a6089935.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2009
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                      to                     
 
Commission file number 001-14905
 
BERKSHIRE HATHAWAY INC.
(Exact name of registrant as specified in its charter)
 
Delaware
47-0813844
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification Number)
 
3555 Farnam Street, Omaha, Nebraska 68131
(Address of principal executive office)
(Zip Code)
 
(402) 346-1400
(Registrant’s telephone number, including area code)
 
 
(Former name, former address and former fiscal year, if changed since last report)

 
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  x    No  ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  x    No  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  x
Accelerated filer  ¨
Non-accelerated filer  ¨
Smaller reporting company  ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     Yes  ¨    No  x
 
Number of shares of common stock outstanding as of October 29, 2009:
 
Class A —   1,056,884
Class B  — 14,845,356
BERKSHIRE HATHAWAY INC.
 
 
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1
Part I Financial Information
 
Item 1. Financial Statements
 
BERKSHIRE HATHAWAY INC.
and Subsidiaries
 
CONSOLIDATED BALANCE SHEETS
(dollars in millions)
 
   
September 30,
2009
    
December 31,
2008
  
   
(Unaudited)
        
ASSETS
            
Insurance and Other:
            
Cash and cash equivalents
   $ 23,840     $ 24,302  
Investments:
                
Fixed maturity securities
     32,586       27,115  
Equity securities
     55,084       49,073  
Other
     31,927       21,535  
Receivables
     16,047       14,925  
Inventories
     6,051       7,500  
Property, plant and equipment
     16,567       16,703  
Goodwill
     27,617       27,477  
Other
     13,258       13,257  
      222,977       201,887  
                 
Utilities and Energy:
                
Cash and cash equivalents
     744       280  
Property, plant and equipment
     30,432       28,454  
Goodwill
     5,333       5,280  
Other
     7,550       7,556  
      44,059       41,570  
                 
Finance and Financial Products:
                
Cash and cash equivalents
     2,335       957  
Investments in fixed maturity securities
     4,765       4,517  
Loans and finance receivables
     13,514       13,942  
Goodwill
     1,024       1,024  
Other
     3,336       3,502  
      24,974       23,942  
    $ 292,010     $ 267,399  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
                
Insurance and Other:
                
Losses and loss adjustment expenses
   $ 59,603     $ 56,620  
Unearned premiums
     8,753       7,861  
Life and health insurance benefits
     4,012       3,619  
Accounts payable, accruals and other liabilities
     15,420       14,987  
Notes payable and other borrowings
     3,815       4,349  
      91,603       87,436  
                 
Utilities and Energy:
                
Accounts payable, accruals and other liabilities
     5,703       6,175  
Notes payable and other borrowings
     19,564       19,145  
      25,267       25,320  
                 
Finance and Financial Products:
                
Accounts payable, accruals and other liabilities
     2,561       2,656  
Derivative contract liabilities
     10,352       14,612  
Notes payable and other borrowings
     14,642       13,388  
      27,555       30,656  
Income taxes, principally deferred
     16,903       10,280  
Total liabilities
     161,328       153,692  
                 
Shareholders’ equity:
                
Common stock and capital in excess of par value
     27,086       27,141  
Accumulated other comprehensive income
     15,816       3,954  
Retained earnings
     83,171       78,172  
Berkshire Hathaway shareholders’ equity
     126,073       109,267  
Noncontrolling interests
     4,609       4,440  
Total shareholders’ equity
     130,682       113,707  
    $ 292,010     $ 267,399  
 
See accompanying Notes to Consolidated Financial Statements
2
BERKSHIRE HATHAWAY INC.
and Subsidiaries
 
CONSOLIDATED STATEMENTS OF EARNINGS
(dollars in millions except per share amounts)
 
    Third Quarter    
First Nine Months
  
   
2009
     2008    
2009
     2008  
   
(Unaudited)
    
(Unaudited)
  
Revenues:
                        
Insurance and Other:
                        
Insurance premiums earned
   $ 6,595     $ 6,465     $ 21,263     $ 18,905  
Sales and service revenues
     16,178       17,323       46,075       49,415  
Interest, dividend and other investment income
     1,361       1,143       4,133       3,588  
Investment gains/losses
     115       (48 )     (314 )     738  
Other-than-temporary impairment losses on investments
     (25 )     (250 )     (3,151 )     (679 )
      24,224       24,633       68,006       71,967  
                                 
Utilities and Energy:
                                
Operating revenues
     2,741       3,240       8,212       9,588  
Other
     71       58       204       139  
      2,812       3,298       8,416       9,727  
                                 
Finance and Financial Products:
                                
Interest income
     420       464       1,257       1,360  
Investment gains/losses
     (5 )     2       57       6  
Derivative gains/losses
     1,732       (1,261 )     2,572       (2,213 )
Other
     721       790       1,987       2,347  
      2,868       (5 )     5,873       1,500  
      29,904       27,926       82,295       83,194  
                                 
Costs and expenses:
                                
Insurance and Other:
                                
Insurance losses and loss adjustment expenses
     4,125       4,796       14,211       12,531  
Life and health insurance benefits
     435       441       1,320       1,383  
Insurance underwriting expenses
     1,475       1,102       4,708       4,023  
Cost of sales and services
     13,614       14,316       38,700       40,530  
Selling, general and administrative expenses
     2,015       1,861       6,051       5,770  
Interest expense
     29       42       101       115  
      21,693       22,558       65,091       64,352  
                                 
Utilities and Energy:
                                
Cost of sales and operating expenses
     2,080       2,468       6,390       7,462  
Interest expense
     291       304       880       894  
      2,371       2,772       7,270       8,356  
                                 
Finance and Financial Products:
                                
Interest expense
     174       168       511       474  
Other
     827       926       2,336       2,586  
      1,001       1,094       2,847       3,060  
      25,065       26,424       75,208       75,768  
                                 
Earnings before income taxes and equity method earnings
     4,839       1,502       7,087       7,426  
Income tax expense
     1,601       294       2,107       2,145  
Earnings from equity method investments
     111       —       307       —  
Net earnings
     3,349       1,208       5,287       5,281  
Less: Earnings attributable to noncontrolling interests
     111       151       288       404  
                                 
Net earnings attributable to Berkshire Hathaway
   $ 3,238     $ 1,057     $ 4,999     $ 4,877  
Average common shares outstanding *
     1,551,727       1,549,226       1,550,986       1,548,871  
Net earnings per share attributable to Berkshire Hathaway shareholders *
   $ 2,087     $ 682     $ 3,223     $ 3,149  
                                   
 
*
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 attributable to Berkshire Hathaway 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.
 
See accompanying Notes to Consolidated Financial Statements
3
BERKSHIRE HATHAWAY INC.
and Subsidiaries
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
 
   
First Nine Months
  
   
2009
    
2008
  
   
(Unaudited)
  
Cash flows from operating activities:
            
Net earnings
   $ 5,287     $ 5,281  
Adjustments to reconcile net earnings to operating cash flows:
                
Investment (gains) losses and other-than-temporary impairment losses
     3,408       (65 )
Depreciation
     2,315       2,071  
Other
     (101 )     (241 )
Changes in operating assets and liabilities before business acquisitions:
                
Losses and loss adjustment expenses
     2,244       988  
Deferred charges reinsurance assumed
     (8 )     362  
Unearned premiums
     802       1,551  
Receivables and originated loans
     (252 )     (2,564 )
Derivative contract assets and liabilities
     (4,315 )     3,182  
Income taxes
     693       (904 )
Other assets and liabilities
     1,953       (1,233 )
Net cash flows from operating activities
     12,026       8,428  
                 
Cash flows from investing activities:
                
Purchases of fixed maturity securities
     (8,939 )     (32,601 )
Purchases of equity securities
     (3,204 )     (9,449 )
Purchases of other investments
     (6,068 )     —  
Sales of fixed maturity securities
     3,222       13,166  
Redemptions and maturities of fixed maturity securities
     4,003       15,675  
Sales of equity securities
     2,126       2,067  
Purchases of loans and finance receivables
     (227 )     (1,359 )
Principal collections on loans and finance receivables
     618       558  
Acquisitions of businesses
     (75 )     (5,860 )
Purchases of property, plant and equipment
     (3,803 )     (4,201 )
Other
     1,218       (17 )
Net cash flows from investing activities
     (11,129 )     (22,021 )
                 
Cash flows from financing activities:
                
Proceeds from borrowings of finance businesses
     1,550       5,149  
Proceeds from borrowings of utilities and energy businesses
     1,241       2,147  
Proceeds from other borrowings
     79       102  
Repayments of borrowings of finance businesses
     (328 )     (2,698 )
Repayments of borrowings of utilities and energy businesses
     (383 )     (2,215 )
Repayments of other borrowings
     (674 )     (174 )
Change in short term borrowings
     (721 )     532  
Acquisitions of noncontrolling interests and other
     (377 )     (87 )
Net cash flows from financing activities
     387       2,756  
Effects of foreign currency exchange rate changes
     96       (123 )
Increase (decrease) in cash and cash equivalents
     1,380       (10,960 )
Cash and cash equivalents at beginning of year *
     25,539       44,329  
Cash and cash equivalents at end of first nine months *
   $ 26,919     $ 33,369  
                 
                 
* Cash and cash equivalents are comprised of the following:
                
Beginning of year—
                
Insurance and Other
   $ 24,302     $ 37,703  
Utilities and Energy
     280       1,178  
Finance and Financial Products
     957       5,448  
    $ 25,539     $ 44,329  
                 
End of first nine months—
                
Insurance and Other
   $ 23,840     $ 27,899  
Utilities and Energy
     744       531  
Finance and Financial Products
     2,335       4,939  
    $ 26,919     $ 33,369  
 
See accompanying Notes to Consolidated Financial Statements
4
BERKSHIRE HATHAWAY INC.
and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
 
Note 1.    General
 
The accompanying unaudited Consolidated Financial Statements include the accounts of Berkshire Hathaway Inc. (“Berkshire” or “Company”) consolidated with the accounts of all its subsidiaries and affiliates in which Berkshire holds controlling financial interests as of the financial statement date. Reference is made to Berkshire’s most recently issued Annual Report on Form 10-K (“Annual Report”) that included information necessary or useful to understanding Berkshire’s businesses and financial statement presentations. In particular, Berkshire’s significant accounting policies and practices were presented as Note 1 to the Consolidated Financial Statements included in the Annual Report. Certain immaterial amounts in 2008 have been reclassified to conform with the current year presentation. Financial information in this Report reflects any adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary to a fair statement of results for the interim periods in accordance with accounting principles generally accepted in the United States (“GAAP”).
 
For a number of reasons, Berkshire’s results for interim periods are not normally indicative of results to be expected for the year. The timing and magnitude of catastrophe losses incurred by insurance subsidiaries and the estimation error inherent to the process of determining liabilities for unpaid losses of insurance subsidiaries can be relatively more significant to results of interim periods than to results for a full year. Variations in the amounts and timing of investment gains/losses and other-than-temporary impairment losses on investments can cause significant variations in periodic net earnings. Investment gains/losses are recorded when investments are sold or in instances when investments are required to be marked-to-market. In addition, changes in the fair value of derivative assets/liabilities associated with derivative contracts that do not qualify for hedge accounting treatment can cause significant variations in periodic net earnings.
 
Note 2.    Accounting pronouncements adopted in 2009
 
During the third quarter of 2009, the FASB Accounting Standards Codification (“the Codification” or “ASC”) became effective and superseded prior existing Financial Accounting Standards and is now the single source of authoritative GAAP.  The Codification does not change previous GAAP and accordingly, its adoption did not have a material impact on Berkshire’s consolidated financial statements.
 
As of January 1, 2009, Berkshire adopted certain provisions of “ASC 810 Consolidation” which require that noncontrolling interests (formerly known as “minority interests”) be displayed in the balance sheet as a separate component of shareholders’ equity and that net earnings attributable to the noncontrolling interests be clearly indentified and presented in the statement of earnings. In addition, changes in ownership interests where the parent retains a controlling interest are to be reported as transactions affecting shareholders’ equity. Previously such transactions were reportable as additional investment purchases (potentially resulting in recognition of additional other assets, including goodwill, or liabilities) or sales. During the first nine months of 2009, Berkshire acquired certain noncontrolling interests in subsidiaries that resulted in a reduction to shareholders’ equity attributable to Berkshire of approximately $118 million, representing the excess of consideration paid over the previously recorded balance sheet carrying amount of the acquired noncontrolling (minority) interests.
 
Effective April 1, 2009, Berkshire adopted guidance issued by the FASB in April 2009 relating to financial instruments.  The following three paragraphs further discuss this guidance, the adoption of which was not material to Berkshire’s Consolidated Financial Statements.
 
The FASB amended standards included in “ASC 320 Investments—Debt and Equity Securities” related to recognition, measurement and presentation for other-than-temporary impairments of debt securities and changed the disclosure requirements for both debt and equity securities. With respect to an investment in a debt security, an other-than-temporary impairment occurs if the investor (a) intends to sell the security before amortized cost is recovered, (b) will more likely than not be required to sell the security before amortized cost is recovered or (c) does not expect to ultimately recover the amortized cost basis even if it does not intend to sell the security. Under (a) and (b) the entire other-than-temporary impairment loss is recognized in earnings. Under (c) a credit loss is recognized in earnings to the extent that the present value of expected cash flows is less than the amortized cost basis and any difference between fair value and the amortized cost basis net of the credit loss is reflected in other comprehensive income net of applicable income taxes.
5
Notes To Consolidated Financial Statements (Continued)
 
Note 2.    Accounting pronouncements adopted in 2009 (Continued)
 
The FASB amended “ASC 820 Fair Value Measurements and Disclosures” to clarify that adjustments to quoted market prices may be required in illiquid or disorderly markets in order to estimate fair value and to provide guidance on the circumstances indicating whether markets are illiquid or disorderly. This amendment prescribes no specific methodology for making adjustments to quoted prices but rather confirms that different valuation techniques may be appropriate under the circumstances to determine the value that would be received to sell an asset or paid to transfer a liability in an orderly transaction.
 
The FASB also amended “ASC 825 Financial Instruments” to require publicly traded companies to make fair value disclosures of financial instruments in interim financial statements whether or not such instruments are carried in the financial statements at fair value. Previously, these disclosures were required only in annual financial statements. See Note 10.
 
In May 2009, the FASB amended “ASC 855 Subsequent Events” to set forth general accounting and disclosure requirements for events that occur subsequent to the balance sheet date but before the company’s financial statements are issued and is effective for the periods ending after June 15, 2009. Events that occurred subsequent to September 30, 2009 have been evaluated by Berkshire’s management through the time of filing this report on November 6, 2009.
 
Note 3.    Accounting pronouncements to be adopted
 
In June 2009, the FASB issued revised standards relating to securitizations and special-purpose entities.  The guidance eliminates the concept of a qualifying special-purpose entity (“QSPE”) and the exemption for QSPE’s from previous consolidation guidance and also modifies the derecognition criteria for transfers of financial assets.  The guidance includes new criteria for determining the primary beneficiary of variable interest entities and increases the frequency in which reassessments must be made to determine the primary beneficiary of such variable interest entities.  The guidance also requires additional disclosures and is effective for financial statements issued for fiscal periods beginning after November 15, 2009. Berkshire is currently evaluating the impact these changes in accounting standards will have on its consolidated financial statements.
 
In August 2009, the FASB issued Accounting Standards Update 2009-05, “Measuring Liabilities at Fair Value” (“ASU 2009-05”).  ASU 2009-05 provides guidance on valuing a liability when a quoted price in an active market is not available and is effective October 1, 2009. Berkshire does not anticipate that the adoption of ASU 2009-05 will have a material impact on its consolidated financial statements.
 
Note 4.    Business acquisitions
 
Berkshire’s long-held acquisition strategy is to purchase businesses with consistent earnings, good returns on equity, able and honest management and at sensible prices. On March 18, 2008, Berkshire acquired 60% of Marmon Holdings, Inc. (“Marmon”), a private company owned by trusts for the benefit of members of the Pritzker Family of Chicago, for $4.5 billion. In the second quarter of 2008, subsequent to this acquisition, Berkshire acquired additional shares of Marmon and currently owns 63.6%. Under the terms of the original purchase agreement, Berkshire will acquire the remaining interests in Marmon between 2011 and 2014 for consideration based on the future earnings of Marmon. Berkshire also acquired several other relatively small businesses during 2008. Consideration paid for all businesses acquired in the year ended December 31, 2008 (including Marmon) was approximately $6.1 billion.
 
Marmon consists of approximately 130 manufacturing and service businesses that operate independently within eleven diverse business sectors. These sectors are: Engineered Wire & Cable, serving energy related markets, residential and non-residential construction and other industries; Building Wire, producing copper electrical wiring for residential, commercial and industrial buildings; Transportation Services & Engineered Products, including railroad tank cars and intermodal tank containers; Highway Technologies, primarily serving the heavy-duty highway transportation industry; Distribution Services for specialty pipe and steel tubing; Flow Products, producing a variety of metal products and materials for the plumbing, HVAC/R, construction and industrial markets; Industrial Products, including metal fasteners, safety products and metal fabrication; Construction Services, providing the leasing and operation of mobile cranes primarily to the energy, mining and petrochemical markets; Water Treatment equipment for residential, commercial and industrial applications; Retail Store Fixtures, providing store fixtures and accessories for major retailers worldwide; and Food Service Equipment, providing food preparation equipment and shopping carts for restaurants and retailers worldwide. Marmon operates more than 250 manufacturing, distribution and service facilities, primarily in North America, Europe and China.
6
Notes To Consolidated Financial Statements (Continued)
 
Note 4.    Business acquisitions (Continued)
 
The results of operations for businesses acquired in 2008 are included in Berkshire’s consolidated results from the effective date of each acquisition. The following table sets forth certain unaudited pro forma consolidated earnings data for the first nine months of 2008 as if each acquisition occurring during 2008 was consummated on the same terms at the beginning of the year. Amounts are in millions, except earnings per share.
 
     
2008
  
 
Total revenues
   $ 84,601  
 
Net earnings attributable to Berkshire Hathaway
     4,961  
 
Earnings per equivalent Class A common share attributable to Berkshire Hathaway shareholders
     3,203  
 
Note 5.    Investments in fixed maturity securities
 
Investments in securities with fixed maturities as of September 30, 2009 and December 31, 2008 are shown below (in millions).

   
Amortized
    
Unrealized
    
Unrealized
    
Fair
  
   
Cost
    
Gains
    
Losses *
    
Value
  
September 30, 2009
                        
U.S. Treasury, U.S. government corporations and agencies
   $ 2,358     $ 59     $ —     $ 2,417  
States, municipalities and political subdivisions
     3,904       286       (1 )     4,189  
Foreign governments
     11,197       406       (34 )     11,569  
Corporate bonds
     13,473       1,897       (637 )     14,733  
Mortgage-backed securities
     4,130       342       (29 )     4,443  
    $ 35,062     $ 2,990     $ (701 )   $ 37,351  
                                 
Insurance and other
   $ 30,814     $ 2,420     $ (648 )   $ 32,586  
Finance and financial products
     4,248       570       (53 )     4,765  
    $ 35,062     $ 2,990     $ (701 )   $ 37,351  

December 31, 2008
                        
U.S. Treasury, U.S. government corporations and agencies
   $ 2,107     $ 123     $ (2 )   $ 2,228  
States, municipalities and political subdivisions
     4,504       242       (5 )     4,741  
Foreign governments
     9,106       343       (59 )     9,390  
Corporate bonds
     10,798       394       (1,568 )     9,624  
Mortgage-backed securities
     5,400       338       (89 )     5,649  
    $ 31,915     $ 1,440     $ (1,723 )   $ 31,632  
                                 
Insurance and other
   $ 27,618     $  1,151     $  (1,654 )   $  27,115  
Finance and financial products
     4,297       289       (69 )     4,517  
    $ 31,915     $ 1,440     $ (1,723 )   $ 31,632  
                                   
*
Includes unrealized losses of $659 million at September 30, 2009 and $176 million at December 31, 2008 related to securities that have been in an unrealized loss position for 12 months or more.
 
The amortized cost and estimated fair value of securities with fixed maturities at September 30, 2009 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.

         
Due after one
    
Due after five
                    
   
Due in one
    
year through
    
years through
    
Due after
    
Mortgage-backed
        
   
year or less
    
five years
    
ten years
    
ten years
    
securities
    
Total
  
Amortized cost
   $ 4,507     $ 16,246     $ 6,532     $ 3,647     $ 4,130     $ 35,062  
Fair value
     4,632       17,101       6,854       4,321       4,443       37,351  
7
Notes To Consolidated Financial Statements (Continued)
 
Note 6.    Investments in equity securities
 
Investments in equity securities as of September 30, 2009 and December 31, 2008 are summarized below (in millions).
 
         
Unrealized
    
Unrealized
    
Fair
  
   
Cost Basis
    
Gains
    
Losses
    
Value
  
September 30, 2009
                        
American Express Company
   $ 1,287     $ 3,853     $ —     $ 5,140  
The Coca-Cola Company
     1,299       9,441       —       10,740  
ConocoPhillips
     2,249       345       —       2,594  
Johnson & Johnson
     2,322       70       (60 )     2,332  
Kraft Foods Inc.
     4,330       —       (908 )     3,422  
The Procter & Gamble Company
     5,484       3       (162 )     5,325  
Wells Fargo & Company
     7,194       2,878       (843 )     9,229  
Other
     14,758       5,458       (1,591 )     18,625  
    $ 38,923     $ 22,048     $ (3,564 )   $ 57,407  
Insurance and other
   $ 38,255     $ 20,393     $ (3,564 )   $ 55,084  
Finance and financial products *
     436       33       —       469  
Utilities and energy *
     232       1,622       —       1,854  
    $ 38,923     $ 22,048     $ (3,564 )   $ 57,407  
December 31, 2008
                                
American Express Company
   $ 1,287     $ 1,525     $ —     $ 2,812  
The Coca-Cola Company
     1,299       7,755       —       9,054  
ConocoPhillips
     6,820       —       (2,422 )     4,398  
Johnson & Johnson
     1,847       24       (76 )     1,795  
Kraft Foods Inc.
     4,330       —       (832 )     3,498  
The Procter & Gamble Company
     5,484       200       —       5,684  
Wells Fargo & Company
     6,703       2,850       (580 )     8,973  
Other
     12,370       2,428       (1,939 )     12,859  
    $ 40,140     $ 14,782     $ (5,849 )   $ 49,073  
                                   
*
Included in Other assets.
 
Berkshire uses no bright-line test in determining whether impairments are temporary or other-than-temporary. Berkshire considers several factors in determining other-than-temporary impairment losses including the current and expected long-term business prospects of the issuer, the length of time and relative magnitude of the price decline and its ability and intent to hold the investment until the price recovers.
 
Unrealized losses at September 30, 2009 included $575 million related to securities that have been in an unrealized loss position for 12 months or more. Approximately 90% of the gross unrealized losses at September 30, 2009 were concentrated in six issuers. Unrealized losses generally ranged from 3% to 40% of cost. In management’s judgment, the future earnings potential and underlying business economics of these companies are favorable and Berkshire possesses the ability and intent to hold these securities until their prices recover.  Changing market conditions and other facts and circumstances may change the business prospects of these issuers as well as Berkshire’s ability and intent to hold these securities until the prices recover.  Accordingly, other-than-temporary impairment charges may be recorded in future periods with respect to one or more of these securities.
 
Note 7.    Other Investments
 
A summary of other investments as of September 30, 2009 and December 31, 2008 follows (in millions).

   
Cost
    
Unrealized
Gains
    
Fair
Value
    
Carrying
Value
  
September 30, 2009
                        
Fixed maturity and equity
   $ 20,089     $ 6,198     $ 26,287     $ 25,451  
Equity method
     5,851       278       6,129       6,476  
    $ 25,940     $ 6,476     $ 32,416     $ 31,927  
                                 
December 31, 2008
                                
Fixed maturity and equity
   $ 14,452     $ 36     $ 14,488     $ 14,675  
Equity method
     5,919       352       6,271       6,860  
    $ 20,371     $ 388     $ 20,759     $ 21,535  
8
Notes To Consolidated Financial Statements (Continued)
 
Note 7.    Other Investments (Continued)
 
Fixed maturity and equity investments in the preceding table include Berkshire’s investments in The Goldman Sachs Group, Inc. (“GS”), The General Electric Company (“GE”) and the Wm. Wrigley Jr. Company (“Wrigley”), which were acquired in the fourth quarter of 2008. In 2009, investments were also made in the Swiss Reinsurance Company Limited (“Swiss Re”) and The Dow Chemical Company (“Dow”).  Additional information regarding these investments follows.
 
Berkshire owns 50,000 shares of 10% Cumulative Perpetual Preferred Stock of GS (“GS Preferred”) and Warrants to purchase 43,478,260 shares of common stock of GS (“GS Warrants”) which were acquired for a combined cost of $5 billion. The GS Preferred may be redeemed at any time by GS at a price of $110,000 per share ($5.5 billion in aggregate). The GS Warrants expire in 2013 and can be exercised for an additional aggregate cost of $5 billion ($115/share). Berkshire also owns 30,000 shares of 10% Cumulative Perpetual Preferred Stock of GE (“GE Preferred”) and Warrants to purchase 134,831,460 shares of common stock of GE (“GE Warrants”) which were acquired for a combined cost of $3 billion. The GE Preferred may be redeemed beginning in October 2011 by GE at a price of $110,000 per share ($3.3 billion in aggregate). The GE Warrants expire in 2013 and can be exercised for an additional aggregate cost of $3 billion ($22.25/share).
 
Berkshire owns $4.4 billion par amount of 11.45% subordinated notes due 2018 of Wrigley (“Wrigley Notes”) and $2.1 billion of 5% preferred stock of Wrigley (“Wrigley Preferred”). The Wrigley Notes and Wrigley Preferred were acquired in connection with Mars, Incorporated’s acquisition of Wrigley.
 
On March 23, 2009, Berkshire acquired a 12% convertible perpetual capital instrument issued by Swiss Re at a cost of 3 billion Swiss Francs (“CHF”), which is also the face amount of the instrument. The instrument has no maturity or mandatory redemption date but can be redeemed under certain conditions at the option of Swiss Re at 140% of the face amount until March 23, 2011 and thereafter at 120% of the face amount. The instrument possesses no voting rights and is subordinated to senior securities of Swiss Re as defined in the agreement. Beginning March 23, 2012, the instrument can be converted at Berkshire’s option into 120,000,000 common shares of Swiss Re (a rate of 25 CHF per share of Swiss Re common stock).
 
On April 1, 2009, Berkshire acquired 3,000,000 shares of Series A Cumulative Convertible Perpetual Preferred Stock of Dow (“Dow Preferred”) for a cost of $3 billion. The Dow Preferred was issued in connection with Dow’s acquisition of the Rohm and Haas Company. Under certain conditions, each share of the Dow Preferred is convertible into 24.201 shares of Dow common stock. Beginning in April 2014, if the Dow common stock price exceeds $53.72 per share for any 20 trading days in a consecutive 30-day window, Dow, at its option, at any time, in whole or in part, may convert the Dow Preferred into Dow common stock at the then applicable conversion rate. The Dow Preferred is entitled to dividends at a rate of 8.5% per annum.
 
As of December 31, 2008, equity method investments included Burlington Northern Santa Fe Corporation (“BNSF”) and Moody’s Corporation (“Moody’s”). During the fourth quarter of 2008, Berkshire’s investment in each of these companies exceeded 20%. Accordingly, Berkshire adopted the equity method of accounting with respect to these investments as of December 31, 2008. Prior to December 31, 2008, the BNSF and Moody’s investments were accounted for as available-for-sale equity securities recorded in the financial statements at fair value. The cumulative effect of adopting the equity method with respect to the investments in BNSF and Moody’s was recorded in the financial statements as of December 31, 2008. Prior years’ financial statements were not restated due to immateriality.
 
As of September 30, 2009, Berkshire owned 22.6% of BNSF’s outstanding common stock. See Note 20 for additional information regarding Berkshire’s investment in BNSF. During the third quarter of 2009, Berkshire sold shares of Moody’s common stock, which reduced its ownership interest to about 16.6% as of September 30.  As a result, Berkshire discontinued the use of the equity method with respect to its investment in Moody’s as of the beginning of the third quarter of 2009.  As of September 30, 2009, Berkshire’s remaining investment in Moody’s common stock is carried at fair value and is included as a component of investments in equity securities in the Consolidated Balance Sheet.  This change did not have a material impact on Berkshire’s Consolidated Financial Statements.
 
Note 8.    Investment gains/losses
 
Investment gains/losses are summarized below (in millions).
 
   
Third Quarter
    
First Nine Months
  
    2009     2008     2009     2008  
Fixed maturity securities:
                        
Gross gains from sales and other disposals
   $ 44     $ 46     $ 216     $ 152  
Gross losses from sales and other disposals
     (8 )     (4 )     (17 )     (5 )
Equity securities:
                                
Gross gains from sales
     94       9       189       686  
Gross losses from sales
     (7 )     (100 )     (566 )     (104 )
Other
     (13 )     3       (79 )     15  
    $ 110     $ (46 )   $ (257 )   $ 744  
9
Notes To Consolidated Financial Statements (Continued)
 
Note 8.    Investment gains/losses (Continued)
 
Net investment gains/losses are reflected in the Consolidated Statements of Earnings as follows (in millions).
 
   
Third Quarter
    
First Nine Months
  
   
2009
    
2008
    
2009
    
2008
  
Insurance and other
   $ 115     $ (48 )   $ (314 )   $ 738  
Finance and financial products
     (5 )     2       57       6  
    $ 110     $ (46 )   $ (257 )   $ 744  
 
Note 9.    Derivative contracts of finance and financial products businesses
 
Derivative contracts of Berkshire’s finance and financial products businesses, with limited exceptions, are not designated as hedges for financial reporting purposes. These contracts were initially entered into with the expectation that the premiums received would exceed the amounts ultimately paid to counterparties. Changes in the fair values of such contracts are reported in earnings as derivative gains/losses. A summary of derivative contracts outstanding as of September 30, 2009 and December 31, 2008 follows (in millions).
 
   
September 30, 2009
    
December 31, 2008
  
   
Assets (3)
    
Liabilities
    
Notional
Value
    
Assets (3)
    
Liabilities
    
Notional
Value
  
Equity index put options
   $ —     $ 8,012     $ 38,592 (1)   $ —     $ 10,022     $ 37,134 (1)
Credit default obligations:
                                                
High yield indexes
     —       1,213       5,855 (2)     —       3,031       7,892 (2)
States/municipalities
     —       657       16,042 (2)     —       958       18,364 (2)
Individual corporate
     11       —       3,690 (2)     —       105       3,900 (2)
Other
     449       500               503       528          
Counterparty netting and funds held as collateral
     (238 )     (30 )             (295 )     (32 )        
    $ 222     $ 10,352             $ 208     $ 14,612          
                                                   
(1)
Represents the aggregate undiscounted amount payable at the contract expiration dates assuming that the value of each index is zero at the contract expiration date.
 
(2)
Represents the maximum undiscounted future value of losses payable under the contracts, assuming a sufficient number of credit defaults occur. The number of losses required to exhaust contract limits under substantially all of the contracts is dependent on the loss recovery rate related to the specific obligor at the time of the default.
 
(3)
Included in Other assets of finance and financial products businesses.
 
A summary of derivative gains/losses included in the Consolidated Statements of Earnings are as follows (in millions).
 
   
Third Quarter
    
First Nine Months
  
    2009     2008    
2009
     2008  
Equity index put options
   $ 220     $ (880 )   $ 2,010     $ (1,731 )
Credit default obligations
     1,443       (342 )     483       (478 )
Other
     69       (39 )     79       (4 )
    $ 1,732     $ (1,261 )   $ 2,572     $ (2,213 )
 
Berkshire has written equity index put option contracts on four major equity indexes including three indexes outside of the United States. These contracts are European style options and will be settled on the contract expiration dates, which occur between June 2018 and January 2028. Future payments, if any, under these contracts will be required if the underlying index value is below the strike price at the contract expiration dates. Premiums on these contracts were received in full at the contract inception dates and therefore Berkshire has no counterparty credit risk.
 
At September 30, 2009, the aggregate intrinsic value (the undiscounted liability assuming the contracts are settled on their future expiration dates based on the September 30, 2009 index values) was approximately $6.3 billion. Aggregate intrinsic value was approximately $9.3 billion at June 30, 2009 and $10.8 billion as of December 31, 2008.  However, these contracts may not be terminated or fully settled before the expiration dates and therefore the ultimate amount of cash basis gains or losses on these contracts will not be known for many years.
10
Notes To Consolidated Financial Statements (Continued)
 
Note 9.    Derivative contracts of finance and financial products businesses (Continued)
 
In 2009, Berkshire agreed with certain counterparties to amend six equity index put option contracts.  The amendments reduced the related contract expiration dates between 3.5 and 9.5 years.  Also, the amendments reduced the strike prices of those contracts between 29% and 39%.  In addition, the aggregate notional value related to three of the amended contracts increased by approximately $161 million.  No consideration was paid by either party with respect to these amendments. Other changes in notional amounts occur from quarter to quarter because of foreign exchange fluctuations.  The remaining weighted average life of all contracts was approximately 12 years at September 30, 2009.
 
Credit default contracts include various high yield indexes, state/municipal debt issuers and individual corporate issuers. These contracts cover the loss in value of specified debt obligations of the issuers arising from default events, which are usually for non-payment or bankruptcy. Loss amounts are subject to contract limits.
 
High yield indexes are comprised of specified North American corporate issuers (usually 100 in number) whose obligations are rated below investment grade. The weighted average contract life on these contracts at September 30, 2009 was approximately 2 years. State and municipality contracts are comprised of over 500 state and municipality issuers. The weighted average contract life at September 30, 2009 was approximately 11 years. Potential obligations related to approximately 50% of the notional amount of the state and municipality contracts cannot be settled before the maturity dates of the underlying obligations, which range from 2019 to 2054.
 
Premiums on the high yield index and state/municipality contracts were received in full at the inception dates of the contracts and, as a result, Berkshire has no counterparty credit risk. Berkshire’s payment obligations under certain of these contracts are on a first loss basis. Several other contracts are subject to aggregate loss deductibles that must be satisfied before Berkshire has any payment obligations.
 
Credit default contracts written on individual corporate issuers primarily relate to investment grade obligations. Installment premiums are due from counterparties over the terms of the contracts. In most instances, premiums are due from counterparties on a quarterly basis. Most of the in-force individual corporate issuer contracts expire in 2013.
 
With limited exceptions, Berkshire’s equity index put option and credit default contracts contain no collateral posting requirements with respect to changes in either the fair value or intrinsic value of the contracts and/or a downgrade of Berkshire’s credit ratings. Under certain conditions, a few contracts require that Berkshire post collateral. As of September 30, 2009, Berkshire’s collateral posting requirement under such contracts was approximately $50 million compared to about $650 million at June 30, 2009. If Berkshire’s credit ratings are downgraded, as much as an additional $1.1 billion could be required to be posted as collateral in addition to the amounts otherwise required depending on the degree of the downgrade.
 
Note 10.    Fair value measurements
 
The fair values of Berkshire’s financial assets and liabilities as of September 30, 2009 and December 31, 2008 are shown in the following table (in millions). The carrying values of cash and cash equivalents, accounts receivable, accounts payable, accruals and other liabilities are deemed to be reasonable estimates of their fair values.
 
    Carrying Value     Fair Value  
    Sept. 30, 2009     Dec. 31, 2008     Sept. 30, 2009     Dec. 31, 2008  
Insurance and other:
                        
Investments in fixed maturity securities
   $ 32,586     $ 27,115     $ 32,586     $ 27,115  
Investments in equity securities
     55,084       49,073       55,084       49,073  
Other investments
     31,927       21,535       32,416       20,759  
Notes payable and other borrowings
     3,815       4,349       3,824       4,300  
Finance and financial products:
                                
Investments in fixed maturity securities
     4,765       4,517       4,765       4,517  
Investments in equity securities (1)     469       —       469       —  
Derivative contract assets (1)
     222       208       222       208  
Loans and finance receivables
     13,514       13,942       13,549       14,016  
Notes payable and other borrowings
     14,642       13,388       15,366       13,820  
Derivative contract liabilities
     10,352       14,612       10,352       14,612  
Utilities and energy:
                                
Investments in equity securities (1)     1,854       —       1,854       —  
Derivative contract assets (1)
     199       324       199       324  
Notes payable and other borrowings
     19,564       19,145       21,360       19,144  
Derivative contract liabilities (2)
     533       729       533       729  
                                   
(1)
Included in Other assets
 
(2)
Included in Accounts payable, accruals and other liabilities
11
Notes To Consolidated Financial Statements (Continued)
 
Note 10.    Fair value measurements (Continued)
 
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. Fair value measurements assume the asset or liability is exchanged in an orderly manner; the exchange is in the principal market for that asset or liability (or in the most advantageous market when no principal market exists); and the market participants are independent, knowledgeable, able and willing to transact an exchange.
 
Fair values for substantially all of Berkshire’s financial instruments were measured using market or income approaches. Considerable judgment may be 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 an actual current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value.
 
A hierarchy for measuring fair value consists of Levels 1 through 3.
 
Level 1 – Inputs represent unadjusted quoted prices for identical assets or liabilities exchanged in active markets. Substantially all of Berkshire’s equity investments are traded on an exchange in active markets and fair value is based on the closing prices as of the balance sheet date.
 
Level 2 – Inputs include directly or indirectly observable inputs (other than Level 1 inputs) such as quoted prices for similar assets or liabilities exchanged in active or inactive markets; quoted prices for identical assets or liabilities exchanged in inactive markets; other inputs that may be considered in fair value determinations of the assets or liabilities, such as interest rates and yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates; and inputs that are derived principally from or corroborated by observable market data by correlation or other means. Fair values for Berkshire’s investments in fixed maturity securities are primarily based on market prices and market data available for instruments with similar characteristics since active markets are not common for many instruments. Pricing evaluations are based on yield curves for instruments with similar characteristics, such as credit rating, estimated duration, and yields for other instruments of the issuer or entities in the same industry sector.
 
Level 3 – Inputs include unobservable inputs used in the measurement of assets and liabilities. Management is required to use its own assumptions regarding unobservable inputs because there is little, if any, market activity in the assets or liabilities or related observable inputs that can be corroborated at the measurement date. Unobservable inputs require management to make certain projections and assumptions about the information that would be used by market participants in pricing assets or liabilities. Measurements of non-exchange traded derivative contracts and certain other investments carried at fair value are based primarily on valuation models, discounted cash flow models or other valuation techniques that are believed to be used by market participants. Berkshire values its equity index put option contracts based on the Black-Scholes option valuation model which Berkshire believes is widely used by market participants. Credit default contracts are primarily valued based on indications of bid or offer data as of the balance sheet date. These contracts are not exchange traded and certain of the terms of Berkshire’s contracts are not standard in derivatives markets. For example, Berkshire is not required to post collateral under most of its contracts. For these reasons, Berkshire has classified these contracts as Level 3.
12
Notes To Consolidated Financial Statements (Continued)
 
Note 10.    Fair value measurements (Continued)
 
Financial assets and liabilities measured and carried at fair value on a recurring basis in the financial statements as of September 30, 2009 and December 31, 2008 are summarized according to the hierarchy previously described as follows (in millions).
 
September 30, 2009
  
Total
Fair Value
    
Quoted
Prices
(Level 1)
    
Significant Other
Observable Inputs
(Level 2)
    
Significant
Unobservable Inputs
(Level 3)
  
Insurance and other:
                        
Investments in fixed maturity securities
   $ 32,586     $ 5,346     $ 26,660     $ 580  
Investments in equity securities
     55,084       54,654       89       341  
Other investments
     18,999       —       —       18,999  
Finance and financial products:
                                
Investments in fixed maturity securities
     4,765       —       4,360       405  
Investments in equity securities
     469       469       —       —  
Net derivative contract liabilities
     10,130       —       248       9,882  
Utilities and energy:
                                
Investments in equity securities
     1,854       1,854       —       —  
Net derivative contract (assets)/liabilities
     334       7       (6 )     333  
                                 
December 31, 2008
                                
Insurance and other:
                                
Investments in fixed maturity securities
   $ 27,115     $ 4,961     $ 21,650     $ 504  
Investments in equity securities
     49,073       48,666       79       328  
Other investments
     8,223       —       —       8,223  
Finance and financial products:
                                
Investments in fixed maturity securities
     4,517       —       4,382       135  
Net derivative contract liabilities
     14,404       —       288       14,116  
Utilities and energy:
                                
Net derivative contract liabilities
     405       —       2       403  
 
Reconciliations of assets and liabilities measured and carried at fair value on a recurring basis with the use of significant unobservable inputs (Level 3) for the first nine months of 2009 and 2008 follow (in millions).
 
   
Investments
in fixed
maturity
securities
    
Investments
in equity
securities
    
Other
investments
    
Net
derivative
contract
liabilities
  
Balance at January 1, 2009
   $ 639     $ 328     $ 8,223     $ (14,519 )
Gains (losses) included in:
                                
Earnings *
     1       —       —       2,584  
Other comprehensive income
     54       15       5,139       (1 )
Regulatory assets and liabilities
     —       —       —       67  
Purchases, sales, issuances and settlements
     291       (1 )     5,637       1,677  
Transfers into (out of) Level 3
     —       (1 )     —       (23 )
Balance at September 30, 2009
   $ 985     $ 341     $ 18,999     $ (10,215 )
                                   
*
Gains and losses related to changes in valuations are included in the Consolidated Statements of Earnings as components of investment gains/losses, derivative gains/losses or other revenues as appropriate. Substantially all of the gains included in earnings were related to derivative contract liabilities outstanding as of September 30, 2009.
13
Notes To Consolidated Financial Statements (Continued)
 
Note 10.    Fair value measurements (Continued)
 
   
Investments
in fixed
maturity
securities
    
Investments
in equity
securities
    
Net
derivative
contract
liabilities
  
Balance at January 1, 2008
   $ 393     $ 356     $ (6,784 )
Gains (losses) included in:
                        
Earnings *
     9       —       (2,193 )
Other comprehensive income
     (15 )     (33 )     1  
Regulatory assets and liabilities
     —       —       (66 )
Purchases, sales, issuances and settlements
     (33 )     —       (578 )
Transfers into Level 3
     5       —       —  
Balance at September 30, 2008
   $ 359     $ 323     $ (9,620 )
                           
*
Gains and losses related to changes in valuations are included in the Consolidated Statements of Earnings as components of investment gains/losses, derivative gains/losses or other revenues as appropriate. Substantially all of the losses included in earnings were related to derivative contract liabilities outstanding as of September 30, 2008.
 
Note 11.    Receivables
 
Receivables of insurance and other businesses are comprised of the following (in millions).
 
   
September 30,
2009
    
December 31,
2008
  
Insurance premiums receivable
   $ 5,933     $ 4,961  
Reinsurance recoverables
     3,177       3,235  
Trade and other receivables
     7,400       7,141  
Allowances for uncollectible accounts
     (463 )     (412 )
    $ 16,047     $ 14,925  
 
Loans and finance receivables of finance and financial products businesses are comprised of the following (in millions).