A summary of property/casualty reinsurance underwriting results follows (dollars in millions).
Property/casualty premiums written increased $514 million (14.5%) in the first quarter of 2020, while premiums earned increased $401 million (17.3%) over 2019. The increase in premiums written was primarily attributable to new business which included $525 million from a property quota-share contract effective in 2020, partially offset by non-renewals and the unfavorable foreign currency effects of a stronger U.S. Dollar.
Losses and loss adjustment expenses in the first quarter of 2020 increased $346 million (19.5%) over 2019. Losses and loss adjustment expenses reflected estimated COVID-19 related claims of approximately $230 million in 2020 and relatively insignificant losses from changes in estimated ultimate liabilities for prior years’ loss events. Losses and loss adjustment expenses in 2019 included no significant losses from catastrophe events and a net increase in estimated ultimate claim liabilities for prior years’ loss events of $212 million.
Life/health
A summary of our life/health reinsurance underwriting results follows (dollars in millions).
|
|
|
|
First Quarter
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Premiums written
|
|
|
|
|
|
|
|
|
|
$
|
1,355
|
|
|
|
|
|
|
$
|
1,027
|
|
|
|
|
|
Premiums earned
|
|
|
|
|
|
|
|
|
|
$
|
1,354
|
|
|
|
100.0
|
|
|
$
|
1,027
|
|
|
|
100.0
|
|
Life and health insurance benefits
|
|
|
|
|
|
|
|
|
|
|
1,098
|
|
|
|
81.1
|
|
|
|
598
|
|
|
|
58.2
|
|
Underwriting expenses
|
|
|
|
|
|
|
|
|
|
|
485
|
|
|
|
35.8
|
|
|
|
149
|
|
|
|
14.5
|
|
Total benefits and expenses
|
|
|
|
|
|
|
|
|
|
|
1,583
|
|
|
|
116.9
|
|
|
|
747
|
|
|
|
72.7
|
|
Pre-tax underwriting earnings (loss)
|
|
|
|
|
|
|
|
|
|
$
|
(229
|
)
|
|
|
|
|
|
$
|
280
|
|
|
|
|
|
Life/health premiums earned were $1.4 billion in the first quarter of 2020, an increase of $327 million (31.8%) compared to 2019. The increase in life/health premiums earned reflected $168 million from a single reinsurance contract covering health insurance risks beginning in the fourth quarter of 2019 and volume growth in several international life markets and in U.S. individual life and health business, partially offset by the unfavorable effects of foreign currency translation attributable to a stronger U.S. Dollar.
The life/health business produced pre-tax underwriting losses of $229 million in the first quarter of 2020 compared to pre-tax earnings of $280 million in 2019. We incurred pre-tax losses of $234 million in the first quarter of 2020 from the run-off of variable annuity guarantee reinsurance contracts compared to pre-tax earnings of $89 million in the first quarter of 2019. Underwriting results from this business reflect changes in estimated liabilities for guaranteed benefits, which derive from changes in securities markets and interest rates and from the periodic amortization of expected profit margins. Life/health underwriting results in the first quarter of 2019 included a one-time pre-tax gain of $163 million attributable to the yearly-renewable-term life reinsurance contract amendment, which effectively eliminated our future exposures under the contract. Underwriting results in the first quarter of 2020 also reflected lower pre-tax earnings from international life business, partially offset by lower pre-tax losses from the run-off of U.S. long-term care business.
Retroactive reinsurance
There were no significant retroactive reinsurance contracts written in the first quarters of 2020 and 2019. Pre-tax underwriting losses in 2020 and 2019 derived from deferred charge amortization and changes in the estimated timing and amount of future claim payments, as well as from foreign currency gains/losses arising from the periodic remeasurement of liabilities related to contracts written by our U.S. subsidiaries that are denominated in foreign currencies.
Pre-tax underwriting results include foreign currency remeasurement gains of $205 million in the first quarter of 2020 and losses of $52 million in 2019. Retroactive reinsurance contracts produced pre-tax underwriting losses before foreign currency gains/losses of $247 million in the first quarter of 2020 and $271 million in 2019.
Gross unpaid losses assumed under retroactive reinsurance contracts were $42.3 billion at March 31, 2020 and $42.4 billion at December 31, 2019. Unamortized deferred charge assets related to such reinsurance contracts were $13.5 billion at March 31, 2020 and $13.7 billion at December 31, 2019. Deferred charge assets will be charged to earnings over the expected remaining claims settlement periods through periodic amortization.
28
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Insurance—Underwriting (Continued)
Berkshire Hathaway Reinsurance Group (Continued)
Periodic payment annuity
Periodic payment annuity premiums written in the first quarter of 2020 were $159 million, a decrease of $35 million (18.0%) compared to 2019. 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 normally produce pre-tax underwriting losses deriving from the recurring discount accretion of annuity liabilities. Underwriting results also include the effects of mortality and interest rate changes and remeasurement gains and losses related to foreign currency denominated liabilities of certain contracts written by our U.S. subsidiaries. During the first quarter, pre-tax underwriting results included remeasurement gains of $105 million in 2020 and losses of $28 million in 2019.
Excluding foreign currency remeasurement gains/losses, pre-tax underwriting losses from periodic payment annuity contracts were $161 million in the first quarter of 2020 and $142 million in the first quarter of 2019. Discounted periodic payment annuity liabilities were $13.7 billion at March 31, 2020 and $13.5 billion at December 31, 2019. The weighted average discount rate of these liabilities was 4.0% at March 31, 2020.
Insurance—Investment Income
A summary of net investment income attributable to our insurance operations follows (dollars in millions).
|
|
|
|
First Quarter
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
Interest and other investment income
|
|
|
|
|
|
$
|
404
|
|
|
$
|
513
|
|
Dividend income
|
|
|
|
|
|
|
1,243
|
|
|
|
972
|
|
Investment income before income taxes and noncontrolling interests
|
|
|
|
|
|
|
1,647
|
|
|
|
1,485
|
|
Income taxes and noncontrolling interests
|
|
|
|
|
|
|
261
|
|
|
|
248
|
|
Net investment income
|
|
|
|
|
|
$
|
1,386
|
|
|
$
|
1,237
|
|
Effective income tax rate
|
|
|
|
|
|
|
15.8
|
%
|
|
|
16.6
|
%
|
Interest and other investment income decreased $109 million (21.2%) in the first quarter of 2020 compared to 2019, primarily due to lower income from short-term investments. Dividend income in the first quarter of 2020 increased $271 million (27.9%) compared to 2019. The increase was primarily attributable to the investment in $10 billion liquidation value of 8% cumulative preferred stock of Occidental on August 8, 2019 and higher dividend rates on certain common stock investments. We continue to hold substantial balances of cash, cash equivalents and short-term U.S. Treasury Bills. Short-term interest yields in the U.S. were higher in the first half of 2019. However, those rates declined over the second half of 2019 and continued to decline through the first quarter of 2020. We expect such rates will remain low over the remainder of 2020 and that our earnings from such investments over the remainder of 2020 will be lower than in 2019. Nevertheless, 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 and reinsurance 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 insurance benefit liabilities, unearned premiums and other liabilities due to policyholders, less insurance premiums and reinsurance receivables, deferred charges assumed under retroactive reinsurance contracts and deferred policy acquisition costs. Float was approximately $130 billion on March 31, 2020 and $129 billion on December 31, 2019. Our average cost of float was negative in the first quarter of 2020 and 2019 as our underwriting operations generated pre-tax earnings in each period.
29
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Insurance—Investment Income (Continued)
A summary of cash and investments held in our insurance businesses as of March 31, 2020 and December 31, 2019 follows (in millions).
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Cash, cash equivalents and U.S. Treasury Bills
|
|
$
|
70,585
|
|
|
$
|
64,908
|
|
Equity securities
|
|
|
169,764
|
|
|
|
240,126
|
|
Fixed maturity securities
|
|
|
17,798
|
|
|
|
18,537
|
|
Other
|
|
|
2,476
|
|
|
|
2,481
|
|
|
|
$
|
260,623
|
|
|
$
|
326,052
|
|
Fixed maturity securities as of March 31, 2020 were as follows (in millions).
|
|
Amortized
cost
|
|
|
Unrealized
gains
|
|
|
Carrying
value
|
|
U.S. Treasury, U.S. government corporations and agencies
|
|
$
|
3,307
|
|
|
$
|
85
|
|
|
$
|
3,392
|
|
Foreign governments
|
|
|
8,125
|
|
|
|
28
|
|
|
|
8,153
|
|
Corporate bonds
|
|
|
5,458
|
|
|
|
252
|
|
|
|
5,710
|
|
Other
|
|
|
472
|
|
|
|
71
|
|
|
|
543
|
|
|
|
$
|
17,362
|
|
|
$
|
436
|
|
|
$
|
17,798
|
|
U.S. government obligations are rated AA+ or Aaa by the major rating agencies. Approximately 88% of all foreign government obligations were rated AA or higher. Foreign government securities include obligations issued or unconditionally guaranteed by national or provincial government entities. Approximately 98% of corporate bond investments were considered investment-grade by the major rating agencies as of March 31, 2020.
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 which includes consumer products, coal, industrial products and agricultural products. A summary of BNSF’s earnings follows (dollars in millions).
|
|
|
|
First Quarter
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
Revenues
|
|
|
|
|
|
$
|
5,417
|
|
|
$
|
5,762
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
|
|
|
|
1,244
|
|
|
|
1,400
|
|
Fuel
|
|
|
|
|
|
|
614
|
|
|
|
711
|
|
Purchased services
|
|
|
|
|
|
|
666
|
|
|
|
713
|
|
Depreciation and amortization
|
|
|
|
|
|
|
615
|
|
|
|
591
|
|
Equipment rents, materials and other
|
|
|
|
|
|
|
432
|
|
|
|
414
|
|
Total operating expenses
|
|
|
|
|
|
|
3,571
|
|
|
|
3,829
|
|
Interest expense
|
|
|
|
|
|
|
262
|
|
|
|
268
|
|
|
|
|
|
|
|
|
3,833
|
|
|
|
4,097
|
|
Pre-tax earnings
|
|
|
|
|
|
|
1,584
|
|
|
|
1,665
|
|
Income taxes
|
|
|
|
|
|
|
394
|
|
|
|
412
|
|
Net earnings
|
|
|
|
|
|
$
|
1,190
|
|
|
$
|
1,253
|
|
Effective income tax rate
|
|
|
|
|
|
|
24.9
|
%
|
|
|
24.7
|
%
|
30
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Railroad (“Burlington Northern Santa Fe”) (Continued)
BNSF’s revenues were $5.4 billion in the first quarter of 2020, a decrease of $345 million (6.0%) versus 2019. During the first quarter of 2020, BNSF’s revenues reflected a 5.2% decrease in volume and a 0.6% comparative decrease in average revenue per car/unit. Volume in the first quarter of 2020 was 2.34 million cars/units compared to 2.46 million in 2019. Pre-tax earnings in the first quarter of 2020 were approximately $1.6 billion, a decrease of 4.9% compared to 2019. The decrease is principally a result of the negative impact on volumes of the COVID-19 pandemic in the first quarter of 2020, as well as the effects in the first quarter of 2019 of a revenue increase related to the favorable outcome of an arbitration hearing and a reduction to expense from a retirement plan curtailment gain arising from a plan amendment. BNSF’s service, velocity and cost performance improved significantly in 2020 compared to the first quarter of 2019 when severe winter weather and flooding on parts of the network negatively affected revenues, expenses and service levels.
Revenues from consumer products were $1.8 billion in the first quarter of 2020, a decrease of 11.8% compared to 2019, reflecting lower average revenue per car/unit and volume decreases of 7.2%. The volume decreases were driven by lower international intermodal volumes as the COVID-19 pandemic contributed to lower U.S. West Coast imports. Volumes further decelerated late in the quarter in the domestic intermodal and automotive segments as the COVID-19 pandemic’s impact to U.S. consumers intensified.
Revenues from industrial products were $1.5 billion in the first quarter of 2020, a decrease of 0.5% from 2019. The decrease was attributable to a volume decrease of 2.3%, partially offset by higher average revenue per car/unit. Volumes decreased primarily due to lower sand volumes driven by increased competition from locally-sourced (“in-basin”) sand and due to lower liquefied petroleum gas volume attributable to increased pipeline takeaway capacity. These decreases were partially offset by higher demand for petroleum products.
Revenues from agricultural products were $1.1 billion in the first quarter of 2020, an increase of 2.8% compared to 2019. The increase reflected higher volumes of 3.3%, primarily due to higher domestic grain and soybean meal shipments, partially offset by lower grain exports.
Revenues from coal were $766 million in the first quarter of 2020, a decrease of 11.9% compared to 2019. This decrease reflected lower average revenue per car/unit and lower volumes of 7.7%. Volumes decreased primarily due to the effects of low natural gas prices, mild winter weather and plant retirements.
Operating expenses were $3.6 billion in the first quarter of 2020, a decrease of $258 million (6.7%) compared to 2019. The ratio of operating expenses to revenues decreased 0.6 percentage points to 65.9% in the first quarter of 2020 versus 2019. BNSF's expenses in 2020 reflected lower volume-related costs, productivity improvements and improved weather conditions compared to the first quarter of 2019, offset by a reduction to expense in the first quarter of 2019 from the pension plan curtailment gain.
Compensation and benefits expense decreased $156 million (11.1%) for the first quarter of 2020, primarily due to lower employee counts associated with lower volume and improved productivity. Purchased service expenses decreased $47 million (6.6%) in the first quarter of 2020 compared to 2019, primarily due to insurance recoveries in 2020 related to the flooding in 2019. Fuel expenses decreased $97 million (13.6%) in the first quarter of 2020 compared to 2019, primarily due to improved efficiency, lower volumes and lower average fuel prices. Equipment rents, materials and other expenses increased $18 million (4.3%) in the first quarter of 2020 compared to 2019, due to the effects of the pension plan curtailment gain in the first quarter of 2019, offset by lower volume-related costs, personal injury expense, casualty-related costs, miscellaneous taxes and the effects of cost controls in 2020.
BNSF is an important part of the national and global supply chain, and as an essential business it has continued to operate throughout the duration of the COVID-19 pandemic. However, the pandemic is expected to cause an economic slowdown that could be significant and, therefore, could adversely affect the demand for BNSF’s services. The pandemic continues to rapidly evolve, and the extent to which it may impact BNSF’s business, operating results, financial condition or liquidity will depend on future developments which are highly uncertain and cannot be predicted with confidence. We believe BNSF has sufficient liquidity to continue business operations during this volatile period.
Utilities and Energy (“Berkshire Hathaway Energy Company”)
We currently own 91.1% of the outstanding common stock of Berkshire Hathaway Energy Company (“BHE”), which operates a global energy business. BHE’s 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. 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.
31
Item 2. Management’s 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 largely based 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. A summary of BHE’s net earnings follows (dollars in millions).
|
|
|
|
First Quarter
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy operating revenue
|
|
|
|
|
|
$
|
3,634
|
|
|
$
|
3,825
|
|
Real estate operating revenue
|
|
|
|
|
|
|
893
|
|
|
|
785
|
|
Other income (loss)
|
|
|
|
|
|
|
(20
|
)
|
|
|
62
|
|
Total revenue
|
|
|
|
|
|
|
4,507
|
|
|
|
4,672
|
|
Costs and expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy cost of sales
|
|
|
|
|
|
|
1,038
|
|
|
|
1,214
|
|
Energy operating expense
|
|
|
|
|
|
|
1,711
|
|
|
|
1,651
|
|
Real estate operating costs and expense
|
|
|
|
|
|
|
873
|
|
|
|
806
|
|
Interest expense
|
|
|
|
|
|
|
466
|
|
|
|
461
|
|
Total costs and expense
|
|
|
|
|
|
|
4,088
|
|
|
|
4,132
|
|
Pre-tax earnings
|
|
|
|
|
|
|
419
|
|
|
|
540
|
|
Income tax expense (benefit)*
|
|
|
|
|
|
|
(201
|
)
|
|
|
(130
|
)
|
Net earnings after income taxes
|
|
|
|
|
|
|
620
|
|
|
|
670
|
|
Noncontrolling interests
|
|
|
|
|
|
|
3
|
|
|
|
3
|
|
Net earnings attributable to Berkshire Hathaway Energy
|
|
|
|
|
|
|
617
|
|
|
|
667
|
|
Noncontrolling interests
|
|
|
|
|
|
|
56
|
|
|
|
62
|
|
Net earnings attributable to Berkshire Hathaway shareholders
|
|
|
|
|
|
$
|
561
|
|
|
$
|
605
|
|
Effective income tax rate
|
|
|
|
|
|
|
(48.0
|
)%
|
|
|
(24.1
|
)%
|
*
|
Includes significant production tax credits from wind-powered electricity generation.
|
The discussion of BHE’s operating results that follows is based on after-tax earnings, reflecting how the energy businesses are managed and evaluated. A summary of net earnings attributable to BHE follows (in millions).
|
|
|
|
First Quarter
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
PacifiCorp
|
|
|
|
|
|
$
|
176
|
|
|
$
|
180
|
|
MidAmerican Energy Company
|
|
|
|
|
|
|
150
|
|
|
|
190
|
|
NV Energy
|
|
|
|
|
|
|
20
|
|
|
|
29
|
|
Northern Powergrid
|
|
|
|
|
|
|
87
|
|
|
|
80
|
|
Natural gas pipelines
|
|
|
|
|
|
|
179
|
|
|
|
181
|
|
Other energy businesses
|
|
|
|
|
|
|
136
|
|
|
|
91
|
|
Real estate brokerage
|
|
|
|
|
|
|
10
|
|
|
|
(22
|
)
|
Corporate interest and other
|
|
|
|
|
|
|
(141
|
)
|
|
|
(62
|
)
|
|
|
|
|
|
|
$
|
617
|
|
|
$
|
667
|
|
32
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Utilities and Energy (“Berkshire Hathaway Energy Company”) (Continued)
PacifiCorp
PacifiCorp operates a regulated electric utility in portions of several Western states, including Utah, Oregon and Wyoming. After-tax earnings were $176 million in the first quarter of 2020, a decrease of $4 million (2.2%) compared to 2019. The decline reflected lower utility margin (operating revenue less cost of sales), lower other income and higher interest expense, partly offset by increased allowances for equity and borrowed funds used during construction and increased income tax benefits from production tax credits from repowering certain existing wind-powered generating facilities. Utility margin was $789 million in the first quarter of 2020, a decrease of $5 million compared to 2019, mainly attributable to lower operating revenue from lower average rates and volumes, which declined 1.7%, due in part to the impacts of weather. The lower operating revenue was largely offset by lower coal-fueled and natural gas-fueled generation costs.
MidAmerican Energy Company
MEC operates a regulated electric and natural gas utility primarily in Iowa and Illinois. After-tax earnings were $150 million in the first quarter of 2020, a decrease of $40 million (21.1%) as compared to 2019. The decrease was primarily attributable to lower electric and natural gas utility margins and lower other income, partially offset by increased income tax benefits from higher production tax credits driven by repowering existing facilities and new wind projects placed in-service. Electric utility margin in the first quarter of 2020 declined 9% to $391 million, primarily due to lower average retail rates from business mix changes, decreased wholesale revenue from lower volumes and prices and unfavorable retail customer volumes of 0.7%, as lower residential volumes from the impacts of weather were largely offset by a 7.7% increase in industrial volumes. The electric utility margin decrease was partially offset by lower generation and purchased power costs. Natural gas utility margin declined 21% due to a 16.2% reduction in retail customer volumes, primarily due to milder weather conditions in 2020.
NV Energy
NV Energy operates regulated electric and natural gas utilities in Nevada. After-tax earnings were $20 million in the first quarter of 2020, a decrease of $9 million (31.0%) compared to 2019. The decrease reflected lower other income and higher depreciation and amortization expense, partly offset by lower interest expense. Electric utility margin in the first quarter of 2020 was $323 million, relatively unchanged versus 2019, as retail customer volumes, including distribution only customers, increased 0.2%, primarily attributable to an increase in the average number of customers.
Northern Powergrid
After-tax earnings in the first quarter of 2020 increased 8.8% as compared to 2019. The increase reflected higher distribution revenues of $8 million, attributable to higher tariff rates, partly offset by a 1.8% decline in distributed units.
Natural gas pipelines
After-tax earnings in the first quarter of 2020 decreased $2 million (1.1%) compared to 2019. The decrease was primarily due to increased operating expenses and higher net interest expense, partially offset by higher transportation revenues from expansion projects.
Other energy businesses
After-tax earnings in the first quarter of 2020 were $136 million, an increase of $45 million (49.5%) compared to 2019. The increase was primarily due to income tax benefits from renewable wind tax equity investments, largely from projects reaching commercial operation.
Real estate brokerage
After-tax earnings in the first quarter of 2020 increased $32 million compared to 2019. The increase was primarily due to higher after-tax earnings from mortgage, brokerage and settlement services in large part attributable to a more favorable interest rate environment, partially offset by higher operating expenses.
Corporate interest and other
After-tax earnings decreased $79 million in the first quarter of 2020 compared to 2019, primarily due to state income tax benefits recognized in 2019 and lower other income in 2020.
33
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 *
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Manufacturing
|
|
|
|
|
|
|
|
|
|
$
|
15,035
|
|
|
$
|
15,070
|
|
|
$
|
2,111
|
|
|
$
|
2,194
|
|
Service and retailing
|
|
|
|
|
|
|
|
|
|
|
18,777
|
|
|
|
19,224
|
|
|
|
623
|
|
|
|
732
|
|
|
|
|
|
|
|
|
|
|
|
$
|
33,812
|
|
|
$
|
34,294
|
|
|
|
|
|
|
|
|
|
Pre-tax earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,734
|
|
|
|
2,926
|
|
Income taxes and noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
696
|
|
|
|
726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,038
|
|
|
$
|
2,200
|
|
Effective income tax rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25.1
|
%
|
|
|
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 $202 million in 2020 and $192 million in 2019. These expenses are included in “Other” in the summary of earnings on page 24 and in the “Other” earnings section on page 38.
|
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, Fechheimer, H.H. Brown Shoe Group and Brooks Sports) and high-performance alkaline batteries (Duracell). 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
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Industrial products
|
|
|
|
|
|
|
|
|
|
$
|
7,358
|
|
|
$
|
7,677
|
|
|
$
|
1,306
|
|
|
$
|
1,431
|
|
Building products
|
|
|
|
|
|
|
|
|
|
|
4,857
|
|
|
|
4,562
|
|
|
|
567
|
|
|
|
482
|
|
Consumer products
|
|
|
|
|
|
|
|
|
|
|
2,820
|
|
|
|
2,831
|
|
|
|
238
|
|
|
|
281
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,035
|
|
|
$
|
15,070
|
|
|
$
|
2,111
|
|
|
$
|
2,194
|
|
Industrial products
Revenues of the industrial products group were $7.4 billion in the first quarter of 2020, a decrease of 4.2% from 2019. Pre-tax earnings of the group were $1.3 billion in the first quarter of 2020, a decline of 8.7% compared to 2019. Pre-tax earnings as a percentage of revenues for the group were 17.7% in the first quarter of 2020 compared to 18.6% in 2019.
PCC’s revenues were $2.4 billion in the first quarter of 2020, a decrease of $173 million (6.6%) compared to 2019. In the first quarter of 2020, PCC experienced lower sales across all of its major markets. The decline in aerospace sales was primarily attributable to volume reductions in new programs, such as LEAP, associated with Boeing’s decision to temporarily suspend production of the 737 MAX aircraft, lower market share within the aerostructures business and reduced shipments to customers affected by COVID-19 across the world.
34
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Manufacturing, Service and Retailing (Continued)
Industrial products (Continued)
PCC’s pre-tax earnings decreased 7.3% in the first quarter of 2020 compared to 2019. The earnings decrease reflected the decline in sales of aerospace products and higher than normal production costs associated with meeting required customer deliveries on new and legacy programs. The increased production costs were due to manufacturing inefficiencies primarily attributable to COVID-19.
Lubrizol’s revenues were $1.6 billion in the first quarter of 2020, a decrease of $72 million (4.3%) compared to 2019. The decline reflected lower volumes. A fire at Lubrizol’s Rouen, France manufacturing, blending and storage facility at the end of the third quarter of 2019 resulted in the suspension of operations. Although these operations were partially restarted in December 2019, volumes continued to be negatively affected in 2020. Lubrizol’s consolidated volume in the first quarter of 2020 declined 4% from 2019, primarily due to a volume decline of 5% in the Additives product lines.
Lubrizol’s pre-tax earnings decreased 9.3% in the first quarter of 2020 compared to 2019. Earnings in the first quarter of 2020 continue to be negatively impacted by costs and lost business associated with the Rouen fire and lower selling prices. These negative impacts were partially offset by lower average raw material costs and favorable product mix.
Marmon’s revenues were $2.0 billion in the first quarter of 2020, substantially unchanged from 2019. Revenues decreased due to lower volumes in the Transportation Products, Retail Solutions, Metal Services, and Foodservice Technology sectors, lower metal prices in the Electrical and Metal Services sectors, the effect of 2019 divestitures and unfavorable foreign currency translation. These decreases were offset by the effect of the 2019 acquisition of Colson Medical Companies, other acquisitions in the Rail & Leasing, Transportation Products and Crane sectors, higher volumes in the Electrical and Plumbing & Refrigeration sectors, and increased revenues in the Rail & Leasing sector on higher railcar equipment sales and railcar fleet utilization.
Marmon’s pre-tax earnings in the first quarter of 2020 increased $2 million (0.7%) compared to 2019. The increase reflected the effects of business acquisitions and higher earnings in the Rail & Leasing sector and increased other income, offset by lower earnings in the Transportation Products and Crane Services sectors, and increases in restructuring charges and interest expense.
IMC’s revenues were $842 million in the first quarter of 2020, a decrease of 5.1% compared to 2019. The revenue decline was attributable to the negative effects of COVID-19 in Asia during the first quarter and in other regions of the world in the latter part of March, and unfavorable foreign currency translation effects, partly offset by the effects of business acquisitions over the past year. IMC’s pre-tax earnings declined 22.3% in the first quarter of 2020 versus 2019, as a result of the impact of the sales decline and changes in sales mix.
Building products
Revenues of the building products group were approximately $4.9 billion in the first quarter of 2020, an increase of $295 million (6.5%) compared to 2019. Pre-tax earnings of the group were $567 million in the first quarter of 2020, an increase of 17.6% over 2019. Pre-tax earnings as percentages of revenues were 11.7% and 10.6% in the first quarters of 2020 and 2019, respectively.
Clayton Homes’ revenues were approximately $1.8 billion in the first quarter of 2020, an increase of $208 million (13.4%) over 2019. The comparative increase was primarily due to an increase in home sales of $173 million (15.3%), reflecting a net increase in units sold and changes in sales mix. Unit sales of site-built homes increased 24% in the first quarter of 2020, primarily due to business acquisitions. Manufactured home unit sales increased 12%, primarily attributable to increased wholesale sales. Interest income from lending activities in the first quarter of 2020 increased 6.3% compared to 2019. Loan balances, net of allowances for credit losses, were approximately $15.5 billion as of March 31, 2020 compared to $15.9 billion as of December 31, 2019.
Pre-tax earnings of Clayton Homes were $201 million in the first quarter of 2020, a decrease of $14 million (6.7%) compared to 2019. The earnings decline reflected increased provisions for expected credit losses, partly offset by comparatively higher earnings from home building activities and increased interest income, net of interest expense. The increase in credit loss provisions was primarily related to COVID-19.
Aggregate revenues of our other building products businesses were approximately $3.1 billion in the first quarter of 2020, an increase of 2.9% versus 2019. The increase was primarily due to higher paint and coatings volumes (including volumes with Ace Hardware Stores), increased roofing and insulation system volumes and product mix changes.
Pre-tax earnings of the other building products businesses were $366 million in the first quarter of 2020, an increase of 37.8% over 2019. Earnings in the first quarter of 2020 benefitted from a combination of lower facilities closure costs, higher average gross margins for flooring products, the effects of the aforementioned increases in sales volumes and operating cost control initiatives.
35
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Manufacturing, Service and Retailing (Continued)
Consumer products
Consumer products revenues were $2.8 billion in the first quarter of 2020, a decrease of 0.4% versus 2019. Footwear and apparel sales declined 6.1% in the first quarter of 2020 and were substantially offset by revenue increases by Forest River (3.8%) and Duracell (5.7%). Our apparel and footwear businesses experienced lower sales volumes, reflecting the effects of COVID-19 that prompted temporary retail store closures and reduced or cancelled orders and from the ongoing shift by certain major retailers towards private label products.
Consumer products pre-tax earnings were $238 million in the first quarter of 2020, a decrease of 15.3% compared to 2019. Pre-tax earnings as a percentage of revenues for the first quarter were 8.4% in 2020 and 9.9% in 2019. The decrease in pre-tax earnings reflected a 34% decline in earnings from footwear and apparel, which included inventory obsolescence allowances related to COVID-19.
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
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Service
|
|
|
|
|
|
|
|
|
|
$
|
3,358
|
|
|
$
|
3,418
|
|
|
$
|
425
|
|
|
$
|
472
|
|
Retailing
|
|
|
|
|
|
|
|
|
|
|
3,598
|
|
|
|
3,607
|
|
|
|
133
|
|
|
|
149
|
|
McLane Company
|
|
|
|
|
|
|
|
|
|
|
11,821
|
|
|
|
12,199
|
|
|
|
65
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,777
|
|
|
$
|
19,224
|
|
|
$
|
623
|
|
|
$
|
732
|
|
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), franchise and service a network of quick service restaurants (Dairy Queen) and offer third party logistics services that primarily serve the petroleum and chemical industries (Charter Brokerage). Other service businesses include transportation equipment leasing (XTRA) and furniture leasing (CORT), electronic news distribution, multimedia and regulatory filings (Business Wire), operation of a television station in Miami, Florida (WPLG) and until the time of their sale on March 16, 2020, the publishing of newspapers.
Service group revenues were approximately $3.4 billion in the first quarter of 2020, a decrease of 1.8% compared to 2019. In the first quarter of 2020, revenues of TTI were relatively unchanged from 2019, while FlightSafety’s revenues increased slightly and NetJets revenues decreased slightly from 2019. The decrease in NetJets revenues in the first quarter of 2020 reflected lower flight hours, partly offset by an increase in the number of aircraft on lease.
Pre-tax earnings of the service group were $425 million in the first quarter of 2020, a decrease of $47 million (10.0%) compared to 2019. Pre-tax earnings of the group as a percentage of revenues were 12.7% in the first quarter of 2020 compared to 13.8% in 2019. The comparative decline in earnings reflected lower earnings from TTI, FlightSafety, XTRA and CORT. TTI’s earnings decline was attributable to lower gross margin rates. Earnings from NetJets increased in the first quarter of 2020, primarily attributable to improved fleet and operating efficiencies, which improved operating margins over the first two months of 2020. However, the spread of COVID-19 had a significant impact on NetJets’ and FlightSafety’s operations during March and April.
Retailing
Our largest retailing business is Berkshire Hathaway Automotive (“BHA”), which consists of 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. Other retailing businesses include four home furnishings retailing businesses (Nebraska Furniture Mart, R.C. Willey, Star Furniture and Jordan’s), which sell furniture, appliances, flooring and electronics. Other retailing businesses also include three jewelry businesses (Borsheims, Helzberg and Ben Bridge), See’s 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.
36
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Manufacturing, Service and Retailing (Continued)
Retailing (Continued)
Retailing group revenues were $3.6 billion in the first quarter of 2020, relatively unchanged compared to 2019. BHA’s revenues in the first quarter of 2020, which represented approximately 65% of our combined retailing revenues, decreased 0.9% from 2019. BHA’s revenue decrease reflected a 1.5% decrease in new and pre-owned vehicle sales, partly offset by increased vehicle finance and service contract revenue and vehicle service revenue as compared to 2019. Home furnishings group revenues, which represented about 21% of the aggregate retailing group revenues, increased 2.3% in the first quarter of 2020 compared to 2019.
Pre-tax earnings of the retail group were $133 million in the first quarter of 2020, a decrease of 10.7% from 2019. BHA’s pre-tax earnings increased 3.6%, primarily due to increased earnings from finance and service contract activities and lower floorplan interest expense, partly offset by lower vehicle sales margins. Aggregate pre-tax earnings for the remainder of our retailing group declined $19 million compared to the first quarter of 2019. The spread of COVID-19 throughout the U.S. resulted in the temporary closures of many of our retail store operations and significantly lower volumes for those operations that remained open.
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 comprised approximately 67% of McLane’s consolidated sales in the first quarter of 2020 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 were $11.8 billion in the first quarter of 2020, a decrease of 3.1% compared to 2019. Revenues in the first quarter of 2020 decreased 2% in the grocery business and 6% in the foodservice business as compared to 2019. Pre-tax earnings decreased $46 million (41.4%) as compared to 2019. The earnings decrease in the first quarter of 2020 included charges of $17 million for expected credit losses and inventory losses in the foodservice operations related to COVID-19 and lower sales and gross margin rates in the grocery operations. McLane continues to operate in an intensely competitive business environment, which is negatively affecting its current operating results.
Investment and Derivative Gains/Losses
A summary of investment and derivative gains/losses follows (dollars in millions).
|
|
|
|
First Quarter
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
Investment gains (losses)
|
|
|
|
|
|
$
|
(68,882
|
)
|
|
$
|
19,552
|
|
Derivative gains (losses)
|
|
|
|
|
|
|
(1,393
|
)
|
|
|
770
|
|
Gains (losses) before income taxes and noncontrolling interests
|
|
|
|
|
|
|
(70,275
|
)
|
|
|
20,322
|
|
Income taxes and noncontrolling interests
|
|
|
|
|
|
|
(14,658
|
)
|
|
|
4,216
|
|
Net gains (losses)
|
|
|
|
|
|
$
|
(55,617
|
)
|
|
$
|
16,106
|
|
Effective income tax rate
|
|
|
|
|
|
|
20.8
|
%
|
|
|
20.7
|
%
|
Investment gains/losses
As a result of a change to GAAP effective in 2018, we are required to include the unrealized gains and losses arising from changes in market prices of investments in equity securities in our reported earnings. While this accounting standard does not change the effect 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.
Pre-tax investment losses in the first quarter of 2020 included net unrealized losses on equity securities we owned on March 31, 2020 of approximately $68.5 billion. Pre-tax gains in the first quarter of 2019 included $19.4 billion in net unrealized gains on equity securities we owned on March 31, 2019. The unrealized losses in the first quarter of 2020 reflected the widespread declines in equity securities prices in the U.S. and internationally. Taxable investment gains on equity securities sold in the first quarter, which is the difference between sales proceeds and the original cost basis of the securities sold, were $1.2 billion in 2020 and $518 million in 2019.
37
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Investment gains/losses (Continued)
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 that the amount of investment gains/losses included in earnings 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, which relate to contracts that were originated prior to March 2008. Substantially all remaining contracts will expire by February 2023. The periodic changes in the fair values of these liabilities are recorded in earnings and can be significant due to the volatility of market prices in the underlying equity markets.
As of March 31, 2020, the intrinsic value of our equity index put option contracts was approximately $2.0 billion and our recorded liability at fair value was $2.4 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. Pre-tax losses from equity index put option contracts were $1,393 million in the first quarter of 2020 compared to pre-tax gains of $770 million in the first quarter of 2019. The losses in 2020 were attributable to the sharp declines in equity index values.
Other
A summary of after-tax other earnings/losses follows (in millions).
|
|
|
|
|
|
First Quarter
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
Equity method earnings
|
|
|
|
|
|
$
|
256
|
|
|
$
|
166
|
|
Acquisition accounting expenses
|
|
|
|
|
|
|
(202
|
)
|
|
|
(192
|
)
|
Corporate interest expense, before foreign currency effects
|
|
|
|
|
|
|
(96
|
)
|
|
|
(74
|
)
|
Foreign currency exchange rate gains (losses) on Berkshire
and BHFC non-U.S. Dollar senior notes
|
|
|
|
|
|
|
175
|
|
|
|
134
|
|
Income tax expense adjustment
|
|
|
|
|
|
|
—
|
|
|
|
(377
|
)
|
Other, principally corporate investment income
|
|
|
|
|
|
|
200
|
|
|
|
214
|
|
Net earnings (loss) attributable to Berkshire Hathaway shareholders
|
|
|
|
|
|
$
|
333
|
|
|
$
|
(129
|
)
|
After-tax equity method earnings include Berkshire’s share of earnings attributable to Kraft Heinz, Pilot, Berkadia and Electric Transmission of Texas. As discussed in Note 5 to the accompanying unaudited Consolidated Financial Statements, financial results of Kraft Heinz for the first quarter of 2019 were not made available to us until the third quarter of 2019. Accordingly, our consolidated statement of earnings for the first quarter of 2019 does not include our share of Kraft Heinz’s earnings for that period. After-tax earnings related to our Kraft Heinz investment were $99 million for the first quarter of 2020.
After-tax acquisition accounting expenses include charges arising from the application of the acquisition method in connection with certain of Berkshire’s past business acquisitions. Such charges arise primarily from the amortization or impairment of intangible assets recorded in connection with those business acquisitions.
Foreign currency exchange rate gains and losses pertain to non-U.S. Dollar denominated debt issued by Berkshire and BHFC. As of March 31, 2020, outstanding borrowings included senior notes of €6.85 billion par, ¥430 billion par and £1.75 billion par. Changes in foreign currency exchange rates produce non-cash unrealized gains and losses from the periodic revaluation of these liabilities into U.S. Dollars. The gains and losses recorded in any given period can be significant due the magnitude of the borrowings and the inherent volatility in foreign currency exchange rates.
The income tax expense adjustment in the first quarter of 2019 relates to investments that we made between 2015 and 2018 in certain tax equity investment funds, which 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 and in January 2020, the principals involved in creating the investment funds plead guilty to criminal charges related to the sale of the investments. In the first quarter of 2019, we concluded it was more likely than not that the income tax benefits that we recognized prior to 2019 were not valid.
38
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Financial Condition
Our consolidated balance sheet continues to reflect very significant liquidity and a very strong capital base. Consolidated shareholders’ equity at March 31, 2020 was $371.6 billion, a decrease of $53.2 billion since December 31, 2019. Net loss attributable to Berkshire shareholders in the first three months of 2020 was $49.7 billion, which included after-tax losses on our investments of approximately $54.5 billion that were primarily due to decreases in market prices of the equity securities we owned at March 31, 2020.
Our operating business groups are preparing for reduced cash flows from reduced revenues and economic activity as a result of COVID-19. We are taking measures to reduce costs as appropriate through the measures previously described in this Report. While we cannot reliably predict when all of our businesses will become fully operational, we currently believe our liquidity and capital strength, which is extremely strong, to be adequate.
At March 31, 2020, our insurance and other businesses held cash, cash equivalents and U.S. Treasury Bills (net of amounts payable for acquired but not yet settled purchases) of $124.7 billion, which included $105.5 billion in U.S. Treasury Bills. Investments in equity and fixed maturity securities (excluding our investment in Kraft Heinz) were $198.7 billion. Additionally, during the month of April we received approximately $6.1 billion from the sales of equity securities, net of the costs of equity securities purchased. The proceeds from these activities have been primarily reinvested in U.S. Treasury Bills.
Berkshire parent company debt outstanding at March 31, 2020 was $19.8 billion, relatively unchanged since December 31, 2019. In March 2020, Berkshire repaid maturing senior notes of €1.0 billion and issued €1.0 billion of 0.0% senior notes due in 2025. In April 2020, Berkshire issued ¥195.5 billion of senior notes (approximately $1.8 billion), which has a weighted average interest rate of 1.07% and maturity dates ranging from 2023 to 2060. Over the remainder of 2020, there are no other Berkshire senior note maturities. In the first quarter of 2021, senior notes of $1.6 billion will mature.
Berkshire’s insurance and other subsidiary outstanding borrowings were $17.7 billion at March 31, 2020, which included senior note borrowings of BHFC, a wholly-owned financing subsidiary, of approximately $11.0 billion. BHFC’s borrowings are used to fund a portion of loans originated and acquired by Clayton Homes and equipment held for lease by our UTLX railcar leasing business. In January 2020, BHFC repaid $350 million of maturing senior notes and in March 2020, BHFC issued $500 million of 1.85% senior notes due in 2030. Berkshire guarantees the full and timely payment of principal and interest with respect to BHFC’s senior notes. Over the next 12 months, approximately $1.3 billion of BHFC senior notes will mature.
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 three months of 2020 were $2.0 billion and we currently forecast additional capital expenditures of approximately $8.8 billion over the remainder of 2020.
BNSF’s outstanding debt was $23.2 billion as of March 31, 2020, relatively unchanged from December 31, 2019. In April 2020, BNSF issued $575 million of 3.05% senior unsecured debentures due in 2051. Outstanding borrowings of BHE and its subsidiaries were $43.6 billion at March 31, 2020, an increase of approximately $1.0 billion since December 31, 2019. In the first three months of 2020, BHE and its subsidiaries issued new term debt aggregating $4.0 billion with maturity dates ranging from 2025 to 2050, repaid approximately $1.7 billion of term debt and reduced short-term borrowings by approximately $1.1 billion. In April 2020, a BHE subsidiary issued $1.0 billion of term debt consisting of $400 million of 2.7% bonds due in 2030 and $600 million of 3.3% bonds due in 2051. Over the remainder of 2020, BHE and its subsidiaries will repay approximately $800 million of maturing term debt. 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.
Berkshire’s common stock repurchase program was amended on July 17, 2018, permitting Berkshire to repurchase its Class A and Class B shares at prices below Berkshire’s intrinsic value, as conservatively determined by Warren Buffett, Berkshire’s 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 Berkshire’s consolidated cash, cash equivalents and U.S. Treasury Bill holdings below $20 billion. Financial strength and redundant liquidity will always be of paramount importance at Berkshire. In the first three months of 2020, Berkshire paid $1.7 billion to repurchase shares of Class A and B common stock.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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, which 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. Actual payments will likely vary, perhaps materially, from the estimated liabilities currently recorded in our Consolidated Balance Sheet.
In the first three months of 2020, Berkshire and its subsidiaries issued new term debt. Principal and interest payments associated with these new term borrowings are expected as follows: in 2020 – $103 million; in 2021 and 2022 – $317 million; in 2023 and 2024 – $317 million; and thereafter – $7.2 billion. In April 2020, Berkshire and certain other subsidiaries issued new term debt aggregating $3.4 billion with maturities ranging from 2023 to 2060.
Except as otherwise disclosed in this Quarterly Report, our contractual obligations as of March 31, 2020 were, in the aggregate, not materially different from those disclosed in the “Contractual Obligations” section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Berkshire’s Annual Report on Form 10-K for the year ended December 31, 2019.
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 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Berkshire’s Annual Report on Form 10-K for the year ended December 31, 2019.
Our Consolidated Balance Sheet as of March 31, 2020 includes estimated liabilities for unpaid losses and loss adjustment expenses from property and casualty insurance and reinsurance contracts of $116 billion. Due to the inherent uncertainties in the process of establishing these liabilities, 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, 2020 included goodwill of acquired businesses of $82 billion and other indefinite-lived intangible assets of $19 billion. We evaluate these assets for impairment at least annually and we conducted our most recent annual review during the fourth quarter of 2019. Goodwill and indefinite-lived intangible asset impairment reviews include determining the estimated fair values of our reporting units and assets. The key assumptions and inputs used in such determinations may include forecasting revenues and expenses, cash flows and capital expenditures, as well as an appropriate discount rate and other inputs. Significant judgment is required in estimating the fair value of a reporting unit and in performing impairment tests. Due to the inherent uncertainty in forecasting cash flows and earnings, actual results may vary significantly from the forecasts.
In response to the adverse effects of the COVID-19 pandemic, we considered whether goodwill needed to be reevaluated for impairment as of March 31, 2020, including goodwill for certain reporting units where the estimated fair value exceeded the carrying value by less than 20% as of the most recent annual impairment test. Making estimates of the fair value of reporting units at this time are significantly affected by assumptions on the severity, duration or long-term effects of the pandemic on the reporting unit’s business, which we cannot reliably predict at this time. Consequently, any fair value estimates in such instances can be subject to wide variations.
We considered the available facts and made qualitative assessments and judgements for what we believed represent reasonably possible outcomes. While the fair values of certain of these reporting units declined since the time that the tests were conducted in the fourth quarter of 2019, we concluded it is more likely than not that goodwill was not impaired as of March 31, 2020. However, COVID-19 pandemic events will continue to evolve and the negative effects on our companies could prove to be worse than we currently estimate and lead us to record goodwill or indefinite-lived asset impairment charges prior to the next annual impairment review in the fourth quarter of 2020.
Information concerning new accounting pronouncements is included in Note 2 to the accompanying Consolidated Financial Statements.
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Item 2. Management’s 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, the frequency and severity of epidemics, pandemics or other outbreaks, including COVID-19, that negatively affect our operating results and restrict our access to borrowed funds through the capital markets at reasonable rates, 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.