01—Abstract
Summary
Summary of the 10-K filed March 1, 2007. Cited figures are marked; the original filing is the authoritative source.
Berkshire Hathaway's 2006 Form 10-K shows a company whose consolidated net earnings rose 29% to $11.0 billiona ($7,144 per Class A equivalent share) on revenues of $98.5 billion, up from $81.7 billion.
Shareholders' equity reached $108.4 billionb (about $70,281 per Class A equivalent share, up from $59,377), and total assets grew to $248.4 billion. Results were helped by a $2.6 billion pre-tax investment and derivative gain, which is far below 2005's $5.5 billion, and by a $3.9 billion pre-tax swing in insurance underwriting, from a $1.6 billion underwriting gain in 2006 versus a $3.4 billion loss in 2005 caused by Hurricanes Katrina, Rita and Wilma. Investors should note that 2005 earnings were inflated by a $5.0 billion Gillette-to-P&G exchange gain, so year-over-year comparisons are distorted.
The insurance franchise remains the core. Statutory surplus of U.S. insurers is about $59 billionc, and float grew to roughly $51 billion. GEICO's auto underwriting was strong, with a 70.1% loss ratio and a pre-tax underwriting gain of $1.3 billion.
The Berkshire Hathaway Reinsurance Group's catastrophe business carries a probable maximum loss of about $6 billiond, a source of earnings volatility the company openly accepts. Non-insurance operations expanded through acquisitions totaling about $10.1 billion in cash, including PacifiCorp, which was folded into the consolidated MidAmerican utilities group (Berkshire owns 87.8%), and the Iscar Metalworking Companies (IMC), which was bought for $4.0 billion net of assets. Consolidating MidAmerican added roughly $16.9 billion of non-recourse utility debt to the balance sheet.
The filing also flags material risks: ongoing governmental investigations of General Re's non-traditional and finite reinsurance business, including criminal charges against several former General Re executives, and a heavy dependence on Warren Buffett for investment decisions. Berkshire has not paid a cash dividend since 1967 and does not expect future book value growth to match its historical pace given the size of its capital base.
02—Key points
Key Highlights
- Consolidated net earnings rose to $11.0 billion in 2006 from $8.5 billion in 2005, or $7,144 per Class A equivalent share, but 2005 included a $5.0 billion pre-tax Gillette exchange gain and $3.4 billion in hurricane losses, which complicates comparisons.
- Shareholders' equity grew to $108.4 billion, or $70,281 per Class A equivalent share, up about 18% from $59,377 a year earlier.
- Insurance underwriting produced a pre-tax gain of $3.8 billion in 2006, compared with $1.6 billion in 2005, with no major hurricanes in 2006 and GEICO's loss ratio improving to 70.1%.
- Insurance float rose to about $51 billion, and U.S. insurers' statutory surplus was about $59 billion, supporting AAA ratings from Standard & Poor's for major subsidiaries.
- Acquisitions totaled about $10.1 billion in cash in 2006, including PacifiCorp (through MidAmerican), Iscar Metalworking Companies (80%), Russell Corporation and Business Wire.
- Consolidating MidAmerican brought roughly $16.9 billion of non-recourse utility debt onto the balance sheet, and Berkshire's total assets rose to $248.4 billion from $198.3 billion.
- Ongoing governmental investigations and litigation tied to General Re's finite reinsurance business remain unresolved, with criminal trial set for December 2007 and no estimate of possible loss provided.
03—Questions
Frequently Asked Questions
Why did Berkshire's reported earnings grow so much in 2006 if investment gains fell?
Most of the growth came from operations rather than investment gains. Insurance underwriting swung from a $1.6 billion pre-tax gain in 2005 to a $3.8 billion gain in 2006, mainly because 2005 hurricanes caused about $3.4 billion of losses and 2006 had no major catastrophes. Investment and derivative gains were $2.6 billion in 2006, down from $5.5 billion in 2005, which included the non-cash Gillette-to-P&G exchange gain.
What is the main risk from Berkshire's catastrophe reinsurance business?
Berkshire's reinsurance group writes catastrophe and individual-risk coverage and generally does not cede this exposure. The company estimates a probable maximum loss of about $6 billion from a single event and states that it accepts large earnings swings from such events, so periodic reported results can be highly volatile.
How much debt did Berkshire take on in 2006, and is it guaranteed by the parent?
Consolidated notes payable rose to about $51 billion including interest. Most of the increase is non-recourse debt at MidAmerican (about $16.9 billion) and Clayton Homes' finance subsidiaries, which Berkshire says it does not guarantee. Parent-guaranteed debt included Berkshire Hathaway Finance Corporation notes (about $8.85 billion par) and $10.8 billion of subsidiary debt guaranteed by the parent.
Does Berkshire pay dividends, and how is succession handled for Warren Buffett?
Berkshire has not declared a cash dividend since 1967, and the filing gives no indication of a change. The filing says Buffett makes investment and major capital allocation decisions, and the board has identified three subsidiary managers capable of serving as CEO and has agreed on a replacement should one be needed now.
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