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Author: jmls Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 214656  
Subject: Re: BRK's Income Statement Date: 1/29/2002 1:12 PM
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Dear jimmy,

I'm a Berkshire fan, but unfortunately this company does have somewhat convoluted financial statements. There are definitely simpler companies to study (e.g. just about any retailer's statements are more straightforward).

Anyways, here goes:

Insurance losses and loss adjustment expenses

Say I'm an auto insurer. My business involves taking in annual premiums (the auto premium) and paying out claims. In insurance-speak, a claim payout is a "loss". A "loss adjustment expense" may involve sending out a claims adjuster to figure out the extent of damage.

Note that the income statement loss may only be an estimate, which may have to be adjusted in the future. Paying money to replace a car is relatively straightforward; the car is totalled, so the insurer coughs up a check for $10K or whatever. But what if the insured develops whiplash? Then he/she may have to go for tests, need further long-term medical care etc. Since it is hard to predict how much the ultimate cost may be, there may necessarily some amount of estimation here.

Insurance underwriting expenses

An "underwriter" is the person who evaluates individual risks and can sign up customers.

Minority interest

A few of Berkshire's subsidiaries have someone, usually the founding family/entrepreneur, personally own a chunk. They would then be owed their fraction of the income from that company, this is the "minority interest" (i.e. what is owed to the minority owner)

Losses and loss adjustment expense

The balance sheet entry represents unpaid losses and loss adjustment expenses. This may include the long-term liabilities earlier mentioned (continuing medical care for the insured for whiplash), and the amounts may not be known.

Unearned premiums

If I sell $100 worth of insurance premiums, and the policy is for 1 year, I am only allowed to call the $100 revenue when the policy is expired; after all, I haven't really provided the service (coverage for the full year) until the policy expired. The remaining part is "unearned premiums". For example, let's say we're 9 months through the $100 policy. The insurer can recognize 9/12*100 = $75 as insurance revenue (= "earned premiums"), and the remaining 3/12*100 = $25 is "unearned premiums".

Note the same situation occurs for other types of businesses. For example, normally one pays for one year's magazine subscription in advance; the magazine publisher can only recognize the full revenue amount after all magazines are delivered.

Income taxes, principally deferred

Berkshire has huge holdings of publically traded companies, which have subsequently increased in value. For example, Berkshire bought $1.3 billion worth of Coke shares, which as of Dec. 31/00 were worth $12.2 billion. Berkshire owes taxes on the $10.9 billion worth of capital gains, but only when Berkshire chooses to sell its Coke share. Hence this leads to a lot of deferred income taxes.

Minority shareholders' interests

The income statement "minority interest" is the amount of income owing for their part of different businesses. The balance sheet entry is the fraction of equity which they own.

Finance business trading activities

Berkshire's financial business engages in a bunch of things including selling swaps. This may involve buying or selling short-term securities.

Best,

Lleweilun Smith
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