Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Insurance—Underwriting (Continued)

Berkshire Hathaway Reinsurance Group (Continued)

Property/casualty

A summary of property/casualty reinsurance underwriting results follows (dollars in millions).

Third QuarterFirst Nine Months
2021202020212020
Amount%Amount%Amount%Amount%
Premiums written$4,115$3,960$11,924$11,011
Premiums earned$3,637100.0$3,428100.0$10,385100.0$8,859100.0
Losses and loss adjustment expenses2,98682.12,54474.27,68974.07,24181.7
Underwriting expenses89824.778522.92,57524.82,32426.3
Total losses and expenses3,884106.83,32997.110,26498.89,565108.0
Pre-tax underwriting earnings (loss)$(247)$99$121$(706)

Premiums written increased $155 million (3.9%) in the third quarter and $913 million (8.3%) in the first nine months of 2021 compared to the same periods in 2020. The increases reflected net new business, increased participations on renewals, improved prices and favorable foreign currency translation effects.

Losses and loss adjustment expenses increased $442 million (17.4%) in the third quarter and $448 million (6.2%) in the first nine months of 2021 compared to 2020. The loss ratio increased 7.9 percentage points in the third quarter and decreased 7.7 percentage points in the first nine months of 2021 compared to 2020. Losses and loss adjustment expenses in 2021 included provisions for estimated liabilities arising from significant catastrophe events of approximately $1.5 billion in the third quarter and $1.9 billion in the first nine months. These provisions were attributable to Hurricane Ida and flooding in Europe in the third quarter and Winter Storm Uri in the first quarter. Estimated losses attributable to significant catastrophes in 2020 were approximately $300 million and derived from Hurricanes Laura and Sally in the third quarter.

Losses incurred in the first nine months of 2021 also included $564 million from a net decrease in estimated ultimate liabilities for prior years’ loss events. Losses and loss adjustment expenses in 2020 included a year-to-date net increase in estimated ultimate liabilities for prior years’ loss events of $342 million and losses attributable to the COVID-19 pandemic of $113 million in the third quarter and $688 million in the first nine months.

Underwriting expenses are primarily commissions and brokerage costs. The expense ratio in 2021 increased 1.8 percentage points in the third quarter and decreased 1.5 percentage points in the first nine months compared to the same periods in 2020, attributable to changes in business mix.

Life/health

A summary of our life/health reinsurance underwriting results follows (dollars in millions).

Third QuarterFirst Nine Months
2021202020212020
Amount%Amount%Amount%Amount%
Premiums written$1,332$1,383$3,929$4,153
Premiums earned$1,328100.0$1,378100.0$3,932100.0$4,147100.0
Life and health insurance benefits1,24793.91,14282.93,73394.93,32880.3
Underwriting expenses26219.721915.972118.475618.2
Total benefits and expenses1,509113.61,36198.84,454113.34,08498.5
Pre-tax underwriting earnings (loss)$(181)$17$(522)$63

Life/health premiums written decreased 3.7% in the third quarter and 5.4% in the first nine months of 2021 compared to 2020. Premiums written in 2020 included $131 million in the third quarter and $497 million in the first nine months from a policy that covered U.S. health insurance risks that did not renew in 2021. Otherwise, premiums written in the first nine months of 2021 increased 7.7% versus 2020, primarily due to favorable foreign currency translation effects. Underwriting results in the third quarter and first nine months of 2021 were negatively affected by significant increases in mortality in the U.S., South Africa, India and Latin America due to the pandemic. Underwriting results in 2020 reflected COVID-19-related claim estimates of $68 million in the third quarter and $172 million in the first nine months, as well as from increased liabilities from changes in underlying assumptions in estimating disability benefit liabilities in Australia.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Insurance—Underwriting (Continued)

Berkshire Hathaway Reinsurance Group (Continued)

Retroactive reinsurance

Pre-tax underwriting losses in each period derived from the amortization of deferred charges 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. Before foreign currency exchange effects, pre-tax underwriting losses were $227 million in the third quarter and $690 million in the first nine months of 2021 compared to $282 million in the third quarter and $874 million in the first nine months of 2020. Foreign currency exchange gains were $69 million in the third quarter and $70 million in the first nine months of 2021 compared to losses of $112 million in the third quarter and $22 million in the first nine months of 2020.

Gross unpaid losses assumed under retroactive reinsurance contracts were $39.7 billion at September 30, 2021, declining $1.2 billion since December 31, 2020, primarily due to loss payments. Unamortized deferred charges related to such reinsurance contracts were $11.7 billion at September 30, 2021, a decline of $709 million since December 31, 2020, primarily attributable to amortization. Deferred charge amortization will be charged to earnings over the expected remaining claims settlement periods.

Periodic payment annuity

Periodic payment annuity premiums earned increased $123 million (180.9%) in the third quarter and $49 million (12.0%) in the first nine months of 2021 compared to 2020. Periodic payment annuity business is both price and demand sensitive. Our premium volumes in 2021 and 2020 were constrained, attributable in part to pandemic related delays in underlying claim settlements, which reduced the supply of available business. The volumes written may also 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 the effects of mortality, interest rate changes that may affect expected settlements under certain contracts and gains or losses from changes in foreign currency exchange rates on non-U.S. Dollar denominated liabilities of our U.S. subsidiaries. Pre-tax underwriting results included foreign currency exchange gains of $45 million in the third quarter and $25 million in the first nine months of 2021 compared to losses of $73 million in the third quarter and gains of $38 million in the first nine months of 2020.

Excluding foreign currency exchange gains/losses, pre-tax underwriting losses were $139 million in the third quarter and $399 million in the first nine months of 2021 compared to $136 million in the third quarter and $449 million in the first nine months of 2020, which primarily derived from the recurring discount accretion of annuity liabilities. Pre-tax losses in the first nine months of 2021 were partially offset by the effects of higher mortality and the effects of higher interest rates applicable to settlements under certain contracts. Discounted annuity liabilities were $14.8 billion at September 30, 2021, having a weighted average discount rate of approximately 3.9%.

Variable annuity

Variable annuity guarantee contracts produced pre-tax losses of $28 million in the third quarter and earnings of $97 million in the first nine months of 2021 compared to earnings of $46 million in the third quarter and losses of $83 million in the first nine months of 2020. The results from these contracts reflect changes in our estimated liabilities for underlying guaranteed benefits, 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 are volatile, reflecting the volatility of securities markets, interest rates and foreign currency exchange rates. The change in underwriting earnings in the first nine months of 2021 compared to 2020 was attributable to the net effects of interest rate changes and, to a lesser extent, changes in securities markets, partly offset by lower underlying lapse rate assumptions.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Insurance—Investment Income

A summary of net investment income attributable to our insurance operations follows (dollars in millions).

Third QuarterFirst Nine MonthsPercentage Change
2021202020212020Third QuarterFirst Nine Months
Interest and other investment income$141$196$458$870(28.1)%(47.4)%
Dividend income1,1961,0243,7473,61016.83.8
Pre-tax net investment income1,3371,2204,2054,4809.6(6.1)
Income taxes and noncontrolling interests176205617711
Net investment income$1,161$1,015$3,588$3,769
Effective income tax rate13.1%16.9%14.7%15.9%

Interest and other investment income declined $55 million (28.1%) in the third quarter and $412 million (47.4%) in the first nine months of 2021 compared to same periods in 2020, primarily due to lower income from short-term investments and fixed maturity securities. We continue to hold substantial balances of cash, cash equivalents and U.S. Treasury Bills. We expect that prevailing low interest rates will continue to negatively affect our earnings from such investments and from fixed maturity securities for at least the remainder of 2021. Nevertheless, we believe that maintaining ample liquidity is paramount and we insist on safety over yield with respect to short-term investments. Dividend income in 2021 included $26 million in the third quarter and $101 million in the first nine months from investments in preferred stock of Berkshire Hathaway Energy. Such amounts are deducted from earnings of the utilities and energy segment. Dividend income may vary from period to period due to changes in the investment portfolio and the frequency and timing of dividends from certain investees.

Invested assets of our insurance businesses derive from shareholder capital 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 benefit liabilities, unearned premiums and other liabilities due to policyholders, which are reduced by insurance premiums receivable, reinsurance receivables, deferred charges assumed under retroactive reinsurance contracts and deferred policy acquisition costs. Float approximated $145 billion at September 30, 2021 and $138 billion at December 31, 2020. Our combined insurance operations generated pre-tax underwriting earnings in the first nine months of 2021 and 2020, and consequently, the average cost of float for each period was negative.

A summary of cash and investments held in our insurance businesses as of September 30, 2021 and December 31, 2020 follows (in millions).

September 30, 2021December 31, 2020
Cash, cash equivalents and short-term investments in U.S. Treasury Bills$89,098$67,082
Equity securities296,038269,498
Fixed maturity securities18,06920,317
Other5,1196,220
$408,324$363,117

Fixed maturity securities as of September 30, 2021 were as follows (in millions).

Amortized CostUnrealized GainsCarrying Value
U.S. Treasury, U.S. government corporations and agencies$3,349$30$3,379
Foreign governments12,4061112,417
Corporate bonds1,4884301,918
Other30451355
$17,547$522$18,069

U.S. government obligations are rated AA+ or Aaa by the major rating agencies. Approximately 90% 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.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Railroad

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).

Third QuarterFirst Nine Months
2021202020212020
Railroad operating revenues$5,591$5,001$16,421$14,698
Railroad operating expenses:
Compensation and benefits1,1681,1053,4773,306
Fuel7053941,9481,335
Purchased services5104791,5251,429
Depreciation and amortization6086161,8321,836
Equipment rents, materials and other3383931,2621,219
Total3,3292,98710,0449,125
Railroad operating earnings2,2622,0146,3775,573
Other revenues (expenses):
Other revenues199175579497
Other expenses, net(176)(155)(514)(436)
Interest expense(256)(257)(775)(779)
Pre-tax earnings2,0291,7775,6674,855
Income taxes4914301,3621,187
Net earnings$1,538$1,347$4,305$3,668
Effective income tax rate24.2%24.2%24.0%24.5%

The following table summarizes BNSF’s railroad freight volumes by business group (cars/units in thousands).

Cars/Units
Third QuarterFirst Nine MonthsPercentage Change
2021202020212020Third QuarterFirst Nine Months
Consumer products1,4251,3904,3073,7662.5%14.4%
Industrial products4433881,2801,21814.25.1
Agricultural products265293896855(9.6)4.8
Coal4043601,1271,03612.28.8
2,5372,4317,6106,8754.410.7

Railroad operating revenues increased 11.8% in the third quarter and 11.7% in the first nine months of 2021 compared to 2020. Railroad operating revenues in 2021 reflected higher volumes of 4.4% in the third quarter and 10.7% in the first nine months, as well as a 5.3% quarter-to-date and a 0.3% year-to-date increase in average revenue per car/unit. Higher rates per car/unit and increased fuel surcharges, principally from higher fuel prices, were offset by business mix changes. Pre-tax earnings were $2.0 billion and $5.7 billion in the third quarter and first nine months of 2021, respectively, increases of 14.2% and 16.7%, respectively, compared to the corresponding 2020 periods. The COVID-19 pandemic caused a significant economic slowdown that adversely affected our volumes in 2020. Revenue changes were driven by continued improvements from the 2020 effects of the COVID-19 pandemic, partially offset by the ongoing disruptions in the global supply chain.

Operating revenues from consumer products were $2.1 billion in the third quarter and $6.1 billion in the first nine months of 2021, increases of 11.2% and 16.3%, respectively, from 2020. Volumes increased 2.5% in the third quarter and 14.4% in the first nine months of 2021, with a higher average revenue per car/unit in both periods. The volume increases for the first nine months of 2021 resulted from growth in intermodal in both international and domestic shipments driven by increased retail sales, inventory replenishments by retailers and increased e-commerce activity, as well as from growth in automotive shipments.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Railroad (Continued)

Operating revenues from industrial products were $1.4 billion in the third quarter and $3.9 billion in the first nine months of 2021, increases of 15.2% and 3.5%, respectively, from 2020. Volumes increased 14.2% in the third quarter and 5.1% in the first nine months, with a higher average revenue per car/unit in the third quarter and a lower average revenue per car/unit in the first nine months of 2021. The volume increases were primarily due to improvement in the U.S. industrial economy, driving higher volumes in the construction and building sectors, partially offset by lower petroleum volumes due to unfavorable market conditions in the energy sector.

Operating revenues from agricultural products decreased 10.4% in the third quarter to $1.1 billion and increased 7.1% to $3.6 billion in the first nine months of 2021, compared to the same periods in 2020. The revenue changes reflected volume decreases of 9.6% in the third quarter due to lower grain exports and lower average revenue per car/unit. Volumes increased 4.8% in the first nine months due to higher domestic and export grain shipments, higher volumes of ethanol and related commodities and higher revenue per car/unit.

Operating revenues from coal were $867 million in the third quarter and $2.3 billion in the first nine months of 2021, increases of 33.2% and 18.5%, respectively, from 2020, attributable to higher volumes of 12.2% in the third quarter and 8.8% in the first nine months, as well as from higher average revenue per car/unit. Volume increases in 2021 were attributable to increased electricity generation, higher natural gas prices and improved export demand.

Railroad operating expenses were $3.3 billion in the third quarter and $10.0 billion in the first nine months of 2021, increases of $342 million (11.4%) and $919 million (10.1%), respectively, compared to the same periods in 2020. The ratio of railroad operating expenses to railroad operating revenues decreased 0.2 percentage points to 59.5% in the third quarter and 0.9 percentage points to 61.2% in the first nine months of 2021 versus the 2020 periods. The increases in railroad operating expenses reflected higher volumes and higher average fuel prices, partially offset by productivity improvements.

Compensation and benefits expenses increased $63 million (5.7%) in the third quarter and $171 million (5.2%) in the first nine months of 2021 compared to 2020. The increases were primarily due to increased volumes, partially offset by productivity improvements. Fuel expenses increased $311 million (78.9%) in the third quarter and $613 million (45.9%) in the first nine months of 2021 compared to 2020, primarily due to higher average fuel prices. Purchased service expenses increased $31 million (6.5%) in the third quarter and $96 million (6.7%) in the first nine months of 2021 compared to 2020, primarily due to higher volumes and the effects of insurance recoveries in 2020 related to 2019 flooding, partially offset by improved productivity. Equipment rents, materials and other expenses decreased $55 million (14.0%) in the third quarter, primarily due to a gain on land sale, and increased $43 million (3.5%) in the first nine months of 2021 compared to 2020 due to higher volume-related costs.

Utilities and Energy

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 (“LNG interest”), which BHE operates and consolidates for financial reporting purposes. Three of the natural gas pipeline systems and the LNG interest were acquired on November 1, 2020 from Dominion Energy, Inc. (“BHE GT&S”). 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 and investments. 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.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Utilities and Energy (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).

Third QuarterFirst Nine Months
2021202020212020
Revenues:
Energy operating revenue$5,225$4,451$14,375$11,504
Real estate operating revenue1,7431,7424,7383,828
Other income (loss)4533(91)60
Total revenue7,0136,22619,02215,392
Costs and expense:
Energy cost of sales1,3851,1694,0643,095
Energy operating expense2,1321,9526,3025,301
Real estate operating costs and expense1,6081,5034,3123,492
Interest expense5134801,5471,430
Total costs and expense5,6385,10416,22513,318
Pre-tax earnings1,3751,1222,7972,074
Income tax expense (benefit)*(398)(412)(842)(778)
Net earnings after income taxes1,7731,5343,6392,852
Noncontrolling interests of BHE subsidiaries103431111
Net earnings attributable to BHE1,6701,5303,3282,841
Noncontrolling interests and preferred stock dividends174135389252
Net earnings attributable to Berkshire Hathaway shareholders$1,496$1,395$2,939$2,589
Effective income tax rate(28.9)%(36.7)%(30.1)%(37.5)%
*Includes significant production tax credits from wind-powered electricity generation.

The discussion of BHE’s operating results is based on after-tax earnings, reflecting how the energy businesses are managed and evaluated. A summary of net earnings attributable to BHE follows (in millions).

Third QuarterFirst Nine MonthsPercentage Change
2021202020212020Third QuarterFirst Nine Months
PacifiCorp$333$286$728$62916.4%15.7%
MidAmerican Energy Company37333772869510.74.7
NV Energy28224941636713.313.4
Northern Powergrid8326162172219.2(5.8)
Natural gas pipelines1447862732184.695.3
Other energy businesses23020752152711.1(1.1)
Real estate brokerage102177321246(42.4)30.5
Corporate interest and other123170(175)(116)(27.6)50.9
$1,670$1,530$3,328$2,8419.217.1

PacifiCorp operates a regulated electric utility in portions of several Western states, including Utah, Oregon and Wyoming. After-tax earnings increased $47 million in the third quarter and $99 million in the first nine months of 2021 as compared to 2020. These increases reflected higher utility margin (operating revenue less cost of sales), lower operating expenses in the third quarter and increased income tax benefits from the impacts of ratemaking as well as higher production tax credits recognized on new wind-powered generating facilities placed in-service. The earnings increases were partially offset by higher year-to-date operating expenses and lower allowances for equity and borrowed funds used during construction. The comparative changes in operating expenses reflected increased depreciation expense from the impacts of a deprecation study effective January 1, 2021, and additional assets placed in-service, offset by costs recognized in the third quarter of 2020 associated with a settlement agreement and wildfires.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Utilities and Energy (Continued)

PacifiCorp’s utility margin was approximately $1.0 billion in the third quarter and $2.7 billion in the first nine months of 2021, increases of $6 million and $131 million, respectively, from the comparable periods in 2020. These increases reflected higher retail revenue from increases in customer volumes and higher wholesale and other revenue, partially offset by higher thermal generation and purchased power costs. Retail customer volumes increased 2.1% in the third quarter and 4.4% in the first nine months of 2021 as compared to 2020, primarily due to higher customer usage, a favorable impact of weather and an increase in the average number of customers.

MEC operates a regulated electric and natural gas utility primarily in Iowa and Illinois. After-tax earnings increased $36 million in the third quarter and $33 million in the first nine months of 2021 compared to 2020. These increases reflected higher electric utility margin and increased income tax benefits, partly offset by higher operating expenses. The increases in operating expenses included incremental costs associated with additional wind-powered generating facilities placed in-service and higher natural gas distribution costs, partially offset by storm restoration costs recognized in the third quarter of 2020. The income tax benefit increases were mainly due to higher production tax credits recognized on new wind-powered generating facilities placed in-service, partially offset by the impacts of ratemaking.

MEC’s electric utility margin was $691 million in the third quarter and $1.6 billion in the first nine months of 2021, increases of 13% and 8%, respectively, versus 2020. These increases were attributable to higher operating revenue from wholesale and retail customer volumes, partially offset by higher thermal generation and purchased power costs. Electric retail customer volumes increased 5.6% in the third quarter and 6.5% in the first nine months of 2021 as compared to 2020, primarily due to increased usage by certain industrial customers and the favorable impacts of weather.

NV Energy operates regulated electric and natural gas utilities in Nevada. After-tax earnings increased $33 million in the third quarter and $49 million in the first nine months of 2021 compared to 2020. These increases reflected lower operating expenses, lower interest expense and lower income tax expense from the impacts of ratemaking, partially offset by lower electric utility margin. The decreases in operating expenses were mainly due to lower comparative accruals for earnings sharing, partially offset by higher depreciation expense from additional assets placed in-service.

NV Energy’s electric utility margin was $621 million in the third quarter and $1.3 billion in the first nine months of 2021, decreases of 6% and 4%, respectively, compared to 2020. These decreases were primarily due to revenue reductions from lower base tariff general rates and a favorable regulatory decision in 2020, partially offset by a 4.2% increase in electric retail customer volumes for the first nine months of 2021, price impacts from changes in sales mix and an increase in the average number of customers. The increase in electric retail customer volumes was primarily due to higher customer usage and the favorable impacts of weather.

Northern Powergrid’s after-tax earnings increased $57 million in the third quarter and decreased $10 million in the first nine months of 2021 as compared to 2020. These changes reflected the impacts of changes in the United Kingdom corporate income tax rate, higher distribution revenue, mainly from increased tariff rates and units distributed, and from favorable foreign currency exchange rate movements in 2021. Earnings in the first nine months of 2021 included deferred income tax expense of $109 million related to the enactment in June 2021 of an increase in the income tax rate from 19% to 25%, effective April 1, 2023, while earnings in each period of 2020 included deferred income tax expense of $35 million related to the enactment in July 2020 of an increase in the income tax rate from 17% to 19%, effective April 1, 2020.

Natural gas pipelines’ after-tax earnings increased $66 million in the third quarter and $306 million in the first nine months of 2021 compared to 2020. Earnings in 2021 from BHE GT&S were $74 million in the third quarter and $247 million in the first nine months. In addition, year-to-date earnings increased from the effects of higher margins on natural gas sales and higher transportation revenue at Northern Natural Gas, largely due to increased demand from the February 2021 winter storms.

Other energy businesses’ after-tax earnings increased $23 million in the third quarter and decreased $6 million in the first nine months of 2021 compared to 2020. The third quarter earnings increase was mainly due to higher operating revenue from a transmission investment. The decrease in year-to-date earnings was primarily due to a decline in wind tax equity investment earnings of $48 million, partially offset by higher operating revenue from owned renewable energy projects. The decrease in wind tax equity investment earnings was primarily due to increased losses from preexisting tax equity investments of $123 million, largely attributable to the February 2021 winter storms, partially offset by increased income tax benefits from projects reaching commercial operation over the past twelve months.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Utilities and Energy (Continued)

Real estate brokerage after-tax earnings decreased $75 million in the third quarter and increased $75 million in the first nine months of 2021 compared to 2020. The decrease in the third quarter reflected lower earnings from mortgage services due to a decrease in funded volume largely attributable to a decrease in refinance activity. The earnings increase during the first nine months was due to a comparative increase in closed brokerage transaction volumes in 2021.

Corporate interest and other after-tax earnings decreased $47 million in the third quarter and $59 million in the first nine months of 2021 compared to 2020, reflecting lower federal income tax credits recognized, changes in operating expenses (lower in the third quarter and higher in the first nine months) and higher interest expense from corporate debt issued in 2020, as well as higher earnings from non-regulated energy services.

Manufacturing, Service and Retailing

A summary of revenues and earnings of our manufacturing, service and retailing businesses follows (dollars in millions).

Third QuarterFirst Nine MonthsPercentage Change
2021202020212020Third QuarterFirst Nine Months
Revenues
Manufacturing$17,496$15,170$50,821$43,23815.3%17.5%
Service and retailing21,29119,31962,14355,35110.212.3
$38,787$34,489$112,964$98,589
Pre-tax earnings
Manufacturing$2,445$2,255$7,595$5,7658.4%31.7%
Service and retailing1,1028753,4131,95025.975.0
3,5473,13011,0087,715
Income taxes and noncontrolling interests8417842,6791,882
Net earnings*$2,706$2,346$8,329$5,833
Effective income tax rate22.9%24.4%23.7%24.0%
Pre-tax earnings as a percentage of revenues9.1%9.1%9.7%7.8%
***Excludes certain acquisition accounting expenses, which were primarily from the amortization of identifiable intangible assets recorded in connection with our business acquisitions. The after-tax acquisition accounting expenses excluded from earnings were $169 million in the third quarter and $532 million in the first nine months of 2021 compared to $195 million in the third quarter and $593 million in the first nine months of 2020. In the first nine months of 2020, net earnings also excluded goodwill and indefinite-lived intangible asset after-tax impairment charges of $10.4 billion. The acquisition accounting expense and impairment charges are included in “Other” in the summary of earnings on page 25 and in the “Other” earnings section on page 42.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Manufacturing, Service and Retailing (Continued)

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).

Third QuarterFirst Nine Months
2021202020212020
Revenues
Industrial products$7,192$6,173$21,050$19,320
Building products6,3745,67218,40415,497
Consumer products3,9303,32511,3678,421
$17,496$15,170$50,821$43,238
Pre-tax earnings
Industrial products$1,124$940$3,508$2,781
Building products8338252,5762,088
Consumer products4884901,511896
$2,445$2,255$7,595$5,765
Pre-tax earnings as a percentage of revenues
Industrial products15.6%15.2%16.7%14.4%
Building products13.1%14.5%14.0%13.5%
Consumer products12.4%14.7%13.3%10.6%

Industrial products

The industrial products group includes metal products for aerospace, power and general industrial markets (Precision Castparts Corp. (“PCC”)), specialty chemicals (The Lubrizol Corporation (“Lubrizol”)), complex metal cutting tools/systems (IMC International Metalworking Companies (“IMC”)) and Marmon, which consists of more than 100 autonomous manufacturing and service businesses, including equipment leasing for the rail, intermodal tank container and mobile crane industries, which are internally aggregated into eleven groups. The industrial products group also includes equipment and systems for the livestock and agricultural industries (CTB International) and a variety of industrial products for diverse markets (Scott Fetzer and LiquidPower Specialty Products).

Revenues of the industrial products group in 2021 increased $1.0 billion (16.5%) in the third quarter and $1.7 billion (9.0%) in the first nine months compared to 2020. Pre-tax earnings in 2021 increased $184 million (19.6%) in the third quarter and $727 million (26.1%) in the first nine months compared to 2020. Pre-tax earnings as a percentage of revenues for the group were 16.7% for the first nine months of 2021, an increase of 2.3 percentage points compared to 2020.

PCC’s revenues were $1.6 billion in the third quarter of 2021, an increase of 6.6% over 2020, while revenues in the first nine months decreased 16.4% compared to 2020. Historically, PCC has derived significant revenues and earnings from aerospace products. The COVID-19 pandemic contributed to material declines in commercial air travel and original equipment manufacturing (“OEM”) aircraft production in 2020. While commercial air travel in the U.S. increased in 2021, global demand remains below pre-pandemic levels, as efforts to manage the pandemic continue.

PCC’s pre-tax earnings increased $217 million in the third quarter and $445 million in the first nine months of 2021 compared to 2020. The increases reflect the aggressive actions previously taken by management to resize and restructure operations. We do not expect significant increases in PCC’s aerospace revenues or earnings to occur in the near term attributable to relatively low aircraft build rates, inventory levels currently within the industry supply chain and the ongoing impact of the COVID-19 pandemic on commercial air travel.

Lubrizol’s revenues were approximately $1.6 billion in the third quarter and $5.0 billion in the first nine months of 2021, increases of 9.6% and 13.4%, respectively, over the same periods in 2020. The increases reflected higher average selling prices, driven by significant increases in materials and other manufacturing costs, as well as higher volumes in the first nine months. Sales volumes in the Additives product lines were negatively affected by severe winter storms in February 2021, which caused the temporary shut-down of several U.S. facilities, as well as other temporary production shut-downs in the third quarter of 2021.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Manufacturing, Service and Retailing (Continued)

Industrial products (Continued)

Lubrizol’s pre-tax earnings decreased 76.9% in the third quarter and 39.0% in the first nine months of 2021 compared to 2020. Earnings in 2021 were negatively impacted by significant losses related to a fire in June 2021 at a facility of Chemtool Incorporated, a Lubrizol subsidiary, located in Rockton, Illinois and impairment charges in the third quarter related to an underperforming business in the Advanced Materials product lines. These losses and charges aggregated $73 million in the third quarter and $229 million in the first nine months of 2021. Earnings in 2021 were also negatively impacted by the effects of accelerating raw material costs and the previously mentioned temporary shut-down of Additives production, which resulted in lost sales and incremental manufacturing costs.

Marmon’s revenues were $2.6 billion in the third quarter and $7.2 billion in the first nine months of 2021, increases of 30.0% and 26.3%, respectively, compared to 2020. The revenue increases were primarily due to higher metal prices in the Electrical, Metal Services and Plumbing & Refrigeration groups and higher volumes in most of Marmon’s other business groups, particularly those serving the construction, automotive, heavy-duty truck and restaurant markets. These increases were partially offset by the impact of divestitures and business closures in the Water Technologies and Retail Solutions groups and a year-to-date decline in Rail & Leasing group revenues.

Marmon’s pre-tax earnings in 2021 increased $106 million (38.3%) in the third quarter and $268 million (33.5%) in the first nine months compared to 2020. Earnings in the first nine months of 2021 reflected higher earnings across several business groups, partially offset by lower earnings from the Rail & Leasing and Water Technologies groups.

IMC’s revenues were $862 million in the third quarter and $2.7 billion in the first nine months of 2021, increases of 23.4% in the third quarter and 22.2% in the first nine months compared to 2020. Revenues in the first nine months of 2021 reflected improving business conditions in most geographic regions and favorable foreign currency translation effects. IMC’s pre-tax earnings increased 59.4% in the third quarter and 63.6% in the first nine months of 2021 versus 2020, primarily attributable to higher customer demand, improved manufacturing efficiencies, operating cost management saving initiatives and favorable foreign currency translation effects.

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).

Revenues of the building products group increased $702 million (12.4%) in the third quarter and $2.9 billion (18.8%) in the first nine months of 2021 compared to 2020. Residential housing construction in the U.S. was strong during 2020 and through the first nine months of 2021. However, the effects of persistent supply chain disruptions limited our sales and contributed to production delays and significant cost increases for key materials and inputs, including lumber, steel, petrochemical-based materials, energy, freight, labor and fixtures. These effects necessitated sales price increases.

Clayton Homes’ revenues were approximately $2.6 billion in the third quarter and $7.6 billion in the first nine months of 2021, increases of $317 million (13.7%) and $1.5 billion (24.5%), respectively, compared to 2020. Revenues from home sales increased $297 million (16.6%) in the third quarter and $1.4 billion (29.4%) in the first nine months of 2021, reflecting a net increase in units sold, increased revenue per home sold and changes in sales mix. Unit sales of site-built homes increased 22.7% in the first nine months of 2021, while factory-built manufactured home unit sales increased 4.5%. Unit sales of site-built homes declined in the third quarter of 2021 versus 2020, attributable to longer construction periods arising from supply chain constraints and labor shortages. Financial services revenues, which include mortgage origination and services, insurance and interest income from lending activities, increased 9.6% in the first nine months of 2021 compared to 2020. Loan balances, net of allowances for credit losses, were approximately $18.3 billion as of September 30, 2021, an increase of approximately $1.2 billion compared to December 31, 2020.

Aggregate revenues of our other building products businesses were approximately $3.7 billion in the third quarter and $10.8 billion in the first nine months of 2021, increases of $385 million (11.5%) and $1.4 billion (15.0%), respectively, versus 2020. The increases were primarily due to higher average selling prices driven by higher input and supply chain costs, as well as higher unit volumes for paint and coatings and certain residential flooring, insulation and engineered products.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Manufacturing, Service and Retailing (Continued)

Building products (Continued)

Pre-tax earnings of our building products group were relatively unchanged in the third quarter of 2021 versus 2020, while earnings increased $488 million (23.4%) in the first nine months. Pre-tax earnings of Clayton Homes were $391 million in the third quarter and $1.2 billion in the first nine months of 2021, increases of $52 million (15.3%) and $380 million (44.2%), respectively, compared to 2020. Earnings in the first nine months of 2021 reflected higher earnings from home sales, mortgage originations, net interest income and a decline of $116 million in the provision for expected credit losses, partially offset by the impact of rising manufacturing and supply chain costs. The provision for expected credit losses in the first nine months of 2020 were unusually high and included provisions for the expected impact of the COVID-19 pandemic. The comparative decline in the provision for expected credit losses is due to fewer actual and anticipated loan foreclosures.

Pre-tax earnings of our other building products businesses declined $45 million (9.2%) in the third quarter and increased $108 million (8.8%) in the first nine months of 2021 compared to the same periods in 2020. Earnings as a percentage of revenues decreased 2.7 percentage points in the third quarter and 0.7 percentage points in the first nine months of 2021 versus 2020. While customer demand was generally strong, reduced availability of materials and other product inputs from supply chain disruptions negatively affected sales and operating results. Higher materials costs, reduced availability of certain materials and freight services and higher restructuring and impairment charges reduced our pre-tax margin rates in 2021.

Consumer products

The consumer products group includes leisure vehicles (Forest River), several apparel and footwear operations (including Fruit of the Loom, Garan, Fechheimer, H.H. Brown Shoe Group and Brooks Sports) and high-performance batteries (Duracell). This group also includes custom picture framing products (Larson-Juhl) and jewelry products (Richline).

Consumer products revenues increased approximately $605 million (18.2%) in the third quarter and $2.9 billion (35.0%) in the first nine months of 2021 compared to 2020. Revenues from Forest River increased 24.7% in the third quarter and 45.3% in the first nine months of 2021 compared to 2020, driven by a year-to-date unit sales increase of 37.5% in recreational vehicles. Revenues in 2021 were, in general, significantly higher at several of our other businesses that were severely impacted by the pandemic in the first half of 2020. Apparel and footwear revenues increased 18.5% in the third quarter and 35.4% in the first nine months of 2021 compared to 2020, reflecting significant comparative increases in unit sales, attributable in part to inventory restocking by certain customers and increased consumer demand.

Pre-tax earnings of our consumer products group were substantially unchanged in the third quarter and increased $615 million (68.6%) in the first nine months of 2021 versus 2020. Pre-tax earnings as a percentage of revenues decreased 2.3 percentage points in the third quarter and increased 2.7 percentage points in the first nine months of 2021 compared to 2020. Earnings in the third quarter reflected higher earnings at Forest River offset by lower earnings from Duracell and the apparel and footwear businesses. The comparative increase in pre-tax earnings for the first nine months reflected significant earnings increases at all of our businesses, driven by Forest River, the apparel and footwear businesses and Duracell. Our consumer products businesses are also experiencing cost increases attributable to supply chain disruptions.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Manufacturing, Service and Retailing (Continued)

Service and retailing

A summary of revenues and pre-tax earnings (loss) of our service and retailing businesses follows (dollars in millions).

Third QuarterFirst Nine Months
2021202020212020
Revenues
Service$4,131$3,068$11,718$9,093
Retailing4,5484,21113,89611,179
McLane Company12,61212,04036,52935,079
$21,291$19,319$62,143$55,351
Pre-tax earnings (loss)
Service$696$470$2,013$1,155
Retailing4143091,221590
McLane Company(8)96179205
$1,102$875$3,413$1,950
Pre-tax earnings (loss) as a percentage of revenues
Service16.8%15.3%17.2%12.7%
Retailing9.1%7.3%8.8%5.3%
McLane Company(0.1)%0.8%0.5%0.6%

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), furniture leasing (CORT), electronic news distribution, multimedia and regulatory filings (Business Wire) and the operation of a television station in Miami, Florida (WPLG).

Service group revenues increased $1.1 billion (34.6%) in the third quarter and $2.6 billion (28.9%) in the first nine months of 2021 compared to 2020. Revenues from TTI increased 45.3% in the third quarter and 40.9% in the first nine months of 2021 versus 2020. The increases reflected accelerating demand across all significant markets, as customers attempt to maintain adequate inventories in response to high demand for components in end products and supply chain disruptions. Revenues from aviation services (NetJets and FlightSafety) increased 31.0% in the third quarter and 25.4% in the first nine months of 2021 over low 2020 levels, primarily due to higher training hours and significantly higher customer flight hours.

Pre-tax earnings of the group increased $226 million (48.1%) in the third quarter and $858 million (74.3%) in the first nine months of 2021 versus 2020. Pre-tax earnings as a percentage of revenues increased 1.5 percentage points in the third quarter and 4.5 percentage points in the first nine months of 2021 compared to 2020. The increase in earnings for the third quarter was primarily due to TTI. Earnings at most of our service businesses increased significantly in the first nine months of 2021 compared to 2020, with the largest increases from TTI and the aviation services businesses. The increases in year-to-date earnings from NetJets and FlightSafety were primarily attributable to improved operating margins from higher volume, changes in business mix, increased operating efficiencies and the effects of past restructuring efforts. TTI’s earnings increases were primarily attributable to the increases in sales and improved operating cost leverage.

Retailing

Our largest retailing business is Berkshire Hathaway Automotive (“BHA”), which consists of over 80 auto dealerships that sell new and pre-owned automobiles and offer repair services and related products. BHA represents about 64% of our combined retailing revenues in the first nine months of 2021. BHA also operates two insurance businesses, two auto auctions and an automotive fluid maintenance products distributor. Our retailing businesses include four home furnishings retailing businesses (Nebraska Furniture Mart, R.C. Willey, Star Furniture and Jordan’s), which sell furniture, appliances, flooring and electronics and represent about 21% of the combined retailing revenues in the first nine months of 2021. Other retailing businesses include three jewelry businesses (Borsheims, Helzberg and Ben Bridge), See’s Candies (confectionary products), Pampered Chef (high quality kitchen tools), Oriental Trading Company (party supplies, school supplies and toys and novelties) and Detlev Louis Motorrad (“Louis”), a Germany-based retailer of motorcycle accessories.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Manufacturing, Service and Retailing (Continued)

Retailing (Continued)

Retailing group revenues increased approximately $337 million (8.0%) in the third quarter and $2.7 billion (24.3%) in the first nine months of 2021 compared to 2020. BHA’s revenues in the third quarter and first nine months of 2021 increased 9.8% and 22.2%, respectively, over 2020, primarily due to increases in pre-owned vehicle unit sales, higher volumes of new auto sales in the first six months, and higher average selling prices. New auto unit sales declined significantly in the third quarter of 2021, reflecting inventory shortages caused by supply chain disruption at OEMs. Home furnishings group revenues increased 11.7% in the third quarter and 27.5% in the first nine months of 2021 as compared to 2020 attributable to higher consumer demand and higher average selling prices.

Pre-tax earnings increased $105 million (34.0%) in the third quarter and $631 million (106.9%) in the first nine months of 2021 compared to 2020. Operating results of our retailing businesses were severely impacted by the pandemic beginning in March of 2020 and continued through the second quarter of 2020. Over the second half of 2020 and through the first six months of 2021, revenues and pre-tax earnings of these businesses increased, and in certain instances increased to levels exceeding those in pre-pandemic periods. Results in the third quarter of 2021 moderated somewhat relative to the first six months reflecting the effects of supply chain disruptions, which, in particular, worsened with respect to new automobiles.

BHA’s pre-tax earnings increased 26.2% in the third quarter and 47.3% in the first nine months of 2021 compared to 2020, primarily due to increases in vehicle sales margins and earnings from finance and service contract activities, as well as from lower floorplan interest expense, primarily attributable to significant declines in inventory levels, and from operating cost control efforts. Aggregate pre-tax earnings for the remainder of our retailing group increased $63 million in the third quarter and $447 million in the first nine months of 2021 compared to 2020. The initial effects of the pandemic in 2020 were severe for most of our other retailers due to the restricted operations at many of those businesses during the first half of 2020. Results in 2021 also benefitted from relatively strong consumer demand and the effects of restructuring efforts in 2020.

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 typically comprise about two-thirds of McLane’s consolidated sales with foodservice comprising much of the remainder. A curtailment of purchasing by any of its significant customers could have an adverse impact on periodic revenues and earnings. The grocery and foodservice businesses continue to operate in an intensely competitive business environment.

Revenues increased $572 million (4.8%) in the third quarter and $1.45 billion (4.1%) in the first nine months of 2021 compared to 2020. Revenues from the grocery business were relatively unchanged over the first nine months of 2021, while revenues from the foodservice and beverage businesses increased 10.9% and 21.1%, respectively, compared to the first nine months of 2020. The foodservice business was significantly impacted by pandemic-related restaurant closures in 2020.

Pre-tax earnings decreased $104 million in the third quarter and $26 million in the first nine months of 2021 compared to 2020. The decreases were primarily attributable to higher personnel costs and fuel expense. McLane’s operations have been adversely affected by supply chain disruptions, including shortages of truck drivers, affecting inventory and customer deliveries. There is increased competition for drivers within the trucking industry. The increase in fuel expense was primarily attributable to significant increases in petroleum prices.

Investment and Derivative Contract Gains/Losses

A summary of investment and derivative contract gains/losses follows (dollars in millions).

Third QuarterFirst Nine Months
2021202020212020
Investment gains/losses$4,851$31,625$37,235$2,032
Derivative contract gains/losses70(43)780(640)
Gains/losses before income taxes and noncontrolling interests4,92131,58238,0151,392
Income taxes and noncontrolling interests1,0436,8458,036627
Net earnings$3,878$24,737$29,979$765
Effective income tax rate20.7%21.3%20.9%35.1%

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Investment and Derivative Contract Gains/Losses (Continued)

Investment gains/losses

Unrealized gains and losses arising from changes in market prices of investments in equity securities are included in our reported 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/losses included net unrealized gains of $4.8 billion in the third quarter and $36.2 billion in the first nine months of 2021 compared to net unrealized gains of $30.8 billion in the third quarter and $16.5 billion in the first nine months of 2020 on securities we held at the end of the applicable period. Investment losses from market value changes in the first nine months of 2020 on equity securities sold in 2020 were $13.9 billion.

Taxable investment gains on equity securities sold, which is generally the difference between sales proceeds and the original cost basis of the securities sold, were $0.9 billion in the third quarter and $2.9 billion in the first nine months of 2021. Taxable investment gains on equity securities were $3.9 billion in the third quarter and $0.7 billion in the first nine months of 2020.

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 in any given period has little analytical or predictive value.

Derivative contract 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. The periodic changes in the fair values of these liabilities are recorded in earnings and can be significant due to the volatility of market prices in the underlying equity markets. As of September 30, 2021, the intrinsic value of our equity index put option contracts was $83 million and our recorded liability at fair value was $286 million. Our ultimate payment obligations, if any, under these contracts will be determined as of the contract expiration dates based on the intrinsic value as defined under the contracts.

Other

A summary of after-tax other earnings/losses follows (in millions).

Third QuarterFirst Nine Months
2021202020212020
Equity method earnings$310$244$665$346
Acquisition accounting expenses(169)(195)(532)(593)
Goodwill and intangible asset impairments—(19)—(10,369)
Corporate interest expense, before foreign currency effects(75)(80)(232)(252)
Foreign currency exchange rate gains (losses) on Berkshire and BHFC non-U.S. Dollar senior notes196(412)676(329)
Income tax expense adjustments—(60)—(60)
Other873276363
$349$(490)$653$(10,894)

After-tax equity method earnings 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 $168 million for the third quarter and $323 million for the first nine months of 2021. Our Kraft Heinz investment produced after-tax earnings of $142 million for the third quarter and an after-tax loss of $56 million for the first nine months of 2020, which included after-tax losses of $59 million in the third quarter and $611 million in the first nine months associated with goodwill and intangible asset impairment charges recorded by Kraft Heinz.

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 of intangible assets recorded in connection with those business acquisitions. Goodwill and intangible asset impairments in the first nine months of 2020 included $9.8 billion attributable to impairments of goodwill and certain identifiable intangible assets recorded in connection with our acquisition of PCC in 2016.

Foreign currency exchange rate gains and losses pertain to Berkshire’s Euro and Japanese Yen denominated debt and BHFC’s Great Britain Pound denominated debt. Changes in foreign currency exchange rates produce unrealized gains and losses from the periodic revaluation of these liabilities into U.S. Dollars. The gains and losses recorded in any given period can be significant due to the magnitude of the borrowings and the inherent volatility in foreign currency exchange rates.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Financial Condition

Our consolidated balance sheet continues to reflect very significant liquidity and a very strong capital base. Consolidated shareholders’ equity at September 30, 2021 was $472 billion, an increase of $29.3 billion since December 31, 2020. Net earnings attributable to Berkshire shareholders were $50.1 billion in the first nine months of 2021 and included after-tax gains on our investments of approximately $29.4 billion. Changes in the market prices of our investments in equity securities can produce significant volatility in our earnings.

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 Bills holdings below $30 billion. Financial strength and redundant liquidity will always be of paramount importance at Berkshire. Berkshire paid $20.2 billion in the first nine months of 2021 to repurchase shares of its Class A and B common stock.

At September 30, 2021, our insurance and other businesses held cash, cash equivalents and U.S. Treasury Bills of $144.4 billion, which included $116.6 billion in U.S. Treasury Bills. Investments in equity and fixed maturity securities (excluding our investment in Kraft Heinz) were $328.9 billion.

Berkshire parent company outstanding debt at September 30, 2021 was $21.8 billion, a decrease of $886 million since December 31, 2020, which was primarily due to the effects of foreign currency exchange rate changes on Euro and Japanese Yen denominated debt. In the first nine months of 2021, Berkshire repaid €550 million and $1.5 billion of maturing senior notes. In the first nine months of 2021, Berkshire issued €600 million of 0.5% senior notes due in 2041 and ¥160 billion (approximately $1.5 billion) of senior notes with maturity dates ranging from 2026 to 2041 and a weighted average interest rate of 0.5%. Berkshire parent company debt maturing over the next twelve months is $600 million.

Berkshire’s insurance and other subsidiary outstanding borrowings were $17.9 billion at September 30, 2021, 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 January 2021, BHFC repaid $750 million of maturing senior notes and issued $750 million of 2.5% senior notes due in 2051. BHFC debt maturing over the next twelve months is $775 million. Berkshire guarantees BHFC’s senior notes for the full and timely payment of principal and interest.

Our railroad, utilities and energy businesses (conducted by BNSF and BHE) maintain very large investments in capital assets (property, plant and equipment) and will regularly make significant capital expenditures in the normal course of business. Capital expenditures of these two operations in the first nine months of 2021 were $6.7 billion and we currently forecast additional capital expenditures of approximately $3.1 billion over the remainder of 2021.

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. BNSF’s outstanding debt was $23.3 billion as of September 30, 2021, relatively unchanged from December 31, 2020. During the first nine months of 2021, BNSF repaid $888 million of debt and issued $925 million of 3.3% debentures due in 2051. Outstanding borrowings of BHE and its subsidiaries were $52.1 billion at September 30, 2021, relatively unchanged from December 31, 2020. During the first nine months of 2021, BHE and its subsidiaries repaid $1.7 billion of term debt and issued $2.1 billion of term debt with a weighted average interest rate of 3.0% with due dates in 2051 and 2052, and short-term borrowings decreased by $318 million. Aggregate debt maturities for BHE and BNSF over the next twelve months approximate $2.4 billion.

Contractual Obligations

We are party to contracts associated with ongoing business and financing activities, which will result in cash payments to counterparties in future periods. Certain obligations are included in our Consolidated Balance Sheets, such as notes payable, which require future payments on contractually specified dates and in fixed and determinable amounts. Other obligations pertaining to the acquisition of goods or services in the future are not currently reflected in the financial statements and will be recognized in future periods as the goods are delivered or services are provided. The timing and amount of the payments under certain contracts, such as insurance and reinsurance contracts, are contingent upon the outcome of future events and the actual payments will likely vary, perhaps materially, from the estimated liabilities currently recorded in our Consolidated Balance Sheet.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Contractual Obligations (Continued)

In the first nine months of 2021, Berkshire and certain of its subsidiaries issued term debt of approximately $5.9 billion in the aggregate. Principal and interest payments associated with these borrowings are expected as follows: in 2021 – $27 million; in 2022 through 2025 – $121 million per annum; and thereafter – $8.8 billion.

Except as otherwise disclosed in this Quarterly Report, our contractual obligations as of September 30, 2021 were, in the aggregate, not materially different from those disclosed in the “Contractual Obligations” section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Berkshire’s Annual Report on Form 10-K for the year ended December 31, 2020.

Critical Accounting Policies

Certain accounting policies require us to make estimates and judgments that affect the amounts reflected in the Consolidated Financial Statements. Such estimates and judgments necessarily involve varying, and possibly significant, degrees of uncertainty. Accordingly, certain amounts recorded in the financial statements will likely be adjusted in the future based on new available information and changes in other facts and circumstances. Reference is made to “Critical Accounting Policies” discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Berkshire’s Annual Report on Form 10-K for the year ended December 31, 2020.

Our Consolidated Balance Sheet as of September 30, 2021 includes estimated liabilities of $125.5 billion for unpaid losses and loss adjustment expenses from property and casualty insurance and reinsurance contracts. Due to the inherent uncertainties in the processes of establishing these liabilities, the actual ultimate claim amounts will likely differ from the currently recorded amounts. A very small percentage change in estimates of this magnitude can result in a material effect on periodic earnings. The effects from changes in these estimates are recorded as a component of insurance losses and loss adjustment expenses in the period of the change.

Our Consolidated Balance Sheet as of September 30, 2021 included goodwill of acquired businesses of $73.8 billion and indefinite-lived intangible assets of $18.3 billion. We evaluate these assets for impairment at least annually and we conducted our most recent annual review during the fourth quarter of 2020.

Goodwill and indefinite-lived intangible asset impairment reviews include determining the estimated fair values of our reporting units and assets. The key assumptions and inputs used in such determinations may include forecasting revenues and expenses, cash flows and capital expenditures, as well as an appropriate discount rate and other inputs. Significant judgment by management is required in estimating the fair value of a reporting unit and in performing impairment tests. 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.

As of September 30, 2021, we concluded it is more likely than not that goodwill recorded in our Consolidated Balance Sheet was not impaired. The long-term adverse effects of the COVID-19 pandemic on certain of our reporting units may prove to be worse than we currently anticipate, and we may need to record goodwill or indefinite-lived asset impairment charges in future periods. Making estimates of the fair value of reporting units and judgments on goodwill impairments at this time are and will likely be significantly affected by assumptions on the severity, duration or long-term effects of the pandemic on a reporting unit’s business, which we cannot reliably predict. Consequently, any fair value estimates in such instances can be subject to wide variations.

As of the most recent annual goodwill impairment review, the estimated fair values of certain reporting units did not exceed our carrying values by at least 20%. The most significant of these reporting units was Precision Castparts Corp. (“PCC”). The estimated fair value of PCC was approximately $35.5 billion, exceeding our carrying value of approximately $32.1 billion by 10.6%. Our carrying value of PCC included goodwill of approximately $7.5 billion. For the four other reporting units where estimated fair value did not exceed carrying value by at least 20%, their aggregate estimated fair value of approximately $1.5 billion exceeded our aggregate carrying value of approximately $1.4 billion by 10.0%. Our carrying value of these units included goodwill of approximately $600 million.

Information concerning new accounting pronouncements is included in Note 2 to the accompanying Consolidated Financial Statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Investors are cautioned that certain statements contained in this document as well as some statements in periodic press releases and some oral statements of Berkshire officials during presentations about Berkshire or its subsidiaries are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). Forward-looking statements include statements which are predictive in nature, which depend upon or refer to future events or conditions, or which include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates” or similar expressions. In addition, any statements concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects and possible future Berkshire actions, which may be provided by management, are also forward-looking statements as defined by the Act. Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties and assumptions about Berkshire and its subsidiaries, economic and market factors and the industries in which we do business, among other things. These statements are not guarantees of future performance and we have no specific intention to update these statements.

Actual events and results may differ materially from those expressed or forecasted in forward-looking statements due to a number of factors. The principal risk factors that could cause our actual performance and future events and actions to differ materially from such forward-looking statements include, but are not limited to, changes in market prices of our investments in fixed maturity and equity securities; losses realized from derivative contracts; the occurrence of one or more catastrophic events, such as an earthquake, hurricane, act of terrorism or cyber-attack that causes losses insured by our insurance subsidiaries and/or losses to our business operations; the frequency and severity of epidemics, pandemics or other outbreaks, including COVID-19, that negatively affect our operating results and restrict our access to borrowed funds through the capital markets at reasonable rates; changes in laws or regulations affecting our insurance, railroad, utilities and energy and finance subsidiaries; changes in federal income tax laws; and changes in general economic and market factors that affect the prices of securities or the industries in which we do business.

Previous: Item 1. Financial Statements · Next: Item 3. Quantitative and Qualitative Disclosures About Market Risk