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).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
First Nine Months
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Insurance underwriting
|
|
$
|
(1,439
|
)
|
|
$
|
272
|
|
|
$
|
(1,728
|
)
|
|
$
|
822
|
|
Insurance investment income
|
|
|
1,044
|
|
|
|
850
|
|
|
|
2,917
|
|
|
|
2,747
|
|
Railroad
|
|
|
1,042
|
|
|
|
1,020
|
|
|
|
2,838
|
|
|
|
2,576
|
|
Utilities and energy
|
|
|
963
|
|
|
|
932
|
|
|
|
1,980
|
|
|
|
1,855
|
|
Manufacturing, service and retailing
|
|
|
1,694
|
|
|
|
1,702
|
|
|
|
4,673
|
|
|
|
4,461
|
|
Finance and financial products
|
|
|
341
|
|
|
|
337
|
|
|
|
976
|
|
|
|
1,044
|
|
Investment and derivative gains/losses
|
|
|
623
|
|
|
|
2,347
|
|
|
|
1,270
|
|
|
|
4,593
|
|
Other
|
|
|
(201
|
)
|
|
|
(262
|
)
|
|
|
(537
|
)
|
|
|
(310
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to Berkshire Hathaway shareholders
|
|
$
|
4,067
|
|
|
$
|
7,198
|
|
|
$
|
12,389
|
|
|
$
|
17,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
after-tax
losses from underwriting in the third
quarter and first nine months of 2017. Underwriting results in the third quarter of 2017 included estimated
pre-tax
losses of approximately $3.0 billion ($1.95 billion
after-tax)
attributable to three major hurricanes in the U.S. and Puerto Rico and an earthquake in Mexico. Underwriting results in 2017 also included
after-tax
foreign
currency exchange rate losses from the revaluation of certain
non-U.S.
Dollar denominated reinsurance liabilities. Such
after-tax
losses were $80 million in the
third quarter and $276 million for the first nine months of 2017 compared to gains of $46 million and $269 million in the comparable 2016 periods.
Our railroad business produced increased earnings in the third quarter (2%) and first nine months (10%) of 2017 compared to
2016, reflecting increased unit volume. Earnings of our utility and energy business were also higher in the third quarter and first nine months of 2017 compared to 2016, reflecting slightly higher
pre-tax
earnings and lower effective income tax rates. Earnings of our manufacturing, service and retailing businesses in the third quarter of 2017 were relatively unchanged and increased 4.8% in the first nine months compared to the same periods in 2016.
Earnings in the first nine months of 2017 reflected comparatively higher earnings from several of our larger operations and the impact of businesses acquired in 2016 and 2017, partly offset by losses and impairment charges related to the disposition
of a prior
bolt-on
acquisition by one of our manufacturing businesses.
After-tax
investment and derivative gains in the third quarter and first nine months of 2017 were $623 million and $1.3 billion, respectively, and $2.3 billion in the third quarter and
$4.6 billion in the first nine months of 2016.
After-tax
investment gains in the third quarter of 2016 included approximately $1.6 billion from the sale of our Wrigley preferred stock investment and
in the first nine months of 2016 also included
non-cash
gains of approximately $1.9 billion related to the exchange of P&G common stock for 100% of the common stock of Duracell.
In the first nine months of 2017, net unrealized gains related to our investments in equity securities
(after-tax
and net of noncontrolling interests) included in other comprehensive income were approximately $10.9 billion. Beginning in 2018, unrealized gains and losses on equity securities will be included in
earnings after the adoption of a new accounting standard required under U.S. GAAP. We believe that investment and derivative gains/losses, whether realized from sales or unrealized from changes in market prices, are often meaningless in terms of
understanding our reported results or evaluating our economic performance. Investment and derivative gains and losses have caused and will continue to cause significant volatility in our periodic earnings.
Other earnings in 2017 and 2016 included
after-tax
foreign currency exchange rate
losses related to parent company Euro denominated notes payable. Such losses, which related to revaluations of the debt due to changes in exchange rates, were $172 million in the third quarter and $571 million in the first nine months of
2017 compared to $48 million in the third quarter and $107 million in the first nine months of 2016.
25
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
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 assumed 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, while 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.
The timing and amount of
significant catastrophe losses can produce significant volatility in our periodic underwriting results, particularly with respect to our reinsurance businesses. Generally, we consider
pre-tax
catastrophe
losses in excess of $100 million from a current year event as significant, and in the third quarter of 2017, we had four such events. There were no significant events in 2016. 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 corresponding decreases or increases 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
First Nine Months
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Underwriting gain (loss) attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GEICO
|
|
$
|
(416
|
)
|
|
$
|
138
|
|
|
$
|
(122
|
)
|
|
$
|
552
|
|
General Re
|
|
|
(504
|
)
|
|
|
100
|
|
|
|
(622
|
)
|
|
|
144
|
|
Berkshire Hathaway Reinsurance Group
|
|
|
(1,341
|
)
|
|
|
(19
|
)
|
|
|
(2,341
|
)
|
|
|
86
|
|
Berkshire Hathaway Primary Group
|
|
|
52
|
|
|
|
190
|
|
|
|
473
|
|
|
|
485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax
underwriting gain (loss)
|
|
|
(2,209
|
)
|
|
|
409
|
|
|
|
(2,612
|
)
|
|
|
1,267
|
|
Income taxes and noncontrolling interests
|
|
|
(770
|
)
|
|
|
137
|
|
|
|
(884
|
)
|
|
|
445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net underwriting gain (loss)
|
|
$
|
(1,439
|
)
|
|
$
|
272
|
|
|
$
|
(1,728
|
)
|
|
$
|
822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
First Nine Months
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Premiums written
|
|
$
|
8,130
|
|
|
|
|
|
|
$
|
6,977
|
|
|
|
|
|
|
$
|
22,987
|
|
|
|
|
|
|
$
|
19,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
7,543
|
|
|
|
100.0
|
|
|
$
|
6,474
|
|
|
|
100.0
|
|
|
$
|
21,632
|
|
|
|
100.0
|
|
|
$
|
18,771
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
|
6,933
|
|
|
|
91.9
|
|
|
|
5,335
|
|
|
|
82.4
|
|
|
|
18,631
|
|
|
|
86.1
|
|
|
|
15,331
|
|
|
|
81.7
|
|
Underwriting expenses
|
|
|
1,026
|
|
|
|
13.6
|
|
|
|
1,001
|
|
|
|
15.5
|
|
|
|
3,123
|
|
|
|
14.5
|
|
|
|
2,888
|
|
|
|
15.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and expenses
|
|
|
7,959
|
|
|
|
105.5
|
|
|
|
6,336
|
|
|
|
97.9
|
|
|
|
21,754
|
|
|
|
100.6
|
|
|
|
18,219
|
|
|
|
97.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax
underwriting gain
|
|
$
|
(416
|
)
|
|
|
|
|
|
$
|
138
|
|
|
|
|
|
|
$
|
(122
|
)
|
|
|
|
|
|
$
|
552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written in the third quarter and first nine months of 2017 increased approximately
$1.15 billion (16.5%) and $3.2 billion (16.3%), respectively, compared to 2016. Premiums earned in 2017 increased 16.5% in the third quarter and 15.2% in the first nine months compared to the same periods in 2016. Over the past year,
voluntary auto
policies-in-force
grew approximately 9.9% and premiums per auto policy increased 6.0%. The increase in average premiums per policy was attributable to
rate increases, coverage changes and changes in state and risk mix. Voluntary auto new business sales in 2017 increased 15.8% in the first nine months compared to the same period in 2016. Voluntary auto
policies-in-force
increased approximately 1,144,000 during the first nine months of 2017.
26
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
InsuranceUnderwriting
(Continued)
GEICO (Continued)
In the third quarter and first nine months of 2017, we incurred
pre-tax
underwriting losses compared to
pre-tax
gains in the corresponding 2016 periods. In the third quarter of 2017, our underwriting results included significant losses
from hurricanes Harvey and Irma. Our underwriting results in 2017 were also affected by increased average claims severities.
Losses and loss adjustment expenses in 2017 increased approximately $1.6 billion (30.0%) in the third quarter and
$3.3 billion (21.5%) in the first nine months compared to the corresponding periods in 2016. Our loss ratio (the ratio of losses and loss adjustment expenses to earned premiums) for the third quarter and first nine months of 2017 increased 9.5
percentage points and 4.4 percentage points, respectively, compared to the same periods in 2016. In the third quarter of 2017, we incurred estimated losses related to hurricanes Harvey and Irma of approximately $500 million (6.6% of premiums
earned in the third quarter and 2.3% in the first nine months). Average claims severities were higher in the first nine months of 2017 for property damage and collision coverages (four to six percent range) and bodily injury coverage (five to seven
percent range). Claims frequencies in the first nine months of 2017 were relatively flat compared to 2016 for property damage, collision and bodily injury coverages and decreased about three percent for personal injury protection coverage. Losses
and loss adjustment expenses in the first nine months of 2017 included
pre-tax
losses of $37 million from the
re-estimation
of liabilities for prior years
claims compared to
pre-tax
gains of $382 million in 2016.
Underwriting
expenses in the third quarter and first nine months of 2017 increased $25 million (2.5%) and $235 million (8.1%), respectively, compared to 2016. Our expense ratios (underwriting expenses to premiums earned) in 2017 declined 1.9 percentage
points in the third quarter and 0.9 percentage points in the first nine months compared to 2016. The largest components of underwriting expenses are employee-related (salaries and benefits) and advertising, which increased at a slower rate than
premiums earned.
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 also 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).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
|
Pre-tax underwriting gain (loss)
|
|
|
|
Third Quarter
|
|
|
First Nine Months
|
|
|
Third Quarter
|
|
|
First Nine Months
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Property/casualty
|
|
$
|
844
|
|
|
$
|
643
|
|
|
$
|
2,275
|
|
|
$
|
1,919
|
|
|
$
|
(561
|
)
|
|
$
|
66
|
|
|
$
|
(718
|
)
|
|
$
|
119
|
|
Life/health
|
|
|
786
|
|
|
|
746
|
|
|
|
2,324
|
|
|
|
2,249
|
|
|
|
57
|
|
|
|
34
|
|
|
|
96
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,630
|
|
|
$
|
1,389
|
|
|
$
|
4,599
|
|
|
$
|
4,168
|
|
|
$
|
(504
|
)
|
|
$
|
100
|
|
|
$
|
(622
|
)
|
|
$
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property/casualty
In the third quarter and first nine months of 2017, property/casualty premiums earned increased $201 million (31%) and
$356 million (19%), respectively, compared to the corresponding 2016 periods. These increases reflected higher written premiums in both direct and broker markets, primarily derived from new business and increased participations for renewal
business. Despite the increase in premium volume in 2017, industry capacity dedicated to property and casualty markets remains high and price competition in most reinsurance markets persists. We continue to decline business when we believe prices
are inadequate.
Our property/casualty operations incurred
pre-tax
underwriting
losses of $561 million in the third quarter and $718 million in the first nine months of 2017 compared to
pre-tax
underwriting gains of $66 million and $119 million, respectively, in the
comparable 2016 periods. In the third quarter of 2017, we incurred estimated losses aggregating $835 million from hurricanes Harvey, Irma and Maria and an earthquake in Mexico. In the first nine months of 2017, we also incurred estimated losses
of approximately $50 million from a cyclone in Australia. Losses from catastrophe events in the first nine months of 2016 were not significant.
In the first nine months of 2017, we also increased our estimates for unpaid losses by approximately $140 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 in the first quarter to reduce the fixed discount rate required in lump sum
settlement calculations of U.K. personal injury claims. The discount rate, referred to as the Ogden rate, was reduced from 2.5% to negative 0.75%. We expect this reduction in the Ogden rate will significantly increase claim costs associated with
currently unsettled cases, as well as for future cases. The Ogden rate is subject to adjustment in the future at the discretion of the U.K Government and significant changes in that rate may have a significant effect on our claim liability
estimates.
27
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
InsuranceUnderwriting
(Continued)
General Re (Continued)
Life/health
Life/health premiums earned in the third quarter and first nine months of 2017 increased $40 million (5%) and
$75 million (3%), respectively, compared to 2016. The increases reflected growth in North America and several international markets. Our life/health operations produced
pre-tax
underwriting gains of
$57 million in the third quarter and $96 million in the first nine months of 2017, increases of $23 million over the third quarter and $71 million over the first nine months of 2016. Underwriting results in 2017 reflected lower
underwriting expenses and the impact of increasing liabilities for estimated premium deficiencies on certain disability business in 2016. Underwriting results in the first nine months of 2017 and 2016 also included
pre-tax
losses from the runoff of U.S. long-term care and disability business of $58 million and $48 million, respectively, primarily due to the periodic 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).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
|
Pre-tax underwriting gain (loss)
|
|
|
|
Third Quarter
|
|
|
First Nine Months
|
|
|
Third Quarter
|
|
|
First Nine Months
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Property/casualty
|
|
$
|
1,217
|
|
|
$
|
1,164
|
|
|
$
|
3,488
|
|
|
$
|
3,358
|
|
|
$
|
(927
|
)
|
|
$
|
40
|
|
|
$
|
(1,144
|
)
|
|
$
|
415
|
|
Retroactive reinsurance
|
|
|
550
|
|
|
|
|
|
|
|
10,736
|
|
|
|
582
|
|
|
|
(285
|
)
|
|
|
(114
|
)
|
|
|
(875
|
)
|
|
|
(196
|
)
|
Life and annuity
|
|
|
557
|
|
|
|
708
|
|
|
|
1,727
|
|
|
|
1,827
|
|
|
|
(129
|
)
|
|
|
55
|
|
|
|
(322
|
)
|
|
|
(133
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,324
|
|
|
$
|
1,872
|
|
|
$
|
15,951
|
|
|
$
|
5,767
|
|
|
$
|
(1,341
|
)
|
|
$
|
(19
|
)
|
|
$
|
(2,341
|
)
|
|
$
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property/casualty
In the third quarter and first nine months of 2017, premiums earned increased $53 million (5%) and $130 million (4%),
respectively, compared to 2016. In the third quarter of 2017, we earned premiums on certain contracts where policy limits were fully exhausted as a result of catastrophe losses. Such premiums would have been otherwise earned in future periods.
Premiums written for the first nine months of 2017 declined 5% compared to 2016. Premium rates, in our view, are generally inadequate and we have constrained our volumes.
Our
pre-tax
underwriting losses were $927 million in the third quarter and
$1.1 billion in the first nine months of 2017. In the third quarter of 2017, we incurred estimated losses of approximately $1.45 billion related to hurricanes Harvey, Irma and Maria and an earthquake in Mexico. Underwriting results in the
first nine months of 2017 also included estimated losses of $110 million from a cyclone in Australia. In the first nine months of 2016, we incurred no significant losses from catastrophe loss events. In the first nine months of 2017, we also
increased estimated ultimate liabilities for prior years loss events by approximately $200 million, compared to reductions of such liabilities of approximately $290 million in 2016. These increases and decreases produced
corresponding decreases and increases in
pre-tax
underwriting earnings in those periods.
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. In connection with the AIG Agreement, we received cash premiums of $10.2 billion. As of the effective date, we also recorded losses and loss adjustment expenses incurred of
$10.2 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 results in 2017 included losses of $60 million in the third
quarter and $251 million in the first nine months from changes in foreign currency exchange rates, which increased foreign currency denominated liabilities of U.S subsidiaries. In 2016, foreign currency exchange rate changes reduced such
liabilities and resulted in
pre-tax
gains of $21 million in the third quarter and $198 million in the first nine months.
28
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
InsuranceUnderwriting
(Continued)
Berkshire Hathaway Reinsurance Group (Continued)
Retroactive reinsurance (Continued)
Before foreign currency gains/losses, retroactive reinsurance contracts
produced
pre-tax
underwriting losses of $225 million and $624 million in the third quarter and first nine months of 2017, respectively, and $135 million and $394 million, respectively, in
the comparable 2016 periods. The comparative increases in
pre-tax
losses in 2017 were primarily attributable to deferred charge amortization from contracts written over the past twelve months, including the
aforementioned AIG Agreement, partly offset by comparatively lower amortization on prior years contracts.
Liabilities for losses and loss adjustment expenses associated with our retroactive reinsurance contracts were approximately
$40.7 billion at September 30, 2017 and $24.7 billion at December 31, 2016. Unamortized deferred charges related to these contracts were approximately $13.5 billion at September 30, 2017 and $8.0 billion at
December 31, 2016. The increases in such liabilities and deferred charges were primarily due to the AIG agreement.
Life and
annuity
A summary of BHRGs life and annuity underwriting results follows (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
|
Pre-tax underwriting gain (loss)
|
|
|
|
Third Quarter
|
|
|
First Nine Months
|
|
|
Third Quarter
|
|
|
First Nine Months
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Periodic payment annuity
|
|
$
|
197
|
|
|
$
|
367
|
|
|
$
|
647
|
|
|
$
|
771
|
|
|
$
|
(185
|
)
|
|
$
|
(61
|
)
|
|
$
|
(528
|
)
|
|
$
|
(123
|
)
|
Life reinsurance
|
|
|
355
|
|
|
|
337
|
|
|
|
1,067
|
|
|
|
1,043
|
|
|
|
11
|
|
|
|
(9
|
)
|
|
|
9
|
|
|
|
5
|
|
Variable annuity guarantee
|
|
|
5
|
|
|
|
4
|
|
|
|
13
|
|
|
|
13
|
|
|
|
45
|
|
|
|
125
|
|
|
|
197
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
557
|
|
|
$
|
708
|
|
|
$
|
1,727
|
|
|
$
|
1,827
|
|
|
$
|
(129
|
)
|
|
$
|
55
|
|
|
$
|
(322
|
)
|
|
$
|
(133
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Periodic payment annuity premiums consist of upfront consideration received under direct and
assumed contracts that provide for structured settlement annuity payments, typically over very long periods. Premiums earned in the third quarter and first nine months of 2017 declined compared to the same periods in 2016, due to lower volumes.
Liabilities under certain of our contracts are denominated in foreign currencies. During 2017, the value of the U.S. Dollar weakened producing
pre-tax
losses of $63 million in the third quarter and
$173 million in the first nine months of 2017. In 2016, foreign currency exchange rate changes produced
pre-tax
gains of $50 million in the third quarter and $216 million in the first nine
months.
Before foreign currency gains and losses,
pre-tax
underwriting losses
from periodic payment annuity contracts were $122 million in the third quarter and $355 million in the first nine months of 2017 and $111 million and $339 million, respectively, in the third quarter and first nine months of 2016.
We expect these contracts will generate
pre-tax
losses over time attributable to the accretion of discounted annuity liabilities. Discounted periodic payment annuity liabilities were approximately
$10.9 billion at September 30, 2017, and our weighted average discount rate was approximately 4.1%.
The
comparative improvements in our underwriting results in 2017 from life reinsurance reflected decreased benefit liabilities on certain blocks of business. Underwriting results from our variable annuity business (reinsurance contracts that provide
guarantees on closed blocks of variable annuity business) reflected changes in liabilities for guaranteed benefits, resulting from changes in securities markets and interest rates and from the periodic recognition of expected profit margins. Our
estimated liabilities for variable annuity guarantees were approximately $1.9 billion at September 30, 2017 and $2.1 billion at December 31, 2016. Periodic underwriting results from these contracts can be volatile reflecting the
volatility of securities markets, interest rates and foreign currency exchange rates.
Berkshire Hathaway Primary Group
The Berkshire Hathaway Primary Group (BH Primary) consists of a wide variety of independently managed 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.
29
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
InsuranceUnderwriting
(Continued)
Berkshire Hathaway Primary Group (Continued)
A summary of BH Primarys underwriting results follows (dollars in
millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
First Nine Months
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Premiums written
|
|
$
|
1,995
|
|
|
|
|
|
|
$
|
1,828
|
|
|
|
|
|
|
$
|
5,645
|
|
|
|
|
|
|
$
|
5,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
1,852
|
|
|
|
100.0
|
|
|
$
|
1,629
|
|
|
|
100.0
|
|
|
$
|
5,287
|
|
|
|
100.0
|
|
|
$
|
4,581
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
|
1,342
|
|
|
|
72.5
|
|
|
|
985
|
|
|
|
60.5
|
|
|
|
3,426
|
|
|
|
64.8
|
|
|
|
2,817
|
|
|
|
61.5
|
|
Underwriting expenses
|
|
|
458
|
|
|
|
24.7
|
|
|
|
454
|
|
|
|
27.8
|
|
|
|
1,388
|
|
|
|
26.3
|
|
|
|
1,279
|
|
|
|
27.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and expenses
|
|
|
1,800
|
|
|
|
97.2
|
|
|
|
1,439
|
|
|
|
88.3
|
|
|
|
4,814
|
|
|
|
91.1
|
|
|
|
4,096
|
|
|
|
89.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax
underwriting gain
|
|
$
|
52
|
|
|
|
|
|
|
$
|
190
|
|
|
|
|
|
|
$
|
473
|
|
|
|
|
|
|
$
|
485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written in the third quarter and first nine months in 2017 increased 9.1% and 11.8%,
respectively, over the same periods in 2016. All of the BH Primary insurers generated increased premiums written in the first nine months of 2017, led by BH Specialty (23%), GUARD (26%) and BHHC (10%). Premiums earned increased $223 million
(13.7%) in the third quarter and $706 million (15.4%) in the first nine months as compared to 2016.
The BH Primary
insurers produced
pre-tax
underwriting gains of $52 million in the third quarter and $473 million in the first nine months of 2017. In the third quarter of 2017, losses and loss adjustment expenses
included approximately $225 million (12% of premiums earned) related to hurricanes Harvey, Irma and Maria. Losses and loss adjustment expenses in the first nine months of 2017 and 2016 also included net reductions of estimated ultimate
liabilities for prior years loss events of $606 million and $373 million, respectively, which produced corresponding increases in
pre-tax
underwriting gains. The gains from the development of
prior years claim estimates in 2017 were primarily attributable to healthcare malpractice and workers compensation business. Many of our businesses write significant levels of liability and workers compensation business and the
related claim costs may be subject to higher severity and longer-claims tails, which may contribute to significant claims development gains or losses in the future.
InsuranceInvestment Income
A summary of net investment income generated by investments held by our insurance operations follows (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
First Nine Months
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Interest income
|
|
$
|
344
|
|
|
$
|
224
|
|
|
$
|
870
|
|
|
$
|
668
|
|
Dividend income
|
|
|
902
|
|
|
|
805
|
|
|
|
2,788
|
|
|
|
2,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income before income taxes and noncontrolling interests
|
|
|
1,246
|
|
|
|
1,029
|
|
|
|
3,658
|
|
|
|
3,406
|
|
Income taxes and noncontrolling interests
|
|
|
202
|
|
|
|
179
|
|
|
|
741
|
|
|
|
659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
1,044
|
|
|
$
|
850
|
|
|
$
|
2,917
|
|
|
$
|
2,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax
investment income in the third quarter and
first nine months of 2017 increased $217 million (21%) and $252 million (7%), respectively, compared to the same periods in 2016. The increases in interest income reflected higher interest rates on short-term investments and certain
fixed maturity investments. We continue to hold significant amounts of cash and cash equivalents and U.S. Treasury Bills earning low yields. We believe that maintaining ample liquidity is paramount and we insist on safety over yield with respect to
such balances.
The increases in dividend income for the third quarter and first nine months reflected increased rates,
increased overall investment levels and an aggregate increase from our investments in Bank of America, partially offset by the impact of the conversion of our $3 billion investment in Dow Chemical Company (Dow) 8.5% preferred stock
into Dow common stock at the end of 2016.
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 $113 billion at September 30, 2017 and $91 billion at
December 31, 2016. The increase in float in the first nine months of 2017 reflected increases in net unpaid losses and loss adjustment expenses, including liabilities assumed under retroactive reinsurance contracts written in 2017, estimated
liabilities related to catastrophe events, and overall growth of our insurance operations. Our
pre-tax
underwriting losses were approximately $2.6 billion in the first nine months of 2017 and our average
cost of float was approximately 2.5%.
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).
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Cash and cash equivalents and U.S. Treasury Bills
|
|
$
|
68,974
|
|
|
$
|
48,888
|
|
Equity securities
|
|
|
150,819
|
|
|
|
119,780
|
|
Fixed maturity securities
|
|
|
21,532
|
|
|
|
22,778
|
|
Other investments
|
|
|
3,303
|
|
|
|
14,364
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
244,628
|
|
|
$
|
205,810
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities as of September 30, 2017 were as follows (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
cost
|
|
|
Unrealized
gains (losses)
|
|
|
Carrying
value
|
|
U.S. Treasury, U.S. government corporations and agencies
|
|
$
|
3,942
|
|
|
$
|
(6
|
)
|
|
$
|
3,936
|
|
States, municipalities and political subdivisions
|
|
|
964
|
|
|
|
50
|
|
|
|
1,014
|
|
Foreign governments
|
|
|
8,554
|
|
|
|
209
|
|
|
|
8,763
|
|
Corporate bonds, investment grade
|
|
|
5,471
|
|
|
|
413
|
|
|
|
5,884
|
|
Corporate bonds,
non-investment
grade
|
|
|
868
|
|
|
|
210
|
|
|
|
1,078
|
|
Mortgage-backed securities
|
|
|
753
|
|
|
|
104
|
|
|
|
857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,552
|
|
|
$
|
980
|
|
|
$
|
21,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations are rated AA+ or Aaa by the major rating agencies and
approximately 88% 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).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
First Nine Months
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenues
|
|
$
|
5,314
|
|
|
$
|
5,167
|
|
|
$
|
15,749
|
|
|
$
|
14,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
1,160
|
|
|
|
1,193
|
|
|
|
3,685
|
|
|
|
3,535
|
|
Fuel
|
|
|
595
|
|
|
|
533
|
|
|
|
1,777
|
|
|
|
1,359
|
|
Purchased services
|
|
|
608
|
|
|
|
562
|
|
|
|
1,843
|
|
|
|
1,789
|
|
Depreciation and amortization
|
|
|
591
|
|
|
|
534
|
|
|
|
1,756
|
|
|
|
1,584
|
|
Equipment rents, materials and other
|
|
|
397
|
|
|
|
462
|
|
|
|
1,335
|
|
|
|
1,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
3,351
|
|
|
|
3,284
|
|
|
|
10,396
|
|
|
|
9,646
|
|
Interest expense
|
|
|
253
|
|
|
|
250
|
|
|
|
761
|
|
|
|
744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,604
|
|
|
|
3,534
|
|
|
|
11,157
|
|
|
|
10,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax
earnings
|
|
|
1,710
|
|
|
|
1,633
|
|
|
|
4,592
|
|
|
|
4,129
|
|
Income taxes
|
|
|
668
|
|
|
|
613
|
|
|
|
1,754
|
|
|
|
1,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
1,042
|
|
|
$
|
1,020
|
|
|
$
|
2,838
|
|
|
$
|
2,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 third quarter and first nine months of 2017 were
$5.3 billion and $15.7 billion, respectively, representing increases of $147 million (2.8%) and $1.23 billion (8.5%), respectively, versus the corresponding periods in 2016.
Pre-tax
earnings in the third quarter and first nine months of 2017 increased 4.7% and 11.2%, respectively, compared to the same periods in 2016.
In the first nine months of 2017, revenues reflected a 2.4% comparative increase in average revenue per car/unit and a 6.0%
increase in volume. Our
year-to-date
volume was 7.6 million cars/units compared to 7.2 million in 2016. Our overall volume growth moderated in the third
quarter of 2017 compared to the growth experienced in the first half of the year and we expect continued moderation in the fourth quarter. The increase in average revenue per car/unit was primarily attributable to higher fuel surcharge revenue and
increased rates per car/unit.
Freight revenues from consumer products in 2017 were $1.8 billion in the third quarter
and $5.2 billion in the first nine months, representing increases of 7.6% and 8.2%, respectively, compared to 2016. The revenue increases reflected volume increases of 7.4% in the third quarter and 6.3% in the first nine months as well as
higher average revenue per car/unit. The volume increases were primarily attributable to improving economic conditions, normalizing of retail inventories, new services and higher market share, which benefited domestic intermodal, international
intermodal and automotive volumes.
Freight revenues from industrial products in 2017 were $1.3 billion in the third
quarter and $3.8 billion for the first nine months, or increases of 4.0% and 5.1%, respectively, from the comparable 2016 periods. The increases were attributable to higher average revenue per car/unit, as well as volume increases of 2.0% in
the third quarter and 2.2% in the first nine months. Volumes in 2017 were higher for sand and other commodities that support drilling. In addition, broad strengthening in the industrial sector drove greater demand for steel and taconite. These
volume increases were partially offset by lower petroleum products volume due to pipeline displacement of U.S. crude rail traffic as well as lower aggregates and plastics volume.
Freight revenues from agricultural products in 2017 decreased 9.4% in the third quarter to $992 million and increased
4.0% to $3.2 billion in the first nine months compared to the same periods in 2016. The decrease in the third quarter was driven by a volume decrease of 12.0% compared to 2016, partially offset by higher average revenue per car/unit. The volume
decrease in the third quarter was driven by lower grain exports, partially offset by higher domestic grain. Revenue growth in the first nine months reflected higher average revenue per car/unit as well as volume increases of 0.7%. The volume growth
in the first nine months of 2017 was primarily due to higher shipments of domestic grain, as well as ethanol and other grain products, partially offset by lower grain exports.
Freight revenues from coal in 2017 increased 5.9% in the third quarter to $1.0 billion and 20.7% in the first nine months
to $2.9 billion compared to 2016. The increase in revenues reflected higher volumes, 1.9% in the third quarter and 12.4%
year-to-date,
as well as higher average
revenue per car/unit. The volume increases in 2017 were due to continued effects of higher natural gas prices, which led to increased utility coal usage. This was partially offset by the effects of unit retirements of coal generating facilities,
increased renewable generation and coal inventory adjustments at customer facilities.
Operating expenses in the third
quarter and first nine months of 2017 were $3.4 billion and $10.4 billion, respectively, increases of $67 million (2.0%) and $750 million (7.8%), respectively, compared to the same periods in 2016. Our ratios of operating
expenses to revenues decreased 0.5 percentage points to 63.1% in the third quarter and 0.4 percentage points to 66.0% for the first nine months of 2017 versus the corresponding prior year periods.
Compensation and benefits expenses decreased $33 million (2.8%) for the third quarter of 2017 and increased
$150 million (4.2%) for the first nine months compared to 2016. The third quarter decrease was due to lower wages and headcount, partially offset by higher health and welfare costs and volume-related increases. The
year-to-date
increase was primarily due to higher health and welfare costs and volume-related increases, partially offset by lower headcount.
Fuel expenses increased $62 million (11.6%) for the third quarter of 2017 due to higher average fuel prices and lower
efficiency. Fuel expenses increased $418 million (30.8%) for the first nine months compared to 2016 primarily due to higher average fuel prices and increased volumes, partially offset by improved efficiency. Purchased services increased
$46 million (8.2%) in the third quarter and $54 million (3.0%) in the first nine months of 2017 as compared to 2016. The increases are due to higher purchased transportation costs of our logistics services business and a prior year
insurance recovery which reduced expenses in 2016.
Depreciation and amortization expense increased $57 million
(10.7%) for the third quarter of 2017 and $172 million (10.9%) for the first nine months compared to 2016 due to a larger base of depreciable assets in service. In the third quarter and first nine months of 2017, equipment rents, materials and
other expense declined $65 million (14.1%) and $44 million (3.2%), respectively, compared to 2016. These declines resulted from lower personal injury and other casualty related costs offset by higher equipment related material costs.
BNSFs effective income tax rate was 38.2% and 37.6% for the nine months ended September 30, 2017 and 2016,
respectively. The increase was primarily driven by a tax rate increase enacted by the State of Illinois during the third quarter of 2017.
32
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Utilities and Energy (Berkshire Hathaway Energy Company)
We hold a 90.2% 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.
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).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
First Nine Months
|
|
|
|
Revenues
|
|
|
Earnings
|
|
|
Revenues
|
|
|
Earnings
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
PacifiCorp
|
|
$
|
1,443
|
|
|
$
|
1,445
|
|
|
$
|
389
|
|
|
$
|
365
|
|
|
$
|
3,991
|
|
|
$
|
3,952
|
|
|
$
|
912
|
|
|
$
|
867
|
|
MidAmerican Energy Company
|
|
|
832
|
|
|
|
806
|
|
|
|
250
|
|
|
|
241
|
|
|
|
2,209
|
|
|
|
2,031
|
|
|
|
402
|
|
|
|
389
|
|
NV Energy
|
|
|
1,057
|
|
|
|
997
|
|
|
|
347
|
|
|
|
345
|
|
|
|
2,412
|
|
|
|
2,335
|
|
|
|
539
|
|
|
|
495
|
|
Northern Powergrid
|
|
|
220
|
|
|
|
220
|
|
|
|
48
|
|
|
|
57
|
|
|
|
685
|
|
|
|
749
|
|
|
|
215
|
|
|
|
274
|
|
Natural gas pipelines
|
|
|
198
|
|
|
|
204
|
|
|
|
60
|
|
|
|
59
|
|
|
|
706
|
|
|
|
709
|
|
|
|
303
|
|
|
|
288
|
|
Other energy businesses
|
|
|
655
|
|
|
|
703
|
|
|
|
198
|
|
|
|
204
|
|
|
|
1,736
|
|
|
|
1,677
|
|
|
|
311
|
|
|
|
336
|
|
Real estate brokerage
|
|
|
965
|
|
|
|
823
|
|
|
|
81
|
|
|
|
89
|
|
|
|
2,511
|
|
|
|
2,162
|
|
|
|
197
|
|
|
|
187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,370
|
|
|
$
|
5,198
|
|
|
|
|
|
|
|
|
|
|
$
|
14,250
|
|
|
$
|
13,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before corporate interest and income taxes (EBIT)
|
|
|
|
1,373
|
|
|
|
1,360
|
|
|
|
|
|
|
|
|
|
|
|
2,879
|
|
|
|
2,836
|
|
Corporate interest
|
|
|
|
111
|
|
|
|
114
|
|
|
|
|
|
|
|
|
|
|
|
332
|
|
|
|
355
|
|
Income taxes and noncontrolling interests
|
|
|
|
299
|
|
|
|
314
|
|
|
|
|
|
|
|
|
|
|
|
567
|
|
|
|
626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to Berkshire Hathaway shareholders
|
|
|
$
|
963
|
|
|
$
|
932
|
|
|
|
|
|
|
|
|
|
|
$
|
1,980
|
|
|
$
|
1,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PacifiCorp
PacifiCorp operates a regulated electric utility in portions of several Western states, including Utah, Oregon and Wyoming.
Revenues in the third quarter were essentially unchanged and in the first nine months of 2017 increased 1% compared with the same periods in 2016. Retail revenues in the third quarter of 2017 declined slightly compared to 2016 and for the first nine
months increased slightly, reflecting higher volumes, partly offset by lower average rates. In the first nine months of 2017, wholesale and other revenues increased, attributable to higher volumes and average rates.
EBIT increased $24 million (7%) in the third quarter and $45 million (5%) in the first nine months of 2017 as
compared to the same periods in 2016. The comparative increases were primarily due to increased gross margins and lower operations and maintenance expenses, partially offset by increased depreciation and amortization associated with additional plant
in-service.
MidAmerican Energy Company
MEC operates a regulated electric and natural gas utility primarily in Iowa and Illinois. Revenues in the third quarter and
first nine months of 2017 increased $26 million (3%) and $178 million (9%), respectively, as compared to the same periods in 2016. In the third quarter and first nine months of 2017, electric operating revenues increased
$15 million and $105 million, respectively, as compared to the same periods in 2016. The increase in
year-to-date
electric revenues was attributable to higher
wholesale and other revenues ($53 million) and retail revenues ($52 million). The increase in wholesale and other electric revenues reflected comparative increases in volumes, average rates and transmission fees. The increase in retail electric
revenues was primarily attributable to higher recoveries through bill riders (which are substantially offset by increases in costs of sales and operating and income tax expenses) and from
non-weather
usage and
rate factors, partially offset by the unfavorable impact of milder temperatures in 2017. Natural gas operating revenues in the first nine months of 2017 increased $55 million compared to 2016, due primarily to higher average
per-unit
cost of gas sold, which is offset in cost of sales.
EBIT in the third quarter
and first nine months of 2017 increased $9 million (4%) and $13 million (3%), respectively, compared to the same periods in 2016. These increases reflected comparative increases in electric gross margins of $15 million in the
third quarter and $75 million in the first nine months, partially offset by increased depreciation, maintenance and other operating expenses and interest expense.
33
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Utilities and Energy (Berkshire Hathaway Energy
Company)
(Continued)
NV Energy
NV Energy operates regulated electric and natural gas utilities in Nevada. Revenues increased $60 million (6%) in the
third quarter and $77 million (3%) in the first nine months of 2017 compared to the same periods in 2016. These increases were due primarily to increases in retail electric operating revenues of $58 million in the third quarter and
$81 million in the first nine months. The increases in retail electric revenues included a combination of increased rates from pass-through cost adjustments and higher volumes, partly offset by lower revenues from energy efficiency programs,
which are offset by lower operating expenses. In 2017, NV Energy also experienced retail electric revenue declines from the transition of certain commercial and industrial customers electing to purchase power from alternative sources and thus
becoming distribution service only customers. Natural gas operating revenue declined $15 million in the first nine months of 2017, primarily due to lower rates, partially offset by higher customer usage.
EBIT in the third quarter was relatively unchanged from the same period in 2016, as lower gross margins were offset by lower
operating expenses. In the first nine months of 2017, EBIT increased $44 million (9%) compared to the same period in 2016, primarily due to lower operating and interest expenses.
Northern Powergrid
Revenues in the third quarter of 2017 were unchanged and declined $64 million (9%) in the first nine months of 2017
compared to the same periods in 2016. Unfavorable foreign currency translation effects of a comparatively stronger U.S. Dollar in the first nine months of 2017 resulted in a $66 million decline in comparative revenues, substantially all of
which occurred in the first half of the year. Otherwise, the comparative declines in distribution revenues were substantially offset by higher smart metering revenue. EBIT in the third quarter and first nine months of 2017 declined $9 million
(16%) and $59 million (22%), respectively, compared to the same periods in 2016. The EBIT declines were primarily due to foreign currency translation effects, as well as from higher depreciation expense attributable to additional assets
placed
in-service
and increased pension expenses.
Natural gas pipelines
Revenues in the first nine months of 2017 declined slightly compared to the same period in 2016. In 2017, higher gas sales,
primarily from system balancing activities (largely offset in cost of sales), and higher transportation revenues at Northern Natural Gas were offset by lower transportation revenues at Kern River. EBIT in the first nine months of 2017 increased
$15 million (5%) compared to the same period in 2016. The increase was 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 and from the changes in transportation revenues.
Other energy businesses
Revenues in the third quarter of 2017 declined $48 million (7%) and in the first nine months increased $59 million
(4%) compared to the same periods in 2016. Revenues in 2017 reflected comparative declines of 20% in the third quarter and 13% in the first nine months from the unregulated service business and comparative increases of 4% in the third quarter and
11% in the first nine months from renewable energy. The comparative revenue increase in the first nine months of 2017 also included the effects of a decision in May 2016 by AltaLinks regulator, which changed the timing of when
construction-in-progress
expenditures included in the rate base are billable to customers and earned in revenues. The decision resulted in a
one-time
net reduction in revenue in the second quarter of 2016, with offsetting reductions in expenses. EBIT in the first nine months of 2017 declined 7% compared to the same period in 2016, which reflected
lower earnings from renewable energy and the unregulated retail services business, partly offset by increased earnings from AltaLink.
Real estate brokerage
Revenues in the third quarter and first nine months of 2017 increased 17% and 16%, respectively, as compared to the same
periods in 2016. The revenue increases were primarily due to recent business acquisitions and an increase in average home sales prices for existing businesses. EBIT declined 9% in the third quarter and increased 5% in the first nine months of 2017
as compared to 2016. Earnings in 2017 reflected a favorable impact from franchise businesses, partially offset by lower earnings from brokerage businesses, which were primarily due to higher operating expenses, and lower mortgage revenue. Overall,
our
year-to-date
2017
pre-tax
margin rate declined 0.8 percentage points compared to 2016.
Corporate interest and income taxes
Corporate interest includes interest on unsecured debt issued by BHE and borrowings from certain Berkshire insurance
subsidiaries. BHEs effective income tax rates for the first nine months of 2017 and 2016 were approximately 13% and 16%, respectively. The effective tax rate in 2017 decreased primarily due to an increase in production tax credits recognized,
partially offset by the impact of a decline in the United Kingdom statutory income tax rate enacted in the third quarter of 2016.
34
Item
2. Managements Discussion and Analysis of Financial Condition and Results
of Operations
(Continued)
Manufacturing, Service and Retailing
A summary of revenues and earnings of our manufacturing, service and retailing businesses follows (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
First Nine Months
|
|
|
|
Revenues
|
|
|
Earnings *
|
|
|
Revenues
|
|
|
Earnings *
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Manufacturing
|
|
$
|
12,819
|
|
|
$
|
12,082
|
|
|
$
|
2,002
|
|
|
$
|
1,981
|
|
|
$
|
37,654
|
|
|
$
|
34,837
|
|
|
$
|
5,428
|
|
|
$
|
5,150
|
|
Service and retailing
|
|
|
19,325
|
|
|
|
18,602
|
|
|
|
536
|
|
|
|
555
|
|
|
|
56,650
|
|
|
|
54,728
|
|
|
|
1,641
|
|
|
|
1,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32,144
|
|
|
$
|
30,684
|
|
|
|
|
|
|
|
|
|
|
$
|
94,304
|
|
|
$
|
89,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax
earnings
|
|
|
|
|
|
|
|
|
|
|
2,538
|
|
|
|
2,536
|
|
|
|
|
|
|
|
|
|
|
|
7,069
|
|
|
|
6,751
|
|
Income taxes and noncontrolling interests
|
|
|
|
|
|
|
844
|
|
|
|
834
|
|
|
|
|
|
|
|
|
|
|
|
2,396
|
|
|
|
2,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,694
|
|
|
$
|
1,702
|
|
|
|
|
|
|
|
|
|
|
$
|
4,673
|
|
|
$
|
4,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
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 for the third quarter and first nine months of 2017 were
$184
million and $485
million, respectively, compared to $281
million and $486
million for the third quarter and first nine months of 2016, respectively. These expenses are
included in other in the summary of earnings on page 25 and in the other earnings section on page 40.
|
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 (LSPI)). 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 on 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).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
First Nine Months
|
|
|
|
Revenues
|
|
|
Pre-tax earnings
|
|
|
Revenues
|
|
|
Pre-tax earnings
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Industrial products
|
|
$
|
6,657
|
|
|
$
|
6,400
|
|
|
$
|
1,247
|
|
|
$
|
1,347
|
|
|
$
|
19,802
|
|
|
$
|
18,599
|
|
|
$
|
3,508
|
|
|
$
|
3,534
|
|
Building products
|
|
|
3,124
|
|
|
|
2,841
|
|
|
|
407
|
|
|
|
362
|
|
|
|
8,983
|
|
|
|
8,149
|
|
|
|
1,057
|
|
|
|
909
|
|
Consumer products
|
|
|
3,038
|
|
|
|
2,841
|
|
|
|
348
|
|
|
|
272
|
|
|
|
8,869
|
|
|
|
8,089
|
|
|
|
863
|
|
|
|
707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,819
|
|
|
$
|
12,082
|
|
|
$
|
2,002
|
|
|
$
|
1,981
|
|
|
$
|
37,654
|
|
|
$
|
34,837
|
|
|
$
|
5,428
|
|
|
$
|
5,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate revenues from manufacturing increased $737 million (6.1%) in the third
quarter and $2.8 billion (8.1%) in the first nine months of 2017 compared to the same periods in 2016.
Pre-tax
earnings in the third quarter of 2017 were approximately $2.0 billion, relatively
unchanged from the third quarter of 2016 and $5.4 billion in the first nine months, an increase of $278 million (5.4%), over earnings in the corresponding 2016 period. 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 nine months of 2017 included
pre-tax
losses of
approximately $190 million in connection with the disposition of an underperforming
bolt-on
business acquired by Lubrizol in 2014.
Industrial products
Revenues of our industrial products businesses in the third quarter and first nine months of 2017 increased $257 million
(4.0%) and $1.2 billion (6.5%), respectively, compared to the corresponding 2016 periods. Marmon and IMC produced comparative third quarter and
year-to-date
revenue increases. The IMC increases were primarily due to increased customer demand and unit sales. Marmons revenues increased 11% in the third quarter and 6% in the first nine months of 2017 versus 2016, reflecting a mixture of increases
from business acquisitions and higher average metal prices. Marmons highway transportation, retail food and restaurant equipment businesses generated volume-based revenue growth in the third quarter, while engineered wire/cable and retail
store product businesses experienced volume-based revenue declines compared to 2016.
35
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Manufacturing, Service and Retailing
(Continued)
Industrial products (Continued)
PCCs revenues in the third quarter of 2017 were relatively unchanged
from 2016. PCCs revenues increased 10% in the first nine months of 2017 compared to the eight month post-acquisition period in 2016. On a comparable full
year-to-date
basis, PCCs revenues increased approximately 2% compared to 2016. In 2017, PCC produced revenue increases from structural castings, airfoils and
forged products and from new business acquisitions, partly offset by lower revenues from airframe products. PCC is presently transitioning into product lines for new programs within the aerospace markets, which are expected to produce future revenue
increases, but may have negative effects on revenues in the near term as prior programs wind down. Industrial gas turbine demand is expected to substantially decrease in the fourth quarter of 2017.
Lubrizols revenues increased 1.5% in the third quarter and first nine months compared to the same periods in 2016,
primarily due to higher unit volumes. CTBs revenues in the third quarter declined 6% and in the first nine months of 2017 increased 1% compared to 2016, reflecting relatively weak demand and selling price pressures.
Pre-tax
earnings of our industrial products businesses in the third quarter and first
nine months of 2017 decreased $100 million (7.4%) and $26 million (1%), respectively, compared to the same periods in 2016. The comparative decline in the third quarter earnings was primarily attributable to a reclassification to
other earnings (see page 40) in the third quarter of 2016 of certain acquisition accounting related amortization expenses that were reflected in PCCs pre-tax earnings in the first and second quarters of 2016. Otherwise,
pre-tax
earnings of our industrial products businesses in the third quarter of 2017 increased 6.9% compared to 2016. PCCs
pre-tax
earnings in the third quarter of 2017
declined 5% compared to 2016, as adjusted for the aforementioned reclassification, and in first nine months of 2017, increased 5% compared to the eight month post-acquisition date period in 2016.
Pre-tax
earnings from IMC and Marmon in the third quarter and first nine months of
2017 increased compared to the same periods in 2016. The increases were attributable to increased sales, ongoing expense control efforts and lower foreign currency exchange losses. Lubrizols
pre-tax
earnings increased slightly in the third quarter of 2017 and decreased 29% in the first nine months compared to the same periods in 2016. Lubrizol recognized
pre-tax
losses of approximately $190 million
in the first nine months of 2017, substantially all of which was in the first quarter, related to the disposition of an underperforming
bolt-on
business and related intangible asset impairments and
restructuring charges.
Building products
Revenues in the third quarter and first nine months of 2017 increased $283 million (10.0%) and $834 million (10.2%),
respectively, compared to the same periods in 2016. The increases were primarily due to the effect of
bolt-on
business acquisitions (Shaw and MiTek) and sales volume increases (MiTek, Benjamin Moore and
Johns Manville), partly offset by lower average sales prices and changes in product mix.
Pre-tax
earnings in the third quarter and first nine months of 2017 increased
$45 million (12.4%) and $148 million (16.3%), respectively, compared to the same periods in 2016. The comparative earnings increase in the first nine months reflected the impact of approximately $100 million in asset impairment,
pension settlement and environmental claim charges recorded in 2016 by Shaw and Benjamin Moore (most of which was recorded in the first six months of 2016), and earnings from recent
bolt-on
acquisitions,
partly offset by comparative declines in the average gross margin rates.
Consumer products
Revenues increased $197 million (6.9%) in the third quarter and $780 million (9.6%) in the first nine months of
2017 compared to the same periods in 2016. These increases were driven by comparative revenue increases from Duracell and Forest River. Duracells revenues in the third quarter and first nine months of 2017 increased 6% and 40%, respectively,
compared to the third quarter and seven month post-acquisition date period in 2016. Forest Rivers revenues increased 17% in the third quarter and 12% in the first nine months of 2017 compared to the same periods in 2016, primarily due to
increases in unit sales. Apparel and footwear revenues in the first nine months of 2017 declined 1% compared to 2016.
Pre-tax
earnings in the third quarter and first nine months of 2017 increased $76 million (27.9%) and $156 million (22.1%), respectively, compared to the same periods in 2016. The increases in
earnings in the third quarter and first nine months of 2017 were primarily due to increased earnings from Duracell and Forest River. Duracells comparative results in the 2017 periods reflected significant decreases in transition costs arising
from the acquisition in 2016 and otherwise improved operating results. Earnings from apparel and footwear businesses increased 9% in the third quarter and decreased 3% in the first nine months of 2017 compared to 2016. The increase in third quarter
earnings was primarily due to higher earnings from our footwear businesses, while the decline in the first nine months reflected lower earnings from Fruit of the Loom, partly offset by increased earnings from the footwear businesses.
36
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Manufacturing, Service and Retailing
(Continued)
Service and retailing
A summary of revenues and
pre-tax
earnings of our service and retailing businesses
follows (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
First Nine Months
|
|
|
|
Revenues
|
|
|
Pre-tax earnings
|
|
|
Revenues
|
|
|
Pre-tax earnings
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Service
|
|
$
|
2,775
|
|
|
$
|
2,619
|
|
|
$
|
315
|
|
|
$
|
305
|
|
|
$
|
8,184
|
|
|
$
|
7,557
|
|
|
$
|
926
|
|
|
$
|
826
|
|
Retailing
|
|
|
3,752
|
|
|
|
3,712
|
|
|
|
176
|
|
|
|
144
|
|
|
|
10,986
|
|
|
|
11,050
|
|
|
|
513
|
|
|
|
404
|
|
McLane Company
|
|
|
12,798
|
|
|
|
12,271
|
|
|
|
45
|
|
|
|
106
|
|
|
|
37,480
|
|
|
|
36,121
|
|
|
|
202
|
|
|
|
371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,325
|
|
|
$
|
18,602
|
|
|
$
|
536
|
|
|
$
|
555
|
|
|
$
|
56,650
|
|
|
$
|
54,728
|
|
|
$
|
1,641
|
|
|
$
|
1,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 service a network of quick service restaurant franchises (Dairy Queen). Service businesses 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).
Revenues in the third quarter and first
nine months of 2017 increased $156 million (6%) and $627 million (8%), respectively, as compared to 2016. The
year-to-date
revenue increase was driven by
TTI, NetJets and FlightSafety. Higher unit volumes and customer demand in most geographic regions and markets drove TTIs revenue increase in 2017. NetJets revenue increase reflected comparatively higher aircraft sales over the first nine
months of 2017 and a 5%
year-to-date
increase in revenue flight hours. The revenue increase at FlightSafety was primarily due to comparative increases in training hours
and equipment sales.
Pre-tax
earnings in the third quarter and first nine months
of 2017 increased $10 million (3%) and $100 million (12%), respectively, compared to the same periods in 2016. Earnings in the third quarter of 2017 reflected higher earnings at TTI, due to the aforementioned increase in revenues, and
lower earnings from NetJets and our media businesses. The comparative increase in earnings for the first nine months of 2017 was primarily attributable to increased earnings of NetJets and TTI, partly offset by lower earnings from our media and
logistics services businesses.
Retailing
Our retailing businesses include four 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), which includes over 80 auto dealerships, which sell new and
pre-owned
automobiles and offer repair and other related services and products. BHA also operates two related insurance businesses, two auto auctions and an automotive fluid maintenance products distributor.
Our other retailing businesses also 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 third quarter of 2017 increased 1.1% and declined
0.6% in the first nine months of 2017 compared to the same periods in 2016. In the first nine months of 2017, BHAs aggregate revenues, which represented 64% of our total retailing revenues, declined 2% compared to 2016, due primarily to lower
vehicle units sold, partly offset by higher service, finance and insurance revenues. In the first nine months of 2017, revenues of our other retailers increased 2% compared to 2016.
Pre-tax
earnings in the third quarter and first nine months of 2017 increased
$32 million (22%) and $109 million (27%), respectively, over earnings in the corresponding 2016 periods. These increases reflected comparatively higher earnings from BHA in the third quarter and first nine months of 2017, primarily due to
increased earnings from finance and insurance activities and lower selling and administrative expenses, partly offset by lower auto sales margins. Earnings of our home furnishings retailers in the third quarter of 2017 were relatively flat versus
2016 and in the first nine months increased 18% compared to 2016. The
year-to
date increase was attributable to a slight increase in the overall gross margin rate and lower operating expense rates. In the
third quarter and first nine months of 2017, Pampered Chef produced comparatively higher earnings, primarily attributable to revenue increases and cost management efforts.
37
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Manufacturing, Service and Retailing
(Continued)
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 third quarter and first nine months of 2017 were approximately $12.8 billion and $37.5 billion,
respectively, increases of 4.3% and 3.8%, respectively, compared to corresponding 2016 periods. The increases in revenues were primarily due to a 5%
year-to-date
increase in grocery business sales.
Pre-tax
earnings in the third quarter and
first nine months of 2017 were $45 million and $202 million, respectively, decreases of $61 million (58%) and $169 million (46%), respectively, compared to corresponding 2016 periods. The earnings declines reflected a 65%
decline in
year-to-date
earnings from our grocery operations. Throughout 2017, significant pricing pressures and an increasingly competitive business environment
negatively affected our operating results, particularly with respect to the grocery business. These conditions contributed to declining gross margin rates, which together with increased payroll and other operating expenses produced a 49 basis point
decline in our overall operating margin for the first nine months of 2017.
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).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
First Nine Months
|
|
|
|
Revenues
|
|
|
Earnings
|
|
|
Revenues
|
|
|
Earnings
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Manufactured housing and finance
|
|
$
|
1,318
|
|
|
$
|
1,099
|
|
|
$
|
173
|
|
|
$
|
165
|
|
|
$
|
3,591
|
|
|
$
|
3,057
|
|
|
$
|
546
|
|
|
$
|
514
|
|
Transportation equipment leasing
|
|
|
652
|
|
|
|
655
|
|
|
|
219
|
|
|
|
235
|
|
|
|
1,928
|
|
|
|
2,009
|
|
|
|
649
|
|
|
|
731
|
|
Other
|
|
|
217
|
|
|
|
208
|
|
|
|
138
|
|
|
|
117
|
|
|
|
566
|
|
|
|
611
|
|
|
|
309
|
|
|
|
333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,187
|
|
|
$
|
1,962
|
|
|
|
530
|
|
|
|
517
|
|
|
$
|
6,085
|
|
|
$
|
5,677
|
|
|
|
1,504
|
|
|
|
1,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes and noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
189
|
|
|
|
180
|
|
|
|
|
|
|
|
|
|
|
|
528
|
|
|
|
534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
341
|
|
|
$
|
337
|
|
|
|
|
|
|
|
|
|
|
$
|
976
|
|
|
$
|
1,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufactured housing and finance
Clayton Homes revenues in the third quarter and first nine months of 2017 increased $219 million (20%) and
$534 million (17%), respectively, compared to the corresponding 2016 periods. These increases were primarily due to higher home sales, attributable to a
year-to-date
increase in overall unit sales (12%) 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. Gross sales margin rates for site built homes, however, are typically lower than manufactured homes.
Pre-tax
earnings
increased $8 million (5%) in the third quarter and $32 million (6%) in the first nine months of 2017 compared to the corresponding 2016 periods.
Pre-tax
earnings in the third quarter of 2017
were negatively impacted by increased insurance claim costs, due primarily to hurricanes Harvey and Irma.
Pre-tax
earnings in the first nine months of 2017 also reflected increased earnings from manufacturing,
retailing and site-built activities, comparatively lower servicing asset impairment charges and a gain from a legal settlement, partly offset by increased employee healthcare, technology, marketing and legal expenses.
Transportation equipment leasing
Transportation equipment leasing revenues in the third quarter were relatively flat and in the first nine months of 2017
declined $81 million (4%) compared to the corresponding 2016 periods. In the third quarter and first nine months of 2017, leasing revenues declined primarily due to lower railcar and trailer units on lease and lower railcar rental rates. We
currently believe industry railcar capacity available for lease exceeds demand, which is contributing to lower lease rates. In the first nine months of 2017, we also experienced lower equipment sales to third parties, although sales during the third
quarter of 2017 increased compared to 2016.
Pre-tax
earnings in the third quarter
and first nine months of 2017 declined $16 million (7%) and $82 million (11%), respectively, compared to the corresponding 2016 periods. These decreases reflected the aforementioned revenue declines and higher railcar repair and storage
costs. Significant components of our operating costs, such as depreciation expense, do not vary proportionately to revenue changes and changes in revenues can disproportionately impact earnings.
38
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Finance and Financial Products
(Continued)
Other
Earnings from other 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.
Pre-tax
earnings in the first nine months of 2017 declined
$24 million compared to 2016, reflecting lower interest and dividend income from investments and lower earnings from CORT, partly offset by higher earnings from Berkadia. 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. The corresponding expenses are included in the results of our manufactured housing and finance and transportation equipment leasing business
groups.
Pre-tax
interest rate spreads charged to these businesses in the first nine months of 2017 and 2016 were $57 million and $55 million, respectively.
Investment and Derivative Gains/Losses
A summary of investment and derivative gains and losses follows (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
First Nine Months
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Investment gains/losses
|
|
$
|
657
|
|
|
$
|
3,150
|
|
|
$
|
1,262
|
|
|
$
|
5,643
|
|
Derivative gains/losses
|
|
|
308
|
|
|
|
458
|
|
|
|
703
|
|
|
|
(332
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains/losses before income taxes and noncontrolling interests
|
|
|
965
|
|
|
|
3,608
|
|
|
|
1,965
|
|
|
|
5,311
|
|
Income taxes and noncontrolling interests
|
|
|
342
|
|
|
|
1,261
|
|
|
|
695
|
|
|
|
718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gains/losses
|
|
$
|
623
|
|
|
$
|
2,347
|
|
|
$
|
1,270
|
|
|
$
|
4,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
As discussed in Note 2 to the Consolidated Financial Statements, we will adopt a new accounting standard on January 1,
2018 that will change the reporting of unrealized gains and losses on our investments in equity securities. Beginning as of that date, unrealized gains and losses on investments in equity securities will be included in our Consolidated Statements of
Earnings along with realized gains from dispositions. This new standard is required to be adopted prospectively and prior years statements of earnings may not be restated to reflect the change. Upon adoption of this accounting standard, we
will reclassify the net unrealized gains related to our investments in equity securities from accumulated other comprehensive income to retained earnings. As of September 30, 2017, accumulated
after-tax
net unrealized appreciation related to our equity securities was approximately $53 billion.
While the adoption of
this standard will not affect our total consolidated shareholders equity, it will almost certainly 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. To illustrate the impact of this standard, our other comprehensive income in the third quarter and first nine months of 2017 included
after-tax
net unrealized gains from equity securities of approximately $2.8 billion and $10.9 billion, respectively. Had this new standard been in effect as of the beginning 2017, these amounts would
have been included in our Consolidated Statements of Earnings. However, our consolidated comprehensive income for those periods would have been unchanged.
We believe the amount of investment gains/losses included in earnings in any given quarterly or annual 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. Market price changes related to our investment securities will likely have
a material impact on our reported earnings after 2017. Although we do not consider investment gains and losses as necessarily meaningful or useful in evaluating our quarterly or annual results of operations, we provide information concerning such
gains and losses when reflected in our earnings.
39
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Investment and Derivative Gains/Losses
(Continued)
Investment gains/losses (Continued)
Pre-tax
investment gains in the third
quarter were $657 million in 2017 and $3.15 billion in 2016. Investment gains in the third quarter of 2016 included $2.4 billion from the disposition of our Wrigley preferred stock investment.
Pre-tax
investment gains in the first nine months of 2016 also included $1.1 billion realized in connection with the
tax-free
exchange of our 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.
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. Our equity index put
option contracts produced
pre-tax
gains of $703 million in the first nine months of 2017, which were primarily attributable to increased index values, shorter contract durations and changes in expected
volatilities, partly offset by unfavorable foreign currency exchange rate changes. In the first nine months of 2016, these contracts generated
pre-tax
losses of $421 million, driven by lower interest
rates and lower index values related to certain contracts. As of September 30, 2017, equity index put option intrinsic values were $640 million and our recorded liabilities at fair value were approximately $2.2 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. In July 2016, our last
credit default contract was terminated. This contract produced a
pre-tax
gain of $89 million in the first nine months of 2016.
Other
A summary of
after-tax
other earnings (losses) follows (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
First Nine Months
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Kraft Heinz earnings
|
|
$
|
215
|
|
|
$
|
146
|
|
|
$
|
725
|
|
|
$
|
552
|
|
Acquisition accounting expenses
|
|
|
(196
|
)
|
|
|
(290
|
)
|
|
|
(518
|
)
|
|
|
(550
|
)
|
Corporate interest expense
|
|
|
(238
|
)
|
|
|
(116
|
)
|
|
|
(769
|
)
|
|
|
(297
|
)
|
Other
|
|
|
18
|
|
|
|
(2
|
)
|
|
|
25
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (losses) attributable to Berkshire Hathaway shareholders
|
|
$
|
(201
|
)
|
|
$
|
(262
|
)
|
|
$
|
(537
|
)
|
|
$
|
(310
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our
after-tax
Kraft Heinz earnings includes
Berkshires share of Kraft Heinzs earnings attributable to common shareholders determined pursuant to the equity method. In the first nine months of 2016, Kraft Heinz earnings also included $180 million in
pre-tax
dividend income from our Preferred Stock investment, which was redeemed in June 2016.
After-tax
other earnings (losses) also include charges arising from the
application of the acquisition method in connection with Berkshires past business acquisitions. Such charges were primarily from the amortization of intangible assets recorded in connection with those business acquisitions.
In each of the last three years, Berkshire issued Euro-denominated debt and at September 30, 2017, the aggregate par
amount outstanding was 6.85 billion. Changes in foreign currency exchange rates can produce sizable
non-cash
gains and losses from the periodic revaluation of these liabilities into U.S. Dollars.
After-tax
corporate interest expense included foreign currency exchange rate losses in the third quarter and first nine months of 2017 of $172 million and $571 million, respectively, related to our Euro
denominated debt. In 2016,
after-tax
corporate interest included foreign currency exchange rate losses of $48 million in the third quarter and $107 million in the first nine months. Excluding these
foreign currency gains and losses,
after-tax
corporate interest expense in the first nine months of 2017 and 2016 was $198 million and $190 million, respectively.
Financial Condition
Our
balance sheet reflects significant liquidity and a strong capital base. Our consolidated shareholders equity at September 30, 2017 was approximately $308.3 billion, an increase of $25.3 billion since December 31, 2016. Net
earnings attributable to Berkshire shareholders in the first nine months of 2017 were $12.4 billion. Net unrealized appreciation of investments and foreign currency translation gains included in other comprehensive income in the first nine
months of 2017 were approximately $10.9 billion and $1.9 billion, respectively.
At September 30, 2017, our
insurance and other businesses held cash, cash equivalents and U.S. Treasury Bills of approximately $96.6 billion and investments (excluding our investment in Kraft Heinz) of $177.2 billion. In January 2017, Berkshire issued
1.1 billion of new senior notes and repaid $1.1 billion of maturing senior notes. Berkshires debt outstanding at September 30, 2017 was approximately $18.6 billion, an increase of $943 million from
December 31, 2016, of which $860 million was attributable to foreign currency exchange rate changes applicable to the 6.85 billion par amount of our Euro-denominated senior notes. Berkshire term debt of $1.55 billion will
mature within the next twelve months.
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 nine months of 2017, capital expenditures were
$3.2 billion by BHE and $2.4 billion by BNSF. We forecast the aggregate capital expenditures of these businesses for the remainder of 2017 will approximate $2.6 billion and we currently expect to fund such future capital expenditures
with cash on hand, cash flows from operations and debt issuances.
BNSFs outstanding debt approximated
$22.5 billion as of September 30, 2017, an increase of $487 million 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. BNSF debentures totaling $650 million par amount will mature in March 2018. Outstanding borrowings of BHE and its subsidiaries were approximately $38.6 billion at September 30, 2017, an increase of $1.6 billion since
December 31, 2016. During the first nine months of 2017, BHE and its subsidiaries issued approximately $1.7 billion of debt with maturity dates ranging from 2022 to 2057. Within the next twelve months, approximately $2.8 billion of
BHE and subsidiary term debt will mature. 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 $40.3 billion as of September 30, 2017, a decrease of
$1.4 billion from December 31, 2016. Finance assets consist primarily of loans and finance receivables, various types of property held for lease, cash, cash equivalents and U.S. Treasury Bills. Finance and financial products liabilities
declined $2.76 billion to approximately $17.0 billion as of September 30, 2017. The decrease was primarily due to a reduction in borrowings of approximately $2.3 billion, reflecting repayments of $3.6 billion, partly offset
by $1.3 billion of senior unsecured notes issued in January by a wholly-owned financing subsidiary, Berkshire Hathaway Finance Corporation (BHFC). The new BHFC notes mature in 2019 and 2020. BHFCs outstanding borrowings were
$12.9 billion at September 30, 2017. In the first six months of 2018, $4.1 billion of BHFC senior notes will mature. BHFCs senior note borrowings 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. 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. We estimate 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. Further, our liabilities for unpaid losses and loss adjustment expenses increased an additional $6.8 billion
during the first nine months of 2017 due to various factors, including catastrophe loss events during the third quarter of 2017 and overall growth in our primary insurance businesses.
Except as otherwise disclosed in this Quarterly Report, our contractual obligations as of September 30, 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.
41
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 September 30, 2017 includes estimated liabilities for unpaid losses and loss
adjustment expenses from property and casualty insurance and reinsurance contracts of approximately $100 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
September 30, 2017 includes goodwill of acquired businesses of approximately $81 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.
42