filings.toolsItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
105K characters. Original on sec.gov · Markdown
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Net earnings/loss attributable to Berkshire Hathaway shareholders are disaggregated in the table that follows. Amounts are after deducting income taxes and exclude earnings attributable to noncontrolling interests (in millions).
| Second Quarter | First Six Months | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Insurance – underwriting | $ | 581 | $ | 376 | $ | 628 | $ | 1,140 | ||||||||
| Insurance – investment income | 1,906 | 1,219 | 3,076 | 2,427 | ||||||||||||
| Railroad | 1,664 | 1,516 | 3,035 | 2,767 | ||||||||||||
| Utilities and energy | 766 | 740 | 1,516 | 1,443 | ||||||||||||
| Manufacturing, service and retailing | 3,249 | 3,004 | 6,274 | 5,623 | ||||||||||||
| Investment and derivative contract gains (losses) | (53,038 | ) | 21,408 | (54,618 | ) | 26,101 | ||||||||||
| Other | 1,117 | (169 | ) | 1,794 | 304 | |||||||||||
| Net earnings (loss) attributable to Berkshire Hathaway shareholders | $ | (43,755 | ) | $ | 28,094 | $ | (38,295 | ) | $ | 39,805 |
Through our subsidiaries, we engage in numerous 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 23 to the accompanying Consolidated Financial Statements) should be read in conjunction with this discussion.
In varying degrees, the COVID-19 pandemic continues to affect our operating businesses. Significant government and private sector actions have been taken since 2020 to control the spread and mitigate the economic effects of the virus. Actions in the latter part of 2021 and during 2022 included periodic temporary business closures or restrictions of business activities in various parts of the world in response to the emergence of variants of the virus. Notwithstanding these efforts, significant disruptions of supply chains and higher costs have persisted. Further, geopolitical conflicts, including the Russia-Ukraine conflict, have developed in 2022. While direct losses to-date have not been material to consolidated results, these events had indirect impacts by contributing to the disruptions of global supply chains, resulting in cost increases for goods and services in parts of the world where we operate. We cannot reliably predict future economic effects of these events on our businesses or when our operations will normalize. Nor can we reliably predict how these events will alter the future consumption patterns of consumers and businesses we serve.
Insurance underwriting after-tax earnings increased $205 million (54.5%) in the second quarter and decreased $512 million (44.9%) in the first six months of 2022 versus 2021. In each period, underwriting earnings from GEICO declined, primarily attributable to increases in claims frequencies and severities and lower reductions of ultimate claim estimates for prior years’ losses. Underwriting earnings in 2022 from reinsurance activities increased compared to 2021, reflecting foreign currency exchange rate gains arising from the remeasurement of non-U.S. Dollar denominated liabilities on insurance contracts of our U.S. insurance subsidiaries due to strengthening of the U.S. Dollar and improved life results. After-tax earnings from insurance investment income increased 56.4% in the second quarter and 26.7% in the first six months of 2022 compared to 2021, attributable to increased dividend income and higher interest rates.
After-tax earnings of our railroad business increased 9.8% in the second quarter and 9.7% in the first six months of 2022 compared to 2021. These increases reflected higher revenue per car/unit, partly offset by lower overall freight volumes and higher fuel costs. After-tax earnings of our utilities and energy business increased 3.5% in the second quarter and 5.1% in the first six months of 2022 compared to 2021. The increases reflected higher earnings from tax equity investments and from the natural gas pipeline and Northern Powergrid businesses, partly offset by lower earnings from the U.S. regulated utilities and real estate brokerage businesses. After-tax earnings from our manufacturing, service and retailing businesses increased 8.2% in the second quarter and 11.6% in the first six months of 2022 versus 2021. Results were mixed among our various businesses. While customer demand for products and services was relatively good in the first six months of 2022, we continue to experience the negative effects of higher materials, freight, labor and other input costs.
Investment and derivative contract gains and losses in 2022 and 2021 predominantly derived from our investments in equity securities and includes unrealized gains and losses from market price changes during the period. 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 quarterly or annual results or in evaluating the economic performance of our businesses. These gains and losses have caused and will continue to cause significant volatility in our periodic earnings. Other earnings included after-tax foreign currency exchange gains related to non-U.S. Dollar denominated debt of $1.1 billion in the second quarter and $1.6 billion in the first six months of 2022, compared to after-tax losses of $45 million and after-tax gains of $480 million in the second quarter and first six months of 2021, respectively.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 and 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. We believe that such gains and losses are not meaningful in understanding the quarterly or annual operating results of our insurance businesses.
The timing and magnitude of catastrophe losses can produce significant volatility in our periodic underwriting results, particularly with respect to our reinsurance businesses. Generally, we consider incurred losses exceeding $100 million from a current year catastrophic event to be significant. Significant catastrophe events in the first six months included floods in Australia and South Africa in 2022 and Winter Storm Uri in 2021.
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 $126 billion as of June 30, 2022. 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.
Underwriting results of certain of our commercial insurance and reinsurance businesses have been affected by estimated losses and costs associated with the COVID-19 pandemic. While the effects of the pandemic on underwriting results in the first six months of 2022 were insignificant, results in future periods may be affected by legal and regulatory actions pertaining to insurance coverage, 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. Underwriting results of our insurance businesses are summarized below (dollars in millions).
| Second Quarter | First Six Months | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | ||||||||||||
| Pre-tax underwriting earnings (loss): | |||||||||||||||
| GEICO | $ | (487 | ) | $ | 626 | $ | (665 | ) | $ | 1,649 | |||||
| Berkshire Hathaway Primary Group | 242 | 166 | 334 | 372 | |||||||||||
| Berkshire Hathaway Reinsurance Group | 967 | (327 | ) | 1,123 | (590 | ) | |||||||||
| Pre-tax underwriting earnings | 722 | 465 | 792 | 1,431 | |||||||||||
| Income taxes and noncontrolling interests | 141 | 89 | 164 | 291 | |||||||||||
| Net underwriting earnings | $ | 581 | $ | 376 | $ | 628 | $ | 1,140 | |||||||
| Effective income tax rate | 19.4 | % | 19.0 | % | 20.7 | % | 20.3 | % |
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).
| Second Quarter | First Six Months | ||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | Amount | % | ||||||||||||||||||||||||
| Premiums written | $ | 9,416 | $ | 9,230 | $ | 19,681 | $ | 19,236 | |||||||||||||||||||||||
| Premiums earned | $ | 9,807 | 100.0 | $ | 9,546 | 100.0 | $ | 19,361 | 100.0 | $ | 18,469 | 100.0 | |||||||||||||||||||
| Losses and loss adjustment expenses | 9,105 | 92.8 | 7,617 | 79.8 | 17,649 | 91.2 | 14,080 | 76.2 | |||||||||||||||||||||||
| Underwriting expenses | 1,189 | 12.2 | 1,303 | 13.6 | 2,377 | 12.2 | 2,740 | 14.9 | |||||||||||||||||||||||
| Total losses and expenses | 10,294 | 105.0 | 8,920 | 93.4 | 20,026 | 103.4 | 16,820 | 91.1 | |||||||||||||||||||||||
| Pre-tax underwriting earnings (loss) | $ | (487 | ) | $ | 626 | $ | (665 | ) | $ | 1,649 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Insurance—Underwriting (Continued)
GEICO (Continued)
GEICO’s pre-tax underwriting loss in the first half of 2022 reflected increased claims severities, primarily due to significant cost inflation in automobile markets, which began to accelerate in the second half of 2021. Increases in used car prices are producing increased claims severities on total losses and shortages of car parts are contributing to increased claims severities on partial losses. In addition, injury claims severities continue to trend higher than general inflation rates.
Premiums written increased $186 million (2.0%) in the second quarter and $445 million (2.3%) in the first six months of 2022 compared to 2021. The increases were primarily attributable to increases in average premiums per auto policy due to rate increases, partially offset by a decrease in policies in-force. Premiums earned increased $261 million (2.7%) in the second quarter and $892 million (4.8%) in the first six months of 2022 compared to 2021. Premiums earned in the first six months of 2021 included a reduction of approximately $460 million attributable to the remaining impact of the GEICO Giveback program that provided a 15% premium credit to new and renewing voluntary auto and motorcycle policies written between April 8, 2020 and October 7, 2020.
Losses and loss adjustment expenses increased $1.5 billion (19.5%) in the second quarter and $3.6 billion (25.3%) in the first six months of 2022 compared to 2021. GEICO’s ratio of losses and loss adjustment expenses to premiums earned was 92.8% in the second quarter and 91.2% in the first six months of 2022, increases of 13.0 percentage points and 15.0 percentage points, respectively, compared to the same periods in 2021, which reflected increases in claims frequencies and severities for the current year and lower reductions of loss estimates for prior years’ loss events.
Claims frequencies in the first six months of 2022 were higher for all coverages, including property damage (four to five percent range), collision (ten to eleven percent range), bodily injury (six to seven percent range) and personal injury (seven to eight percent range). Average claims severities in the first six months of 2022 were higher for property damage coverage (eleven to twelve percent range), collision coverage (nineteen to twenty percent range) and bodily injury coverage (nine to eleven percent range). Losses and loss adjustment expenses reflected reductions in the ultimate loss estimates for prior years’ loss events of $207 million in the first six months of 2022 compared to $846 million in the first six months of 2021. The reductions in 2022 reflected decreases for bodily and personal injury coverages, partially offset by increases for collision and property damage coverages, while the reductions in 2021 were across all major coverages.
Underwriting expenses decreased $114 million (8.7%) in the second quarter and $363 million (13.2%) in the first six months of 2022 compared to 2021, reflecting lower advertising costs in both periods and lower employee-related costs in the first six months. GEICO’s expense ratio (underwriting expense to premiums earned) was 12.2% in the second quarter and first six months of 2022, decreases of 1.4 percentage points and 2.7 percentage points, respectively, compared to the same periods in 2021, attributable to both the decreases in expenses as well as the increases in earned premiums.
Berkshire Hathaway Primary Group
The Berkshire Hathaway Primary Group (“BH Primary”) provides a variety of commercial insurance solutions, including healthcare professional liability, workers’ compensation, automobile, general liability, property and specialty coverages for small, medium and large clients. BH Primary’s larger insurers include Berkshire Hathaway Specialty Insurance (“BH Specialty”), Berkshire Hathaway Homestate Companies (“BHHC”), MedPro Group, Berkshire Hathaway GUARD Insurance Companies (“GUARD”), National Indemnity Company (“NICO Primary”) and U.S. Liability Insurance Company (“USLI”). A summary of BH Primary underwriting results follows (dollars in millions).
| Second Quarter | First Six Months | ||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | Amount | % | ||||||||||||||||||||||||
| Premiums written | $ | 3,504 | $ | 2,943 | $ | 6,896 | $ | 5,851 | |||||||||||||||||||||||
| Premiums earned | $ | 3,313 | 100.0 | $ | 2,755 | 100.0 | $ | 6,431 | 100.0 | $ | 5,409 | 100.0 | |||||||||||||||||||
| Losses and loss adjustment expenses | 2,243 | 67.7 | 1,955 | 71.0 | 4,517 | 70.2 | 3,804 | 70.3 | |||||||||||||||||||||||
| Underwriting expenses | 828 | 25.0 | 634 | 23.0 | 1,580 | 24.6 | 1,233 | 22.8 | |||||||||||||||||||||||
| Total losses and expenses | 3,071 | 92.7 | 2,589 | 94.0 | 6,097 | 94.8 | 5,037 | 93.1 | |||||||||||||||||||||||
| Pre-tax underwriting earnings | $ | 242 | $ | 166 | $ | 334 | $ | 372 |
Premiums written increased $561 million (19.1%) in the second quarter and $1.0 billion (17.9%) in the first six months of 2022 compared to 2021, reflecting year-to-date increases at BH Specialty (26%), USLI (17%) and BHHC (14%). The increases were primarily on property and casualty coverages in the U.S. across several markets.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Insurance—Underwriting (Continued)
Berkshire Hathaway Primary Group (Continued)
BH Primary’s loss ratio was 67.7% in the second quarter and 70.2% in the first six months of 2022, a decrease of 3.3 percentage points in the second quarter and relatively unchanged in the first six months compared to 2021. Losses and loss adjustment expenses from significant catastrophe events were $75 million in the first six months of 2022 compared to $156 million in 2021. Losses and loss adjustment expenses also included net reductions in estimated ultimate liabilities for prior years’ loss events of $106 million in the first six months of 2022 compared to $253 million in 2021. BH Primary insurers write significant levels of workers’ compensation, commercial and professional liability insurance and the related claim costs may be subject to high severity and long claim-tails. 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.
Underwriting expenses increased $194 million (30.6%) in the second quarter and $347 million (28.1%) in the first six months of 2022 compared to the same periods in 2021. The expense ratio increased 2.0 percentage points in the second quarter and 1.8 percentage points in the first six months compared to 2021. These increases reflected costs associated with new business development and changes in business mix.
Berkshire Hathaway Reinsurance Group
The Berkshire Hathaway Reinsurance Group (“BHRG”) offers excess-of-loss and quota-share reinsurance coverages on property and casualty risks to insurers and reinsurers worldwide through several subsidiaries, led by National Indemnity Company (“NICO”), General Reinsurance Corporation and General Reinsurance AG. We also write life and health reinsurance coverages through General Re Life Corporation, General Reinsurance AG and Berkshire Hathaway Life Insurance Company of Nebraska (“BHLN”). We periodically assume property and casualty risks under retroactive reinsurance contracts written through NICO. In addition, we write periodic payment annuity contracts through BHLN.
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 business due to the expected long durations of the claim liabilities. We expect to incur pre-tax underwriting losses from such business, 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).
| Second Quarter | First Six Months | ||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Premiums earned | Pre-tax underwriting earnings (loss) | Premiums earned | Pre-tax underwriting earnings (loss) | ||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||
| Property/casualty | $ | 3,531 | $ | 3,354 | $ | 976 | $ | 202 | $ | 6,930 | $ | 6,748 | $ | 1,381 | $ | 368 | |||||||||||||||
| Life/health | 1,265 | 1,299 | 75 | (169 | ) | 2,513 | 2,604 | 63 | (341 | ) | |||||||||||||||||||||
| Retroactive reinsurance | — | 82 | (52 | ) | (220 | ) | — | 82 | (242 | ) | (462 | ) | |||||||||||||||||||
| Periodic payment annuity | 168 | 123 | (27 | ) | (144 | ) | 337 | 267 | (130 | ) | (280 | ) | |||||||||||||||||||
| Variable annuity | 3 | 4 | (5 | ) | 4 | 7 | 8 | 51 | 125 | ||||||||||||||||||||||
| $ | 4,967 | $ | 4,862 | $ | 967 | $ | (327 | ) | $ | 9,787 | $ | 9,709 | $ | 1,123 | $ | (590 | ) |
Property/casualty
A summary of property/casualty reinsurance underwriting results follows (dollars in millions).
| Second Quarter | First Six Months | ||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | Amount | % | ||||||||||||||||||||||||
| Premiums written | $ | 4,159 | $ | 3,426 | $ | 8,545 | $ | 7,809 | |||||||||||||||||||||||
| Premiums earned | $ | 3,531 | 100.0 | $ | 3,354 | 100.0 | $ | 6,930 | 100.0 | $ | 6,748 | 100.0 | |||||||||||||||||||
| Losses and loss adjustment expenses | 2,067 | 58.5 | 2,296 | 68.5 | 4,374 | 63.1 | 4,703 | 69.7 | |||||||||||||||||||||||
| Underwriting expenses | 488 | 13.9 | 856 | 25.5 | 1,175 | 17.0 | 1,677 | 24.8 | |||||||||||||||||||||||
| Total losses and expenses | 2,555 | 72.4 | 3,152 | 94.0 | 5,549 | 80.1 | 6,380 | 94.5 | |||||||||||||||||||||||
| Pre-tax underwriting earnings | $ | 976 | $ | 202 | $ | 1,381 | $ | 368 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Insurance—Underwriting (Continued)
Berkshire Hathaway Reinsurance Group (Continued)
Property/casualty (Continued)
Premiums written increased $733 million (21.4%) in the second quarter and $736 million (9.4%) in the first six months of 2022 compared to the same periods in 2021, reflecting net increases from new property business and rates, partially offset by unfavorable foreign currency translation effects. Losses and loss adjustment expenses decreased $229 million (10.0%) in the second quarter and $329 million (7.0%) in the first six months, while the loss ratio declined 10.0 percentage points in the second quarter and 6.6 percentage points in the first six months of 2022 compared to 2021. Losses incurred arising from significant catastrophe events were $443 million in the second quarter and $758 million in the first six months of 2022, which were partially offset by reductions in estimated ultimate liabilities for losses occurring in prior years of $437 million in the second quarter and $574 million in the first six months. Losses incurred from significant catastrophe events were $108 million in the second quarter and $418 million in the first six months of 2021. Changes in estimated ultimate liabilities for prior years’ loss events were relatively insignificant in the second quarter and first six months of 2021.
Underwriting expenses as percentages of premiums earned decreased 11.6 percentage points in the second quarter and 7.8 percentage points in the first six months of 2022 compared to 2021, primarily attributable to foreign currency effects and changes in business mix. Underwriting expenses included foreign currency exchange gains of $308 million in the second quarter and $389 million in the first six months of 2022, primarily related to a third quarter 2021 intercompany reinsurance agreement in which a non-U.S. based Berkshire subsidiary ceded non-U.S. Dollar denominated liabilities to a U.S. based Berkshire subsidiary. Under U.S. GAAP, the effects of exchange rate changes from the remeasurement of liabilities assumed by the U.S. subsidiary are reflected in earnings as its functional currency is the U.S. Dollar. The net foreign currency exchange rate effects from translating the financial statements of the non-U.S. subsidiary to the U.S. Dollar are included in other comprehensive income.
Life/health
A summary of our life/health reinsurance underwriting results follows (dollars in millions).
| Second Quarter | First Six Months | ||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | Amount | % | ||||||||||||||||||||||||
| Premiums written | $ | 1,249 | $ | 1,296 | $ | 2,492 | $ | 2,597 | |||||||||||||||||||||||
| Premiums earned | $ | 1,265 | 100.0 | $ | 1,299 | 100.0 | $ | 2,513 | 100.0 | $ | 2,604 | 100.0 | |||||||||||||||||||
| Life and health insurance benefits | 964 | 76.2 | 1,235 | 95.1 | 2,015 | 80.2 | 2,486 | 95.5 | |||||||||||||||||||||||
| Underwriting expenses | 226 | 17.8 | 233 | 17.9 | 435 | 17.3 | 459 | 17.6 | |||||||||||||||||||||||
| Total benefits and expenses | 1,190 | 94.0 | 1,468 | 113.0 | 2,450 | 97.5 | 2,945 | 113.1 | |||||||||||||||||||||||
| Pre-tax underwriting earnings (loss) | $ | 75 | $ | (169 | ) | $ | 63 | $ | (341 | ) |
Life/health premiums written decreased $47 million (3.6%) in the second quarter and $105 million (4.0%) in the first six months of 2022 compared to the same periods in 2021, primarily due to lower volumes in the Asia Pacific and North America regions and from unfavorable foreign currency translation effects. Life and health benefits declined $271 million (21.9%) in the second quarter and $471 million (18.9%) in the first six months of 2022 compared to 2021, attributable to lower mortality. Underwriting results in 2021 were negatively affected by significant, pandemic-related increases in mortality in the U.S., South Africa, India and Latin America.
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. Foreign currency exchange gains were $157 million in the first six months of 2022, substantially all of which was in the second quarter. Foreign currency exchange gains/losses were insignificant in the corresponding 2021 periods. Pre-tax underwriting losses before foreign currency exchange effects were $204 million in the second quarter and $399 million in the first six months of 2022 compared to $220 million in the second quarter and $463 million in the first six months of 2021.
Unpaid losses assumed under retroactive reinsurance contracts declined $1.0 billion in the first six months of 2022 to $37.2 billion at June 30, 2022, primarily due to loss payments. Unamortized deferred charges related to retroactive reinsurance contracts declined $426 million in the first six months of 2022 to $10.2 billion at June 30, 2022, primarily attributable to periodic amortization. Deferred charge amortization will be included in underwriting earnings over the expected remaining claims settlement periods.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Insurance—Underwriting (Continued)
Berkshire Hathaway Reinsurance Group (Continued)
Periodic payment annuity
Periodic payment annuity premiums earned increased $45 million (36.6%) in the second quarter and $70 million (26.2%) in the first six months of 2022 compared to the same periods in 2021. Periodic payment annuity business is both price and demand sensitive and the supply of available business is affected by the timing of underlying legal claim settlements. Our volumes written may 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 gains of $116 million in the second quarter and $160 million in the first six months of 2022 compared to losses of $10 million in the second quarter and $20 million in the first six months of 2021.
Pre-tax underwriting losses before foreign currency exchange effects were $143 million in the second quarter and $290 million in the first six months of 2022 and $134 million in the second quarter and $260 million in the first six months of 2021. Discounted annuity liabilities were $15.4 billion at June 30, 2022 and had a weighted average discount rate of approximately 3.9%.
Variable annuity
Variable annuity guarantee reinsurance contracts produced pre-tax losses of $5 million in the second quarter and gains of $51 million in the first six months of 2022 compared to pre-tax gains of $4 million in the second quarter and $125 million in the first six months of 2021. The results from these contracts are affected by changes in securities markets, interest rates and foreign currency exchange rates, which can be volatile, and from the periodic amortization of expected profit margins. Underwriting earnings in the first six months of 2022 and 2021 were primarily attributable to the net effects of interest rate changes and changes in securities markets which were unfavorable in 2022 and favorable in 2021.
Insurance—Investment Income
A summary of net investment income attributable to our insurance operations follows (dollars in millions).
| Second Quarter | First Six Months | Percentage Change | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | Second Quarter | First Six Months | ||||||||||||||||||
| Dividend income | $ | 2,055 | $ | 1,298 | $ | 3,252 | $ | 2,551 | 58.3 | % | 27.5 | % | |||||||||||
| Interest and other investment income | 228 | 158 | 392 | 317 | 44.3 | 23.7 | |||||||||||||||||
| Pre-tax net investment income | 2,283 | 1,456 | 3,644 | 2,868 | 56.8 | 27.1 | |||||||||||||||||
| Income taxes and noncontrolling interests | 377 | 237 | 568 | 441 | |||||||||||||||||||
| Net investment income | $ | 1,906 | $ | 1,219 | $ | 3,076 | $ | 2,427 | |||||||||||||||
| Effective income tax rate | 16.5 | % | 16.3 | % | 15.6 | % | 15.4 | % |
Dividend income increased 58.3% in the second quarter and 27.5% in the first six months of 2022 compared to 2021. The increases in 2022 reflected an overall increase in equity security investments during the first six months of 2022. Dividend income also varies from period to period due to changes in the investment portfolio and the frequency and timing of dividends from certain investees. Dividend income included $13 million in the second quarter and $29 million in the first six months of 2022 and $37 million in the second quarter and $75 million in the first six months of 2021 from investments in preferred stock of Berkshire Hathaway Energy. Such amounts are deducted from earnings of the utilities and energy segment.
Interest and other investment income increased 44.3% in the second quarter and 23.7% in the first six months of 2022 compared to the same periods in 2021. The increases were primarily due to increases in short-term interest rates. We continue to hold substantial balances of cash, cash equivalents and short-term U.S. Treasury Bills. While exceptionally low interest rates prevailed in recent years, interest rates began to increase during 2022. The effects of such increases are expected to be reflected in our earnings as maturing investments are replaced by new investments. We continue to believe that maintaining ample liquidity is paramount and we insist on safety over yield with respect to short-term investments.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Insurance—Investment Income (Continued)
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 $147 billion at June 30, 2022 and December 31, 2021. Our combined insurance operations generated pre-tax underwriting earnings in the first six months of 2022 and 2021, 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 June 30, 2022 and December 31, 2021 follows (in millions).
| June 30, 2022 | December 31, 2021 | |||||||
|---|---|---|---|---|---|---|---|---|
| Cash, cash equivalents and U.S. Treasury Bills | $ | 58,034 | $ | 90,688 | ||||
| Equity securities | 312,777 | 334,907 | ||||||
| Fixed maturity securities | 21,028 | 16,386 | ||||||
| Other | 3,421 | 4,296 | ||||||
| $ | 395,260 | $ | 446,277 |
Fixed maturity securities as of June 30, 2022 were as follows (in millions).
| Amortized Cost | Unrealized Gains (Losses) | Carrying Value | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| U.S. Treasury, U.S. government corporations and agencies | $ | 8,884 | $ | (152 | ) | $ | 8,732 | |||||
| Foreign governments | 10,880 | (107 | ) | 10,773 | ||||||||
| Corporate bonds | 981 | 255 | 1,236 | |||||||||
| Other | 260 | 27 | 287 | |||||||||
| $ | 21,005 | $ | 23 | $ | 21,028 |
U.S. government obligations are rated AA+ or Aaa by the major rating agencies. Approximately 94% of all foreign government obligations were rated AA or higher by at least one of the major rating agencies as of June 30, 2022. Foreign government securities include obligations issued or unconditionally guaranteed by national or provincial government entities.
Railroad
Burlington Northern Santa Fe, LLC (“BNSF”) operates one of the largest railroad systems in North America, with over 32,500 route miles of track in 28 states. BNSF also operates in three Canadian provinces. BNSF classifies its major business groups by type of product shipped including consumer products, industrial products, agricultural products and coal. A summary of BNSF’s earnings follows (dollars in millions).
| Second Quarter | First Six Months | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Railroad operating revenues | $ | 6,454 | $ | 5,609 | $ | 12,231 | $ | 10,830 | ||||||||
| Railroad operating expenses: | ||||||||||||||||
| Compensation and benefits | 1,213 | 1,145 | 2,437 | 2,309 | ||||||||||||
| Fuel | 1,276 | 693 | 2,137 | 1,243 | ||||||||||||
| Purchased services | 509 | 510 | 1,008 | 1,015 | ||||||||||||
| Depreciation and amortization | 618 | 608 | 1,242 | 1,224 | ||||||||||||
| Equipment rents, materials and other | 460 | 433 | 986 | 924 | ||||||||||||
| Total | 4,076 | 3,389 | 7,810 | 6,715 | ||||||||||||
| Railroad operating earnings | 2,378 | 2,220 | 4,421 | 4,115 | ||||||||||||
| Other revenues (expenses): | ||||||||||||||||
| Other revenues | 186 | 200 | 377 | 380 | ||||||||||||
| Other expenses, net | (159 | ) | (180 | ) | (329 | ) | (338 | ) | ||||||||
| Interest expense | (254 | ) | (261 | ) | (509 | ) | (519 | ) | ||||||||
| Pre-tax earnings | 2,151 | 1,979 | 3,960 | 3,638 | ||||||||||||
| Income taxes | 487 | 463 | 925 | 871 | ||||||||||||
| Net earnings | $ | 1,664 | $ | 1,516 | $ | 3,035 | $ | 2,767 | ||||||||
| Effective income tax rate | 22.6 | % | 23.4 | % | 23.4 | % | 23.9 | % |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Railroad (Continued)
The following table summarizes BNSF’s railroad freight volumes by business group (cars/units in thousands).
| Cars/Units | Percentage Change | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Second Quarter | First Six Months | Second | First Six | ||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | Quarter | Months | ||||||||||||||||||
| Consumer products | 1,379 | 1,489 | 2,654 | 2,882 | (7.4 | )% | (7.9 | )% | |||||||||||||||
| Industrial products | 421 | 438 | 824 | 837 | (3.9 | ) | (1.6 | ) | |||||||||||||||
| Agricultural products | 303 | 313 | 608 | 631 | (3.2 | ) | (3.6 | ) | |||||||||||||||
| Coal | 373 | 384 | 759 | 723 | (2.9 | ) | 5.0 | ||||||||||||||||
| 2,476 | 2,624 | 4,845 | 5,073 | (5.6 | ) | (4.5 | ) |
Railroad operating revenues increased 15.1% in the second quarter and 12.9% in the first six months of 2022 compared to 2021 primarily due to a 21.9% quarter-to-date and a 17.9% year-to-date increase in average revenue per car/unit resulting from higher fuel surcharge revenue driven by higher fuel prices, along with increased rates per car/unit. Railroad operating revenues reflected lower volumes of 5.6% in the second quarter and 4.5% in the first six months of 2022 compared to 2021. Pre-tax earnings increased 8.7% in the second quarter and 8.9% in the first six months of 2022 compared to 2021.
Operating revenues from consumer products were $2.5 billion in the second quarter and $4.5 billion in the first six months of 2022, increases of 17.6% and 14.1%, respectively, from 2021. The increases reflected higher average revenue per car/unit, partially offset by volume decreases of 7.4% in the second quarter and 7.9% in the first six months of 2022 as compared to 2021. The volume decreases were primarily due to lower international intermodal shipments resulting from supply chain disruptions, partially offset by modest increases in domestic intermodal and automotive volumes.
Operating revenues from industrial products were $1.5 billion in the second quarter and $2.8 billion in the first six months of 2022, increases of 7.8% and 6.9%, respectively, from 2021. The increases reflected higher average revenue per car/unit, partially offset by volume decreases of 3.9% in the second quarter and 1.6% in the first six months of 2022 as compared to 2021. The volume decreases were primarily due to a decrease in petroleum shipments related to lower demand for crude by rail and network challenges, with the decrease in the first six months partially offset by increased volumes in other product categories.
Operating revenues from agricultural products were $1.4 billion in the second quarter and $2.7 billion in the first six months of 2022, increases of 9.1% and 6.4%, respectively, compared to 2021. The increases were primarily attributable to higher average revenue per car/unit, partially offset by decreased volumes of 3.2% in the second quarter and 3.6% in the first six months of 2022 as compared to 2021. The volume decreases were primarily due to lower grain exports, partially offset by higher volumes of renewable diesel and oil feedstocks.
Operating revenues from coal were $1.0 billion in the second quarter and $1.9 billion in the first six months of 2022, increases of 30.2% and 29.9%, respectively, from 2021. The increases were primarily attributable to higher average revenue per car/unit. Volumes decreased 2.9% in the second quarter primarily due to network challenges, while volumes increased 5.0% in the first six months of 2022 due to increased electricity generation, higher natural gas prices and improved export demand.
Railroad operating expenses were $4.1 billion in the second quarter and $7.8 billion in the first six months of 2022, increases of $687 million (20.3%) and $1.1 billion (16.3%), respectively, compared to 2021, primarily due to significant increases in the cost of fuel, as well as higher compensation and benefits expenses. Our ratio of railroad operating expenses to railroad operating revenues increased 2.8 percentage points to 63.2% in the second quarter and 1.9 percentage points to 63.9% in the first six months of 2022 versus the comparable 2021 periods.
Compensation and benefits expenses increased $68 million (5.9%) in the second quarter and $128 million (5.5%) in the first six months of 2022 compared to 2021, primarily due to wage inflation, health and welfare costs and lower productivity. Fuel expenses increased $583 million (84.1%) in the second quarter and $894 million (71.9%) in the first six months of 2022 compared to 2021, primarily due to higher fuel prices, partially offset by lower volumes.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Utilities and Energy
We currently own 92% of Berkshire Hathaway Energy Company (“BHE”), which operates a global energy business. BHE’s domestic regulated utility interests include PacifiCorp, MidAmerican Energy Company (“MEC”) and NV Energy. BHE subsidiaries also operate two regulated electricity distribution businesses referred to as Northern Powergrid in Great Britain. 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. 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 a residential real estate brokerage business and a large network of residential real estate brokerage franchises in the United States.
The rates our regulated businesses charge customers for energy and services are largely based on the costs of business operations, including income taxes and a return on capital, and are subject to regulatory approval. To the extent such costs are not allowed in the approved rates, operating results will be adversely affected. A summary of BHE’s net earnings follows (dollars in millions).
| Second Quarter | First Six Months | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenues: | ||||||||||||||||
| Energy operating revenue | $ | 4,940 | $ | 4,301 | $ | 9,763 | $ | 9,150 | ||||||||
| Real estate operating revenue | 1,672 | 1,763 | 2,879 | 2,995 | ||||||||||||
| Other income (loss) | (94 | ) | 21 | (141 | ) | (136 | ) | |||||||||
| Total revenue | 6,518 | 6,085 | 12,501 | 12,009 | ||||||||||||
| Costs and expense: | ||||||||||||||||
| Energy cost of sales | 1,525 | 1,110 | 2,985 | 2,679 | ||||||||||||
| Energy operating expense | 2,343 | 2,134 | 4,496 | 4,170 | ||||||||||||
| Real estate operating costs and expense | 1,555 | 1,584 | 2,734 | 2,704 | ||||||||||||
| Interest expense | 531 | 518 | 1,046 | 1,034 | ||||||||||||
| Total costs and expense | 5,954 | 5,346 | 11,261 | 10,587 | ||||||||||||
| Pre-tax earnings | 564 | 739 | 1,240 | 1,422 | ||||||||||||
| Income tax expense (benefit)* | (421 | ) | (212 | ) | (704 | ) | (444 | ) | ||||||||
| Net earnings after income taxes | 985 | 951 | 1,944 | 1,866 | ||||||||||||
| Noncontrolling interests of BHE subsidiaries | 120 | 102 | 229 | 208 | ||||||||||||
| Net earnings attributable to BHE | 865 | 849 | 1,715 | 1,658 | ||||||||||||
| Noncontrolling interests and preferred stock dividends | 99 | 109 | 199 | 215 | ||||||||||||
| Net earnings attributable to Berkshire Hathaway shareholders | $ | 766 | $ | 740 | $ | 1,516 | $ | 1,443 | ||||||||
| Effective income tax rate | (74.6 | )% | (28.7 | )% | (56.8 | )% | (31.2 | )% |
| * | 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).
| Second Quarter | First Six Months | Percentage Change | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | Second Quarter | First Six Months | ||||||||||||||||||
| PacifiCorp | $ | 83 | $ | 226 | $ | 213 | $ | 395 | (63.3 | )% | (46.1 | )% | |||||||||||
| MidAmerican Energy Company | 204 | 211 | 445 | 355 | (3.3 | ) | 25.4 | ||||||||||||||||
| NV Energy | 93 | 100 | 122 | 134 | (7.0 | ) | (9.0 | ) | |||||||||||||||
| Northern Powergrid | 71 | (25 | ) | 182 | 79 | * | 130.4 | ||||||||||||||||
| Natural gas pipelines | 188 | 100 | 497 | 483 | 88.0 | 2.9 | |||||||||||||||||
| Other energy businesses | 310 | 229 | 483 | 291 | 35.4 | 66.0 | |||||||||||||||||
| Real estate brokerage | 84 | 135 | 105 | 219 | (37.8 | ) | (52.1 | ) | |||||||||||||||
| Corporate interest and other | (168 | ) | (127 | ) | (332 | ) | (298 | ) | 32.3 | 11.4 | |||||||||||||
| $ | 865 | $ | 849 | $ | 1,715 | $ | 1,658 | 1.9 | 3.4 |
| * | Not meaningful. |
|---|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Utilities and Energy (Continued)
PacifiCorp operates a regulated electric utility in portions of several Western states, including Utah, Oregon and Wyoming. After-tax earnings decreased $143 million in the second quarter and $182 million in the first six months of 2022 as compared to 2021. The decreases reflected higher operating expenses and lower income tax benefits mainly from lower production tax credits recognized, partially offset by slight increases in utility margin (operating revenue less cost of sales). The increases in operating expenses reflected higher costs associated with wildfires, higher general and plant maintenance costs and incremental costs from additional assets placed in-service.
PacifiCorp’s utility margin was $863 million in the second quarter and $1.7 billion in the first six months of 2022, increases of $6 million and $20 million, respectively, from the comparable periods in 2021. The increases reflected higher operating revenue from favorable retail and wholesale pricing, partially offset by lower operating revenue from decreases in retail customer volumes and higher thermal generation costs. Retail customer volumes decreased 3.3% in the second quarter and 0.7% in the first six months of 2022 compared to 2021, primarily due to the unfavorable impact of weather and lower customer usage, partially offset by 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 decreased $7 million in the second quarter and increased $90 million in the first six months of 2022 compared to 2021. The increase for the first six months reflected higher electric utility margin and increased income tax benefits, partly offset by higher operating expenses. The increase in operating expenses included higher costs associated with certain regulatory mechanisms as well as incremental costs associated with additional wind-powered generating facilities placed in-service. The income tax benefit increase was 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 $551 million in the second quarter and $1.0 billion in the first six months of 2022, increases of 14% and 18%, respectively, versus 2021. The increases were attributable to higher operating revenue from increased retail and wholesale customer volumes and favorable wholesale pricing, partially offset by higher purchased power costs. Electric retail customer volumes increased 3.3% in the second quarter and 4.4% in the first six months of 2022 as compared to 2021, primarily due to higher customer usage and the favorable impact of weather.
NV Energy operates regulated electric and natural gas utilities in Nevada. After-tax earnings decreased $7 million in the second quarter and $12 million in the first six months of 2022 compared to 2021. The decreases reflected higher operating expenses from increased plant operations and maintenance expenses, higher comparative accruals for earnings sharing and incremental costs from additional assets placed in-service.
NV Energy’s electric utility margin was $404 million in the second quarter and $710 million in the first six months of 2022, relatively unchanged compared to 2021. Electric retail customer volumes increased 0.4% in the second quarter and 2.0% in the first six months of 2022 compared to 2021, primarily due to an increase in the average number of customers and higher customer usage, partially offset by the unfavorable impact of weather.
Northern Powergrid’s after-tax earnings increased $96 million in the second quarter and $103 million in the first six months of 2022 as compared to 2021, reflecting the impact on deferred income taxes in 2021 from an increase in the United Kingdom income tax rate, partially offset by unfavorable foreign currency exchange rate movements in 2022. Earnings in each period of 2021 included deferred income tax expense of $109 million related to the enactment in June 2021 of an increase in the United Kingdom income tax rate from 19% to 25%, effective April 1, 2023.
Natural gas pipelines’ after-tax earnings increased $88 million in the second quarter and $14 million in the first six months of 2022 compared to 2021. The increases were primarily due to higher earnings at BHE GT&S, largely from favorable state income tax adjustments, the impacts of an agreement in principle related to a general rate case and lower operating expenses. The year-to-date increase was offset by higher margins on natural gas sales and higher transportation revenue in the first quarter of 2021 due to an increase in demand as a result of the February 2021 winter storms.
Other energy businesses’ after-tax earnings increased $81 million in the second quarter and $192 million in the first six months of 2022 compared to 2021. The increases in earnings were primarily due to increased wind tax equity investment earnings of $40 million in the second quarter and $158 million in the first six months of 2022 as well as from higher operating revenue from owned renewable energy projects. The increases in wind tax equity investment earnings reflected increased income tax benefits from projects reaching commercial operation over the past twelve months. The comparative increase in year-to-date earnings also reflected the impact of significant losses in the first quarter of 2021 on pre-existing tax equity investments due to the February 2021 winter storms.
Real estate brokerage after-tax earnings decreased $51 million in the second quarter and $114 million in the first six months of 2022 compared to 2021. The decreases in earnings were primarily attributable to lower earnings from mortgage services due to a decrease in funded volume and in refinancing activity, and lower earnings from brokerage and settlement services from a decrease in closed units at existing companies.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Utilities and Energy (Continued)
Corporate interest and other after-tax losses increased $41 million in the second quarter and $34 million in the first six months of 2022 compared to 2021, reflecting lower federal income tax credits recognized, partially offset by higher earnings from non-regulated energy services in the first six months.
Manufacturing, Service and Retailing
A summary of revenues and earnings of our manufacturing, service and retailing businesses follows (dollars in millions).
| Second Quarter | First Six Months | Percentage Change | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | Second Quarter | First Six Months | |||||||||||||||||||||
| Revenues | ||||||||||||||||||||||||||
| Manufacturing | $ | 19,772 | $ | 17,412 | $ | 38,193 | $ | 33,325 | 13.6 | % | 14.6 | % | ||||||||||||||
| Service and retailing | 22,879 | 21,272 | 44,509 | 40,852 | 7.6 | 9.0 | ||||||||||||||||||||
| $ | 42,651 | $ | 38,684 | $ | 82,702 | $ | 74,177 | |||||||||||||||||||
| Pre-tax earnings | ||||||||||||||||||||||||||
| Manufacturing | $ | 3,028 | $ | 2,714 | $ | 5,852 | $ | 5,150 | 11.6 | % | 13.6 | % | ||||||||||||||
| Service and retailing | 1,275 | 1,270 | 2,492 | 2,311 | 0.4 | 7.8 | ||||||||||||||||||||
| 4,303 | 3,984 | 8,344 | 7,461 | |||||||||||||||||||||||
| Income taxes and noncontrolling interests | 1,054 | 980 | 2,070 | 1,838 | ||||||||||||||||||||||
| Net earnings* | $ | 3,249 | $ | 3,004 | $ | 6,274 | $ | 5,623 | ||||||||||||||||||
| Effective income tax rate | 24.0 | % | 24.1 | % | 24.3 | % | 24.1 | % | ||||||||||||||||||
| Pre-tax earnings as a percentage of revenues | 10.1 | % | 10.3 | % | 10.1 | % | 10.1 | % |
| *** | Excludes certain acquisition accounting expenses, primarily related to the amortization of identifiable intangible assets recorded in connection with our business acquisitions. The after-tax acquisition accounting expenses excluded from earnings were $162 million in the second quarter and $323 million in the first six months of 2022 and $183 million in the second quarter and $363 million in the first six months of 2021. These expenses are included in “Other” in the summary of earnings on page 24 and in the “Other” earnings section on page 40. |
|---|
Manufacturing
Our manufacturing group includes a variety of industrial, building and consumer products businesses. A summary of revenues and pre-tax earnings of these operations follows (dollars in millions).
| Second Quarter | First Six Months | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | ||||||||||||
| Revenues | |||||||||||||||
| Industrial products | $ | 7,714 | $ | 7,186 | $ | 15,189 | $ | 13,858 | |||||||
| Building products | 7,710 | 6,402 | 14,422 | 12,030 | |||||||||||
| Consumer products | 4,348 | 3,824 | 8,582 | 7,437 | |||||||||||
| $ | 19,772 | $ | 17,412 | $ | 38,193 | $ | 33,325 | ||||||||
| Pre-tax earnings | |||||||||||||||
| Industrial products | $ | 1,270 | $ | 1,242 | $ | 2,486 | $ | 2,384 | |||||||
| Building products | 1,307 | 973 | 2,451 | 1,743 | |||||||||||
| Consumer products | 451 | 499 | 915 | 1,023 | |||||||||||
| $ | 3,028 | $ | 2,714 | $ | 5,852 | $ | 5,150 | ||||||||
| Pre-tax earnings as a percentage of revenues | |||||||||||||||
| Industrial products | 16.5 | % | 17.3 | % | 16.4 | % | 17.2 | % | |||||||
| Building products | 17.0 | % | 15.2 | % | 17.0 | % | 14.5 | % | |||||||
| Consumer products | 10.4 | % | 13.0 | % | 10.7 | % | 13.8 | % |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Manufacturing, Service and Retailing (Continued)
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”)), metal cutting tools/systems (IMC International Metalworking Companies (“IMC”)) and Marmon, which consists of more than 100 autonomous manufacturing and service businesses, internally aggregated into eleven groups, and includes leasing for the rail, intermodal tank container and mobile crane industries. 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 increased $528 million (7.3%) in the second quarter and $1.3 billion (9.6%) in the first six months of 2022 compared to 2021. Pre-tax earnings increased $28 million (2.3%) in the second quarter and $102 million (4.3%) in the first six months of 2022 compared to 2021. Pre-tax earnings as a percentage of revenues for the group were 16.4% for the first six months of 2022, a decrease of 0.8 percentage points compared to 2021. Operating results in 2022 were negatively affected by a combination of higher materials and energy costs, manufacturing inefficiencies attributable to supply chain disruptions and labor shortages and asset impairment charges, which largely offset the impacts of increased average selling prices and increased demand for certain product categories. Operating results of this group’s international businesses were also negatively impacted in 2022 by the stronger U.S. Dollar.
PCC’s revenues were $1.8 billion in the second quarter and $3.6 billion in the first six months of 2022, increases of 13.3% in the second quarter and 13.0% in the first six months compared to 2021. PCC derives significant revenues and earnings from sales of aerospace products. The revenue increases in 2022 were primarily attributable to higher demand for aerospace products, and to a lesser extent, general industrial products.
While commercial air travel increased in both the U.S. and international markets, traffic remains below pre-COVID-19 pandemic levels, especially for international routes. Long-term industry forecasts continue to show growth and strong demand for air travel and aerospace products. However, further recovery likely will continue to be uneven, attributable in part to travel restrictions imposed from time-to-time to control the spread of variants of the COVID-19 virus, as well as from the changes in supply chain conditions, including the availability of workers.
Commercial aircraft delivery rates by original equipment manufacturers of narrow-body aircraft have rebounded since the onset of the pandemic. However, deliveries of wide-body aircraft remain relatively low, in part attributable to the pause in the Boeing 787 program, as it works through production quality issues.
PCC’s pre-tax earnings increased $7 million in the second quarter and $24 million in the first six months of 2022 compared to 2021, reflecting the impact of increased revenues, substantially offset by a year-to-date reduction in pension plan income of $29 million, materials and utilities cost inflation and manufacturing inefficiencies attributable to worker shortages. PCC management continues to take actions to improve operations, maintain safety and prepare for increased demand for PCC’s products. Growth in PCC’s revenues and earnings will be predicated on the ability to increase production levels to match the significant growth in aerospace demand, as well as resolution of the quality issues associated with the Boeing 787.
Lubrizol’s revenues were approximately $1.7 billion in the second quarter and $3.4 billion in the first six months of 2022, increases of 3.5% in the second quarter and 0.5% in the first six months compared to 2021. The revenue increases reflected higher average selling prices, partially offset by lower volumes. Sales volumes through the first half of 2022 were restricted by raw material supply constraints and unplanned temporary maintenance shutdowns, which limited Lubrizol’s production capabilities. The increase in average selling prices was due to escalating prices for raw materials, including oil feedstocks, as well as for utilities, packaging, shipping and freight costs.
Lubrizol’s pre-tax earnings increased 60.2% in the second quarter and were relatively unchanged in the first six months of 2022 compared to 2021. Earnings in the second quarter of 2021 included property losses, asset impairment charges and containment and response costs of approximately $160 million in connection with a fire at its Chemtool facility in Rockton, Illinois in June 2021. Earnings in 2021 were also negatively impacted by the weather-related temporary shut-down of Additives facilities in the U.S. in the first quarter, which resulted in lost sales and various incremental and non-recurring manufacturing and other operating costs. Earnings in 2022 included a comparative increase in insurance recoveries in connection with fires at facilities in 2021 and 2020 and were negatively impacted by rising raw material costs, lower sales volumes, and higher expenses from the unplanned temporary shutdowns, partially offset by higher selling prices.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Manufacturing, Service and Retailing (Continued)
Industrial products (Continued)
Marmon’s revenues were $2.8 billion in the second quarter and $5.4 billion in the first six months of 2022, increases of 10.3% in the second quarter and 17.5% in the first six months compared to 2021. The Transportation, Metal Services, Retail and Electrical groups generated significant revenue increases in the first six months of 2022, primarily attributable to higher volumes and average metals prices. These groups contributed approximately 70% of Marmon’s aggregate revenue increase in the first six months.
Marmon’s pre-tax earnings decreased 5.8% in the second quarter and increased 14.6% in the first six months of 2022 compared to 2021. Earnings in the second quarter of 2022 included losses of approximately $90 million in the Rail & Leasing group related to the shutdown of its business in Russia. In the first six months of 2022, the Transportation, Metal Services, Retail, Electrical and Industrial Products groups contributed meaningful increases in earnings, due to a combination of higher sales volumes and margins and ongoing cost management, partially offset by lower earnings from the Rail & Leasing group.
IMC’s revenues were $930 million in the second quarter and $1.9 billion in the first six months of 2022, increases of 1.7% in the second quarter and 5.0% in the first six months compared to 2021. Revenues in 2022 reflected increased sales in several geographic regions, partially offset by lower revenues in Asia and unfavorable foreign currency translation effects. IMC’s pre-tax earnings decreased 9.6% in the second quarter and 1.0% in the first six months of 2022 compared to 2021, as the revenue increases were more than offset by higher raw material costs and unfavorable 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 $1.3 billion (20.4%) in the second quarter and $2.4 billion (19.9%) in the first six months of 2022 and pre-tax earnings increased $334 million (34.3%) in the second quarter and $708 million (40.6%) in the first six months of 2022 compared to 2021. Residential home construction in the U.S. continued to be relatively strong throughout the first half of 2022. During the first half of 2022, interest rates in the U.S. increased significantly compared to the previous low-rate environment. The increases in home mortgage interest rates will very likely slow demand for new home construction, which could adversely impact our businesses. We also continue to be negatively affected by persistent supply chain disruptions and significant cost increases for many raw materials and other inputs, including energy, freight and labor.
Clayton Homes’ revenues increased 28.1% to $3.4 billion in the second quarter and 25.0% to $6.2 billion in the first six months of 2022 compared to 2021. Revenues from home sales increased $1.2 billion (30.5%) in the first six months of 2022, primarily due to higher average selling prices and increased volume. New home unit sales also increased 9.8% in the first six months of 2022, reflecting an 11.3% increase in higher factory-built manufactured home unit sales and a 3.1% increase in site-built home unit sales. Financial services revenues, which include mortgage origination and services, insurance and interest income from lending activities, increased 4.3% in the first six months of 2022 compared to 2021. Loan balances, net of allowances for credit losses, were approximately $20.0 billion as of June 30, 2022, an increase of approximately $1.2 billion from December 31, 2021.
Pre-tax earnings of Clayton Homes increased $168 million (36.9%) in the second quarter and $262 million (30.9%) in the first six months of 2022 compared to 2021. Earnings in 2022 reflected higher home sales, gross margins and net interest income and relatively low credit losses.
Aggregate revenues of our other building products businesses were approximately $4.3 billion in the second quarter and $8.2 billion in the first six months of 2022, increases of $555 million (14.9%) in the second quarter and $1.1 billion (16.3%) in the first six months versus 2021. The increases were primarily due to higher average selling prices driven by higher input and transportation costs, and to a lesser extent, from higher unit volumes and product mix changes.
Pre-tax earnings of our other building products businesses increased $166 million (32.1%) in the second quarter and $446 million (49.8%) in the first six months of 2022 compared to 2021. Earnings as a percentage of revenues in the first six months of 2022 increased 3.7 percentage points versus 2021. Year-to-date earnings in 2022 benefitted from an increase in pre-tax gains from a business divestiture and asset sales of $111 million, primarily in the first quarter. The increase in earnings in 2022 also reflected the impact of severe winter storms in the first quarter of 2021, which reduced sales and produced incremental production and other operating costs in the first half of 2021.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Manufacturing, Service and Retailing (Continued)
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 group revenues increased approximately $524 million (13.7%) in the second quarter and $1.1 billion (15.4%) in the first six months of 2022 compared to 2021, reflecting higher revenues from Forest River and lower revenues from apparel and footwear businesses. Forest River’s revenues increased 34.1% in the second quarter and 37.0% in the first six months of 2022 compared to 2021, driven by higher average selling prices and a 5.3% year-to-date increase in unit sales. Forest River experienced exceptional sales growth in recent years, however there are signs of slowing demand which could reverse that trend. Revenues of our apparel and footwear businesses declined $93 million (7.2%) in the second quarter and $137 million (5.4%) in the first six months of 2022 compared to 2021, reflecting lower revenues from apparel (15.5% in the second quarter and 10.1% in the first six months), partly offset by higher revenues from footwear. The declines in apparel revenues were driven by lower volumes, as retail customers reduced orders in response to rising inventories.
Pre-tax earnings of our consumer products group declined $48 million (9.6%) in the second quarter and $108 million (10.6%) in the first six months of 2022 versus 2021. Pre-tax earnings as a percentage of revenues decreased 3.1 percentage points in the first six months of 2022 compared to 2021. The declines in earnings in 2022 reflected lower aggregate earnings from the apparel and footwear businesses, partially offset by higher earnings from Forest River. Forest River’s earnings increases were primarily due to the increases in sales, partly offset by higher materials costs. Apparel and footwear earnings declined about 50% in the second quarter and in the first half of 2022 compared to 2021. Our apparel businesses were negatively impacted by lower sales volumes, reduced manufacturing efficiencies and higher input costs, including raw material, freight, labor and other operating costs. While supply chain restrictions eased somewhat in the second quarter of 2022, we expect that the operating earnings of these businesses for the remainder of 2022 will be likely lower, due to slowing demand and high costs.
Service and retailing
A summary of revenues and pre-tax earnings of our service and retailing businesses follows (dollars in millions).
| Second Quarter | First Six Months | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | ||||||||||||
| Revenues | |||||||||||||||
| Service | $ | 4,737 | $ | 3,982 | $ | 9,260 | $ | 7,587 | |||||||
| Retailing | 4,880 | 4,995 | 9,472 | 9,348 | |||||||||||
| McLane | 13,262 | 12,295 | 25,777 | 23,917 | |||||||||||
| $ | 22,879 | $ | 21,272 | $ | 44,509 | $ | 40,852 | ||||||||
| Pre-tax earnings | |||||||||||||||
| Service | $ | 756 | $ | 727 | $ | 1,480 | $ | 1,317 | |||||||
| Retailing | 443 | 459 | 854 | 807 | |||||||||||
| McLane | 76 | 84 | 158 | 187 | |||||||||||
| $ | 1,275 | $ | 1,270 | $ | 2,492 | $ | 2,311 | ||||||||
| Pre-tax earnings as a percentage of revenues | |||||||||||||||
| Service | 16.0 | % | 18.3 | % | 16.0 | % | 17.4 | % | |||||||
| Retailing | 9.1 | % | 9.2 | % | 9.0 | % | 8.6 | % | |||||||
| McLane | 0.6 | % | 0.7 | % | 0.6 | % | 0.8 | % |
Service
Our service group consists of several businesses. The largest of these businesses are NetJets and FlightSafety (aviation services), which offer shared ownership programs for general aviation aircraft and high technology training products and services to operators of aircraft, and TTI, a distributor of electronics components. Our other service businesses franchise and service a network of quick service restaurants (Dairy Queen), lease transportation equipment (XTRA) and furniture (CORT), provide third party logistics services that primarily serve the petroleum and chemical industries (Charter Brokerage), distribute electronic news, multimedia and regulatory filings (Business Wire) and operate a television station in Miami, Florida (WPLG).
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Manufacturing, Service and Retailing (Continued)
Service (Continued)
Service group revenues increased $755 million (19.0%) in the second quarter and $1.7 billion (22.1%) in the first six months of 2022 compared to 2021. Revenues from TTI increased 16.3% in the second quarter and 22.3% in the first six months of 2022 versus 2021, reflecting strong demand in nearly all significant markets. During the second quarter, we saw signs that growth is beginning to decelerate, in part attributable to higher inventory levels within the supply chain. Revenues from aviation services (NetJets and FlightSafety) increased 22.6% in the second quarter and 23.0% in the first six months of 2022 compared to 2021. The increases reflected year-to-date increases in training hours (29%), customer flight hours (25%) and fuel surcharges to customers due to significant increases in fuel prices, partially offset by the effects from changes in sales mix.
Pre-tax earnings of the service group increased $29 million (4.0%) in the second quarter and $163 million (12.4%) in the first six months of 2022 compared to 2021. Pre-tax earnings as a percentage of revenues decreased 1.4 percentage points in the first six months of 2022 compared to 2021. The increases in earnings reflected increases from TTI and CORT and decreases from aviation services. The increases in earnings from TTI were primarily attributable to the increases in sales and improved operating cost leverage. The decreases in earnings from aviation services were attributable to the need to utilize more subcontracted aircraft due to the exceptional increase in customer flight hours, and from higher equipment maintenance and other operating costs, which more than offset the increases in revenues.
Retailing
Our largest retailing business is Berkshire Hathaway Automotive, Inc. (“BHA”), representing 65% of our combined retailing revenue in the first six months of 2022. BHA consists of over 80 auto dealerships that sell new and pre-owned automobiles and offer repair services and related products. BHA also operates two insurance businesses, two auto auctions and an automotive fluid maintenance products distributor. 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. The home furnishings group represented 20% of the combined retailing revenues in the first six months of 2022.
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.
Retailing group revenues decreased $115 million (2.3%) in the second quarter and increased $124 million (1.3%) in the first six months of 2022 compared to 2021. BHA’s revenues in the second quarter declined 1.0% and increased 3.8% in the first six months of 2022 compared to the same periods in 2021. BHA’s revenues from new and used vehicle sales decreased 2.7% in the second quarter and increased 2.8% in the first six months of 2022 compared to 2021. Revenues from service and repair and finance and service contract revenues each increased versus 2021. Revenues from vehicle sales reflected higher average vehicle transaction prices, partly offset by lower unit sales. Unit sales continue to be constrained by low new vehicle production by original equipment manufacturers, attributable to the ongoing global computer chip shortages and other supply chain disruptions. Home furnishings group revenues were relatively unchanged in the second quarter and in the first six months of 2022 compared to 2021, as higher average selling prices were substantially offset by lower transaction volumes.
Retailing group pre-tax earnings decreased $16 million (3.5%) in the second quarter and increased $47 million (5.8%) in the first six months of 2022 compared to 2021. BHA’s pre-tax earnings increased 17.2% in the second quarter and 21.7% in the first six months of 2022 compared to 2021, primarily due to increases in vehicle gross profit margins and finance and service contract earnings per vehicle sold and from operating cost control efforts. Over the remainder of 2022, BHA’s comparative new vehicle gross profit margin rates may decline compared to 2021, as the current environment of elevated margins began during the second half of 2021. Aggregate pre-tax earnings for the remainder of our retailing group decreased $52 million (20.8%) in the second quarter and $35 million (8.0%) in the first six months of 2022 compared to 2021, primarily due to declining earnings from the furniture retailers and Pampered Chef.
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 61% of McLane’s consolidated sales in the first six months of 2022, with foodservice representing most of the remainder. A curtailment of purchasing by any of its significant customers could have an adverse impact on McLane’s periodic revenues and earnings.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Manufacturing, Service and Retailing (Continued)
McLane Company (Continued)
Revenues increased $967 million (7.9%) in the second quarter and $1.9 billion (7.8%) in the first six months of 2022 compared to 2021, reflecting increases in the first six months of 2022 of 3.4% from the grocery business and 16.5% from the foodservice business. Pre-tax earnings decreased $8 million (9.5%) in the second quarter and $29 million (15.5%) in the first six months of 2022 compared to 2021, primarily attributable to higher personnel costs, fuel expense and insurance costs, partly offset by increased gross sales margins. The increase in fuel expense was primarily attributable to significant increases in petroleum prices. McLane’s grocery and food service operating results continue to be adversely affected by supply chain constraints, including the effects of labor and truck driver shortages and higher inventory costs. We expect the current difficult operating environment to continue for the remainder of 2022.
Investment and Derivative Contract Gains/Losses
A summary of investment and derivative contract gains/losses follows (dollars in millions).
| Second Quarter | First Six Months | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Investment gains (losses) | $ | (66,854 | ) | $ | 27,173 | $ | (68,589 | ) | $ | 32,384 | ||||||
| Derivative contract gains (losses) | (65 | ) | 221 | (308 | ) | 710 | ||||||||||
| Gains (losses) before income taxes and noncontrolling interests | (66,919 | ) | 27,394 | (68,897 | ) | 33,094 | ||||||||||
| Income taxes and noncontrolling interests | (13,881 | ) | 5,986 | (14,279 | ) | 6,993 | ||||||||||
| Net earnings (loss) | $ | (53,038 | ) | $ | 21,408 | $ | (54,618 | ) | $ | 26,101 | ||||||
| Effective income tax rate | 21.0 | % | 21.4 | % | 20.8 | % | 20.9 | % |
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. Unrealized gains and losses also include the effects of changes in foreign currency exchange rates on investments in non-U.S. issuers that are held by our U.S. based subsidiaries. Pre-tax investment gains/losses included net unrealized losses of $66.9 billion in the second quarter and $68.5 billion in the first six months of 2022 compared to net unrealized gains of $27.0 billion in the second quarter and $31.5 billion in the first six months of 2021 on securities we held at the end of the applicable period. Taxable investment gains/losses on equity securities sold is generally the difference between sales proceeds and the original cost of the securities sold. Sales of equity securities produced taxable gains of $76 million in the second quarter and taxable losses of $663 million in the first six months of 2022 compared to taxable gains of $228 million in the second quarter and $2.0 billion in the first six months of 2021.
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 few remaining equity index put option contract liabilities, which relate to contracts originated between 2004 and 2008. The gains and losses from the 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 related equity securities markets. As of June 30, 2022, the intrinsic value of our remaining equity index put option contracts was $179 million and our recorded liability at fair value was $186 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 in the contracts.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Other
A summary of after-tax other earnings/losses follows (in millions).
| Second Quarter | First Six Months | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | ||||||||||||
| Equity method earnings | $ | 205 | $ | 141 | $ | 512 | $ | 355 | |||||||
| Acquisition accounting expenses | (162 | ) | (183 | ) | (323 | ) | (363 | ) | |||||||
| Corporate interest expense, before foreign currency effects | (67 | ) | (77 | ) | (137 | ) | (157 | ) | |||||||
| Foreign currency exchange rate gains (losses) on Berkshire and BHFC non-U.S. Dollar senior notes | 1,061 | (45 | ) | 1,583 | 480 | ||||||||||
| Other | 80 | (5 | ) | 159 | (11 | ) | |||||||||
| $ | 1,117 | $ | (169 | ) | $ | 1,794 | $ | 304 |
After-tax equity method earnings include our proportionate share of earnings attributable to our investments in Kraft Heinz, Pilot, Berkadia, Electric Transmission of Texas and Iroquois Gas Transmission Systems. Equity method earnings increased $157 million in the first six months of 2022 versus 2021, primarily due to higher earnings from Kraft Heinz and Pilot.
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.
Foreign currency exchange rate gains and losses pertain to Berkshire’s Euro and Japanese Yen denominated debt and BHFC’s Euro and 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. In 2022, we recorded significant foreign currency exchange rate gains on these debt issues, due to strengthening of the U.S. Dollar, which reduced the U.S Dollar carrying value of the debt. These gains were largely offset by losses included in investment gains/losses, pertaining to non-U.S. Dollar denominated investments held by our U.S. based subsidiaries. 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. Other earnings/loss consist primarily of Berkshire parent company investment income and corporate expenses, other intercompany interest income where the interest expense is included in earnings of the operating businesses and unallocated income taxes.
Financial Condition
Our Consolidated Balance Sheet continues to reflect very significant liquidity and a very strong capital base. Consolidated shareholders’ equity attributable to Berkshire shareholders at June 30, 2022 was $461.2 billion, a decrease of $45.0 billion since December 31, 2021. Net loss attributable to Berkshire shareholders was $38.3 billion in the first six months of 2022, which included after-tax losses on our investments of $54.4 billion, substantially all of which occurred in the second quarter. Investment gains and losses from changes in the market prices of our investments in equity securities will 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 does not specify a maximum number of shares to be repurchased and does not require any specified repurchase amount. 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 $4.2 billion in the first six months of 2022 to repurchase shares of its Class A and B common stock.
At June 30, 2022, our insurance and other businesses held cash, cash equivalents and U.S. Treasury Bills of $101.3 billion, which included $76.1 billion in U.S. Treasury Bills. Investments in equity and fixed maturity securities (excluding our investment in Kraft Heinz) were $348.8 billion. During the first six months of 2022, we paid cash of $57.3 billion to acquire equities securities and we received proceeds of $12.0 billion from sales of equity securities.
Our consolidated borrowings at June 30, 2022 were $119.1 billion, of which over 95% were by the Berkshire parent company, BHFC, BNSF and BHE and its subsidiaries. In the first six months of 2022, Berkshire and certain of its subsidiaries issued term debt of approximately $10.2 billion in the aggregate.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Financial Condition (Continued)
Berkshire parent company outstanding debt at June 30, 2022 was $20.1 billion, a decrease of $1.3 billion since December 31, 2021. In January 2022, Berkshire repaid $600 million of maturing senior notes and issued ¥128.5 billion (approximately $1.1 billion) of senior notes with maturity dates ranging from 2027 to 2052 and a weighted average interest rate of 0.5%. Berkshire’s borrowings decreased $1.8 billion in the first six months of 2022 from changes in foreign currency exchange rates on its non-U.S. Dollar denominated debt. Berkshire parent company debt maturities over the next twelve months approximate $4.3 billion, all of which is in the first six months of 2023.
Berkshire’s insurance and other subsidiary outstanding borrowings were $22.5 billion at June 30, 2022, which included senior note borrowings of BHFC, a wholly-owned financing subsidiary, of approximately $17.9 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 March 2022, BHFC issued $4.5 billion of senior notes with maturity dates ranging from 2027 to 2052 and a weighted average interest rate of 3.4% and issued €1.25 billion of senior notes maturing in 2030 and 2034 with a weighted average interest rate of 1.8%. Aggregate maturities of BHFC debt in the first six months of 2022 were $775 million. Berkshire guarantees BHFC’s senior notes for the full and timely payment of principal and interest.
BNSF’s outstanding debt was $23.4 billion as of June 30, 2022, an increase of $157 million from December 31, 2021. In June 2022, BNSF issued $1.0 billion of 4.45% debentures due in 2053. During the first six months of 2022, BNSF repaid $800 million of term debt. Outstanding borrowings of BHE and its subsidiaries were $53.1 billion at June 30, 2022, an increase of $1.3 billion from December 31, 2021. In April 2022, BHE issued $1.0 billion of 4.6% senior notes due in 2053, and during the first six months of 2022, subsidiaries issued approximately $1.3 billion of term debt with a weighted average interest rate of 3.5% and maturity dates ranging from 2024 to 2052. Aggregate debt maturities for BHE and BNSF over the next twelve months approximate $2.6 billion. 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.
In the first six months of 2022, our diverse group of businesses generated net operating cash flows of approximately $15.4 billion. Our consolidated capital expenditures for property, plant and equipment and equipment held for lease were $6.8 billion in the first six months of 2022, which included capital expenditures by our railroad, utilities and energy businesses (BNSF and BHE) of $4.8 billion. 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. We forecast additional capital expenditures of approximately $6.6 billion for BHE and BNSF over the remainder of 2022.
Contractual Obligations
We are party to other contracts associated with ongoing business activities, which will result in cash payments to counterparties in future periods. Certain obligations are included in our Consolidated Balance Sheets, such as operating lease liabilities and shared aircraft repurchase liabilities of NetJets.
We are also obligated to pay claims arising from property and casualty insurance companies. Such liabilities, including amounts from retroactive reinsurance, were $125.8 billion at June 30, 2022. However, 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 any forecasted payments, as well as from the liabilities currently recorded in our Consolidated Balance Sheet. We anticipate that these payments will be funded by operating cash flows.
Other obligations pertaining to the acquisition of goods or services in the future, such as certain purchase obligations, are not currently reflected in the Consolidated Financial Statements and will be recognized in future periods as the goods are delivered or services are provided. As of June 30, 2022, the largest categories of our long-term contractual obligations primarily related to fuel, capacity, transmission and maintenance contracts and capital expenditure commitments of BHE and BNSF and aircraft purchase commitments of NetJets.
On March 21, 2022, we agreed to acquire all of the outstanding shares of Alleghany Corporation (“Alleghany”) common stock for cash consideration of approximately $11.6 billion, subject to Alleghany shareholder approval and receipt of various regulatory approvals. We currently anticipate this acquisition will close in the fourth quarter of 2022. We also have an agreement to acquire an additional 41.4% of Pilot in 2023 and agreements to acquire certain non-controlling interests of consolidated subsidiaries, which are described in Note 26 to the Consolidated Financial Statements included in Item 8 of Berkshire’s Annual Report on Form 10-K for the year ended December 31, 2021.
Except as otherwise disclosed in this Quarterly Report, our contractual obligations as of June 30, 2022 were, in the aggregate, not materially different from those disclosed in “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, 2021.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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, 2021.
Our Consolidated Balance Sheet as of June 30, 2022 includes estimated liabilities of $125.8 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 June 30, 2022 included goodwill of acquired businesses of $73.6 billion and indefinite-lived intangible assets of $18.4 billion. We evaluate these assets for impairment at least annually and we conducted our most recent annual review during the fourth quarter of 2021. In connection with that annual goodwill impairment review, the estimated fair values of five 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 $34.5 billion, exceeding our carrying value of approximately $31.1 billion by 10.7%. Our carrying value of PCC included goodwill of approximately $7.5 billion. For the four other reporting units, our aggregate estimated fair value was approximately $2.5 billion, which exceeded our aggregate carrying value of approximately $2.3 billion by 9.2%. Our carrying value of these units included goodwill of approximately $1.2 billion.
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 June 30, 2022, 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 intangible 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.
Information concerning new accounting pronouncements is included in Note 2 to the accompanying Consolidated Financial Statements.
Forward-Looking Statements
Investors are cautioned that certain statements contained in this document as well as some statements in periodic press releases and some oral statements of Berkshire officials during presentations about Berkshire or its subsidiaries are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). Forward-looking statements include statements which are predictive in nature, which depend upon or refer to future events or conditions, 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.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements (Continued)
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; the adverse impacts from geopolitical events; 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