filings.toolsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Net earnings attributable to Berkshire Hathaway shareholders for each of the past three years are disaggregated in the table that follows. Amounts are after deducting income taxes and exclude earnings attributable to noncontrolling interests (in millions).
| 2020 | 2019 | 2018 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Insurance – underwriting | $ | 657 | $ | 325 | $ | 1,566 | ||||||
| Insurance – investment income | 5,039 | 5,530 | 4,554 | |||||||||
| Railroad | 5,161 | 5,481 | 5,219 | |||||||||
| Utilities and energy | 3,091 | 2,840 | 2,621 | |||||||||
| Manufacturing, service and retailing | 8,300 | 9,372 | 9,364 | |||||||||
| Investment and derivative gains/losses | 31,591 | 57,445 | (17,737 | ) | ||||||||
| Other* | (11,318 | ) | 424 | (1,566 | ) | |||||||
| Net earnings attributable to Berkshire Hathaway shareholders | $ | 42,521 | $ | 81,417 | $ | 4,021 |
| * | Includes goodwill and indefinite-lived intangible asset impairment charges of $11.0 billion in 2020, $435 million in 2019 and $3.0 billion in 2018, which includes our share of charges recorded by Kraft Heinz. |
|---|
Through our subsidiaries, we engage in a number of diverse business activities. We manage our operating businesses on an unusually decentralized basis. There are few centralized or integrated business functions. Our senior corporate management team participates in and is ultimately responsible for significant capital allocation decisions, investment activities and the selection of the Chief Executive to head each of the operating businesses. The business segment data (Note 27 to the accompanying Consolidated Financial Statements) should be read in conjunction with this discussion.
As the COVID-19 pandemic accelerated beginning in the second half of March, most of our businesses were negatively affected, with the effects to date ranging from relatively minor to severe. Revenues and earnings of most of our manufacturing, service and retailing businesses declined considerably, and in certain instances severely, in the second quarter due to closures of facilities where crowds gather, such as retail stores, restaurants and entertainment venues as well as from public travel restrictions and from closures of certain of our businesses. In each of the third and fourth quarters of 2020, several of these businesses experienced significant increases in revenues and earnings as compared to the second quarter.
Our businesses that were deemed essential continued to operate through the pandemic, including our railroad, utilities and energy, insurance and certain of our manufacturing, wholesale distribution and service businesses. In response to the effects of the pandemic, our businesses implemented various business continuity plans to protect our employees and customers. Such plans include a variety of actions, such as temporarily closing certain retail stores, manufacturing facilities and service centers of businesses that were not subject to government mandated closure. Our businesses also implemented practices to protect employees while at work. Such practices included work-from-home, staggered or reduced work schedules, increased cleaning and sanitation of workspaces, providing employee health screenings, eliminating non-essential travel and face-to-face meetings and providing general health reminders intended to lower the risk of spreading COVID-19.
We also took actions in response to the economic losses from reductions in consumer demand for products and services we offer and our temporary inability to produce goods and provide services at certain of our businesses. These actions included employee furloughs, wage and salary reductions, capital spending reductions and other actions intended to help mitigate the economic losses and preserve capital and liquidity. Certain of our businesses undertook and may continue to undertake restructuring activities to resize their operations to better fit expected customer demand. We cannot reliably predict future economic effects of the pandemic or when business activities at all of our numerous and diverse operations will normalize. Nor can we predict how these events will alter the future consumption patterns of consumers and businesses we serve.
Our insurance businesses generated after-tax earnings from underwriting of $657 million in 2020, $325 million in 2019 and $1.6 billion in 2018. In each year, we generated underwriting earnings from primary insurance and underwriting losses from reinsurance. Insurance underwriting results included after-tax losses from significant catastrophe events of approximately $750 million in 2020, $800 million in 2019 and $1.3 billion in 2018. Underwriting results in 2020 also reflected the effects of the pandemic, arising from premium reductions from the GEICO Giveback program, reduced claims frequencies for private passenger automobile insurance and increased loss estimates for certain commercial insurance and property and casualty reinsurance business.
K-33
Management’s Discussion and Analysis (Continued)
Results of Operations (Continued)
After-tax earnings from insurance investment income in 2020 declined $491 million (8.9%) versus 2019, reflecting lower interest income primarily attributable to declines in interest rates on our substantial holdings of cash and U.S. Treasury Bills. After-tax earnings from insurance investment income in 2019 increased 21.4% over 2018, attributable to increases in interest and dividend income.
After-tax earnings of our railroad business decreased 5.8% in 2020 as compared to 2019. Earnings in 2020 reflected lower railroad operating revenues from lower shipping volumes, attributable to the negative effects of the COVID-19 pandemic, partly offset by lower operating costs and the effects of productivity improvements. After-tax earnings of our utilities and energy business increased 8.8% as compared to 2019. The increase reflected increased tax benefits from renewable energy and increased earnings from the real estate brokerage business. Earnings in 2020 from our manufacturing, service and retailing businesses declined 11.4% versus 2019. The effects of the COVID-19 pandemic varied among our manufacturing businesses relative to significance and duration.
Other earnings included after-tax goodwill and indefinite-lived intangible asset impairment charges of $11.0 billion in 2020, $435 million in 2019 and $3.0 billion in 2018. Such amounts included our share of impairment charges recorded by Kraft Heinz. Approximately $9.8 billion of the charges in 2020 were attributable to impairments of goodwill and identifiable intangible assets recorded in connection with Berkshire’s acquisition of Precision Castparts in 2016. Other earnings in 2020 also included after-tax foreign exchange rate losses of $764 million related to non-U.S. Dollar denominated debt issued by Berkshire and its U.S.-based finance subsidiary, Berkshire Hathaway Finance Corporation (“BHFC”).
After-tax earnings of our railroad business increased 5.0% in 2019 compared to 2018. Earnings in 2019 benefitted from higher rates per car/unit, a curtailment gain related to an amendment to defined benefit retirement plans and ongoing operating cost control initiatives, partly offset by lower freight volumes and incremental costs associated with the persistent flooding conditions and severe winter weather in the first half of 2019. After-tax earnings of our utilities and energy business increased 8.4% in 2019 compared to 2018.
Earnings from our manufacturing, service and retailing businesses in 2019 were relatively unchanged from 2018, reflecting mixed operating results with several of these businesses experiencing lower earnings in 2019 from a variety of factors. Revenues and pre-tax earnings in 2019 of certain of these businesses were negatively affected by the unfavorable effects of foreign currency translation attributable to a stronger U.S. Dollar, international trade tensions and U.S. trade tariffs.
Investment and derivative gains/losses in each of the three years presented included significant gains and losses on our investments in equity securities, including unrealized gains and losses from market price changes on securities we continue to hold. We believe that investment and derivative gains/losses, whether realized from dispositions or unrealized from changes in market prices of equity securities, are generally meaningless in understanding our reported results or evaluating the economic performance of our businesses. These gains and losses have caused and will continue to cause significant volatility in our periodic earnings.
Insurance—Underwriting
Our management views our insurance businesses as possessing two distinct activities – underwriting and investing. Underwriting decisions are the responsibility of the unit managers, while investing decisions are the responsibility of Berkshire’s Chairman and CEO, Warren E. Buffett and Berkshire’s corporate investment managers. Accordingly, we evaluate performance of underwriting operations without any allocation of investment income or investment gains/losses. We consider investment income as an integral component of our aggregate insurance operating results. However, we consider investment gains and losses, whether realized or unrealized as non-operating, based on our long-held strategy of acquiring securities and holding those securities for long periods. We believe that such gains and losses are not meaningful in understanding the operating results of our insurance businesses.
The timing and amount of catastrophe losses can produce significant volatility in our periodic underwriting results, particularly with respect to our reinsurance businesses. Generally, we consider pre-tax losses in excess of $100 million from a current year catastrophic event to be significant.
Changes in estimates for unpaid losses and loss adjustment expenses, including amounts established for occurrences in prior years, can also significantly affect our periodic underwriting results. Unpaid loss estimates, including estimates under retroactive reinsurance contracts, were approximately $120.8 billion as of December 31, 2020. Our periodic underwriting results may also include significant foreign currency transaction gains and losses arising from the changes in the valuation of non-U.S. Dollar denominated liabilities of our U.S. based insurance subsidiaries due to foreign currency exchange rate fluctuations.
K-34
Management’s Discussion and Analysis (Continued)
Insurance—Underwriting (Continued)
Underwriting results in 2020 of certain of our commercial insurance and reinsurance businesses were negatively affected by estimated losses and costs associated with the COVID-19 pandemic, including estimated provisions for claims and uncollectible premiums and incremental operating costs to maintain customer service levels. The effects of the pandemic in the future may be further affected by judicial rulings and regulatory and legislative actions pertaining to insurance coverage and claims and by its effects on general economic activity, which we cannot reasonably estimate at this time.
We provide primary insurance and reinsurance products covering property and casualty risks, as well as life and health risks. Our insurance and reinsurance businesses are GEICO, Berkshire Hathaway Primary Group and Berkshire Hathaway Reinsurance Group (“BHRG”).
Underwriting results of our insurance businesses are summarized below (dollars in millions).
| 2020 | 2019 | 2018 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Pre-tax underwriting earnings (loss): | |||||||||||
| GEICO | $ | 3,428 | $ | 1,506 | $ | 2,449 | |||||
| Berkshire Hathaway Primary Group | 110 | 383 | 670 | ||||||||
| Berkshire Hathaway Reinsurance Group | (2,700 | ) | (1,472 | ) | (1,109 | ) | |||||
| Pre-tax underwriting earnings | 838 | 417 | 2,010 | ||||||||
| Income taxes and noncontrolling interests | 181 | 92 | 444 | ||||||||
| Net underwriting earnings | $ | 657 | $ | 325 | $ | 1,566 | |||||
| Effective income tax rate | 21.5 | % | 24.2 | % | 21.4 | % |
GEICO
GEICO writes private passenger automobile insurance, offering coverages to insureds in all 50 states and the District of Columbia. GEICO markets its policies mainly by direct response methods where most customers apply for coverage directly to the company via the Internet or over the telephone. A summary of GEICO’s underwriting results follows (dollars in millions).
| 2020 | 2019 | 2018 | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | % | Amount | % | Amount | % | ||||||||||||||||||
| Premiums written | $ | 34,928 | $ | 36,016 | $ | 34,123 | |||||||||||||||||
| Premiums earned | $ | 35,093 | 100.0 | $ | 35,572 | 100.0 | $ | 33,363 | 100.0 | ||||||||||||||
| Losses and loss adjustment expenses | 26,018 | 74.1 | 28,937 | 81.3 | 26,278 | 78.8 | |||||||||||||||||
| Underwriting expenses | 5,647 | 16.1 | 5,129 | 14.5 | 4,636 | 13.9 | |||||||||||||||||
| Total losses and expenses | 31,665 | 90.2 | 34,066 | 95.8 | 30,914 | 92.7 | |||||||||||||||||
| Pre-tax underwriting earnings | $ | 3,428 | $ | 1,506 | $ | 2,449 |
2020 versus 2019
GEICO’s pre-tax underwriting earnings for 2020 reflected significant declines in losses and loss adjustment expenses attributable to lower claims frequencies from the effects of less driving by policyholders during the COVID-19 pandemic offset by the effects of the GEICO Giveback program (see following paragraph) on earned premiums.
Premiums written decreased 3.0% compared to 2019. The GEICO Giveback program provided for a 15% premium credit to all voluntary auto and motorcycle policies renewing between April 8, 2020 and October 7, 2020, as well as to any new policies written during the same period. The GEICO Giveback program reduced premiums written in 2020 by approximately $2.9 billion. Premiums earned decreased 1.3% in 2020 compared to 2019, which included reductions of approximately $2.5 billion attributable to the GEICO Giveback program.
K-35
Management’s Discussion and Analysis (Continued)
Insurance—Underwriting (Continued)
GEICO (Continued)
Voluntary auto policies-in-force at the end of 2020 increased approximately 820,000 (4.6%) compared to the end of 2019. The increase reflected a 7.3% decrease in new business sales and a 2.5% decrease in non-renewals and policy cancellations.
Losses and loss adjustment expenses decreased $2.9 billion (10.1%) in 2020 compared to 2019. GEICO’s ratio of losses and loss adjustment expenses to premiums earned (the “loss ratio”) was 74.1%, a decrease of 7.2 percentage points compared to 2019. The decrease in the loss ratio reflected declines in claims frequencies, partly offset by increases in claims severities and the impact of lower premiums earned attributable to the GEICO Giveback program.
Claims frequencies in 2020 were lower for property damage, bodily injury and personal injury protection coverages (twenty-eight to thirty percent range) and collision coverage (twenty-three to twenty-four percent range) compared to 2019. Average claims severities in 2020 were higher for property damage and collision coverages (eight to ten percent range) and bodily injury coverage (twelve to thirteen percent range).
Losses and loss adjustment expenses included net reductions of $253 million in 2020 for decreases in the ultimate loss estimates for prior years’ loss events compared to net increases of $42 million in 2019. Losses incurred included $81 million in 2020 from Hurricanes Laura and Sally and U.S. wildfires. There were no losses from significant catastrophe events in 2019.
Underwriting expenses in 2020 increased $518 million (10.1%) compared to 2019, reflecting higher employee-related, advertising and technology costs partly offset by lower premium taxes. GEICO’s expense ratio in 2020 (underwriting expenses to premiums earned) was 16.1%, an increase of 1.6 percentage points compared to 2019. The expense ratio increase was primarily attributable to the decline in earned premiums from the GEICO Giveback program.
2019 versus 2018
Premiums written and earned in 2019 increased 5.5% and 6.6%, respectively, compared to 2018. These increases were primarily attributable to voluntary auto policies-in-force growth of 6.4%, partially offset by a decrease in average premiums per auto policy. The increase in voluntary auto policies-in-force primarily resulted from an increase in new business sales and a decrease in policies cancelled or not renewed. Voluntary auto policies-in-force increased approximately 1,068,000 during 2019.
Losses and loss adjustment expenses in 2019 increased 10.1% compared to 2018. The loss ratio in 2019 was 81.3%, an increase of 2.5 percentage points over 2018, primarily due to increases in average claims severities.
Average claims severities in 2019 were higher versus 2018 for property damage and collision coverages (four to six percent range) and bodily injury coverage (seven to nine percent range). Claims frequencies in 2019 declined compared to 2018 for property damage and collision coverages (two to four percent range) and personal injury protection coverage (one to two percent range) and were relatively unchanged for bodily injury coverage. Losses and loss adjustment expenses included net increases of $42 million in 2019 and net of decreases $222 million in 2018 for changes in the ultimate loss estimates for prior years’ loss events.
Underwriting expenses in 2019 increased $493 million (10.6%) over 2018. GEICO’s underwriting expense ratio in 2019 was 14.5%, an increase of 0.6 percentage points compared to 2018. The underwriting expense increase was primarily attributable to increases in advertising expenses and employee-related costs, which reflected wage and staffing increases.
K-36
Management’s Discussion and Analysis (Continued)
Insurance—Underwriting (Continued)
Berkshire Hathaway Primary Group
The Berkshire Hathaway Primary Group (“BH Primary”) provides a variety of commercial insurance solutions, including healthcare malpractice, workers’ compensation, automobile, general liability, property and various specialty coverages for small, medium and large clients. The largest of these insurers are Berkshire Hathaway Specialty Insurance (“BH Specialty”), Berkshire Hathaway Homestate Companies (“BHHC”), MedPro Group, Berkshire Hathaway GUARD Insurance Companies (“GUARD”) and National Indemnity Company (“NICO Primary”). Other BH Primary insurers include U.S. Liability Insurance Company, Central States Indemnity Company and MLMIC Insurance Company (“MLMIC”), acquired October 1, 2018. A summary of BH Primary underwriting results follows (dollars in millions).
| 2020 | 2019 | 2018 | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | % | Amount | % | Amount | % | ||||||||||||||||||
| Premiums written | $ | 10,212 | $ | 9,843 | $ | 8,561 | |||||||||||||||||
| Premiums earned | $ | 9,615 | 100.0 | $ | 9,165 | 100.0 | $ | 8,111 | 100.0 | ||||||||||||||
| Losses and loss adjustment expenses | 7,129 | 74.1 | 6,336 | 69.1 | 5,261 | 64.9 | |||||||||||||||||
| Underwriting expenses | 2,376 | 24.7 | 2,446 | 26.7 | 2,180 | 26.9 | |||||||||||||||||
| Total losses and expenses | 9,505 | 98.8 | 8,782 | 95.8 | 7,441 | 91.8 | |||||||||||||||||
| Pre-tax underwriting earnings | $ | 110 | $ | 383 | $ | 670 |
Premiums written increased $369 million (3.7%) in 2020 compared to 2019, reflecting increased premiums written from BH Specialty (34%) and MedPro Group (9%), partially offset by a 13% decrease in premiums written by our other primary insurers. The increase at BH Specialty was driven by increased casualty business globally and the increase at MedPro Group reflected increases across several product categories. The decline in volume by our other primary insurers was primarily due to lower workers’ compensation and commercial automobile volumes and the effect of the divestiture of Applied Underwriters in October 2019. The declines in workers’ compensation and commercial auto business written reflected the effects of reduced exposures and premium refunds related to the COVID-19 pandemic and volume reductions attributable to increased price competition in the market.
Premiums written increased $1.3 billion (15.0%) in 2019 compared to 2018. The increase was attributable to higher volumes from BH Specialty, MedPro Group and GUARD, as well as from the effects of the MLMIC acquisition. These increases were partly offset by lower volume at BHHC and the effect of the Applied Underwriters divestiture.
BH Primary’s combined loss ratios were 74.1% in 2020, 69.1% in 2019 and 64.9% in 2018, which reflected the effects of significant catastrophe events during the year and changes in estimated losses for prior years’ loss events. Losses and loss adjustment expenses attributable to significant catastrophe events were $207 million in 2020 (Hurricanes Laura and Sally and U.S. wildfires) and $190 million in 2018 (Hurricanes Florence and Michael and the wildfires in California). We incurred no losses from significant catastrophe events in 2019. Losses in 2020 also included $167 million attributable to the pandemic. Finally, losses and loss adjustment expenses were reduced $265 million in 2020, $499 million in 2019 and $715 million in 2018 for net reductions in estimated ultimate liabilities for prior years’ loss events.
BH Primary insurers write significant levels of commercial and professional liability and workers’ compensation insurance and the related claim costs may be subject to high severity and long claim-tails. Accordingly, we could experience significant increases in claims liabilities in the future attributable to higher-than-expected claim settlements, adverse litigation outcomes or judicial rulings and other factors not currently anticipated.
Berkshire Hathaway Reinsurance Group
We offer excess-of-loss and quota-share reinsurance coverages on property and casualty risks and life and health reinsurance to insurers and reinsurers worldwide through several subsidiaries, led by National Indemnity Company (“NICO”), Berkshire Hathaway Life Insurance Company of Nebraska (“BHLN”) and General Reinsurance Corporation, General Reinsurance AG and General Re Life Corporation (collectively, “General Re”). We also periodically assume property and casualty risks under retroactive reinsurance contracts written through NICO. In addition, we write periodic payment annuity contracts predominantly through BHLN.
K-37
Management’s Discussion and Analysis (Continued)
Insurance—Underwriting (Continued)
Berkshire Hathaway Reinsurance Group (Continued)
Generally, we strive to generate underwriting profits. However, time-value-of-money concepts are important elements in establishing prices for retroactive reinsurance and periodic payment annuity businesses due to the expected long durations of the liabilities. We expect to incur pre-tax underwriting losses from such businesses, primarily through deferred charge amortization and discount accretion charges. We receive premiums at the inception of these contracts, which are then available for investment. A summary of BHRG’s premiums and pre-tax underwriting results follows (dollars in millions).
| Premiums written | Premiums earned | Pre-tax underwriting earnings (loss) | |||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | |||||||||||||||||||||
| Property/casualty | $ | 13,295 | $ | 10,428 | $ | 9,413 | $ | 12,214 | $ | 9,911 | $ | 8,928 | $ | (799 | ) | $ | 16 | $ | (207 | ) | |||||||||
| Life/health | 5,848 | 4,963 | 5,430 | 5,861 | 4,869 | 5,327 | (18 | ) | 159 | 182 | |||||||||||||||||||
| Retroactive reinsurance | 38 | 684 | 517 | 38 | 684 | 517 | (1,248 | ) | (1,265 | ) | (778 | ) | |||||||||||||||||
| Periodic payment annuity | 566 | 863 | 1,156 | 566 | 863 | 1,156 | (617 | ) | (549 | ) | (340 | ) | |||||||||||||||||
| Variable annuity | 14 | 14 | 16 | 14 | 14 | 16 | (18 | ) | 167 | 34 | |||||||||||||||||||
| $ | 19,761 | $ | 16,952 | $ | 16,532 | $ | 18,693 | $ | 16,341 | $ | 15,944 | $ | (2,700 | ) | $ | (1,472 | ) | $ | (1,109 | ) |
Property/casualty
A summary of property/casualty reinsurance underwriting results follows (dollars in millions).
| 2020 | 2019 | 2018 | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | % | Amount | % | Amount | % | ||||||||||||||||||
| Premiums written | $ | 13,295 | $ | 10,428 | $ | 9,413 | |||||||||||||||||
| Premiums earned | $ | 12,214 | 100.0 | $ | 9,911 | 100.0 | $ | 8,928 | 100.0 | ||||||||||||||
| Losses and loss adjustment expenses | 9,898 | 81.0 | 7,313 | 73.8 | 6,929 | 77.6 | |||||||||||||||||
| Underwriting expenses | 3,115 | 25.5 | 2,582 | 26.0 | 2,206 | 24.7 | |||||||||||||||||
| Total losses and expenses | 13,013 | 106.5 | 9,895 | 99.8 | 9,135 | 102.3 | |||||||||||||||||
| Pre-tax underwriting earnings (loss) | $ | (799 | ) | $ | 16 | $ | (207 | ) |
Premiums written in 2020 increased $2.9 billion (27.5%) compared to 2019. The increase was primarily attributable to new business, including a small number of contracts with very large premiums, and increased participations on renewals. Premiums written in 2019 increased $1.0 billion (10.8%) compared to 2018. The increase was primarily attributable to new business, net of non-renewals, and increased participations on renewal business, partly offset by the unfavorable foreign currency translation effects of a stronger U.S. Dollar.
Underwriting earnings in 2020 were negatively affected by an increase in losses and loss adjustment expenses of $2.6 billion (35.3%). The loss ratio in 2020 was 81.0%, an increase of 7.2 percentage points over 2019. Losses and loss adjustment expenses in 2020 included estimated losses of $964 million attributable to the COVID-19 pandemic and estimated losses from significant catastrophe events of $667 million from Hurricanes Laura and Sally and U.S. wildfires. Losses and loss adjustment expenses also reflected net increases in estimated ultimate liabilities for prior years’ loss events of $162 million in 2020 primarily attributable to legacy environmental, asbestos and other latent injury claims. Such amount as a percentage of the related net unpaid claim liabilities as of the beginning of 2020 was 0.5%.
BHRG’s loss ratio was 73.8% in 2019 and 77.6% in 2018. Losses in 2019 included approximately $1.0 billion from Typhoons Faxia and Hagibis and various U.S. and non-U.S. wildfires, while losses in 2018 included approximately $1.3 billion from Hurricanes Florence and Michael, Typhoon Jebi and wildfires in California. Losses and loss adjustment expenses also included net decreases of $295 million in 2019 and $469 million in 2018 for prior years’ loss events. Such amounts as percentages of the related net unpaid claim liabilities as of the beginning of the applicable year were 1.0% in 2019 and 1.7% in 2018.
Underwriting expenses are primarily commissions and brokerage costs. Underwriting expenses in 2020 increased $533 million (20.6%) over 2019, and underwriting expenses in 2019 increased $376 million (17.0%) over 2018. The increases reflected the increases in premium volumes and changes in business mix.
K-38
Management’s Discussion and Analysis (Continued)
Insurance—Underwriting (Continued)
Life/health
A summary of our life/health reinsurance underwriting results follows (dollars in millions).
| 2020 | 2019 | 2018 | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | % | Amount | % | Amount | % | ||||||||||||||||||
| Premiums written | $ | 5,848 | $ | 4,963 | $ | 5,430 | |||||||||||||||||
| Premiums earned | $ | 5,861 | 100.0 | $ | 4,869 | 100.0 | $ | 5,327 | 100.0 | ||||||||||||||
| Life and health insurance benefits | 4,883 | 83.3 | 3,800 | 78.0 | 4,240 | 79.6 | |||||||||||||||||
| Underwriting expenses | 996 | 17.0 | 910 | 18.7 | 905 | 17.0 | |||||||||||||||||
| Total benefits and expenses | 5,879 | 100.3 | 4,710 | 96.7 | 5,145 | 96.6 | |||||||||||||||||
| Pre-tax underwriting earnings (loss) | $ | (18 | ) | $ | 159 | $ | 182 |
Life/health premiums written increased $885 million (17.8%) in 2020 compared to 2019. Approximately $480 million of the increase was attributable to a reinsurance contract covering U.S. health insurance risks that incepted in the fourth quarter of 2019, which was not renewed for 2021. The remainder of the increase was primarily from volume growth in the Asian and European life reinsurance markets.
Underwriting earnings in 2020 were negatively affected by increased life benefits from COVID-19-related claims (approximately $275 million) and continuing losses from increased liabilities from changes in underlying assumptions with respect to disability benefit liabilities in Australia, which were mostly offset by lower other life claims and reduced losses from U.S. long-term care business that is in run-off. The ratio of life and health insurance benefits to premiums earned was 83.3% in 2020 and 81.5% in 2019, which is before the effects of the BHLN contract amendment referred to below.
Life/health premiums written in 2019 decreased $467 million (8.6%) compared to 2018. In the first quarter of 2019, BHLN amended a yearly-renewable-term life reinsurance contract with a major reinsurer. BHLN recorded a reduction in earned premiums on this contract in 2019 of $49 million, while premiums earned in 2018 related to this contract were $954 million. In 2019, premiums earned also included $228 million from a new health reinsurance contract and reflected volume growth in life markets, partially offset by the unfavorable effects of foreign currency translation attributable to a stronger U.S. Dollar.
Underwriting earnings in 2019 included a one-time gain of $163 million attributable to the BHLN yearly-renewable-term life reinsurance contract amendment. Pre-tax underwriting earnings in 2019 also included losses from increased disability benefit liabilities in Australia, attributable to higher claims experience and changes to various underlying assumptions increased U.S. long-term care liabilities due to discount rate reductions and changes in other actuarial assumptions, and an increase in life claims in North America, partially offset by increased earnings from other international life business.
Retroactive reinsurance
There were no significant retroactive reinsurance contracts written in 2020. Premiums written were $684 million in 2019 and $517 million in 2018, attributable to a limited number of contracts in each year. Pre-tax underwriting losses in each year derived from deferred charge amortization and changes in the estimated timing and amounts of future claim payments. Underwriting results also include foreign currency exchange gains and losses from the effects of changes in foreign currency exchange rates on non-U.S. Dollar denominated liabilities of our U.S. subsidiaries. Underwriting results included pre-tax foreign currency losses of $139 million in 2020 and $76 million in 2019 and pre-tax gains of $169 million in 2018.
Pre-tax underwriting losses before foreign currency gains/losses were $1.1 billion in 2020, $1.2 billion in 2019 and $947 million in 2018. Overall, we decreased estimated ultimate liabilities $399 million in 2020 for prior years’ contracts compared to an increase of $378 million in 2019. After adjustments to the related unamortized deferred charges from changes in the estimated timing and amount of the future claim payments, such changes produced pre-tax underwriting earnings of approximately $230 million in 2020 and pre-tax losses of $125 million in 2019.
Gross unpaid losses assumed under retroactive reinsurance contracts were $41.0 billion at December 31, 2020 and $42.4 billion at December 31, 2019. Unamortized deferred charge assets related to such reinsurance contracts were $12.4 billion at December 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.
K-39
Management’s Discussion and Analysis (Continued)
Insurance—Underwriting (Continued)
Periodic payment annuity
Periodic payment annuity premiums earned in 2020 decreased $297 million (34.4%) compared to 2019, which decreased $293 million (25.3%) from 2018. Periodic payment annuity 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, as well as 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 gains or losses from the effects of changes in mortality and interest rates and from foreign currency exchange rate changes on non-U.S. Dollar denominated liabilities of our U.S. subsidiaries. Pre-tax underwriting results included foreign currency losses of $67 million in 2020 and $40 million in 2019 compared to pre-tax gains of $93 million in 2018.
Excluding foreign currency gains/losses, pre-tax underwriting losses from periodic payment annuity contracts were $550 million in 2020, $509 million in 2019 and $433 million in 2018. These losses primarily derived from the recurring discount accretion of annuity liabilities, as well as from the impact of mortality and interest rate changes. Discounted annuity liabilities were $14.3 billion at December 31, 2020 and $13.5 billion at December 31, 2019. The weighted average discount rate was approximately 4.0%.
Variable annuity
Variable annuity guarantee reinsurance contracts produced pre-tax losses of $18 million in 2020 compared to pre-tax earnings of $167 million in 2019 and $34 million in 2018. The results of this business reflect changes in remaining liabilities for underlying guaranteed benefits reinsured, which are affected by changes in securities markets and interest rates and from the periodic amortization of expected profit margins. Underwriting results from these contracts can be volatile, reflecting the volatility of securities markets, interest rates and foreign currency exchange rates.
Insurance—Investment Income
A summary of net investment income attributable to our insurance operations follows (dollars in millions).
| Percentage change | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | 2018 | 2020 vs 2019 | 2019 vs 2018 | |||||||||||||
| Interest and other investment income | $ | 1,059 | $ | 2,075 | $ | 1,851 | (49.0 | )% | 12.1 | % | |||||||
| Dividend income | 4,890 | 4,525 | 3,652 | 8.1 | 23.9 | ||||||||||||
| Pre-tax net investment income | 5,949 | 6,600 | 5,503 | (9.9 | ) | 19.9 | |||||||||||
| Income taxes and noncontrolling interests | 910 | 1,070 | 949 | ||||||||||||||
| Net investment income | $ | 5,039 | $ | 5,530 | $ | 4,554 | |||||||||||
| Effective income tax rate | 15.3 | % | 16.1 | % | 17.2 | % |
Interest and other investment income declined $1.0 billion (49.0%) in 2020 compared to 2019, primarily due to lower income from short-term investments. We continue to hold substantial balances of cash, cash equivalents and short-term U.S. Treasury Bills. Short-term interest rates declined over the second half of 2019 and the decline continued throughout 2020, which resulted in significantly lower interest income. We expect such rates, which are historically low, to remain low, negatively affecting our earnings from such investments in 2021. Nevertheless, we believe that maintaining ample liquidity is paramount and we insist on safety over yield with respect to short-term investments.
K-40
Management’s Discussion and Analysis (Continued)
Insurance—Investment Income (Continued)
Dividend income increased $365 million (8.1%) in 2020 compared to 2019. The increase was primarily attributable to dividends from the investment in $10 billion liquidation value of 8% cumulative preferred stock of Occidental Petroleum Corporation (“Occidental”) on August 8, 2019, partly offset by lower dividends from common stock investments.
Interest and other investment income increased $224 million (12.1%) in 2019 compared to 2018, primarily due to higher interest rates on short-term investments and interest from a term loan with Seritage Growth Properties, partially offset by lower income earned from fixed maturity securities and limited partnership investments. Dividend income increased $873 million (23.9%) in 2019 compared to 2018. The increase in dividend income was attributable to an overall increase in investment levels, including the investment in Occidental and increased dividends from common stock 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, which are reduced by insurance premiums and reinsurance receivables, deferred charges assumed under retroactive reinsurance contracts and deferred policy acquisition costs. Float approximated $138 billion at December 31, 2020, $129 billion at December 31, 2019 and $123 billion at December 31, 2018. Our combined insurance operations generated pre-tax underwriting earnings of approximately $838 million in 2020, $417 million in 2019 and $2.0 billion in 2018, and consequently, the average cost of float for each of those periods was negative.
A summary of cash and investments held in our insurance businesses as of December 31, 2020 and 2019 follows (in millions).
| December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | |||||||
| Cash, cash equivalents and U.S. Treasury Bills | $ | 67,082 | $ | 64,908 | ||||
| Equity securities | 269,498 | 240,126 | ||||||
| Fixed maturity securities | 20,317 | 18,537 | ||||||
| Other | 6,220 | 2,481 | ||||||
| $ | 363,117 | $ | 326,052 |
Fixed maturity investments as of December 31, 2020 were as follows (in millions).
| Amortized cost | Unrealized gains/losses | Carrying value | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| U.S. Treasury, U.S. government corporations and agencies | $ | 3,339 | $ | 55 | $ | 3,394 | ||||||
| Foreign governments | 11,232 | 105 | 11,337 | |||||||||
| Corporate bonds | 4,678 | 462 | 5,140 | |||||||||
| Other | 382 | 64 | 446 | |||||||||
| $ | 19,631 | $ | 686 | $ | 20,317 |
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 by at least one of the major rating agencies. Foreign government securities include obligations issued or unconditionally guaranteed by national or provincial government entities.
K-41
Management’s Discussion and Analysis (Continued)
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 railroad business groups by type of product shipped which includes consumer products, industrial products, agricultural products and coal. A summary of BNSF’s earnings follows (dollars in millions).
| Percentage change | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | 2018 | 2020 vs 2019 | 2019 vs 2018 | ||||||||||||
| Railroad operating revenues | $ | 20,181 | $ | 22,745 | $ | 22,999 | (11.3 | )% | (1.1 | )% | ||||||
| Railroad operating expenses: | ||||||||||||||||
| Compensation and benefits | 4,542 | 5,270 | 5,322 | (13.8 | ) | (1.0 | ) | |||||||||
| Fuel | 1,789 | 2,944 | 3,346 | (39.2 | ) | (12.0 | ) | |||||||||
| Purchased services | 1,954 | 2,049 | 2,131 | (4.6 | ) | (3.8 | ) | |||||||||
| Depreciation and amortization | 2,460 | 2,389 | 2,306 | 3.0 | 3.6 | |||||||||||
| Equipment rents, materials and other | 1,684 | 2,028 | 2,110 | (17.0 | ) | (3.9 | ) | |||||||||
| Total | 12,429 | 14,680 | 15,215 | (15.3 | ) | (3.5 | ) | |||||||||
| Railroad operating earnings | 7,752 | 8,065 | 7,784 | (3.9 | ) | 3.6 | ||||||||||
| Other revenues (expenses): | ||||||||||||||||
| Other revenues | 688 | 770 | 856 | (10.6 | ) | (10.0 | ) | |||||||||
| Other expenses, net | (611 | ) | (515 | ) | (736 | ) | 18.6 | (30.0 | ) | |||||||
| Interest expense | (1,037 | ) | (1,070 | ) | (1,041 | ) | (3.1 | ) | 2.8 | |||||||
| Pre-tax earnings | 6,792 | 7,250 | 6,863 | (6.3 | ) | 5.6 | ||||||||||
| Income taxes | 1,631 | 1,769 | 1,644 | (7.8 | ) | 7.6 | ||||||||||
| Net earnings | $ | 5,161 | $ | 5,481 | $ | 5,219 | (5.8 | ) | 5.0 | |||||||
| Effective income tax rate | 24.0 | % | 24.4 | % | 24.0 | % |
The following table summarizes BNSF’s railroad freight volumes by business group (cars/units in thousands).
| Cars/Units | Percentage change | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | 2018 | 2020 vs 2019 | 2019 vs 2018 | ||||||||||||
| Consumer products | 5,266 | 5,342 | 5,597 | (1.4 | )% | (4.6 | )% | |||||||||
| Industrial products | 1,622 | 1,931 | 1,991 | (16.0 | ) | (3.0 | ) | |||||||||
| Agricultural products | 1,189 | 1,146 | 1,208 | 3.8 | (5.1 | ) | ||||||||||
| Coal | 1,404 | 1,802 | 1,902 | (22.1 | ) | (5.3 | ) | |||||||||
| Total cars/units | 9,481 | 10,221 | 10,698 | (7.2 | ) | (4.5 | ) |
2020 versus 2019
Railroad operating revenues declined 11.3% in 2020 versus 2019, reflecting a 7.2% decrease in volume and a 4.5% decrease in average revenue per car/unit. The decrease in revenue per car/unit was attributable to lower fuel surcharge revenue driven by lower fuel prices and business mix changes. The overall volume decrease was primarily due to the COVID-19 pandemic, which severely impacted volumes through the first half of the year. Volumes sequentially improved from earlier periods and recovered overall to pre-pandemic levels by the end of the year.
BNSF is an important component of the national and global supply chain and, as an essential business, has continued to operate throughout the duration of the COVID-19 pandemic. However, the pandemic caused significant economic disruptions that adversely affected the demand for transportation services. The pandemic continues to evolve, and the full extent to which it may impact BNSF's business, operating results, financial condition, or liquidity will depend on future developments. We believe BNSF's fundamental business remains strong and it has ample liquidity to continue business operations during this volatile period.
K-42
Management’s Discussion and Analysis (Continued)
Railroad (“Burlington Northern Santa Fe”) (Continued)
Pre-tax earnings were $6.8 billion in 2020, a decrease of 6.3% from 2019, principally due to the negative impacts of the pandemic on volumes. In addition, pre-tax earnings in 2019 included an operating revenue increase related to the favorable outcome of an arbitration hearing and a retirement plan curtailment gain that is included in other expenses, net in the preceding table. These effects were partially offset by significant improvements in 2020 in service, system velocity and cost performance compared to 2019, along with lower costs related to severe winter weather and flooding on parts of the network, which negatively affected expenses and service levels in 2019.
Operating revenues from consumer products of $7.3 billion in 2020 declined 7.6% compared to 2019, primarily due to a 6.3% decrease in average revenue per car/unit along with lower volumes. The volume decrease was primarily due to the impact of the pandemic. Lower international and automotive volumes were offset by higher domestic intermodal volumes. Increased retail sales, inventory replenishments by retailers and e-commerce activity produced recovery of intermodal volumes in the second half of 2020.
Operating revenues from industrial products were $5.0 billion in 2020, a decrease of 17.0% from 2019. The decrease was primarily attributable to the decline in volume and to a lesser extent lower average revenue per car/unit. Volumes decreased primarily due to lower U.S. industrial production driven by the pandemic, including reduced production and demand in the energy sector, which drove lower sand and petroleum products volume, along with reduced steel demand, which drove lower taconite volume.
Operating revenues from agricultural products increased 2.9% to $4.8 billion in 2020 compared to 2019. The increase was due to higher volumes, partially offset by slightly lower average revenue per car/unit. The volume increase was primarily due to higher grain and meal exports, partially offsetting adverse impacts of the pandemic, primarily for ethanol and sweeteners shipments.
Operating revenues from coal decreased 28.5% to $2.7 billion in 2020 compared to 2019. This decrease was primarily due to lower volumes, as well as lower revenues per car/unit. Volumes decreased primarily due to lower natural gas prices, lower electricity demand driven by the pandemic, utility coal plant retirements and mild temperatures.
Railroad operating expenses declined 15.3% to $12.4 billion in 2020 as compared to 2019. The ratio of railroad operating expenses to railroad operating revenues declined 2.9 percentage points to 61.6% in 2020 versus 2019. Railroad operating expenses in 2020 reflected lower volume-related costs, productivity improvements, the effects of cost control initiatives and improved weather conditions compared to 2019.
Compensation and benefits expenses decreased $728 million (13.8%) in 2020 compared to 2019, primarily due to lower employee counts associated with lower volume and due to improved workforce productivity. Fuel expenses decreased $1.2 billion (39.2%) compared to 2019, primarily due to lower average fuel prices, lower volumes and improved fuel efficiency. Purchased services expense declined $95 million (4.6%) compared to 2019. The decrease was primarily due to lower volume, improved productivity and higher insurance recoveries in 2020 related to network flooding in 2019. Equipment rents, materials and other expense decreased $344 million (17.0%) compared to 2019, primarily due to lower volume-related costs, the effects of cost controls and lower personal injury and derailment expenses.
2019 versus 2018
Railroad operating revenues were $22.7 billion in 2019, a decline of 1.1% versus 2018. During 2019, BNSF’s revenues reflected a 3.6% comparative increase in average revenue per car/unit and a 4.5% decrease in volume. The increase in average revenue per car/unit was attributable to increased rates per car/unit and a favorable outcome of an arbitration hearing. Pre-tax earnings were approximately $7.3 billion in 2019, an increase of 5.6% over 2018. BNSF experienced severe winter weather and flooding on parts of the network, which negatively affected revenues, expenses and service levels. In addition to the impact of an increase in average revenue per car/unit, earnings in 2019 benefited from a reduction in total operating expenses.
K-43
Management’s Discussion and Analysis (Continued)
Railroad (“Burlington Northern Santa Fe”) (Continued)
Operating revenues from consumer products were $7.9 billion in 2019, a decrease of 0.5% compared to 2018, reflecting volume decreases and higher average revenue per car/unit. The volume decreases were driven by moderated demand and the availability of truck capacity, as well as lower west coast imports.
Operating revenues from industrial products were $6.1 billion in 2019, an increase of 1.7% from 2018. The increase was attributable to higher average revenue per car/unit, partially offset by a decrease in volume. Volumes decreased primarily due to overall softness in the industrial sector, lower sand volumes and reduced car loadings, due to the challenging weather conditions in 2019. Increased demand for petroleum products and liquefied petroleum gas, partially offset the other decreases in volumes.
Operating revenues from agricultural products decreased 0.3% in 2019 to $4.7 billion compared to 2018. The decrease was due to lower volumes and higher average revenue per car/unit. The volume decreases were attributable to export competition from non-U.S. sources, the impacts of international trade policies and the challenging weather conditions in 2019.
Operating revenues from coal decreased 7.4% in 2019 to $3.7 billion compared to 2018, reflecting lower average revenue per car/unit and lower volumes. Volumes were negatively impacted by adverse weather conditions, as well as from the effects of lower natural gas prices.
Railroad operating expenses were $14.7 billion in 2019, a decrease of $535 million compared to 2018. Our ratio of operating expenses to railroad operating revenues in 2019 of 64.5% decreased 1.7 percentage points versus 2018. Operating expenses in 2019 reflected lower volume-related costs, lower fuel prices and the effects of cost control initiatives, partially offset by the costs associated with the adverse weather conditions.
Fuel expenses decreased $402 million in 2019 compared to 2018, primarily due to lower average fuel prices, lower volumes and improved fuel efficiency. Purchased services expense decreased $82 million compared to 2018. The decrease was due to lower purchased transportation costs of our logistics services business, lower drayage, lower services expense and higher insurance recoveries. Equipment rents, materials and other expense decreased $82 million compared to 2018, due to lower locomotive and various other costs associated with lower volumes and cost controls. Other expenses, net decreased $221 million compared to 2018. In 2019, other expenses were net of a $120 million curtailment gain from an amendment to the company-sponsored defined benefit retirement plans.
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’s natural gas pipelines consist of five domestic regulated interstate natural gas pipeline systems and a 25% interest in a liquefied natural gas export, import and storage facility in which BHE operates and consolidates for financial reporting purposes. Three of these systems were acquired on November 1, 2020 from Dominion Energy, Inc. (“BHE GT&S acquisition”). See Note 2 to accompanying Consolidated Financial Statements. 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.
K-44
Management’s Discussion and Analysis (Continued)
Utilities and Energy (“Berkshire Hathaway Energy Company”) (Continued)
The rates our regulated businesses charge customers for energy and services are based in large part on the costs of business operations, including 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).
| 2020 | 2019 | 2018 | |||||||||
| Revenues: | |||||||||||
| Energy operating revenue | $ | 15,556 | $ | 15,371 | $ | 15,573 | |||||
| Real estate operating revenue | 5,396 | 4,473 | 4,214 | ||||||||
| Other income (loss) | 79 | 270 | 200 | ||||||||
| Total revenue | 21,031 | 20,114 | 19,987 | ||||||||
| Costs and expense: | |||||||||||
| Energy cost of sales | 4,187 | 4,586 | 4,769 | ||||||||
| Energy operating expense | 7,539 | 6,824 | 6,969 | ||||||||
| Real estate operating costs and expense | 4,885 | 4,251 | 4,000 | ||||||||
| Interest expense | 1,941 | 1,835 | 1,777 | ||||||||
| Total costs and expense | 18,552 | 17,496 | 17,515 | ||||||||
| Pre-tax earnings | 2,479 | 2,618 | 2,472 | ||||||||
| Income tax expense (benefit)* | (1,010 | ) | (526 | ) | (452 | ) | |||||
| Net earnings after income taxes | 3,489 | 3,144 | 2,924 | ||||||||
| Noncontrolling interests | 71 | 18 | 23 | ||||||||
| Net earnings attributable to BHE | 3,418 | 3,126 | 2,901 | ||||||||
| Noncontrolling interests and preferred stock dividends | 327 | 286 | 280 | ||||||||
| Net earnings attributable to Berkshire Hathaway shareholders | $ | 3,091 | $ | 2,840 | $ | 2,621 | |||||
| Effective income tax rate | (40.7 | )% | (20.1 | )% | (18.3 | )% |
*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 (dollars in millions).
| Percentage change | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | 2018 | 2020 vs 2019 | 2019 vs 2018 | |||||||||||||
| PacifiCorp | $ | 741 | $ | 773 | $ | 739 | (4.1 | )% | 4.6 | % | |||||||
| MidAmerican Energy Company | 818 | 781 | 669 | 4.7 | 16.7 | ||||||||||||
| NV Energy | 410 | 365 | 317 | 12.3 | 15.1 | ||||||||||||
| Northern Powergrid | 201 | 256 | 239 | (21.5 | ) | 7.1 | |||||||||||
| Natural gas pipelines | 528 | 422 | 387 | 25.1 | 9.0 | ||||||||||||
| Other energy businesses | 697 | 608 | 489 | 14.6 | 24.3 | ||||||||||||
| Real estate brokerage | 375 | 160 | 145 | 134.4 | 10.3 | ||||||||||||
| Corporate interest and other | (352 | ) | (239 | ) | (84 | ) | 47.3 | 184.5 | |||||||||
| $ | 3,418 | $ | 3,126 | $ | 2,901 | 9.3 | 7.8 |
K-45
Management’s Discussion and Analysis (Continued)
Utilities and Energy (“Berkshire Hathaway Energy Company”) (Continued)
2020 versus 2019
PacifiCorp operates a regulated electric utility in portions of several Western states, including Utah, Oregon and Wyoming. PacifiCorp after-tax earnings decreased $32 million in 2020 compared to 2019. The decrease reflected higher operating expenses and net interest expense, partially offset by increased production tax credit benefits driven by repowered wind projects placed in-service, higher utility margin (operating revenue less cost of sales) and higher other income. The increase in operating expenses was largely due to costs associated with wildfires, a settlement agreement and pension benefits.
PacifiCorp utility margin was $3.3 billion in 2020, an increase of $47 million compared to 2019. The increase reflected higher operating revenue from favorable average retail prices and lower generation and purchased power costs, partially offset by lower operating revenue from a 1.4% decline in retail customer volumes. The decline in retail customer volumes was due to the impacts of the pandemic, partly offset by an increase in the average number of customers and the favorable impacts of weather.
MEC operates a regulated electric and natural gas utility primarily in Iowa and Illinois. After-tax earnings increased $37 million in 2020 compared to 2019. The increase reflected increased income tax benefits, primarily from production tax credits, driven by repowered and new wind projects placed in-service, and the effects of ratemaking. These effects were partially offset by higher depreciation expense from additional assets placed in-service, higher net interest expense, lower other income and lower electric and natural gas utility margins.
MEC electric utility margin decreased $10 million to $1.8 billion in 2020 compared to 2019. The electric utility margin decrease was attributable to lower operating revenue from unfavorable wholesale prices and price impacts from changes in retail sales mix. These effects were mostly offset by lower generation and purchased power costs and higher operating revenue from a 1.2% increase in retail customer volumes. The increase in electric retail customer volumes was primarily due to increased usage by certain industrial customers, partially offset by the impacts of the pandemic. Natural gas utility margin decreased $9 million in 2020 compared to 2019, due to the unfavorable impacts of weather.
NV Energy operates regulated electric and natural gas utilities in Nevada. After-tax earnings increased $45 million in 2020 compared to 2019. The increase reflected higher electric utility margin and lower income tax expense from the favorable impacts of ratemaking, partially offset by higher operating expenses. The increase in operating expenses was mainly due to higher earnings sharing accruals for customers at Nevada Power Company and higher depreciation expense from additional assets placed in-service.
NV Energy electric utility margin increased $100 million to $1.7 billion in 2020 compared to 2019. The increase was primarily due to higher operating revenue from a 1.5% increase in electric retail customer volumes, including distribution-only service customers and price impacts from changes in retail sales mix. The increase in electric retail customer volumes was primarily due to the favorable impacts of weather, partially offset by the impacts of the pandemic.
Northern Powergrid after-tax earnings decreased $55 million in 2020 as compared to 2019. The earnings decrease reflected write-offs of gas exploration costs and higher income tax expense, in large part from a change in the United Kingdom corporate income tax rate, partially offset by lower pension costs and interest expense.
Natural gas pipelines after-tax earnings increased $106 million in 2020 compared to 2019. The increase was primarily due to $73 million of earnings from the BHE GT&S acquisition, the favorable impact of a rate case settlement at Northern Natural Gas and higher transportation volume and rates, partially offset by higher depreciation, operating expenses and interest expenses.
Other energy business after-tax earnings in 2020 increased $89 million compared to 2019. The increase was primarily due to increased income tax benefits from renewable wind tax equity investments, largely from projects reaching commercial operation, partially offset by lower operating revenue and higher operating expenses from geothermal and natural gas units.
K-46
Management’s Discussion and Analysis (Continued)
Utilities and Energy (“Berkshire Hathaway Energy Company”) (Continued)
Real estate brokerage after-tax earnings increased $215 million in 2020 compared to 2019. The increase reflected higher earnings from mortgage and brokerage services. The increase in earnings from mortgage services was attributable to higher refinance activity from the favorable interest rate environment and the earnings increase from brokerage services was due to an increase of 13.1% in closed transaction dollar volume.
Corporate interest and other after-tax earnings decreased $113 million in 2020 compared to 2019. The decline was primarily due to higher interest expense and lower state income tax benefits.
2019 versus 2018
PacifiCorp after-tax earnings were $773 million in 2019, an increase of $34 million compared to 2018, reflecting slightly higher utility margin and higher other income, partly offset by higher depreciation expense from additional assets placed in-service. PacifiCorp utility margin was $3.3 billion in 2019, an increase of $4 million compared to 2018, as a 0.4% increase in retail customer volumes was largely offset by lower wholesale revenue mainly due to lower volumes.
MEC after-tax earnings of $781 million in 2019 increased $112 million as compared to 2018, primarily attributable to increases in electric utility margin, income tax benefits from higher production tax credits and the effects of ratemaking and other income. Electric utility margin in 2019 increased 2% to $1.8 billion, primarily due to higher wind generation and higher retail customer volumes of 1.4%, as a 4.0% increase in industrial volumes was largely offset by lower residential volumes from the unfavorable impacts of weather. These earnings increases were partially offset by increased depreciation expense from additional assets placed in-service (net of lower Iowa revenue sharing) and higher net interest expense.
NV Energy after-tax earnings were $365 million in 2019, an increase of $48 million compared to 2018, as lower operating expenses were partly offset by lower electric utility margin. Electric utility margin in 2019 was $1.6 billion, representing a decrease of $58 million (3%) versus 2018. The decrease was primarily due to a 1.4% decline in retail customer volumes, largely attributable to the impacts of weather, and rate reductions from the impact of the changes in U.S. income tax laws, partially offset by retail customer growth.
Northern Powergrid after-tax earnings increased in 2019 compared to 2018, reflecting higher distribution revenues and lower operating expenses, which were largely from lower pension settlement losses in 2019, partially offset by the unfavorable foreign currency translation effects of a strong average U.S. Dollar. Distribution revenues increased $18 million, attributable to higher tariff rates, partly offset by lower distributed units.
Natural gas pipelines after-tax earnings increased $35 million in 2019 compared to 2018, primarily due to higher transportation revenues from generally higher volumes and rates, favorable margins from system balancing activities and a decrease in operating expenses, partly offset by higher depreciation expense from increased spending on capital projects.
Other energy businesses after-tax earnings in 2019 increased $119 million compared to 2018. The increase was primarily due to improved earnings from renewable wind energy projects ($49 million from tax equity investments and $25 million from new and existing projects and activities), higher income from geothermal and natural gas units, largely due to higher generation and favorable margins and lower operating expenses, partly offset by lower earnings at a hydroelectric facility in the Philippines due to lower rainfall. The increase in earnings also reflected the effects of favorable regulatory decisions received in 2019 and the unfavorable impacts of a regulatory rate order received in 2018 at AltaLink L.P.
Real estate brokerage after-tax earnings increased in 2019 compared to 2018. The increase was primarily due to higher earnings at mortgage businesses due to increased refinance activity and earnings attributable to recent business acquisitions, partially offset by lower earnings at brokerage businesses, primarily from a decrease in closed units and lower margins.
Corporate interest and other after-tax earnings decreased $155 million in 2019 compared to 2018. The earnings decline was primarily due to income tax benefits recognized in 2018 related to the reduction of accrued repatriation taxes on undistributed foreign earnings in connection with the changes in U.S. income tax laws, higher interest expense and lower earnings from non-regulated energy services.
K-47
Management’s Discussion and Analysis (Continued)
Manufacturing, Service and Retailing
A summary of revenues and earnings of our manufacturing, service and retailing businesses follows (dollars in millions).
| Percentage change | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | 2018 | 2020 vs 2019 | 2019 vs 2018 | |||||||||||||||||
| Revenues | |||||||||||||||||||||
| Manufacturing | $ | 59,079 | $ | 62,730 | $ | 61,883 | (5.8 | )% | 1.4 | % | |||||||||||
| Service and retailing | 75,018 | 79,945 | 78,926 | (6.2 | ) | 1.3 | |||||||||||||||
| $ | 134,097 | $ | 142,675 | $ | 140,809 | (6.0 | ) | 1.3 | |||||||||||||
| Pre-tax earnings * | |||||||||||||||||||||
| Manufacturing | $ | 8,010 | $ | 9,522 | $ | 9,366 | (15.9 | )% | 1.7 | % | |||||||||||
| Service and retailing | 2,879 | 2,843 | 2,942 | 1.3 | (3.4 | ) | |||||||||||||||
| 10,889 | 12,365 | 12,308 | (11.9 | ) | 0.5 | ||||||||||||||||
| Income taxes and noncontrolling interests | 2,589 | 2,993 | 2,944 | ||||||||||||||||||
| $ | 8,300 | $ | 9,372 | $ | 9,364 | ||||||||||||||||
| Effective income tax rate | 23.3 | % | 23.7 | % | 23.4 | % | |||||||||||||||
| Pretax earnings as a percentage of revenues | 8.1 | % | 8.7 | % | 8.7 | % |
| *** | Excludes certain acquisition accounting expenses, which primarily related to the amortization of identified intangible assets recorded in connection with our business acquisitions. The after-tax acquisition accounting expenses excluded from earnings above were $783 million in 2020, $788 million in 2019 and $932 million in 2018. In 2020, such expenses also exclude after-tax goodwill and indefinite-lived intangible asset impairment charges of $10.4 billion. These expenses are included in “Other” in the summary of earnings on page K-33 and in the “Other” earnings section on page K-56. |
|---|
Manufacturing
Our manufacturing group includes a variety of industrial, building and consumer products businesses. A summary of revenues and pre-tax earnings of our manufacturing operations follows (dollars in millions).
| Percentage change | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | 2018 | 2020 vs 2019 | 2019 vs 2018 | |||||||||||||||||
| Revenues | |||||||||||||||||||||
| Industrial products | $ | 25,667 | $ | 30,594 | $ | 30,679 | (16.1 | )% | (0.3 | )% | |||||||||||
| Building products | 21,244 | 20,327 | 18,677 | 4.5 | 8.8 | ||||||||||||||||
| Consumer products | 12,168 | 11,809 | 12,527 | 3.0 | (5.7 | ) | |||||||||||||||
| $ | 59,079 | $ | 62,730 | $ | 61,883 | ||||||||||||||||
| Pretax earnings | |||||||||||||||||||||
| Industrial products | $ | 3,755 | $ | 5,635 | $ | 5,822 | (33.4 | )% | (3.2 | )% | |||||||||||
| Building products | 2,858 | 2,636 | 2,336 | 8.4 | 12.8 | ||||||||||||||||
| Consumer products | 1,397 | 1,251 | 1,208 | 11.7 | 3.6 | ||||||||||||||||
| $ | 8,010 | $ | 9,522 | $ | 9,366 | ||||||||||||||||
| Pre-tax earnings as a percentage of revenues | |||||||||||||||||||||
| Industrial products | 14.6 | % | 18.4 | % | 19.0 | % | |||||||||||||||
| Building products | 13.5 | % | 13.0 | % | 12.5 | % | |||||||||||||||
| Consumer products | 11.5 | % | 10.6 | % | 9.6 | % |
K-48
Management’s Discussion and Analysis (Continued)
Manufacturing, Service and Retailing (Continued)
Industrial products
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 consists of more than 100 autonomous manufacturing and service businesses, including equipment leasing for the rail, intermodal tank container and mobile crane industries.
2020 versus 2019
Revenues of the industrial products group in 2020 declined $4.9 billion (16.1%) from 2019, while pre-tax earnings declined $1.9 billion (33.4%). Pre-tax earnings as a percentage of revenues for the group were 14.6% in 2020 compared to 18.4% in 2019.
PCC’s revenues were $7.3 billion in 2020, a decrease of $3.0 billion (28.9%) compared to 2019. Historically, a significant portion of PCC’s earnings have been dependent on sales related to the aerospace industry. The COVID-19 pandemic contributed to material declines in commercial air travel and aircraft production. Airlines responded to the pandemic by delaying delivery of aircraft orders or, in some cases, cancelling aircraft orders, resulting in significant reductions in build rates by aircraft manufacturers and significant inventory reduction initiatives by PCC’s customers. Further, Boeing’s 737 MAX aircraft production issues contributed to the declines in aerospace product sales across the industry in 2020. These factors resulted in significant declines in demand for PCC’s aerospace products in 2020. In 2020, PCC’s sales of products for power markets increased 2.2%, primarily driven by increases in industrial gas turbine products, offset by reductions in oil and gas products.
PCC’s pre-tax earnings in 2020 were $650 million, a decrease of 64.5% compared to 2019, which reflected the decline in aerospace product sales as well as increased manufacturing inefficiencies attributable to lower volumes. In response to the effects of the pandemic, PCC has taken aggressive restructuring actions to resize operations in response to reduced expected volumes in aerospace markets. PCC’s worldwide workforce was reduced by about 40% since the end of 2019. PCC recorded charges for restructuring and inventory and fixed asset charges of approximately $295 million in 2020. Although earnings as a percentage of revenues were negatively impacted in 2020 due to inefficiencies associated with aligning operations to reduced aircraft build rates, the restructuring actions taken contributed to improved margins in the fourth quarter compared to earlier in the year and further margin improvements are expected in the future. The level of aircraft production is currently expected to slowly increase beginning in the latter half of 2021. However, this is dependent of the timing and extent that COVID-19 infections are lowered on a sustained basis and the return to historical levels of air travel and subsequent demand for aerospace products.
Lubrizol’s revenues were $5.95 billion in 2020, a decrease of 8.0% compared to 2019. The decline was primarily attributable to lower volumes from economic effects of the pandemic and a fire at an Additives manufacturing, blending and storage facility in Rouen, France at the end of the third quarter of 2019, which resulted in the temporary suspension of operations. Revenues in 2020 also reflected lower selling prices, partly offset by favorable changes in sales mix. Lubrizol’s consolidated volume for the year declined 9% in 2020 compared to 2019, due to declines in the Additives and Engineered Materials product lines, partly offset by higher volumes in Life Science products. Overall, the effects of the pandemic on Lubrizol were more pronounced in the first half of the year, as volumes rebounded significantly in the second half.
Lubrizol’s pre-tax earnings in 2020 were approximately $1.0 billion, essentially unchanged compared to 2019. The effects of lower sales volumes, including the effects from the Rouen fire and lower average selling prices were offset by lower average raw material costs, lower operating expenses and insurance recoveries in 2020 associated with the Rouen fire.
Marmon’s revenues were $7.6 billion in 2020, a decrease of $681 million (8.2%) compared to 2019. Excluding the effects of business acquisitions, revenues decreased in essentially all sectors, primarily attributable to lower demand from the effects of the pandemic. The largest effects were experienced in the Transportation Products and Foodservice Technologies sectors. Additionally, revenues decreased due to lower metal prices in the Metal Services sector and the effect of business divestitures in 2019. Declines in oil prices in 2020 also adversely affected demand and revenues in the Rail & Leasing and Crane Services sectors.
Marmon’s pre-tax earnings in 2020 decreased $312 million (24.3%) as compared to 2019. The decrease reflected the declines in revenues, increased restructuring charges and lower interest income. Restructuring initiatives were initiated in response to the lower product demand, particularly in the sectors most impacted by the pandemic.
K-49
Management’s Discussion and Analysis (Continued)
Manufacturing, Service and Retailing (Continued)
Industrial products (Continued)
IMC’s revenues declined 13.2% in 2020 compared to 2019, reflecting negative economic effects from the pandemic on demand for cutting tools in most geographic regions, partly offset by the effects of business acquisitions over the past year. IMC’s pre-tax earnings declined 26.6% in 2020 versus 2019, attributable to declines in sales and margins due to lower volumes and to changes in sales mix.
2019 versus 2018
Revenues of the industrial products group were slightly lower in 2019 than in 2018 and pre-tax earnings declined 3.2% compared to 2018. Pre-tax earnings as a percentage of revenues for the group were 18.4% in 2019 compared to 19.0% in 2018.
PCC’s revenues were $10.3 billion in 2019, an increase of $74 million (0.7%) compared to 2018. In 2019, PCC generated increased sales in aerospace markets, which was partially offset by lower sales in the power markets. The increase in aerospace sales was tempered due to significant efforts focused on the ramp-up requirements for certain new aerospace programs, such as LEAP, that created manufacturing inefficiencies and slowed production cycles contributing to delays in product deliveries and sales.
PCC’s pre-tax earnings increased 5.1% in 2019 compared to 2018, reflecting increased sales of aerospace products and higher earnings from various non-recurring items in 2019, which were partially offset by lower earnings from the power markets due to the decrease in sales. Temporary unplanned shutdowns of certain metals facilities and metal press outages also negatively impacted earnings in 2018. PCC incurred incremental costs in 2019 to meet required deliveries to customers associated with the increased aerospace demand, which negatively affected margins and earnings. The production headwinds experienced were primarily attributable to shortages of qualified skilled labor and the rapid increase in requirements for newer, complex aerospace products.
Lubrizol’s revenues were $6.5 billion in 2019, a decrease of 5.2% compared to 2018. The decline reflected lower volumes, including the effects from the Rouen fire, and unfavorable foreign currency translation effects, partly offset by higher average selling prices which were necessitated by raw material cost increases. Lubrizol’s consolidated volume in 2019 declined 4% from 2018, primarily due to volume decline of 6% in the Additives product lines.
Lubrizol’s pre-tax earnings in 2019 for the fourth quarter and year decreased 50.5% and 14.6%, respectively, compared to the same periods in 2018. Earnings in 2019 were significantly impacted by costs and lost business associated with the Rouen fire. Lubrizol’s operating results in 2019 were also negatively affected by lower sales volumes, higher manufacturing expenses and unfavorable foreign currency translation effects, partly offset by improved material margins.
Marmon’s revenues were $8.3 billion in 2019, an increase of $146 million (1.8%) compared to 2018. The revenue increase reflected the effects of business acquisitions, higher volumes in several business sectors, which were largely offset by lower distribution volumes in the Metals Services sector, unfavorable foreign currency translation and the impact of lower metal prices in the Electrical and Plumbing & Refrigeration sectors. Marmon’s business acquisitions included the acquisition of the Colson Medical companies on October 31, 2019, resulting in a new Medical sector. Marmon’s Rail & Leasing and Crane Services sectors benefitted from higher railcar equipment sales, railcar fleet utilization, railcar repair services, intermodal container leasing revenue and improved crane rental demand in the U.S. and Australia.
Marmon’s pre-tax earnings increased $12 million in 2019 (1.0%) as compared to 2018. The earnings increase reflected the effects of business acquisitions, partly offset by lower gains from business divestitures. Earnings in 2019 also reflected increased earnings in sectors that experienced sales volume increases, which were substantially offset by lower earnings in the Metal Services and certain other sectors, the unfavorable impacts of foreign currency translation and increased interest and other expenses.
IMC’s revenues declined 1.3% in 2019 as compared to 2018, reflecting unfavorable foreign currency translation effects of a stronger U.S. Dollar and lower sales in several regions, including Asia and Europe, mostly offset by increased revenues from recent business acquisitions. IMC’s pre-tax earnings declined 12.8% in 2019 versus 2018, attributable to unfavorable foreign currency translation effects, changes in business mix to lower margin items and the effects of the U.S./China trade disputes.
K-50
Management’s Discussion and Analysis (Continued)
Manufacturing, Service and Retailing (Continued)
Building products
The building products group includes manufactured and site-built home construction and related lending and financial services (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).
2020 versus 2019
Revenues of the building products group increased $917 million (4.5%) in 2020 compared to 2019 and pre-tax earnings increased $222 million (8.4%) over 2019. Pre-tax earnings as percentages of revenues were 13.5% in 2020 and 13.0% in 2019.
Clayton Homes’ revenues were approximately $8.6 billion in 2020, an increase of $1.3 billion (17.1%) over 2019. The increase was primarily due to increases in home sales of $1.0 billion (18.4%), driven by increases in units sold and revenue per home sold and by changes in sales mix. Unit sales of site-built homes increased 28.6% in 2020 over 2019, while revenue per home increased slightly. Manufactured home unit sales increased 2.8% in 2020. Financial services revenues, which include mortgage services, insurance and interest income from lending activities increased 13.7% in 2020 compared to 2019, attributable to increased loan originations and average outstanding loan balances. Loan balances, net of allowances for credit losses, were approximately $17.1 billion at December 31, 2020 compared to $15.9 billion as of December 31, 2019.
Pre-tax earnings of Clayton Homes were approximately $1.25 billion in 2020, an increase of $152 million (13.9%) compared to 2019. The earnings increase reflected higher earnings from home sales, partly offset by higher materials costs, which lowered manufactured housing gross margin rates. Earnings in 2020 also benefitted from increased interest income, lower interest expense and higher earnings from mortgage services, partly offset by increased provisions for credit and insurance losses.
Aggregate revenues of our other building products businesses were approximately $12.6 billion in 2020, a decrease of 2.6% versus 2019. The revenue decrease reflected lower flooring volumes, partly attributable to the negative effects of the COVID-19 pandemic, partly offset by increased paint and coatings volumes, including volumes from a new agreement with Ace Hardware Stores, and increased volumes in residential markets.
Pre-tax earnings of the other building products businesses were approximately $1.6 billion in 2020, an increase of 4.6% over 2019. The earnings increase reflected the effects of lower average input costs, operating cost containment efforts and lower facilities closure costs.
2019 versus 2018
Revenues of the building products group in 2019 increased $1.65 billion (8.8%) compared to 2018, while pre-tax earnings increased 12.8% over 2018. Pre-tax earnings as percentages of revenues were 13.0% in 2019 and 12.5% in 2018.
Clayton Homes’ revenues were approximately $7.3 billion in 2019, an increase of $1.3 billion (21.5%) over 2018. The comparative increase was primarily due to a 26% increase in home sales, reflecting a net increase in units sold and changes in sales mix. Unit sales of site-built homes increased 84% in 2019 over 2018, primarily due to business acquisitions, while average prices declined 5%. Manufactured home unit retail sales increased 5% and wholesale sales were 9% lower in 2019. Interest income from lending activities increased 6.7% in 2019 compared to 2018, attributable to increased originations and average outstanding loan balances. Aggregate loan balances outstanding were approximately $15.9 billion at December 31, 2019 compared to $14.7 billion as of December 31, 2018.
Clayton Homes’ pre-tax earnings were $1.1 billion in 2019, an increase of $182 million (20.0%) compared to 2018. The increase was attributable to home building activities, which benefitted from the increases in home sales, and to financial services activities. Pre-tax earnings from lending and finance activities increased 12%, primarily due to an increase in interest income attributable to higher average loan balances, increased earnings from other financial services and lower credit losses, partially offset by higher interest expense, attributable to higher average borrowings and interest rates, and by higher other operating costs.
Aggregate revenues of our other building products businesses were $13.0 billion in 2019, an increase of 2.8% versus 2018. Revenues increased for paint and coatings, hard surface flooring and roofing products, attributable to a combination of increased volumes, product mix changes and increased average selling prices, while sales of brick products declined.
K-51
Management’s Discussion and Analysis (Continued)
Manufacturing, Service and Retailing (Continued)
Building products (Continued)
Pre-tax earnings of the other building products businesses were $1.5 billion in 2019, an increase of 8.2% over 2018. Earnings in 2019 benefitted from a combination of increases in selling prices in certain product categories, declining raw material costs for certain commodities and operating cost control initiatives, which were partly offset by the effects of increased facilities closure costs.
Consumer products
The consumer products group includes leisure vehicles (Forest River), several apparel and footwear operations (including Fruit of the Loom, Garan, H.H. Brown Shoe Group and Brooks Sports) and a manufacturer of high-performance alkaline batteries (Duracell). This group also includes custom picture framing products (Larson Juhl) and jewelry products (Richline).
2020 versus 2019
Consumer products revenues increased of $359 million (3.0%) in 2020 versus 2019, while pre-tax earnings increased $146 million (11.7%). Pre-tax earnings as a percentage of revenues in 2020 increased 0.9 percentage points to 11.5%.
The comparative increase in revenues reflected revenue increases from Forest River and Duracell, partially offset by lower apparel and footwear revenues. Forest River revenues increased 11.7% in 2020 compared to 2019, primarily attributable to a significant increase in recreational vehicle unit sales over the last half of the year and changes in sales mix. Unit sales in the second half of 2020 increased 31% over the second half of 2019. Revenues from Duracell increased 10.0% in 2020 compared to 2019, reflecting the effects of changes in sales mix and increased volume. Apparel and footwear revenues declined 6.1% in 2020 compared to 2019.
Apparel and footwear sales volumes in the first half of 2020, particularly in the second quarter, reflected the negative effects of the pandemic, which included retail store closures, reduced or cancelled orders and pandemic-related disruptions at certain manufacturing facilities. Sales recovered somewhat in the second half of 2020, attributable to higher consumer demand and inventory restocking by retailers. Brooks Sports revenues were higher, partly attributable to the effect of the reduced sales in 2019 that were caused by shipping delays at a new distribution facility.
The comparative increase in pre-tax earnings was primarily attributable to Forest River and Duracell, partially offset by lower earnings from apparel and footwear. The increase reflected the effects of sales volumes changes and ongoing expense management efforts.
2019 versus 2018
Consumer products revenues declined $718 million (5.7%) in 2019 versus 2018, driven by a 12.9% revenue decline from Forest River, primarily due to lower unit sales. Revenues of Duracell increased 1.3% and apparel and footwear revenues declined 1.1% compared to 2018. Although revenues from Brooks Sports increased 3.5% in 2019, its operating results were negatively affected by lost sales associated with problems encountered at a distribution center that opened in the second quarter. In addition, our other apparel and other footwear businesses continue to experience lower sales volumes for certain products, reflecting the shift by major retailers towards private label products.
Consumer products pre-tax earnings increased $43 million (3.6%) in 2019 compared to 2018. The increase was primarily attributable to continuing cost containment efforts across several of the businesses and the effects of a new Duracell product launch, partially offset by the impact of lower recreational vehicle sales at Forest River.
K-52
Management’s Discussion and Analysis (Continued)
Manufacturing, Service and Retailing (Continued)
Service and retailing
A summary of revenues and pre-tax earnings of our service and retailing businesses follows (dollars in millions).
| Percentage change | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | 2018 | 2020 vs 2019 | 2019 vs 2018 | |||||||||||||||||
| Revenues | |||||||||||||||||||||
| Service | $ | 12,346 | $ | 13,496 | $ | 13,333 | (8.5 | )% | 1.2 | % | |||||||||||
| Retailing | 15,832 | 15,991 | 15,606 | (1.0 | ) | 2.5 | |||||||||||||||
| McLane Company | 46,840 | 50,458 | 49,987 | (7.2 | ) | 0.9 | |||||||||||||||
| $ | 75,018 | $ | 79,945 | $ | 78,926 | ||||||||||||||||
| Pre-tax earnings | |||||||||||||||||||||
| Service | $ | 1,600 | $ | 1,681 | $ | 1,836 | (4.8 | )% | (8.4 | )% | |||||||||||
| Retailing | 1,028 | 874 | 860 | 17.6 | 1.6 | ||||||||||||||||
| McLane Company | 251 | 288 | 246 | (12.8 | ) | 17.1 | |||||||||||||||
| $ | 2,879 | $ | 2,843 | $ | 2,942 | ||||||||||||||||
| Pre-tax earnings as a percentage of revenues | |||||||||||||||||||||
| Service | 13.0 | % | 12.5 | % | 13.8 | % | |||||||||||||||
| Retailing | 6.5 | % | 5.5 | % | 5.5 | % | |||||||||||||||
| McLane Company | 0.5 | % | 0.6 | % | 0.5 | % |
Service
Our service business group offers shared ownership programs for general aviation aircraft (NetJets) and high technology training products and services 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) and the operation of a television station in Miami, Florida (WPLG).
2020 versus 2019
Service group revenues declined $1.15 billion (8.5%) in 2020 compared to 2019 and pre-tax earnings decreased $81 million (4.8%). Pre-tax earnings of the group as a percentage of revenues were 13.0% in 2020 compared to 12.5% in 2019.
The aggregate revenues of NetJets and FlightSafety in 2020 declined $816 million (13.5%) compared to 2019, reflecting lower demand for air travel and aviation services attributable to the COVID-19 pandemic. NetJets experienced a decline in flight hours of 27% and FlightSafety’s commercial and corporate simulator training hours declined 30% from 2019. The comparative service group revenue decline was also attributable to the effects of the disposition of the newspaper operations in March of 2020 and lower revenues from CORT, which was driven by lower demand attributable to the effects of the pandemic. Partially offsetting these declines were revenue increases at TTI and at WPLG.
The decline in earnings reflected lower earnings from NetJets, TTI and CORT and from the effects of the divestiture of the newspaper operations, partly offset by higher earnings from XTRA, Business Wire, WPLG and FlightSafety. TTI’s earnings decline reflected lower average gross margin rates, attributable to product mix changes and sales price pressures deriving from ample inventory availability. The decline at NetJets was primarily attributable to increased asset impairment charges and restructuring costs, partly offset by lower general and administrative expenses and a slight net increase in margins. The decline at CORT was driven by lower revenues, partly offset by the effects of cost control initiatives. The increase at FlightSafety was attributable to the effects of contract losses recorded in 2019 with respect to an existing government contract and cost control efforts in 2020, which more than offset significantly lower earnings from commercial and corporate training services.
K-53
Management’s Discussion and Analysis (Continued)
Manufacturing, Service and Retailing (Continued)
Service (Continued)
2019 versus 2018
Service group revenues increased $163 million (1.2%) in 2019 compared to 2018, primarily attributable to increased sales at TTI and higher aviation-related services revenues (NetJets and FlightSafety), partially offset by decreases from the media businesses and Charter Brokerage. TTI’s sales increased 2% in 2019 compared to the exceptionally high sales levels in 2018. TTI’s sales slowed throughout 2019, attributable to softening customer demand, lower average selling prices and the effects of U.S. trade tariffs. The increase in NetJets’ revenues in 2019 reflected increased lease revenue, primarily attributable to an increase in aircraft on lease, and increased flight hours, partly offset by lower revenue from prepaid flight cards. The revenue decline at Charter Brokerage was attributable to the divesture of a high revenue, low margin business in mid-2019.
Pre-tax earnings of the service group decreased $155 million (8.4%) compared to 2018. The comparative earnings decline was primarily due to lower earnings from TTI and FlightSafety, partly offset by higher earnings from NetJets. TTI’s earnings decline was primarily attributable to lower gross margins, unfavorable foreign currency translation effects and higher operating expenses. The earnings decline at FlightSafety was attributable to pre-tax losses of approximately $165 million recorded in the fourth quarter of 2019 in connection with an existing government contract, partly offset by lower training equipment impairment charges. Earnings from NetJets increased in 2019, primarily attributable to increased revenues and improved fleet and operating efficiencies, which improved operating margins.
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 and represented 62.6% of our combined retailing revenue in 2020. BHA also operates two insurance businesses, two auto auctions and an automotive fluid maintenance products distributor. Our retailing businesses also include four home furnishings retailing businesses (Nebraska Furniture Mart, R.C. Willey, Star Furniture and Jordan’s), which sell furniture, appliances, flooring and electronics and represented 20.6% of the combined retailing revenues in 2020.
Other retailing businesses include three jewelry retailing 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 retailer of motorcycle accessories based in Germany.
2020 versus 2019
Retailing group revenues in 2020 declined $159 million (1.0%) compared to 2019. The spread of COVID-19 throughout the U.S. resulted in the temporary closures or restricted operations at several of our retailing businesses and effected consumer spending patterns during 2020. The severity and duration of the effects from the pandemic varied widely at our retail operations.
BHA’s revenues decreased 2.9% in 2020 compared to 2019. BHA’s revenues in 2020 reflected decreases in new and pre-owned vehicle sales of 2.6% as well as lower vehicle service and repair revenues. Home furnishings revenues were essentially unchanged in 2020 compared to 2019. The group experienced lower revenues in the first half of 2020, attributable to restricted store hours, which were substantially offset by increased revenues over the second half of the year. However, supply chain disruptions had a negative effect on obtaining product at certain times, which negatively affected sales levels.
The effects of the pandemic contributed to significantly lower sales in 2020 for our jewelry stores, See’s Candy and Oriental Trading Company, which were more than offset by significant revenue increases from Pampered Chef and Louis. Sales volumes generally increased and operating results improved beginning in the latter part of the second quarter as our operations slowly reopened.
K-54
Management’s Discussion and Analysis (Continued)
Manufacturing, Service and Retailing (Continued)
Retailing (Continued)
Retail group pre-tax earnings increased $154 million (17.6%) in 2020 from 2019. BHA’s pre-tax earnings increased 37.7%, primarily due to lower selling, general and administrative expenses, lower floorplan interest expense and higher average gross sales margin rates. Aggregate pre-tax earnings for the remainder of our retailing group increased 1.1% in 2020 compared to 2019, reflecting higher earnings from the home furnishings businesses and from Pampered Chef, which were substantially offset by lower earnings from our other retailing operations.
Home furnishings group pre-tax earnings increased $79 million (36%) in 2020 versus 2019, reflecting generally higher average gross margin rates, sales mix changes and fewer sales promotions, and from lower advertising and other operating expenses. Certain of our other operations, including Pampered Chef and Louis experienced significant earnings increases in 2020, while others, including See’s Candy and Oriental Trading Company, experienced significant declines driven by the negative effects of the pandemic.
2019 versus 2018
Retailing group revenues increased $385 million (2.5%) in 2019 compared to 2018. BHA’s revenues increased 4.1% in 2019 over 2018, primarily attributable to an 11.5% increase in pre-owned vehicle sales, vehicle pricing increases, improvement in vehicle finance and service contract activities and vehicle repair work as compared to 2018. New vehicle sales in 2019 were relatively unchanged from 2018. Home furnishings group revenues declined 1.3% in 2019 compared to 2018, as sales were relatively unchanged or lower in each of our home furnishings operations.
Retail group pre-tax earnings increased $14 million (1.6%) in 2019 over 2018. BHA’s pre-tax earnings increased 22.7%, primarily due to the increases in earnings from finance and service contract activities, partly offset by higher floorplan interest expense. Home furnishings group pre-tax earnings declined 14.7% versus 2018, reflecting the decline in revenues and generally higher operating expenses.
McLane Company
McLane operates a wholesale distribution business that provides grocery and non-food consumer products to retailers and convenience stores (“grocery”) and to restaurants (“foodservice”). McLane also operates businesses that are wholesale distributors of distilled spirits, wine and beer (“beverage”). The grocery and foodservice 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 about two-thirds of McLane’s consolidated sales in 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.
2020 versus 2019
Revenues declined $3.6 billion (7.2%) in 2020 compared to 2019. The decline was attributable to COVID-19 related restaurant closures (particularly in the casual dining category) in the foodservice business and lower sales in certain product categories within the grocery business. McLane operates on a 52/53-week fiscal year and 2020 included 52 weeks compared to 53 weeks in 2019. Otherwise, revenues declined 5.2% in the grocery business and 7.7% in the foodservice business in 2020 as compared to 2019.
Pre-tax earnings decreased $37 million (12.8%) in 2020 as compared to 2019. The earnings decrease included the effects of increased LIFO inventory reserves of $22 million, credit and inventory losses of $12 million in the foodservice operations and the impact of lower sales. McLane continues to operate in an intensely competitive business environment, which is negatively affecting its current operating results. We expect that these operating conditions will continue.
2019 versus 2018
Revenues increased $471 million (0.9%) in 2019 compared to 2018. McLane’s results in 2019 included 53 weeks compared to 52 weeks in 2018. Otherwise, revenues decreased roughly 3% in the grocery business and increased 3% in the foodservice business in 2019 as compared to 2018. Pre-tax earnings increased $42 million (17.1%) as compared to 2018. The earnings increase in 2019 reflected an increase in average gross margin rates and changes in business mix, partly offset by increased operating expenses, the largest portion of which was employee costs.
K-55
Management’s Discussion and Analysis (Continued)
Investment and Derivative Gains (Losses)
A summary of investment and derivative gains and losses follows (dollars in millions).
| 2020 | 2019 | 2018 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Investment gains (losses) | $ | 40,905 | $ | 71,123 | $ | (22,155 | ) | |||||
| Derivative gains (losses) | (159 | ) | 1,484 | (300 | ) | |||||||
| Gains (losses) before income taxes and noncontrolling interests | 40,746 | 72,607 | (22,455 | ) | ||||||||
| Income taxes and noncontrolling interests | 9,155 | 15,162 | (4,718 | ) | ||||||||
| Net gains (losses) | $ | 31,591 | $ | 57,445 | $ | (17,737 | ) | |||||
| Effective income tax rate | 21.7 | % | 20.9 | % | 20.8 | % |
Investment gains (losses)
We are required to include the unrealized gains and losses arising from changes in market prices of investments in equity securities in earnings, which significantly increases 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 gains included net unrealized gains of approximately $55.0 billion in 2020 attributable to changes in market prices of equity securities we held at December 31, 2020 and net losses of approximately $14.0 billion from changes in market prices during 2020 on securities sold during 2020. We recorded pre-tax unrealized investment gains of approximately $69.6 billion in 2019 attributable to changes in market prices in 2019 on equity securities we held at December 31, 2019. Pre-tax unrealized investment losses of approximately $22.7 billion were recorded in 2018 attributable to market price changes in 2018 on equity securities we held at December 31, 2018. Taxable investment gains on equity securities sold, which is the difference between sales proceeds and the original cost basis of the securities sold, were $6.2 billion in 2020, $3.2 billion in 2019 and $3.3 billion in 2018.
We believe that investment gains/losses, whether realized from sales or unrealized from changes in market prices, are often meaningless in terms of understanding our reported consolidated earnings or evaluating our periodic economic performance. We continue to believe the investment gains/losses recorded in earnings, including the changes in market prices for equity securities, in any given period has little analytical or predictive value.
Derivative gains (losses)
Derivative contract gains/losses include the changes in fair value of our equity index put option contract liabilities, 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, primarily due to the volatility of underlying equity markets. As of December 31, 2020, the intrinsic value of our equity index put option contracts was $727 million and our recorded liability at fair value was approximately $1.1 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.
Equity index put option contracts produced pre-tax losses of $159 million in 2020, pre-tax gains of $1.5 billion in 2019 and pre-tax losses of $300 million in 2018. These gains and losses reflected changes in the equity index values and shorter remaining contract durations. Settlement payments to counterparties were relatively insignificant in each of the three years.
Other
A summary of after-tax other earnings/losses follows (in millions).
| 2020 | 2019 | 2018 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity method earnings (losses) | $ | 665 | $ | 1,023 | $ | (1,419 | ) | |||||
| Acquisition accounting expenses | (783 | ) | (788 | ) | (831 | ) | ||||||
| Goodwill and intangible asset impairments | (10,381 | ) | (96 | ) | (280 | ) | ||||||
| Corporate interest expense, before foreign currency effects | (334 | ) | (280 | ) | (311 | ) | ||||||
| Foreign currency exchange rate gains (losses) on Berkshire and BHFC non-U.S. Dollar senior notes | (764 | ) | 58 | 289 | ||||||||
| Income tax expense adjustments | (60 | ) | (377 | ) | — | |||||||
| Other, principally corporate investment income | 339 | 884 | 986 | |||||||||
| $ | (11,318 | ) | $ | 424 | $ | (1,566 | ) |
K-56
Management’s Discussion and Analysis (Continued)
Other (Continued)
After-tax equity method earnings (losses) include our proportionate share of earnings attributable to our investments in Kraft Heinz, Pilot, Berkadia and Electric Transmission of Texas. Our after-tax earnings from Kraft Heinz were $170 million in 2020 and $488 million in 2019 and our after-tax losses were $1,859 million in 2018. Our earnings from Kraft Heinz included our after-tax share of goodwill and other intangible asset impairment charges recorded by Kraft Heinz in each year. Our after-tax share of such charges was $611 million in 2020, $339 million in 2019 and approximately $2.7 billion in 2018.
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. Goodwill and intangible asset impairments in 2020 included after-tax charges of $9.8 billion attributable to impairments of goodwill and certain identifiable intangible assets that were recorded in connection with our acquisition of PCC in 2016. See Critical Accounting Policies on page K-63 for additional details.
Foreign currency exchange rate gains and losses pertain to Berkshire’s outstanding Euro denominated debt (€6.85 billion par) and Japanese Yen denominated debt (¥625.5 billion par), and BHFC’s Great Britain Pound denominated debt (£1.75 billion par). Changes in foreign currency exchange rates produced 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 to the magnitude of the borrowings and the inherent volatility in foreign currency exchange rates.
The income tax expense adjustments relate to investments that were made between 2015 and 2018 in certain tax equity investment funds. Our investments in these funds aggregated approximately $340 million. In December 2018, we first learned of allegations by federal authorities of fraudulent conduct by the sponsor of these funds. 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 that it is more likely than not that the previously recognized income tax benefits were not valid.
Financial Condition
Our consolidated balance sheet continues to reflect very significant liquidity and a very strong capital base. Consolidated shareholders’ equity at December 31, 2020 was $443.2 billion, an increase of $18.4 billion since December 31, 2019, which was net of common stock repurchases of $24.7 billion. Net earnings attributable to Berkshire shareholders was $42.5 billion and included after-tax gains on our investments of approximately $31.7 billion. During each of the last three years, changes in the market prices of our investments in equity securities produced exceptional volatility in our earnings. Our results in 2020 also included after-tax goodwill and other intangible asset impairments charges of $11.0 billion.
At December 31, 2020, our insurance and other businesses held cash, cash equivalents and U.S. Treasury Bills of $135.0 billion, which included $112.8 billion in U.S. Treasury Bills. Investments in equity and fixed maturity securities (excluding our investment in Kraft Heinz) were $301.6 billion.
Berkshire parent company debt outstanding at December 31, 2020 was $22.7 billion, an increase of $2.8 billion since December 31, 2019. In 2020, Berkshire repaid maturing senior notes of €1.0 billion and issued €1.0 billion of 0.0% senior notes due in 2025. Berkshire also issued ¥195.5 billion of senior notes (approximately $1.8 billion) with a weighted average interest rate of 1.07% and maturity dates ranging from 2023 to 2060. In the first quarter of 2021, senior notes of $1.7 billion will mature, including $665 million (€550 million) that matured in January. In January 2021, Berkshire issued €600 million of 0.5% senior notes due in 2041.
Berkshire’s insurance and other subsidiary outstanding borrowings were approximately $18.9 billion at December 31, 2020, which included senior note borrowings of BHFC, a wholly-owned financing subsidiary, of approximately $13.1 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 railcar leasing business. In 2020, BHFC repaid $900 million of maturing senior notes and issued $3.0 billion of senior notes with maturity dates ranging from 2030 to 2050 and a weighted average interest rate of 2.3%. Berkshire guarantees the full and timely payment of principal and interest with respect to BHFC’s senior notes. In January 2021, $750 million of BHFC debt matured and BHFC issued $750 million of 2.5% senior notes due in 2051.
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 were $9.8 billion in 2020 and we forecast a similar amount of capital expenditures in 2021.
K-57
Management’s Discussion and Analysis (Continued)
Financial Condition (Continued)
BNSF’s outstanding debt was $23.2 billion as of December 31, 2020. In 2020, BNSF issued $575 million of 3.05% senior unsecured debentures due in 2051. Outstanding borrowings of BHE and its subsidiaries were $52.2 billion at December 31, 2020, an increase of $9.6 billion since December 31, 2019. In 2020, BHE and its subsidiaries issued new term debt of approximately $7.6 billion with maturity dates ranging from 2025 to 2062 and repaid approximately $3.2 billion of debt. BHE also assumed $5.6 billion in debt in connection with the business acquired from Dominion Energy in November 2020. 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 as amended permits 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 2020, Berkshire paid $24.7 billion to repurchase shares of its Class A and B common stock.
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, such as certain purchase obligations, are not currently reflected in the financial statements and will be recognized in future periods as the goods are delivered or services are provided. The timing and amount of the payments under 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.
A summary of our contractual obligations as of December 31, 2020 follows (in millions). Actual payments will likely vary, perhaps significantly, from estimates reflected in the table.
| Estimated payments due by period | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Total | 2021 | 2022-2023 | 2024-2025 | After 2025 | ||||||||||||||||
| Notes payable and other borrowings, including interest | $ | 182,004 | $ | 13,456 | $ | 23,393 | $ | 19,596 | $ | 125,559 | ||||||||||
| Operating leases | 6,318 | 1,342 | 2,016 | 1,269 | 1,691 | |||||||||||||||
| Purchase obligations (1) | 48,413 | 14,552 | 7,947 | 5,939 | 19,975 | |||||||||||||||
| Unpaid losses and loss adjustment expenses (2) | 120,820 | 27,617 | 28,623 | 16,144 | 48,436 | |||||||||||||||
| Life, annuity and health insurance benefits (3) | 36,920 | 2,623 | 269 | 540 | 33,488 | |||||||||||||||
| Other | 26,524 | 3,136 | 7,762 | 1,684 | 13,942 | |||||||||||||||
| Total | $ | 420,999 | $ | 62,726 | $ | 70,010 | $ | 45,172 | $ | 243,091 |
| (1) | Primarily related to fuel, capacity, transmission and maintenance contracts and capital expenditure commitments of BHE and BNSF and aircraft purchase commitments of NetJets. |
|---|
| (2) | Includes unpaid losses and loss adjustment expenses under retroactive reinsurance contracts. |
|---|
| (3) | Amounts represent estimated undiscounted benefits, net of estimated future premiums, as applicable. |
|---|
K-58
Management’s Discussion and Analysis (Continued)
Critical Accounting Policies
Certain accounting policies require us to make estimates and judgments in determining the amounts reflected in the Consolidated Financial Statements. Such estimates and judgments necessarily involve varying, and possibly significant, degrees of uncertainty. Accordingly, certain amounts currently recorded in the financial statements will likely be adjusted in the future based on new available information and changes in other facts and circumstances. A discussion of our principal accounting policies that required the application of significant judgments as of December 31, 2020 follows.
Property and casualty insurance unpaid losses
We record liabilities for unpaid losses and loss adjustment expenses (also referred to as “gross unpaid losses” or “claim liabilities”) based upon estimates of the ultimate amounts payable for losses occurring on or before the balance sheet date. The timing and amount of ultimate loss payments are contingent upon, among other things, the timing of claim reporting from insureds and ceding companies and the final determination of the loss amount through the loss adjustment process. We use a variety of techniques in establishing claim liabilities and all techniques require significant judgments and assumptions.
As of the balance sheet date, recorded claim liabilities include liabilities for reported claims and for claims not yet reported. The period between the loss occurrence date and loss settlement date is the “claim-tail.” Property claims usually have relatively short claim-tails, absent litigation. Casualty claims usually have longer claim-tails, occasionally extending for decades. Casualty claims may be more susceptible to litigation and the impact of changing contract interpretations. The legal environment and judicial process further contribute to extending claim-tails.
Our consolidated claim liabilities as of December 31, 2020 were approximately $120.8 billion (including liabilities from retroactive reinsurance), of which 83% related to GEICO and the Berkshire Hathaway Reinsurance Group. Additional information regarding significant uncertainties inherent in the processes and techniques for estimating unpaid losses of these businesses follows.
GEICO
GEICO predominantly writes private passenger auto insurance. As of December 31, 2020, GEICO’s gross unpaid losses were $22.9 billion and claim liabilities, net of reinsurance recoverable, were $21.8 billion.
GEICO’s claim reserving methodologies produce liability estimates based upon the individual claims. The key assumptions affecting our liability estimates include projections of ultimate claim counts (“frequency”) and average loss per claim (“severity”). We utilize a combination of several actuarial estimation methods, including Bornhuetter-Ferguson and chain-ladder methodologies.
Claim liability estimates for automobile liability coverages (such as bodily injury (“BI”), uninsured motorists, and personal injury protection) are more uncertain due to the longer claim-tails, so we establish additional case development estimates. As of December 31, 2020, case development liabilities averaged approximately 33% of the case reserves. We select case development factors through analysis of the overall adequacy of historical case liabilities.
Incurred-but-not-reported (“IBNR”) claim liabilities are based on projections of the ultimate number of claims expected (reported and unreported) for each significant coverage. We use historical claim count data to develop age-to-age projections of the ultimate counts by quarterly accident period, from which we deduct reported claims to produce the number of unreported claims. We estimate the average costs per unreported claim and apply such estimates to the unreported claim counts, producing an IBNR liability estimate. We may record additional IBNR estimates when actuarial techniques are difficult to apply.
We test the adequacy of the aggregate claim liabilities using one or more actuarial projections based on claim closure models and paid and incurred loss triangles. Each type of projection analyzes loss occurrence data for claims occurring in a given period and projects the ultimate cost.
Our claim liability estimates recorded at the end of 2019 were reduced by $253 million during 2020, which produced a corresponding increase to pre-tax earnings. The assumptions used to estimate liabilities at December 31, 2020 reflect the most recent frequency and severity results. Future development of recorded liabilities will depend on whether actual frequency and severity of claims are more or less than anticipated.
K-59
Management’s Discussion and Analysis (Continued)
Property and casualty losses (Continued)
GEICO (Continued)
With respect to liabilities for BI claims, we believe it is reasonably possible that average severities will change by at least one percentage point from the severities used in establishing the recorded liabilities at December 31, 2020. We estimate that a one percentage point increase or decrease in BI severities would produce a $300 million increase or decrease in recorded liabilities, with a corresponding decrease or increase in pre-tax earnings. Many of the economic forces that would likely cause BI severity to differ from expectations would likely also cause severities for other injury coverages to differ in the same direction.
Berkshire Hathaway Reinsurance Group
BHRG’s liabilities for unpaid losses and loss adjustment expenses derive primarily from reinsurance contracts issued through NICO and General Re. A summary of BHRG’s property and casualty unpaid losses and loss adjustment expenses, other than retroactive reinsurance losses and loss adjustment expenses, as of December 31, 2020 follows (in millions).
| Property | Casualty | Total | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Reported case liabilities | $ | 5,714 | $ | 9,497 | $ | 15,211 | ||||||
| IBNR liabilities | 5,821 | 14,615 | 20,436 | |||||||||
| Gross unpaid losses and loss adjustment expenses | 11,535 | 24,112 | 35,647 | |||||||||
| Reinsurance recoverable | 181 | 864 | 1,045 | |||||||||
| Net unpaid losses and loss adjustment expenses | $ | 11,354 | $ | 23,248 | $ | 34,602 |
Gross unpaid losses and loss adjustment expenses consist primarily of traditional property and casualty coverages written primarily under excess-of-loss and quota-share treaties. Under certain contracts, coverage can apply to multiple lines of business written and the ceding company may not report loss data by such lines consistently, if at all. In those instances, we allocate losses to property and casualty coverages based on internal estimates.
In connection with reinsurance contracts, the nature, extent, timing and perceived reliability of loss information received from ceding companies varies widely depending on the type of coverage and the contractual reporting terms. Contract terms, conditions and coverages also tend to lack standardization and may evolve more rapidly than primary insurance policies.
The nature and extent of loss information provided under many facultative (individual risk) or per occurrence excess contracts may be comparable to the information received under a primary insurance contract. However, loss information is often less detailed with respect to aggregate excess-of-loss and quota-share contracts and is often in a summary format rather than on an individual claim basis. Loss data includes recoverable paid losses, as well as case loss estimates. Ceding companies infrequently provide reliable IBNR estimates to reinsurers.
Loss reporting to reinsurers is typically slower in comparison to primary insurers. In the U.S., such reporting is generally required at quarterly intervals ranging from 30 to 90 days after the end of the quarterly period, while outside of the U.S., reinsurance reporting practices may vary further. In certain countries, clients report annually from 90 to 180 days after the end of the annual period. Reinsurers may assume and cede underlying risks from other reinsurers, which may further delay the reporting of claims. The relative impact of reporting delays on the reinsurer may vary depending on the type of coverage, contractual reporting terms, the magnitude of the claim relative to the attachment point of the reinsurance coverage, and for other reasons.
As reinsurers, the premium and loss data we receive is at least one level removed from the underlying claimant, so there is a risk that the loss data reported is incomplete, inaccurate or the claim is outside the coverage terms. We maintain certain internal procedures in order to determine that the information is complete and in compliance with the contract terms. Generally, our reinsurance contracts permit us to access the ceding company’s records with respect to the subject business, thus providing the ability to audit the reported information. In the normal course of business, disputes occasionally arise concerning whether claims are covered by our reinsurance policies. We resolve most coverage disputes through negotiation with the client. If disputes cannot be resolved, our contracts generally provide arbitration or alternative dispute resolution processes. There are no coverage disputes at this time for which an adverse resolution would likely have a material impact on our consolidated results of operations or financial condition.
K-60
Management’s Discussion and Analysis (Continued)
Property and casualty losses (Continued)
Berkshire Hathaway Reinsurance Group (Continued)
Establishing claim liability estimates for reinsurance requires evaluation of loss information received from our clients. We generally rely on the ceding companies reported case loss estimates. We independently evaluate certain reported case losses and if appropriate, we use our own case liability estimate. For instance, as of December 31, 2020, our case loss estimates exceeded ceding company estimates by approximately $800 million for certain legacy workers’ compensation claims occurring over 10 years ago. We also periodically conduct detailed reviews of individual client claims, which may cause us to adjust our case estimates.
Although liabilities for losses are initially determined based on pricing and underwriting analysis, BHRG uses a variety of actuarial methodologies that place reliance on the extrapolation of actual historical data, loss development patterns, industry data and other benchmarks, as appropriate. The estimate of the required IBNR liabilities also requires judgment by actuaries and management to reflect the impact of additional factors like change in business mix, volume, claim reporting and handling practices, inflation, social and legal environment and the terms and conditions of the contracts. The methodologies generally fall into one of the following categories or are hybrids of one or more of the following categories:
Paid and incurred loss development methods – these methods consider expected case loss emergence and development patterns, together with expected loss ratios by year. Factors affecting our loss development analysis include, but are not limited to, changes in the following: client claims reporting and settlement practices; the frequency of client company claim reviews; policy terms and coverage (such as loss retention levels and occurrence and aggregate policy limits); loss trends; and legal trends that result in unanticipated losses. Collectively, these factors influence our selections of expected case loss emergence patterns.
Incurred and paid loss Bornhuetter-Ferguson methods – these methods consider actual paid and incurred losses and expected patterns of paid and incurred losses, taking the initial expected ultimate losses into account to determine an estimate of the expected unpaid or unreported losses.
Frequency and severity methods – these methods commonly focus on a review of the number of anticipated claims and the anticipated claims severity and may also rely on development patterns to derive such estimates. However, our processes and techniques for estimating liabilities in such analyses generally rely more on a per-policy assessment of the ultimate cost associated with the individual loss rather than with an analysis of historical development patterns of past losses.
Additional Analysis – in some cases we have established reinsurance claim liabilities on a contract-by-contract basis, determined from case loss estimates reported by the ceding company and IBNR liabilities that are primarily a function of an anticipated loss ratio for the contract and the reported case loss estimate. Liabilities are adjusted upward or downward over time to reflect case losses reported versus expected case losses, which we use to form revised judgement on the adequacy of the expected loss ratio and the level of IBNR liabilities required for unreported claims. Anticipated loss ratios are also revised to include estimates of known major catastrophe events.
Our claim liability estimation process for short-tail lines, primarily property exposures, utilizes a combination of the paid and incurred loss development methods and the incurred and paid loss Bornhuetter-Ferguson methods. Certain catastrophe, individual risk and aviation excess-of-loss contracts tend to generate low frequency/high severity losses. Our processes and techniques for estimating liabilities under such contracts generally rely more on a per contract assessment of the ultimate cost associated with the individual loss event rather than with an analysis of the historical development patterns of past losses.
For our long-tail lines, primarily casualty exposures, we may rely on different methods depending on the maturity of the business, with estimates for the most recent years being based on priced loss expectations and more mature years reflecting the paid or incurred development pattern indications.
In 2020, certain workers’ compensation claims reported losses were less than expected. As a result, we reduced estimated ultimate losses for prior years’ loss events by $160 million. We estimate that increases of ten percent in the tail of the expected loss emergence pattern and in the expected loss ratios would produce a net increase of approximately $1.1 billion in IBNR liabilities, producing a corresponding decrease in pre-tax earnings. We believe it is reasonably possible for these assumptions to increase at these rates.
K-61
Management’s Discussion and Analysis (Continued)
Property and casualty losses (Continued)
Berkshire Hathaway Reinsurance Group (Continued)
For other casualty losses, excluding asbestos, environmental, and other latent injury claims, the overall change in estimates for prior years’ events was not significant in 2020. However, the potential for significant changes in future periods remains. For certain significant casualty and general liability portfolios, we estimate that increases of five percent in the claim-tails of the expected loss emergence patterns and in the expected loss ratios would produce a net increase in our nominal IBNR liabilities and a corresponding reduction in pre-tax earnings of approximately $900 million, although outcomes of greater than or less than $900 million are possible given the diversification in worldwide business.
Estimated ultimate liabilities for asbestos, environmental and other latent injury claims, excluding amounts assumed under retroactive reinsurance contracts increased $468 million in 2020, which produced a corresponding reduction in pre-tax earnings. Net liabilities for such claims were approximately $2.1 billion at December 31, 2020. Loss estimations for these exposures are difficult to determine due to the changing legal environment and increases may be required in the future if new exposures or claimants are identified, new claims are reported or new theories of liability emerge.
Retroactive reinsurance
Our retroactive reinsurance contracts cover loss events occurring before the contract inception dates. Claim liabilities relating to our retroactive reinsurance contracts are predominately related to casualty or liability exposures. We expect the claim-tails to be very long. As of December 31, 2020, gross unpaid losses were $41.0 billion and deferred charge assets were $12.4 billion.
Our contracts are generally subject to maximum limits of indemnifications and, as such, we currently expect that maximum remaining gross losses payable under our retroactive policies will not exceed $56 billion. Absent significant judicial or legislative changes affecting asbestos, environmental or latent injury exposures, we also currently believe it unlikely that losses will develop upward to the maximum losses payable or downward by more than 15% of our estimated gross liability.
We establish liability estimates by individual contract, considering exposure and development trends. In establishing our liability estimates, we often analyze historical aggregate loss payment patterns and project expected ultimate losses under various scenarios. We assign judgmental probability factors to these scenarios and an expected outcome is determined. We then monitor subsequent loss payment activity and review ceding company reports and other available information concerning the underlying losses. We re-estimate the expected ultimate losses when significant events or significant deviations from expected results are revealed.
Certain of our retroactive reinsurance contracts include asbestos, environmental and other latent injury claims. Our estimated liabilities for such claims were approximately $12.5 billion at December 31, 2020. We do not consistently receive reliable detailed data regarding asbestos, environmental and latent injury claims from all ceding companies, particularly with respect to multi-line or aggregate excess-of-loss policies. When possible, we conduct a detailed analysis of the underlying loss data to make an estimate of ultimate reinsured losses. When detailed loss information is unavailable, we develop estimates by applying recent industry trends and projections to aggregate client data. Judgments in these areas necessarily consider the stability of the legal and regulatory environment under which we expect claims will be adjudicated. Legal reform and legislation could also have a significant impact on our ultimate liabilities.
We reduced estimated ultimate liabilities for prior years’ retroactive reinsurance contracts by $399 million in 2020, which after the changes in related deferred charge assets, resulted in pre-tax earnings of $230 million. In 2020, we paid losses and loss adjustment expenses of $1.1 billion with respect to these contracts.
K-62
Management’s Discussion and Analysis (Continued)
Property and casualty losses (Continued)
Retroactive reinsurance (Continued)
In connection with our retroactive reinsurance contracts, we also record deferred charge assets, which at contract inception represents the excess, if any, of the estimated ultimate liability for unpaid losses over premiums received. We amortize deferred charge assets, which produces charges to pre-tax earnings in future periods based on the expected timing and amount of loss payments. We also adjust deferred charge balances due to changes in the expected timing and ultimate amount of claim payments. Significant changes in such estimates may have a significant effect on unamortized deferred charge balances and the amount of periodic amortization. Based on the contracts in effect as of December 31, 2020, we currently estimate that amortization expense in 2021 will approximate $1.1 billion.
Other Critical Accounting Policies
Our Consolidated Balance Sheet at December 31, 2020 includes goodwill of acquired businesses of $73.7 billion and other indefinite-lived intangible assets of $18.3 billion. We evaluate these assets for impairment annually in the fourth quarter and on an interim basis if the facts and circumstances lead us to believe that more-likely-not there has been an impairment.
Goodwill and indefinite-lived intangible asset impairment reviews include determining the estimated fair values of our reporting units and intangible 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 by management is required in estimating the fair value of a reporting unit and in performing impairment reviews. Due to the inherent subjectivity and uncertainty in forecasting future cash flows and earnings over long periods of time, actual results may vary materially from the forecasts. If the carrying value of the indefinite-lived intangible asset exceeds fair value, the excess is charged to earnings as an impairment loss. If the carrying value of a reporting unit exceeds the estimated fair value of the reporting unit, then the excess, limited to the carrying amount of goodwill, will be charged to earnings as an impairment loss.
In response to the adverse effects of the COVID-19 pandemic, we considered whether goodwill needed to be reevaluated for impairment during the second quarter of 2020. We determined it was necessary to quantitively reevaluate goodwill for impairment for certain reporting units, and most significantly for PCC. As a result of our reviews, we recorded pre-tax goodwill impairment charges of $10.0 billion and indefinite-lived intangible asset impairment charges of $638 million of which approximately $10 billion related to PCC.
Prior to the reevaluation, the carrying value of goodwill related to PCC was approximately $17 billion. Additionally, the carrying value of PCC’s indefinite-lived intangible assets was approximately $14 billion. Substantially all of these amounts were recorded in connection with Berkshire’s acquisition of PCC in 2016. The effects of the COVID-19 pandemic on commercial airlines and aircraft manufacturers is particularly severe. We considered a number of factors in our reevaluation, including but not limited to the announcements by airlines concerning potential future demand, employment levels and aircraft orders, announcements by manufacturers on reduced aircraft production, and the actions we are taking or may take to restructure our operations to fit lower expected demand. In our judgment, the timing and extent of the recovery in the commercial airline and aerospace industries may be dependent on the development and wide-scale distribution of medicines and vaccines that effectively treat the virus. Consequently, we deemed it prudent under the prevailing circumstances to increase discount rates and reduce prior long-term forecasts of future cash flows for purposes of reviewing for impairments.
As of December 31, 2020, we concluded it is more likely than not that goodwill recorded in our Consolidated Balance Sheet was not impaired. Making estimates of the fair value of reporting units at this time is and will likely be 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. Consequently, any fair value estimates in such instances can be subject to wide variations. The effects of the COVID-19 pandemic could prove to be worse than we currently estimate and could lead us to record additional goodwill or indefinite-lived intangible asset impairment charges in 2021.
We primarily use discounted projected future earnings or cash flow methods in determining fair values. The key assumptions and inputs used in such methods may include forecasting revenues and expenses, cash flows and capital expenditures, as well as an appropriate discount rate and other inputs. A significant amount of judgment is required in estimating the fair value of a reporting unit and in performing goodwill impairment tests.
K-63
Management’s Discussion and Analysis (Continued)
Market Risk Disclosures
Our Consolidated Balance Sheets include substantial amounts of assets and liabilities whose fair values are subject to market risks. Our significant market risks are primarily associated with equity prices, interest rates, foreign currency exchange rates and commodity prices. The fair values of our investment portfolios and equity index put option contracts remain subject to considerable volatility. The following sections address the significant market risks associated with our business activities.
Equity Price Risk
Equity securities represent a significant portion of our investment portfolio. Strategically, we strive to invest in businesses that possess excellent economics and able and honest management, and we prefer to invest a meaningful amount in each investee. Historically, equity investments have been concentrated in relatively few issuers. At December 31, 2020, approximately 68% of the total fair value of equity securities was concentrated in four issuers.
We often hold our equity investments for long periods and short-term price volatility has occurred in the past and will occur in the future. We also strive to maintain significant levels of shareholder capital and ample liquidity to provide a margin of safety against short-term price volatility.
We are also subject to equity price risk with respect to our equity index put option contracts. Our ultimate liability with respect to these contracts is determined from the movement of the underlying stock index between the contract inception date and expiration date. The fair values of our liabilities arising from these contracts are also affected by changes in other factors such as interest rates and the remaining duration of the contracts.
The following table summarizes our equity securities and derivative contract liabilities with significant equity price risk as of December 31, 2020 and 2019 and the estimated effects of a hypothetical 30% increase and a 30% decrease in market prices as of those dates. The selected 30% hypothetical increase and decrease does not reflect the best or worst case scenario. Indeed, results from declines could be far worse due both to the nature of equity markets and the aforementioned concentrations existing in our equity investment portfolio. Dollar amounts are in millions.
| Fair Value | Hypothetical Price Change | Estimated Fair Value after Hypothetical Change in Prices | Estimated Increase (Decrease) in Net Earnings (1) | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, 2020 | ||||||||||||||
| Investments in equity securities | $ | 281,170 | 30% increase | $ | 362,830 | $ | 63,321 | |||||||
| 30% decrease | 199,547 | (63,293 | ) | |||||||||||
| Equity index put option contract liabilities | 1,065 | 30% increase | 257 | 638 | ||||||||||
| 30% decrease | 2,702 | (1,293 | ) | |||||||||||
| December 31, 2019 | ||||||||||||||
| Investments in equity securities | $ | 248,027 | 30% increase | $ | 319,445 | $ | 56,493 | |||||||
| 30% decrease | 176,749 | (56,382 | ) | |||||||||||
| Equity index put option contract liabilities | 968 | 30% increase | 267 | 554 | ||||||||||
| 30% decrease | 2,776 | (1,428 | ) |
| (1) | The estimated increase (decrease) is after income taxes at the statutory rate in effect as of the balance sheet date. |
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K-64
Management’s Discussion and Analysis (Continued)
Market Risk Disclosures (Continued)
Interest Rate Risk
We may also invest in bonds, loans or other interest rate sensitive instruments. Our strategy is to acquire or originate such instruments at prices considered appropriate relative to the perceived credit risk. We also issue debt in the ordinary course of business to fund business operations, business acquisitions and for other general purposes. We attempt to maintain high credit ratings, in order to minimize the cost of our debt. We infrequently utilize derivative products, such as interest rate swaps, to manage interest rate risks.
The fair values of our fixed maturity investments, loans and finance receivables, and notes payable and other borrowings will fluctuate in response to changes in market interest rates. In addition, changes in interest rate assumptions used in our equity index put option contract models cause changes in the reported liabilities. Increases and decreases in interest rates generally translate into decreases and increases in fair values of these instruments. Additionally, fair values of interest rate sensitive instruments may be affected by the creditworthiness of the issuer, prepayment options, relative values of alternative investments, the liquidity of the instrument and other general market conditions.
The following table summarizes the estimated effects of hypothetical changes in interest rates on our significant assets and liabilities that are subject to significant interest rate risk at December 31, 2020 and 2019. We assumed that the interest rate changes occur immediately and uniformly to each category of instrument and that there were no significant changes to other factors used to determine the value of the instrument. The hypothetical changes in interest rates do not reflect the best or worst case scenarios. Actual results may differ from those reflected in the table. Dollars are in millions.
| Estimated Fair Value after Hypothetical Change in Interest Rates | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (bp=basis points) | ||||||||||||||||||||
| Fair Value | 100 bp decrease | 100 bp increase | 200 bp increase | 300 bp increase | ||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||
| Assets: | ||||||||||||||||||||
| Investments in fixed maturity securities | $ | 20,410 | $ | 20,622 | $ | 20,139 | $ | 19,879 | $ | 19,628 | ||||||||||
| Investments in equity securities*** | 8,891 | 9,408 | 8,413 | 7,970 | 7,559 | |||||||||||||||
| Loans and finance receivables | 20,554 | 21,472 | 19,916 | 19,219 | 18,570 | |||||||||||||||
| Liabilities: | ||||||||||||||||||||
| Notes payable and other borrowings: | ||||||||||||||||||||
| Insurance and other | 46,677 | 50,754 | 42,785 | 39,514 | 36,739 | |||||||||||||||
| Railroad, utilities and energy | 92,593 | 102,926 | 83,070 | 75,484 | 69,093 | |||||||||||||||
| Equity index put option contracts | 1,065 | 1,125 | 1,008 | 953 | 900 | |||||||||||||||
| December 31, 2019 | ||||||||||||||||||||
| Assets: | ||||||||||||||||||||
| Investments in fixed maturity securities | $ | 18,685 | $ | 19,008 | $ | 18,375 | $ | 18,075 | $ | 17,787 | ||||||||||
| Investments in equity securities* | 10,314 | 11,016 | 9,671 | 9,081 | 8,539 | |||||||||||||||
| Loans and finance receivables | 17,861 | 18,527 | 17,240 | 16,660 | 16,116 | |||||||||||||||
| Liabilities: | ||||||||||||||||||||
| Notes payable and other borrowings: | ||||||||||||||||||||
| Insurance and other | 40,589 | 44,334 | 37,454 | 34,799 | 32,534 | |||||||||||||||
| Railroad, utilities and energy | 76,237 | 84,758 | 69,160 | 63,218 | 58,193 | |||||||||||||||
| Equity index put option contracts | 968 | 1,065 | 877 | 792 | 713 |
*Occidental Petroleum Cumulative Perpetual Preferred Stock
K-65
Management’s Discussion and Analysis (Continued)
Foreign Currency Risk
Certain of our subsidiaries operate in foreign jurisdictions and we transact business in foreign currencies. In addition, we hold investments in common stocks of major multinational companies, who have significant foreign business and foreign currency risk of their own. We generally do not attempt to match assets and liabilities by currency and do not use derivative contracts to manage foreign currency risks in a meaningful way.
Our net assets subject to financial statement translation into U.S. Dollars are primarily in our insurance, utilities and energy and certain manufacturing and service subsidiaries. A portion of our financial statement translation-related impact from changes in foreign currency rates is recorded in other comprehensive income. In addition, we include gains or losses in net earnings related to certain liabilities of Berkshire and U.S. insurance subsidiaries that are denominated in foreign currencies, due to changes in exchange rates. A summary of these gains (losses), after-tax, for each of the years ending December 31, 2020 and 2019 follows (in millions).
| 2020 | 2019 | |||||||
|---|---|---|---|---|---|---|---|---|
| Non-U.S. denominated debt included in net earnings | $ | (764 | ) | $ | 58 | |||
| Net liabilities under certain reinsurance contracts included in net earnings | (163 | ) | (92 | ) | ||||
| Foreign currency translation included in other comprehensive income | 1,264 | 257 |
Commodity Price Risk
Our subsidiaries use commodities in various ways in manufacturing and providing services. As such, we are subject to price risks related to various commodities. In most instances, we attempt to manage these risks through the pricing of our products and services to customers. To the extent that we are unable to sustain price increases in response to commodity price increases, our operating results will likely be adversely affected. We do not utilize derivative contracts to manage commodity price risks to any significant degree.
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