Berkshire Hathaway (NYSE: BRKa, NYSE: BRKb) is a company headquartered in Omaha, Nebraska, USA, that oversees and manages a number of subsidiary companies. Berkshire Hathaway's core business is insurance, including underwriting of property and casualty insurance, reinsurance and specialty nonstandard insurance.

The company is controlled by Warren Buffett, who is one of the most celebrated investors in history and is currently the second richest man in the world according to Forbes magazine. Buffett has used the "float" provided by Berkshire Hathaway's insurance operations (a policyholder's money which it holds temporarily and is allowed to invest for its own profit) to finance his investment schemes. In the early part of his career at Berkshire these focused on long term investments in publicly quoted stocks, but more recently Berkshire has purchased a diverse range of non-insurance businesses including candy production and sales at retail, newspaper publishing, retailing of home furnishings, sales of encyclopedias, sales of home cleaning units, manufacture and distribution of uniforms, retail jewelry, and manufacture, import and distribution of footwear.

The Company averaged a phenomenal 25%+ annual return to its shareholders for the last 25 years while employing large amounts of capital. Berkshire has identified utility as its next big area of investment. In 2005, Public Utility Holding Company Act of 1935 was repealed; this allowed utility investors such as Berkshire to have more control over their investments.

History

The Hathaway Manufacturing Company was founded in 1888 by Horatio Hathaway, as a cotton milling business. The company was successful in its first decades, but suffered during a general decline in the textile industry after World War I. At this time, the company was run by Seabury Stanton, whose investment and effort were rewarded with renewed profitability after the Depression.

In the 1950s, Hathaway merged with Berkshire Fine Spinning Associates, another textile company which had been in operation since the early 19th century. Berkshire Hathaway now had 15 plants employing over 12,000 workers with over $120 million in revenue, and was headquartered in New Bedford, Massachusetts. However, seven of those locations were closed by the end of the decade, accompanied by large layoffs.

In 1962, Warren Buffett, convinced that it was trading at less than its real value, began buying stock in Berkshire Hathaway. After some clashes with the Stanton family, he bought up enough shares to change the management, and soon controlled the company.

Buffett maintained BH's core business of textile milling, but by 1967 was expanding into the insurance industry and other investments. Berkshire first ventured into the insurance business with the purchase of National Indemnity Company. In the late 1970s, Berkshire acquired an equity stake in the Government Employees Insurance Company (GEICO), which forms the core of its insurance operations today (and is a major source of capital for BH's other investments). In 1985, the last textile operations (BH's historic core) were shut down.

Berkshire Facts

The Intrinsivaluator site, calculates four valuation metrics for Berkshire, giving estimates from a liquidation value of $83,162 per A share ($2,772 per B share) to an optimistic intrinsic value of $160,800 per A share ($5,360 per B share). All figures as of March 5, 2006.

Berkshire's CEO, Warren Buffett, is respected for his investment prowess and his deep understanding of a wide spectrum of businesses. His annual chairman letters are read and quoted widely. A source of his quotes can be found at Wikiquote - Warren Buffett

As of 2005, Buffett owns 38% of Berkshire Hathaway. Berkshire's Vice-Chairman Charlie Munger also holds a stake big enough for him to be considered a billionaire in his own right.

Berkshire Hathaway is notable in that it never allows its shares to split. Each share is thus worth tens of thousands of dollars. However, Berkshire Hathaway has created a Class B stock, with a price set to 1/30 of that of the original shares (now Class A) but 1/200 of the per-share voting rights. Holders of Class A stock are allowed to convert their stock to Class B, though not vice versa.

Buffett was reluctant to create the Class B shares, but did so to thwart the creation of unit trusts that would have marketed themselves as Berkshire look-alikes. As Buffett said in his 1995 shareholder letter:

"The unit trusts that have recently surfaced fly in the face of these goals. They would be sold by brokers working for big commissions, would impose other burdensome costs on their shareholders, and would be marketed en masse to unsophisticated buyers, apt to be seduced by our past record and beguiled by the publicity Berkshire and I have received in recent years. The sure outcome: a multitude of investors destined to be disappointed."

Corporate governance

Current members of the board of directors of Berkshire Hathaway are: Howard Graham Buffett, Warren Buffett, Malcolm Chace, Bill Gates, David Gottesman, Charlotte Guyman, Donald Keough, Charlie Munger, Thomas S. Murphy, Ronald Olson, and Walter Scott Jr.

Financials

Source: SEC filings

• Cash and cash equivalents at September 30, 2005: $41.1 billion USD
• Equity investments at September 30, 2005: $45.3 billion USD
• Total shareholders’ equity at September 30, 2005: $89.5 billion USD
• Revenue for 2004: $74.4 billion USD
• Net earnings for 2004: $7.3 billion USD
• Income taxes paid in 2004: $3.6 billion USD

Berkshire Hathaway businesses

Insurance and reinsurance businesses

Insurance and reinsurance business activities are conducted through more than 50 domestic and foreign-based insurance companies. Berkshire’s insurance businesses provide insurance and reinsurance of property and casualty risks primarily in the United States. In addition, as a result of the General Re acquisition in December 1998, Berkshire’s insurance businesses also include life, accident and health reinsurers, as well as internationally-based property and casualty reinsurers.

Berkshire’s insurance companies maintain capital strength at exceptionally high levels. This strength differentiates Berkshire’s insurance companies from their competitors. Collectively, the aggregate statutory surplus of Berkshire’s U.S. based insurers was approximately $48 billion at December 31, 2004. All of Berkshire’s major insurance subsidiaries are rated AAA by Standard & Poor’s Corporation, the highest Financial Strength Rating assigned by Standard & Poor’s, and are rated A++ (superior) by A.M. Best with respect to their financial condition and operating performance. This Triple-A status is the result of Buffett's astuteness in the management of capital, people and business.

• GEICO — Berkshire acquired GEICO in January 1996. GEICO is headquartered in Chevy Chase, Maryland and its principal insurance subsidiaries include: Government Employees Insurance Company, GEICO General Insurance Company, GEICO Indemnity Company, and GEICO Casualty Company. Over the past five years, these companies have offered primarily private passenger automobile insurance to individuals in 49 states and the District of Columbia. The subsidiaries market their policies primarily through direct response methods, in which applications for insurance are submitted directly to the companies by telephone, through the mail, or via the Internet.

• General Re — Berkshire acquired General Re in December 1998. General Re held a 91% ownership interest in Cologne Re as of December 31, 2004. General Re subsidiaries currently conduct global reinsurance business in approximately 72 cities and provide reinsurance coverage worldwide. General Re operates the following reinsurance businesses: North American property/casualty, international property/casualty, which principally consists of Cologne Re and the Faraday operations, and life/health reinsurance. General Re’s reinsurance operations are primarily based in Stamford, Connecticut and Cologne, Germany. General Re is one of the largest reinsurers in the world based on net premiums written and capital.