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Management’s Discussion and Analysis of Financial Condition and Results Of

Management’s Discussion and Analysis of Financial Condition and Results Of

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Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Results of Operations
 
Net earnings attributable to Berkshire are disaggregated in the table that follows. Amounts are after deductingincome taxes and exclude earnings attributable to noncontrolling interests. Amounts are in millions.
 
SecondThirdQuarter
 
FirstSixNineMonths2009
 
2008
 
2009
 
2008
 
 
rance underwriting $83363 
 
$36081 
 
$302665 
 
$541622 
 
rance – investment income1,159976 
 
884809 
 
2,1923,168 
 
1,6862,495 
 
ties and energy253346 
 
208324 
 
456802 
 
524848 
 
ufacturing, service and retailing239336 
 
719665 
 
497833 
 
1,206871 
 
nce and financial products8292 
 
15991 
 
160252 
 
306397 
 
r (3658
 
)(6099
 
)
 
(122180
 
)(6237
 
)
 
stment and derivative gains/losses 1,515183 
 
610(1,012
 
)(1,724541
 
) (3811,393
 
)arnings attributable to Berkshire $3,295238 
 
$2,8801,057 
 
$1,761
 
4,999$3,820
 
4,877 Berkshire’s operating businesses are managed on an unusually decentralized basis. There are essentially nocentralized or integrated business functions (such as sales, marketing, purchasing, legal or human resources) and there isminimal involvement by Berkshire’s corporate headquarters in the day-to-day business activities of the operatingbusinesses. Berkshire’s corporate office management participates in and is ultimately responsible for significant capitalallocation decisions, investment activities and the selection of the Chief Executive to head each of the operatingbusinesses. The business segment data (Note 17 to the CondensedConsolidated Financial Statements) should be read inconjunction with this discussion.
 
The declines in global economic activity over the last half of 2008(and in the fourth quarter in particular)continued through the firsthalfnine monthsof 2009. Berkshire’s operating results in 2009have beenweresignificantly impacted by those declines. Earnings in 2009 of most of Berkshire’s diverse group of manufacturing, service andretailing businesses declined, in some cases severely, compared to the prior year. The effects from thecurrent worldwideeconomic recession resulted in lower sales volume, revenues and profit margins as consumers have significantly curtailedspending, particularly for discretionary items. Berkshire’s two largest business segments, insurance and utilities, remainstrong andoperating resultshave not been negatively impactedin any significant wayby the recession.
 
Investment and derivative gains were $1.5 billion,183 millionin thesecondthirdquarter of 2009, while in the first sixninemonths there were losses of $1.7 billion.541 million.The gains and losses primarily derived from credit default contracts, dispositions of certain equity securities,non-
 
cashother-than-temporary impairment charges with respect tocertain equity securities and changes in estimated fair values of long duration equity index put option contracts. Changesin the equity and credit markets from period to periodcan andhave causedand will likely continue to causesignificant volatility in periodic earnings.
 
In response to the crises in the financial and capital markets and global recession, the U.S. and other governmentsaround the world are taking measures to stabilize financial institutions, regulate markets (including over-the-counterderivatives markets) and stimulate economic activity. While managementhopesbelievessuch actions willprovebe  successful, thepotentialultimateimpact on Berkshire is not clear at this time.It is expected that the current economic conditions will persist at least through 2009 before meaningful improvements become evident.Berkshire’s operatingcompanies have taken and will continue to take cost reduction actionsas necessaryto manage through the currenteconomic situation. Management believes that the economic franchises of Berkshire’s business operations remain intactand that operating results will ultimatelyreturn to more normal historical levelsimprove, although it cannot predict thetiming of aan economicrecoverythat will be required to have this happen.
 
 Insurance —Underwriting
 
Berkshire’s management views insurance businesses as possessing two distinct operations – underwriting andinvesting. Underwriting decisions are the responsibility of the unit managers; investing, with limited exception, is theresponsibility of Berkshire’s Chairman and CEO, Warren E. Buffett. Accordingly, Berkshire evaluates performance of underwriting operations without any allocation of investment income.
 
 
Berkshire provides both primary insurance and reinsurance of property and casualty risks. Through General Re,Berkshire also reinsures life and health risks.Berkshire’s principal insurance and reinsurance underwriting units are:(1) GEICO, (2) General Re, (3) Berkshire Hathaway Reinsurance Group and (4) Berkshire Hathaway Primary Group. Through General Re, Berkshire also reinsures life and health risks.
 
21
 
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
 
 Insurance
 
 —Underwriting
(Continued)
 
Periodic underwriting results can be affected significantly by changes in estimates for unpaid losses and lossadjustment expenses, including amounts established for occurrences in prior years. In addition, the timing and amount of catastrophe losses produce significant volatility in periodic underwriting results. A key marketing strategy followed byall of the insurance businesses is the maintenance of extraordinary capital strength. Statutory surplus of Berkshire’sinsurance businesses was approximately $51 billion at December 31, 2008. This superior capital strength createsopportunities, especially with respect to reinsurance activities, to negotiate and enter into insurance and reinsurancecontracts specially designed to meet the unique needs of insurance and reinsurance buyers.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
 
 Insurance —Underwriting
(Continued)
 
A summary follows of underwriting results from Berkshire’s insurance businesses. Amounts are in millions.
 
SecondThirdQuarter
 
FirstSixNineMonths2009
 
2008
 
2009
 
2008
 rwriting gain (loss) attributable to:
 
O $111200 
 
$298246 
 
$259
 
459$484730 
 
ral Re276186 
 
10254 
 
260
 
446 144198 
 
shire Hathaway Reinsurance Group(291167
 
)
 
79(166
 
) 
 
(8879 
 
)
 
108(58
 
)
 
shire Hathaway Primary Group297 
 
81(8
 
) 33
 
40 10698 
 
ax underwriting gain125560 
 
560126 
 
4641,024 
 
842968 
 
me taxes and noncontrolling interests42197 
 
200
 
45 162359 
 
301346 
 
underwriting gain $83363 
 
$36081 
 
$302665 
 
$541622 
GEICO
 
GEICO provides primarily private passenger automobile coverages to insureds in all 50 states and the District of Columbia. GEICO policies are marketed mainly by direct response methods in which customers apply for coveragedirectly to the company via the Internet, over the telephone or through the mail. This is a significant element in GEICO’sstrategy to be a low-cost insurer. In addition, GEICO strives to provide excellent service to customers, with the goal of establishing long-term customer relationships. GEICO’s underwriting results are summarized in the table below. Dollaramounts are in millions.
 
SecondThirdQuarterFirstSixNineMonths
 
200920082009
 
2008
 
Amount
 
%Amount%Amount%
 
Amount%
 
Premiumsearned$3,394
 
448100.0$3,08615
 
0100.0$
 
6,65510,1
 
03100.0 $6,1189,26
 
8100.0es and loss adjustment expenses2,64863
 
6 78.076.
 
5 2,23335
 
072.474.
 
6 5,1627,79
 
877.62 
 
4,5186,86
 
873.974.
 
1rwriting expenses635612 
 
1817.7
 
555554
 
18.017.
 
61,234846
 
18.53 
 
1,116670
 
18.2
 
0Total losses and expenses3,28324
 
8 96.794.
 
2 2,78890
 
490.492.
 
2 6,3969,64
 
496.195.
 
5 5,6348,53
 
892.1Pre-tax underwriting gain $111200 
 
$298246 
 
$
 
259
 
459$484730
 
 
Premiums earned in thesecond thirdquarter and firstsixninemonths of 2009 increased $308298million (10.09.5%) and $537835million (8.89.0%), respectively, overthepremiums earned in the corresponding 2008 periods. The growth in premiums earned for voluntary auto was8.79.0% for the firstsixninemonths of 2009, reflecting an increase in policies-in-force. The weakening economy of 10.1% offset somewhat by a decrease in average premiums perpolicy. Itisalsobelievedto be causingthat the weak economic conditions have causedcustomers to raise policy deductibles and reduce coverage in order to save money.Policies-in-force over the last twelve months increased 10.8%overall, including 9.1% in the preferred risk auto markets and 15.9% in the standard and nonstandard auto markets.Voluntary auto new business sales in the firstsixninemonths of 2009 increased25.618.2% versus 2008. Growth was particularly strong during the first quarter and slowed toamore normalrateratesin the secondquarterand third quarters. Voluntary auto policies-in-force atJuneSeptember30, 2009 were596662,000 greater than at December 31, 2008.
 
22
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
 
 Insurance
 
 —Underwriting
(Continued)
 
GEICO
(Continued)
 
Losses and loss adjustment expenses incurred in thesecondthirdquarter and firstsixninemonths of 2009 increased $415286million (18.612.2%) and $644930million (14.313.5%), respectively, over amounts incurred in 2008 periods. The loss ratio was 77.62% in the firstsixninemonths of 2009 compared to73.974.1% in 2008. The higher loss ratio in 2009 reflected overall increases in average claim frequencies and injury claim severities. Claims frequenciesin 2009 for physical damage coverages increased in theonetwotothreefourpercent range, while frequencies for injury coverages increased in thethree
 
eighttofivetenpercent range compared withthe very low frequency levels in2008. Average injury severities in 2009 increased in the three to five percent range while average physical damage severitiesdecreased in the three to five percent rangeover from2008. Incurred losses from catastrophe eventsinfor the first nine months of 2009and 2008wererelatively insignificant. Management anticipates that loss ratios over the remainder of  2009 will be generally higher than in 2008, resulting in
 
comparatively lower underwriting gains$73 million compared to$88 million for the first nine months of 2008. Underwriting expenses in the firstsixninemonths of 2009 increased 10.65% over 2008 to $1,234846million dueprimarilyto higher policy issuance costs and increased salary and employee benefit expenses.
 
23
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
 
 Insurance —Underwriting
(Continued)
 
General Re
 
General Re conducts a reinsurance business offering property and casualty and life and health coverages to clientsworldwide. Property and casualty reinsurance is written in North America on a direct basis through General ReinsuranceCorporation and internationally through Cologne Re (based in Germany) and other wholly-owned affiliates. Property andcasualty reinsurance is also written through brokers with respect to Faraday in London. Life and health reinsurance iswritten worldwide through Cologne Re. General Re strives to generate underwriting gains in essentially all product lines.Underwriting performance is not evaluated based upon market share and underwriters are instructed to rejectinadequately priced risks. General Re’s underwriting results are summarized in the following table. Amounts are inmillions.
 
Premiums earnedPre-tax underwriting gain /loss
 
SecondThird QuarterFirstSixNine MonthsSecondThird Quarter
 
FirstSixNine Months
 
20092008200920082009
 
2008
 
20092008
 
Property/casualty $
 
814820
 
$
 
821819
 
$
 
1,5772,3
 
97$
 
1,8592,6
 
78$21410
 
7$
 
55(1
 
3 )$
 
19129
 
8$
 
7057
 
Life/health612656 
 
667639 
 
1,228884 
 
1,333972 
 
6279 
 
4767 
 
69148 
 
74141 
 
$
 
1,426
 
476$
 
1,488
 
458$
 
2,805
 
4,281$
 
3,192
 
4,650$27618
 
6$
 
1025
 
4$
 
260
 
446$
 
14419
 
8

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