How much of Berkshire's 1998 net earnings came from recurring operations versus investment gains?

Net earnings were $2.83 billion, of which $1.55 billion (after tax) came from realized investment gains and $1.28 billion from operations. Management cautions that realized gains have no predictive value, so the $1.28 billion figure is the better guide to recurring earnings power.

What did the General Re merger change for Berkshire's financial profile?

The December 1998 merger added about $25 billion of invested assets, roughly $14.9 billion of float, and about $14.5 billion of goodwill. Only ten days of General Re's results were included in 1998, so 1999 will show a much larger reinsurance contribution, making year-over-year comparisons less meaningful.

What are the main risks to Berkshire's insurance earnings?

The primary risks are a large catastrophe event (the Reinsurance Group's estimated single-event exposure is about $600 million after tax, excluding General Re), softening catastrophe reinsurance pricing, and GEICO's expected rate reductions and rising claim costs. Reserve estimates for environmental and latent injury claims also carry uncertainty.

How exposed is Berkshire's balance sheet to stock market declines?

Equity securities of $38.5 billion carry significant price risk. A hypothetical 30% decline would reduce their fair value by about $11.5 billion, or roughly 12.8% of shareholders' equity. Much of this risk sits in a few holdings, including American Express, Coca-Cola, and Gillette, which together hold a large share of the equity portfolio.

Does Berkshire pay dividends, and how much capacity does it have to return capital?

Berkshire has not declared a cash dividend since 1967 and does not plan to change that policy in this filing. Its insurance subsidiaries could pay up to about $4 billion in dividends in 1999 without prior regulatory approval, and the company holds substantial cash, about $13.6 billion at the parent-consolidated level at year-end 1998.

BRK-B/BRK-A 10-K FY1998 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 30, 1999. Cited figures are marked; the original filing is the authoritative source.

Berkshire Hathaway's 1998 10-K reflects a transformational year driven by the December 21, 1998 merger with General Re, which roughly doubled the size of the balance sheet.

Total assets rose to $122.2 billion^a from $56.1 billion, and shareholders' equity reached $57.4 billion (about $37,801 per Class A equivalent share, up from $25,488). Net earnings were $2.83 billion, or $2,262 per Class A equivalent share, compared with $1.90 billion in 1997. However, roughly $1.55 billion of 1998 net earnings came from realized investment gains, and management explicitly states these have no predictive value.

Earnings before realized gains rose modestly to $1.28 billion^b from $1.20 billion. Operationally, the insurance franchise is the core: GEICO grew net premiums written to $4.18 billion, and the Reinsurance Group posted an underwriting loss of $21 million as catastrophe reinsurance pricing weakened. General Re adds meaningful scale, but only its final ten days were consolidated in 1998, so 1999 results should look materially different.

Float grew to $22.8 billion^c, about two-thirds of it from General Re, and the non-insurance segments contributed $635 million in operating profit, led by Flight Services (NetJets) and Dairy Queen. Shoe Group profitability continued to erode.

Investors should note the concentration of the equity portfolio (about 60% in three holdings: American Express, Coca-Cola, and Gillette, with Citigroup exposure via the Exchange Notes), the 30% equity price sensitivity of roughly 12.8% of shareholders' equity, and the $600 million^d after-tax single-event catastrophe exposure in the Reinsurance Group. Berkshire has not paid a cash dividend since 1967, and capital remains very strong, with U.S. statutory surplus of about $45 billion.

02—Key points

Key Highlights

Total assets more than doubled to $122.2 billion (from $56.1 billion) and shareholders' equity rose to $57.4 billion, driven by the General Re merger completed December 21, 1998.
Net earnings of $2.83 billion ($2,262 per Class A equivalent share) included $1.55 billion after-tax realized investment gains; earnings before realized gains were $1.28 billion, up from $1.20 billion.
Insurance float grew to about $22.8 billion, roughly two-thirds from General Re; statutory surplus of U.S. insurers is approximately $45 billion.
GEICO net premiums written rose to $4.18 billion, with pre-tax underwriting gain of $269 million and a loss ratio improving to 73.8%, though management expects rate cuts and margin normalization.
Berkshire Hathaway Reinsurance Group posted a pre-tax underwriting loss of $21 million as catastrophe reinsurance pricing deteriorated; estimated single-event exposure is about $600 million after tax.
Non-insurance segments generated $4.46 billion in revenue and $635 million in operating profit, led by Flight Services (NetJets acquisition) and International Dairy Queen, while the Shoe Group declined sharply.
Equity portfolio is highly concentrated, with about 60% of equity fair value in three holdings (American Express, Coca-Cola, Gillette); a 30% decline would reduce shareholders' equity by about 12.8%.

03—Questions

Frequently Asked Questions

How much of Berkshire's 1998 net earnings came from recurring operations versus investment gains?
Net earnings were $2.83 billion, of which $1.55 billion (after tax) came from realized investment gains and $1.28 billion from operations. Management cautions that realized gains have no predictive value, so the $1.28 billion figure is the better guide to recurring earnings power.
What did the General Re merger change for Berkshire's financial profile?
The December 1998 merger added about $25 billion of invested assets, roughly $14.9 billion of float, and about $14.5 billion of goodwill. Only ten days of General Re's results were included in 1998, so 1999 will show a much larger reinsurance contribution, making year-over-year comparisons less meaningful.
What are the main risks to Berkshire's insurance earnings?
The primary risks are a large catastrophe event (the Reinsurance Group's estimated single-event exposure is about $600 million after tax, excluding General Re), softening catastrophe reinsurance pricing, and GEICO's expected rate reductions and rising claim costs. Reserve estimates for environmental and latent injury claims also carry uncertainty.
How exposed is Berkshire's balance sheet to stock market declines?
Equity securities of $38.5 billion carry significant price risk. A hypothetical 30% decline would reduce their fair value by about $11.5 billion, or roughly 12.8% of shareholders' equity. Much of this risk sits in a few holdings, including American Express, Coca-Cola, and Gillette, which together hold a large share of the equity portfolio.
Does Berkshire pay dividends, and how much capacity does it have to return capital?
Berkshire has not declared a cash dividend since 1967 and does not plan to change that policy in this filing. Its insurance subsidiaries could pay up to about $4 billion in dividends in 1999 without prior regulatory approval, and the company holds substantial cash, about $13.6 billion at the parent-consolidated level at year-end 1998.

04—Continue

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