehensive income. Otherwise, changes in deferred income tax
assets and liabilities are included as a component of income tax expense. Valuation
allowances have been established for certain deferred tax assets where realization
is not likely.
59
(1) |
|
Significant accounting policies and practices (Continued) |
|
(r) |
|
Accounting pronouncements to be adopted in subsequent years |
In July 2006, the FASB issued FASB Interpretation No. 48 Accounting for
Uncertainty in Income Taxes (FIN 48). FIN 48 prescribes a recognition threshold
and measurement attribute for financial statement recognition of positions taken or
expected to be taken in income tax returns. Only tax positions meeting a
more-likely-than-not threshold of being sustained are recognized under FIN 48.
FIN 48 also provides guidance on derecognition, classification of interest and
penalties and accounting and disclosures for annual and interim financial
statements. FIN 48 is effective for fiscal years beginning after December 15, 2006.
The cumulative effect of any changes arising from the initial application of FIN 48
is required to be reported as an adjustment to the opening balance of retained
earnings in the period of adoption.
In September 2006, the FASB issued FASB Staff Position No. AUG AIR-1,
Accounting for Planned Major Maintenance Activities (AUG AIR-1). AUG AIR-1
prohibits the use of the accrue-in-advance method of accounting for planned major
maintenance activities in which such maintenance costs are ratably recognized by
accruing a liability in periods before the maintenance is performed. This
pronouncement also retains three alternative methods for accounting for planned
major maintenance activities including the direct expensing method, the built-in
overhaul method and the deferral method. AUG AIR-1 is effective for fiscal years
beginning after December 15, 2006.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(SFAS 157). SFAS 157 defines fair value as the price received to transfer an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date reflecting the highest and best use valuation
concepts. SFAS 157 establishes a framework for measuring fair value by creating a
hierarchy of fair value measurements currently required under GAAP that
distinguishes market data between observable independent market inputs and
unobservable market assumptions. SFAS 157 further expands disclosures about such
fair value measurements. SFAS 157 is effective for fiscal years beginning after
November 15, 2007 and may be adopted earlier but only if the adoption is in the
first quarter of the fiscal year.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities Including an amendment of FASB
Statement No. 115 (SFAS No. 159). SFAS No. 159 permits entities to elect to
measure many financial instruments and certain other items at fair value. Upon
adoption of SFAS No. 159, an entity may elect the fair value option for eligible
items that exist at the adoption date. Subsequent to the initial adoption, the
election of the fair value option should only be made at initial recognition of the
asset or liability or upon a remeasurement event that gives rise to new-basis
accounting. SFAS No. 159 does not affect any existing accounting literature that
requires certain assets and liabilities to be carried at fair value nor does it
eliminate disclosure requirements included in other accounting standards. SFAS No.
159 is effective for fiscal years beginning after November 15, 2007 and may be adopted earlier but only if the adoption is in the first quarter
of the fiscal year.
Berkshire
is
evaluating the impact that the adoption of these pronouncements will have on
its consolidated financial position and currently does not anticipate that the
adoption of these accounting pronouncements will have a material effect on its consolidated financial position.
(2) Investments in MidAmerican Energy Holdings Company
MidAmerican owns a combined regulated electric and natural gas utility company in the United
States (MidAmerican Energy Company), a regulated electric utility company in the United States
(PacifiCorp which was acquired March 21, 2006), two interstate natural gas pipeline companies in
the United States (Kern River and Northern Natural Gas), two electricity distribution companies in
the United Kingdom (Northern Electric and Yorkshire Electricity), a diversified portfolio of
domestic and international electric power projects and the second largest residential real estate
brokerage firm in the United States (HomeServices). This group of businesses is
referred to as MidAmerican or the utilities and
energy businesses.
On February 9, 2006,
Berkshire converted its non-voting preferred stock to common
stock and upon conversion, owned approximately 83.4% (80.5% diluted) of the voting common stock
interests. In conjunction with the acquisition of PacifiCorp, Berkshire acquired additional common
stock of MidAmerican for $3.4 billion. Berkshires ownership in MidAmerican as of December 31,
2006 was 87.8% (86.6% diluted). Accordingly, the 2006 Consolidated Financial Statements reflect
the consolidation of the accounts of MidAmerican. MidAmericans debt obligations are not
guaranteed by Berkshire. However, Berkshire has made a commitment until February 28, 2011 that
would allow MidAmerican to request up to $3.5 billion of capital to pay its debt obligations or to
provide funding to its regulated subsidiaries.
During 2004 and 2005, Berkshire possessed the ability to exercise significant influence on the
operations of MidAmerican through its investments in common and convertible preferred stock of
MidAmerican, which together possessed 9.7% of the voting rights and 83.4% (80.5% diluted) of the
economic rights of MidAmerican. The convertible preferred stock, although generally non-voting,
was substantially an identical subordinate interest to a share of common stock and economically
equivalent to common stock. Therefore, during that period, Berkshire accounted for its investments
in MidAmerican pursuant to the equity method. An unaudited pro forma balance sheet as of December
31, 2005 is included on the face of the accompanying Consolidated Balance Sheets reflecting the
consolidation of MidAmerican. Walter Scott, Jr., a member of Berkshires Board of Directors,
controlled approximately 86% of the voting interest in MidAmerican at
December 31, 2005. As a result of Berkshires conversion of
its preferred stock to voting common stock, at December 31,
2006, Mr. Scotts voting interest has been reduced
to 11%.
60
Notes to Consolidated Financial Statements (Continued)
(2) Investments in MidAmerican Energy Holdings Company (Continued)
A condensed consolidated balance sheet as of December 31, 2005 and condensed statements of
earnings for the years ending December 31, 2005 and 2004 of MidAmerican are as follows (in
millions).
|
|
|
|
|
Assets |
|
|
|
|
|
Property, plant and equipment, net |
|
$ |
11,915 |
|
Goodwill |
|
|
4,156 |
|
Other assets |
|
|
4,122 |
|
|
|
|
|
|
|
$ |
20,193 |
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders equity |
|
|
|
|
|
Debt, except debt owed to Berkshire |
|
$ |
10,296 |
|
Debt owed to Berkshire |
|
|
1,289 |
|
Other liabilities and minority interests |
|
|
5,223 |
|
|
|
|
|
|
|
|
16,808 |
|
Shareholders equity |
|
|
3,385 |
|
|
|
|
|
|
|
$ |
20,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Operating revenue and other income |
|
$ |
7,279 |
|
|
$ |
6,727 |
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
Cost of sales and operating expenses |
|
|
5,586 |
|
|
|
5,028 |
|
Interest expense debt held by Berkshire |
|
|
157 |
|
|
|
170 |
|
Other interest expense |
|
|
717 |
|
|
|
713 |
|
|
|
|
|
|
|
|
|
|
|
6,460 |
|
|
|
5,911 |
|
|
|
|
|
|
|
|
Earnings before taxes |
|
|
819 |
|
|
|
816 |
|
Income taxes and minority interests |
|
|
261 |
|
|
|
278 |
|
|
|
|
|
|
|
|
Earnings from continuing operations |
|
|
558 |
|
|
|
538 |
|
Gain (loss) on discontinued operations |
|
|
5 |
|
|
|
(368) |
* |
|
|
|
|
|
|
|
Net earnings |
|
$ |
563 |
|
|
$ |
170 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
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 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 recorded
to write-down assets of the Project, rights to quantities of extractable minerals and allocated
goodwill to estimated net realizable value. |
(3) Significant business acquisitions
Berkshires long-held acquisition strategy is to purchase businesses with consistent earning
power, good returns on equity and able and honest management at sensible prices. During the last
three years, Berkshire acquired several businesses which are described in the following paragraphs.
On June 30, 2005, Berkshire acquired
Medical Protective Corporation (MedPro) from GE Insurance
Solutions. MedPro is one of the nations premier professional liability insurers for physicians,
dentists and other primary health care providers. On August 31, 2005, Berkshire acquired Forest
River, Inc., (Forest River) a leading manufacturer of leisure vehicles in the U.S. Forest River
manufactures a complete line of motorized and towable recreational vehicles, utility trailers,
buses, boats and manufactured houses. Operating results of MedPro and Forest River are
consolidated with Berkshires results beginning as of July 1, 2005 and September 1, 2005,
respectively. Inclusion of MedPros and Forest Rivers results as of the beginning of 2004 would
not have materially impacted Berkshires consolidated results of operations as reported. Aggregate
consideration paid for all business acquisitions completed during 2005, including smaller
acquisitions directed by certain Berkshire subsidiaries, was $2.4 billion.
On February 28, 2006, Berkshire acquired Business Wire, a leading global distributor of
corporate news, multimedia and regulatory filings. On March 21, 2006, PacifiCorp, a regulated
electric utility providing service to customers in six Western states, was acquired for
approximately $5.1 billion in cash. On May 19, 2006, Berkshire acquired 85% of Applied
Underwriters (Applied), an industry leader in integrated workers compensation solutions. Under
certain conditions, existing minority shareholders of Applied may acquire up to an additional 4%
interest in Applied from Berkshire.
On July 5, 2006, Berkshire acquired 80% of the Iscar Metalworking Companies (IMC) for cash
in a transaction that valued IMC at $5 billion. IMC, headquartered in Israel, is an industry
leader in the metal cutting tools business through its Iscar, TaeguTec, Ingersoll and other IMC
companies. IMC provides a comprehensive range of tools for the full scope of metalworking
applications. IMCs products are manufactured through a global network of world-class,
technologically advanced manufacturing facilities located in Israel, Korea, the United States,
Brazil, China, Germany, India, Italy and Japan, and are sold through subsidiary offices and agents
located in 61 major industrial countries worldwide. On August 2, 2006, Berkshire acquired Russell
Corporation, a leading branded athletic apparel and sporting goods
company for cash of approximately $600 million.
61
(3) Significant business acquisitions (Continued)
The results of operations for each of these businesses are included in Berkshires
consolidated results from the effective date of each acquisition. The following table sets forth
certain unaudited pro forma consolidated earnings data for 2006 and 2005, as if each acquisition
that was completed during 2005 and 2006 was consummated on the same terms at the beginning of each
year. The earnings data for 2005 also reflects
the pro forma consolidation of MidAmerican. Amounts are in millions, except per share amounts.
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
Total revenues |
|
$ |
100,992 |
|
|
$ |
95,836 |
|
Net earnings |
|
|
11,107 |
|
|
|
8,624 |
|
Earnings per equivalent Class A common share |
|
|
7,204 |
|
|
|
5,601 |
|
The following table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition for PacifiCorp and IMC (in millions).
|
|
|
|
|
|
|
|
|
|
|
PacifiCorp |
|
|
IMC |
|
Property, plant and equipment |
|
$ |
10,051 |
|
|
$ |
606 |
|
Goodwill |
|
|
1,118 |
|
|
|
2,072 |
|
Other assets |
|
|
3,087 |
|
|
|
1,988 |
|
|
|
|
|
|
|
|
Assets acquired |
|
|
14,256 |
|
|
|
4,666 |
|
|
|
|
|
|
|
|
Accounts payable, accruals and other liabilities |
|
|
4,969 |
|
|
|
263 |
|
Notes payable and other borrowings |
|
|
4,167 |
|
|
|
153 |
|
Minority interests |
|
|
|
|
|
|
248 |
|
|
|
|
|
|
|
|
Liabilities assumed and minority interests |
|
|
9,136 |
|
|
|
664 |
|
|
|
|
|
|
|
|
Net assets acquired |
|
$ |
5,120 |
|
|
$ |
4,002 |
|
|
|
|
|
|
|
|
In December 2006, Berkshire agreed to acquire TTI, Inc., a privately held electronic component
distributor headquartered in Fort Worth, Texas. TTI, Inc. is the largest distributor specialist of
passive, interconnect electromechanical components. The acquisition is expected to be completed in
the first quarter of 2007.
(4) Loans and receivables
Receivables of insurance and other businesses are comprised of the following (in millions).
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Insurance premiums receivable |
|
$ |
4,418 |
|
|
$ |
4,406 |
|
Reinsurance recoverables |
|
|
2,961 |
|
|
|
2,990 |
|
Trade and other receivables |
|
|
5,884 |
|
|
|
5,340 |
|
Allowances for uncollectible accounts |
|
|
(382 |
) |
|
|
(339 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,881 |
|
|
$ |
12,397 |
|
|
|
|
|
|
|
|
Loans and finance receivables of finance and financial products businesses are comprised of
the following (in millions).
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Consumer installment loans and finance receivables |
|
$ |
10,325 |
|
|
$ |
9,792 |
|
Commercial loans and finance receivables |
|
|
1,336 |
|
|
|
1,481 |
|
Allowances for uncollectible loans |
|
|
(163 |
) |
|
|
(186 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,498 |
|
|
$ |
11,087 |
|
|
|
|
|
|
|
|
Allowances for uncollectible loans primarily relate to consumer installment loans. Provisions
for consumer loan losses were $210 million in 2006 and $232 million in 2005. Loan charge-offs
were $243 million in 2006 and $110 million in 2005. Consumer loan amounts are net of
acquisition discounts of $484 million at December 31, 2006 and $579 million at December 31, 2005.
62
Notes to Consolidated Financial Statements (Continued)
(5) Investments in fixed maturity securities
Investments in securities with fixed maturities as of December 31, 2006 and 2005 are shown
below (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses * |
|
|
Value |
|
December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance and other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury, U.S. government corporations and agencies |
|
$ |
4,962 |
|
|
$ |
12 |
|
|
$ |
(14 |
) |
|
$ |
4,960 |
|
States, municipalities and political subdivisions |
|
|
2,967 |
|
|
|
71 |
|
|
|
(15 |
) |
|
|
3,023 |
|
Foreign governments |
|
|
8,444 |
|
|
|
51 |
|
|
|
(79 |
) |
|
|
8,416 |
|
Corporate bonds and redeemable preferred stocks |
|
|
5,468 |
|
|
|
1,467 |
|
|
|
(17 |
) |
|
|
6,918 |
|
Mortgage-backed securities |
|
|
1,955 |
|
|
|
35 |
|
|
|
(7 |
) |
|
|
1,983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
23,796 |
|
|
$ |
1,636 |
|
|
$ |
(132 |
) |
|
$ |
25,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance and financial products: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
$ |
305 |
|
|
$ |
70 |
|
|
$ |
|
|
|
$ |
375 |
|
Mortgage-backed securities |
|
|
1,134 |
|
|
|
32 |
|
|
|
(4 |
) |
|
|
1,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,439 |
|
|
$ |
102 |
|
|
$ |
(4 |
) |
|
$ |
1,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities, held-to-maturity |
|
$ |
1,475 |
|
|
$ |
153 |
|
|
$ |
(1 |
) |
|
$ |
1,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Includes gross unrealized losses of $69 million related to securities that have been in an
unrealized loss position for 12 months or more. Such losses are believed to be the result of
general interest rate increases. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance and other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury, U.S. government corporations and agencies |
|
$ |
7,660 |
|
|
$ |
13 |
|
|
$ |
(28 |
) |
|
$ |
7,645 |
|
States, municipalities and political subdivisions |
|
|
4,243 |
|
|
|
104 |
|
|
|
(14 |
) |
|
|
4,333 |
|
Foreign governments |
|
|
6,884 |
|
|
|
105 |
|
|
|
(28 |
) |
|
|
6,961 |
|
Corporate bonds and redeemable preferred stocks |
|
|
5,492 |
|
|
|
1,492 |
|
|
|
(15 |
) |
|
|
6,969 |
|
Mortgage-backed securities |
|
|
1,472 |
|
|
|
45 |
|
|
|
(5 |
) |
|
|
1,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
25,751 |
|
|
$ |
1,759 |
|
|
$ |
(90 |
) |
|
$ |
27,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance and financial products: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and foreign governments |
|
$ |
114 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
114 |
|
Corporate bonds |
|
|
348 |
|
|
|
62 |
|
|
|
|
|
|
|
410 |
|
Mortgage-backed securities |
|
|
1,425 |
|
|
|
44 |
|
|
|
(2 |
) |
|
|
1,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,887 |
|
|
$ |
106 |
|
|
$ |
(2 |
) |
|
$ |
1,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities, held-to-maturity |
|
$ |
1,444 |
|
|
$ |
181 |
|
|
$ |
(1 |
) |
|
$ |
1,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized
cost and estimated fair values of securities with fixed maturities at December 31, 2006 are
summarized below by contractual maturity dates. Actual maturities will differ from
contractual maturities because issuers of certain of the securities retain early call or prepayment
rights. Amounts are in millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed |
|
|
|
|
Due 2007 |
|
Due 2008 - 2011 |
|
Due 2012 - 2016 |
|
Due after 2016 |
|
securities |
|
Total |
Amortized cost |
|
$ |
8,314 |
|
|
$ |
9,099 |
|
|
$ |
2,575 |
|
|
$ |
2,158 |
|
|
$ |
4,564 |
|
|
$ |
26,710 |
|
Fair value |
|
|
8,493 |
|
|
|
9,531 |
|
|
|
2,713 |
|
|
|
2,955 |
|
|
|
4,772 |
|
|
|
28,464 |
|
(6) Investments in equity securities
Investments in equity securities are summarized below. Amounts are in millions.
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Cost |
|
$ |
28,353 |
|
|
$ |
21,339 |
|
Gross unrealized gains |
|
|
33,217 |
|
|
|
25,892 |
|
Gross unrealized losses |
|
|
(37 |
) |
|
|
(510 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
61,533 |
|
|
$ |
46,721 |
|
|
|
|
|
|
|
|
63
(7) Investment gains (losses)
Investment gains (losses) are summarized below (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Fixed maturity securities |
|
|
|
|
|
|
|
|
|
|
|
|
Gross gains from sales and other disposals |
|
$ |
279 |
|
|
$ |
792 |
|
|
$ |
883 |
|
Gross losses from sales and other disposals |
|
|
(9 |
) |
|
|
(23 |
) |
|
|
(63 |
) |
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
Gross gains from sales and other disposals (1) |
|
|
1,562 |
|
|
|
5,612 |
|
|
|
769 |
|
Gross losses from sales |
|
|
(44 |
) |
|
|
(6 |
) |
|
|
(1 |
) |
Losses from other-than-temporary impairments |
|
|
(142 |
) |
|
|
(114 |
) |
|
|
(19 |
) |
Life settlement contracts (2) |
|
|
92 |
|
|
|
(82 |
) |
|
|
(207 |
) |
Other investments |
|
|
73 |
|
|
|
17 |
|
|
|
274 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,811 |
|
|
$ |
6,196 |
|
|
$ |
1,636 |
|
|
|
|
|
|
|
|
|
|
|
Net gains (losses) are reflected in the Consolidated Statements of Earnings as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance and other |
|
$ |
1,697 |
|
|
$ |
5,728 |
|
|
$ |
1,746 |
|
Finance and financial products |
|
|
114 |
|
|
|
468 |
|
|
|
(110 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,811 |
|
|
$ |
6,196 |
|
|
$ |
1,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Gross gains from sales and other disposals of equity securities during
2005 includes a $5.0 billion gain on the exchange of The Gillette Company common shares for common
shares of The Procter and Gamble Company. |
|
(2) |
|
The FASB issued Staff Position No. FTB 85-4-1, Accounting for Life
Settlement Contracts by Third-Party Investors (FTB 85-4-1) in 2006, which provides guidance on
the initial and subsequent measurement, financial statement presentation and disclosures for
third-party investors in life settlement contracts. Berkshire adopted FTB 85-4-1 as of January 1,
2006, and recorded an after-tax gain of $180 million which is reflected as an increase in retained
earnings. Berkshire elected to use the investment method whereby the initial transaction price
plus all subsequent direct external costs paid to keep the policy in force are capitalized. Death
benefits received are applied against the capitalized costs and the difference is recorded in
earnings. Previously, life settlement contracts were valued at the cash surrender value of the
underlying insurance policy. During the second quarter of 2006, certain life settlement contracts
were disposed of for proceeds of approximately $330 million. Investments in life settlement contracts
as of December 31, 2006 were insignificant. |
(8) Goodwill
A reconciliation of the change in the carrying value of goodwill for 2006 and 2005 is as
follows (in millions).
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Balance at beginning of year |
|
$ |
23,644 |
|
|
$ |
23,012 |
|
Goodwill related to MidAmerican as of January 1, 2006 |
|
|
4,156 |
|
|
|
|
|
Acquisitions of businesses and other |
|
|
4,438 |
|
|
|
632 |
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
32,238 |
|
|
$ |
23,644 |
|
|
|
|
|
|
|
|
The MidAmerican goodwill represents the consolidation of Berkshires investment in MidAmerican
as of January 1, 2006. The increase in goodwill from business acquisitions and other primarily
relates to the acquisitions of PacifiCorp and IMC.
(9) Inventories
Inventories are comprised of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Raw materials |
|
$ |
700 |
|
|
$ |
657 |
|
Work in progress and other |
|
|
402 |
|
|
|
271 |
|
Finished manufactured goods |
|
|
1,817 |
|
|
|
1,217 |
|
Purchased goods |
|
|
2,338 |
|
|
|
1,998 |
|
|
|
|
|
|
|
|
|
|
$ |
5,257 |
|
|
$ |
4,143 |
|
|
|
|
|
|
|
|
(10) Property, plant and equipment
Property, plant and equipment of insurance and other businesses is comprised of the following
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ranges of |
|
|
December 31, |
|
|
December 31, |
|
|
|
estimated useful life |
|
|
2006 |
|
|
2005 |
|
Land |
|
|
|
|
$ |
548 |
|
|
$ |
361 |
|
Buildings and improvements |
|
3 40 years |
|
|
3,203 |
|
|
|
2,623 |
|
Machinery and equipment |
|
3 20 years |
|
|
8,470 |
|
|
|
6,774 |
|
Furniture, fixtures and other |
|
3 20 years |
|
|
1,702 |
|
|
|
1,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,923 |
|
|
|
11,407 |
|
Accumulated depreciation |
|
|
|
|
|
|
(4,620 |
) |
|
|
(3,907 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,303 |
|
|
$ |
7,500 |
|
|
|
|
|
|
|
|
|
|
|
|
64
Notes to Consolidated Financial Statements (Continued)
(10) Property, plant and equipment (Continued)
Property, plant and equipment of utilities and energy businesses is comprised of the following
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ranges of |
|
|
December 31, |
|
|
Pro Forma
December 31, |
|
|
|
estimated useful life |
|
|
2006 |
|
|
2005 |
|
Utility generation and distribution system |
|
5-85 years |
|
$ |
27,687 |
|
|
$ |
10,499 |
|
Interstate pipeline assets |
|
3-67 years |
|
|
5,329 |
|
|
|
5,322 |
|
Independent power plants and other assets |
|
3-30 years |
|
|
1,770 |
|
|
|
1,861 |
|
Construction in progress |
|
|
|
|
|
|
1,969 |
|
|
|
847 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,755 |
|
|
|
18,529 |
|
Accumulated depreciation and amortization |
|
|
|
|
|
|
(12,716 |
) |
|
|
(6,614 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
24,039 |
|
|
$ |
11,915 |
|
|
|
|
|
|
|
|
|
|
|
|
The utility generation and distribution system and interstate pipeline assets are the
regulated assets of public utility and natural gas pipeline subsidiaries. At December 31, 2006 and
December 31, 2005, accumulated depreciation and amortization
related to regulated assets was $11.9 billion and $5.7 billion, respectively. Substantially all of the construction in progress at
December 31, 2006 and December 31, 2005 related to the construction of regulated assets.
(11) Derivatives
A summary of the fair value and gross notional value of open derivative contracts of finance
and financial products businesses follows. Amounts are in millions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
|
December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
Notional |
|
|
|
|
|
|
|
|
|
|
Notional |
|
|
|
Assets |
|
|
Liabilities |
|
|
Value |
|
|
Assets |
|
|
Liabilities |
|
|
Value |
|
Credit default obligations |
|
$ |
|
|
|
$ |
952 |
|
|
$ |
2,510 |
|
|
$ |
|
|
|
$ |
1,609 |
|
|
$ |
2,871 |
|
Equity options |
|
|
16 |
|
|
|
2,463 |
|
|
|
21,396 |
|
|
|
35 |
|
|
|
1,592 |
|
|
|
14,488 |
|
Foreign currency forwards |
|
|
|
|
|
|
23 |
|
|
|
1,057 |
|
|
|
12 |
|
|
|
243 |
|
|
|
13,760 |
|
Foreign currency options |
|
|
40 |
|
|
|
36 |
|
|
|
1,094 |
|
|
|
117 |
|
|
|
241 |
|
|
|
2,072 |
|
Interest rate and foreign currency swaps |
|
|
632 |
|
|
|
473 |
|
|
|
10,851 |
|
|
|
977 |
|
|
|
1,533 |
|
|
|
41,070 |
|
Interest rate options |
|
|
13 |
|
|
|
13 |
|
|
|
3,085 |
|
|
|
164 |
|
|
|
347 |
|
|
|
12,033 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
701 |
|
|
|
3,960 |
|
|
|
|
|
|
|
1,305 |
|
|
|
5,565 |
|
|
|
|
|
Adjustment for counterparty netting |
|
|
(77 |
) |
|
|
(77 |
) |
|
|
|
|
|
|
(504 |
) |
|
|
(504 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contract assets and liabilities |
|
$ |
624 |
|
|
$ |
3,883 |
|
|
|
|
|
|
$ |
801 |
|
|
$ |
5,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Berkshire utilizes derivatives in order to manage certain economic risks of its businesses as
well as to assume specified amounts of market risk from others. The contracts
summarized in the preceding table, with limited exceptions, are not designated as hedges for
financial reporting purposes. Changes in the fair values of derivative assets and derivative
liabilities that do not qualify as hedges are reported in the Consolidated Statements of Earnings
as derivative gains/losses. Since January 2002, the operations of General Re Securities (GRS)
have been in run-off. As of December 31, 2006, substantially all of GRSs derivative risks (as
measured by the gross notional value) that existed as of the commencement of the run-off have been
liquidated.
Master netting agreements are utilized to manage counterparty credit risk, where gains and
losses are netted across other contracts with that counterparty. In addition, Berkshire may
receive cash or securities from counterparties as collateral. Likewise, Berkshire may be required
to post cash or securities as collateral with counterparties under similar circumstances. At
December 31, 2006, Berkshire held collateral with a fair value of $338 million, including cash of
$314 million to secure open contract assets. At December 31, 2006, Berkshire had posted no
collateral with counterparties as security on contract liabilities. Berkshire may be required to
post collateral to cover derivative liabilities in the event of a downgrade of its credit rating
below specified levels. Assuming non-performance by all counterparties on all contracts
potentially subject to a credit loss, the maximum potential receivable loss, net of collateral
held, at December 31, 2006 approximated $274 million.
Berkshire is also exposed to variations in the market prices of natural gas and electricity as
a result of its regulated utility operations and uses derivative instruments, including forward
purchases and sales, futures, swaps and options to manage these commodity price risks. Derivative
instruments are recorded in the Consolidated Balance Sheets at fair value as either assets or
liabilities unless they are designated as and qualify for normal purchases and normal sales
exemptions under GAAP. The majority of these contracts are either probable of recovery in rates
and therefore recorded as a regulatory net asset or liability or are accounted for
as cash flow hedges and therefore recorded as accumulated other comprehensive income.
Accordingly, amounts are generally not recognized in earnings until the contracts are settled.
65
(11) Derivatives (Continued)
Fair values and gross notional values of open derivative contracts of utilities and energy
businesses as of December 31, 2006 follow (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional |
|
|
|
Assets |
|
|
Liabilities |
|
|
Value |
|
Energy derivatives |
|
$ |
467 |
|
|
$ |
740 |
|
|
|
* |
|
Interest rate and foreign currency swaps |
|
|
17 |
|
|
|
149 |
|
|
$ |
2,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
484 |
|
|
$ |
889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Notional values associated with commodity and weather-related derivatives are not presented due
to the unique units of measure pertinent to such contracts. Notional values for commodity and
weather contracts are not stated in terms of dollars. |
(12) Unpaid losses and loss adjustment expenses
The balances of unpaid losses and loss adjustment expenses are based upon estimates of the
ultimate claim costs associated with property and casualty claim occurrences as of the balance
sheet dates including estimates for incurred but not reported (IBNR) claims. Considerable
judgment is required to evaluate claims and establish estimated claim liabilities.
Supplemental data with respect to unpaid losses and loss adjustment expenses of
property/casualty insurance subsidiaries is as follows (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Unpaid losses and loss adjustment expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Gross liabilities at beginning of year |
|
$ |
48,034 |
|
|
$ |
45,219 |
|
|
$ |
45,393 |
|
Ceded losses and deferred charges at beginning of year |
|
|
(5,200 |
) |
|
|
(5,132 |
) |
|
|
(5,684 |
) |
|
|
|
|
|
|
|
|
|
|
Net balance at beginning of year |
|
|
42,834 |
|
|
|
40,087 |
|
|
|
39,709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred losses recorded during the year: |
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year |
|
|
13,680 |
|
|
|
15,839 |
|
|
|
13,043 |
|
All prior accident years |
|
|
(612 |
) |
|
|
(357 |
) |
|
|
419 |
|
|
|
|
|
|
|
|
|
|
|
Total incurred losses |
|
|
13,068 |
|
|
|
15,482 |
|
|
|
13,462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments during the year with respect to: |
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year |
|
|
(5,510 |
) |
|
|
(5,514 |
) |
|
|
(4,746 |
) |
All prior accident years |
|
|
(9,345 |
) |
|
|
(7,793 |
) |
|
|
(8,828 |
) |
|
|
|
|
|
|
|
|
|
|
Total payments |
|
|
(14,855 |
) |
|
|
(13,307 |
) |
|
|
(13,574 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid losses and loss adjustment expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Net balance at end of year |
|
|
41,047 |
|
|
|
42,262 |
|
|
|
39,597 |
|
Ceded losses and deferred charges at end of year |
|
|
4,833 |
|
|
|
5,200 |
|
|
|
5,132 |
|
Foreign currency translation adjustment |
|
|
608 |
|
|
|
(728 |
) |
|
|
490 |
|
Acquisitions |
|
|
1,124 |
|
|
|
1,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross liabilities at end of year |
|
$ |
47,612 |
|
|
$ |
48,034 |
|
|
$ |
45,219 |
|
|
|
|
|
|
|
|
|
|
|
Incurred losses all prior accident years reflects the amount of estimation error charged or
credited to earnings in each calendar year with respect to the liabilities established as of the
beginning of that year. The beginning of the year net loss and loss adjustment expense liability
was reduced by $1,071 million in 2006, $743 million in 2005 and $119 million in 2004. In both 2005
and 2006, the reductions in loss estimates for occurrences in prior years were primarily due to
lower than expected frequencies and severities on reported and settled claims in the primary
private passenger and commercial auto lines and lower than expected general liability losses. In 2006
and 2005, developed frequencies were generally more favorable than originally expected,
particularly for liability coverages and claim severity increases were generally less than
originally estimated. In addition, in 2006 prior years loss estimates were reduced for certain
casualty reinsurance claims as a result of lower than expected losses
reported during the year. Accident year loss estimates are regularly adjusted to consider emerging
loss development patterns of prior years losses, whether favorable or unfavorable.
Prior accident
years incurred losses also include amortization of deferred charges related to retroactive
reinsurance contracts incepting prior to the beginning of the year. Amortization charges included
in prior accident years losses were $358 million in 2006, $294 million in 2005 and $451 million in
2004. Certain workers compensation reserves are discounted. Net discounted liabilities at
December 31, 2006 and 2005 were $2,705 million and $2,434 million, respectively, reflecting net
discounts of $2,793 million and $2,798 million, respectively. Periodic accretions of these
discounts are also a component of prior years losses incurred. The accretion of discounted
liabilities was approximately $101 million in 2006, $92 million in 2005 and $87 million in 2004.
Berkshires insurance subsidiaries are exposed to environmental, asbestos and other latent
injury claims arising from insurance and reinsurance contracts. Loss reserve estimates for
environmental and asbestos exposures include case basis reserves and also reflect reserves for
legal and other loss adjustment expenses and IBNR reserves. IBNR reserves are determined based
upon Berkshires historic general liability exposure base and policy language, previous
environmental loss experience and the assessment of current trends of environmental law,
environmental cleanup costs, asbestos liability law and judgmental settlements of asbestos
liabilities.
The liabilities for
environmental, asbestos and latent injury claims and claims expenses net
of reinsurance recoverables were approximately $5.1 billion at December 31, 2006 and $5.4 billion
at December 31, 2005. These liabilities include $3.8 billion at December 31, 2006 and $4.0 billion
at December 31, 2005, of liabilities assumed under retroactive
reinsurance contracts. Liabilities
66
Notes to Consolidated Financial Statements (Continued)
(12) Unpaid losses and loss adjustment expenses (Continued)
arising from retroactive contracts with
exposure to claims of this nature are generally subject to aggregate policy limits. Thus,
Berkshires exposure to environmental and latent injury claims under these contracts is, likewise,
limited. Berkshire monitors evolving case law and its effect on environmental and latent injury claims.
Changing government regulations, newly identified toxins, newly reported claims, new theories of
liability, new contract interpretations and other factors could result in significant increases in
these liabilities. Such development could be material to Berkshires results of operations. It is
not possible to reliably estimate the amount of additional net loss
or the range of net loss that is reasonably possible.
(13) Notes payable and other borrowings
Notes payable and other borrowings of Berkshire and its subsidiaries are summarized below.
Amounts are in millions.
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Insurance and other: |
|
|
|
|
|
|
|
|
Issued by parent company due 2007-2033 |
|
$ |
894 |
|
|
$ |
992 |
|
Issued by subsidiaries and guaranteed by Berkshire: |
|
|
|
|
|
|
|
|
Commercial paper and other short-term borrowings |
|
|
1,355 |
|
|
|
1,381 |
|
Other debt due 2009-2035 |
|
|
240 |
|
|
|
315 |
|
Issued by subsidiaries and not guaranteed by Berkshire due 2007-2041 |
|
|
1,209 |
|
|
|
895 |
|
|
|
|
|
|
|
|
|
|
$ |
3,698 |
|
|
$ |
3,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilities and energy *: |
|
|
|
|
|
|
|
|
Issued by MidAmerican and its subsidiaries and not guaranteed by Berkshire: |
|
|
|
|
|
|
|
|
MidAmerican senior unsecured debt due 2007-2036 |
|
$ |
4,479 |
|
|
$ |
2,776 |
|
Operating subsidiary and project debt due 2007-2036 |
|
|
12,014 |
|
|
|
7,169 |
|
Other |
|
|
453 |
|
|
|
351 |
|
|
|
|
|
|
|
|
|
|
$ |
16,946 |
|
|
$ |
10,296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance and financial products: |
|
|
|
|
|
|
|
|
Issued by Berkshire Hathaway Finance Corporation and guaranteed by Berkshire: |
|
|
|
|
|
|
|
|
Notes due 2007 |
|
$ |
700 |
|
|
$ |
700 |
|
Notes due 2008 |
|
|
3,098 |
|
|
|
3,095 |
|
Notes due 2010 |
|
|
1,994 |
|
|
|
1,992 |
|
Notes due 2012-2015 |
|
|
3,039 |
|
|
|
3,038 |
|
Issued by other subsidiaries and guaranteed by Berkshire due 2007-2027 |
|
|
398 |
|
|
|
417 |
|
Issued by other subsidiaries and not guaranteed by Berkshire due 2007-2030 |
|
|
2,732 |
|
|
|
1,626 |
|
|
|
|
|
|
|
|
|
|
$ |
11,961 |
|
|
$ |
10,868 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
Amounts as of December 31, 2005 are pro forma. |
Parent company debt includes several individual investment agreement borrowings under which
Berkshire is required to periodically pay interest over the contract terms. The weighted average
interest rate on amounts outstanding as of December 31, 2006 was 3.2%. Under certain conditions,
principal amounts may be redeemed without premium prior to the contractual maturity date at the
option of the counterparties. Parent company debt also includes $334 million principal amount of
senior notes associated with SQUARZ securities issued in 2002. When issued, each SQUARZ security
consisted of a 3% senior note due in November 2007 together with a warrant which expires in May
2007. The warrant permits each holder the right to purchase either 0.1116 shares of Class A common
stock (effectively at $89,606 per share) or 3.3480 shares of
Class B common stock (effectively at $2,987 per share) for $10,000. A warrant premium is payable to Berkshire at an annual rate of
3.75%.
Commercial paper and other short-term borrowings are utilized by certain subsidiaries as part
of normal operations. Weighted average interest rates as of December 31, 2006 and 2005 were 5.4%
and 4.4%, respectively. Berkshire subsidiaries have approximately $4.2 billion of available unused
lines of credit and commercial paper capacity to support their short-term borrowing programs and
provide additional liquidity.
Operating subsidiary and project debt of utilities and energy businesses represents amounts
issued by subsidiaries of MidAmerican pursuant to separate project financing agreements. All or
substantially all of the assets of certain utility subsidiaries are or may be pledged or encumbered
to support or otherwise provide security. These borrowing arrangements generally contain various
covenants including, but not limited to, leverage ratios, interest coverage ratios and debt service
coverage ratios. As of December 31, 2006, MidAmerican and its subsidiaries were in compliance with
all applicable covenants.
67
(13) Notes payable and other borrowings (Continued)
Berkshire Hathaway Finance Corporation (BHFC), a wholly-owned subsidiary of Berkshire,
issued senior notes at various times during the three years ending December 31, 2005. The proceeds
were used in the financing of manufactured housing loan originations and portfolio acquisitions of
Clayton Homes. During the fourth quarter of 2006, Clayton Homes borrowed approximately $1.3
billion whereby all principal and interest collected under certain manufactured housing loan
portfolios, together with any repurchased principal on such loans will be used to pay the principal
and interest on these borrowings. The expected weighted average life of the borrowings is
approximately eight years. The proceeds from these borrowings which are not guaranteed by
Berkshire will be used to repay certain debt of BHFC.
Generally, Berkshires guarantee of a subsidiarys debt obligation is an absolute,
unconditional and irrevocable guarantee for the full and prompt payment when due of all present and
future payment obligations of the issuer.
Principal
payments expected during the next five years are as follows (in
millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
Insurance and other |
|
$ |
2,229 |
|
|
$ |
13 |
|
|
$ |
295 |
|
|
$ |
61 |
|
|
$ |
10 |
|
Utilities and energy |
|
|
1,655 |
|
|
|
1,975 |
|
|
|
431 |
|
|
|
136 |
|
|
|
1,139 |
|
Finance and financial products |
|
|
1,271 |
|
|
|
3,645 |
|
|
|
213 |
|
|
|
2,172 |
|
|
|
131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,155 |
|
|
$ |
5,633 |
|
|
$ |
939 |
|
|
$ |
2,369 |
|
|
$ |
1,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14) Income taxes
The liability for income taxes as of December 31, 2006 and 2005 as reflected in the
accompanying Consolidated Balance Sheets is as follows (in millions).
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Payable currently |
|
$ |
189 |
|
|
$ |
258 |
|
Deferred |
|
|
18,271 |
|
|
|
11,994 |
|
|
|
|
|
|
|
|
|
|
|
$ |
18,460 |
|
|
$ |
12,252 |
|
|
|
|
|
|
|
|
The tax effects of temporary differences that give rise to significant portions of deferred
tax assets and deferred tax liabilities at December 31, 2006 and 2005 are shown below (in
millions).
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Investments unrealized appreciation; basis differences |
|
$ |
14,520 |
|
|
$ |
11,882 |
|
Deferred charges reinsurance assumed |
|
|
687 |
|
|
|
828 |
|
Property, plant and equipment |
|
|
4,775 |
|
|
|
1,202 |
|
Other |
|
|
2,591 |
|
|
|
1,165 |
|
|
|
|
|
|
|
|
|
|
|
22,573 |
|
|
|
15,077 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Unpaid losses and loss adjustment expenses |
|
|
(681 |
) |
|
|
(867 |
) |
Unearned premiums |
|
|
(443 |
) |
|
|
(403 |
) |
Accrued liabilities |
|
|
(1,335 |
) |
|
|
(815 |
) |
Other |
|
|
(1,843 |
) |
|
|
(998 |
) |
|
|
|
|
|
|
|
|
|
|
(4,302 |
) |
|
|
(3,083 |
) |
|
|
|
|
|
|
|
Net deferred tax liability |
|
$ |
18,271 |
|
|
$ |
11,994 |
|
|
|
|
|
|
|
|
Deferred income taxes have not
been established with respect to undistributed earnings of
certain foreign subsidiaries. Earnings expected to remain reinvested indefinitely was
approximately $1,762 million as of December 31, 2006. Upon distribution as dividends or otherwise,
such amounts would be subject to taxation in the United States as well as foreign countries.
However, U.S. income tax liabilities could be offset, in whole or in part, by tax credits allowable from
taxes paid to foreign jurisdictions. Determination of the potential net tax due is impracticable
due to the complexities of hypothetical calculations involving uncertain timing and amounts of
taxable income and the effects of multiple taxing jurisdictions.
The Consolidated Statements of Earnings reflect charges for income taxes as shown below (in
millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Federal |
|
$ |
4,752 |
|
|
$ |
3,736 |
|
|
$ |
3,313 |
|
State |
|
|
153 |
|
|
|
129 |
|
|
|
108 |
|
Foreign |
|
|
600 |
|
|
|
294 |
|
|
|
148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,505 |
|
|
$ |
4,159 |
|
|
$ |
3,569 |
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
5,030 |
|
|
$ |
2,057 |
|
|
$ |
3,746 |
|
Deferred |
|
|
475 |
|
|
|
2,102 |
|
|
|
(177 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,505 |
|
|
$ |
4,159 |
|
|
$ |
3,569 |
|
|
|
|
|
|
|
|
|
|
|
68
Notes to Consolidated Financial Statements (Continued)
(14) Income taxes (Continued)
Berkshire
and its subsidiaries income tax returns are continuously under audit by Federal and
various local and international taxing authorities. Berkshires consolidated
Federal income tax return liabilities have been settled with the Internal Revenue Service through
1998. Berkshire has received approximately $50 million in income tax refunds and interest with
respect to certain issues in its Federal income tax returns dating
back to 1988 that were
litigated and for which a favorable ruling from the U.S. District Court was received in the fourth
quarter of 2005. Berkshire does not currently believe that the impact
of potential future audit adjustments will have a material effect on its Consolidated Financial Statements.
Charges for income taxes are reconciled to hypothetical amounts computed at the U.S. Federal
statutory rate in the table shown below (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Earnings before income taxes |
|
$ |
16,778 |
|
|
$ |
12,791 |
|
|
$ |
10,936 |
|
|
|
|
|
|
|
|
|
|
|
Hypothetical amounts applicable to above
computed at the Federal statutory rate |
|
$ |
5,872 |
|
|
$ |
4,477 |
|
|
$ |
3,828 |
|
|
Tax effects resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt interest income |
|
|
(44 |
) |
|
|
(65 |
) |
|
|
(59 |
) |
Dividends received deduction |
|
|
(224 |
) |
|
|
(133 |
) |
|
|
(116 |
) |
Net earnings of MidAmerican |
|
|
|
|
|
|
(183 |
) |
|
|
(83 |
) |
State income taxes, less Federal income tax benefit |
|
|
99 |
|
|
|
84 |
|
|
|
70 |
|
Foreign rate differences |
|
|
(45 |
) |
|
|
56 |
|
|
|
(41 |
) |
Other differences, net |
|
|
(153 |
) |
|
|
(77 |
) |
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
|
Total income taxes |
|
$ |
5,505 |
|
|
$ |
4,159 |
|
|
$ |
3,569 |
|
|
|
|
|
|
|
|
|
|
|
(15) Dividend restrictions Insurance subsidiaries
Payments of dividends by insurance subsidiaries are restricted by insurance statutes and
regulations. Without prior regulatory approval, insurance subsidiaries may declare up to
approximately $6.4 billion as ordinary dividends before the end of 2007.
Combined shareholders equity of U.S. based property/casualty insurance subsidiaries
determined pursuant to statutory accounting rules (Statutory Surplus as Regards Policyholders) was
approximately $59 billion at December 31, 2006 and $52 billion at December 31, 2005.
Statutory surplus differs from the corresponding amount determined on the basis of GAAP. The
major differences between statutory basis accounting and GAAP are that deferred charges reinsurance
assumed, deferred policy acquisition costs, unrealized gains and losses on investments in
fixed maturity securities and related deferred income taxes are recognized under GAAP but
not for statutory reporting purposes. In addition, statutory accounting for goodwill of acquired
businesses requires amortization of goodwill over 10 years, whereas under GAAP, goodwill is subject
to periodic tests for impairment.
(16) Fair values of financial instruments
The estimated fair values of Berkshires financial instruments as of December 31, 2006 and
2005 are as follows (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value |
|
|
Fair Value |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Insurance and other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in fixed maturity securities |
|
$ |
25,300 |
|
|
$ |
27,420 |
|
|
$ |
25,300 |
|
|
$ |
27,420 |
|
Investments in equity securities |
|
|
61,533 |
|
|
|
46,721 |
|
|
|
61,533 |
|
|
|
46,721 |
|
Notes payable and other borrowings |
|
|
3,698 |
|
|
|
3,583 |
|
|
|
3,815 |
|
|
|
3,653 |
|
Finance and financial products: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in fixed maturity securities |
|
|
3,012 |
|
|
|
3,435 |
|
|
|
3,164 |
|
|
|
3,615 |
|
Derivative
contract assets (a) |
|
|
624 |
|
|
|
801 |
|
|
|
624 |
|
|
|
801 |
|
Loans and finance receivables |
|
|
11,498 |
|
|
|
11,087 |
|
|
|
11,862 |
|
|
|
11,370 |
|
Notes payable and other borrowings |
|
|
11,961 |
|
|
|
10,868 |
|
|
|
11,787 |
|
|
|
10,865 |
|
Derivative contract liabilities |
|
|
3,883 |
|
|
|
5,061 |
|
|
|
3,883 |
|
|
|
5,061 |
|
Utilities and energy: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments (a) |
|
|
1,046 |
|
|
|
|
|
|
|
1,041 |
|
|
|
|
|
Derivative contract assets (a) |
|
|
484 |
|
|
|
|
|
|
|
484 |
|
|
|
|
|
Notes payable and other borrowings |
|
|
16,946 |
|
|
|
|
|
|
|
17,789 |
|
|
|
|
|
Derivative contract liabilities (b) |
|
|
889 |
|
|
|
|
|
|
|
889 |
|
|
|
|
|
|
|
|
(a) |
|
Included in Other assets |
|
(b) |
|
Included in Accounts payable, accruals and other liabilities |
In determining fair value of financial instruments, Berkshire used quoted market prices
when available. For instruments where quoted market prices were not available, independent pricing
services or appraisals by Berkshires management were used. Those
69
(16) Fair values of financial instruments (Continued)
services and appraisals reflected the estimated present values utilizing current risk adjusted
market rates of similar instruments. The carrying values of cash and cash equivalents, accounts
receivable and payable, other accruals, securities sold under agreements to repurchase and other
liabilities are deemed to be reasonable estimates of their fair values.
Considerable judgment is necessarily required in interpreting market data used to develop the
estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative
of the amounts that could be realized in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the estimated fair value.
(17) Common stock
Changes in issued and outstanding Berkshire common stock during the three years ended December
31, 2006 are shown in the table below.
|
|
|
|
|
|
|
|
|
|
|
Class A Common, $5 Par Value |
|
Class B Common, $0.1667 Par Value |
|
|
(1,650,000 shares authorized) |
|
(55,000,000 shares authorized) |
|
|
Shares Issued and |
|
Shares Issued and |
|
|
Outstanding |
|
Outstanding |
Balance December 31, 2003 |
|
|
1,282,979 |
|
|
|
7,609,543 |
|
Conversions of Class A common stock
to Class B common stock and other |
|
|
(14,196 |
) |
|
|
489,632 |
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2004 |
|
|
1,268,783 |
|
|
|
8,099,175 |
|
Conversions of Class A common stock
to
Class B common stock and other |
|
|
(7,863 |
) |
|
|
294,908 |
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2005 |
|
|
1,260,920 |
|
|
|
8,394,083 |
|
Conversions of Class A common stock
to
Class B common stock and other |
|
|
(143,352 |
) |
|
|
4,358,348 |
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2006 |
|
|
1,117,568 |
|
|
|
12,752,431 |
|
|
|
|
|
|
|
|
|
|
Each share of Class B common stock has dividend and distribution rights equal to one-thirtieth
(1/30) of such rights of a Class A share. Accordingly, on an equivalent Class A common stock basis
there are 1,542,649 shares outstanding as of December 31, 2006 and 1,540,723 shares as of December
31, 2005.
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.
On July 6, 2006, Berkshires Chairman and CEO, Warren E. Buffett converted 124,998 shares of Class
A common stock into 3,749,940 shares of Class B common stock. Each share of Class B common stock
possesses voting rights equivalent to one-two-hundredth (1/200) of the voting rights of a share of
Class A common stock. Class A and Class B common shares vote together as a single class.
(18) Pension plans
Several Berkshire subsidiaries individually sponsor defined benefit pension plans covering
certain employees. Benefits under the plans are generally based on years of service and
compensation, although benefits under certain plans are based on years of service and fixed benefit
rates. The companies generally contribute to the plans amounts required to meet regulatory
requirements plus additional amounts determined by management based on actuarial valuations. The
measurement date for the pension plans is predominantly December 31.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106, and
132(R) (SFAS No. 158). SFAS No. 158 requires an employer to recognize in its statement of
financial position the over-funded or under-funded status of a defined benefit postretirement plan. SFAS
No. 158 also requires entities to recognize as a component of other comprehensive income, net of
tax, the actuarial gains and losses and the prior service costs and credits that arise during the
period, but are not recognized as components of net periodic benefit cost of the period pursuant
to SFAS No. 87, Employers Accounting for Pensions and SFAS No. 106, Employers Accounting for
Postretirement Benefits Other Than Pensions. Berkshire adopted the recognition and related
disclosure provisions of SFAS No. 158 as of December 31, 2006. The incremental impact to the
accompanying Consolidated Balance Sheet of such adoption is as follows (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before |
|
|
|
|
|
After |
|
|
SFAS No. 158 |
|
Adjustments |
|
SFAS No. 158 |
Other assets (1) |
|
$ |
17,086 |
|
|
$ |
(322 |
) |
|
$ |
16,764 |
|
Total assets |
|
|
248,759 |
|
|
|
(322 |
) |
|
|
248,437 |
|
Accounts payable, accruals and other liabilities (2) |
|
|
20,465 |
|
|
|
135 |
|
|
|
20,600 |
|
Income taxes, principally deferred |
|
|
18,614 |
|
|
|
(154 |
) |
|
|
18,460 |
|
Total liabilities |
|
|
137,775 |
|
|
|
(19 |
) |
|
|
137,756 |
|
Accumulated other comprehensive income |
|
|
23,280 |
|
|
|
(303 |
) |
|
|
22,977 |
|
Total shareholders equity |
|
|
108,722 |
|
|
|
(303 |
) |
|
|
108,419 |
|
Total liabilities and shareholders equity |
|
|
248,759 |
|
|
|
(322 |
) |
|
|
248,437 |
|
|
|
|
(1) |
|
Consists of $126 million related to Insurance and Other and ($448) million
related to Utilities and Energy businesses. |
|
(2) |
|
Consists of $30 million related to Insurance and Other and $105 million related to
Utilities and Energy businesses. |
70
Notes to Consolidated Financial Statements (Continued)
(18) Pension plans (Continued)
The components of net periodic pension expense for each of the three years ending December 31,
2006 are as follows (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Service cost |
|
$ |
199 |
|
|
$ |
113 |
|
|
$ |
109 |
|
Interest cost |
|
|
390 |
|
|
|
190 |
|
|
|
189 |
|
Expected return on plan assets |
|
|
(393 |
) |
|
|
(186 |
) |
|
|
(171 |
) |
Curtailment gain |
|
|
|
|
|
|
|
|
|
|
(70 |
) |
Net amortization, deferral and other |
|
|
67 |
|
|
|
9 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
Net pension expense |
|
$ |
263 |
|
|
$ |
126 |
|
|
$ |
70 |
|
|
|
|
|
|
|
|
|
|
|
In 2004, a Berkshire subsidiary amended its defined benefit plan to freeze benefits. Such an
event is considered a curtailment and the curtailment gain included in the table above represents
the elimination of projected plan benefits and the recognition of unamortized prior service costs
and actuarial losses as of the amendment date.
The accumulated benefit obligation is the actuarial present value of benefits earned based on
service and compensation prior to the valuation date. The projected benefit obligation is the
actuarial present value of benefits earned based upon service and compensation prior to the
valuation date and includes assumptions regarding future compensation levels when benefits are
based on those amounts. Information regarding accumulated and projected benefit obligations is
shown in the table that follows (in millions).
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Projected benefit obligation, beginning of year |
|
$ |
3,602 |
|
|
$ |
3,293 |
|
Service cost |
|
|
199 |
|
|
|
113 |
|
Interest cost |
|
|
390 |
|
|
|
190 |
|
Benefits paid |
|
|
(370 |
) |
|
|
(171 |
) |
Consolidation of MidAmerican |
|
|
2,237 |
|
|
|
|
|
Business acquisitions |
|
|
1,519 |
|
|
|
|
|
Actuarial loss and other |
|
|
349 |
|
|
|
177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation, end of year |
|
$ |
7,926 |
|
|
$ |
3,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation, end of year |
|
$ |
7,056 |
|
|
$ |
3,228 |
|
|
|
|
|
|
|
|
Benefit obligations
under qualified U.S. defined benefit plans are funded through assets held
in trusts and are not included as assets in Berkshires Consolidated Financial Statements. Pension
obligations under certain non-U.S. plans and non-qualified U.S. plans are unfunded. As of December
31, 2006, projected benefit obligations of non-qualified U.S. plans and non-U.S. plans which are
not funded through assets held in trusts were $569 million. A reconciliation of the changes in
plan assets and a summary of plan assets held as of December 31, 2006 and 2005 is presented in the
table that follows (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
2005 |
|
|
|
|
|
|
|
|
Plan assets at fair value, beginning of year |
|
$ |
3,101 |
|
|
$ |
3,039 |
|
Employer contributions |
|
|
228 |
|
|
|
104 |
|
Benefits paid |
|
|
(370 |
) |
|
|
(171 |
) |
Actual return on plan assets |
|
|
612 |
|
|
|
119 |
|
Consolidation of MidAmerican |
|
|
2,238 |
|
|
|
|
|
Business acquisitions |
|
|
967 |
|
|
|
|
|
Other and expenses |
|
|
16 |
|
|
|
10 |
|
|
|
|
|
|
|
|
Plan assets at fair value, end of year |
|
$ |
6,792 |
|
|
$ |
3,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents |
|
$ |
818 |
|
|
$ |
942 |
|
U.S. Government obligations |
|
|
554 |
|
|
|
1,103 |
|
Mortgage-backed securities |
|
|
602 |
|
|
|
259 |
|
Corporate obligations |
|
|
963 |
|
|
|
382 |
|
Equity securities |
|
|
3,440 |
|
|
|
391 |
|
Other |
|
|
415 |
|
|
|
24 |
|
|
|
|
|
|
|
|
|
|
$ |
6,792 |
|
|
$ |
3,101 |
|
|
|
|
|
|
|
|
Pension plan assets are generally invested with the long-term objective of earning sufficient
amounts to cover expected benefit obligations, while assuming a prudent level of risk. There are no
target investment allocation percentages with respect to individual or categories of investments.
Allocations may change rapidly as a result of changing market conditions and investment
opportunities. The expected rates of return on plan assets reflect Berkshires subjective
assessment of expected invested asset returns over a period of several years. Berkshire does not
give significant consideration to past investment returns when establishing assumptions for
expected long-term rates of returns on plan assets. Actual experience will differ from the assumed
rates, in particular over quarterly or annual periods as a result of market volatility and changes
in the mix of assets.
The total net deficit status fo