Results of Operations
Net earnings attributable to Berkshire are disaggregated in the table that follows. Amounts are after deducting income taxes and exclude earnings attributable to noncontrolling interests. Amounts are in millions.
| |
|
First Quarter
|
|
| |
|
2012
|
|
|
2011
|
|
|
Insurance – underwriting
|
|
$ |
54 |
|
|
$ |
(821 |
) |
|
Insurance – investment income
|
|
|
791 |
|
|
|
952 |
|
|
Railroad
|
|
|
701 |
|
|
|
607 |
|
|
Utilities and energy
|
|
|
338 |
|
|
|
301 |
|
|
Manufacturing, service and retailing *
|
|
|
854 |
|
|
|
558 |
|
|
Finance and financial products
|
|
|
104 |
|
|
|
96 |
|
|
Other
|
|
|
(177 |
) |
|
|
(100 |
) |
|
Investment and derivative gains/losses
|
|
|
580 |
|
|
|
(82 |
) |
|
Net earnings attributable to Berkshire
|
|
$ |
3,245 |
|
|
$ |
1,511 |
|
|
*
|
Includes Lubrizol in 2012.
|
Through our subsidiaries, we engage in a number of diverse business activities. Our operating businesses are managed on an unusually decentralized basis. There are essentially no centralized or integrated business functions (such as sales, marketing, purchasing, legal or human resources) and there is minimal involvement by our corporate headquarters in the day-to-day business activities of the operating businesses. Our senior corporate management team participates in and is ultimately responsible for significant capital allocation decisions, investment activities and the selection of the Chief Executive to head each of the operating businesses. It also is responsible for establishing and monitoring Berkshire’s corporate governance efforts, including, but not limited to, communicating the appropriate “tone at the top” messages to its employees and associates, monitoring governance efforts at the operating businesses, and participating in the resolution of governance-related issues as needed. The business segment data (Note 17 to the Consolidated Financial Statements) should be read in conjunction with this discussion. We completed the acquisition of The Lubrizol Corporation on September 16, 2011 and its results are included for the first quarter of 2012 as a component of manufacturing, service and retailing businesses in the preceding table.
During the first quarter of 2011, insurance underwriting results of our reinsurance operations included after-tax losses of approximately $1.1 billion from several significant catastrophe events. We incurred no significant losses from catastrophes during the first quarter of 2012.
Investment and derivative gains/losses in the first quarter included after-tax gains from derivative contracts of $650 million in 2012 and $176 million in 2011. Investment and derivative gains/losses in the first quarter also included after-tax other-than-temporary impairment (“OTTI”) losses of $219 million in 2012 and $322 million in 2011. In 2012, the OTTI losses related to fixed maturity investments in a single issuer where we concluded that we are unlikely to receive all contractual cash flows when due. In 2011, the OTTI losses related to certain equity securities. We believe that realized investment gains/losses and OTTI losses are often meaningless in terms of understanding our reported results or evaluating our economic performance. These gains and losses and changes in the equity and credit markets from period to period have caused and will likely continue to cause significant volatility in our periodic earnings.
Insurance—Underwriting
We engage in both primary insurance and reinsurance of property and casualty 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: (1) GEICO, (2) General Re, (3) Berkshire Hathaway Reinsurance Group (“BHRG”) and (4) Berkshire Hathaway Primary Group. General Re and BHRG also reinsure life and health risks.
Our management views insurance businesses as possessing two distinct operations – underwriting and investing. Underwriting decisions are the responsibility of the unit managers; investing decisions, with limited exceptions, are the responsibility of Berkshire’s Chairman and CEO, Warren E. Buffett. Accordingly, we evaluate the performance of underwriting operations without any allocation of investment income.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Insurance—Underwriting (Continued)
Our periodic underwriting results are affected significantly by changes in estimates for unpaid losses and loss adjustment expenses, including amounts established for occurrences in prior years. The timing and amount of catastrophe losses can produce significant volatility in our periodic underwriting results, particularly with respect to BHRG and General Re. We incurred no significant losses from catastrophes occurring in the first quarter of 2012. In the first quarter of 2011, we recorded aggregate estimated pre-tax losses of approximately $1.7 billion arising from several catastrophe events, including the earthquakes in Japan and New Zealand, as well as a cyclone and floods in Australia. Our periodic underwriting results may also include significant foreign currency transaction gains and losses arising from the changes in the valuations of certain non-U.S. Dollar denominated reinsurance liabilities as a result of foreign currency exchange rate fluctuations.
A key marketing strategy followed by all of our insurance businesses is the maintenance of extraordinary capital strength. Statutory surplus of our insurance businesses was approximately $95 billion at December 31, 2011. This superior capital strength creates opportunities, especially with respect to reinsurance activities, to negotiate and enter into insurance and reinsurance contracts specially designed to meet the unique needs of insurance and reinsurance buyers.
A summary follows of underwriting results from our insurance businesses. Amounts are in millions.
| |
|
First Quarter
|
|
| |
|
2012
|
|
|
2011
|
|
|
Underwriting gain (loss) attributable to:
|
|
|
|
|
|
|
|
GEICO
|
|
$ |
124 |
|
|
$ |
337 |
|
|
General Re
|
|
|
81 |
|
|
|
(326 |
) |
|
Berkshire Hathaway Reinsurance Group
|
|
|
(191 |
) |
|
|
(1,343 |
) |
|
Berkshire Hathaway Primary Group
|
|
|
71 |
|
|
|
56 |
|
|
Pre-tax underwriting gain (loss)
|
|
|
85 |
|
|
|
(1,276 |
) |
|
Income taxes and noncontrolling interests
|
|
|
31 |
|
|
|
(455 |
) |
|
Net underwriting gain (loss)
|
|
$ |
54 |
|
|
$ |
(821 |
) |
GEICO
Through GEICO, we primarily write private passenger automobile insurance, offering coverages to insureds in all 50 states and the District of Columbia. GEICO’s policies are marketed mainly by direct response methods in which customers apply for coverage directly to the company via the Internet or over the telephone. This is a significant element in our strategy to be a low-cost auto insurer. In addition, we strive to provide excellent service to customers, with the goal of establishing long-term customer relationships. GEICO’s underwriting results are summarized below. Dollars are in millions.
| |
|
First Quarter
|
|
| |
|
2012
|
|
|
2011
|
|
| |
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Premiums earned
|
|
$ |
4,016 |
|
|
|
100.0 |
|
|
$ |
3,675 |
|
|
|
100.0 |
|
|
Losses and loss adjustment expenses
|
|
|
2,933 |
|
|
|
73.0 |
|
|
|
2,653 |
|
|
|
72.2 |
|
|
Underwriting expenses
|
|
|
959 |
|
|
|
23.9 |
|
|
|
685 |
|
|
|
18.6 |
|
|
Total losses and expenses
|
|
|
3,892 |
|
|
|
96.9 |
|
|
|
3,338 |
|
|
|
90.8 |
|
|
Pre-tax underwriting gain
|
|
$ |
124 |
|
|
|
|
|
|
$ |
337 |
|
|
|
|
|
Premiums earned in the first quarter of 2012 increased $341 million (9.3%) to $4,016 million. The growth in premiums earned for voluntary auto was 9.3%, as policies-in-force increased 6.5% during the past year. The increase in policies-in-force reflects a decrease of 2.7% in voluntary auto new business sales compared with the strong new business sales in the first quarter of 2011. Voluntary auto policies-in-force at March 31, 2012 were approximately 287,000 greater than at December 31, 2011. In recent years, the growth in voluntary auto policies-in-force has been the greatest during the first quarter.
Losses and loss adjustment expenses incurred in the first quarter of 2012 were $2,933 million, an increase of $280 million (10.6%) versus the first quarter of 2011. The loss ratio (the ratio of losses and loss adjustment expenses incurred to premiums earned) was 73.0% in the first quarter of 2012 compared to 72.2% in 2011. The increase in the loss ratio in the first quarter of 2012 reflected higher average injury and physical damage severities estimates. In the first quarter of 2012, bodily injury severities estimates generally increased in the one to two percent range over 2011, while physical damage severities increased in the six to nine percent range.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Insurance —Underwriting (Continued)
GEICO (Continued)
Underwriting expenses in the first quarter of 2012 were $959 million, an increase of $274 million (40.0%) over 2011. The increase was primarily the result of a change in U.S. GAAP accounting standards regarding deferred policy acquisition costs (“DPAC”), which represent certain underwriting costs that are eligible to be capitalized and expensed over the policy period as the related premiums are earned. As a result of adopting the new accounting standard, beginning in 2012, GEICO ceased deferring a large portion of its direct advertising cost. Through prospective adoption of the new accounting standard, DPAC as of December 31, 2011 will be amortized to expense over the remainder of the related policy periods. Acquisition costs related to policies written and renewed after December 31, 2011 will be deferred at lower levels than in the past. The new accounting standard for DPAC does not impact the cash basis underwriting costs or our assessment of GEICO’s underwriting performance. However, the new standard accelerates the timing of when underwriting costs are recognized in earnings.
We estimate that GEICO’s underwriting expenses for the first quarter of 2012 would have been about $250 million less had we computed DPAC under the prior standard and that its expense ratio in 2012 would have been less than 2011. We anticipate that substantially all the effect of transitioning to this new standard will be completed by the end of the third quarter of 2012. Thereafter, we expect that the amount of GEICO underwriting expenses reported in earnings will decline to near the historical levels as measured by the ratio of underwriting expenses to premiums earned.
General Re
Through General Re, we conduct a reinsurance business offering property and casualty and life and health coverages to clients worldwide. We write property and casualty reinsurance in North America on a direct basis through General Reinsurance Corporation and internationally through Germany-based General Reinsurance AG and other wholly-owned affiliates. Property and casualty reinsurance is also written through brokers with respect to Faraday in London. Life and health reinsurance is written in North America through General Re Life Corporation and internationally through General Reinsurance AG. General Re strives to generate underwriting profits in essentially all of its product lines. Our management does not evaluate underwriting performance based upon market share and our underwriters are instructed to reject inadequately priced risks. General Re’s underwriting results are summarized in the following table. Amounts are in millions.
| |
|
First Quarter
|
|
| |
|
Premiums earned
|
|
|
Pre-tax underwriting gain (loss)
|
|
| |
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
Property/casualty
|
|
$ |
735 |
|
|
$ |
715 |
|
|
$ |
46 |
|
|
$ |
(324 |
) |
|
Life/health
|
|
|
736 |
|
|
|
722 |
|
|
|
35 |
|
|
|
(2 |
) |
| |
|
$ |
1,471 |
|
|
$ |
1,437 |
|
|
$ |
81 |
|
|
$ |
(326 |
) |
Property/casualty
Property/casualty premiums earned in the first quarter of 2012 were $735 million, an increase of $20 million (2.8%) compared to 2011. Excluding the effects of foreign currency exchange rate changes, premiums earned in the first quarter of 2012 increased $31 million (4.3%), which was primarily due to increases in international treaty business. Price competition in most property and casualty lines persists. Our underwriters continue to exercise discipline by not accepting offers to write business where prices are deemed inadequate. We remain prepared to increase premium volumes should market conditions improve.
Underwriting results in the first quarter of 2012 included underwriting gains of $66 million from property business, offset in part by underwriting losses of $20 million from casualty/workers’ compensation business. The property underwriting gains reflect an absence of significant catastrophe losses as well as underwriting gains from the run-off of prior years’ business. The timing and magnitude of catastrophe and large individual losses has produced and is expected to continue to produce significant volatility in periodic underwriting results. The underwriting losses from casualty/workers’ compensation business included $26 million from loss reserve discount accretion and deferred charge amortization.
Underwriting losses in the first quarter of 2011 consisted of $355 million of losses from property business offset in part by underwriting gains of $31 million from casualty/workers’ compensation businesses. The property results included $491 million of catastrophe losses incurred, which were primarily from the earthquakes in Japan and New Zealand. The underwriting gains of $31 million from casualty/workers’ compensation business reflected overall favorable run-off of prior years’ casualty loss reserves.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Insurance —Underwriting (Continued)
Life/health
Premiums earned in the first quarter of 2012 were $736 million, an increase of $14 million (1.9%) over 2011. Adjusting for the effects of foreign currency exchange rate changes, premiums earned increased 4.1% over the first quarter of 2011. The increase in premiums earned was primarily due to increased non-U.S. life business. The life/health operations produced an underwriting gain of $35 million in 2012 as compared to an underwriting loss of $2 million in 2011. The first quarter of 2012 underwriting gain was primarily due to lower than expected mortality. The loss in the first quarter of 2011 included $40 million of incurred losses related to the earthquakes in Japan and New Zealand and also reflected increases in frequency and severity of life and health claims in the U.S.
Berkshire Hathaway Reinsurance Group (“BHRG”)
Through BHRG, we underwrite excess-of-loss reinsurance and quota-share coverages on property and casualty risks for insurers and reinsurers worldwide. BHRG’s business includes catastrophe excess-of-loss reinsurance and excess primary and facultative reinsurance for large or otherwise unusual property risks referred to as individual risk. BHRG also writes retroactive reinsurance, which provides indemnification of losses and loss adjustment expenses with respect to past loss events. Other multi-line business refers to other property and casualty business written on both a quota-share and excess basis and includes a quota-share contract with Swiss Reinsurance Company Ltd. (“Swiss Re”) covering a 20% share of substantially all of Swiss Re’s property/casualty contracts incepting between January 1, 2008 and December 31, 2012. We currently do not anticipate that the Swiss Re quota-share contract will be renewed or extended. BHRG’s underwriting activities also include life reinsurance and annuity business. BHRG’s underwriting results are summarized in the table below. Amounts are in millions.
| |
|
First Quarter
|
|
| |
|
Premiums earned
|
|
|
Pre-tax underwriting gain (loss)
|
|
| |
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
Catastrophe and individual risk
|
|
$ |
134 |
|
|
$ |
189 |
|
|
$ |
82 |
|
|
$ |
(273 |
) |
|
Retroactive reinsurance
|
|
|
298 |
|
|
|
143 |
|
|
|
(73 |
) |
|
|
(155 |
) |
|
Other multi-line property/casualty
|
|
|
1,125 |
|
|
|
1,133 |
|
|
|
(130 |
) |
|
|
(910 |
) |
|
Life and annuity
|
|
|
514 |
|
|
|
479 |
|
|
|
(70 |
) |
|
|
(5 |
) |
| |
|
$ |
2,071 |
|
|
$ |
1,944 |
|
|
$ |
(191 |
) |
|
$ |
(1,343 |
) |
Premiums earned in the first quarter of 2012 from catastrophe and individual risk contracts declined $55 million (29%) versus the first quarter of 2011. The level of business written in a given period will vary significantly due to changes in market conditions and management’s assessment of the adequacy of premium rates. We have generally constrained the volume of business written in recent years as premium rates have not been attractive enough to warrant increasing volume. However, we have the capacity and willingness to write substantially more business when appropriate pricing can be obtained.
Catastrophe and individual risk underwriting results for the first quarter of 2012 reflected no significant losses from catastrophe events, while results for the first quarter of 2011 included estimated losses of $454 million from the earthquakes in Japan and New Zealand. Catastrophe and individual risk contracts may provide exceptionally large limits of indemnification and cover catastrophe risks (such as hurricanes, earthquakes or other natural disasters) or other property and liability risks. The timing and magnitude of losses produces extraordinary volatility in periodic underwriting results of this business.
Retroactive reinsurance policies generally provide very large, but limited, indemnification of losses and loss adjustment expenses with respect to past loss events that are generally expected to be paid over long periods of time. Underwriting results attributable to retroactive reinsurance include the recurring periodic amortization of deferred charges that are established with respect to these contracts. At the inception of a contract, deferred charges represent the difference between the premium received and the estimated ultimate losses payable. Deferred charges are subsequently amortized over the estimated claims payment period using the interest method, which reflects estimates of the timing and amount of loss payments. The original estimates of the timing and amount of loss payments are analyzed against actual experience and as necessary are revised based on an actuarial evaluation of the expected remaining losses. Amortization charges and deferred charge adjustments resulting from changes to the estimated timing and amount of future loss payments are included as a component of losses and loss adjustment expenses.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Insurance —Underwriting (Continued)
Berkshire Hathaway Reinsurance Group (“BHRG”) (Continued)
The underwriting losses from retroactive policies for the first quarter of 2012 and 2011 primarily represent the amortization of deferred charges. At March 31, 2012 and December 31, 2011, unamortized deferred charges for all of BHRG’s retroactive contracts were approximately $3.9 billion and $4.0 billion, respectively. Gross unpaid losses from retroactive reinsurance contracts were approximately $18.6 billion at March 31, 2012 compared to approximately $18.8 billion as of December 31, 2011.
Premiums earned in the first quarters of 2012 and 2011 from other multi-line property and casualty business included $746 million and $785 million, respectively, from the Swiss Re quota-share contract. Other multi-line property and casualty underwriting losses in the first quarters of 2012 and 2011 were $130 million and $910 million, respectively. Underwriting results can be significantly impacted by the timing and magnitude of catastrophe losses (arising primarily from the Swiss Re quota-share contract) and fluctuations in foreign currency exchange rates. While there were no significant catastrophe loss events in 2012, we increased liability estimates for prior years’ losses by approximately $53 million. Underwriting results in the first quarter of 2011 included estimated catastrophe losses of $701 million from the Swiss Re quota-share contract. Other multi-line property and casualty underwriting results also included losses of $135 million in the first quarter of 2012 and $173 million in the first quarter of 2011 arising from the conversion of certain reinsurance liabilities denominated in foreign currencies into U.S. Dollars.
Life and annuity premiums earned in the first quarters of 2012 and 2011 primarily derive from life reinsurance contracts, including a contract with Swiss Re Life & Health America Inc. covering yearly renewable term risks. Underwriting losses of the life and annuity business were $70 million for the first quarter of 2012 and $5 million for the first quarter of 2011. For the first quarter, the life reinsurance business produced an underwriting loss of $21 million in 2012 compared to an underwriting gain of $16 million in 2011. The underwriting results of the life and annuity business also include underwriting losses related to a portfolio of annuity contracts, most of which were written several years ago. For the first quarter, the annuity business generated underwriting losses of $49 million in 2012 and $21 million in 2011. The increase in annuity underwriting losses in 2012 was primarily attributable to unfavorable foreign currency exchange rate changes and lower mortality gains. At March 31, 2012 and December 31, 2011, annuity liabilities were approximately $2.15 billion and $2.07 billion, respectively.
Berkshire Hathaway Primary Group
Our primary insurance group consists of a wide variety of independently managed insurance businesses that principally write liability coverages for commercial accounts. These businesses include: Medical Protective Corporation and Princeton Insurance Company (acquired as of December 30, 2011), providers of professional liability insurance to physicians, dentists and other healthcare providers; National Indemnity Company’s primary group, writers of commercial motor vehicle and general liability coverages; U.S. Investment Corporation, whose subsidiaries underwrite specialty insurance coverages; a group of companies referred to internally as “Berkshire Hathaway Homestate Companies,” providers of commercial multi-line insurance, including workers’ compensation; Central States Indemnity Company, a provider of credit and disability insurance to individuals nationwide through financial institutions; Applied Underwriters, a provider of integrated workers’ compensation solutions; and BoatU.S., a writer of insurance for owners of boats and small watercraft.
Premiums earned in the first quarter by our various primary insurers were $507 million in 2012 and $426 million in 2011. The increase in premiums earned in 2012 was primarily due to increased volume from the Berkshire Hathaway Homestate Companies and premiums from Princeton Insurance Company. Premium volume of our primary insurers, in general, continues to be constrained by market conditions. We have the capacity and desire to write substantially more volume if market conditions improve. For the first quarter, our primary insurers produced underwriting gains of $71 million in 2012 and $56 million in 2011. Underwriting gains as a percentage of premiums earned for the first quarter of 2012 was 14%, which was relatively unchanged from 2011.
Insurance—Investment Income
A summary of net investment income of our insurance operations follows. Amounts are in millions.
| |
|
First Quarter
|
|
| |
|
2012
|
|
|
2011
|
|
|
Investment income before income taxes and noncontrolling interests
|
|
$ |
1,052 |
|
|
$ |
1,261 |
|
|
Income taxes and noncontrolling interests
|
|
|
261 |
|
|
|
309 |
|
|
Net investment income
|
|
$ |
791 |
|
|
$ |
952 |
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Insurance —Underwriting (Continued)
Insurance—Investment Income (Continued)
Investment income consists of interest and dividends earned on cash and investments of our insurance businesses. Pre-tax investment income in the first quarter of 2012 was $1,052 million, a decline of $209 million (17%) from 2011. The decline in investment income in 2012 was attributable to the redemptions in 2011 of our investments in Goldman Sachs 10% Preferred Stock (approximately 87% of the $5 billion aggregate investment was held by insurance subsidiaries) and in General Electric 10% Preferred Stock ($3 billion). Dividends earned by insurance subsidiaries from these investments were $278 million in the first quarter of 2011. Our investment income earned over the remainder of 2012 will likely be negatively affected by these redemptions, given the comparatively lower yields currently available from new investment opportunities. In 2012, investment income was favorably impacted by increased dividend rates with respect to several of our common stock holdings. Investment income for the first quarter of 2012 also included dividends earned from our investment in Bank of America 6% Preferred Stock; of which our insurance subsidiaries hold $4 billion in aggregate liquidation amount.
Invested assets derive from shareholder capital and reinvested earnings as well as net liabilities under insurance contracts or “float.” The major components of float are unpaid losses, life, annuity and health benefit liabilities, unearned premiums and other liabilities to policyholders less premiums and reinsurance receivables, deferred charges assumed under retroactive reinsurance contracts and deferred policy acquisition costs. Float approximated $71.7 billion at March 31, 2012 and $70.6 billion at December 31, 2011. In the first quarter of 2012, the cost of float, as represented by the ratio of our underwriting gain or loss to average float, was negative as our insurance group generated a net underwriting gain. For the first quarter of 2011, the cost of float was approximately 2%, as our insurance businesses, in the aggregate, generated a net underwriting loss.
A summary of cash and investments held in our insurance businesses follows. Other investments include our investments in Wrigley, Dow Chemical and Bank of America as well as warrants to acquire common shares of Goldman Sachs, General Electric and Bank of America (See Note 6 to the Consolidated Financial Statements). Amounts are in millions.
| |
|
March 31,
|
|
|
Dec. 31,
|
|
| |
|
2012
|
|
|
2011
|
|
|
Cash and cash equivalents
|
|
$ |
21,082 |
|
|
$ |
21,571 |
|
|
Equity securities
|
|
|
87,625 |
|
|
|
75,759 |
|
|
Fixed maturity securities
|
|
|
29,407 |
|
|
|
29,899 |
|
|
Other
|
|
|
14,986 |
|
|
|
13,111 |
|
| |
|
$ |
153,100 |
|
|
$ |
140,340 |
|
Fixed maturity investments as of March 31, 2012 were as follows. Amounts are in millions.
| |
|
Amortized
cost
|
|
|
Unrealized
gains/losses
|
|
|
Fair
value
|
|
|
U.S. Treasury, U.S. government corporations and agencies
|
|
$ |
2,621 |
|
|
$ |
31 |
|
|
$ |
2,652 |
|
|
States, municipalities and political subdivisions
|
|
|
2,749 |
|
|
|
202 |
|
|
|
2,951 |
|
|
Foreign governments
|
|
|
9,479 |
|
|
|
253 |
|
|
|
9,732 |
|
|
Corporate bonds, investment grade
|
|
|
5,093 |
|
|
|
741 |
|
|
|
5,834 |
|
|
Corporate bonds, non-investment grade
|
|
|
5,082 |
|
|
|
742 |
|
|
|
5,824 |
|
|
Mortgage-backed securities
|
|
|
2,134 |
|
|
|
280 |
|
|
|
2,414 |
|
| |
|
$ |
27,158 |
|
|
$ |
2,249 |
|
|
$ |
29,407 |
|
All U.S. government obligations are rated AA+ or Aaa by the major rating agencies and approximately 85% of all state, municipal and political subdivisions, foreign government obligations and mortgage-backed securities were rated AA or higher. Non-investment grade securities represent securities that are rated below BBB- or Baa3. Foreign government securities include obligations issued or unconditionally guaranteed by national or provincial government entities.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Railroad (“BNSF”)
We acquired control of Burlington Northern Santa Fe Corporation, (“BNSF”), on February 12, 2010. BNSF operates one of the largest railroad systems in North America with approximately 32,000 route miles of track in 28 states and two Canadian provinces. BNSF’s major business groups are classified by product shipped and include consumer products, coal, industrial products and agricultural products. Earnings of BNSF are summarized below (in millions).
| |
|
First Quarter
|
|
| |
|
2012
|
|
|
2011
|
|
|
Revenues
|
|
$ |
5,002 |
|
|
$ |
4,533 |
|
|
Operating expenses
|
|
|
3,739 |
|
|
|
3,432 |
|
|
Interest expense
|
|
|
148 |
|
|
|
136 |
|
| |
|
|
3,887 |
|
|
|
3,568 |
|
|
Pre-tax earnings
|
|
|
1,115 |
|
|
|
965 |
|
|
Income taxes
|
|
|
414 |
|
|
|
358 |
|
|
Net earnings
|
|
$ |
701 |
|
|
$ |
607 |
|
Revenues for the first quarter of 2012 were approximately $5.0 billion, an increase of $469 million (10%) over 2011. Revenues from each of the four business groups increased as compared to 2011, reflecting a 7% increase in average revenues per car/unit, as well as a 3% increase in the volume of cars/units handled. Revenues in each period include fuel surcharges to customers under programs intended to recover incremental fuel costs when fuel prices exceed threshold fuel prices. Fuel surcharges increased by 16% as compared to 2011 which is reflected in average revenue per car/unit.
The 3% increase in volume is comprised of increases of 6% and 11% in cars/units handled in the consumer products and industrial products groups, respectively, combined with 4% and 5% decreases in volume for coal products and agricultural products, respectively. The consumer products volume increase was attributable primarily to higher domestic intermodal and automotive volume. The decline in coal unit volume was attributable to decreased coal demand as a result of low natural gas prices, a mild winter and rising utility stockpiles. Industrial products volume increased primarily as a result of increased shipments of petroleum products, as well as increased steel and sand shipments. Agricultural product volume decreased due to a decline in wheat shipments for export partially offset by higher U.S. corn shipments.
Operating expenses in the first quarter of 2012 were approximately $3.7 billion, representing an increase of $307 million (9%) over 2011. Fuel expenses increased $156 million in 2012 primarily due to higher fuel prices and volume increases, partially offset by improved fuel efficiency. Compensation and benefits expenses increased $42 million, reflecting volume-related costs, as well as inflation. Purchased services expenses increased $22 million due primarily to volume-related and locomotive maintenance costs. Materials and other expenses increased $61 million due to an unfavorable arbitration ruling in 2012.
Utilities and Energy (“MidAmerican”)
We hold an 89.8% ownership interest in MidAmerican Energy Holdings Company (“MidAmerican”), which operates an international energy business. MidAmerican’s domestic regulated energy interests are comprised of two regulated utility companies, PacifiCorp and MidAmerican Energy Company (“MEC”). MidAmerican also operates two interstate natural gas pipeline companies. In the United Kingdom, MidAmerican operates two electricity distribution businesses, operating as Northern Powergrid Holdings Company (“Northern Powergrid”). The rates that utility and natural gas pipeline companies charge customers for energy and other services are generally subject to regulatory approval. Rates are based in large part on the costs of business operations, including a return on capital. To the extent these operations are not allowed to include such costs in the approved rates, operating results will be adversely affected. In addition, MidAmerican also operates a diversified portfolio of independent power projects and the second-largest residential real estate brokerage firm in the United States.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Utilities and Energy (“MidAmerican”) (Continued)
Revenues and earnings from MidAmerican are summarized below. Amounts are in millions.
| |
|
First Quarter
|
|
| |
|
Revenues
|
|
|
Earnings
|
|
| |
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
PacifiCorp
|
|
$ |
1,209 |
|
|
$ |
1,132 |
|
|
$ |
208 |
|
|
$ |
190 |
|
|
MidAmerican Energy Company
|
|
|
881 |
|
|
|
985 |
|
|
|
56 |
|
|
|
71 |
|
|
Natural gas pipelines
|
|
|
302 |
|
|
|
297 |
|
|
|
160 |
|
|
|
155 |
|
|
Northern Powergrid
|
|
|
263 |
|
|
|
253 |
|
|
|
124 |
|
|
|
122 |
|
|
Real estate brokerage
|
|
|
213 |
|
|
|
191 |
|
|
|
(1 |
) |
|
|
(10 |
) |
|
Other
|
|
|
26 |
|
|
|
22 |
|
|
|
18 |
|
|
|
3 |
|
| |
|
$ |
2,894 |
|
|
$ |
2,880 |
|
|
|
|
|
|
|
|
|
|
Earnings before corporate interest and income taxes
|
|
|
|
|
|
|
|
|
|
|
565 |
|
|
|
531 |
|
|
Corporate interest
|
|
|
|
|
|
|
|
|
|
|
(82 |
) |
|
|
(80 |
) |
|
Interest on Berkshire junior debt
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
(5 |
) |
|
Income taxes and noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
(108 |
) |
|
|
(115 |
) |
|
Net earnings
|
|
|
|
|
|
|
|
|
|
$ |
375 |
|
|
$ |
331 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings attributable to Berkshire *
|
|
|
|
|
|
|
|
|
|
$ |
338 |
|
|
$ |
301 |
|
|
Debt owed to others at March 31
|
|
|
|
|
|
|
|
|
|
|
20,698 |
|
|
|
19,882 |
|
|
Debt owed to Berkshire at March 31
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
165 |
|
|
*
|
Net of noncontrolling interests and includes interest earned by Berkshire (net of related income taxes).
|
PacifiCorp’s first quarter of 2012 revenues were $1,209 million, an increase of $77 million (7%) over the first quarter of 2011. The increase reflected higher retail revenues ($48 million) and wholesale and other revenues ($24 million). The increase in retail revenues included higher regulator approved cost-based prices ($60 million), and was partially offset by lower retail customer load ($12 million) attributable to the impacts of mild weather on residential loads in PacifiCorp's eastern service territory. The increase in wholesale and other revenues was due to higher volumes of $32 million on higher short-term sales from increased thermal generation availability and improved natural gas spark spreads, partially offset by lower average market prices on short-term wholesale sales. Additionally, renewable energy credit revenue increased $16 million.
PacifiCorp’s earnings before corporate interest and income taxes (“EBIT”) in the first quarter of 2012 were $208 million, an increase of $18 million (9%) over the first quarter of 2011. Earnings were favorably impacted by higher revenues and lower interest expense, which were largely offset by higher energy costs ($62 million) and higher depreciation and amortization ($6 million). Energy costs in 2012 increased due to reduced gains from electricity swap settlements ($51 million), higher thermal generation and the impact of energy adjustment mechanisms ($15 million), and were partially offset by lower purchased power volumes.
MEC’s first quarter 2012 revenues of $881 million declined $104 million (11%) and its EBIT of $56 million declined $15 million (21%) from the first quarter of 2011. MEC’s regulated electric revenues and earnings in the first quarter of 2012 were relatively unchanged from 2011. Regulated natural gas revenues decreased $70 million (21%) for the first quarter of 2012 compared to the first quarter of 2011 primarily attributable to lower average per-unit cost of gas sold and an 8% decline in volumes sold as a result of unseasonably warm weather. Nonregulated and other operating revenues decreased $38 million due to lower electricity and natural gas prices and volumes. The decline in EBIT was primarily attributable to lower regulated natural gas volume-related margins and lower non regulated electric margins, partially offset by lower interest expense.
Natural gas pipeline revenues increased $5 million (2%) for the first quarter of 2012 compared to the first quarter of 2011. The revenue increase was primarily due to increased capacity from Kern River’s Apex Expansion project, which was placed in service in October of 2011, and from better natural gas price spreads, partially offset by contract expirations. Natural gas pipeline EBIT increased $5 million (3%) for the first quarter of 2012 versus 2011 which was primarily due to the higher revenues, partially offset by higher depreciation associated with the Kern River Apex Expansion project.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Utilities and Energy (“MidAmerican”) (Continued)
Northern Powergrid’s revenues increased $10 million (4%) in the first quarter of 2012 compared to the first quarter of 2011. The increase was primarily due to higher distribution revenues ($18 million), partially offset by the stronger U.S. Dollar ($5 million). Distribution revenues increased due to comparatively higher rates ($31 million), partially offset by comparatively lower recoveries of certain regulatory provisions and lower volumes. EBIT in the first quarter of 2012 was relatively unchanged from 2011 as the aforementioned revenue increase was substantially offset by higher pension expense.
Revenues and EBIT of the real estate brokerage business improved by $22 million and $9 million, respectively, for the first quarter of 2012 compared to the first quarter of 2011 primarily due to a 14% increase in closed sales transactions, partially offset by a 5% decrease in average home sale prices.
Manufacturing, Service and Retailing
A summary of revenues and earnings of our manufacturing, service and retailing businesses follows. Amounts are in millions.
| |
|
First Quarter
|
|
| |
|
Revenues
|
|
|
Earnings
|
|
| |
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
Marmon
|
|
$ |
1,793 |
|
|
$ |
1,674 |
|
|
$ |
269 |
|
|
$ |
222 |
|
|
McLane Company
|
|
|
8,073 |
|
|
|
7,767 |
|
|
|
102 |
|
|
|
82 |
|
|
Other manufacturing
|
|
|
6,504 |
|
|
|
4,553 |
|
|
|
815 |
|
|
|
444 |
|
|
Other service
|
|
|
2,047 |
|
|
|
1,968 |
|
|
|
205 |
|
|
|
200 |
|
|
Retailing
|
|
|
745 |
|
|
|
687 |
|
|
|
49 |
|
|
|
31 |
|
| |
|
$ |
19,162 |
|
|
$ |
16,649 |
|
|
|
|
|
|
|
|
|
|
Pre-tax earnings
|
|
|
|
|
|
|
|
|
|
|
1,440 |
|
|
|
979 |
|
|
Income taxes and noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
586 |
|
|
|
421 |
|
| |
|
|
|
|
|
|
|
|
|
$ |
854 |
|
|
$ |
558 |
|
Marmon
Through Marmon, we operate approximately 150 manufacturing and service businesses that operate independently within eleven diverse business sectors. Marmon’s first quarter 2012 revenues were approximately $1.8 billion, an increase of $119 million (7%) as compared to the first quarter of 2011. Overall, eight of the eleven business sectors generated increased revenues compared to the first quarter of 2011. Nearly half of the increase in revenues was attributable to recent bolt-on business acquisitions in the Crane Services, Highway Technologies and Engineered Wire & Cable sectors. In addition, the Transportation Services & Engineered Products, Distribution Services and Highway Technologies sectors (excluding acquisitions) generated significant revenue increases in the first quarter of 2012. The revenue increases were partially offset by significantly lower comparative revenues from the Flow Products and Retail Store Fixtures sectors. The Retail Store Fixtures sector continues to be impacted by significantly reduced activity of its major customer. The Flow Products revenues were impacted by lower copper prices, as well as by lower volume from its industrial customers.
Pre-tax earnings were $269 million in the first quarter of 2012, an increase of $47 million (21%) as compared to the first quarter of 2011. All but two sectors produced comparable or increased pre-tax earnings in the first quarter of 2012 as compared to the first quarter of 2011. The aforementioned business acquisitions accounted for approximately 20% of the pre-tax earnings increase in the first quarter of 2012. In addition, the Transportation Services & Engineered Products, Distribution Services, Highway Technologies and Engineered Wire & Cable sectors (excluding acquisitions) generated significant increases in pre-tax earnings, while earnings from the Retail Store Fixtures and Flow Products sectors declined for the reasons indicated above. Pre-tax earnings as a percent of revenues was 15.0% in the first quarter of 2012 compared to 13.3% in the first quarter of 2011. The improvement in earnings as a percent of revenues reflects the continued emphasis of Marmon’s business model which fosters margin growth. In addition to the impact of recent acquisitions, improvements in revenues and pre-tax earnings generally reflected continued strength in some of Marmon’s end markets, increased product innovation and ongoing efforts to control overhead costs.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Manufacturing, Service and Retailing (Continued)
McLane Company
Through McLane, we operate a wholesale distribution business that provides grocery and non-food products to retailers, convenience stores and restaurants. McLane’s business is marked by high sales volume and very low profit margins. McLane’s significant customers include Wal-Mart, 7-Eleven and Yum! Brands. Approximately 30% of McLane’s annual revenues are attributable to Wal-Mart. A curtailment of purchasing by Wal-Mart or another of its significant customers could have a material adverse impact on McLane’s periodic revenues and earnings. In 2010, McLane acquired Empire Distributors, based in Georgia and North Carolina, and Horizon Wine and Spirits Inc., based in Tennessee. Empire and Horizon are wholesale distributors of distilled spirits, wine and beer.
Revenues for the first quarter of 2012 were $8,073 million, an increase of $306 million (3.9%) over 2011, reflecting revenue increases from the grocery, foodservice and beverage distribution operations. Pre-tax earnings in the first quarter of 2012 were $102 million, an increase of $20 million over 2011. The increase in pre-tax earnings was primarily attributable to the favorable impact of changes in LIFO inventory reserves and comparatively lower professional fees.
Other manufacturing
Our other manufacturing businesses include several manufacturers of building products (Acme Building Brands, Benjamin Moore, Johns Manville, Shaw and MiTek) and apparel (led by Fruit of the Loom which includes the Russell athletic apparel and sporting goods business and the Vanity Fair Brands women’s intimate apparel business). Also included in this group are Forest River, a leading manufacturer of recreational vehicles, IMC Metalworking Companies (“ISCAR”), an industry leader in the metal cutting tools business with operations worldwide and CTB, a manufacturer of equipment and systems for the livestock and agricultural industries. Other manufacturing businesses also include The Lubrizol Corporation (“Lubrizol”), a specialty chemical manufacturer that we acquired on September 16, 2011.
Revenues from our other manufacturing activities for the first quarter of 2012 were $6,504 million, an increase of $1,951 million (43%) over 2011. In 2012, revenues from Lubrizol were $1,576 million. For the first quarter of 2012, we also experienced revenue increases from sales of building products (7.5%), recreational vehicles (19.6%) and apparel (6.5%). While revenues in 2012 from the building products group increased over 2011, these businesses, generally, continue to be negatively impacted by slow construction activity, particularly in the single-family housing markets.
Pre-tax earnings of our other manufacturing businesses in the first quarter of 2012 were $815 million, an increase of $371 million (84%) versus 2011, which was primarily due to the inclusion of Lubrizol’s earnings. Excluding the impact of Lubrizol, earnings in the first quarter of 2012 increased $72 million (16%) compared to 2011. The increase was primarily attributable to increased earnings from our building products businesses. With the exception of bricks, all of our building products businesses as well as ISCAR and several of our other diverse manufacturing businesses generated higher earnings in 2012 over 2011 somewhat offset by decreased earnings from our apparel businesses. Also, several of our manufacturers experienced higher commodity costs of certain raw materials, as well as higher energy costs over the past year. As a result, we have increased selling prices for certain products. To the extent that costs continue to stay at current elevated levels or increase, further selling price actions will likely be necessary.
Other service
Our other service businesses include NetJets, the world’s leading provider of fractional ownership programs for general aviation aircraft and FlightSafety, a provider of high technology training to operators of aircraft. Among the other businesses included in this group are: TTI, a leading electronic components distributor; Business Wire, a leading distributor of corporate news, multimedia and regulatory filings; Pampered Chef, a direct seller of high quality kitchen tools; Dairy Queen, which licenses and services a system of over 6,100 stores that offer prepared dairy treats and food; Buffalo News and the Omaha World-Herald (acquired at the end of 2011), publishers of daily and Sunday newspapers; and businesses that provide management and other services to insurance companies.
Revenues of our other service businesses were $2,047 million in the first quarter of 2012, an increase of $79 million (4%) compared to 2011. Pre-tax earnings were $205 million in the first quarter of 2012, an increase of $5 million (2.5%) versus 2011. The increase in revenues in 2012 was primarily attributable to the inclusion of the Omaha World-Herald and revenue increases from FlightSafety and NetJets. The increase in earnings in 2012 reflected increased earnings at NetJets, partially offset by lower earnings from TTI. The improvement in comparative first quarter earnings of NetJets, was largely due to fees incurred in the first quarter of 2011 to cancel certain aircraft purchases under a purchase agreement entered into several years earlier and lower foreign currency exchange losses affecting operations outside of the United States in 2012. In the first quarter of 2011, TTI experienced very strong demand, which favorably impacted revenues and earnings. Over the last half of 2011 and into the first quarter of 2012, demand softened and price competition intensified, which put downward pressure on TTI’s margins. As a result, TTI’s pre-tax earnings for the first quarter of 2012 declined 22% versus the first quarter of 2011.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Manufacturing, Service and Retailing (Continued)
Retailing
Our retailing operations consist of four home furnishings businesses (Nebraska Furniture Mart, R.C. Willey, Star Furniture and Jordan’s), three jewelry businesses (Borsheims, Helzberg and Ben Bridge) and See’s Candies. Revenues and pre-tax earnings in the first quarter of 2012 from the retailing businesses increased $58 million (8%) and $18 million (58%), respectively, over the first quarter of 2011. First quarter 2012 revenues of the home furnishings businesses increased $42 million (9%) over 2011, while pre-tax earnings in 2012 increased $13 million (53%).
Finance and Financial Products
Our finance and financial products businesses include manufactured housing and finance (“Clayton Homes”), transportation equipment leasing (“XTRA”), furniture leasing (“CORT”) as well as various miscellaneous financing activities. A summary of revenues and earnings from our finance and financial products businesses follows. Amounts are in millions.
| |
|
First Quarter
|
|
| |
|
Revenues
|
|
|
Earnings
|
|
| |
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
Manufactured housing and finance
|
|
$ |
718 |
|
|
$ |
671 |
|
|
$ |
40 |
|
|
$ |
32 |
|
|
Furniture/transportation equipment leasing
|
|
|
176 |
|
|
|
169 |
|
|
|
26 |
|
|
|
21 |
|
|
Other
|
|
|
65 |
|
|
|
73 |
|
|
|
97 |
|
|
|
103 |
|
| |
|
$ |
959 |
|
|
$ |
913 |
|
|
|
|
|
|
|
|
|
|
Pre-tax earnings
|
|
|
|
|
|
|
|
|
|
|
163 |
|
|
|
156 |
|
|
Income taxes and noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
59 |
|
|
|
60 |
|
| |
|
|
|
|
|
|
|
|
|
$ |
104 |
|
|
$ |
96 |
|
Revenues of Clayton Homes in the first quarter of 2012 were $718 million, an increase of $47 million (7%) over 2011. Revenues from home sales in the first quarter of 2012 increased $63 million (22%) over 2011, due to a 32% increase in units sold partially offset by a lower average price per unit due primarily to product mix changes. Financial services revenues for the first quarter of 2012 declined $16 million from 2011, due primarily to lower interest income from installment loans. Installment loan and finance receivable balances were approximately $12.7 billion, a decrease of approximately $200 million from December 31, 2011. Clayton Homes pre-tax earnings were $40 million for the first quarter of 2012, an increase of $8 million (25%) over 2011, which was primarily attributable to the increase in unit sales and gross sales margins, partially offset by lower financial services earnings.
Clayton Homes’ operating results continue to be negatively affected by the ongoing soft housing markets and the surplus of traditional single family homes for sale. In addition, our manufactured housing programs continue to operate at a competitive disadvantage compared to traditional single family housing markets, which have been receiving significant interest rate subsidies from the U.S. government through government agency insured mortgages. For the most part, these subsidies are not available to factory built homes. Nevertheless, Clayton Homes remains the largest manufactured housing business in the United States and we believe that it will continue to operate profitably, even under the current conditions.
Revenues and pre-tax earnings of CORT and XTRA increased slightly in 2012 compared to 2011. The increases primarily reflected higher furniture rental income.
Earnings from our other finance business activities include investment income from a portfolio of fixed maturity and equity investments and from a small portfolio of long-held commercial real estate loans. In addition, other earnings include income from interest rate spreads charged to Clayton Homes on borrowings (approximately $11.3 billion as of March 31, 2012) by a Berkshire financing subsidiary. The borrowings were made to fund the loans to Clayton Homes. A corresponding charge is reflected in Clayton Homes’ earnings. In addition, other finance business earnings for the first quarter include guaranty fee income of $9 million in 2012 and $11 million in 2011 from NetJets. Corresponding expenses are recorded by NetJets, which reduced its earnings in both periods.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Investment and Derivative Gains/Losses
A summary of investment and derivative gains and losses and other-than-temporary impairment losses on investments follows. Amounts are in millions.
| |
|
First Quarter
|
|
| |
|
2012
|
|
|
2011
|
|
|
Investment gains/losses
|
|
$ |
231 |
|
|
$ |
99 |
|
|
Other-than-temporary impairment losses on investments
|
|
|
(337 |
) |
|
|
(506 |
) |
|
Derivative gains/losses
|
|
|
1,002 |
|
|
|
271 |
|
|
Gains/losses before income taxes and noncontrolling interests
|
|
|
896 |
|
|
|
(136 |
) |
|
Income taxes and noncontrolling interests
|
|
|
316 |
|
|
|
(54 |
) |
|
Net gains/losses
|
|
$ |
580 |
|
|
$ |
(82 |
) |
Investment gains/losses arise primarily from the sale or redemption of investments. The timing of gains or losses from sales or redemptions can have a material effect on periodic earnings. Investment gains and losses usually have minimal impact on the periodic changes in our consolidated shareholders’ equity since most of our investments are regularly recorded at fair value in the Consolidated Balance Sheets with the unrealized gains and losses included in shareholders’ equity as a component of accumulated other comprehensive income.
We believe the amount of investment gains/losses included in earnings in any given period typically has little analytical or predictive value. Our decisions to sell securities are not motivated by the impact that the resulting gains or losses will have on our reported earnings. Although our management does not consider investment gains and losses in a given period as necessarily meaningful or useful in evaluating periodic earnings, we are providing information to explain the nature of such gains and losses when they are reflected in earnings.
Other-than-temporary impairment (“OTTI”) losses in the first quarter of 2012 were related to our investments in Texas Competitive Electric Holdings bonds. In 2011, OTTI losses related to our investments in Kraft Foods ($169 million) and Wells Fargo ($337 million). The OTTI losses recorded in the first quarters of 2012 and 2011 had no impact whatsoever on the asset values recorded in our Consolidated Balance Sheets or on our consolidated shareholders’ equity as of March 31, 2012 and 2011. Although we have periodically recorded OTTI losses in earnings in the past, we continue to hold positions in many of these securities. The recognition of such losses in earnings rather than in accumulated other comprehensive income does not necessarily indicate that sales are imminent or planned and sales ultimately may not occur for numerous years or even decades. Furthermore, the recognition of OTTI losses does not necessarily indicate that the loss in value of the security is permanent or that the market price of the security will not subsequently increase to and ultimately exceed our original cost.
We consider several factors in determining whether or not impairments are deemed to be other than temporary, including the current and expected long-term business prospects and if applicable, the creditworthiness of the issuer, our ability and intent to hold the investment until the price recovers and the length of time and relative magnitude of the price decline. Security prices may remain below cost for a period of time that may be deemed excessive from the standpoint of interpreting existing accounting rules, even though other factors suggest that the prices will eventually recover. As a result, accounting regulations may require that we recognize OTTI losses in earnings in instances where we may strongly believe that the market price of the impaired security will recover to at least our original cost and where we possess the ability and intent to hold the security until, at least, that time.
As of March 31, 2012, unrealized losses on our investments in equity securities (determined on an individual purchase lot basis) were $274 million. Unrealized losses averaged 8% of cost. In our judgment, the future earnings potential and underlying business economics of these companies are favorable and we possess the ability and intent to hold these securities until their prices recover. Changing market conditions and other facts and circumstances may change the business prospects of these issuers as well as our ability and intent to hold these securities until their prices recover.
Our derivative contracts generated gains of $1,002 million in the first quarter of 2012 and $271 million in the first quarter of 2011. Derivative gains/losses primarily represent the changes in fair value of our credit default and equity index put option contracts. The periodic changes in the fair values of these contracts can be significant, reflecting the volatility of underlying equity and credit markets. Our ultimate payment obligations, if any, under our remaining equity index put option contracts will be determined as of the contract expiration dates, which begin in 2018.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Investment and Derivative Gains/Losses (Continued)
In the first quarter of 2012, our equity index put option contracts produced gains of $689 million, due primarily to higher equity prices, partially offset by lower interest rate assumptions. In the first quarter of 2011, gains from our equity index put option contracts of $223 million were primarily due to higher interest rate assumptions. Our credit default contracts generated gains of $340 million and $70 million in the first quarters of 2012 and 2011, respectively. The gains in both periods were primarily due to the narrowing of credit default spreads as well as the passage of time. We paid losses of $62 million in the first quarter of 2012 with respect to our corporate high yield contracts.
Financial Condition
Our balance sheet continues to reflect significant liquidity and a strong capital base. Our consolidated shareholders’ equity at March 31, 2012 was $176.0 billion, an increase of $11.1 billion from December 31, 2011. Consolidated cash and investments of insurance and other businesses approximated $167.3 billion at March 31, 2012 including cash and cash equivalents of $33.6 billion. These assets are held predominantly in our insurance businesses. On January 31, 2012, we issued an additional $1.7 billion of parent company senior unsecured notes, the proceeds of which were used to fund the repayment of $1.7 billion of notes that matured in February 2012.
In late September 2011, our Board of Directors authorized Berkshire Hathaway to repurchase Class A and Class B shares of Berkshire at prices no higher than a 10% premium over the book value of the shares. Berkshire may repurchase shares in open market purchases or through privately negotiated transactions, at management’s discretion. The repurchase program is expected to continue indefinitely, but does not obligate Berkshire to repurchase any dollar amount or number of Class A or Class B shares. Berkshire plans to use cash on hand to fund repurchases and repurchases will not be made if they would reduce Berkshire’s consolidated cash equivalent holdings below $20 billion. Financial strength and redundant liquidity will always be of paramount importance at Berkshire. To date, share repurchases have been insignificant.
Our railroad, utilities and energy businesses (conducted by BNSF and MidAmerican) maintain very large investments in capital assets (property, plant and equipment) and will regularly make capital expenditures in the normal course of business. In the first quarter of 2012, MidAmerican’s capital expenditures were $756 million and BNSF’s capital expenditures were $787 million. For the remainder of 2012, MidAmerican’s forecasted capital expenditures are $3.0 billion, while BNSF’s forecasted capital commitments are approximately $3.1 billion. Future capital expenditures are expected to be funded from cash flows from operations and debt issuances. In 2012, BNSF issued debt of $1.25 billion with maturities in 2022 and 2042, and its outstanding debt increased $1.2 billion to $13.8 billion as of March 31, 2012. In 2012, MidAmerican’s new borrowings were $1.6 billion and its aggregate outstanding borrowings increased $783 million to $20.7 billion as of March 31, 2012. MidAmerican and BNSF have aggregate debt and capital lease maturities over the remainder of 2012 of $1.6 billion. Berkshire has committed until February 28, 2014 to provide up to $2 billion of additional capital to MidAmerican to permit the repayment of its debt obligations or to fund its regulated utility subsidiaries. Berkshire does not guarantee the repayment of debt issued by BNSF, MidAmerican or any of their subsidiaries.
Assets of the finance and financial products businesses, which consisted primarily of loans and finance receivables, fixed maturity securities, other investments and cash and cash equivalents, were approximately $25.5 billion as of March 31, 2012 and $25.0 billion at December 31, 2011. Liabilities were approximately $24.0 billion as of March 31, 2012 and $25.4 billion as of December 31, 2011. As of March 31, 2012, notes payable and other borrowings of $13.7 billion included approximately $11.3 billion of notes issued by BHFC. In January 2012, $250 million of BHFC notes matured and an additional $2.45 billion will mature in the second and third quarters of 2012. We currently intend to issue new debt through BHFC to replace some or all of the BHFC debt maturing in 2012. The proceeds from the BHFC notes are used to finance originated and acquired loans of Clayton Homes. The full and timely payment of principal and interest on the BHFC notes is guaranteed by Berkshire.
We regularly access the credit markets, particularly through our parent company and through our railroad, utilities and energy and the finance and financial products businesses. Restricted access to credit markets at affordable rates in the future could have a significant negative impact on our operations.
On July 21, 2010, President Obama signed into law financial regulatory reform legislation, known as the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Reform Act”). The Reform Act reshapes financial regulations in the United States by creating new regulators, regulating new markets and market participants and providing new enforcement powers to regulators. Virtually all major areas of the Reform Act will be subject to regulatory interpretation and implementation rules requiring rulemaking that may take several years to complete.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Financial Condition (Continued)
We are party to several equity index put option and credit default contracts as described in Note 12 to the Consolidated Financial Statements. With limited exception, these contracts contain no collateral posting requirements under any circumstances, including changes in either the fair value or intrinsic value of the contracts or a downgrade in Berkshire’s credit ratings. Substantially all of these contracts were entered into prior to December 31, 2008. At March 31, 2012, the net liabilities recorded for such contracts were approximately $8.9 billion and our collateral posting requirements were $45 million. With respect to such collateral requirements, we receive the income attributable to such collateral or, in certain instances, interest credit from the counterparty. Although the ultimate outcome of the regulatory rulemaking proceedings described in the preceding paragraph cannot be predicted with certainty, we do not believe that the provisions of the Reform Act that concern collateral requirements apply to derivatives contracts that were entered into prior to the enactment of the Reform Act, as ours were. As such, although the Reform Act may adversely affect some of our business activities, it is not currently expected to have a material impact on our consolidated financial results or financial condition.
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 reflected in our Consolidated Balance Sheets, such as notes payable, require future payments on contractually specified dates and in fixed and determinable amounts. The timing and/or amount of the payment of other obligations, such as losses arising from unpaid property and casualty loss insurance contracts and credit default and equity index put option derivatives contracts, are contingent upon the outcome of future events. Actual payments will likely vary, perhaps significantly, from the liability estimates currently recorded in the Consolidated Balance Sheet. Other obligations pertain to the acquisition of goods or services in the future, which are not currently reflected in the financial statements, such as minimum rentals under operating leases. Our contractual obligations as of March 31, 2012 were 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, 2011.
Critical Accounting Policies
Certain accounting policies require us to make estimates and judgments regarding transactions that have occurred and ultimately will be settled several years in the future or concerning the recoverability of assets. Amounts recognized in the financial statements from such estimates are necessarily based on assumptions about numerous factors involving varying, and possibly significant, degrees of judgment and uncertainty. Accordingly, the amounts currently recorded in the financial statements may prove, with the benefit of hindsight, to be inaccurate. 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, 2011 for additional discussion regarding these estimates.
Our Consolidated Balance Sheet as of March 31, 2012 includes estimated liabilities for unpaid losses from property and casualty insurance and reinsurance contracts of $63.7 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 reported earnings. The effects from changes in these estimates are recorded as a component of losses incurred in the period of the change.
Our Consolidated Balance Sheet as of March 31, 2012 includes goodwill of acquired businesses of $53.2 billion. We evaluate goodwill for impairment at least annually and conducted our most recent annual review during the fourth quarter of 2011. Although we believe that the goodwill reflected in the Consolidated Balance Sheet as of March 31, 2012 is not impaired, goodwill may subsequently become impaired as a result of changes in facts and circumstances affecting the valuation of the reporting unit. A goodwill impairment charge could have a material effect on periodic net earnings.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Critical Accounting Policies (Continued)
Our Consolidated Balance Sheets include significant amounts of derivative contract liabilities that are measured at fair value. Our significant derivative contract exposures are concentrated in credit default and equity index put option contracts. These contracts were primarily entered into in over-the-counter markets and certain elements in the terms and conditions of such contracts are not standardized. In particular, we are not required to post collateral under most of our contracts. Furthermore, there is no source of independent data available to us showing trading volume and actual prices of completed transactions. As a result, the values of these liabilities are primarily based on valuation models, discounted cash flow models or other valuation techniques that are believed to be used by market participants. Such models or other valuation techniques may use inputs that are observable in the marketplace, while others are unobservable. Unobservable inputs require us to make certain projections and assumptions about the information that would be used by market participants in establishing prices. Considerable judgment may be required in making assumptions, including the selection of interest rates, default and recovery rates and volatility. Changes in assumptions may have a significant effect on values.
Information concerning new accounting pronouncements is included in Note 2 to the Consolidated Financial Statements.
Forward-Looking Statements
Investors are cautioned that certain statements contained in this document as well as some statements in periodic press releases and some oral statements of Berkshire officials during presentations about Berkshire or its subsidiaries are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). Forward-looking statements include statements which are predictive in nature, which depend upon or refer to future events or conditions, which include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates” or similar expressions. In addition, any statements concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects and possible future Berkshire actions, which may be provided by management, are also forward-looking statements as defined by the Act. Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties and assumptions about Berkshire and its subsidiaries, economic and market factors and the industries in which we do business, among other things. These statements are not guaranties 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 important risk factors that could cause our actual performance and future events and actions to differ materially from such forward-looking statements include, but are not limited to, changes in market prices of our investments in fixed maturity and equity securities, losses realized from derivative contracts, the occurrence of one or more catastrophic events, such as an earthquake, hurricane or act of terrorism that causes losses insured by our insurance subsidiaries, 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.
Reference is made to Berkshire’s most recently issued Annual Report and in particular the “Market Risk Disclosures” included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” As of March 31, 2012, there are no material changes in the market risks described in Berkshire’s Annual Report on Form 10-K for the year ended December 31, 2011.
As of the end of the period covered by this Quarterly Report on Form 10-Q, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Chairman (Chief Executive Officer) and the Senior Vice President (Chief Financial Officer), of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chairman (Chief Executive Officer) and the Senior Vice President (Chief Financial Officer) concluded that the Corporation’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Corporation (including its consolidated subsidiaries) required to be included in the Corporation’s periodic SEC filings. During the quarter, there have been no significant changes in the Corporation’s internal control over financial reporting or in other factors that could significantly affect internal control over financial reporting.
We are party in a variety of legal actions arising out of the normal course of business. In particular, such legal actions affect our insurance and reinsurance businesses. Such litigation generally seeks to establish liability directly through insurance contracts or indirectly through reinsurance contracts issued by Berkshire subsidiaries. Plaintiffs occasionally seek punitive or exemplary damages. We do not believe that such normal and routine litigation will have a material effect on our financial condition or results of operations.
Our significant business risks are described in Item 1A to Form 10-K for the year ended December 31, 2011 to which reference is made herein.
On September 26, 2011, Berkshire announced a common stock repurchase program where Berkshire’s Board of Directors authorized Berkshire to repurchase Class A and Class B shares of the Company at prices no higher than a 10% premium over the book value of the shares. Berkshire’s Board of Directors’ authorization does not specify a maximum number of shares to be purchased. However, repurchases will not be made if they would reduce Berkshire’s consolidated cash equivalent holdings below $20 billion. The repurchase program is expected to continue indefinitely and the amount of purchases will depend entirely upon the levels of cash available, the attractiveness of investment and business opportunities either at hand or on the horizon and the degree of discount from management’s estimate of intrinsic value. The repurchase program does not obligate Berkshire to repurchase any dollar amount or number of Class A or Class B shares. There were no share repurchases during the first quarter of 2012.
None
Information regarding the Company’s mine safety violations and other legal matters disclosed in accordance with Section 1503(a) of the Dodd-Frank reform Act is included in Exhibit 95 to this Form 10-Q.
None
a. Exhibits
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12
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Calculation of Ratio of Consolidated Earnings to Consolidated Fixed Charges
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31.1
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Rule 13a-14(a)/15d-14(a) Certifications
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31.2
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Rule 13a-14(a)/15d-14(a) Certifications
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32.1
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Section 1350 Certifications
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32.2
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Section 1350 Certifications
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95
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Mine Safety Disclosures
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101
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The following financial information from Berkshire Hathaway Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in XBRL (Extensible Business Reporting Language) includes: (i) the Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011, (ii) the Consolidated Statements of Earnings for each of the three-month periods ended March 31, 2012 and 2011, (iii) the Consolidated Statements of Comprehensive Income for each of the three-month periods ended March 31, 2012 and 2011, (iv) the Consolidated Statements of Changes in Shareholders’ Equity for each of the three-month periods ended March 31, 2012 and 2011, (v) the Consolidated Statements of Cash Flows for each of the three-month periods ended March 31, 2012 and 2011, and (vi) the Notes to Consolidated Financial Statements, tagged in summary and detail.
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Pursuant to the requirement of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
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BERKSHIRE HATHAWAY INC.
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(Registrant)
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Date: May 4, 2012
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/S/ MARC D. HAMBURG
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(Signature)
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Marc D. Hamburg,
Senior Vice President and
Principal Financial Officer
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36