Saturday, November 8, 2008
Berkshire Q3 08
--NI $1.057 bil vs $4.553 bil Q3 07 --factors a.Investment gains/losses under insurance (equity options) -0.298 bil vs $3 bil Q3 07 b.Derivative gains/losses: (1.261 ) bil vs (.122 ) bil Q3 07 --CDS contract is is not a major concern --Notional amount is $10.78 bil. Fair value (liability) of the contacts 2.525 bil --potential loss is another 5 bil. Note 5. Derivative contracts of finance and financial products businesses --Equity option derivative --notional amount 37 bil vs fair value (liability) 6.725 bil --this might be an drag if equtiy market is further down. Note 5. Derivative contracts of finance and financial products businesses http://www.sec.gov/Archives/edgar/data/1067983/000095015008000030/v50391e10vq.htm Investment and Derivative Gains/Losses (Continued) Investment gains or losses are recognized upon the sales of investments, recognition of non-cash other-than-temporary-impairment losses or as otherwise required under GAAP. The timing of realized gains or losses from sales can have a material effect on periodic earnings. However, such gains or losses usually have little, if any, impact on total shareholders’ equity because most equity and fixed maturity investments are carried at fair value with the unrealized gain or loss included as a component of accumulated other comprehensive income. Other-than-temporary-impairment losses of $250 million and $679 million were recognized in the third quarter and first nine months of 2008, respectively. Impairment losses in 2007 periods were insignificant. Derivative gains and losses in the preceding table primarily represent the non-cash (or unrealized) changes in fair value of credit default and equity index put option contracts. Berkshire’s credit default contract exposures are primarily in various “high-yield” indexes comprised of specified corporate issuers in North America whose obligations are rated below investment grade. These contracts generally cover the loss in value of senior unsecured debt obligations of those entities in the event of default for non-payment or bankruptcy over the contract period (usually 5 years). Losses under these contracts are limited to specified amounts per issuer, as well as aggregate limits for all losses under the contract. The premiums due from the counterparties are received at the inception date and, therefore, Berkshire has no credit exposure for unpaid premiums. None of Berkshire’s high-yield credit default contracts involve direct exposure to mortgage or asset backed loan structures, including collateralized debt obligations. During 2008, Berkshire also entered into credit default contracts on individual issuers in North America whose obligations are primarily rated as investment grade and where installment premiums are due from counterparties over the terms of the contracts. Most of these contracts expire in 2013 and certain of the contracts relate to obligations of large financial institutions. Berkshire’s equity index put option contracts relate to four major equity indexes, including three outside of the United States. Berkshire’s equity index put option contracts are European style options and at inception had durations of 15-20 years. At September 30, 2008, the weighted average remaining life of these contracts was approximately 13.5 years. Any future loss payments under the equity index put option contracts will be based on the net decline in the underlying index below the strike price in each contract. Berkshire has no obligation to purchase the underlying equity securities comprising the indexes. The aforementioned credit default and equity index put option contracts are not traded on an exchange. The contracts were entered into with the expectation that amounts ultimately paid to counterparties for actual credit defaults or declines in equity index values (measured at the expiration date of the contract) will be less than the premiums received. The contracts generally may not be terminated or fully settled before the expiration dates and therefore the ultimate amount of cash basis gains or losses may not be known for years.