Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Net earnings attributable to Berkshire Hathaway shareholders are disaggregated in the table that follows. Amounts are after
deducting income taxes and exclude earnings attributable to noncontrolling interests (in millions).
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
|
2017
|
|
|
2016
|
|
Insurance underwriting
|
|
$
|
(267
|
)
|
|
$
|
213
|
|
Insurance investment income
|
|
|
908
|
|
|
|
919
|
|
Railroad
|
|
|
838
|
|
|
|
784
|
|
Utilities and energy
|
|
|
501
|
|
|
|
441
|
|
Manufacturing, service and retailing
|
|
|
1,317
|
|
|
|
1,266
|
|
Finance and financial products
|
|
|
303
|
|
|
|
311
|
|
Investment and derivative gains/losses
|
|
|
504
|
|
|
|
1,852
|
|
Other
|
|
|
(44
|
)
|
|
|
(197
|
)
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to Berkshire Hathaway shareholders
|
|
$
|
4,060
|
|
|
$
|
5,589
|
|
|
|
|
|
|
|
|
|
|
Through our subsidiaries, we engage in a number of diverse business activities. We manage our
operating businesses on an unusually decentralized basis. There are essentially no centralized or integrated business functions (such as sales, marketing, purchasing, legal or human resources) and there is minimal involvement by our corporate
headquarters in the day-to-day business activities of the operating businesses. Our senior corporate management team participates in and is ultimately responsible for significant capital allocation decisions, investment activities and the selection
of the Chief Executive to head each of the operating businesses. It also is responsible for establishing and monitoring Berkshires corporate governance practices, including, but not limited to, communicating the appropriate tone at the
top messages to employees and associates, monitoring governance efforts, including those at the operating businesses, and participating in the resolution of governance-related issues as needed. The business segment data (Note 22 to the
accompanying Consolidated Financial Statements) should be read in conjunction with this discussion.
Our insurance
businesses generated an after-tax loss from underwriting in the first quarter of 2017 due primarily to increased loss estimates for prior years loss events, higher losses from current year catastrophe events and increased deferred charge
amortization related to our property and casualty reinsurance businesses. Our railroad business generated increased earnings in the first quarter of 2017 compared to 2016, reflecting an increase in unit volume, partly offset by increased fuel and
other costs. Our utility and energy business produced higher earnings in the first quarter of 2017 compared to 2016, reflecting a lower effective income tax rate and an overall increase in pre-tax earnings from the various operating businesses
within this group. Earnings from our manufacturing, service and retailing businesses in 2017 increased 4.0% over the first quarter of 2016, reflecting increases from businesses acquired in the first quarter of 2016 (PCC and Duracell), partly offset
by losses and impairment charges related to the disposition of a prior bolt-on acquisition by one of our manufacturing businesses.
Investment and derivative gains/losses in the first quarter of 2017 included after-tax gains of approximately $300 million
from changes in the fair values of derivative contracts. In the first quarter of 2016, changes in derivative contract liabilities produced after-tax losses of approximately $525 million. After-tax gains from investments were approximately $200
million in 2017 and of $2.4 billion in 2016. After-tax investment gains in the first quarter of 2016 included a non-cash gain of approximately $1.9 billion related to the exchange of P&G common stock for 100% of the common stock of Duracell. We
believe that investment and derivative gains/losses are often meaningless in terms of understanding our reported results or evaluating our economic performance. These gains and losses have caused and will likely continue to cause significant
volatility in our periodic earnings.
InsuranceUnderwriting
We engage in both primary insurance and reinsurance of property/casualty, life and health risks. In primary insurance
activities, we assume defined portions of the risks of loss from persons or organizations that are directly subject to the risks. In reinsurance activities, we assume defined portions of similar or dissimilar risks that other insurers or reinsurers
have subjected themselves to in their own insuring activities. Our insurance and reinsurance businesses are disaggregated as follows: GEICO, General Re, Berkshire Hathaway Reinsurance Group (BHRG) and Berkshire Hathaway Primary Group.
Our management views insurance businesses as possessing two distinct operations underwriting and investing.
Underwriting decisions are the responsibility of the unit managers; investing decisions, with limited exceptions, are the responsibility of Berkshires Chairman and CEO, Warren E. Buffett. Accordingly, we evaluate performance of underwriting
operations without any allocation of investment income or investment gains/losses.
25
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
InsuranceUnderwriting
(Continued)
The timing and amount of catastrophe losses can produce significant
volatility in our periodic underwriting results, particularly with respect to our reinsurance businesses. Our periodic underwriting results may be affected significantly by changes in estimates for unpaid losses and loss adjustment expenses,
including amounts established for occurrences in prior years. Actual claim settlements and revised loss estimates will develop over time and the unpaid loss estimates recorded as of the balance sheet date will develop upward or downward in future
periods, producing a corresponding decrease or increase to pre-tax earnings. Our periodic underwriting results may also include significant gains and losses arising from the changes in the valuation of non-U.S. Dollar denominated reinsurance
liabilities of our U.S. based insurance subsidiaries as a result of foreign currency exchange rate fluctuations. Foreign currency exchange rates can be volatile and the resulting impact on our underwriting earnings can be relatively significant.
Underwriting results of our insurance businesses are summarized below. Amounts are in millions.
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
|
2017
|
|
|
2016
|
|
Underwriting gain (loss) attributable to:
|
|
|
|
|
|
|
|
|
GEICO
|
|
$
|
175
|
|
|
$
|
264
|
|
General Re
|
|
|
(143
|
)
|
|
|
42
|
|
Berkshire Hathaway Reinsurance Group
|
|
|
(600
|
)
|
|
|
(79
|
)
|
Berkshire Hathaway Primary Group
|
|
|
189
|
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
Pre-tax underwriting gain (loss)
|
|
|
(379
|
)
|
|
|
348
|
|
Income taxes and noncontrolling interests
|
|
|
(112
|
)
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
Net underwriting gain (loss)
|
|
$
|
(267
|
)
|
|
$
|
213
|
|
|
|
|
|
|
|
|
|
|
GEICO
GEICO writes private passenger automobile insurance, offering coverages to insureds in all 50 states and the District of
Columbia. GEICOs policies are marketed mainly by direct response methods in which most customers apply for coverage directly to the company via the Internet or over the telephone. GEICOs underwriting results are summarized below (dollars
in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Premiums written
|
|
$
|
7,587
|
|
|
|
|
|
|
$
|
6,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
6,845
|
|
|
|
100.0
|
|
|
$
|
6,050
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
|
5,590
|
|
|
|
81.7
|
|
|
|
4,823
|
|
|
|
79.7
|
|
Underwriting expenses
|
|
|
1,080
|
|
|
|
15.7
|
|
|
|
963
|
|
|
|
15.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and expenses
|
|
|
6,670
|
|
|
|
97.4
|
|
|
|
5,786
|
|
|
|
95.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax underwriting gain
|
|
$
|
175
|
|
|
|
|
|
|
$
|
264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
InsuranceUnderwriting
(Continued)
GEICO (Continued)
Premiums written and earned in the first quarter of 2017
were $7,587 million and $6,845 million, respectively, and represented increases of 15.6% and 13.1%, respectively, compared to 2016. These increases reflected voluntary auto policy-in-force growth of 9.2% and increased premiums per auto policy of
approximately 4.7% over the past twelve months, which was attributable to rate increases, coverage changes and changes in state and risk mix. Voluntary auto new business sales in the first quarter of 2017 increased 30.2% compared to the first
quarter of 2016. Voluntary auto policies-in-force increased approximately 568,000 during the first quarter of 2017.
Losses and loss adjustment expenses in the first quarter of 2017 increased $767 million (15.9%) over 2016. Incurred
losses and loss adjustment expenses were reduced $93 million in 2017 and $143 million in 2016 from the re-estimation of unpaid liabilities for prior years claims. Claims frequencies in the first quarter of 2017 for property damage and
collision coverages were relatively unchanged compared to 2016, and increased two to three percent for bodily injury coverage. Claim frequencies for personal injury protection coverage decreased approximately one percent in the first quarter of
2017. Average claims severities were higher in the first quarter of 2017 for property damage, collision and bodily injury coverages (four to six percent range). In addition, in each period, we experienced storm losses of approximately $100 million
representing approximately 1.5% and 1.7%, respectively, of premiums earned.
Underwriting expenses in the first quarter of
2017 were $1,080 million, an increase of $117 million (12.1%) over 2016. Our expense ratio (underwriting expenses to premiums earned) in the first quarter of 2017 decreased 0.2 percentage points compared to 2016. The largest components of
underwriting expenses are employee-related expenses (salaries and benefits) and advertising costs. The increase in underwriting expenses reflects the increase in policies-in-force.
General Re
General Re conducts a reinsurance business offering property and casualty coverages to clients worldwide through General
Reinsurance Corporation, Germany-based General Reinsurance AG, Faraday Holdings in London and other wholly-owned affiliates. We write life and health reinsurance primarily on a direct basis through General Re Life Corporation and General Reinsurance
AG. We strive to generate underwriting profits in essentially all of our product lines. General Res underwriting results are summarized in the following table (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
|
Premiums written
|
|
|
Premiums earned
|
|
|
Pre-tax underwriting gain (loss)
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Property/casualty
|
|
$
|
1,130
|
|
|
$
|
992
|
|
|
$
|
654
|
|
|
$
|
652
|
|
|
$
|
(143)
|
|
|
$
|
30
|
|
Life/health
|
|
|
742
|
|
|
|
740
|
|
|
|
737
|
|
|
|
738
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,872
|
|
|
$
|
1,732
|
|
|
$
|
1,391
|
|
|
$
|
1,390
|
|
|
$
|
(143)
|
|
|
$
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property/casualty
Property/casualty premiums written in the first quarter of 2017 increased $138 million (14%) compared to 2016. Adjusting
for changes in foreign currency exchange rates, premiums written in 2017 increased 16% compared to 2016, reflecting higher volume in both direct and broker markets. Premiums earned in the first quarter of 2017 were essentially unchanged from 2016
and increased 2% before the effects of foreign currency exchange rate changes. Industry capacity dedicated to property and casualty markets remains high and price competition in most reinsurance markets persists. While we continue to decline
business when we believe prices are inadequate, we remain prepared to write substantially more business, when appropriate prices are attainable.
27
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
InsuranceUnderwriting
(Continued)
General Re (Continued)
Property/casualty (Continued)
Our property/casualty operations generated a pre-tax underwriting loss of $143 million in the first quarter of 2017 compared to
a pre-tax underwriting gain of $30 million in 2016. In the first quarter of 2017, we increased our estimates for unpaid losses by $142 million with respect to certain United Kingdom (U.K.) liability business written in prior years. The
increase was the result of the U.K. Ministry of Justices decision to reduce the fixed discount rate required in lump sum settlement calculations of U.K. personal injury claims, referred to as the Ogden rate, from 2.5% to negative 0.75%. We
expect the Ogden rate decrease will significantly increase claim costs associated with currently unsettled cases, as well as for future cases. Underwriting results for the first quarter of 2017 also included $50 million of estimated losses from a
cyclone in Australia in March 2017. There were no significant catastrophe loss events in the first quarter of 2016.
Life/health
Life/health premiums written and earned in the first quarter of 2017 were relatively unchanged from 2016. The
life/health operations produced pre-tax break-even results in the first quarter of 2017, compared to pre-tax underwriting gains of $12 million in 2016. First quarter results in 2017 reflected a comparative decline in pre-tax gains from international
life business of $3 million and a comparative increase in pre-tax losses from business in North America of $9 million. The increase in pre-tax losses in North America was primarily attributable to an increase in large individual and group life
claims. Underwriting results also include pre-tax losses from the recurring discount accretion on long-term care liabilities.
Berkshire Hathaway Reinsurance Group
BHRG underwrites excess-of-loss reinsurance and quota-share coverages on property and casualty risks for insurers and
reinsurers worldwide, including property catastrophe insurance and reinsurance. BHRG also writes retroactive reinsurance on property/casualty exposures as well as life reinsurance and periodic payment annuity business. A summary of BHRGs
underwriting results follows (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
|
Premiums written
|
|
|
Premiums earned
|
|
|
Pre-tax underwriting gain (loss)
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Property/casualty
|
|
$
|
1,461
|
|
|
$
|
1,612
|
|
|
$
|
1,088
|
|
|
$
|
1,127
|
|
|
$
|
(269
|
)
|
|
$
|
126
|
|
Retroactive reinsurance
|
|
|
10,185
|
|
|
|
580
|
|
|
|
10,185
|
|
|
|
580
|
|
|
|
(259
|
)
|
|
|
(91
|
)
|
Life and annuity
|
|
|
568
|
|
|
|
536
|
|
|
|
568
|
|
|
|
536
|
|
|
|
(72
|
)
|
|
|
(114
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,214
|
|
|
$
|
2,728
|
|
|
$
|
11,841
|
|
|
$
|
2,243
|
|
|
$
|
(600
|
)
|
|
$
|
(79
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property/casualty
Premiums written and earned in the first quarter of 2017 decreased 9% and 3%, respectively, compared to 2016. Our premium
volume is generally constrained for most property/casualty reinsurance coverages, as rates, in our view, are generally inadequate. We have the capacity and desire to write more business when prices are appropriate.
Our property/casualty business generated pre-tax underwriting losses of $269 million in the first quarter of 2017 compared to
pre-tax gains of $126 million in 2016. The comparative decline in first quarter underwriting results was primarily due to increases in estimated ultimate liabilities for prior years loss events and an increase in current year catastrophe
losses. In 2017, we incurred losses of approximately $270 million related to prior years loss events and estimated losses of $52 million from a cyclone in Australia in March. The losses for prior years loss events primarily related to
unanticipated reported claims from hurricane and earthquake events in 2016 and from increases in estimated incurred-but-not reported losses. In the first quarter of 2016, changes in our estimated ultimate liabilities for prior years loss
events were insignificant and we incurred no significant losses from catastrophe loss events.
28
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
InsuranceUnderwriting
(Continued)
Berkshire Hathaway Reinsurance Group (Continued)
Retroactive reinsurance
We periodically write retroactive reinsurance contracts, which provide indemnification of losses and loss adjustment expenses
with respect to past loss events. In January 2017, NICO entered into an aggregate excess-of-loss retroactive reinsurance agreement with AIG (the AIG Agreement) that became effective on February 2, 2017. We received cash premiums of
$10.2 billion in connection with the AIG Agreement and we also recorded losses and loss adjustment expenses incurred of $10.2 billion, representing our initial estimate of the unpaid losses and loss adjustment expenses assumed of $16.4 billion,
partly offset by a deferred charge asset of $6.2 billion. Thus, on the effective date, the AIG Agreement had no effect on our pre-tax underwriting results. See Note 16 to the accompanying Consolidated Financial Statements.
Pre-tax underwriting losses from retroactive reinsurance contracts in the first quarter were $259 million in 2017 and $91
million in 2016. In each period, underwriting results included deferred charge amortization and foreign currency transaction gains and losses associated with the revaluation of foreign currency denominated liabilities of U.S.-based subsidiaries.
Exchange rate changes in the first quarter produced pre-tax losses of $89 million in 2017 and pre-tax gains of $19 million in 2016. Before such foreign currency gains/losses, retroactive reinsurance contracts produced first quarter pre-tax losses of
$170 million in 2017 and $110 million in 2016. The increase in pre-tax underwriting losses was primarily due to deferred charge amortization related to the AIG contract and another retroactive reinsurance contract written in December 2016, partly
offset by a net gain in the first quarter of 2017 from the commutation of an unrelated retroactive reinsurance contract. We currently estimate deferred charge amortization for the year ending December 31, 2017 will be approximately $975
million, which includes amortization related to the aforementioned AIG Agreement.
Liabilities for losses and loss
adjustment expenses associated with our retroactive reinsurance contracts were approximately $40.3 billion at March 31, 2017 and $24.7 billion at December 31, 2016. Unamortized deferred charges related to these contracts were approximately
$13.8 billion at March 31, 2017 and $8.0 billion at December 31, 2016.
Life and annuity
A summary of BHRGs life and annuity underwriting results follows (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
|
Premiums earned
|
|
|
Pre-tax underwriting gain (loss)
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Periodic payment annuity
|
|
$
|
220
|
|
|
$
|
209
|
|
|
$
|
(145)
|
|
|
$
|
(70)
|
|
Life reinsurance
|
|
|
344
|
|
|
|
323
|
|
|
|
(5)
|
|
|
|
11
|
|
Variable annuity
|
|
|
4
|
|
|
|
4
|
|
|
|
78
|
|
|
|
(55)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
568
|
|
|
$
|
536
|
|
|
$
|
(72)
|
|
|
$
|
(114)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Periodic payment annuity contracts generated pre-tax underwriting losses of $145 million and
$70 million in the first quarter of 2017 and 2016, respectively. Liabilities under certain contracts of a U.S. domiciled subsidiary are denominated in foreign currencies, primarily the British Pound. Changes in the exchange rates produce changes in
the values of related liabilities, which are reflected in pre-tax earnings. Exchange rate changes in the first quarter produced pre-tax losses of $24 million in 2017 and pre-tax gains of $40 million in 2016. Before such foreign currency
revaluation gains and losses, pre-tax underwriting losses were $121 million in 2017 compared to $110 million in 2016. We expect these contracts will generate pre-tax underwriting losses attributable to the recurring accretion of discounted annuity
liabilities. The increase in underwriting losses in 2017 reflected increased average liabilities from new business written. Discounted periodic payment annuity liabilities were approximately $10.2 billion at March 31, 2017 and the weighted
average interest rate of these contracts was approximately 4.1%.
The life reinsurance business produced pre-tax
underwriting losses of $5 million in the first quarter of 2017, compared to pre-tax underwriting gains of $11 million in 2016. The deterioration in underwriting results was attributable to increased liabilities for future policyholder benefits,
reflecting lower expected net cash flow with respect to a certain block of business.
The variable annuity business
primarily consists of reinsurance contracts that provide guarantees on closed blocks of variable annuity business written by other insurers. In the first quarter, these contracts produced pre-tax underwriting gains of $78 million in 2017 and pre-tax
underwriting losses of $55 million in 2016. Underwriting gains and losses in each period reflected changes in liabilities for guaranteed benefits, which were affected by changes in securities markets and interest rates, as well as from the periodic
amortization of expected profit margins included in our liabilities estimates.
29
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
InsuranceUnderwriting
(Continued)
Berkshire Hathaway Primary Group
The Berkshire Hathaway Primary Group (BH Primary) consists of a wide variety of independently managed insurance
underwriting businesses that primarily provide a variety of commercial insurance products, including healthcare malpractice, workers compensation, automobile, general liability, property and various specialty coverages for small, medium and
large clients. The largest of these insurers include the MedPro Group, National Indemnity Company (NICO Primary), Berkshire Hathaway Homestate Companies (BHHC), Berkshire Hathaway Specialty Insurance (BH
Specialty) and Berkshire Hathaway GUARD Insurance Companies (GUARD). Other BH Primary insurers include U.S. Liability Insurance Company, Applied Underwriters and Central States Indemnity Company. A summary of BH Primarys
underwriting results follows (dollars in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Premiums written
|
|
$
|
1,849
|
|
|
|
|
|
|
$
|
1,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
1,676
|
|
|
|
100.0
|
|
|
$
|
1,441
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
|
1,037
|
|
|
|
61.9
|
|
|
|
911
|
|
|
|
63.2
|
|
Underwriting expenses
|
|
|
450
|
|
|
|
26.8
|
|
|
|
409
|
|
|
|
28.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and expenses
|
|
|
1,487
|
|
|
|
88.7
|
|
|
|
1,320
|
|
|
|
91.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax underwriting gain
|
|
$
|
189
|
|
|
|
|
|
|
$
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written and earned in the first quarter of 2017 increased $280 million (18%) and
$235 million (16%), respectively, compared to 2016. These increases were primarily attributable to volume increases from BH Specialty, BHHC and GUARD. The BH Primary insurers produced aggregate pre-tax underwriting gains of $189 million in the first
quarter of 2017 and $121 million in 2016. In the first quarter, losses and loss adjustment expenses included reductions of estimated ultimate liabilities for prior years loss events of $168 million in 2017 and $119 million in 2016, which
produced corresponding increases in pre-tax underwriting gains.
InsuranceInvestment Income
A summary of net investment income generated by investments held by our insurance operations follows (in millions).
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
|
2017
|
|
|
2016
|
|
Interest income
|
|
$
|
246
|
|
|
$
|
230
|
|
Dividend income
|
|
|
883
|
|
|
|
912
|
|
|
|
|
|
|
|
|
|
|
Investment income before taxes and noncontrolling interests
|
|
|
1,129
|
|
|
|
1,142
|
|
Income taxes and noncontrolling interests
|
|
|
221
|
|
|
|
223
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
908
|
|
|
$
|
919
|
|
|
|
|
|
|
|
|
|
|
Pre-tax investment income in the first quarter of 2017 decreased $13 million (1%) from
2016, which reflected decreased dividend income partly offset by increased interest income. We continue to hold significant cash, cash equivalents and U.S. Treasury Bills earning very low yields, although such yields were higher in 2017 than in
2016. We believe that maintaining ample liquidity is paramount and we insist on safety over yield with respect to such balances. The decrease in dividends in 2017 reflected Dow Chemical Companys redemption of our $3 billion investment in 8.5%
preferred stock in December 2016, partly offset by increased dividend income from investments in other equity securities.
Invested assets of our insurance businesses derive from shareholder capital, including reinvested earnings, and from net
liabilities under insurance contracts or float. The major components of float are unpaid losses, life, annuity and health benefit liabilities, unearned premiums and other liabilities to policyholders less premium and reinsurance
receivables, deferred charges assumed under retroactive reinsurance contracts and deferred policy acquisition costs. Float approximated $105 billion at March 31, 2017 and $91 billion at December 31, 2016. Our average cost of float was
approximately 0.4% in the first quarter of 2017, as we generated an aggregate pre-tax underwriting loss of $379 million. The increase in float in the first quarter of 2017 was primarily attributable to the AIG Agreement.
30
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
InsuranceInvestment Income
(Continued)
A summary of cash and investments held in our insurance businesses follows
(in millions).
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Cash, cash equivalents and U.S. Treasury Bills
|
|
|
$ 56,090
|
|
|
|
$ 48,888
|
|
Equity securities
|
|
|
132,587
|
|
|
|
119,780
|
|
Fixed maturity securities
|
|
|
22,298
|
|
|
|
22,778
|
|
Other investments
|
|
|
15,293
|
|
|
|
14,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$226,268
|
|
|
|
$205,810
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity investments as of March 31, 2017 were as follows (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
cost
|
|
|
Unrealized
gains/losses
|
|
|
Carrying
value
|
|
U.S. Treasury, U.S. government corporations and agencies
|
|
$
|
4,361
|
|
|
$
|
4
|
|
|
$
|
4,365
|
|
States, municipalities and political subdivisions
|
|
|
1,037
|
|
|
|
54
|
|
|
|
1,091
|
|
Foreign governments
|
|
|
8,463
|
|
|
|
189
|
|
|
|
8,652
|
|
Corporate bonds, investment grade
|
|
|
5,516
|
|
|
|
459
|
|
|
|
5,975
|
|
Corporate bonds, non-investment grade
|
|
|
1,047
|
|
|
|
222
|
|
|
|
1,269
|
|
Mortgage-backed securities
|
|
|
835
|
|
|
|
111
|
|
|
|
946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,259
|
|
|
$
|
1,039
|
|
|
$
|
22,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations are rated AA+ or Aaa by the major rating agencies and
approximately 87% of all state, municipal and political subdivisions, foreign government obligations and mortgage-backed securities were rated AA or higher by the major rating agencies. Non-investment grade securities represent securities rated
below BBB- or Baa3. Foreign government securities include obligations issued or unconditionally guaranteed by national or provincial government entities.
Railroad (Burlington Northern Santa Fe)
Burlington Northern Santa Fe, LLC (BNSF) operates one of the largest railroad systems in North America. BNSF
operates approximately 32,500 route miles of track in 28 states, as well as in three Canadian provinces. BNSFs major business groups are classified by type of product shipped and include consumer products, coal, industrial products and
agricultural products. A summary of BNSFs earnings follows (in millions).
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
|
2017
|
|
|
2016
|
|
Revenues
|
|
$
|
5,185
|
|
|
$
|
4,767
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
1,283
|
|
|
|
1,208
|
|
Fuel
|
|
|
605
|
|
|
|
395
|
|
Purchased services
|
|
|
626
|
|
|
|
638
|
|
Depreciation and amortization
|
|
|
573
|
|
|
|
520
|
|
Equipment rents, materials and other
|
|
|
501
|
|
|
|
503
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
3,588
|
|
|
|
3,264
|
|
Interest expense
|
|
|
252
|
|
|
|
245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,840
|
|
|
|
3,509
|
|
|
|
|
|
|
|
|
|
|
Pre-tax earnings
|
|
|
1,345
|
|
|
|
1,258
|
|
Income taxes
|
|
|
507
|
|
|
|
474
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
838
|
|
|
$
|
784
|
|
|
|
|
|
|
|
|
|
|
31
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Railroad (Burlington Northern Santa Fe)
(Continued)
Consolidated revenues in the first quarter of 2017 were $5.2 billion,
representing an increase of $418 million (8.8%) compared to 2016. Pre-tax earnings in the first quarter of 2017 were $1.3 billion, an increase of $87 million (6.9%) compared to 2016.
In the first quarter of 2017, revenues reflected a 2.7% comparative increase in average revenue per car/unit and a 6.4%
increase in volume. Our aggregate volume was 2.5 million cars/units compared to 2.3 million in 2016. The increase in average revenue per car/unit was primarily attributable to higher fuel surcharge revenue, driven by higher fuel prices, as
well as increased rates per car/unit and business mix changes.
Freight revenues from consumer products were
$1.7 billion in the first quarter of 2017, an increase of 8.8% from 2016. The increase reflected higher average revenue per car/unit and volume increases of 5.6%. Consumer products volumes benefited from higher domestic intermodal,
international intermodal, and automotive volumes. The increases were primarily attributable to improving economic conditions, normalizing of retail inventories and higher market share.
Freight revenues from industrial products were $1.2 billion in the first quarter of 2017, an increase of 3.9% compared
with 2016. The increase was primarily due to higher average revenue per car/unit. Overall, industrial products volumes in the first quarter of 2017 were slightly higher than in 2016. We experienced volume increases in minerals and other commodities
that support domestic drilling activity, decreases in petroleum products volume, due primarily to pipeline displacement of U.S. crude traffic, and lower plastics volume.
Freight revenues from agricultural products increased to $1.1 billion in the first quarter of 2017, an increase of 5.7%
compared to the same period in 2016. The increase was primarily due to higher average revenue per car/unit, as well as volume growth of 1.8%. In the first quarter of 2017, we experienced higher grain exports, partially offset by lower domestic grain
shipments.
Freight revenues from coal increased 23.2% to $960 million in the first quarter of 2017 compared to 2016,
reflecting an 18.5% increase in volumes and higher average revenue per car/unit. The volume increases in 2017 were due to mild winter weather in the first quarter of 2016 and higher natural gas prices in the first quarter of 2017. Together, these
factors led to increased utility coal usage in 2017, which was partly offset by the effects of retirements of coal generating facilities.
Operating expenses in the first quarter of 2017 were $3.6 billion, an increase of $324 million (9.9%) compared to
the first quarter of 2016, and our ratio of operating expenses to revenues increased 0.7 percentage points to 69.2%. Compensation and benefits expenses increased $75 million (6.2%) compared to 2016. The increase was primarily due to higher
health and welfare costs, wage inflation, and volume-related increases, partially offset by productivity improvements. Fuel expenses increased $210 million (53.2%) compared to 2016, due to higher average fuel prices and increased volumes,
partially offset by improved efficiency. Depreciation and amortization expense increased $53 million (10.2%) compared to 2016 due to a larger base of depreciable assets in service.
Interest expense in the first quarter of 2017 was $252 million, an increase of $7 million (2.9%) compared to
2016, which was primarily due to an increase in average outstanding debt. BNSF funds its capital expenditures with cash flow from operations and new debt issuances.
Utilities and Energy (Berkshire Hathaway Energy Company)
We hold a 90% ownership interest in Berkshire Hathaway Energy Company (BHE), which operates a global energy
business. BHEs domestic regulated utility interests are comprised of PacifiCorp, MidAmerican Energy Company (MEC) and NV Energy. In Great Britain, BHE subsidiaries operate two regulated electricity distribution businesses referred
to as Northern Powergrid. BHE also owns two domestic regulated interstate natural gas pipeline companies. Other energy businesses include AltaLink, L.P. (AltaLink), a regulated electricity transmission-only business in Alberta, Canada
and a diversified portfolio of independent power projects. In addition, BHE also operates the second-largest residential real estate brokerage firm and one of the largest residential real estate brokerage franchise networks in the United States.
32
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Utilities and Energy (Berkshire Hathaway Energy Company)
(Continued)
The rates our regulated businesses charge customers for energy and services
are based, in large part, on the costs of business operations, including a return on capital, and are subject to regulatory approval. To the extent these operations are not allowed to include such costs in the approved rates, operating results will
be adversely affected. Revenues and earnings of BHE are summarized below (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
|
Revenues
|
|
|
Earnings
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
PacifiCorp
|
|
$
|
1,292
|
|
|
$
|
1,264
|
|
|
$
|
265
|
|
|
$
|
244
|
|
MidAmerican Energy Company
|
|
|
708
|
|
|
|
632
|
|
|
|
62
|
|
|
|
53
|
|
NV Energy
|
|
|
594
|
|
|
|
624
|
|
|
|
51
|
|
|
|
32
|
|
Northern Powergrid
|
|
|
245
|
|
|
|
279
|
|
|
|
103
|
|
|
|
125
|
|
Natural gas pipelines
|
|
|
318
|
|
|
|
316
|
|
|
|
200
|
|
|
|
180
|
|
Other energy businesses
|
|
|
513
|
|
|
|
508
|
|
|
|
41
|
|
|
|
54
|
|
Real estate brokerage
|
|
|
587
|
|
|
|
495
|
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,257
|
|
|
$
|
4,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before corporate interest and income taxes (EBIT)
|
|
|
|
|
|
|
|
|
|
|
725
|
|
|
|
691
|
|
Corporate interest
|
|
|
|
|
|
|
|
|
|
|
110
|
|
|
|
122
|
|
Income taxes and noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
114
|
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to Berkshire Hathaway shareholders
|
|
|
|
|
|
|
|
|
|
$
|
501
|
|
|
$
|
441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PacifiCorp
PacifiCorp operates a regulated electric utility in portions of several Western states, including Utah, Oregon and Wyoming.
PacifiCorps revenues in the first quarter of 2017 were $1.3 billion, an increase of 2% from 2016. The increase was primarily due to a 2.8% increase in retail customer volume and higher wholesale electricity prices, partly offset by lower
average retail prices attributable to changes in mix. EBIT in the first quarter of 2017 were $265 million, an increase of $21 million (9%) compared to 2016. The increase was primarily due to an increase in gross margins ($8 million), reflecting
the increase in revenues and lower operating expenses ($13 million), which was primarily due to lower pension and plant maintenance expenses.
MidAmerican Energy Company
MEC operates a regulated electric and natural gas utility primarily in Iowa and Illinois. Revenues in the first quarter of 2017
were $708 million, an increase of $76 million (12%) compared to 2016. The increase was primarily due to increases in regulated natural gas revenues ($36 million) and electric revenues ($34 million). The comparative increase in first quarter
natural gas revenues reflected higher average per-unit costs of gas sold ($40 million), which are offset in cost of sales. In the first quarter of 2017, retail natural gas volumes decreased (5.4%), while wholesale volumes increased (6.9%). The
increase in electric revenues was attributable to higher wholesale volumes and prices ($21 million) and increased retail revenues ($13 million). The increase in retail revenues reflected increased recoveries through bill riders (which are
substantially offset by increases in costs and expenses) and from non-weather usage and rate factors, partially offset by the impact of warmer winter temperatures in 2017. Electric retail customer volumes in the first quarter of 2017 increased 1.6%
compared to 2016. EBIT in the first quarter of 2017 were $62 million, an increase of $9 million (17%) compared to 2016. The increase in 2017 was primarily attributable to an increase in gross margin, partly offset by increased depreciation,
maintenance and other operating expenses.
NV Energy
NV Energy operates regulated electric and natural gas utilities in Nevada. Revenues in the first quarter of 2017 were $594
million, a decrease of $30 million (5%) versus 2016. In the first quarter of 2017, electric revenues declined $19 million and natural gas revenues declined $12 million as compared to 2016. The decline in electric revenues reflected lower retail
revenues resulting from lower energy costs and lower revenues from customer efficiency incentive programs, which are both passed on to customers, and from lower commercial and industrial customer volumes. Natural gas operating revenue decreased
primarily due to lower energy rates, partially offset by higher customer usage. EBIT in the first quarter of 2017 were $51 million, an increase of $19 million (59%) compared to 2016. The increase was primarily due to lower other operating
expenses and lower interest expense. Operating expenses declined primarily due to lower planned maintenance and other generating costs.
33
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Utilities and Energy (Berkshire Hathaway Energy Company)
(Continued)
Northern Powergrid
Revenues in the first quarter of 2017 declined $34 million (12%) to $245 million. The decrease was primarily due to the
unfavorable impact from a stronger U.S. Dollar ($38 million) and lower distribution revenue ($2 million), partially offset by higher smart metering revenue of $6 million. Distribution revenue decreased due to the recovery in 2016 of the
December 2013 customer rebate of $11 million, unfavorable movements in regulatory provisions of $6 million and lower units distributed of $5 million, partially offset by higher tariff rates of $20 million. EBIT decreased
$22 million (18%) compared to 2016, primarily due to the stronger U.S. Dollar of $16 million and higher depreciation of $7 million from additional assets placed in-service.
Natural gas pipelines
Revenues in the first quarter of 2017 of $318 million were relatively unchanged from 2016, as higher transportation revenues
and higher gas sales of $4 million related to system balancing activities (largely offset in cost of sales) at Northern Natural Gas were offset by lower transportation revenues at Kern River. EBIT in 2017 increased $20 million
(11%) compared to 2016, primarily due to a reduction in expenses and regulatory liabilities related to the impact of an alternative rate structure approved by Kern Rivers regulators in the first quarter of 2017, as well as from higher
transportation revenues.
Other energy businesses
Revenues in the first quarter of 2017 increased $5 million (1%) to $513 million, reflecting increased revenues from
AltaLink (6%) and renewable energy (4%), partially offset by a 9% decline in revenues from the unregulated retail services business. EBIT in the first quarter of 2017 declined $13 million compared to 2016 due to higher operating expenses of
$19 million and higher depreciation and amortization of $9 million, primarily due to the additional wind, solar and transmission assets placed in service, and increased interest expense, partially offset by an increase in revenues from
AltaLink and renewable energy.
Real estate brokerage
Revenues in the first quarter of 2017 increased 19% to $587 million compared to 2016, reflecting increases in closed
transactions and average home transaction prices and the impact of business acquisitions. EBIT from real estate brokerage activities were $3 million in the first quarter of 2017 and was unchanged from 2016.
Corporate interest and income taxes
Corporate interest includes interest on unsecured debt issued by BHE and borrowings from certain Berkshire insurance
subsidiaries. BHEs consolidated effective income tax rate for the first quarter was approximately 9% in 2017 and 13% in 2016. The effective tax rate decreased primarily due to an increase in production tax credits recognized, the favorable
impacts of rate making, and lower consolidated deferred state income tax expenses due to changes in the tax status of certain subsidiaries.
Manufacturing, Service and Retailing
A summary of revenues and earnings of our manufacturing, service and retailing businesses follows (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
|
Revenues
|
|
|
Earnings *
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Manufacturing
|
|
$
|
12,097
|
|
|
$
|
10,554
|
|
|
$
|
1,487
|
|
|
$
|
1,482
|
|
Service and retailing
|
|
|
18,194
|
|
|
|
17,692
|
|
|
|
481
|
|
|
|
460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
30,291
|
|
|
$
|
28,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax earnings
|
|
|
|
|
|
|
|
|
|
|
1,968
|
|
|
|
1,942
|
|
Income taxes and noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
651
|
|
|
|
676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,317
|
|
|
$
|
1,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Excludes certain acquisition accounting expenses, which were primarily from the amortization of identified
intangible assets recorded in connection with our business acquisitions. The after-tax acquisition accounting expenses excluded from earnings above were $132 million in 2017 and $91 million in 2016. These expenses are included in
other in the summary of earnings on page 25 and in the other earnings section on page 40.
|
34
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Manufacturing, Service and Retailing
(Continued)
Manufacturing
Our manufacturing group includes a variety of businesses that produce industrial, building and consumer products. Industrial
products businesses include specialty chemicals (The Lubrizol Corporation (Lubrizol)), metal cutting tools/systems (IMC International Metalworking Companies (IMC)), equipment and systems for the livestock and agricultural
industries ((CTB International (CTB)), and a variety of industrial products for diverse markets (Marmon, Scott Fetzer and LiquidPower Specialty Products). Beginning on January 29, 2016, our industrial products group also includes
Precision Castparts Corp. (PCC), a leading manufacturer of complex metal products for aerospace, power and general industrial markets.
Our building products businesses include flooring (Shaw), insulation, roofing and engineered products (Johns Manville), bricks
and masonry products (Acme Building Brands), paint and coatings (Benjamin Moore), and residential and commercial construction and engineering products and systems (MiTek). Our consumer products businesses include leisure vehicles (Forest River),
several apparel and footwear operations (including Fruit of the Loom, Garan, H.H. Brown Shoe Group and Brooks Sports), and beginning February 29, 2016, the Duracell Company (Duracell), a leading manufacturer of high performance
alkaline batteries. This group also includes custom picture framing products (Larson Juhl) and jewelry products (Richline). A summary of revenues and pre-tax earnings of our manufacturing operations follows (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
Revenues
|
|
|
Pre- tax earnings
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
Industrial products
|
|
$
|
6,508
|
|
|
$
|
5,694
|
|
|
$
|
994
|
|
|
$ 1,054
|
Building products
|
|
|
2,734
|
|
|
|
2,461
|
|
|
|
249
|
|
|
242
|
Consumer products
|
|
|
2,855
|
|
|
|
2,399
|
|
|
|
244
|
|
|
186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,097
|
|
|
$
|
10,554
|
|
|
$
|
1,487
|
|
|
$ 1,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate first quarter revenues were approximately $12.1 billion in 2017, an increase of
approximately $1.5 billion (15%) from 2016. In 2016, operating results of our industrial products and consumer products businesses included the results of PCC and Duracell from their respective acquisition dates. Pre-tax earnings in the first
quarter was $1.5 billion in 2017, which was relatively unchanged from 2016. Pre-tax earnings in 2017 included pre-tax losses of $184 million in connection with the disposition of an underperforming bolt-on business acquired by Lubrizol in 2014.
Excluding these losses, pre-tax earnings of our manufacturing businesses increased 13% compared to 2016.
Industrial products
Revenues in the first quarter of 2017 increased $814 million (14%) versus 2016. The increase was primarily due to
inclusion of PCC for the full three months of 2017 compared to two months in the prior year period. We also experienced revenue increases from Lubrizol (5%), IMC (7%) and CTB (12%). Comparatively higher volumes drove the first quarter revenue
increases of Lubrizol and IMC, while business acquisitions generated most of CTBs increase. Marmon manufacturing revenues increased 3% in the first quarter of 2017 versus 2016, reflecting the mixture of increases from business acquisitions,
metal price increases and increased volume in certain product lines, offset by lower demand at several of its business units. In 2017, while sales volumes were generally higher than the first quarter of 2016, we experienced margin pressures,
particularly at Lubrizol and CTB.
Pre-tax earnings in the first quarter of 2017 declined $60 million (6%) compared
to the first quarter of 2016. Pre-tax earnings in 2017 reflected earnings of PCC for the full three months, which was more than offset by lower earnings from certain of our other businesses. During the first quarter of 2017, Lubrizol recognized
pre-tax losses of $184 million related to the disposition of an underperforming bolt-on business and the recognition of intangible asset impairments and restructuring charges. In the first quarter of 2017, Lubrizol, CTB, as well as other businesses,
also experienced higher manufacturing costs derived from increased prices for petroleum-based materials and certain metals, which contributed to a comparative pre-tax margin decline. We continue to implement cost containment and other initiatives
intended to improve productivity at several of our businesses.
35
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Manufacturing, Service and Retailing
(Continued)
Manufacturing
(Continued)
Building products
Revenues in the first quarter of 2017 increased $273 million (11%) compared to 2016. The increase reflected the effect of
bolt-on business acquisitions (Shaw and MiTek) and sales volume increases (MiTek and Johns Manville), partly offset by lower average sales prices and changes in product mix.
Pre-tax earnings in the first quarter of 2017 increased $7 million (3%) compared to 2016. The increase in earnings was
primarily attributable to the aforementioned increases in revenues and lower restructuring charges, largely offset by lower gross sales margin rates in most of our businesses. The declines in gross sales margin rates were primarily due to increases
in average raw material prices and contributed to an overall decline in the first quarter pre-tax margin from approximately 9.8% in 2016 to 9.1% in 2017.
Consumer products
Revenues were approximately $2.9 billion in the first quarter of 2017, an increase of $456 million (19%) over 2016. The
increase reflected the impact of the Duracell acquisition on February 29, 2016 and a 6.7% increase in Forest Rivers revenues, due to an increase in unit sales. Apparel revenues were relatively unchanged compared to 2016.
Pre-tax earnings in the first quarter of 2017 increased $58 million (31%) compared to 2016, reflecting increased earnings
from Duracell and Forest River, partly offset by lower apparel earnings. Duracells results in 2016 included significant transition and integration costs arising from the acquisition.
Service and retailing
Our service and retailing businesses are comprised of a large group of independently managed businesses engaged in a variety of
activities. A summary of revenues and pre-tax earnings of these operations follows (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
|
Revenues
|
|
|
Pre-tax earnings
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Service
|
|
$
|
2,617
|
|
|
$
|
2,361
|
|
|
$
|
260
|
|
|
$
|
225
|
|
Retailing
|
|
|
3,476
|
|
|
|
3,530
|
|
|
|
133
|
|
|
|
99
|
|
McLane Company
|
|
|
12,101
|
|
|
|
11,801
|
|
|
|
88
|
|
|
|
136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,194
|
|
|
$
|
17,692
|
|
|
$
|
481
|
|
|
$
|
460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
Our service businesses offer fractional ownership programs for general aviation aircraft (NetJets) and high technology training
to operators of aircraft (FlightSafety). We also distribute electronic components (TTI) and franchise and service a network of quick service restaurants (Dairy Queen). Services also include the electronic distribution of corporate news, multimedia
and regulatory filings (Business Wire), publication of newspapers and other publications (Buffalo News and the BH Media Group) and operation of a television station in Miami, Florida (WPLG). We also offer third party logistics services that
primarily serve the petroleum and chemical industries (Charter Brokerage).
36
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Manufacturing, Service and Retailing
(Continued)
Service (Continued)
Revenues in the first quarter of 2017 increased $256
million (11%) as compared to 2016, primarily due to revenue increases of NetJets (19%) and TTI (10%). The increase at NetJets was primarily due to an increase in fractional aircraft sold and, to a lesser degree, an increase in services
revenues, attributable to increases in pass-through costs and a 2% increase in flight hours. The increase in TTIs revenues was primarily due to volume increases in most of its markets. Pre-tax earnings in the first quarter of 2017 increased
$35 million (16%) compared to 2016. The increase in earnings was primarily attributable to increased earnings of NetJets and TTI, partly offset by lower earnings from media businesses and FlightSafety.
Retailing
Our retailing businesses include four distinct home furnishings retailing businesses (Nebraska Furniture Mart, R.C. Willey,
Star Furniture and Jordans), which sell furniture, appliances, flooring and electronics. Our retailers also include Berkshire Hathaway Automotive (BHA). BHA includes 83 auto dealerships, which sell new and pre-owned automobiles and
offer repair and other related services and products. BHA also includes two related insurance businesses, two auto auctions and a distributor of automotive fluid maintenance products.
Our other retailing businesses include three jewelry retailing businesses (Borsheims, Helzberg and Ben Bridge), Sees
Candies (confectionary products), Pampered Chef (high quality kitchen tools), Oriental Trading Company (party supplies, school supplies and toys and novelties) and Detlev Louis Motorrad (Louis), a Germany-based retailer of motorcycle
accessories.
Revenues of our retailing businesses in the first quarter of 2017 decreased $54 million (2%) as
compared to 2016. The decrease reflected a 2% decline in revenues at BHA, due primarily to lower vehicle units sold, and lower revenues at Sees attributable to the timing of Easter, partly offset by a slight increase in revenues of our home
furnishings retailers and increased revenues of Pampered Chef. Pre-tax earnings in the first quarter of 2017 from retailing increased $34 million (34%) over 2016. The increase was primarily due to BHA and Nebraska Furniture Mart. The earnings
increase at BHA reflected lower amortization and operating expenses, as well as a slight increase in gross margin rates due to changes in sales mix. The earnings increase of Nebraska Furniture Mart reflected an increase in the gross sales margin
rate and lower operating and depreciation expenses.
McLane Company
McLane operates a wholesale distribution business that provides grocery and non-food consumer products to retailers and
convenience stores (grocery) and to restaurants (foodservice). McLane also operates businesses that are wholesale distributors of distilled spirits, wine and beer (beverage). The grocery and foodservice units are
marked by high sales volumes and very low profit margins and have several significant customers, including Wal-Mart, 7-Eleven and Yum! Brands. A curtailment of purchasing by any of its significant customers could have an adverse impact on
McLanes periodic revenues and earnings.
Revenues for the first quarter of 2017 were $12.1 billion, an increase of
2.5% over the first quarter of 2016. The increase in revenues was primarily due to a 4% increase in grocery sales. Pre-tax earnings in the first quarter of 2017 were $88 million, a decrease of $48 million (35%) compared to 2016, due
primarily to a 51% decline in earnings from grocery operations. In the first quarter of 2017, our grocery business results were negatively affected by pricing pressures from an increasingly competitive business environment. In addition, personnel,
fuel and depreciation costs increased at greater rates than revenues, negatively affecting our results. McLanes consolidated operating margin (ratio of pre-tax earnings to revenues) in the first quarter of 2017 was approximately 0.7% compared
to 1.2% in 2016.
37
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Finance and Financial Products
Our finance and financial products businesses include manufactured housing and finance (Clayton Homes), transportation
equipment manufacturing and leasing businesses (UTLX and XTRA, and together, transportation equipment leasing), as well as other leasing and financing activities. A summary of earnings from our finance and financial products businesses
follows (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
|
Revenues
|
|
|
Earnings
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Manufactured housing and finance
|
|
$
|
1,074
|
|
|
$
|
893
|
|
|
$
|
176
|
|
|
$
|
170
|
|
Transportation equipment leasing
|
|
|
624
|
|
|
|
683
|
|
|
|
209
|
|
|
|
251
|
|
Other
|
|
|
167
|
|
|
|
150
|
|
|
|
81
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,865
|
|
|
$
|
1,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax earnings
|
|
|
|
|
|
|
|
|
|
|
466
|
|
|
|
478
|
|
Income taxes and noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
163
|
|
|
|
167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
303
|
|
|
$
|
311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufactured housing and finance
Clayton Homes revenues in the first quarter of 2017 were approximately $1.1 billion, an increase of $181 million
(20%) compared to 2016. The increase was primarily due to a 31% increase in home sales, attributable a 20% increase in unit sales, and higher average prices, primarily due to sales mix changes. In 2017, home sales included a higher mix of site
built homes, which have a higher land content and therefore unit prices tend to be higher. In addition, the increased land content generally results in lower gross sales margin rates for site built homes than for typical sales of manufactured homes.
Revenues from financial services in the first quarter of 2017 increased 2% compared to 2016. Pre-tax earnings increased $6 million (4%) in the first quarter of 2017 as compared to 2016. Earnings in 2017 included a gain of $11 million from a
legal settlement and higher earnings from manufacturing and retail operations, partly offset by lower earnings from lending and finance activities. In 2017, the increase in financial services revenues was more than offset by increased operating and
interest expenses.
Transportation equipment leasing
Transportation equipment leasing revenues in the first quarter of 2017 decreased $59 million (9%) compared to 2016,
primarily due to lower railcar sales, lower railcar and trailer fleet utilization rates, and lower volume and demand for cranes and other products and services. Pre-tax earnings were $209 million in the first quarter of 2017, a decline of $42
million (17%) compared to 2016. The decrease was primarily attributable to the demand driven decline in revenues discussed previously, as well as from higher railcar repair and storage costs and additional interest costs attributable to
borrowings from a Berkshire financing subsidiary. A significant portion of the transportation leasing business costs, such as depreciation, do not vary proportionately to revenue changes and therefore changes in revenues can disproportionately
impact earnings.
Other
Other earnings from finance activities include CORT furniture leasing, our share of the earnings of a commercial mortgage
servicing business (Berkadia) in which we own a 50% joint venture interest, and interest and dividends from a portfolio of investments. In 2017, other earnings increased $24 million compared to 2016, reflecting increased interest income
and earnings from Berkadia, partly offset by lower earnings from CORT. Other earnings also includes income from interest rate spreads charged on borrowings by a Berkshire financing subsidiary that are used to finance loans and assets held for lease.
Corresponding expenses are included in the results of our manufactured housing and finance and transportation equipment business groups. Interest rate spreads charged to these businesses were $20 million in 2017 and $16 million in 2016.
38
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Investment and Derivative Gains/Losses
A summary of investment and derivative gains and losses follows (in millions).
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
|
2017
|
|
|
2016
|
|
Investment gains/losses
|
|
$
|
315
|
|
|
$
|
1,850
|
|
Derivative gains/losses
|
|
|
460
|
|
|
|
(810)
|
|
|
|
|
|
|
|
|
|
|
Gains/losses before income taxes and noncontrolling interests
|
|
|
775
|
|
|
|
1,040
|
|
Income taxes and noncontrolling interests
|
|
|
271
|
|
|
|
(812)
|
|
|
|
|
|
|
|
|
|
|
Net gains/losses
|
|
$
|
504
|
|
|
$
|
1,852
|
|
|
|
|
|
|
|
|
|
|
Investment gains/losses
Investment gains/losses arise primarily from the sale, redemption or exchange of investments. The timing of gains or losses can
have a material effect on periodic earnings. Investment gains and losses included in earnings usually have minimal impact on the periodic changes in our consolidated shareholders equity since most of our investments are recorded at fair value
with the unrealized gains and losses included in shareholders equity as a component of accumulated other comprehensive income.
We believe the amount of investment gains/losses included in earnings in any given period typically has little analytical or
predictive value. Our decisions to sell securities are not motivated by the impact that the resulting gains or losses will have on our reported earnings. Although we do not consider investment gains and losses as necessarily meaningful or useful in
evaluating our periodic results, we are providing information to explain the nature of such gains and losses when reflected in our earnings.
Pre-tax investment gains in the first quarter were $315 million in 2017 and $1.85 billion in 2016. Pre-tax investment gains in
the first quarter of 2016 included $1.1 billion realized in connection with the tax-free exchange of shares of P&G common stock for 100% of the common stock of Duracell. Income tax expense allocated to investment gains included a benefit from
the reduction of certain deferred income tax liabilities in connection with the exchange of P&G common stock for Duracell. Our after-tax gain from this transaction was approximately $1.9 billion.
We recorded no other-than-temporary impairment (OTTI) charges in the first quarters of 2017 or 2016. Although we
have periodically recorded OTTI charges in earnings in the past, we continue to hold some of the related securities. If the market values of those securities subsequently increase, such increases are not reflected in earnings but are instead
included in shareholders equity as a component of accumulated other comprehensive income. When recorded, OTTI charges have no impact whatsoever on the asset values otherwise recorded in our Consolidated Balance Sheets or on our consolidated
shareholders equity. In addition, the recognition of such losses in earnings rather than in accumulated other comprehensive income does not necessarily indicate that sales are planned and ultimately sales may not occur for a number of years.
Furthermore, the recognition of an OTTI charge does not necessarily indicate that the loss in value of the security is permanent or that the market price of the security will not subsequently increase to and ultimately exceed our original cost.
At the beginning of 2018, we will adopt a new accounting standard that, among its provisions, changes the reporting of
unrealized gains and losses related to investments in equity securities and certain other investments. Upon adoption of this accounting standard, we will reclassify the net unrealized gains for such investments presently reflected in accumulated
other comprehensive income to retained earnings. The amount of the reclassification will be based on our equity investments at December 31, 2017. As of March 31, 2017, accumulated after-tax net unrealized gains related to equity securities
and other investments was approximately $47.8 billion. Thereafter, the changes in the accumulated unrealized gains and losses on equity securities, as well as realized gains and losses from sales and dispositions, will be included in our periodic
Consolidated Statements of Earnings. We do not expect the adoption of this standard will affect our total consolidated shareholders equity. However, it will likely produce a very significant increase in the volatility of our periodic net
earnings given the magnitude of our existing equity securities portfolio and the inherent volatility of equity securities prices.
39
Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations
(Continued)
Investment and Derivative Gains/Losses
(Continued)
Derivative gains/losses
Derivative gains/losses currently represent the changes in fair value of our equity index put option contract liabilities. The
periodic changes in the fair values of these contracts are recorded in earnings and can be significant, reflecting the volatility of underlying equity markets and the changes in the inputs used to measure such liabilities.
Derivative contracts produced pre-tax gains in the first quarter of 2017 of $460 million and pre-tax losses of $810 million in
2016, substantially all of which derived from our equity index put options. The gains in 2017 related to these contracts were primarily attributable to increased index values and the passage of time, while the losses in 2016 were driven by lower
index values and interest rates. As of March 31, 2017, equity index put option intrinsic values were approximately $700 million and our recorded liabilities at fair value were approximately $2.43 billion. Our ultimate payment obligations, if
any, under our equity index put option contracts will be determined as of the contract expiration dates (beginning in 2018), and will be based on the intrinsic value as defined under the contracts.
Other
A summary of after-tax other earnings (losses) follows (in millions).
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
|
2017
|
|
|
2016
|
|
Kraft Heinz earnings
|
|
|
$ 222
|
|
|
|
$ 159
|
|
Acquisition accounting expenses
|
|
|
(142
|
)
|
|
|
(134
|
)
|
Corporate interest expense
|
|
|
(124
|
)
|
|
|
(213
|
)
|
Other
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
Net earnings (losses) attributable to Berkshire Hathaway shareholders
|
|
|
$ (44
|
)
|
|
|
$ (197
|
)
|
|
|
|
|
|
|
|
|
|
Kraft Heinz earnings includes Berkshires share of Kraft Heinzs earnings
attributable to common shareholders determined pursuant to the equity method. Other earnings also include charges from the application of the acquisition method in connection with Berkshires business acquisitions. Such charges were primarily
from the amortization of intangible assets recorded in connection with those business acquisitions, which we view as corporate expenses. Corporate interest expense included after-tax foreign exchange losses in the first quarter of $57 million in
2017 and $161 million in 2016 with respect to Euro denominated debt issued by Berkshire during the last three years. Such debt is currently 6.85 billion, and thus changes in foreign currency exchange rates can produce sizable
remeasurement gains and losses. Excluding foreign currency effects, after-tax corporate interest expense was $67 million in 2017 and $52 million in 2016. The increase in interest expense was attributable to increased average outstanding
borrowings.
Financial Condition
Our balance sheet reflects significant liquidity and a strong capital base. Our consolidated shareholders equity at
March 31, 2017 was approximately $292.8 billion, an increase of about $9.8 billion since December 31, 2016. Net earnings attributable to Berkshire shareholders in the first quarter of 2017 were $4.1 billion and net
unrealized appreciation of investments, after taxes, increased approximately $5.3 billion during the first quarter. At March 31, 2017, our insurance and other businesses held cash, cash equivalents and U.S. Treasury Bills of $79.4 billion
and investments (excluding our investment in Kraft Heinz) of $171.6 billion. In January 2017, Berkshire issued new senior notes aggregating 1.1 billion and repaid $1.1 billion of maturing senior notes. There are no other
Berkshire term debt maturities in 2017. Berkshires debt outstanding at March 31, 2017 was $17.8 billion.
40
Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations
(Continued)
Financial Condition
(Continued)
Our railroad, utilities and energy businesses (conducted by BNSF and BHE)
maintain very large investments in capital assets (property, plant and equipment) and will regularly make significant capital expenditures in the normal course of business. In the first quarter of 2017, capital expenditures were $865 million by BHE
and $674 million by BNSF. We estimate that aggregate forecasted capital expenditures of these businesses for the remainder of 2017 will be approximately $6.5 billion and we currently expect to fund such future capital expenditures with cash
flows from operations and debt issuances.
BNSFs outstanding debt approximated $23.2 billion as of
March 31, 2017, an increase of approximately $1.2 billion since December 31, 2016. In March 2017, BNSF issued $1.25 billion of senior unsecured debentures with $500 million due in 2027 and $750 million due in 2047. Approximately $650
million of BNSF debentures mature in May 2017, and another $650 million mature in March 2018. Outstanding borrowings of BHE and its subsidiaries, excluding its borrowings from Berkshire insurance subsidiaries, were approximately $37.7 billion
at March 31, 2017, an increase of $643 million since December 31, 2016. During the first three months of 2017, BHE subsidiaries issued approximately $850 million of debt with maturity dates ranging from 2027 to 2047. BHE has $656
million of debt maturities during the remainder of 2017. Berkshire does not guarantee the repayment of debt issued by BNSF, BHE or any of their subsidiaries and is not committed to provide capital to support BNSF, BHE or any of their subsidiaries.
Finance and financial products assets were approximately $42.1 billion as of March 31, 2017, relatively
unchanged since December 31, 2016. Finance assets consist primarily of loans and finance receivables, various types of property held for lease, cash, cash equivalents, U.S. Treasury Bills and other investments. Finance and financial products
liabilities were approximately $19.5 billion as of March 31, 2017, relatively unchanged compared to December 31, 2016. Liabilities at March 31, 2017 included approximately $14.7 billion of senior unsecured notes issued by a
wholly-owned financing subsidiary, Berkshire Hathaway Finance Corporation (BHFC). The proceeds of BHFCs senior notes are used to fund loans originated and acquired by Clayton Homes and a portion of assets held for lease by our UTLX
railcar leasing business. In January 2017, BHFC issued new senior notes aggregating $1.3 billion due in 2019 and 2020 and repaid $1.05 billion of maturing notes. Over the remainder of 2017, an additional $1.75 billion of BHFC senior
notes will mature. Berkshire guarantees the full and timely payment of principal and interest with respect to BHFCs senior notes.
Berkshires Board of Directors has authorized Berkshire management to repurchase, at its discretion, Berkshire
Class A and Class B common stock at prices no higher than a 20% premium over book value. There is no obligation to repurchase any stock and the program is expected to continue indefinitely. We will not repurchase our stock if it reduces
the total amount of Berkshires consolidated cash, cash equivalents and U.S. Treasury Bills holdings below $20 billion. Financial strength and redundant liquidity will always be of paramount importance at Berkshire. There were no
repurchases in 2017.
Contractual Obligations
We are party to contracts associated with ongoing business and financing activities, which will result in cash payments to
counterparties in future periods. Certain obligations are included in our Consolidated Balance Sheets, such as notes payable, which require future payments on contractually specified dates and in fixed and determinable amounts. Other obligations
pertain to the acquisition of goods or services in the future, such as minimum rentals under operating leases and certain purchase obligations, and are not currently reflected in the financial statements, but will be recognized in future periods as
the goods are delivered or services are provided.
The timing and amount of the payments under certain contracts, such as
insurance and reinsurance contracts, are contingent upon the outcome of future events and claim settlements. Actual payments will likely vary, perhaps materially, from the estimated liabilities currently recorded in our Consolidated Balance Sheet.
As previously discussed, we entered into a retroactive reinsurance agreement with AIG, which became effective in February 2017. In connection with this agreement, we recorded liabilities of $16.4 billion for unpaid losses and loss adjustment
expenses, representing our current estimate of the claims we ultimately expect to pay under the agreement. Based on our current estimates, we project future payments under this agreement as follows: 2020-2021 $3.6 billion and thereafter
$12.8 billion; however, as generally noted above, actual payments under this agreement will likely vary, perhaps materially, from these estimates.
Except as otherwise disclosed herein, our contractual obligations as of March 31, 2017 were, in the aggregate, not
materially different from those disclosed in the Contractual Obligations section of Managements Discussion and Analysis of Financial Condition and Results of Operations contained in Berkshires Annual Report on
Form 10-K for the year ended December 31, 2016.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Critical Accounting Policies
Certain accounting policies require us to make estimates and judgments that affect the amounts reflected in the Consolidated
Financial Statements. Such estimates and judgments necessarily involve varying, and possibly significant, degrees of uncertainty. Accordingly, certain amounts currently recorded in the financial statements will likely be adjusted in the future based
on new available information and changes in other facts and circumstances. Reference is made to Critical Accounting Policies discussed in Managements Discussion and Analysis of Financial Condition and Results of
Operations included in Berkshires Annual Report on Form 10-K for the year ended December 31, 2016.
Our
Consolidated Balance Sheet as of March 31, 2017 includes estimated liabilities for unpaid losses from property and casualty insurance and reinsurance contracts of approximately $94 billion. Due to the inherent uncertainties in the process of
establishing loss reserve amounts, the actual ultimate claim amounts will likely differ from the currently recorded amounts. A very small percentage change in estimates of this magnitude will result in a material effect on periodic earnings. The
effects from changes in these estimates are recorded as a component of insurance losses and loss adjustment expenses in the period of the change.
Our Consolidated Balance Sheet as of March 31, 2017 includes goodwill of acquired businesses of approximately
$80 billion. We evaluate goodwill for impairment at least annually and we conducted our most recent annual review during the fourth quarter of 2016. Although we believe that the goodwill reflected in the Consolidated Balance Sheet is not
impaired, goodwill may subsequently become impaired as a result of changes in facts and circumstances affecting the valuation of the reporting unit. A goodwill impairment charge could have a material effect on periodic earnings.
Our Consolidated Balance Sheets include significant derivative contract liabilities with respect to our long-duration equity
index put option contracts. The fair values recorded for these liabilities are based on valuation models that utilize various inputs and assumptions that we believe are used by market participants. We further believe that fair values based on such
models are inherently subjective and the values in an actual transaction may differ significantly from the model values. Changes in the assumptions utilized within the valuation models may have a significant effect on recorded fair values and
periodic earnings.
Information concerning new accounting pronouncements is included in Note 2 to the accompanying
Consolidated Financial Statements.
Forward-Looking Statements
Investors are cautioned that certain statements contained in this document as well as some statements in periodic press
releases and some oral statements of Berkshire officials during presentations about Berkshire or its subsidiaries are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the
Act). Forward-looking statements include statements which are predictive in nature, which depend upon or refer to future events or conditions, which include words such as expects, anticipates, intends,
plans, believes, estimates or similar expressions. In addition, any statements concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or
prospects and possible future Berkshire actions, which may be provided by management, are also forward-looking statements as defined by the Act. Forward-looking statements are based on current expectations and projections about future events and are
subject to risks, uncertainties and assumptions about Berkshire and its subsidiaries, economic and market factors and the industries in which we do business, among other things. These statements are not guarantees of future performance and we have
no specific intention to update these statements.
Actual events and results may differ materially from those expressed or
forecasted in forward-looking statements due to a number of factors. The important risk factors that could cause our actual performance and future events and actions to differ materially from such forward-looking statements include, but are not
limited to, changes in market prices of our investments in fixed maturity and equity securities, losses realized from derivative contracts, the occurrence of one or more catastrophic events, such as an earthquake, hurricane, act of terrorism or
cyber attack that causes losses insured by our insurance subsidiaries and/or losses to our business operations, changes in laws or regulations affecting our insurance, railroad, utilities and energy and finance subsidiaries, changes in federal
income tax laws, and changes in general economic and market factors that affect the prices of securities or the industries in which we do business.
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