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Berkshire Reports! March 1, 2010

Posted by shaferfinancial in Finance, Uncategorized.
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The much awaited annual Berkshire Hathaway report was issued Saturday.  BRKb remains the majority holding of my portfolio.  First some general comments.  It never fails that around the internet folks take shots at Warren Buffett.  Despite very positive results, the critics were out in groves, same as last year.  This  reports activity in 2009 so doesn’t include the purchase of BNI, although Buffett comments on it.  Results were very positive, although many of the companies are still effected by the recession.  Since Buffett took on many new stockholders in the BNI deal this letter opens with some explanations about the company and how it is valued.  For those new to BRK or even interested in it, this years letter is a must read.

Buffett evaluates his company in the annual letter by looking at book value.  He explicitly states why he does this and the weakness of this valuation.  But what it does is allow investors to compare apples to apples on an ongoing basis.  The book value ended at $84,487 an increase of 19.8%.  Using this metric if you had invested $10,000 in Berkshire On Jan 3, 2000 it would be worth $22,250. If you had bought the stock 10 years ago with $10K it would be worth $26,478 today.  This compares to $9,094 for the 10 year period culminating at the end of 2009 and $8,360 for the 10 years back from today for the S & P 500 Index.

Now to the details:

Insurance:  The float from the insurance premiums is up to $62B.  The float is funds that will be paid out as claims, but can be used in the interim by Berkshire in its investments.  This is up from $58.4B at the end of 2008.  Berkshire had underwriting profits for the seventh straight year of $1.55B which is down from $2.79B the year before.  Buffett had said that premiums were creeping down during the year, while risk was not so they actually wrote less insurance than normal during the year.  Despite this the float did go up.  Note, underwriting profits are not generally obtained by insurance companies, so Berkshire has accomplished a remarkable feat here.  GEICOs market share has risen to 8.1%.  National Indemnity writes large contracts for reinsurance and in fact wrote a large contract for life reinsurance that Buffett states could produce $50B in profit over the next 50 years.  General Re another large reinsurance company made a larger underwriting profit than last year as it continues to clean up its books.  In short, despite a harsher environment for insurance, Berkshire made an underwriting profit and upped its float.  Both positive signs for the future.

Regulated Utilities:

This part of the business is highly regulated and capital intensive.  Overall usage was down last year and the earnings reflect that.  Net earnings were $1.15B compared to $1.85 in 2008.

Manufacturing, Retail, Service:

Here we see the total effect of the recession with earnings only about 47% of 2008 or $1.113B.  However,  there was a noticeable increase in quarter 4 for earnings as the recession loosened it tight grip on the economy.  The largest problem child was NETJETS, which lost money last year [$711M].  However, Buffett changed management and he stated it is already showing a profit for 2010.

Investments:

The famous investment portfolio for which most people think is the totality of Berkshire Hathaway had a good year with prices coming off their lows.  Most successful is probably BYD a Chinese manufacturing company that has a cost value of $232M and a value today of around $2B.  The non- traded securities [DOW, GE, Goldman Sachs, Swiss RE, Wrigley, etc.] bought over the last 18 months have a cost basis of $21.1B and a worth of $26B along with annual dividends and interest of $2.1B!  Not bad for 18 months!  Cash equivalents stood at $30.6B with $8B set aside for the purchase of BNI.

The much maligned derivative contracts gained $3.62B during the year.  We also know that they provided  $6.3B in additional float.  Just a word again on these contracts.  They only have to pay out if the stock indexes they were written on are lower at the end of the contract period, an unlikely event.  Currently, if the market indexes remain exactly where they were on Dec. 31, 2009 their would be a payout of $4.6B.  The average maturity date is over 11 years.  With Berkshire still having over $22B in cash, a $4.6B payout would not materially effect the company.

Earnings compare favorably to 2008 with $8.055B in 2009 compared to $4,994B in 2008.  However, earnings are still behind pre-recession 2007 of $13,213B.

So,  let’s recap.  Berkshire Hathaway is at its highest Book Value ever of $84,487 an increase of almost 20%.  It’s earnings rebounded from 2008 61%.  But is still below 2007 level by 39%.  Its float increased to $62B.  Investments made over the last year and a half [Goldman, GE, Wrigley, etc.], while the market was awash in panic, have produced returns in excess of 38%, over $20B in cash on hand after the BNI deal.  Where are the critics coming from??????

This stock will remain the centerpiece of my investment portfolio.  I added several “B” shares before the split.  I will add on further shares during the year, but probably wait to see if there are any buying dips.

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