Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Net earnings (loss) attributable to Berkshire Hathaway shareholders are disaggregated in the table that follows. Amounts are
after deducting income taxes and exclude earnings attributable to noncontrolling interests (in millions).
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
2019
|
|
2018
|
Insurance underwriting
|
|
$
|
389
|
|
|
$
|
407
|
|
Insurance investment income
|
|
|
1,237
|
|
|
|
1,012
|
|
Railroad
|
|
|
1,253
|
|
|
|
1,145
|
|
Utilities and energy
|
|
|
605
|
|
|
|
585
|
|
Manufacturing, service and retailing
|
|
|
2,200
|
|
|
|
2,127
|
|
Investment and derivative gains/losses
|
|
|
16,106
|
|
|
|
(6,426
|
)
|
Other
|
|
|
(129
|
)
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) attributable to Berkshire Hathaway shareholders
|
|
$
|
21,661
|
|
|
$
|
(1,138
|
)
|
|
|
|
|
|
|
|
|
|
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 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. The business segment data (Note 25 to the accompanying Consolidated Financial Statements) should be read in conjunction with this discussion.
Beginning in 2018, our periodic net earnings include changes in unrealized gains and losses on our investments in equity
securities. These gains and losses are likely to be exceptionally large given the size of our current holdings and the inherent volatility in securities prices. Prior to 2018, the changes in unrealized gains and losses pertaining to such investments
were recorded in other comprehensive income.
Our insurance businesses generated
after-tax
earnings from underwriting of $389 million in the first quarter of 2019 and $407 million in 2018. Results in 2019 and 2018 included net underwriting gains from primary insurance and net
underwriting losses from reinsurance.
After-tax
earnings in the first quarter of 2019 from insurance investments increased 22.2% over 2018, reflecting increased short-term interest rates and dividend income.
Our railroad business generated a 9.4% increase in
after-tax
earnings in the first
quarter of 2019 compared to 2018. Results in 2019 benefited from higher rates per car/unit and a curtailment gain related to an amendment to a retirement plan, partly offset by lower unit volume. Severe winter weather and flooding across the
mid-U.S.
in the first quarter of 2019 had a significant negative impact on freight volumes and operating results.
Our utilities and energy business produced a 3.4% increase in
after-tax
earnings in the
first quarter of 2019 compared to 2018. Earnings from our manufacturing, service and retailing businesses in the first quarter of 2019 increased 3.4% over 2018. First quarter 2019 results of our underlying business operations were mixed, with
several of these businesses experiencing lower first quarter earnings from a variety of factors.
After-tax
investment and derivative gains in the first quarter of 2019 were $16.1 billion compared to
after-tax
losses of $6.4 billion in 2018. In the table above,
investment and derivative gains/losses include a gain of approximately $15.1 billion in 2019 and a loss of approximately $7.0 billion in 2018 due to changes during the first quarters of 2019 and 2018 in the amount of unrealized gains that
existed in our equity security investment holdings and also include
after-tax
realized gains on sales of equity and fixed maturity securities of $392 million and $747 million during the first
quarters of 2019 and 2018, respectively. We believe that investment and derivative gains/losses, whether realized from dispositions or settlements or unrealized from changes in market prices of equity securities, are generally meaningless in
understanding our reported results or evaluating our economic performance of our businesses. These gains and losses have caused and will continue to cause significant volatility in our periodic earnings.
25
Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
InsuranceUnderwriting
Our management views our insurance businesses as possessing two distinct activities underwriting and investing.
Underwriting decisions are the responsibility of the unit managers, while investing decisions are the responsibility of Berkshires Chairman and CEO, Warren E. Buffett and Berkshires corporate investment managers. Accordingly, we evaluate
performance of underwriting operations without any allocation of investment income or investment gains/losses. We consider investment income as a component of our aggregate insurance operating results. However, we consider investment gains and
losses, whether realized or unrealized as
non-operating,
based on our long-held philosophy of acquiring securities and holding those securities for long periods. Accordingly, we believe that such gains and
losses are not necessarily meaningful in understanding the operating results of our insurance operations.
The timing and
amount of catastrophe losses can produce significant volatility in our periodic underwriting results, particularly with respect to our reinsurance businesses. Generally, we consider catastrophe losses in excess of $100 million
(pre-tax)
from a current year event as significant.
Changes in estimates for unpaid
losses and loss adjustment expenses, including amounts established for occurrences in prior years, can also significantly affect our periodic underwriting results. Unpaid loss estimates, including estimates under retroactive reinsurance contracts,
were approximately $111 billion as of March 31, 2019. Our periodic underwriting results may also include significant foreign currency transaction 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 due to foreign currency exchange rate fluctuations.
We engage in both primary insurance and reinsurance of property/casualty, life and health risks. In primary insurance
activities, we assume defined portions of the risks of loss from persons or organizations that are directly subject to the risks. In reinsurance activities, we assume defined portions of similar or dissimilar risks that other insurers or reinsurers
have subjected themselves to in their own insuring activities. Our insurance and reinsurance businesses are GEICO, Berkshire Hathaway Reinsurance Group (BHRG) and Berkshire Hathaway Primary Group.
Underwriting results of our insurance businesses are summarized below (dollars in millions).
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
2019
|
|
2018
|
Underwriting gain (loss):
|
|
|
|
|
|
|
|
|
GEICO
|
|
$
|
770
|
|
|
$
|
677
|
|
Berkshire Hathaway Reinsurance Group
|
|
|
(253
|
)
|
|
|
(258
|
)
|
Berkshire Hathaway Primary Group
|
|
|
(30
|
)
|
|
|
99
|
|
|
|
|
|
|
|
|
|
|
Pre-tax
underwriting gain
|
|
|
487
|
|
|
|
518
|
|
Income taxes and noncontrolling interests
|
|
|
98
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
Net underwriting gain
|
|
$
|
389
|
|
|
$
|
407
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
22.5%
|
|
|
|
21.4%
|
|
|
|
|
|
|
|
|
|
|
GEICO
GEICO writes private passenger automobile insurance, offering coverages to insureds in all 50 states and the District of
Columbia. GEICO markets its policies mainly by direct response methods where most customers apply for coverage directly to the company via the Internet or over the telephone. A summary of GEICOs underwriting results follows (dollars in
millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
2019
|
|
2018
|
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
Premiums written
|
|
$
|
9,263
|
|
|
|
|
|
|
$
|
8,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
8,622
|
|
|
|
100.0
|
|
|
$
|
7,915
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
|
6,556
|
|
|
|
76.1
|
|
|
|
6,075
|
|
|
|
76.7
|
|
Underwriting expenses
|
|
|
1,296
|
|
|
|
15.0
|
|
|
|
1,163
|
|
|
|
14.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and expenses
|
|
|
7,852
|
|
|
|
91.1
|
|
|
|
7,238
|
|
|
|
91.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax
underwriting gain
|
|
$
|
770
|
|
|
|
|
|
|
$
|
677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
InsuranceUnderwriting
(Continued)
GEICO (Continued)
Premiums written and earned in the first quarter of 2019 increased 6.6% and
8.9%, respectively, compared to 2018. These increases reflected voluntary auto
policy-in-force
growth of 3.6% and increased premiums per auto policy of approximately
4.0% over the past twelve months. The increase in premiums per policy was attributable to rate increases from 2018, coverage changes and changes in state and risk mix. The increases in rates were in response to accelerating losses. Voluntary auto
new business sales in the first quarter of 2019 increased 6.2% compared to the first quarter of 2018, while our voluntary auto
policies-in-force
increased approximately
342,000 during the first quarter of 2019.
Losses and loss adjustment expenses in the first quarter of 2019 were
approximately $6.6 billion, an increase of $481 million (7.9%) compared to 2018. GEICOs ratio of losses and loss adjustment expenses to premiums earned (the loss ratio) in the first quarter of 2019 was 76.1%, a
decline of 0.6 percentage points compared to the first quarter of 2018.
GEICO reduced ultimate claim loss estimates for
prior years loss events by $83 million in the first quarter of 2019 and $407 million in 2018. These reductions produced corresponding
pre-tax
underwriting gains. The gains in 2019 were
primarily due to lower losses from collision, property damage and bodily injury claims, partially offset by higher losses from personal injury protection claims. Claims frequencies in the first quarter of 2019 for property damage and collision
coverages and personal injury protection coverage were down (two to four percent range) compared to 2018 and were flat for bodily injury coverage. Average claims severities in the first quarter of 2019 were higher for property damage and collision
coverages (four to six percent range) and bodily injury coverage (six to eight percent range).
Underwriting expenses in
the first quarter of 2019 were approximately $1.3 billion, an increase of $133 million (11.4%) over 2018. GEICOs expense ratio (underwriting expenses to premiums earned) in the first quarter of 2019 was 15.0%, an increase of 0.3
percentage points compared to 2018. The underwriting expense increase was primarily attributable to increases in advertising expenses, insurance premium taxes and employee-related costs, which reflected wage and staffing increases.
Berkshire Hathaway Reinsurance Group
We offer
excess-of-loss
and quota-share
reinsurance coverages on property and casualty risks and life and health reinsurance to insurers and reinsurers worldwide through several subsidiaries, led by National Indemnity Company (NICO), Berkshire Hathaway Life Insurance Company
of Nebraska (BHLN) and General Reinsurance Corporation, General Reinsurance AG and General Re Life Corporation (collectively, General Re). We also periodically assume property and casualty risks under retroactive reinsurance
contracts written through NICO. In addition, we write periodic payment annuity contracts predominantly through BHLN.
With
the exception of our retroactive reinsurance and periodic payment annuity product lines, we strive to generate
pre-tax
underwriting profits.
Time-value-of-money
concepts are important elements in establishing prices for retroactive reinsurance and periodic payment annuity premiums due to the expected long
durations of the liabilities. We expect to incur
pre-tax
underwriting losses from these products through deferred charge amortization and discount accretion charges. We receive premiums at the inception of
these contracts, which are then available for investment. A summary of BHRGs premiums and
pre-tax
underwriting results follows (dollars in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
Premiums earned
|
|
Pre-tax underwriting gain (loss)
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Property/casualty
|
|
$
|
2,322
|
|
|
$
|
2,026
|
|
|
$
|
(40
|
)
|
|
$
|
130
|
|
Retroactive reinsurance
|
|
|
3
|
|
|
|
|
|
|
|
(323
|
)
|
|
|
(311
|
)
|
Life/health
|
|
|
1,027
|
|
|
|
1,234
|
|
|
|
280
|
|
|
|
96
|
|
Periodic payment annuity
|
|
|
194
|
|
|
|
280
|
|
|
|
(170
|
)
|
|
|
(173
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,546
|
|
|
$
|
3,540
|
|
|
$
|
(253
|
)
|
|
$
|
(258
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
InsuranceUnderwriting
(Continued)
Berkshire Hathaway Reinsurance Group (Continued)
Property/casualty
A summary of property/casualty reinsurance underwriting results follows (dollars in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
2019
|
|
2018
|
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
Premiums written
|
|
$
|
3,542
|
|
|
|
|
|
|
$
|
3,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
2,322
|
|
|
|
100.0
|
|
|
$
|
2,026
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
|
1,774
|
|
|
|
76.4
|
|
|
|
1,391
|
|
|
|
68.7
|
|
Underwriting expenses
|
|
|
588
|
|
|
|
25.3
|
|
|
|
505
|
|
|
|
24.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and expenses
|
|
|
2,362
|
|
|
|
101.7
|
|
|
|
1,896
|
|
|
|
93.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax
underwriting gain (loss)
|
|
$
|
(40)
|
|
|
|
|
|
|
$
|
130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property/casualty premiums earned in the first quarter of 2019 were approximately
$2.3 billion, an increase of $296 million (14.6%) compared to 2018. The increase primarily reflected higher direct and broker markets business and derived primarily from new business and increased participations for renewal business in
both property and casualty lines. Premiums earned in the first quarter included $432 million in 2019 and $448 million in 2018 from a
10-year,
20% quota-share contract entered into by NICO with
Insurance Australia Group Limited, which expires in 2025.
Losses and loss adjustment expenses in 2019 were approximately
$1.8 billion, an increase of $383 million (27.5%) compared to 2018. Losses and loss adjustment expenses in the first quarter of 2019 included increases in estimated ultimate claim liabilities attributable to prior years loss events
of $212 million compared to decreases of $182 million in 2018, which produced corresponding decreases and increases in
pre-tax
underwriting gains. Such gains and losses were less than 1% of the
unpaid claim liabilities as of the beginning of the applicable year. Losses and loss adjustment expenses in 2019 also reflected a decline in the overall loss ratio for current accident year business as compared to the first quarter of 2018. There
were no significant catastrophe loss events in the first quarter of 2019 or 2018.
Retroactive reinsurance
There were no new retroactive reinsurance contracts written in the first quarter of 2019 or 2018.
Pre-tax
underwriting losses from retroactive reinsurance contracts in the first quarter were $323 million in 2019 and $311 million in 2018. Certain liabilities related to retroactive reinsurance contracts
written by our U.S. subsidiaries are denominated in foreign currencies. Underwriting results in the first quarter included
pre-tax
losses of $52 million in 2019 and $60 million in 2018 associated
with the
re-measurement
of such liabilities due to changes in foreign currency exchange rates.
Pre-tax
underwriting losses before foreign currency gains/losses in the first quarter
were $271 million in 2019 and $251 million in 2018, which derived from deferred charge amortization and changes in the estimated timing and amount of future claim payments. Deferred charge amortization in the first quarter included
approximately $156 million in 2019 and $147 million in 2018 related to an aggregate
excess-of-loss
retroactive reinsurance agreement with various subsidiaries
of American International Group, Inc.
Gross unpaid losses assumed under retroactive reinsurance contracts were
approximately $41.6 billion at March 31, 2019 and $41.8 billion at December 31, 2018. Unamortized deferred charge assets related to such reinsurance contracts were approximately $13.8 billion at March 31, 2019 and
$14.1 billion at December 31, 2018. Deferred charge assets will be charged to
pre-tax
earnings over the expected remaining claims settlement periods through periodic amortization.
28
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
InsuranceUnderwriting
(Continued)
Berkshire Hathaway Reinsurance Group (Continued)
Life/health
A summary of our life/health reinsurance underwriting results follows (dollars in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
2019
|
|
2018
|
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
Premiums written
|
|
$
|
1,027
|
|
|
|
|
|
|
$
|
1,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
1,027
|
|
|
|
100.0
|
|
|
$
|
1,234
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life and health insurance benefits
|
|
|
598
|
|
|
|
58.2
|
|
|
|
936
|
|
|
|
75.9
|
|
Underwriting expenses
|
|
|
149
|
|
|
|
14.5
|
|
|
|
202
|
|
|
|
16.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
747
|
|
|
|
72.7
|
|
|
|
1,138
|
|
|
|
92.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax
underwriting gain (loss)
|
|
$
|
280
|
|
|
|
|
|
|
$
|
96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life/health premiums earned in the first quarter of 2019 were approximately $1.0 billion,
a decrease of $207 million (16.8%) compared to 2018. The decrease was primarily attributable to the effects of an amendment in the first quarter of 2019 to a reinsurance contract, partially offset by growth in the Asia life markets. In the
first quarter of 2019, BHLN amended its yearly renewable term life insurance contract with a major U.S. reinsurer. The amendment effectively eliminates BHLNs exposure under the contract in the future. BHLN recorded a reduction in earned
premiums on this contract of $49 million in the first quarter of 2019, largely attributable to the contract amendment. Premiums earned from this contract were $189 million in the first quarter of 2018 and approximately $1 billion for
the year ending December 31, 2018.
The life/health business produced
pre-tax
underwriting gains of $280 million in the first quarter of 2019 compared to $96 million in 2018. Underwriting results in the first quarter of 2019 included a
one-time
pre-tax
gain of approximately $160 million attributable to the BHLN contract amendment, which resulted in reductions of benefits incurred and premiums earned. First quarter underwriting results in 2019
also included increased gains from the
run-off
of variable annuity contracts, partially offset by increased losses from U.S. individual life business and the
run-off
of
U.S. long-term care business. Variable annuity guarantee reinsurance produced
pre-tax
underwriting gains of $89 million in the first quarter of 2019 versus $45 million in 2018. Underwriting results
from this business reflect changes in estimated liabilities for guaranteed benefits, which result from changes in securities markets and interest rates and from the periodic amortization of expected profit margins.
Periodic payment annuity
Periodic payment annuity premiums earned in the first quarter of 2019 were $194 million, a decrease of $86 million
(30.7%) compared to 2018. Periodic payment business is price sensitive. The volumes written can change rapidly due to changes in prices, which are affected by prevailing interest rates, the perceived risks and durations associated with the expected
annuity payments, and the level of competition.
Periodic payment annuity contracts produced
pre-tax
losses in the first quarter of $170 million in 2019 and $173 million in 2018. Certain contracts written by our U.S. subsidiaries are denominated in foreign currencies. First quarter
pre-tax
underwriting results included
pre-tax
losses of $28 million in 2019 and $70 million in 2018 associated with the
re-measurement
of such liabilities due to changes in exchange rates.
Before
foreign currency gains and losses,
pre-tax
underwriting losses were $142 million in the first quarter of 2019 and $103 million in the first quarter of 2018. These losses derived primarily from the
recurring discount accretion of annuity liabilities, as well as the impact of mortality and interest rate changes. Discounted annuity liabilities approximated $12.7 billion at March 31, 2019 and $12.5 billion at December 31,
2018, reflecting a weighted average discount rate of approximately 4.1%.
Berkshire Hathaway Primary Group
The Berkshire Hathaway Primary Group (BH Primary) provides a variety of commercial insurance solutions, including
healthcare malpractice, workers compensation, automobile, general liability, property and various specialty coverages for small, medium and large clients. The largest of these insurers are Berkshire Hathaway Specialty Insurance (BH
Specialty), Berkshire Hathaway Homestate Companies (BHHC), MedPro Group, Berkshire Hathaway GUARD Insurance Companies (GUARD), and National Indemnity Company (NICO Primary). Other BH Primary insurers include
U.S. Liability Insurance Company, Applied Underwriters, Central States Indemnity Company and MLMIC Insurance Company, acquired October 1, 2018.
29
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
InsuranceUnderwriting
(Continued)
Berkshire Hathaway Primary Group (Continued)
A summary of BH Primary underwriting results follows (dollars in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
2019
|
|
2018
|
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
Premiums written
|
|
$
|
2,341
|
|
|
|
|
|
|
$
|
2,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
2,151
|
|
|
|
100.0
|
|
|
$
|
1,918
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
|
1,570
|
|
|
|
73.0
|
|
|
|
1,251
|
|
|
|
65.2
|
|
Underwriting expenses
|
|
|
611
|
|
|
|
28.4
|
|
|
|
568
|
|
|
|
29.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and expenses
|
|
|
2,181
|
|
|
|
101.4
|
|
|
|
1,819
|
|
|
|
94.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax
underwriting gain (loss)
|
|
$
|
(30
|
)
|
|
|
|
|
|
$
|
99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written and earned in the first quarter of 2019 increased 8.3% and 12.1%,
respectively, compared to 2018. The increases in premiums written were primarily attributable to BH Specialty (19.6%), GUARD (19.0%) and NICO Primary (11.9%). The increase in premiums earned in the first quarter of 2019 also reflected the impact of
the MLMIC acquisition.
BH Primary produced
pre-tax
underwriting losses of
$30 million in the first quarter of 2019 compared to
pre-tax
gains of $99 million in 2018. BH Primarys aggregate loss ratios for the first quarter were 73.0% in 2019 and 65.2% in 2018. Losses
and loss adjustment expenses incurred in the first quarter for prior years loss events included reductions of $17 million in 2019 and $164 million in 2018. In the first quarter of 2019, we recorded additional estimated claim
liabilities for legacy casualty exposures. In addition, the net gains from the reductions of prior accident years liabilities in 2019 were lower as compared to 2018.
BH Primary units write significant levels of commercial and professional liability and workers compensation insurance and
the related claim costs may be subject to higher severity and longer claim-tails. Accordingly, we could experience significant increases in claims liabilities in the future attributable to higher than expected claim settlements, adverse litigation
outcomes or judicial rulings and other factors not currently anticipated.
InsuranceInvestment Income
A summary of net investment income attributable to our insurance operations follows (dollars in millions).
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
2019
|
|
2018
|
Interest and other investment income
|
|
$
|
513
|
|
|
$
|
452
|
|
Dividend income
|
|
|
972
|
|
|
|
753
|
|
|
|
|
|
|
|
|
|
|
Investment income before income taxes and noncontrolling interests
|
|
|
1,485
|
|
|
|
1,205
|
|
Income taxes and noncontrolling interests
|
|
|
248
|
|
|
|
193
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
1,237
|
|
|
$
|
1,012
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
16.6%
|
|
|
|
15.9%
|
|
|
|
|
|
|
|
|
|
|
Pre-tax
interest and other investment income in the
first quarter of 2019 increased $61 million (13.5%) compared to 2018, attributable to an increase in interest income, primarily due to higher interest rates on short-term investments, partially offset by lower income from limited partnership
investments. Dividend income in the first quarter of 2019 increased $219 million (29.1%) compared to the first quarter of 2018. The increase in dividend income was attributable to an overall increase in investment levels over the past year and
higher dividend rates. We continue to hold large balances of cash, cash equivalents and U.S. Treasury Bills. We believe that maintaining ample liquidity is paramount and we insist on safety over yield with respect to short-term investments.
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 and loss adjustment expenses, including liabilities under retroactive reinsurance contracts, life, annuity and health benefit liabilities,
unearned premiums and other liabilities due to policyholders, less premium and reinsurance receivables, deferred charges assumed under retroactive reinsurance contracts and deferred policy acquisition costs. Float approximated $124 billion at
March 31, 2019 and $123 billion at December 31, 2018. Our average cost of float was negative in the first quarter of 2019 as our underwriting operations generated
pre-tax
earnings of
$487 million.
30
Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
InsuranceInvestment Income
(Continued)
A summary of cash and investments held in our insurance businesses as of
March 31, 2019 and December 31, 2018 follows (in millions).
|
|
|
|
|
|
|
|
|
|
|
March 31,
2019
|
|
December 31,
2018
|
Cash, cash equivalents and U.S. Treasury Bills
|
|
$
|
66,969
|
|
|
$
|
64,548
|
|
Equity securities
|
|
|
184,953
|
|
|
|
166,385
|
|
Fixed maturity securities
|
|
|
19,226
|
|
|
|
19,690
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
271,148
|
|
|
$
|
250,623
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities as of March 31, 2019 were as follows (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
cost
|
|
Unrealized
gains
|
|
Carrying
value
|
U.S. Treasury, U.S. government corporations and agencies
|
|
$
|
3,893
|
|
|
$
|
17
|
|
|
$
|
3,910
|
|
States, municipalities and political subdivisions
|
|
|
141
|
|
|
|
6
|
|
|
|
147
|
|
Foreign governments
|
|
|
8,045
|
|
|
|
44
|
|
|
|
8,089
|
|
Corporate bonds, investment grade
|
|
|
5,627
|
|
|
|
435
|
|
|
|
6,062
|
|
Corporate bonds,
non-investment
grade
|
|
|
498
|
|
|
|
29
|
|
|
|
527
|
|
Mortgage-backed securities
|
|
|
429
|
|
|
|
62
|
|
|
|
491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,633
|
|
|
$
|
593
|
|
|
$
|
19,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities are rated AA+ or Aaa by the major rating agencies. Approximately
88% of all state, municipal and political subdivisions, foreign government securities and mortgage-backed securities were rated AA or higher.
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, with
approximately 32,500 route miles of track in 28 states. BNSF also operates in three Canadian provinces. BNSF classifies its major business groups by type of product shipped and include consumer products, coal, industrial products and agricultural
products. A summary of BNSFs earnings follows (dollars in millions).
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
2019
|
|
2018
|
Revenues
|
|
$
|
5,762
|
|
|
$
|
5,624
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
1,400
|
|
|
|
1,315
|
|
Fuel
|
|
|
711
|
|
|
|
767
|
|
Purchased services
|
|
|
713
|
|
|
|
692
|
|
Depreciation and amortization
|
|
|
591
|
|
|
|
571
|
|
Equipment rents, materials and other
|
|
|
414
|
|
|
|
510
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
3,829
|
|
|
|
3,855
|
|
Interest expense
|
|
|
268
|
|
|
|
256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,097
|
|
|
|
4,111
|
|
|
|
|
|
|
|
|
|
|
Pre-tax
earnings
|
|
|
1,665
|
|
|
|
1,513
|
|
Income taxes
|
|
|
412
|
|
|
|
368
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
1,253
|
|
|
$
|
1,145
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
24.7
|
%
|
|
|
24.3
|
%
|
|
|
|
|
|
|
|
|
|
31
Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
Railroad (Burlington Northern Santa Fe)
(Continued)
BNSFs revenues were approximately $5.8 billion in the first
quarter of 2019, an increase of $138 million (2.5%) versus 2018. During the first quarter of 2019, BNSFs revenues reflected an 8.5% comparative increase in average revenue per car/unit, driven by increased rates per car/unit and higher
fuel surcharge revenue. Aggregate volumes in the first quarter of 2019 were approximately 2.5 million cars, a decrease of 5.4% from 2.6 million cars in the first quarter of 2018.
Pre-tax earnings were approximately
$1.7 billion in the first quarter of 2019, an increase of 10.0% compared to 2018. BNSF experienced severe winter weather and flooding on parts of the
network in the first quarter of 2019, which negatively affected revenues, expenses and service levels. BNSFs first quarter results also included a revenue increase related to the favorable outcome of an arbitration hearing and a reduction to
expense for a curtailment gain arising from an amendment to a retirement plan.
Revenues from consumer products were
$2.0 billion in the first quarter of 2019, representing an increase of 7.6% compared to 2018. The increase reflected higher average revenue per car/unit, partially offset by volume decreases of 5.7%. The volume decrease was attributable to
lower international intermodal market share, increased truck competition, and the adverse weather conditions.
Revenues
from industrial products were $1.5 billion in the first quarter of 2019, an increase of 8.4% from 2018. The increase was attributable to higher average revenue per car/unit and a volume increase of 1.3%. Volumes in the first quarter of 2019
were higher primarily due to strength in the energy and industrial sectors, which drove higher demand for petroleum products, liquefied petroleum gas, and aggregates, partially offset by lower sand and taconite volumes as well as the aforementioned
weather conditions.
Revenues from agricultural products in the first quarter of 2019 were $1.1 billion, a decrease of
3.4% compared to 2018. The revenue decline reflected lower volumes of 7.4%, partially offset by higher average revenue per car/unit. Volumes decreased primarily due to the weather conditions, partially offset by higher soybean exports.
Revenues from coal in the first quarter of 2019 were $869 million, a decrease of 8.3% compared to 2018. This decrease
reflected lower volumes of 10.3%, partially offset by higher average revenue per car/unit. The volume decrease in the first quarter of 2019 was primarily attributable to the weather conditions, partially offset by higher market share.
BNSFs operating expenses were $3.8 billion in the first quarter of 2019, a decrease of $26 million (0.7%)
compared to 2018. The ratio of operating expenses to revenues in the first quarter of 2019 decreased 2.0 percentage points to 66.5% versus 2018. BNSFs expenses reflected lower volume-related costs and the aforementioned retirement plan
curtailment gain, substantially offset by the impact of the adverse weather conditions. Compensation and benefits expenses increased $85 million (6.5%) compared to 2018. The increase was primarily due to wage inflation and higher employee
counts and related training costs. Fuel expenses decreased $56 million (7.3%) compared to 2018, primarily due to lower average fuel prices and lower fuel volumes, partially offset by unfavorable efficiency. Equipment rents, materials and other
expense decreased $96 million (18.8%) compared to 2018. The decrease was primarily attributable to the retirement plan curtailment gain, partially offset by higher personal injury expenses and casualty-related costs.
Utilities and Energy (Berkshire Hathaway Energy Company)
We currently own 90.9% of the outstanding common stock of 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 a regulated electricity transmission-only business in Alberta, Canada (AltaLink,
L.P.) and a diversified portfolio of mostly renewable independent power projects. In addition, BHE also operates the largest residential real estate brokerage firm and one of the largest residential real estate brokerage franchise networks in
the United States.
32
Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
Utilities and Energy (Berkshire Hathaway Energy
Company)
(Continued)
The rates our regulated businesses charge customers for energy and services
are based in large part on the costs of business operations, including income taxes and a return on capital, and are subject to regulatory approval. To the extent such costs are not allowed in the approved rates, operating results will be adversely
affected. The legislation known as the Tax Cuts and Jobs Act of 2017 (TCJA) was enacted in December 2017, which reduced the U.S. federal statutory corporate income tax rate from 35% to 21%. In 2018, BHEs regulated subsidiaries
began passing the benefits of lower income tax expense attributable to the TCJA to customers through various regulatory mechanisms, including lower rates, higher depreciation and reductions to rate base. Revenues and earnings of BHE are summarized
below (dollars in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
Revenues
|
|
Earnings
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
PacifiCorp
|
|
$
|
1,281
|
|
|
$
|
1,202
|
|
|
$
|
222
|
|
|
$
|
173
|
|
MidAmerican Energy Company
|
|
|
872
|
|
|
|
767
|
|
|
|
84
|
|
|
|
40
|
|
NV Energy
|
|
|
628
|
|
|
|
625
|
|
|
|
36
|
|
|
|
40
|
|
Northern Powergrid
|
|
|
263
|
|
|
|
275
|
|
|
|
99
|
|
|
|
109
|
|
Natural gas pipelines
|
|
|
376
|
|
|
|
379
|
|
|
|
238
|
|
|
|
219
|
|
Other energy businesses
|
|
|
464
|
|
|
|
500
|
|
|
|
(7)
|
|
|
|
20
|
|
Real estate brokerage
|
|
|
788
|
|
|
|
764
|
|
|
|
(24)
|
|
|
|
(10)
|
|
Corporate interest
|
|
|
|
|
|
|
|
|
|
|
(108)
|
|
|
|
(104)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,672
|
|
|
$
|
4,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax
earnings
|
|
|
|
540
|
|
|
|
487
|
|
Income tax benefit
|
|
|
|
(130)
|
|
|
|
(167)
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
$
|
670
|
|
|
$
|
654
|
|
Noncontrolling interests
|
|
|
|
65
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to Berkshire Hathaway shareholders
|
|
|
$
|
605
|
|
|
$
|
585
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
|
(24.1)%
|
|
|
|
(34.3)%
|
|
|
|
|
|
|
|
|
|
|
|
PacifiCorp
PacifiCorp operates a regulated electric utility in portions of several Western states, including Utah, Oregon and Wyoming.
Revenues in the first quarter of 2019 were $1.3 billion, an increase of $79 million (7%) compared to the same period in 2018. Retail revenues in the first quarter of 2019 increased $95 million compared to 2018, reflecting a 4.3%
increase in volumes largely attributable to weather and higher average rates ($39 million) due to lower net tax deferrals related to the TCJA and to business mix changes. Wholesale and other revenues decreased $20 million due to lower volumes
and rates.
Pre-tax
earnings increased $49 million (28%) in the first quarter
of 2019 as compared to the same period in 2018. Utility margin (operating revenues less cost of fuel and energy) in the first quarter of 2019 was $794 million, an increase of $43 million (6%) versus 2018. The increase in utility margin was
due to the increase in revenues, partially offset by higher energy costs. PacifiCorps
after-tax
earnings in the first quarter of 2019 were $180 million, an increase of $32 million (22%)
compared to 2018.
MidAmerican Energy Company
MEC operates a regulated electric and natural gas utility primarily in Iowa and Illinois. Revenues in the first quarter of 2019
were $872 million, an increase of $105 million (14%) as compared to 2018. In the first quarter of 2019, electric operating revenues increased $73 million and natural gas revenues increased $20 million versus 2018. The increase in
electric revenues was attributable to higher retail revenues ($55 million), reflecting increases in aggregate volumes and average rates from higher recoveries through bill riders, including a favorable ratemaking outcome in 2018 related to 2017
tax reform, and increased wholesale and other revenue ($18 million). The increase in natural gas revenues was primarily due to increased volumes.
33
Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
Utilities and Energy (Berkshire Hathaway Energy
Company)
(Continued)
MidAmerican Energy Company (Continued)
Pre-tax
earnings in the first quarter
of 2019 increased $44 million compared to the same period in 2018. Electric utility margin in the first quarter of 2019 was $428 million, an increase of $67 million compared to 2018. The increase in electric utility margin was
partially offset by increased depreciation ($19 million) and maintenance and other operating expenses ($17 million). The depreciation increase reflected increases in new wind-powered generation and other plant additions. MECs
after-tax
earnings are greater than its
pre-tax
earnings due to the significant production tax credits related to its wind-powered generating facilities. MECs
after-tax
earnings in the first quarter of 2019 were $190 million, an increase of $87 million (84%) compared to 2018.
NV Energy
NV Energy operates regulated electric and natural gas utilities in Nevada. Revenues in the first quarter of 2019 were
$628 million, an increase of $3 million compared to 2018, reflecting increased other income partly offset by lower operating revenues. Natural gas operating revenue decreased $4 million in the first quarter of 2019, primarily due to
lower rates, partially offset by higher customer usage. Retail electric operating revenues were relatively unchanged as lower rates resulting from rate reductions effective April 1, 2018 related to the TCJA were largely offset by higher retail
customer volumes and wholesale revenue.
Pre-tax
earnings in the first quarter of
2019 decreased $4 million (10%) compared to 2018. Electric utility margin in the first quarter of 2019 was $321 million, a decrease of $7 million compared to 2018. The decrease was primarily due to lower retail operating
revenues. NV Energys
after-tax
earnings in the first quarter of 2019 were $29 million, a decrease of $4 million (12%) compared to 2018.
Northern Powergrid
Revenues decreased $12 million in the first quarter of 2019 compared to 2018, primarily due to the unfavorable foreign
currency translation effects of a stronger average U.S. Dollar in 2019.
Pre-tax
earnings in the first quarter of 2019 decreased $10 million (9%) compared to 2018, primarily due to lower revenues.
Natural gas pipelines
Revenues in the first quarter of 2019 declined $3 million (1%) compared to 2018. The decline was primarily due to lower
transportation revenues of $19 million at Kern River (largely offset by lower depreciation) and lower gas sales volumes related to system balancing activities at Northern Natural Gas, which were largely offset in cost of sales, partially offset
by higher transportation revenues at Northern Natural Gas of $20 million.
Pre-tax
earnings increased $19 million (9%) in the first quarter of 2019 compared to 2018. The increase was primarily due to
the increase in transportation revenues at Northern Natural Gas, partly offset by a comparative increase in operating expenses.
Other energy businesses
Other energy revenues in the first quarter of 2019 declined $36 million (7%) compared to the same period in 2018. The
decline included comparative decreases of 17% from renewable energy and a comparative decline of 7% at AltaLink, L.P.
Pre-tax
earnings in the first quarter of 2019 decreased $27 million compared to the
same period in 2018, which reflected increased
pre-tax
losses from tax equity renewable energy investments. The
pre-tax
losses from these investments were substantially
offset by income tax benefits.
After-tax
earnings from other energy activities in the first quarter of 2019 were $104 million versus $110 million in 2018.
Real estate brokerage
Revenues in the first quarter of 2019 increased 3% as compared to the same period in 2018 due to recent business acquisitions,
partially offset by an 11% decrease in closed units at existing brokerage businesses.
Pre-tax
losses increased $14 million in the first quarter of 2019 as compared to 2018, primarily due to lower net
revenues at existing brokerage businesses and higher interest expense, partially offset by lower operating expenses.
Corporate interest
Corporate interest includes interest on unsecured debt issued by the BHE holding company. Corporate interest in the first three
months of 2019 increased 4% as compared to 2018, primarily due to higher average borrowings.
34
Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
Utilities and Energy (Berkshire Hathaway Energy
Company)
(Continued)
Income taxes
BHEs effective income tax rates for the first quarter of 2019 and 2018 were approximately (24.1%) and (34.3%),
respectively. BHEs effective income tax rates regularly reflect significant production tax credits from wind-powered electricity generation placed in service by our domestic regulated utilities and other energy businesses. The effective tax
rate in the first quarter of 2019 increased primarily due to benefits recognized in 2018 related to foreign earnings and the accrued repatriation tax on undistributed foreign earnings in connection with the TCJA, partially offset by an increase in
recognized production tax credits and favorable impacts of rate making.
Manufacturing, Service and Retailing
A summary of revenues and earnings of our manufacturing, service and retailing businesses follows (dollars
in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
Revenues
|
|
Earnings *
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Manufacturing
|
|
$
|
15,070
|
|
|
$
|
14,722
|
|
|
$
|
2,194
|
|
|
$
|
2,207
|
|
Service and retailing
|
|
|
19,224
|
|
|
|
19,004
|
|
|
|
732
|
|
|
|
633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
34,294
|
|
|
$
|
33,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax
earnings
|
|
|
|
|
|
|
|
|
|
|
2,926
|
|
|
|
2,840
|
|
Income taxes and noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
726
|
|
|
|
713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,200
|
|
|
$
|
2,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
|
|
|
|
|
|
|
|
24.5%
|
|
|
|
24.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
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 in the preceding table were $192 million in 2019
and $218 million in 2018. These expenses are included in Other in the summary of earnings on page 25 and in the Other earnings section on page 39.
|
Manufacturing
Our manufacturing group includes a variety of industrial, building and consumer products businesses. The industrial products
group includes specialty chemicals (The Lubrizol Corporation (Lubrizol)), complex metal products for aerospace, power and general industrial markets (Precision Castparts Corp. (PCC)), 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)). Marmon includes UTLX Company (UTLX), which provides various products and services (including equipment leasing) for the rail and mobile crane industries.
The building products group includes homebuilding and manufactured housing finance (Clayton Homes), 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). The
consumer products group includes leisure vehicles (Forest River), several apparel and footwear operations (including Fruit of the Loom, Garan, H.H. Brown Shoe Group and Brooks Sports) and the Duracell Company (Duracell), a 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 (dollars in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
Revenues
|
|
Pre-tax earnings
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Industrial products
|
|
$
|
7,677
|
|
|
$
|
7,619
|
|
|
$
|
1,431
|
|
|
$
|
1,467
|
|
Building products
|
|
|
4,562
|
|
|
|
4,080
|
|
|
|
482
|
|
|
|
447
|
|
Consumer products
|
|
|
2,831
|
|
|
|
3,023
|
|
|
|
281
|
|
|
|
293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,070
|
|
|
$
|
14,722
|
|
|
$
|
2,194
|
|
|
$
|
2,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
Manufacturing, Service and Retailing
(Continued)
Manufacturing (Continued)
Aggregate revenues of our manufacturing businesses in the first quarter of
2019 were approximately $15.1 billion, an increase of $348 million (2.4%) compared to 2018.
Pre-tax
earnings in the first quarter of 2019 were approximately $2.2 billion, a decrease of
$13 million (0.6%) from 2018.
Industrial products
Revenues of the industrial products group in the first quarter of 2019 were approximately $7.7 billion, an increase of
$58 million (0.8%) versus 2018.
Pre-tax
earnings of the group were approximately $1.4 billion in the first quarter of 2019, a decrease of $36 million (2.5%) compared to 2018.
Pre-tax
earnings of the group as a percentage of revenues for the first quarter were 18.6% in 2019 and 19.3% in 2018.
PCCs revenues in the first quarter of 2019 were approximately $2.6 billion, an increase of 3.1% over 2018. The
increase reflected higher demand in aerospace markets in connection with new aircraft programs, partly offset by lower industrial gas turbine products sales and lower sales of certain pipe products, primarily attributable to U.S tariffs.
PCCs
pre-tax
earnings increased 3.4% in the first quarter of 2019 compared to
2018. Results in 2019 reflected higher earnings from aerospace products, partially offset by lower earnings from industrial gas turbine business. While demand for aerospace products has been increasing, we have incurred incremental production and
other costs to meet required deliveries to customers, which has negatively affected margins and earnings. However, we expect costs will decline as we increase production capacity where needed and further improve processes and reduce inefficiencies.
Lubrizols revenues in the first quarter of 2019 were approximately $1.7 billion, a decrease of 3.6% compared to
2018. The decline was primarily due to lower volumes and unfavorable foreign currency translation effects, partly offset by higher average selling prices. Lubrizol continued to experience increases in average material unit costs, necessitating
increases in sales prices. Lubrizols consolidated volume in the first quarter of 2019 declined 4% from 2018, reflecting reduced volumes in the Additives product lines, partially offset by volume increases in the Advanced Materials product
lines.
Lubrizols
pre-tax
earnings decreased 5.2% in the first quarter of
2019 compared to 2018. Results in the first quarter of 2019 were negatively affected by the reduction in sales volume, unfavorable foreign currency translation effects, increased operating expenses and raw materials costs.
Marmons revenues in the first quarter of 2019 were approximately $2.0 billion, an increase of 1.2% as compared to
2018. First quarter revenues were higher in the Transportation Products (heavy-duty trucks and trailers), Retail Solutions and Crane Services sectors, partially offset by decreases across the other sectors. The comparative first quarter revenue
declines were primarily in the Food & Beverage Equipment and Plumbing & Refrigeration sectors, which included the effects of a 2018 divestiture of a beverage equipment parts business, lower metals prices and volumes and unfavorable
foreign currency translation effects of a stronger U.S Dollar.
Marmons
pre-tax
earnings in the first quarter of 2019 decreased 3.1% compared to 2018.
Pre-tax
earnings as a percentage of sales fell to 14.9% in the first quarter of 2019 as
compared to 15.5% in 2018.
Pre-tax
earnings in the first quarter of 2019 of the Rail Products & Leasing sector declined $10 million, which was attributable to lower average railcar lease rates.
In addition, we experienced lower earnings from sales volume declines in the Metal Services and Plumbing & Refrigeration sectors, and depressed margins in the Retail Solutions and Industrial Products sectors, with the latter negatively
affected by U.S. tariffs. These earnings declines were partially offset by increased earnings in the Transportation Products and Electrical Products sectors and from the effects of 2018 business acquisitions.
IMCs revenues in the first quarter of 2019 were relatively unchanged from the first quarter of 2018, reflecting increased
revenues from recent business acquisitions, offset by unfavorable foreign currency translation effects from a stronger U.S. Dollar. IMCs
pre-tax
earnings declined in the first quarter of 2019 versus
2018, reflecting increased average raw material costs, unfavorable foreign currency translation effects and changes in business mix.
CTBs revenues increased 3.9% in the first quarter of 2019 versus 2018, primarily due to increased revenues from grain
systems and processing equipment, partially offset by lower protein production revenues and the unfavorable foreign currency translation effects of a stronger U.S. Dollar. CTBs
pre-tax
earnings in
the first quarter of 2019 increased 16.3% versus 2018, primarily due to the increase in revenues, moderation of average costs of certain raw materials, pricing efficiency and ongoing efforts to control operating expenses.
36
Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
Manufacturing, Service and Retailing
(
Continued)
Building products
Revenues of the building products group in the first quarter of 2019 were approximately $4.6 billion, an increase of
$482 million (11.8%) compared to 2018.
Pre-tax
earnings of the group in the first quarter of 2019 were $482 million, an increase of 7.8% versus 2018.
Pre-tax
earnings represented 10.6% and 11.0% of revenues in the first quarter of 2019 and 2018, respectively.
Clayton Homes
produced revenues of $1,554 million in the first quarter of 2019, an increase of $307 million (25%) over 2018. The comparative increase was primarily due to increased home sales of $281 million (33%) and increased interest income from
lending activities. The sales increase reflected changes in sales mix. Unit sales of site built homes in the first quarter of 2019 increased 157% over 2018, primarily due to business acquisitions completed during 2018, while manufactured homes sold
at retail and wholesale declined 10%. The increase in income from lending activities was primarily due to increased average outstanding loan balances. As of March 31, 2019, aggregate loan balances outstanding were approximately
$14.8 billion, compared to $13.8 billion as of March 31, 2018.
Pre-tax
earnings of Clayton Homes for the first quarter of 2019 were $216 million,
an increase of $21 million (11%) compared to 2018. The increase was primarily attributable to home building activities, which reflected the increase in home sales. A significant part of Clayton Homes earnings derives from manufactured
housing lending activities.
Pre-tax
earnings from lending activities in 2019 were relatively unchanged compared to 2018, as the increase in income from lending activities was substantially offset by higher
interest expense, attributable to higher average outstanding debt and interest rates and to higher operating costs.
In the
first quarter of 2019, our other building products businesses generated a comparative increase in revenues of 6%, primarily attributable to higher hard surface flooring products and roofing systems volumes, partly offset by lower carpet volumes.
Additionally, average selling prices of these businesses were generally higher in the first quarter of 2019 as compared to 2018, which were in response to rising raw material and other production costs over the past year.
Pre-tax
earnings of the other building products businesses in the first quarter of 2019
were $266 million, an increase of 6% over 2018. The ratio of
pre-tax
earnings to revenues was relatively unchanged from the first quarter of 2018. As previously noted, rising raw material and production
cost increases prevailed over the past year. In particular, the cost increases for steel, titanium dioxide, and certain petrochemicals were significant. In the first quarter of 2019, these cost increases moderated.
Consumer products
Consumer products revenues were approximately $2.8 billion in the first quarter of 2019, a decrease of $192 million
(6.4%) versus 2018. The first quarter revenue decline was primarily attributable to decreases at Forest River and Duracell, partly offset by higher revenues from apparel and footwear businesses. First quarter 2019 revenues of Forest River declined
16% versus 2018, reflecting an 18% decline in unit sales. Revenues of Duracell declined 6% in the first quarter of 2019 compared to the prior year period due to lower sales in foreign markets and the unfavorable effects of foreign currency
translation. Apparel and footwear revenues in the first quarter of 2019 increased 6%, due primarily to increases of Brooks Sports footwear (22%) and the apparel group (5%).
Consumer products
pre-tax
earnings were $281 million in the first quarter of 2019,
a decrease of $12 million (4.1%) compared to 2018.
Pre-tax
earnings as a percentage of revenues were 9.9% in 2019 and 9.7% in 2018. The decrease in
pre-tax
earnings reflected a 24% comparative decline at Forest River, partly offset by comparative earnings increases from Brooks Sports, the apparel businesses and Richline.
Service and retailing
A summary of revenues and
pre-tax
earnings of our service and retailing businesses
follows (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
Revenues
|
|
Pre-tax earnings
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Service
|
|
$
|
3,418
|
|
|
$
|
3,173
|
|
|
$
|
472
|
|
|
$
|
415
|
|
Retailing
|
|
|
3,607
|
|
|
|
3,642
|
|
|
|
149
|
|
|
|
158
|
|
McLane Company
|
|
|
12,199
|
|
|
|
12,189
|
|
|
|
111
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,224
|
|
|
$
|
19,004
|
|
|
$
|
732
|
|
|
$
|
633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
Manufacturing, Service and Retailing
(Continued)
Service
Our service business group offers fractional ownership programs for general aviation aircraft (NetJets) and high technology
training to operators of aircraft (FlightSafety). We also distribute electronic components (TTI) and franchise and service a network of quick service restaurants (Dairy Queen). Other service businesses include transportation equipment leasing (XTRA)
and furniture leasing (CORT), electronic news distribution, 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 of the service group in the first quarter of 2019 were approximately $3.4 billion, an increase of
$245 million (7.7%) as compared to 2018. The increase was primarily attributable to TTI and NetJets. First quarter 2019 revenues of TTI increased 15% compared to 2018, reflecting industry-wide increased demand for electronic components in many
geographic markets around the world that began in 2017, and from the effects of business acquisitions, partly offset by foreign currency translation effects of a stronger average U.S. Dollar. We believe the strong growth in electronic
components demand experienced recently is beginning to moderate. NetJets revenue increased 5% in the first quarter of 2019, due to increases in the number of aircraft on lease and in flight hours.
Pre-tax
earnings of the service group in the first quarter of 2019 were
$472 million, an increase of $57 million (13.7%) compared to 2018.
Pre-tax
earnings of the group were 13.8% of first quarter revenues in 2019 compared to 13.1% in 2018. The increase in comparative
first quarter earnings was primarily attributable to TTI and NetJets.
Retailing
Our retailers include Berkshire Hathaway Automotive (BHA). BHA includes over 80 auto dealerships that sell new and
pre-owned
automobiles, and offer repair services and related products. BHA also operates two insurance businesses, two auto auctions and an automotive fluid maintenance products distributor. Our retailing businesses
also include four home furnishings retailing businesses (Nebraska Furniture Mart, R.C. Willey, Star Furniture and Jordans), which sell furniture, appliances, flooring and electronics.
Other retailing businesses include three jewelry retailing businesses (Borsheims, Helzberg and Ben Bridge), Sees Candies
(confectionary products), Pampered Chef (high quality kitchen tools), Oriental Trading Company (party supplies, school supplies and toys and novelties) and Detlev Louis Motorrad (Louis), a Germany-based retailer of motorcycle
accessories.
Revenues of the retailing group in the first quarter of 2019 were approximately $3.6 billion, a decrease
of $35 million (1.0%) compared to 2018. BHAs revenues, which represented approximately 65% of our aggregate retailing revenues, increased 1.3% in the first quarter of 2019 compared to 2018. The increase was primarily from a 7% increase in
pre-owned
vehicle sales and higher revenues from finance and service contract activities, partly offset by a 4% reduction in new auto sales. Revenues of Sees Candies and Oriental Trading declined 19% and
11%, respectively, in the first quarter of 2019 compared to 2018, primarily attributable to the seasonal effects of the timing of the Easter holiday. Revenues of our home furnishings businesses declined 4% in the first quarter of 2019 versus 2018
attributable to slowing consumer demand and unfavorable weather in certain regions.
Pre-tax
earnings of the retailing group in the first quarter of 2019 were
$149 million, a decrease of $9 million (5.7%) from 2018. Our home furnishings retailers experienced a 42% decline in comparative first quarter earnings, reflecting lower revenues and generally higher operating expenses.
Pre-tax
earnings of Sees Candies and Oriental Trading also declined in the first quarter of 2019 compared to 2018, attributable to the lower revenues previously noted. These earnings declines were partly
offset by increased earnings of BHA, due to increased earnings from finance and service contract activities, partly offset by higher floorplan interest expense.
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 businesses generate high sales and very low profit margins. These businesses have several significant customers, including Walmart,
7-Eleven,
Yum! Brands and others. Grocery sales
comprise approximately
two-thirds
of McLanes consolidated sales with food service comprising most of the remainder. A curtailment of purchasing by any of its significant customers could have an adverse
impact on periodic revenues and earnings.
Revenues for the first quarter of 2019 were $12.2 billion, relatively
unchanged from the first quarter of 2018, reflecting a 1.5% decrease in grocery sales and a 2.7% increase in foodservice sales.
Pre-tax
earnings in the first quarter of 2019 were $111 million, an increase
of $51 million (85%) compared to 2018. The comparative improvement in first quarter earnings was primarily due to the effects of lower LIFO inventory valuation allowances from lower inventory levels and gains from increased prices related
to certain inventory items. Otherwise, pretax-earnings in the first quarter of 2019 were substantially unchanged from 2018. McLane continues to operate in an intensely competitive business environment, which is negatively affecting its current
operating results and contributing to low operating margin rates. We expect these unfavorable operating conditions will continue in 2019.
38
Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
Investment and Derivative Gains/Losses
A summary of investment and derivative gains/losses follows (dollars in millions).
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
2019
|
|
2018
|
Investment gains (losses)
|
|
$
|
19,552
|
|
|
$
|
(7,809)
|
|
Derivative gains (losses)
|
|
|
770
|
|
|
|
(206)
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) before income taxes and noncontrolling interests
|
|
|
20,322
|
|
|
|
(8,015)
|
|
Income taxes and noncontrolling interests
|
|
|
4,216
|
|
|
|
(1,589)
|
|
|
|
|
|
|
|
|
|
|
Net gains (losses)
|
|
$
|
16,106
|
|
|
$
|
(6,426)
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
20.7%
|
|
|
|
19.6%
|
|
|
|
|
|
|
|
|
|
|
Investment gains/losses
Due to a new accounting pronouncement adopted as of January 1, 2018,
pre-tax
investment gains/losses reported in earnings in the first quarter included net unrealized gains of approximately $19.4 billion in 2019 and net unrealized losses of approximately $7.8 billion in 2018 from our investments in equity
securities still held the end of each period. Prior to 2018, investment gains/losses on equity securities were recorded when the securities were sold based on the cost of the disposed securities. While the new accounting standard does not change the
affect on our consolidated shareholders equity or total comprehensive income, it has significantly increased the volatility of our periodic net earnings due to the magnitude of our equity securities portfolio and the inherent volatility of
equity securities prices. Investment gains/losses from periodic changes in securities prices will continue to cause significant volatility in our consolidated earnings.
We believe that investment gains/losses, whether realized from sales or unrealized from changes in market prices, are often
meaningless in terms of understanding our reported consolidated earnings or evaluating our periodic economic performance. We continue to believe the amount of investment gains/losses included in earnings, including the changes in market prices for
equity securities in any given period, has little analytical or predictive value.
Derivative gains/losses
Derivative contract gains/losses include the changes in fair value of our equity index put option contract liabilities. These
liabilities relate to contracts entered into before March 2008. Substantially all of these contracts will expire between April 2019 and February 2023. The periodic changes in the fair values of these liabilities 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.
As of March 31, 2019, the intrinsic value of our equity index put option contracts was approximately $1.0 billion and
our recorded liabilities at fair value were approximately $1.7 billion. Our ultimate payment obligations, if any, under our contracts will be determined as of the contract expiration dates based on the intrinsic value as defined under the
contracts. Contracts with an aggregate notional value of approximately $12.2 billion will expire over the remainder of 2019.
Derivative contracts produced
pre-tax
gains of $770 million in the first quarter
of 2019 compared to
pre-tax
losses of $206 million in 2018. The gains in 2019 were primarily due to higher equity index values, changes in foreign currency exchange rates and shorter average contract
durations.
Other
A summary of
after-tax
other earnings/losses follows (in millions).
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
2019
|
|
2018
|
Equity method earnings
|
|
$
|
166
|
|
|
$
|
340
|
|
Acquisition accounting expenses
|
|
|
(192)
|
|
|
|
(218)
|
|
Corporate interest expense, before foreign currency effects
|
|
|
(74)
|
|
|
|
(77)
|
|
Corporate interest expense, Euro note foreign exchange rate effects
|
|
|
134
|
|
|
|
(163)
|
|
Income tax expense adjustment
|
|
|
(377)
|
|
|
|
|
|
Other
|
|
|
214
|
|
|
|
130
|
|
|
|
|
|
|
|
|
|
|
Net earnings (losses) attributable to Berkshire Hathaway shareholders
|
|
$
|
(129)
|
|
|
$
|
12
|
|
|
|
|
|
|
|
|
|
|
39
Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
Other
(
Continued
)
After-tax
equity method earnings
include Berkshires share of earnings attributable to Kraft Heinz, Pilot Flying J, Berkadia and Electric Transmission of Texas. As discussed in Note 5 to the accompanying unaudited interim Consolidated Financial Statements, financial statements
of Kraft Heinz for the first quarter of 2019 were not made available to us. Accordingly, our consolidated financial statements do not include our share of Kraft Heinzs earnings for that period.
After-tax
equity method earnings from Kraft Heniz were $234 million in the first quarter of 2018. We will include our share of Kraft Heinzs first quarter 2019 earnings in our earnings in the period such information is made available to Berkshire.
After-tax
acquisition accounting expenses include charges arising from the
application of the acquisition method in connection with certain of Berkshires past business acquisitions. Such charges were primarily from the amortization or impairment of intangible assets recorded in connection with those business
acquisitions.
The aggregate par amount of Berkshires outstanding Euro denominated debt was 6.85 billion
during the first quarter of 2019 and 2018. Changes in foreign currency exchange rates produced
non-cash
unrealized gains in the first quarter of 2019 and losses in the first quarter of 2018 from the periodic
revaluation of these liabilities into U.S. Dollars.
The income tax expense adjustment relates to investments that we made
between 2015 and 2018 in certain tax equity investment funds. Our investments in these funds aggregated approximately $340 million. In December 2018 and during the first quarter of 2019, we learned of allegations by federal authorities of
fraudulent income conduct by the sponsor of these funds. As a result of our investigation into these allegations, we now believe that it is more likely than not that the income tax benefits that we recognized are not valid.
Financial Condition
Our consolidated balance sheet continues to reflect significant liquidity and a strong capital base. Consolidated
shareholders equity at March 31, 2019 was approximately $369 billion, an increase of $20.2 billion since December 31, 2018. Net earnings attributable to Berkshire shareholders in the first quarter of 2019 were
$21.7 billion, which included
after-tax
gains on our investments of approximately $15.5 billion, which was primarily due to increases during the first quarter in market prices of the equity
securities we owned at March 31, 2019.
At March 31, 2019, our insurance and other businesses held cash, cash
equivalents and U.S. Treasury Bills of approximately $110.5 billion, which included $89.9 billion in U.S. Treasury Bills. Investments in equity and fixed maturity securities (excluding our investment in Kraft Heinz) were approximately
$211.2 billion.
Berkshire parent company debt outstanding at March 31, 2019 was approximately
$16.7 billion, a decrease of $167 million since December 31, 2018, which was attributable to foreign currency exchange rate changes applicable to the 6.85 billion par amount of Euro denominated senior notes. Berkshire
parent company debt of $750 million matures in August 2019.
Berkshires insurance and other subsidiary
outstanding borrowings declined approximately $1 billion in the first quarter of 2019 to approximately $17.1 billion at March 31, 2019, primarily attributable to a net decrease in borrowings of Berkshire Hathaway Finance Corporation
(BHFC), a wholly-owned financing subsidiary. 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. In the first
quarter of 2019, BHFC repaid $2.7 billion of maturing senior notes and issued $2.0 billion of 4.25% senior notes due in 2049. An additional $1.25 billion of BHFC senior notes will mature in August 2019. Berkshire guarantees the full
and timely payment of principal and interest with respect to BHFCs senior notes.
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. Capital expenditures of these two
operations in the first quarter of 2019 were $2.0 billion and we forecast additional capital expenditures of approximately $9.0 billion over the remainder of 2019.
BNSFs outstanding debt approximated $23.2 billion as of March 31, 2019, which was substantially unchanged since
December 31, 2018. BNSF debentures of $750 million will mature in 2019. Outstanding borrowings of BHE and its subsidiaries were approximately $40.1 billion at March 31, 2019, an increase of $840 million since
December 31, 2018. In the first quarter of 2019, BHE and its subsidiaries issued debt aggregating $3.0 billion with maturity dates ranging from 2029 to 2050 and repaid approximately $1.4 billion of maturing term debt. The proceeds
from these financings were used to repay borrowings, to fund capital expenditures and for other general corporate purposes. BHE subsidiary term debt of $666 million will mature over the remainder of 2019. 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.
40
Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
Financial Condition
(Continued)
Berkshires common stock repurchase program was amended on July 17,
2018, permitting Berkshire to repurchase its Class A and Class B shares at prices below Berkshires intrinsic value, as conservatively determined by Warren Buffett, Berkshires Chairman of the Board and Chief Executive Officer,
and Charlie Munger, Vice Chairman of the Board. The program allows share repurchases in the open market or through privately negotiated transactions and does not specify a maximum number of shares to be repurchased. 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. In the first quarter of 2019, Berkshire repurchased shares of Class A and B common stock for an aggregate cost of approximately $1.7 billion.
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
pertaining to the acquisition of goods or services in the future are not currently reflected in the financial statements, and will be recognized in future periods as the goods are delivered or services are provided. Beginning in 2019, operating
lease obligations are included in the consolidated balance sheet as a result of the adoption of a new accounting pronouncement. The timing and amount of the payments under certain contracts, such as insurance and reinsurance contracts, are
contingent upon the outcome of future events. Actual payments will likely vary, perhaps materially, from the estimated liabilities currently recorded in our Consolidated Balance Sheet.
Except as otherwise disclosed in this Quarterly Report, our contractual obligations as of March 31, 2019 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, 2018.
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, 2018.
Our Consolidated Balance Sheet as of March 31, 2019 includes estimated liabilities for unpaid losses and loss adjustment
expenses from property and casualty insurance and reinsurance contracts of approximately $111 billion. Due to the inherent uncertainties in the process of establishing loss reserve amounts, the actual ultimate claim amounts will likely differ
from the currently recorded amounts. A very small percentage change in estimates of this magnitude will result in a material effect on periodic earnings. The effects from changes in these estimates are recorded as a component of insurance losses and
loss adjustment expenses in the period of the change.
Our Consolidated Balance Sheet as of March 31, 2019 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 2018. Although we believe that the goodwill
reflected in the Consolidated Balance Sheet is not impaired, goodwill may subsequently become impaired due to changes in facts and circumstances affecting the valuation of the reporting unit. A goodwill impairment charge could have a material effect
on periodic earnings.
Information concerning new accounting pronouncements is included in Note 2 to the accompanying
Consolidated Financial Statements.
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Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
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 principal 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.