UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2018March 31, 2019
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number001-14905
BERKSHIRE HATHAWAY INC.
(Exact name of registrant as specified in its charter)
Delaware | 47-0813844 | |
incorporation or organization) | (I.R.S. Employer Identification Number) |
3555 Farnam Street, Omaha, Nebraska 68131
(Address of principal executive office)
(Zip (Zip Code)
(402)346-1400
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule12b-2 of the Exchange Act.
Large accelerated filer | ☒ | Accelerated filer | ☐ | |||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes ☐ No ☒
Number of shares of common stock outstanding as of OctoberApril 25, 2018:2019:
Class A — | 723,114 | |||||||||
Class B — | 1,368,243,498 |
Securities registered pursuant to Section 12(b) of the Act:
| Trading Symbols |
| |||
Class A Common Stock Class B | BRK.A BRK.B | New York Stock Exchange New York Stock Exchange |
Page No. | ||||||
Consolidated Balance Sheets— | 2-3 | |||||
Consolidated Statements of Earnings— | 4 | |||||
5 | ||||||
5 | ||||||
Consolidated Statements of Cash Flows—First | 6 | |||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||
Item 3. | ||||||
Item 4. | ||||||
Item 1. | ||||||
Item 1A. | ||||||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Repurchases of Equity Securities | |||||
Item 3. | ||||||
Item 4. | ||||||
Item 5. | ||||||
Item 6. | ||||||
and Subsidiaries
(dollars in millions)
September 30, 2018 | December 31, 2017 |
March 31, |
December 31, | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
ASSETS | ||||||||||||||||
Insurance and Other: | ||||||||||||||||
Cash and cash equivalents* | $ | 36,506 | $ | 25,460 | $ | 22,487 | $ | 27,749 | ||||||||
Short-term investments in U.S. Treasury Bills | 59,947 | 78,515 | 88,029 | 81,506 | ||||||||||||
Investments in fixed maturity securities | 18,271 | 21,353 | 19,415 | 19,898 | ||||||||||||
Investments in equity securities | 201,226 | 164,026 | 191,771 | 172,757 | ||||||||||||
Investment in The Kraft Heinz Company | 17,453 | 17,635 | ||||||||||||||
Receivables | 31,884 | 28,578 | ||||||||||||||
Equity method investments | 17,308 | 17,325 | ||||||||||||||
Loans and finance receivables | 16,432 | 16,280 | ||||||||||||||
Other receivables | 33,710 | 31,564 | ||||||||||||||
Inventories | 16,793 | 16,187 | 19,454 | 19,069 | ||||||||||||
Property, plant and equipment | 24,357 | 20,104 | 20,825 | 20,628 | ||||||||||||
Equipment held for lease | 14,429 | 14,298 | ||||||||||||||
Goodwill | 54,985 | 54,985 | 56,449 | 56,323 | ||||||||||||
Other intangible assets | 31,626 | 32,518 | 31,266 | 31,499 | ||||||||||||
Deferred charges under retroactive reinsurance contracts | 14,451 | 15,278 | 13,831 | 14,104 | ||||||||||||
Other | 13,250 | 11,158 | 12,726 | 9,307 | ||||||||||||
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520,749 | 485,797 | 558,132 | 532,307 | |||||||||||||
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Railroad, Utilities and Energy: | ||||||||||||||||
Cash and cash equivalents* | 3,297 | 2,910 | 3,652 | 2,612 | ||||||||||||
Receivables | 3,460 | 3,666 | ||||||||||||||
Property, plant and equipment | 130,387 | 128,184 | 132,170 | 131,780 | ||||||||||||
Goodwill | 24,790 | 24,780 | 24,771 | 24,702 | ||||||||||||
Regulatory assets | 2,928 | 2,950 | 3,154 | 3,067 | ||||||||||||
Other | 16,020 | 15,589 | 13,385 | 9,660 | ||||||||||||
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177,422 | 174,413 | 180,592 | 175,487 | |||||||||||||
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Finance and Financial Products: | ||||||||||||||||
Cash and cash equivalents* | 1,635 | 3,213 | ||||||||||||||
Short-term investments in U.S. Treasury Bills | 2,258 | 5,856 | ||||||||||||||
Loans and finance receivables | 14,477 | 13,748 | ||||||||||||||
Property, plant and equipment and assets held for lease | 10,273 | 9,931 | ||||||||||||||
Goodwill | 1,552 | 1,493 | ||||||||||||||
Other | 8,093 | 7,644 | ||||||||||||||
|
| $ | 738,724 | $ | 707,794 | |||||||||||
38,288 | 41,885 |
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| |||||||||||||
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$ | 736,459 | $ | 702,095 | |||||||||||||
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* | Cash and cash equivalents includes U.S. Treasury Bills with maturities of three months or less when purchased of |
See accompanying Notes to Consolidated Financial Statements
BERKSHIRE HATHAWAY INC.
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(dollars in millions)
September 30, 2018 | December 31, 2017 |
March 31, |
December 31, | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
Insurance and Other: | ||||||||||||||||
Unpaid losses and loss adjustment expenses | $ | 64,263 | $ | 61,122 | $ | 69,535 | $ | 68,458 | ||||||||
Unpaid losses and loss adjustment expenses under retroactive reinsurance contracts | 41,935 | 42,937 | 41,633 | 41,834 | ||||||||||||
Unearned premiums | 19,011 | 16,040 | 20,172 | 18,093 | ||||||||||||
Life, annuity and health insurance benefits | 18,368 | 17,608 | 18,918 | 18,632 | ||||||||||||
Other policyholder liabilities | 6,692 | 7,654 | 7,742 | 7,675 | ||||||||||||
Accounts payable, accruals and other liabilities | 27,178 | 23,099 | 25,164 | 25,776 | ||||||||||||
Derivative contract liabilities | 1,682 | 2,452 | ||||||||||||||
Aircraft repurchase liabilities and unearned lease revenues | 5,071 | 4,593 | ||||||||||||||
Notes payable and other borrowings | 24,271 | 27,324 | 33,847 | 34,975 | ||||||||||||
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201,718 | 195,784 | 223,764 | 222,488 | |||||||||||||
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Railroad, Utilities and Energy: | ||||||||||||||||
Accounts payable, accruals and other liabilities | 11,269 | 11,334 | 14,643 | 11,410 | ||||||||||||
Regulatory liabilities | 7,723 | 7,511 | 7,528 | 7,506 | ||||||||||||
Notes payable and other borrowings | 62,599 | 62,178 | ||||||||||||||
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81,591 | 81,023 | |||||||||||||||
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Finance and Financial Products: | ||||||||||||||||
Accounts payable, accruals and other liabilities | 1,752 | 1,470 | ||||||||||||||
Derivative contract liabilities | 1,869 | 2,172 | ||||||||||||||
Notes payable and other borrowings | 10,770 | 13,085 | 63,346 | 62,515 | ||||||||||||
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14,391 | 16,727 | 85,517 | 81,431 | |||||||||||||
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Income taxes, principally deferred | 59,340 | 56,607 | 56,852 | 51,375 | ||||||||||||
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Total liabilities | 357,040 | 350,141 | 366,133 | 355,294 | ||||||||||||
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Shareholders’ equity: | ||||||||||||||||
Common stock | 8 | 8 | 8 | 8 | ||||||||||||
Capital in excess of par value | 35,713 | 35,694 | 35,622 | 35,707 | ||||||||||||
Accumulated other comprehensive income | (3,927) | 58,571 | (4,727 | ) | (5,015 | ) | ||||||||||
Retained earnings | 346,503 | 255,786 | 342,773 | 321,112 | ||||||||||||
Treasury stock, at cost | (2,691) | (1,763) | (4,799 | ) | (3,109 | ) | ||||||||||
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Berkshire Hathaway shareholders’ equity | 375,606 | 348,296 | 368,877 | 348,703 | ||||||||||||
Noncontrolling interests | 3,813 | 3,658 | 3,714 | 3,797 | ||||||||||||
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Total shareholders’ equity | 379,419 | 351,954 | 372,591 | 352,500 | ||||||||||||
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$ | 736,459 | $ | 702,095 | $ | 738,724 | $ | 707,794 | |||||||||
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See accompanying Notes to Consolidated Financial Statements
and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(dollars in millions except per share amounts)
Third Quarter | First Nine Months | First Quarter | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | |||||||||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | ||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Insurance and Other: | ||||||||||||||||||||||||
Insurance premiums earned | $ | 14,333 | $ | 13,349 | $ | 41,855 | $ | 47,469 | $ | 14,319 | $ | 13,373 | ||||||||||||
Sales and service revenues | 33,249 | 32,055 | 98,128 | 94,017 | 32,409 | 31,882 | ||||||||||||||||||
Leasing revenues | 1,436 | 1,434 | ||||||||||||||||||||||
Interest, dividend and other investment income | 1,619 | 1,320 | 4,468 | 3,804 | 2,117 | 1,682 | ||||||||||||||||||
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49,201 | 46,724 | 144,451 | 145,290 | 50,281 | 48,371 | |||||||||||||||||||
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Railroad, Utilities and Energy operating and other revenues | 11,818 | 10,633 | 32,815 | 29,833 | ||||||||||||||||||||
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Finance and Financial Products: | ||||||||||||||||||||||||
Sales and service revenues | 2,057 | 1,790 | 5,742 | 4,936 | ||||||||||||||||||||
Interest, dividend and other investment income | 374 | 360 | 1,115 | 1,074 | ||||||||||||||||||||
Railroad, Utilities and Energy: | ||||||||||||||||||||||||
Freight rail transportation revenues | 5,725 | 5,590 | ||||||||||||||||||||||
Energy operating revenues | 3,825 | 3,679 | ||||||||||||||||||||||
Service revenues and other income | 847 | 833 | ||||||||||||||||||||||
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2,431 | 2,150 | 6,857 | 6,010 | 10,397 | 10,102 | |||||||||||||||||||
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Total revenues | 63,450 | 59,507 | 184,123 | 181,133 | 60,678 | 58,473 | ||||||||||||||||||
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Investment and derivative contract gains/losses: | ||||||||||||||||||||||||
Investments gains (losses) | 14,569 | 657 | 12,750 | 1,262 | ||||||||||||||||||||
Investment and derivative contract gains (losses): | ||||||||||||||||||||||||
Investment gains (losses) | 19,552 | (7,809 | ) | |||||||||||||||||||||
Derivative contract gains (losses) | 137 | 308 | 303 | 703 | 770 | (206 | ) | |||||||||||||||||
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14,706 | 965 | 13,053 | 1,965 | 20,322 | (8,015 | ) | ||||||||||||||||||
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Costs and expenses: | ||||||||||||||||||||||||
Insurance and Other: | ||||||||||||||||||||||||
Insurance losses and loss adjustment expenses | 9,932 | 12,137 | 28,296 | 39,450 | 10,174 | 8,963 | ||||||||||||||||||
Life, annuity and health insurance benefits | 1,448 | 1,213 | 4,153 | 3,703 | 904 | 1,287 | ||||||||||||||||||
Insurance underwriting expenses | 2,352 | 2,207 | 7,079 | 6,924 | 2,756 | 2,604 | ||||||||||||||||||
Cost of sales and services | 26,789 | 25,815 | 78,684 | 75,594 | 25,767 | 25,461 | ||||||||||||||||||
Cost of leasing | 1,020 | 983 | ||||||||||||||||||||||
Selling, general and administrative expenses | 3,984 | 3,965 | 12,158 | 12,101 | 4,432 | 4,708 | ||||||||||||||||||
Interest expense | 116 | 435 | 246 | 1,405 | 262 | 265 | ||||||||||||||||||
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44,621 | 45,772 | 130,616 | 139,177 | 45,315 | 44,271 | |||||||||||||||||||
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Railroad, Utilities and Energy: | ||||||||||||||||||||||||
Cost of sales and operating expenses | 8,087 | 6,984 | 23,451 | 20,678 | ||||||||||||||||||||
Interest expense | 698 | 700 | 2,110 | 2,090 | ||||||||||||||||||||
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8,785 | 7,684 | 25,561 | 22,768 | |||||||||||||||||||||
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Finance and Financial Products: | ||||||||||||||||||||||||
Cost of sales and services | 1,273 | 1,062 | 3,519 | 2,891 | ||||||||||||||||||||
Selling, general and administrative expenses | 564 | 531 | 1,549 | 1,442 | ||||||||||||||||||||
Freight rail transportation expenses | 3,982 | 3,852 | ||||||||||||||||||||||
Utilities and energy cost of sales and other expenses | 2,842 | 2,800 | ||||||||||||||||||||||
Other expenses | 653 | 749 | ||||||||||||||||||||||
Interest expense | 82 | 98 | 253 | 305 | 729 | 710 | ||||||||||||||||||
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1,919 | 1,691 | 5,321 | 4,638 | 8,206 | 8,111 | |||||||||||||||||||
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Total costs and expenses | 55,325 | 55,147 | 161,498 | 166,583 | 53,521 | 52,382 | ||||||||||||||||||
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Earnings before income taxes and equity method earnings | 22,831 | 5,325 | 35,678 | 16,515 | ||||||||||||||||||||
Earnings (loss) before income taxes and equity method earnings (losses) | 27,479 | (1,924 | ) | |||||||||||||||||||||
Equity method earnings | 316 | 305 | 1,044 | 932 | 168 | 401 | ||||||||||||||||||
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Earnings before income taxes | 23,147 | 5,630 | 36,722 | 17,447 | ||||||||||||||||||||
Income tax expense | 4,440 | 1,427 | 7,009 | 4,750 | ||||||||||||||||||||
Earnings (loss) before income taxes | 27,647 | (1,523 | ) | |||||||||||||||||||||
Income tax expense (benefit) | 5,915 | (452 | ) | |||||||||||||||||||||
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Net earnings | 18,707 | 4,203 | 29,713 | 12,697 | ||||||||||||||||||||
Net earnings (loss) | 21,732 | (1,071 | ) | |||||||||||||||||||||
Earnings attributable to noncontrolling interests | 167 | 136 | 300 | 308 | 71 | 67 | ||||||||||||||||||
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Net earnings attributable to Berkshire Hathaway shareholders | $ | 18,540 | $ | 4,067 | $ | 29,413 | $ | 12,389 | ||||||||||||||||
Net earnings (loss) attributable to Berkshire Hathaway shareholders | $ | 21,661 | $ | (1,138 | ) | |||||||||||||||||||
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Net earnings per average equivalent Class A share* | $ | 11,280 | $ | 2,473 | $ | 17,885 | $ | 7,533 | ||||||||||||||||
Net earnings per average equivalent Class B share* | $ | 7.52 | $ | 1.65 | $ | 11.92 | $ | 5.02 | ||||||||||||||||
Average Class A shares outstanding | 736,262 | 756,528 | 744,126 | 766,245 | ||||||||||||||||||||
Average Class B shares outstanding | 1,360,940,890 | 1,332,192,917 | 1,350,588,758 | 1,317,463,821 | ||||||||||||||||||||
Net earnings (loss) per average equivalent Class A share | $ | 13,209 | $ | (692 | ) | |||||||||||||||||||
Net earnings (loss) per average equivalent Class B share* | $ | 8.81 | $ | (0.46 | ) | |||||||||||||||||||
Average equivalent Class A shares outstanding | 1,639,821 | 1,644,958 | ||||||||||||||||||||||
Average equivalent Class B shares outstanding | 2,459,731,886 | 2,467,436,888 |
* | Class B shares are economically equivalent toone-fifteen-hundredth of a Class A share. Accordingly, net |
See accompanying Notes to Consolidated Financial Statements
and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in millions)
Third Quarter | First Nine Months | First Quarter | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | |||||||||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | ||||||||||||||||||||||
Net earnings | $ | 18,707 | $ | 4,203 | $ | 29,713 | $ | 12,697 | ||||||||||||||||
Net earnings (loss) | $ | 21,732 | $ | (1,071 | ) | |||||||||||||||||||
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Other comprehensive income: | ||||||||||||||||||||||||
Net change in unrealized appreciation of investments | 5 | 4,952 | (132) | 18,040 | 117 | (45 | ) | |||||||||||||||||
Applicable income taxes | (1) | (1,716) | 19 | (6,247) | (27 | ) | (2 | ) | ||||||||||||||||
Reclassification of investment appreciation in net earnings | (34) | (646) | (299) | (1,235) | 5 | (221 | ) | |||||||||||||||||
Applicable income taxes | 7 | 226 | 63 | 432 | (1 | ) | 46 | |||||||||||||||||
Foreign currency translation | (79) | 771 | (842) | 2,127 | 183 | 601 | ||||||||||||||||||
Applicable income taxes | 9 | (24) | 46 | (116) | (3 | ) | (6 | ) | ||||||||||||||||
Prior service cost and actuarial gains/losses of defined benefit pension plans | (13) | (3) | 50 | (57) | ||||||||||||||||||||
Defined benefit pension plans | 66 | (24 | ) | |||||||||||||||||||||
Applicable income taxes | 3 | 6 | — | 31 | (17 | ) | 17 | |||||||||||||||||
Other, net | (21) | 32 | (57) | 38 | (13 | ) | (31 | ) | ||||||||||||||||
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Other comprehensive income, net | (124) | 3,598 | (1,152) | 13,013 | 310 | 335 | ||||||||||||||||||
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Comprehensive income | 18,583 | 7,801 | 28,561 | 25,710 | 22,042 | (736 | ) | |||||||||||||||||
Comprehensive income attributable to noncontrolling interests | 162 | 203 | 271 | 436 | 93 | 75 | ||||||||||||||||||
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Comprehensive income attributable to Berkshire Hathaway shareholders | $ | 18,421 | $ | 7,598 | $ | 28,290 | $ | 25,274 | $ | 21,949 | $ | (811 | ) | |||||||||||
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and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
(dollars in millions)
Berkshire Hathaway shareholders’ equity | Total | |||||||||||||||||||||||
Common stock and capital in excess of par value | Accumulated other comprehensive income | Retained earnings | Treasury stock | Non- controlling interests | ||||||||||||||||||||
First nine months 2017: | ||||||||||||||||||||||||
Balance at December 31, 2016 | $ | 35,689 | $ | 37,298 | $ | 210,846 | $ | (1,763) | $ | 3,358 | $ | 285,428 | ||||||||||||
Net earnings | — | — | 12,389 | — | 308 | 12,697 | ||||||||||||||||||
Other comprehensive income, net | — | 12,885 | — | — | 128 | 13,013 | ||||||||||||||||||
Issuance of common stock | 58 | — | — | — | — | 58 | ||||||||||||||||||
Transactions with noncontrolling interests | (55) | — | — | — | (220) | (275) | ||||||||||||||||||
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Balance at September 30, 2017 | $ | 35,692 | $ | 50,183 | $ | 223,235 | $ | (1,763) | $ | 3,574 | $ | 310,921 | ||||||||||||
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First nine months 2018: | ||||||||||||||||||||||||
Balance at December 31, 2017 | $ | 35,702 | $ | 58,571 | $ | 255,786 | $ | (1,763) | $ | 3,658 | $ | 351,954 | ||||||||||||
Adoption of new accounting pronouncements | — | (61,375) | 61,304 | — | — | (71) | ||||||||||||||||||
Net earnings | — | — | 29,413 | — | 300 | 29,713 | ||||||||||||||||||
Other comprehensive income, net | — | (1,123) | — | — | (29) | (1,152) | ||||||||||||||||||
Issuance (acquisition) of common stock | 54 | — | — | (928) | — | (874) | ||||||||||||||||||
Transactions with noncontrolling interests | (35) | — | — | — | (116) | (151) | ||||||||||||||||||
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Balance at September 30, 2018 | $ | 35,721 | $ | (3,927) | $ | 346,503 | $ | (2,691) | $ | 3,813 | $ | 379,419 | ||||||||||||
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Berkshire Hathaway shareholders’ equity | Total | |||||||||||||||||||||||
Common stock and capital in excess of par value | Accumulated other comprehensive income | Retained earnings | Treasury stock | Non- controlling interests | ||||||||||||||||||||
Balance at December 31, 2017 | $ | 35,702 | $ | 58,571 | $ | 255,786 | $ | (1,763 | ) | $ | 3,658 | $ | 351,954 | |||||||||||
Adoption of new accounting pronouncements | — | (61,375 | ) | 61,304 | — | — | (71 | ) | ||||||||||||||||
Net earnings (loss) | — | — | (1,138 | ) | — | 67 | (1,071 | ) | ||||||||||||||||
Other comprehensive income, net | — | 327 | — | — | 8 | 335 | ||||||||||||||||||
Issuance (acquisition) of common stock | 24 | — | — | — | — | 24 | ||||||||||||||||||
Transactions with noncontrolling interests | (37 | ) | — | — | — | (82 | ) | (119 | ) | |||||||||||||||
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Balance at March 31, 2018 | $ | 35,689 | $ | (2,477 | ) | $ | 315,952 | $ | (1,763 | ) | $ | 3,651 | $ | 351,052 | ||||||||||
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Balance at December 31, 2018 | $ | 35,715 | $ | (5,015 | ) | $ | 321,112 | $ | (3,109 | ) | $ | 3,797 | $ | 352,500 | ||||||||||
Net earnings (loss) | — | — | 21,661 | — | 71 | 21,732 | ||||||||||||||||||
Other comprehensive income, net | — | 288 | — | — | 22 | 310 | ||||||||||||||||||
Issuance (acquisition) of common stock | 13 | — | — | (1,690 | ) | — | (1,677 | ) | ||||||||||||||||
Transactions with noncontrolling interests | (98 | ) | — | — | — | (176 | ) | (274 | ) | |||||||||||||||
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Balance at March 31, 2019 | $ | 35,630 | $ | (4,727 | ) | $ | 342,773 | $ | (4,799 | ) | $ | 3,714 | $ | 372,591 | ||||||||||
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See accompanying Notes to Consolidated Financial Statements
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
First Nine Months | First Quarter | |||||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net earnings | $ | 29,713 | $ | 12,697 | ||||||||||||
Adjustments to reconcile net earnings to operating cash flows: | ||||||||||||||||
Investment gains/losses | (12,750) | (1,262) | ||||||||||||||
Net earnings (loss) | $ | 21,732 | $ | (1,071 | ) | |||||||||||
Adjustments to reconcile net earnings (loss) to operating cash flows: | ||||||||||||||||
Investment (gains) losses | (19,552 | ) | 7,809 | |||||||||||||
Depreciation and amortization | 7,169 | 6,835 | 2,417 | 2,387 | ||||||||||||
Other | (677) | 1,110 | (469 | ) | (1 | ) | ||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Losses and loss adjustment expenses | 2,272 | 22,615 | 778 | 69 | ||||||||||||
Deferred charges reinsurance assumed | 827 | (5,525) | 273 | 271 | ||||||||||||
Unearned premiums | 2,974 | 2,253 | 2,054 | 2,352 | ||||||||||||
Receivables and originated loans | (4,781) | (2,890) | (2,237 | ) | (2,186 | ) | ||||||||||
Other assets | (1,788) | (1,287) | (990 | ) | (881 | ) | ||||||||||
Other liabilities | 805 | 360 | (1,800 | ) | (392 | ) | ||||||||||
Income taxes | 2,791 | 2,593 | 5,371 | (801 | ) | |||||||||||
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Net cash flows from operating activities | 26,555 | 37,499 | 7,577 | 7,556 | ||||||||||||
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Cash flows from investing activities: | ||||||||||||||||
Purchases of U.S. Treasury Bills and fixed maturity securities | (85,502) | (106,597) | (30,918 | ) | (13,037 | ) | ||||||||||
Purchases of equity securities | (38,552) | (14,936) | (1,527 | ) | (14,765 | ) | ||||||||||
Sales of U.S. Treasury Bills and fixed maturity securities | 26,903 | 35,143 | 2,334 | 13,577 | ||||||||||||
Redemptions and maturities of U.S. Treasury Bills and fixed maturity securities | 83,742 | 65,666 | 21,114 | 35,088 | ||||||||||||
Sales and redemptions of equity securities | 14,164 | 10,572 | 2,063 | 4,240 | ||||||||||||
Purchases of loans and finance receivables | (1,748) | (1,392) | (14 | ) | (41 | ) | ||||||||||
Collections of loans and finance receivables | 266 | 1,599 | 93 | 100 | ||||||||||||
Acquisitions of businesses, net of cash acquired | (521) | (2,640) | (262 | ) | (112 | ) | ||||||||||
Purchases of property, plant and equipment | (10,040) | (8,411) | ||||||||||||||
Purchases of property, plant and equipment and equipment held for lease | (3,151 | ) | (2,589 | ) | ||||||||||||
Other | 257 | (150) | 67 | (153 | ) | |||||||||||
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Net cash flows from investing activities | (11,031) | (21,146) | (10,201 | ) | 22,308 | |||||||||||
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Cash flows from financing activities: | ||||||||||||||||
Proceeds from borrowings of insurance and other businesses | 55 | 1,321 | 1,996 | 37 | ||||||||||||
Proceeds from borrowings of railroad, utilities and energy businesses | 7,019 | 2,812 | 2,945 | 3,613 | ||||||||||||
Proceeds from borrowings of finance businesses | 2,339 | 1,298 | ||||||||||||||
Repayments of borrowings of insurance and other businesses | (2,661) | (1,763) | (2,811 | ) | (4,192 | ) | ||||||||||
Repayments of borrowings of railroad, utilities and energy businesses | (3,658) | (1,944) | (1,431 | ) | (1,221 | ) | ||||||||||
Repayments of borrowings of finance businesses | (4,661) | (3,605) | ||||||||||||||
Changes in short term borrowings, net | (2,754) | 122 | (503 | ) | (1,929 | ) | ||||||||||
Acquisition of treasury stock | (928) | — | (1,585 | ) | — | |||||||||||
Other | (277) | (108) | (289 | ) | (102 | ) | ||||||||||
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Net cash flows from financing activities | (5,526) | (1,867) | (1,678 | ) | (3,794 | ) | ||||||||||
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Effects of foreign currency exchange rate changes | (109) | 222 | 15 | 92 | ||||||||||||
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Increase in cash and cash equivalents and restricted cash | 9,889 | 14,708 | ||||||||||||||
Increase (decrease) in cash and cash equivalents and restricted cash | (4,287 | ) | 26,162 | |||||||||||||
Cash and cash equivalents and restricted cash at beginning of year | 32,212 | 28,643 | 30,811 | 32,212 | ||||||||||||
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Cash and cash equivalents and restricted cash at end of third quarter * | $ | 42,101 | $ | 43,351 | ||||||||||||
Cash and cash equivalents and restricted cash at end of first quarter * | $ | 26,524 | $ | 58,374 | ||||||||||||
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*Cash and cash equivalents and restricted cash are comprised of the following: | ||||||||||||||||
Beginning of year— | ||||||||||||||||
Insurance and Other | $ | 25,460 | $ | 23,581 | $ | 27,749 | $ | 28,673 | ||||||||
Railroad, Utilities and Energy | 2,910 | 3,939 | 2,612 | 2,910 | ||||||||||||
Finance and Financial Products | 3,213 | 528 | ||||||||||||||
Restricted cash, included in other assets | 629 | 595 | 450 | 629 | ||||||||||||
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$ | 32,212 | $ | 28,643 | $ | 30,811 | $ | 32,212 | |||||||||
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End of third quarter— | ||||||||||||||||
End of first quarter— | ||||||||||||||||
Insurance and Other | $ | 36,506 | $ | 35,247 | $ | 22,487 | $ | 54,331 | ||||||||
Railroad, Utilities and Energy | 3,297 | 4,448 | 3,652 | 3,550 | ||||||||||||
Finance and Financial Products | 1,635 | 3,011 | ||||||||||||||
Restricted cash, included in other assets | 663 | 645 | 385 | 493 | ||||||||||||
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$ | 42,101 | $ | 43,351 | $ | 26,524 | $ | 58,374 | |||||||||
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See accompanying Notes to Consolidated Financial Statements
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018March 31, 2019
Note 1. General
The accompanying unaudited Consolidated Financial Statements include the accounts of Berkshire Hathaway Inc. (“Berkshire” or “Company”) consolidated with the accounts of all its subsidiaries and affiliates in which Berkshire holds controlling financial interests as of the financial statement date. In these notes, the terms “us,” “we” or “our” refer to Berkshire and its consolidated subsidiaries. Reference is made to Berkshire’s most recently issued Annual Report on Form10-K (“Annual Report”), which includes information necessary or useful to understanding Berkshire’s businesses and financial statement presentations. Our significant accounting policies and practices were presented as Note 1 to the Consolidated Financial Statements included in the Annual Report. As described in the Annual Report, we modified certain presentations to our Consolidated Financial Statements. Presentations in these interim Consolidated Financial Statements conform to the presentations in the Annual Report. Changes to those policies due to the adoption of a new accounting standards effective January 1, 2018 arestandard is described in Note 2. Certain immaterial amounts related to equity method earnings were reclassified in the accompanying 2017 Consolidated Financial Statements to conform to current presentations.
Financial information in this Quarterly Report reflects all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary to a fair statement of results for the interim periods in accordance with accounting principles generally accepted in the United States (“GAAP”). For a number of reasons, our results for interim periods are not normally indicative of results to be expected for the year. The timing and magnitude of catastrophe losses incurred by insurance subsidiaries and the estimation error inherent to the process of determining liabilities for unpaid losses of insurance subsidiaries can be more significant to results of interim periods than to results for a full year. ChangesIn light of the size of our equity security investment portfolio, changes in market prices ofand the related changes in unrealized gains on equity securities we own canwill produce significant effects on our consolidated shareholders’ equity. Beginning in 2018, those effects are includedvolatility in our Consolidated Statements of Earnings, whereas inpre-2018 periods, such effects were included in other comprehensive income.interim and annual earnings. In addition, changes in the fair values of certain derivative contract liabilities and gains and losses from the periodic revaluation of certain assets and liabilities denominated in foreign currencies can cause significant variations in our periodic net earnings.
Note 2. New Accounting Pronouncements
Berkshire adopted Accounting Standards Codification (“ASC”) 842 “Leases” on January 1, 2019. Most significantly, ASC 842 requires a lessee to recognize a liability to make lease payments and an asset with respect to its right to use the underlying asset for the lease term. Upon the adoption of ASC 842, we recognized operating lease assets of approximately $6.2 billion and lease liabilities of $5.9 billion. We also reduced other assets by approximately $300 million. Consequently, our consolidated assets and liabilities increased by approximately $5.9 billion.
We are party to contracts where we lease property from others (“lessee” contracts) and where we lease property to others (“lessor” contracts). In adopting and applying ASC 842, we elected to use practical expedients, including but not limited to, not reassessing past lease and easement accounting, not separating lease components fromnon-lease components by class of asset and not recording assets or liabilities for leases with terms of one year or less. We adopted ASC 842 as of January 1, 2019 with regard to contracts in effect as of that date and elected to not restate prior period financial statements. ASC 842 did not have a material effect on our accounting for our lessor contracts or for lessee contracts classified as financing leases.
Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. In this regard, lease payments include fixed payments and variable payments that depend on an index or rate. The lease term is generally thenon-cancellable lease period. Certain lease contracts contain renewal options or other terms that provide for variable payments based on performance or usage or changes in an index or interest rates. Options are not included in determining lease assets or liabilities unless it is reasonably certain that options will be exercised. Generally, incremental borrowing rates are used in measuring lease liabilities. Lease assets are subject to review for impairment.
On January 1, 2018, we adopted Accounting Standards Update (“ASU”)2016-01 “Financial Instruments—Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU2016-01”),Liabilities,” ASU2018-02 “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU2018-02”)and Accounting Standards Codification (“ASC”)ASC 606 – “Revenues from Contracts with Customers” (“ASC 606”). Prior year financial statements were not restated. A summary of the effects of the initial adoption of ASU2016-01, ASU2018-02 and ASC 606 on our shareholders’ equity follows (in millions).
ASU 2016-01 | ASU 2018-02 | ASC 606 | Total | ASU 2016-01 | ASU 2018-02 | ASC 606 | Total | |||||||||||||||||||||||||
Increase (decrease): | ||||||||||||||||||||||||||||||||
Assets | $ | — | $ | — | $ | 3,382 | $ | 3,382 | ||||||||||||||||||||||||
Liabilities | — | — | 3,453 | 3,453 | ||||||||||||||||||||||||||||
Accumulated other comprehensive income | (61,459) | 84 | — | (61,375) | $ | (61,459 | ) | $ | 84 | $ | — | $ | (61,375 | ) | ||||||||||||||||||
Retained earnings | 61,459 | (84) | (71) | 61,304 | 61,459 | (84 | ) | (70 | ) | 61,305 | ||||||||||||||||||||||
Shareholders’ equity | — | — | (71) | (71) | — | — | (70 | ) | (70 | ) |
With respect to ASU2016-01, beginning in 2018, we are including unrealized gains and losses arising from the changes in the fair values of our equity securities during the period as a component ofare included within investment gains (losses) in the Consolidated Statements of Earnings. For periods ending prior to January 1, 2018, we recognized gains and losses in earnings when we sold equity securities, based on the difference between the sale proceeds and the cost of the securities, and for other-than-temporary impairment losses. We recorded unrealized gains and losses from the changes in fair value ofavailable-for-sale equity securities in other comprehensive income. We continue to carry our investments in equity securities at fair value and there is no change to the asset values or total shareholders’ equity amounts we would have otherwise recorded. ASU2016-01 prohibited the restatement of prior year financial statements. However, asAs of January 1, 2018, we reclassified netafter-tax unrealized gains on equity securities from accumulated other comprehensive income to retained earnings.
Notes to Consolidated Financial Statements(Continued)
Note 2. New Accounting Pronouncements(Continued)
In connection with our adoption ofadopting ASU2018-02, we reclassified the stranded deferred income tax effects that were included in accumulated other comprehensive income as of January 1, 2018 to retained earnings. These stranded income tax effects arosearising from the reduction in the U.S. statutory income tax rate under the U.S. Tax Cuts and Jobs Act enacted on December 22, 2017. The effect of the reductionthat were included in the statutory income tax rate on accumulated other comprehensive income items was recorded in earnings in December 2017. Prior year financial statements were not restated.
We adopted ASC 606 using the modified retrospective method, whereby the cumulative effect of the adoption was recorded as an adjustment to retained earnings. Prior year financial statements were not restated. The initial adoption of ASC 606 as of January 1, 2018 resulted into retained earnings.
In adopting ASC 606, we recorded increases to certain assets and other liabilities, with a relatively minor reduction inthe cumulative net effect recorded to retained earnings. Prior to January 1, 2018, we recognized revenues from the sales of fractional ownership interests in aircraft over the term of the related management services agreements, as the transfers of the ownership interests were inseparable from the management services agreements. These agreements also include provisions that require us to repurchase the fractional interest at fair market value at contract termination or upon the customer’s request following the end of a minimum commitment period. ASC 606 provides that such contracts are subject to accounting guidance for lease contracts and not ASC 606.contracts. The principal effects of thisre-characterization were to increase both property, plantequipment held for lease and equipmentaircraft repurchase liabilities and other liabilitiesunearned lease revenues by approximately $3.5 billion. There-characterization of these fractional ownership interests as operating leases did not have a material effect on our consolidated revenues or earnings for the first nine months of 2018.
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU2016-02 “Leases,” which together with subsequent amendments is included in ASC 842. Most significantly, ASC 842 requires a lessee to recognize a liability to make lease payments and an asset with respect to its right to use the underlying asset for the lease term. ASC 842 also addresses accounting and reporting by lessors, which is not significantly different from current accounting and reporting, and further provides for qualitative and quantitative disclosures. We intend to adopt ASC 842 as of January 1, 2019 under the modified retrospective method.
We are party to contracts where we are the lessee and other contracts where we are the lessor. For contracts where we are the lessee, we will record lease liabilities and right of use assets for contracts in effect on January 1, 2019 based on the facts and circumstances as of that date. While we continue to evaluate certain provisions of ASC 842, based on our current estimates, we expect to recognize right of use assets and lessee lease liabilities of approximately $6 billion with respect to operating leases. We do not believe the adoption of ASC 842 will have a material effect on our consolidated financial position, results of operations or cash flows.
In June 2016, the FASB issued ASU2016-13 “Financial Instruments—Credit Losses,” which provides for the recognition and measurement at the reporting date of all expected credit losses for financial assets held at amortized cost and foravailable-for-sale debt securities. Currently, credit losses are recognized and measured when such losses become probable based on the prevailing facts and circumstances. ASU2016-13 is effective for reporting periods beginning after December 15, 2019. We are currently evaluating the effect this standard will have on our Consolidated Financial Statements.
In January 2017, the FASB issued ASU2017-04 “Simplifying the Test for Goodwill Impairment.” ASU2017-04 eliminates the requirement to determine the implied value of goodwill in measuring an impairment loss. Upon adoption of ASU2017-04, the measurement of a goodwill impairment will represent the excess of the reporting unit’s carrying value over its fair value and will be limited to the carrying value of goodwill. ASU2017-04 is effective for goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted.
In August 2018, the FASB issued ASU2018-12 “Targeted Improvements to the Accounting for Long-Duration Contracts.” ASU2018-12 requires periodic reassessment of actuarial and discount rate assumptions used in the valuation ofto value policyholder liabilities and deferred acquisition costs arising from the issuance of long-duration insurance and reinsurance contracts, with the effects of changes in cash flow assumptions reflected in earnings and the effects of changes in discount rate assumptions reflected in other comprehensive income. Under current accounting guidance,Currently, the actuarial and discount rate assumptions are set at the contract inception date and not subsequently changed, except under limited circumstances. ASU2018-12 also requires new disclosures and is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. We are evaluating the effect this standard will have on our Consolidated Financial Statements.
Note 3. Investments in fixed maturity securities
Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | |||||||||||||
March 31, 2019 | ||||||||||||||||
U.S. Treasury, U.S. government corporations and agencies | $ | 3,901 | $ | 29 | $ | (12 | ) | $ | 3,918 | |||||||
States, municipalities and political subdivisions | 145 | 6 | — | 151 | ||||||||||||
Foreign governments | 8,047 | 60 | (16 | ) | 8,091 | |||||||||||
Corporate bonds | 6,259 | 470 | (5 | ) | 6,724 | |||||||||||
Mortgage-backed securities | 470 | 63 | (2 | ) | 531 | |||||||||||
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$ | 18,822 | $ | 628 | $ | (35 | ) | $ | 19,415 | ||||||||
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December 31, 2018 | ||||||||||||||||
U.S. Treasury, U.S. government corporations and agencies | $ | 4,223 | $ | 22 | $ | (22 | ) | $ | 4,223 | |||||||
States, municipalities and political subdivisions | 182 | 7 | — | 189 | ||||||||||||
Foreign governments | 7,480 | 50 | (28 | ) | 7,502 | |||||||||||
Corporate bonds | 7,055 | 408 | (23 | ) | 7,440 | |||||||||||
Mortgage-backed securities | 487 | 59 | (2 | ) | 544 | |||||||||||
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$ | 19,427 | $ | 546 | �� | $ | (75 | ) | $ | 19,898 | |||||||
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Investments in foreign governments include securities issued by national and provincial government entities as well as instruments that are unconditionally guaranteed by such entities. As of March 31, 2019, approximately 88% of our foreign government holdings were rated AA or higher by at least one of the major rating agencies.
Notes to Consolidated Financial Statements(Continued)
Note 3. Revenues from contracts with customers
As discussed in Note 2, on January 1, 2018, we adopted ASC 606 “Revenues from Contracts with Customers.” Except as described in Note 2, our revenue recognition practices for contracts with customers under ASC 606 do not differ significantly from prior practices. Under ASC 606, revenues are recognized when a good or service is transferred to a customer. A good or service is transferred when (or as) the customer obtains control of that good or service. Revenues are based on the consideration we expect to receive in connection with our promises to deliver goods and services to our customers. Our accounting policies related to revenue from contracts with customers follow.
We manufacture and/or distribute a wide variety of industrial, building and consumer products. Our sales contracts provide customers with these products through wholesale and retail channels in exchange for consideration specified under the contracts. Contracts generally represent customer orders for individual products at stated prices. Sales contracts may contain either single or multiple performance obligations. In instances where contracts contain multiple performance obligations, we allocate the revenue to each obligation based on the relative stand-alone selling prices of each product or service.
Sales revenue reflects reductions for returns, allowances, volume discounts and other incentives, some of which may be contingent on future events. In certain customer contracts of our grocery distribution business, sales revenue includes certain state and local excise taxes billed to customers on specified products when those taxes are levied directly upon us by the taxing authorities. Sales revenue excludes sales taxes and value-added taxes collected on behalf of taxing authorities. Sales revenue includes consideration for shipping and other fulfillment activities performed prior to the customer obtaining control of the goods. We also elect to treat consideration for such services performed after control has passed to the customer as sales revenue.
Our product sales revenues are generally recognized at a point in time when control of the product transfers to the customer, which coincides with customer pickup or product delivery or acceptance, depending on terms of the arrangement. We recognize sales revenues and related costs with respect to certain contracts over time, primarily from certain castings, forgings and aerostructures contracts. Control of the product units under these contracts transfers continuously to the customer as the product is manufactured. These products generally have no alternative use and the contract requires the customer to provide reasonable compensation if terminated for reasons other than breach of contract.
Our energy revenue derives primarily from tariff based sales arrangements approved by various regulatory bodies. These tariff based revenues are mainly comprised of energy, transmission, distribution and natural gas and have performance obligations to deliver energy products and services to customers which are satisfied over time as energy is delivered or services are provided. Our nonregulated energy revenue primarily relates to our renewable energy business. Energy revenues are equivalent to the amounts we have the right to invoice and correspond directly with the value to the customer of the performance to date and include billed and unbilled amounts. As of September 30, 2018 and December 31, 2017, trade receivables were approximately $2.2 billion and $2.0 billion, respectively, and were included in other assets of our railroad, utilities and energy businesses on the Consolidated Balance Sheets. Such amounts substantially relate to customer revenue and included unbilled revenue of $624 million as of September 30, 2018 and $665 million as of December 31, 2017. Payments from customers are generally due from the customer within 30 days of billing. Rates charged for energy products and services are established by regulators or contractual arrangements that establish the transaction price, as well as the allocation of price amongst the separate performance obligations. When preliminary regulated rates are permitted to be billed prior to final approval by the applicable regulator, certain revenue collected may be subject to refund and a liability for estimated refunds is accrued.
The primary performance obligation under our freight rail transportation service contracts is to move freight from a point of origin to a point of destination. The performance obligations are represented by bills of lading which create a series of distinct services that have a similar pattern of transfer to the customer. The revenues for each performance obligation are based on various factors including the product being shipped, the origin and destination pair, and contract incentives which are outlined in various private rate agreements, common carrier public tariffs, interline foreign road agreements and pricing quotes. The transaction price is generally a per car amount to transport railcars from a specified origin to a specified destination. Freight revenues are recognized over time as the service is performed because the customer simultaneously receives and consumes the benefits of the service. Revenues recognized represent the proportion of the service completed as of the balance sheet date. Receivables related to customer contracts were approximately $1.3 billion at September 30, 2018 and $1.2 billion at December 31, 2017 and were included in other assets of our railroad, utilities and energy businesses. Invoices for freight transportation services are generally issued to customers and paid within thirty days or less. Customer incentives, which are primarily provided for shipping a specified cumulative volume or shipping to/from specific locations, are recorded as a reduction to revenue on apro-rata basis based on actual or projected future customer shipments.
Other service revenues derive from contracts with customers in which performance obligations are satisfied over time, where customers receive and consume benefits as we perform the services, or at a point in time when the services are provided. Other service revenues primarily derive from real estate brokerage, automotive repair, aircraft management, aviation training, franchising and news distribution services.
Notes to Consolidated Financial Statements(Continued)
Note 3. Revenues from contracts with customersInvestments in fixed maturity securities(Continued)
The following table summarizes customer contract revenues disaggregatedamortized cost and estimated fair value of fixed maturity securities at March 31, 2019 are summarized below by reportable segment and the source of the revenue for the three and nine months ending September 30, 2018 (in millions). Other revenues includedcontractual maturity dates. Amounts are in our consolidated revenues were primarily insurance premiums earned, interest, dividend and other investment income and lease income which are not within the scope of ASC 606.millions. Actual maturities may differ from contractual maturities due to early call or prepayment rights held by issuers.
Manufacturing | McLane Company | Service and Retail | BNSF | Berkshire Hathaway Energy | Finance and Financial Products | Insurance, Corporate and other | Total | |||||||||||||||||||||||||
Three months ending September 30, 2018 | ||||||||||||||||||||||||||||||||
Manufactured products: | ||||||||||||||||||||||||||||||||
Industrial and commercial products | $ | 6,384 | $ | — | $ | 47 | $ | — | $ | — | $ | 82 | $ | — | $ | 6,513 | ||||||||||||||||
Building products | 3,473 | — | — | — | — | 4 | — | 3,477 | ||||||||||||||||||||||||
Consumer products | 2,838 | — | — | — | — | 1,170 | — | 4,008 | ||||||||||||||||||||||||
Grocery and convenience store distribution | — | 8,709 | — | — | — | — | — | 8,709 | ||||||||||||||||||||||||
Food and beverage distribution | — | 4,079 | — | — | — | — | — | 4,079 | ||||||||||||||||||||||||
Auto sales | — | — | 2,083 | — | — | — | — | 2,083 | ||||||||||||||||||||||||
Other retail and wholesale distribution | 521 | — | 3,117 | — | — | 23 | — | 3,661 | ||||||||||||||||||||||||
Service | 262 | 16 | 965 | 6,099 | 1,140 | 148 | — | 8,630 | ||||||||||||||||||||||||
Electricity and natural gas | — | — | — | — | 4,267 | — | — | 4,267 | ||||||||||||||||||||||||
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Total | 13,478 | 12,804 | 6,212 | 6,099 | 5,407 | 1,427 | — | 45,427 | ||||||||||||||||||||||||
Other revenue | 51 | 18 | 743 | 13 | 299 | 1,004 | 15,895 | 18,023 | ||||||||||||||||||||||||
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$ | 13,529 | $ | 12,822 | $ | 6,955 | $ | 6,112 | $ | 5,706 | $ | 2,431 | $ | 15,895 | $ | 63,450 | |||||||||||||||||
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Manufacturing | McLane Company | Service and Retail | BNSF | Berkshire Hathaway Energy | Finance and Financial Products | Insurance, Corporate and other | Total | |||||||||||||||||||||||||
Nine months ending September 30, 2018 | ||||||||||||||||||||||||||||||||
Manufactured products: | ||||||||||||||||||||||||||||||||
Industrial and commercial products | $ | 19,306 | $ | — | $ | 155 | $ | — | $ | — | $ | 503 | $ | — | $ | 19,964 | ||||||||||||||||
Building products | 9,817 | — | — | — | — | 11 | — | 9,828 | ||||||||||||||||||||||||
Consumer products | 8,734 | — | — | — | — | 3,124 | — | 11,858 | ||||||||||||||||||||||||
Grocery and convenience store distribution | — | 25,128 | — | — | — | — | — | 25,128 | ||||||||||||||||||||||||
Food and beverage distribution | — | 12,203 | — | — | — | — | — | 12,203 | ||||||||||||||||||||||||
Auto sales | — | — | 6,087 | — | — | — | — | 6,087 | ||||||||||||||||||||||||
Other retail and wholesale distribution | 1,533 | — | 8,734 | — | — | 65 | — | 10,332 | ||||||||||||||||||||||||
Service | 759 | 53 | 2,912 | 17,510 | 3,026 | 174 | — | 24,434 | ||||||||||||||||||||||||
Electricity and natural gas | — | — | — | — | 11,357 | — | — | 11,357 | ||||||||||||||||||||||||
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Total | 40,149 | 37,384 | 17,888 | 17,510 | 14,383 | 3,877 | — | 131,191 | ||||||||||||||||||||||||
Other revenue | 132 | 54 | 2,664 | 37 | 885 | 2,980 | 46,180 | 52,932 | ||||||||||||||||||||||||
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$ | 40,281 | $ | 37,438 | $ | 20,552 | $ | 17,547 | $ | 15,268 | $ | 6,857 | $ | 46,180 | $ | 184,123 | |||||||||||||||||
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A summary of the transaction price allocated to the significant unsatisfied remaining performance obligations relating to contracts with expected durations in excess of one year as of September 30, 2018 follows (in millions).
Performance obligations expected to be satisfied: | ||||||||||||
Less than 12 months | Greater than 12 months | Total | ||||||||||
Manufactured products: | ||||||||||||
Industrial and commercial products | $ | 50 | $ | 2,549 | $ | 2,599 | ||||||
Electricity and natural gas | 1,011 | 5,879 | 6,890 |
Notes to Consolidated Financial Statements(Continued)
Due in one year or less | Due after one year through five years | Due after five years through ten years | Due after ten years | Mortgage-backed securities | Total | |||||||||||||||||||
Amortized cost | $ | 7,198 | $ | 10,331 | $ | 364 | $ | 459 | $ | 470 | $ | 18,822 | ||||||||||||
Fair value | 7,242 | 10,443 | 410 | 789 | 531 | 19,415 |
Note 4. Investments in fixed maturity securities
Our investments in fixed maturity securities as of September 30, 2018 and December 31, 2017 are summarized by type below (in millions).
Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | |||||||||||||
September 30, 2018 | ||||||||||||||||
U.S. Treasury, U.S. government corporations and agencies | $ | 3,626 | $ | 8 | $ | (35) | $ | 3,599 | ||||||||
U.S. states, municipalities and political subdivisions | 276 | 15 | (1) | 290 | ||||||||||||
Foreign governments | 7,362 | 45 | (37) | 7,370 | ||||||||||||
Corporate bonds | 6,029 | 436 | (7) | 6,458 | ||||||||||||
Mortgage-backed securities | 502 | 56 | (4) | 554 | ||||||||||||
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$ | 17,795 | $ | 560 | $ | (84) | $ | 18,271 | |||||||||
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December 31, 2017 | ||||||||||||||||
U.S. Treasury, U.S. government corporations and agencies | $ | 3,975 | $ | 4 | $ | (26) | $ | 3,953 | ||||||||
U.S. states, municipalities and political subdivisions | 847 | 19 | (12) | 854 | ||||||||||||
Foreign governments | 8,572 | 274 | (24) | 8,822 | ||||||||||||
Corporate bonds | 6,279 | 588 | (5) | 6,862 | ||||||||||||
Mortgage-backed securities | 772 | 92 | (2) | 862 | ||||||||||||
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$ | 20,445 | $ | 977 | $ | (69) | $ | 21,353 | |||||||||
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Investments in foreign government securities include securities issued by national and provincial government entities as well as instruments that are unconditionally guaranteed by such entities. As of September 30, 2018, approximately 89% of foreign government holdings were rated AA or higher by at least one of the major rating agencies.
The amortized cost and estimated fair value of fixed maturity securities at September 30, 2018 are summarized below by contractual maturity dates. Amounts are in millions. Actual maturities may differ from contractual maturities due to early call or prepayment rights held by issuers.
Due in one year or less | Due after one year through five years | Due after five years through ten years | Due after ten years | Mortgage- backed securities | Total | |||||||||||||||||||
Amortized cost | $ | 7,275 | $ | 9,057 | $ | 387 | $ | 574 | $ | 502 | $ | 17,795 | ||||||||||||
Fair value | 7,274 | 9,108 | 435 | 900 | 554 | 18,271 |
Note 5. Investments in equity securities
Our investmentsInvestments in equity securities as of September 30, 2018March 31, 2019 and December 31, 20172018 are summarized based on the primary industry of the investee as followsin the table below (in millions).
Cost Basis | Net Unrealized Gains | Fair Value | Cost Basis | Net Unrealized Gains | Fair Value | |||||||||||||||||||
September 30, 2018 * | ||||||||||||||||||||||||
March31, 2019* | ||||||||||||||||||||||||
Banks, insurance and finance | $ | 42,010 | $ | 51,499 | $ | 93,509 | $ | 44,710 | $ | 46,029 | $ | 90,739 | ||||||||||||
Consumer products | 38,793 | 39,858 | 78,651 | 38,909 | 31,232 | 70,141 | ||||||||||||||||||
Commercial, industrial and other | 21,035 | 14,137 | 35,172 | 19,280 | 11,611 | 30,891 | ||||||||||||||||||
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$ | 101,838 | $ | 105,494 | $ | 207,332 | $ | 102,899 | $ | 88,872 | $ | 191,771 | |||||||||||||
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* | Approximately |
Notes to Consolidated Financial Statements(Continued)
Note 5. Investments in equity securities(Continued)
Cost Basis | Net Unrealized Gains | Fair Value | Cost Basis | Net Unrealized Gains | Fair Value | |||||||||||||||||||
December 31, 2017 * | ||||||||||||||||||||||||
December 31, 2018* | ||||||||||||||||||||||||
Banks, insurance and finance | $ | 25,783 | $ | 55,026 | $ | 80,809 | $ | 44,332 | $ | 38,260 | $ | 82,592 | ||||||||||||
Consumer products | 25,177 | 25,698 | 50,875 | 38,783 | 22,838 | 61,621 | ||||||||||||||||||
Commercial, industrial and other | 23,716 | 15,140 | 38,856 | 19,752 | 8,792 | 28,544 | ||||||||||||||||||
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$ | 74,676 | $ | 95,864 | $ | 170,540 | $ | 102,867 | $ | 69,890 | $ | 172,757 | |||||||||||||
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* | Approximately |
InvestmentsNote 5. Equity method investments
Berkshire and its subsidiaries hold investments in certain businesses that are accounted for pursuant to the equity method. Currently, the most significant of these is our investment in the common stock of The Kraft Heinz Company (“Kraft Heinz”). Kraft Heinz is one of the world’s largest manufacturers and marketers of food and beverage products, including condiments and sauces, cheese and dairy, meals, meats, refreshment beverages, coffee and other grocery products.
Berkshire currently owns 325,442,152 shares of Kraft Heinz common stock representing 26.7% of the outstanding shares. Shares of Kraft Heinz common stock are publicly-traded and the fair value of our investment was approximately $10.6 billion at March 31, 2019 and $14.0 billion at December 31, 2018. The carrying value of our investment was approximately $13.7 billion at March 31, 2019 and $13.8 billion at December 31, 2018. As of May 3, 2019, Kraft Heinz has not filed its 2018 Form10-K with the Securities and Exchange Commission. In addition, Kraft Heinz has not made its financial statements for the first quarter of 2019 available to Berkshire. Accordingly, Berkshire does not have the necessary financial information to determine its share of the earnings and other comprehensive income of Kraft Heinz for the first quarter of 2019. As a result, Berkshire’s first quarter 2019 earnings and other comprehensive income exclude such amounts. Berkshire will record its share of Kraft Heinz’s earnings and other comprehensive income for the three months ended March 31, 2019 during the period that such information becomes available. We recorded equity method earnings in the first quarter of 2018 of approximately $265 million. We received dividends on the common stock of $130 million and $203 million in the first quarter of 2019 and 2018, respectively, which we recorded as reductions of our investment.
Notes to Consolidated Financial Statements(Continued)
Note 5. Equity method investments(Continued)
Summarized unaudited financial information of Kraft Heinz as of December 29, 2018 and for the first quarter of 2018 follows (in millions).
December 29, 2018 | ||||
Assets | $ | 103,627 | ||
Liabilities | 51,721 | |||
First Quarter | ||||
2018 | ||||
Sales | $ | 6,304 | ||
Net earnings attributable to Kraft Heinz common shareholders | $ | 993 | ||
Other investments accounted for pursuant to the equity method include our investments in Berkadia Commercial Mortgage LLC (“Berkadia”), Pilot Travel Centers LLC, d/b/a Pilot Flying J (“Pilot Flying J”), and Electric Transmission Texas, LLC (“ETT”). The carrying value of our investments in these entities was approximately $3.6 billion as of March 31, 2019 and $3.5 billion as of December 31, 2018. Our equity method earnings in these entities in the first quarter were $167 million in 2019 and $136 million in 2018. Additional information concerning these investments follows.
We own a 50% interest in Berkadia, with Jefferies Financial Group Inc. (“Jefferies”), formerly known as Leucadia National Corporation, owning the other 50% interest. Berkadia is a servicer of commercial real estate loans in the U.S., performing primary, master and special servicing functions for U.S. government agency programs, commercial mortgage-backed securities transactions, banks, insurance companies and other financial institutions. A source of funding for Berkadia’s operations is through its issuance of commercial paper, which is currently limited to $1.5 billion. On March 31, 2019, Berkadia’s commercial paper outstanding was $1.47 billion. The commercial paper is supported by a surety policy issued by a Berkshire insurance subsidiary. Jefferies is obligated to indemnify us forone-half of any losses incurred under the policy. In addition, a Berkshire Hathaway Energy Company subsidiary owns a 50% interest in ETT, an owner and operator of electric transmission assets in the Electric Reliability Council of Texas footprint. American Electric Power owns the other 50% interest.
On October 3, 2017, we entered into an investment agreement and an equity purchase agreement whereby we acquired a 38.6% interest in Pilot Flying J, headquartered in Knoxville, Tennessee. Pilot Flying J is one of the largest operators of travel centers in North America, with more than 28,000 team members, 750 locations across the U.S. and Canada, and nearly $30 billion in annual revenues. The Haslam family currently owns a 50.1% interest in Pilot Flying J and a third party owns the remaining 11.3% interest. We also entered into an agreement to acquire in 2023 an additional 41.4% interest in Pilot Flying J with the Haslam family retaining a 20% interest. As a result, Berkshire will become the majority owner of Pilot Flying J in 2023.
Note 6. Investment gains/losses
Investment gains/losses in the first quarter of 2019 and 2018 are reflected in our Consolidated Balance Sheetssummarized as follows (in millions).
September 30, 2018 | December 31, 2017 | |||||||
Insurance and other | $ | 201,226 | $ | 164,026 | ||||
Railroad, utilities and energy * | 1,616 | 1,961 | ||||||
Finance and financial products * | 4,490 | 4,553 | ||||||
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$ | 207,332 | $ | 170,540 | |||||
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2019 | 2018 | |||||||
Equity securities: | ||||||||
Unrealized investment gains (losses) on securities held at the end of the period | $ | 19,393 | $ | (7,807 | ) | |||
Investment gains (losses) during the period | 161 | (240 | ) | |||||
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| |||
19,554 | (8,047 | ) | ||||||
Fixed maturity securities: | ||||||||
Gross realized gains | 5 | 359 | ||||||
Gross realized losses | (10 | ) | (138 | ) | ||||
Other | 3 | 17 | ||||||
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| |||
$ | 19,552 | $ | (7,809 | ) | ||||
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Prior to 2018, we recognized investment gains and losses in earnings when we sold equity securities based on the difference between the proceeds from the sale and the cost of the securities and also when we recognized other-than-temporary impairment losses. Beginning in 2018, equity securities gains and losses include unrealized gains and losses from changes in fair values during the period on equity securities we still own. Prior to 2018, we recorded the changes in unrealized gains and losses on our investments in equity securities in other comprehensive income.
Notes to Consolidated Financial Statements(Continued)
|
Note 6. Investment gains/losses(Continued)
In the first quarter of 2019 and 2018, as reflected in the Consolidated Statements of Cash Flows, we received proceeds of approximately $2.1 billion and $4.2 billion, respectively, from sales of equity securities. In the preceding table, investment gains/losses on equity securities sold in each period reflect the difference between proceeds from sales and the fair value of the equity security sold at the beginning of the period or the purchase date, if later. Our taxable gains on equity securities sold during the first quarter of 2019 and 2018, which are generally the difference between the proceeds from sales and our original cost, were $518 million and $727 million, respectively.
Note 7. Loans and finance receivables
Loans and finance receivables are summarized as follows (in millions).
March 31, 2019 | December 31, 2018 | |||||||
Loans and finance receivables before allowances and discounts | $ | 16,767 | $ | 16,622 | ||||
Allowances for uncollectible loans | (176 | ) | (177 | ) | ||||
Unamortized acquisition discounts | (159 | ) | (165 | ) | ||||
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| |||||
$ | 16,432 | $ | 16,280 | |||||
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Loans and finance receivables are principally installment loans originated or acquired by our manufactured housing business. Provisions for loan losses for the first quarter were $32 million in 2019 and $34 million in 2018. Loan charge-offs, net of recoveries in the first quarter, were $33 million in 2019 and $35 million in 2018. At March 31, 2019, approximately 98% of the manufactured housing loan balances were evaluated collectively for impairment, with the remainder evaluated individually. As part of the evaluation process, credit quality indicators are reviewed and loans are designated as performing ornon-performing. At March 31, 2019, we considered approximately 99% of the loan balances to be performing and approximately 97% of the loan balances to be current as to payment status.
Additionally, during 2018, an insurance subsidiary entered into an agreement with Seritage Growth Properties to provide a $2.0 billion term loan facility, which matures on July 31, 2023. As of March 31, 2019 and December 31, 2018, the outstanding loans under the facility were approximately $1.6 billion.
Note 8. Other receivables
Other receivables of insurance and other businesses are comprised of the following (in millions).
March 31, 2019 | December 31, 2018 | |||||||
Insurance premiums receivable | $ | 13,766 | $ | 12,452 | ||||
Reinsurance recoverable on unpaid losses | 3,164 | 3,060 | ||||||
Trade receivables | 12,957 | 12,617 | ||||||
Other | 4,188 | 3,823 | ||||||
Allowances for uncollectible accounts | (365 | ) | (388 | ) | ||||
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| |||
$ | 33,710 | $ | 31,564 | |||||
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Receivables of railroad and utilities and energy businesses are comprised of the following (in millions).
March 31, 2019 | December 31, 2018 | |||||||
Trade receivables | $ | 3,237 | $ | 3,433 | ||||
Other | 354 | 362 | ||||||
Allowances for uncollectible accounts | (131 | ) | (129 | ) | ||||
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| |||
$ | 3,460 | $ | 3,666 | |||||
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Trade receivables include unbilled revenue of $569 million and $554 million as of March 31, 2019 and December 31, 2018, respectively, attributable to the regulated utility businesses.
Notes to Consolidated Financial Statements(Continued)
Note 9. Inventories
Inventories are comprised of the following (in millions).
March 31, 2019 | December 31, 2018 | |||||||
Raw materials | $ | 4,249 | $ | 4,182 | ||||
Work in process and other | 2,678 | 2,625 | ||||||
Finished manufactured goods | 4,789 | 4,541 | ||||||
Goods acquired for resale | 7,738 | 7,721 | ||||||
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| |||
$ | 19,454 | $ | 19,069 | |||||
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Note 10. Property, plant and equipment
A summary of property, plant and equipment of our insurance and other businesses follows (in millions).
March 31, 2019 | December 31, 2018 | |||||||
Land | $ | 2,549 | $ | 2,536 | ||||
Buildings and improvements | 10,128 | 9,959 | ||||||
Machinery and equipment | 22,682 | 22,574 | ||||||
Furniture, fixtures and other | 5,049 | 4,758 | ||||||
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| ||||
40,408 | 39,827 | |||||||
Accumulated depreciation | (19,583 | ) | (19,199 | ) | ||||
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$ | 20,825 | $ | 20,628 | |||||
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A summary of property, plant and equipment of railroad and utilities and energy businesses follows (in millions). The utility generation, transmission and distribution systems and interstate natural gas pipeline assets are owned by regulated public utility and natural gas pipeline subsidiaries.
March 31, 2019 | December 31, 2018 | |||||||
Railroad: | ||||||||
Land, track structure and other roadway | $ | 60,328 | $ | 59,509 | ||||
Locomotives, freight cars and other equipment | 13,185 | 13,016 | ||||||
Construction in progress | 574 | 664 | ||||||
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| ||||
74,087 | 73,189 | |||||||
Accumulated depreciation | (10,865 | ) | (10,004 | ) | ||||
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| ||||
63,222 | 63,185 | |||||||
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| ||||
Utilities and energy: | ||||||||
Utility generation, transmission and distribution systems | 77,659 | 77,288 | ||||||
Interstate natural gas pipeline assets | 7,547 | 7,524 | ||||||
Independent power plants and other assets | 8,318 | 8,324 | ||||||
Construction in progress | 3,388 | 3,110 | ||||||
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| ||||
96,912 | 96,246 | |||||||
Accumulated depreciation | (27,964 | ) | (27,651 | ) | ||||
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68,948 | 68,595 | |||||||
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| ||||
$ | 132,170 | $ | 131,780 | |||||
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Depreciation expense for the first quarter of 2019 and 2018 is summarized below (in millions).
2019 | 2018 | |||||||
Insurance and other | $ | 542 | $ | 535 | ||||
Railroad, utilities and energy | 1,256 | 1,225 | ||||||
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$ | 1,798 | $ | 1,760 | |||||
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Notes to Consolidated Financial Statements(Continued)
Note 11. Equipment held for lease
Equipment held for lease includes railcars, aircraft,over-the-road trailers, intermodal tank containers, cranes, storage units and furniture. Equipment held for lease is summarized below (in millions).
March 31, 2019 | December 31, 2018 | |||||||
Railcars | $ | 8,992 | $ | 8,862 | ||||
Aircraft | 7,485 | 7,376 | ||||||
Other equipment held for lease | 4,478 | 4,379 | ||||||
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20,955 | 20,617 | |||||||
Accumulated depreciation | (6,526 | ) | (6,319 | ) | ||||
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$ | 14,429 | $ | 14,298 | |||||
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Depreciation expense for equipment held for lease in the first quarter was $286 million in 2019 and $275 million in 2018.
Note 12. Leases
We are party to contracts where we lease property from others. As a lessee, we primarily lease office and operating facilities, locomotives, freight cars, energy generation facilities and transmission assets. Operating leaseright-of-use assets and lease liabilities included in our March 31, 2019 Consolidated Balance Sheet were approximately $6.2 billion and $6.0 billion, respectively. Such amounts were included in other assets and accounts payable, accruals and other liabilities in our Consolidated Balance Sheet. The weighted average term of these leases was approximately 7.7 years and the weighted average discount rate used to measure lease liabilities was approximately 3.9%. A summary of our remaining operating lease payments as of March 31, 2019 and December 31, 2018 follows (in millions).
2019 | 2020 | 2021 | 2022 | 2023 | Thereafter | Total lease | Amount | Lease | ||||||||||||||||||||||||||||
March 31, 2019 | $ | 933 | $ | 1,312 | $ | 1,091 | $ | 859 | $ | 685 | $ | 2,183 | $ | 7,063 | $ | (1,053 | ) | $ | 6,010 | |||||||||||||||||
December 31, 2018 | 1,310 | 1,268 | 1,048 | 820 | 658 | 2,079 | 7,183 |
Components of operating lease costs by type were as follows (in millions).
Operating lease cost | Short-term lease cost | Variable lease cost | Sublease | Total lease cost | ||||||||||||||||
First quarter of 2019 | $ | 361 | $ | 44 | $ | 69 | $ | (6 | ) | $ | 468 |
We are also party to contracts where we lease property to others as a lessor. Operating lease revenues by type were as follows (in millions).
Fixed lease revenue | Variable lease revenue | Total | |||||||||||||
First quarter of 2019 | $ | 1,074 | $ | 362 | $ | 1,436 |
Future operating lease rentals to be received on assets we lease to others were as follows (in millions).
2019 | 2020 | 2021 | 2022 | 2023 | Thereafter | Total | ||||||||||||||||||||||
As of March 31, 2019 | $ | 1,932 | $ | 1,928 | $ | 1,363 | $ | 893 | $ | 529 | $ | 485 | $ | 7,130 |
Note 6. Equity Method Investments13. Goodwill and other intangible assets
Berkshire holds investments in certain businesses that are accounted for pursuant toReconciliations of the equity method. Currently, the most significant of these is our investmentchanges in the common stock of The Kraft Heinz Company (“Kraft Heinz”). Kraft Heinz is one of the world’s largest manufacturers and marketers of food and beverage products, including condiments and sauces, cheese and dairy, meals, meats, refreshment beverages, coffee and other grocery products. Berkshire currently owns 325,442,152 shares of Kraft Heinz common stock representing 26.7% of the outstanding shares. The carrying value of goodwill during 2019 and fair value of this investment at September 30, 2018 was approximately $17.5 billion and $17.9 billion, respectively, and at December 31, 2017 was $17.6 billion and $25.3 billion, respectively. Our earnings determined under the equity method during the first nine months of 2018 and 2017 were $635 million and $800 million, respectively. We received dividends on the common stock of $610 million in the first nine months of 2018 and $594 million in the first nine months of 2017, which we recorded as reductions of our investment.
Summarized consolidated financial information of Kraft Heinz follows (in millions).
September 29, 2018 | December 30, 2017 | |||||||||||||||
Assets | $ | 119,730 | $ | 120,232 | ||||||||||||
Liabilities | 54,152 | 53,985 | ||||||||||||||
Third Quarter | First Nine Months | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Sales | $ | 6,378 | $ | 6,280 | $ | 19,368 | $ | 19,241 | ||||||||
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Net earnings attributable to Kraft Heinz common shareholders | $ | 630 | $ | 944 | $ | 2,379 | $ | 2,996 | ||||||||
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March 31, 2019 | December 31, 2018 | |||||||
Balance at beginning of year | $ | 81,025 | $ | 81,258 | ||||
Acquisitions of businesses | 159 | 376 | ||||||
Other, including foreign currency translation | 36 | (609 | ) | |||||
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| |||
Balance at end of period | $ | 81,220 | $ | 81,025 | ||||
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Other investments accounted for pursuant to the equity method include our investments in Berkadia Commercial Mortgage LLC (“Berkadia”), Pilot Travel Centers LLC, d/b/a Pilot Flying J (“Pilot Flying J”), and Electric Transmission Texas, LLC (“ETT”). Our investments in these entities were approximately $3.6 billion as of September 30, 2018 and $3.4 billion as of December 31, 2017 and were included in other assets. Our equity method earnings in these entities for the first nine months were $409 million in 2018 and $132 million in 2017. Additional information concerning these investments follows.
Notes to Consolidated Financial Statements(Continued)
Note 6. Equity Method Investments13. Goodwill and other intangible assets(Continued)
We own a 50% interest in Berkadia with Jefferies Financial Group Inc. (“Jefferies”), formerly knownOur other intangible assets and related accumulated amortization are summarized as Leucadia National Corporation, owning the other 50% interest. Berkadia is a servicer of commercial real estate loans in the U.S., performing primary, master and special servicing functions for U.S. government agency programs, commercial mortgage-backed securities transactions, banks, insurance companies and other financial institutions. A source of funding for Berkadia’s operations is through its issuance of commercial paper, which is currently limited to $1.5 billion. The commercial paper is supported by a surety policy issued by a Berkshire insurance subsidiary. Jefferies is obligated to indemnify us forone-half of any losses incurred under the policy. In addition, a Berkshire Hathaway Energy Company subsidiary owns a 50% interest in ETT, an owner and operator of electric transmission assets in the Electric Reliability Council of Texas footprint. American Electric Power owns the other 50% interest.
On October 3, 2017, we entered into an investment agreement and an equity purchase agreement whereby we acquired a 38.6% interest in Pilot Flying J, headquartered in Knoxville, Tennessee. Pilot Flying J is one of the largest operators of travel centers in North America, with more than 28,000 team members, 750 locations across the U.S. and Canada and more than $20 billion in annual revenues. The Haslam family currently owns a 50.1% interest in Pilot Flying J and a third party owns the remaining 11.3% interest. We also entered into an agreement to acquire in 2023 an additional 41.4% interest in Pilot Flying J with the Haslam family retaining a 20% interest. As a result, Berkshire will become the majority owner of Pilot Flying J in 2023.
Note 7. Income taxes
Our consolidated effective income tax rates for the third quarter and first nine months of 2018 were 19.2% and 19.1%, respectively, and 25.3% and 27.2% in the third quarter and first nine months of 2017, respectively. Our effective income tax rate normally reflects recurring benefits from: (a) dividends received deductions applicable to certain investments in equity securities and (b) income production tax credits related to wind-powered electricity generation placed in service in the U.S. In 2018, our effective income tax rate reflects the current U.S. statutory rate of 21%, while the rate for 2017 reflects the then current U.S. statutory rate of 35%. The relative mix ofpre-tax earnings or losses and underlying income tax rates applicable to the various taxing jurisdictions can also affect our periodic consolidated effective income tax rate.
In December 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin 118 (“SAB 118”) to provide clarification in implementing the Tax Cuts and Jobs Act of 2017 (“TCJA”) when registrants do not have the necessary information available to complete the accounting for an element of the TCJA in the period of its enactment. SAB 118 provides for tax amounts to be classified as provisional and subject to remeasurement for up to one year from the enactment date for such elements when the accounting effect is not complete, but can be reasonably estimated. We recorded income tax expense of approximately $1.4 billion in the fourth quarter of 2017, representing our provisional estimate of the U.S. Federal and state income taxes on the deemed repatriation of accumulated undistributed earnings of foreign subsidiaries. We continue to consider this estimate to be provisional and subject to remeasurement when we obtain the necessary additional information to complete the measurement. As of September 30, 2018, we had not finalized the inputs to the foreign earnings and profits calculations, the basis on which income taxes are determined. Our accounting for the repatriation tax under the TCJA will be completed during the fourth quarter of 2018. We do not anticipate significant adjustments to the provisional estimates.
Note 8. Investment gains/losses
A summary of investment gains and losses in the third quarter and first nine months of 2018 and 2017 follows (in millions).
Third Quarter | First Nine Months | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Equity securities: | ||||||||||||||||
Unrealized investment gains/losses on securities held at the end of the period | $ | 14,294 | $ | — | $ | 12,126 | $ | — | ||||||||
Investment gains/losses during 2018 on securities sold in 2018 | 244 | — | 307 | — | ||||||||||||
Gross realized gains | — | 1,011 | — | 1,795 | ||||||||||||
Gross realized losses | — | (419) | — | (626) | ||||||||||||
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14,538 | 592 | 12,433 | 1,169 | |||||||||||||
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Fixed maturity securities: | ||||||||||||||||
Gross realized gains | 44 | 56 | 451 | 82 | ||||||||||||
Gross realized losses | (10) | (2) | (152) | (16) | ||||||||||||
Other | (3) | 11 | 18 | 27 | ||||||||||||
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$ | 14,569 | $ | 657 | $ | 12,750 | $ | 1,262 | |||||||||
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March 31, 2019 | December 31, 2018 | |||||||||||||||
Gross carrying amount | Accumulated amortization | Gross carrying amount | Accumulated amortization | |||||||||||||
Insurance and other | $ | 40,553 | $ | 9,287 | $ | 40,493 | $ | 8,994 | ||||||||
Railroad, utilities and energy | 1,011 | 373 | 1,011 | 362 | ||||||||||||
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$ | 41,564 | $ | 9,660 | $ | 41,504 | $ | 9,356 | |||||||||
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Trademarks and trade names | $ | 5,367 | $ | 757 | $ | 5,368 | $ | 750 | ||||||||
Patents and technology | 4,472 | 2,862 | 4,446 | 2,790 | ||||||||||||
Customer relationships | 28,426 | 4,782 | 28,375 | 4,573 | ||||||||||||
Other | 3,299 | 1,259 | 3,315 | 1,243 | ||||||||||||
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$ | 41,564 | $ | 9,660 | $ | 41,504 | $ | 9,356 | |||||||||
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Intangible asset amortization expense in the first quarter was $333 million in 2019 and $352 million in 2018. Intangible assets with indefinite lives as of March 31, 2019 and December 31, 2018 were $18.9 billion and primarily related to certain customer relationships and trademarks and trade names.
We are party to derivative contracts through certain of our subsidiaries. Currently, the most significant derivative contracts consist of equity index put option contracts. The liabilities and related notional values of these contracts follows (in millions).
Liabilities | Notional Value | |||||||
March 31, 2019 | $ | 1,682 | $ | 26,522 | ||||
December 31, 2018 | 2,452 | 26,759 |
Notional value represents the aggregate undiscounted amounts payable assuming that the value of each index is zero at each contract’s expiration date. Certain of these contracts are denominated in foreign currencies. Notional amounts are based on the foreign currency exchange rates as of each balance sheet date. We recordedpre-tax gains of $770 million in the first quarter of 2019 and losses of $206 million in the first quarter of 2018 with respect to our equity index put option contracts.
The equity index put option contracts are European style options written prior to March 2008 on four major equity indexes. The remaining contracts expire between April 2019 and October 2025. The weighted average life of unexpired contracts at March 31, 2019 was approximately 1.65 years. Contracts with notional values of $12.2 billion will expire over the remainder of 2019. Future payments, if any, under any given contract will be required if the prevailing index value is below the contract strike price at the expiration date. We received aggregate premiums of $4.0 billion on the contract inception dates with respect to unexpired contracts at March 31, 2019 and we have no counterparty credit risk. The aggregate intrinsic value (the undiscounted liability assuming the contracts are settled based on the index values and foreign currency exchange rates as of the balance sheet date) was $957 million at March 31, 2019 and $1,653 million at December 31, 2018. These contracts may not be unilaterally terminated or fully settled before the expiration dates and the ultimate amount of cash basis gains or losses on these contracts will not be determined until the contract expiration dates.
A limited number of our equity index put option contracts contain collateral posting requirements with respect to changes in the fair value or intrinsic value of the contracts and/or a downgrade of Berkshire’s credit ratings. As of March 31, 2019, we did not have any collateral posting requirements. If Berkshire’s credit ratings (currently AA from Standard & Poor’s and Aa2 from Moody’s) are downgraded below eitherA- by Standard & Poor’s or A3 by Moody’s, collateral of up to $1.1 billion could be required to be posted.
Our regulated utility subsidiaries are exposed to variations in the prices of fuel required to generate electricity, wholesale electricity purchased and sold and natural gas supplied for customers. We may use forward purchases and sales, futures, swaps and options to manage a portion of these price risks. Most of the net derivative contract assets or liabilities of our regulated utilities are probable of recovery through rates and are offset by regulatory liabilities or assets. Derivative contract assets are included in other assets and were $171 million as of March 31, 2019 and $172 million as of December 31, 2018. Derivative contract liabilities are included in accounts payable, accruals and other liabilities and were $99 million as of March 31, 2019 and $111 million as of December 31, 2018.
Notes to Consolidated Financial Statements(Continued)
Note 8. Investment gains/losses(Continued)
Prior to 2018, we recognized investment gains and losses in earnings when we sold or otherwise disposed of equity securities based on the difference between the proceeds from the sale and the cost of the securities and also when we recognized other-than-temporary impairment losses. Beginning in 2018, equity securities gains and losses include unrealized gains and losses from changes in fair values during the period on equity securities we still own. Prior to 2018, we recorded the changes in unrealized gains and losses on our investments in equity securities in other comprehensive income. See Note 2.
During the first nine months of 2018, as reflected on the Consolidated Statement of Cash Flows, we received proceeds of approximately $14.2 billion from sales of equity securities. In the table above, investment gains/losses on equity securities sold during 2018 reflect the difference between proceeds from sales and the fair value of the equity security sold at the beginning of the period or the purchase date, if later. Our taxable gains on equity securities sold during the third quarter and first nine months of 2018, which are generally the difference between the proceeds from sales and our original cost, were $1,329 million and $2,688 million, respectively.
Note 9. Receivables
Receivables of insurance and other businesses are comprised of the following (in millions).
September 30, 2018 | December 31, 2017 | |||||||
Insurance premiums receivable | $ | 13,002 | $ | 11,058 | ||||
Reinsurance recoverable on unpaid losses | 2,944 | 3,201 | ||||||
Trade receivables | 13,197 | 11,756 | ||||||
Other | 3,121 | 2,925 | ||||||
Allowances for uncollectible accounts | (380) | (362) | ||||||
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$ | 31,884 | $ | 28,578 | |||||
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A summary of loans and finance receivables of our finance and financial products businesses follows (in millions).
September 30, 2018 | December 31, 2017 | |||||||
Loans and finance receivables before allowances and discounts | $ | 14,832 | $ | 14,126 | ||||
Allowances for uncollectible loans | (183) | (180) | ||||||
Unamortized acquisition discounts | (172) | (198) | ||||||
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$ | 14,477 | $ | 13,748 | |||||
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Loans and finance receivables are predominantly installment loans originated or acquired by our manufactured housing business. Provisions for loan losses in the first nine months of 2018 and 2017 were $109 million and $124 million, respectively. Loan charge-offs, net of recoveries, in the first nine months were $106 million in 2018 and $126 million in 2017. At September 30, 2018, we evaluated approximately 98% of the loan balances collectively for impairment. As part of the evaluation process, credit quality indicators were reviewed and loans were designated as performing ornon-performing. At September 30, 2018, we considered approximately 99% of the loan balances to be performing and approximately 95% of the loan balances to be current as to payment status.
Note 10. Inventories
Inventories are comprised of the following (in millions).
September 30, 2018 | December 31, 2017 | |||||||
Raw materials | $ | 3,326 | $ | 2,997 | ||||
Work in process and other | 2,232 | 2,315 | ||||||
Finished manufactured goods | 4,150 | 4,179 | ||||||
Goods acquired for resale | 7,085 | 6,696 | ||||||
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$ | 16,793 | $ | 16,187 | |||||
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Notes to Consolidated Financial Statements(Continued)
Note 11. Property, plant and equipment and assets held for lease
A summary of property, plant and equipment of our insurance and other businesses follows (in millions).
September 30, 2018 | December 31, 2017 | |||||||
Land | $ | 2,272 | $ | 2,292 | ||||
Buildings and improvements | 9,034 | 8,810 | ||||||
Machinery and equipment | 28,594 | 21,935 | ||||||
Furniture, fixtures and other | 4,972 | 4,387 | ||||||
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44,872 | 37,424 | |||||||
Accumulated depreciation | (20,515) | (17,320) | ||||||
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$ | 24,357 | $ | 20,104 | |||||
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In conjunction with the adoption of ASC 606, we recorded a net asset of approximately $3.5 billion related to aircraft sold under fractional aircraft ownership programs in machinery and equipment. Such amount included cost of approximately $5.3 billion, net of accumulated depreciation of $1.8 billion. We also recorded other liabilities of approximately $3.5 billion for estimated aircraft repurchase obligations and unearned lease revenues, substantially offsetting the amount recorded in machinery and equipment. See Note 2.
A summary of property, plant and equipment of our railroad and our utilities and energy businesses follows (in millions). The utility generation, transmission and distribution systems and interstate natural gas pipeline assets are owned by regulated public utility and natural gas pipeline subsidiaries.
September 30, 2018 | December 31, 2017 | |||||||
Railroad: | ||||||||
Land, track structure and other roadway | $ | 58,755 | $ | 57,408 | ||||
Locomotives, freight cars and other equipment | 12,731 | 12,543 | ||||||
Construction in progress | 910 | 989 | ||||||
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72,396 | 70,940 | |||||||
Accumulated depreciation | (9,596) | (8,627) | ||||||
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62,800 | 62,313 | |||||||
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Utilities and energy: | ||||||||
Utility generation, transmission and distribution systems | 75,751 | 74,660 | ||||||
Interstate natural gas pipeline assets | 7,295 | 7,176 | ||||||
Independent power plants and other assets | 8,156 | 7,499 | ||||||
Construction in progress | 3,724 | 2,556 | ||||||
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94,926 | 91,891 | |||||||
Accumulated depreciation | (27,339) | (26,020) | ||||||
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67,587 | 65,871 | |||||||
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$ | 130,387 | $ | 128,184 | |||||
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Notes to Consolidated Financial Statements(Continued)
Note 11. Property, plant and equipment and assets held for lease(Continued)
Assets held for lease and property, plant and equipment of our finance and financial products businesses are summarized below (in millions). Assets held for lease include railcars, intermodal tank containers, cranes,over-the-road trailers, storage units and furniture.
September 30, 2018 | December 31, 2017 | |||||||
Assets held for lease | $ | 12,736 | $ | 12,318 | ||||
Land | 240 | 231 | ||||||
Buildings, machinery and other | 1,527 | 1,444 | ||||||
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14,503 | 13,993 | |||||||
Accumulated depreciation | (4,230) | (4,062) | ||||||
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$ | 10,273 | $ | 9,931 | |||||
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A summary of depreciation expense for the first nine months of 2018 and 2017 follows (in millions).
First Nine Months | ||||||||
2018 | 2017 | |||||||
Insurance and other | $ | 1,954 | $ | 1,636 | ||||
Railroad, utilities and energy | 3,678 | 3,604 | ||||||
Finance and financial products | 485 | 487 | ||||||
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$ | 6,117 | $ | 5,727 | |||||
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Note 12. Goodwill and other intangible assets
A reconciliation of the change in the carrying value of goodwill is as follows (in millions).
September 30, 2018 | December 31, 2017 | |||||||
Balance at beginning of year | $ | 81,258 | $ | 79,486 | ||||
Acquisitions of businesses | 250 | 1,545 | ||||||
Other, including foreign currency translation | (181) | 227 | ||||||
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Balance at end of period | $ | 81,327 | $ | 81,258 | ||||
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Other intangible assets are summarized as follows (in millions).
September 30, 2018 | December 31, 2017 | |||||||||||||||
Gross carrying amount | Accumulated amortization | Gross carrying amount | Accumulated amortization | |||||||||||||
Insurance and other | $ | 40,288 | $ | 8,662 | $ | 40,225 | $ | 7,707 | ||||||||
Railroad, utilities and energy | 1,026 | 362 | 988 | 324 | ||||||||||||
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$ | 41,314 | $ | 9,024 | $ | 41,213 | $ | 8,031 | |||||||||
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Trademarks and trade names | $ | 5,396 | $ | 744 | $ | 5,381 | $ | 692 | ||||||||
Patents and technology | 4,408 | 2,716 | 4,341 | 2,493 | ||||||||||||
Customer relationships | 28,343 | 4,351 | 28,322 | 3,722 | ||||||||||||
Other | 3,167 | 1,213 | 3,169 | 1,124 | ||||||||||||
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$ | 41,314 | $ | 9,024 | $ | 41,213 | $ | 8,031 | |||||||||
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Amortization expense in the first nine months was $1,052 million in 2018 and $1,108 million in 2017. Intangible assets with indefinite lives were approximately $18.9 billion as of September 30, 2018 and December 31, 2017.
Notes to Consolidated Financial Statements(Continued)
Note 13. Derivative contracts15. Supplemental cash flow information
We are party to derivative contracts primarily through our financeA summary of supplemental cash flow information for the first quarter of 2019 and financial products and our utilities and energy businesses. Currently,2018 is presented in the derivative contracts of our finance and financial products businesses consist of equity index put option contracts written between 2004 and 2008. The liabilities and related notional values of such contracts followsfollowing table (in millions).
September 30, 2018 | December 31, 2017 | |||||||||||||||
Liabilities | Notional Value | Liabilities | Notional Value | |||||||||||||
Equity index put options | $ | 1,869 | $ | 27,434(1) | $ | 2,172 | $ | 28,753 (1) |
2019 | 2018 | |||||||
Cash paid during the period for: | ||||||||
Income taxes | $ | 464 | $ | 289 | ||||
Interest: | ||||||||
Insurance and other | 395 | 421 | ||||||
Railroad, utilities and energy | 683 | 747 | ||||||
Non-cash investing and financing activities: | ||||||||
Liabilities assumed in connection with business acquisitions | 61 | 4 | ||||||
Right-of-use assets obtained in exchange for new operating lease liabilities | 170 | — |
Note 16. Unpaid losses and loss adjustment expenses
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We record equity index put option contractOur liabilities at fair valuefor unpaid losses and include the changes in the fair values of such contracts in earningsloss adjustment expenses (also referred to as derivative contract gains/losses. A summary of derivative contract gains/losses included in our Consolidated Statements of Earnings follows (in millions).
Third Quarter | First Nine Months | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Equity index put options | $ | 137 | $ | 308 | $ | 303 | $ | 703 |
The equity index put option“claim liabilities”) under short-duration property and casualty insurance and reinsurance contracts are European style options written prior to March 2008 on four major equity indexes. The remaining contracts expire between April 2019 and January 2026. At September 30, 2018,based upon estimates of the remaining weighted average life of all contracts was approximately 2.25 years. In the second quarter of 2018, one equity index put option contract expiredultimate claim costs associated with no payment to the counterparty.
Future payments, if any, under any given contract will be required if the prevailing index value is below the contract strike price at the expiration date. We received aggregate premiums of approximately $4.1 billion on the remaining contracts at the contract inception dates and we have no counterparty credit risk. The aggregate intrinsic value (the undiscounted liability assuming the contracts are settled based on the index values and foreign currency exchange ratesclaim occurrences as of the balance sheet date) was $919 million at September 30, 2018date and $789 million at December 31, 2017. These contracts may not be unilaterally terminated or fully settled beforeinclude estimates forincurred-but-not-reported (“IBNR”) claims. Reconciliations of the expiration dates and the ultimate amount of cash basis gains or losses on these contracts will not be determined until the contract expiration dates.
A limited number of our equity index put option contracts contain collateral posting requirements with respect to changes in the fair value or intrinsic valueclaim liabilities, excluding liabilities under retroactive reinsurance contracts (see Note 17), for each of the contracts and/or a downgrade of Berkshire’s credit ratings. As of September 30,three months ending March 31, 2019 and 2018 we did not have any collateral posting requirements. If Berkshire’s credit ratings (currently AA from Standard & Poor’sfollow (in millions).
2019 | 2018 | |||||||
Balances – beginning of year: | ||||||||
Gross liabilities | $ | 68,458 | $ | 61,122 | ||||
Reinsurance recoverable on unpaid losses | (3,060 | ) | (3,201 | ) | ||||
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Net liabilities | 65,398 | 57,921 | ||||||
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Incurred losses and loss adjustment expenses: | ||||||||
Current accident year events | 9,787 | 9,475 | ||||||
Prior accident years’ events | 112 | (753 | ) | |||||
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Total incurred losses and loss adjustment expenses | 9,899 | 8,722 | ||||||
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Paid losses and loss adjustment expenses: | ||||||||
Current accident year events | (3,123 | ) | (3,091 | ) | ||||
Prior accident years’ events | (5,884 | ) | (4,759 | ) | ||||
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Total payments | (9,007 | ) | (7,850 | ) | ||||
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Foreign currency translation adjustment | 81 | 253 | ||||||
Balances – March 31: | ||||||||
Net liabilities | 66,371 | 59,046 | ||||||
Reinsurance recoverable on unpaid losses | 3,164 | 3,048 | ||||||
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Gross liabilities | $ | 69,535 | $ | 62,094 | ||||
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Incurred losses and Aa2 from Moody’s) are downgraded below eitherA- by Standard & Poor’s or A3 by Moody’s, collateral of up to $1.1 billion could be required to be posted.
Our regulated utility subsidiaries are exposed to variationsloss adjustment expenses in the pricesfirst quarter of fuel required2019 included a net increase of estimated ultimate liabilities for prior accident years of $112 million compared to generate electricity, wholesale electricity purchaseda net decrease of $753 million in the first quarter of 2018. Increases and solddecreases in estimated ultimate liabilities produce corresponding decreases and natural gas supplied for customers. We may use forward purchases and sales, futures, swaps and optionsincreases to manage a portionpre-tax earnings. Such amounts as percentages of these price risks. Mostnet liabilities at the beginning of the net derivative contract assets or liabilities of our regulated utilities are probable of recovery through ratesyear were 0.2% in 2019 and are offset by regulatory liabilities or assets. Derivative contract assets are included1.3% in other assets and were $154 million as of September 30, 2018 and $142 million as of December 31, 2017. Derivative contract liabilities are included in other liabilities and were $80 million as of September 30, 2018 and $82 million as of December 31, 2017.
Notes to Consolidated Financial Statements(Continued)
Note 14. Supplemental cash flow information
Supplemental cash flow information follows (in millions).16. Unpaid losses and loss adjustment expenses(Continued)
First Nine Months | ||||||||
2018 | 2017 | |||||||
Cash paid during the period for: | ||||||||
Income taxes | $ | 3,977 | $ | 1,774 | ||||
Interest: | ||||||||
Insurance and other businesses | 677 | 747 | ||||||
Railroad, utilities and energy businesses | 2,129 | 2,111 | ||||||
Finance and financial products businesses | 257 | 296 | ||||||
Non-cash investing and financing activities: | ||||||||
Liabilities assumed in connection with business acquisitions | 93 | 685 | ||||||
Equity securities surrendered in connection with warrant exercise | — | 4,965 |
In the first quarter of 2019, we reduced estimated ultimate liabilities of primary insurance for prior years’ events by $100 million, compared to a reduction of $571 million in 2018. In each period, these liability reductions primarily derived from private passenger automobile, medical malpractice and workers’ compensation insurance, although the liability reductions in the first quarter of 2019 were lower than in the first quarter of 2018 for private passenger automobile and medical malpractice. In addition, we increased estimated liabilities in the first quarter of 2019 for legacy casualty exposures and other commercial insurance business.
In the first quarter of 2019, we increased estimated ultimate property and casualty reinsurance liabilities for prior years’ events by $212 million, compared to a decrease of $182 million in the first quarter of 2018. The losses in 2019 derived primarily from casualty claims.
Note 15. Unpaid losses and loss adjustment expenses
Our liabilities for unpaid losses and loss adjustment expenses (also referred to as “claim liabilities”) under short-duration property and casualty insurance and reinsurance contracts are based upon estimates of the ultimate claim costs associated with claim occurrences as of the balance sheet date and include estimates forincurred-but-not-reported (“IBNR”) claims. Reconciliations of the changes in claim liabilities, excluding liabilities under retroactive reinsurance contracts (see Note 16), for the nine months ending September 30, 2018 and 2017 follow (in millions).
2018 | 2017 | |||||||
Balances – beginning of year: | ||||||||
Gross liabilities | $ | 61,122 | $ | 53,379 | ||||
Reinsurance recoverable on unpaid losses | (3,201) | (3,338) | ||||||
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Net liabilities | 57,921 | 50,041 | ||||||
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Incurred losses and loss adjustment expenses: | ||||||||
Current accident year events | 29,071 | 28,632 | ||||||
Prior accident years’ events | (1,566) | (461) | ||||||
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Total incurred losses and loss adjustment expenses | 27,505 | 28,171 | ||||||
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Paid losses and loss adjustment expenses: | ||||||||
Current accident year events | (12,474) | (11,539) | ||||||
Prior accident years’ events | (11,516) | (9,952) | ||||||
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Total payments | (23,990) | (21,491) | ||||||
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Foreign currency translation adjustment | (117) | 603 | ||||||
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Balances – September 30: | ||||||||
Net liabilities | 61,319 | 57,324 | ||||||
Reinsurance recoverable on unpaid losses | 2,944 | 3,254 | ||||||
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Gross liabilities | $ | 64,263 | $ | 60,578 | ||||
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Incurred losses and loss adjustment expenses in the first nine months of 2018 and 2017 included net reductions of estimated ultimate claim liabilities for prior accident years of $1,566 million and $461 million, respectively. We reduced estimated ultimate claim liabilities for prior accident years related to primary insurance by $985 million in the first nine months of 2018 and $569 million in the first nine months of 2017, which included reductions of $478 million in 2018 and increases of $37 million in 2017 related to private passenger automobile insurance coverages. We also reduced estimated ultimate claim liabilities with respect to prior accident years for property and casualty reinsurance by $581 million in the first nine months of 2018, compared to an increase of $108 million in the first nine months of 2017.
Notes to Consolidated Financial Statements(Continued)
Note 16.17. Retroactive reinsurance contracts
Retroactive reinsurance policies provide indemnification of losses and loss adjustment expenses of short-duration insurance contracts with respect to underlying loss events that occurred prior to the contract inception date. Claims payments may commence immediately after the contract date or, if applicable, once a contractual retention amount has been reached. Reconciliations of the changes in estimated liabilities for retroactive reinsurance unpaid losses and loss adjustment expenses (“claim liabilities”) and related deferred charge reinsurance assumed assets for each of the ninethree months ending September 30,March 31, 2019 and 2018 and 2017 follows (in millions).
2018 | 2017 | 2019 | 2018 | |||||||||||||||||||||||||||||
Unpaid losses and loss adjustment expenses | Deferred charges reinsurance assumed | Unpaid losses and loss adjustment expenses | Deferred charges reinsurance assumed | Unpaid losses and loss adjustment expenses | Deferred charges reinsurance assumed | Unpaid losses and loss adjustment expenses | Deferred charges reinsurance assumed | |||||||||||||||||||||||||
Balances – beginning of year: | $ | 42,937 | $ | (15,278) | $ | 24,972 | $ | (8,047) | $ | 41,834 | $ | (14,104 | ) | $ | 42,937 | $ | (15,278 | ) | ||||||||||||||
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Incurred losses and loss adjustment expenses | ||||||||||||||||||||||||||||||||
Current year contracts | — | — | 17,213 | (6,170) | — | — | — | — | ||||||||||||||||||||||||
Prior years’ contracts | (36) | 827 | (409) | 645 | 2 | 273 | (30 | ) | 271 | |||||||||||||||||||||||
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Total | (36) | 827 | 16,804 | (5,525) | 2 | 273 | (30 | ) | 271 | |||||||||||||||||||||||
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Paid losses and loss adjustment expenses | (966) | — | (783) | — | (203 | ) | — | (563 | ) | — | ||||||||||||||||||||||
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Balances – September 30: | $ | 41,935 | $ | (14,451) | $ | 40,993 | $ | (13,572) | ||||||||||||||||||||||||
Balances – March 31: | $ | 41,633 | $ | (13,831 | ) | $ | 42,344 | $ | (15,007 | ) | ||||||||||||||||||||||
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Incurred losses and loss adjustment expenses, net of deferred charges | $ | 791 | $ | 11,279 | $ | 275 | $ | 241 | ||||||||||||||||||||||||
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In the preceding table, classifications of incurred losses and loss adjustment expenses are based on the inception dates of the contracts. We do not believe that analysis ofIncurred losses incurred and paid by accident year of the underlying event is relevant or meaningful given that our exposure to losses incepts when the contract incepts. Further, we believe the classifications of reported claims and case development liabilities has little or no practical analytical value.
Inloss adjustment expenses in the first quarter related to contracts written in prior years were $275 million in 2019 and $241 million in 2018. Such losses reflected the periodic amortization of deferred charge assets and the effects of changes in the timing and amount of ultimate claim liabilities.
In 2017, National Indemnity Company (“NICO”), a wholly-owned subsidiary, entered into an agreementa contract with various subsidiaries of American International Group, Inc. (collectively, “AIG”), which became effective on February 2, 2017. Under this agreement, NICO agreed to indemnify AIG for 80% of up to $25 billion of losses and allocated loss adjustment expenses in excess of $25 billion retained by AIG with respect to certain commercial insurance loss events occurring prior to 2016. As of the effective date, we recorded premiums earned of $10.2 billion and losses incurred of $10.2 billion, which consisted of liabilities for unpaid losses and loss adjustment expenses of $16.4 billion and deferred charge reinsurance assumed assets of $6.2 billion. Berkshire agreed to guarantee the timely payment of all amounts due to AIG under the agreement.. Our estimated ultimate claim liabilities with respect to the AIG contract at September 30, 2018March 31, 2019 and at December 31, 20172018 were $18.2 billion, which reflected an increase of $1.8 billion in estimated ultimate claim liabilities recorded in the fourth quarter of 2017.billion. Deferred charge assets related to the AIG contract were approximately $7.1$6.8 billion at September 30, 2018March 31, 2019 and $7.5$6.9 billion at December 31, 2017, which included an additional $1.7 billion2018.
Notes to Consolidated Financial Statements(Continued)
Note 18. Notes payable and other borrowings
Notes payable and other borrowings are summarized below (in millions). The weighted average interest rates and maturity date ranges shown in the following tables are based on borrowings as of March 31, 2019.
Weighted Average Interest Rate | March 31, 2019 | December 31, 2018 | ||||||||||
Insurance and other: | ||||||||||||
Berkshire Hathaway Inc. (“Berkshire”): | ||||||||||||
U.S. Dollar denominated due 2019-2047 | 3.1 | % | $ | 9,066 | $ | 9,065 | ||||||
Euro denominated due 2020-2035 | 1.1 | % | 7,638 | 7,806 | ||||||||
Berkshire Hathaway Finance Corporation (“BHFC”) due 2019-2049 | 3.8 | % | 9,928 | 10,650 | ||||||||
Other subsidiary borrowings due 2019-2045 | 4.0 | % | 5,519 | 5,597 | ||||||||
Subsidiary short-term borrowings | 4.4 | % | 1,696 | 1,857 | ||||||||
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$ | 33,847 | $ | 34,975 | |||||||||
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The carrying value of Berkshire’s Euro denominated senior notes reflects the Euro/U.S. Dollar exchange rate as of the balance sheet date. The gains or losses arising from the aforementioned increase to ultimate claim liabilitieschanges in the fourth quarter.
Incurred lossesEuro/U.S. Dollar exchange rate during the period are recorded in earnings as a component of selling, general and loss adjustment expenses related to contracts writtenadministrative expenses. Changes in prior years were $791the Euro/U.S. Dollar exchange rate resulted inpre-tax gains of $170 million in the first nine monthsquarter of 2018 and $2362019 compared topre-tax losses of $217 million in the first nine monthsquarter of 2017.2018. The carrying values of the Euro denominated senior notes reflected corresponding decreases with respect to the gains and increases with respect to the losses in those periods.
Borrowings of BHFC, a wholly owned finance subsidiary of Berkshire, consist of senior unsecured notes used to fund manufactured housing loans originated or acquired and equipment held for lease of certain finance subsidiaries. In the first quarter of 2019, BHFC issued $2.0 billion of 4.25% senior notes due in 2049 and repaid $2.7 billion of maturing notes. Such lossesborrowings are fully and unconditionally guaranteed by Berkshire. In addition to BHFC’s borrowings, Berkshire guaranteed approximately $1.6 billion of other subsidiary borrowings at March 31, 2019. Generally, Berkshire’s guarantee of a subsidiary’s debt obligation is an absolute, unconditional and irrevocable guarantee for the full and prompt payment when due of all payment obligations.
Weighted Average Interest Rate | March 31, 2019 | December 31, 2018 | ||||||||||
Railroad, utilities and energy: | ||||||||||||
Berkshire Hathaway Energy Company (“BHE”) and subsidiaries: | ||||||||||||
BHE senior unsecured debt due 2020-2049 | 4.6 | % | $ | 8,578 | $ | 8,577 | ||||||
Subsidiary and other debt due 2019-2064 | 4.5 | % | 29,337 | 28,196 | ||||||||
Short-term borrowings | 3.2 | % | 2,214 | 2,516 | ||||||||
Burlington Northern Santa Fe and subsidiaries due 2019-2097 | 4.7 | % | 23,217 | 23,226 | ||||||||
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$ | 63,346 | $ | 62,515 | |||||||||
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BHE subsidiary debt represents amounts issued pursuant to separate financing agreements. Substantially all of the assets of certain BHE subsidiaries are, or may be, pledged or encumbered to support or otherwise secure debt. These borrowing arrangements generally contain various covenants, including covenants which pertain to leverage ratios, interest coverage ratios and/or debt service coverage ratios. During the first quarter of 2019, BHE and its subsidiaries issued approximately $3.0 billion of long-term debt. The debt issued in 2019 has maturity dates ranging from 2029 to 2050 and a weighted average interest rate of 3.9%. Proceeds from these debt issuances were used to repay debt, to fund capital expenditures and for general corporate purposes.
BNSF’s borrowings are primarily senior unsecured debentures. As of March 31, 2019, BNSF, BHE and their subsidiaries were in compliance with all applicable debt covenants. Berkshire does not guarantee any debt, borrowings or lines of credit of BNSF, BHE or their subsidiaries.
As of March 31, 2019, our subsidiaries had unused lines of credit and commercial paper capacity aggregating approximately $7.3 billion to support short-term borrowing programs and provide additional liquidity. Such unused lines of credit included recurring amortization of deferred charge assetsapproximately $5.8 billion related to BHE and net gains from reductions of estimated ultimate claim liabilities.its subsidiaries.
Notes to Consolidated Financial Statements(Continued)
Note 17. Notes payable and other borrowings
Notes payable and other borrowings are summarized below (dollars in millions). The weighted average interest rates and maturity date ranges shown in the following tables are based on borrowings as of September 30, 2018.
Weighted Average Interest Rate | September 30, 2018 | December 31, 2017 | ||||||||||
Insurance and other: | ||||||||||||
Issued by Berkshire: | ||||||||||||
U.S. Dollar denominated borrowings due 2018-2047 | 3.1 | % | $ | 9,058 | $ | 10,603 | ||||||
Euro denominated borrowings due 2020-2035 | 1.1 | % | 7,897 | 8,164 | ||||||||
Short-term subsidiary borrowings | 4.1 | % | 1,733 | 1,832 | ||||||||
Other subsidiary borrowings due 2018-2045 | 4.0 | % | 5,583 | 6,725 | ||||||||
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$ | 24,271 | $ | 27,324 | |||||||||
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Notes to Consolidated Financial Statements(Continued)
Note 17. Notes payable and other borrowings(Continued)
The carrying value of Berkshire’s Euro denominated senior notes reflects the Euro/U.S. Dollar exchange rate as of the balance sheet date. The gains or losses arising from the changes in the Euro/U.S. Dollar exchange rate during the period are recorded in earnings as a component of interest expense. The change in the Euro/U.S. Dollar exchange rate in the first nine months of 2018 resulted in reductions of $273 million in interest expense and to the carrying value of the Euro denominated senior notes compared to increases of $860 million in interest expense and to the carrying value of the notes in the first nine months of 2017.
Weighted Average Interest Rate | September 30, 2018 | December 31, 2017 | ||||||||||
Railroad, utilities and energy: | ||||||||||||
Issued by Berkshire Hathaway Energy Company (“BHE”) and its subsidiaries: | ||||||||||||
BHE senior unsecured debt due 2018-2049 | 4.5% | $ | 8,970 | $ | 6,452 | |||||||
Subsidiary and other debt due 2019-2064 | 4.7% | 28,588 | 28,739 | |||||||||
Short-term debt | 3.0% | 1,784 | 4,488 | |||||||||
Issued by BNSF due 2018-2097 | 4.7% | 23,257 | 22,499 | |||||||||
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$ | 62,599 | $ | 62,178 | |||||||||
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BHE subsidiary debt represents amounts issued pursuant to separate financing agreements. Substantially all of the assets of certain BHE subsidiaries are, or may be, pledged or encumbered to support or otherwise secure debt. These borrowing arrangements generally contain various covenants, which pertain to leverage ratios, interest coverage ratios and/or debt service coverage ratios, among other covenants. During the first nine months of 2018, BHE and its subsidiaries issued approximately $5.5 billion of long-term debt, including $2.05 billion in the third quarter. The debt issued in 2018 has maturity dates ranging from 2020 to 2049 and a weighted average interest rate of 3.6%. Proceeds from these debt issuances were used to repay debt, to fund capital expenditures and for general corporate purposes.
BNSF’s borrowings are primarily senior unsecured debentures. In the first nine months of 2018, BNSF issued $1.5 billion of senior unsecured debentures due in 2048, including $750 million in the third quarter. These debentures have a weighted average interest rate of 4.1%. In 2018, BNSF repaid $650 million of maturing debentures. As of September 30, 2018, BNSF, BHE and their subsidiaries were in compliance with all applicable debt covenants. Berkshire does not guarantee any debt, borrowings or lines of credit of BNSF, BHE or their subsidiaries.
Weighted Average Interest Rate | September 30, 2018 | December 31, 2017 | ||||||||||
Finance and financial products: | ||||||||||||
Issued by Berkshire Hathaway Finance Corporation (“BHFC”) due 2019-2048 | 3.3% | $ | 10,649 | $ | 12,926 | |||||||
Issued by other subsidiaries due 2018-2028 | 3.6% | 121 | 159 | |||||||||
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$ | 10,770 | $ | 13,085 | |||||||||
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Borrowings of BHFC, a wholly owned finance subsidiary of Berkshire, consist of senior unsecured notes used to fund manufactured housing loans originated or acquired and assets held for lease of certain finance subsidiaries. In August 2018, BHFC issued $2.35 billion of 4.2% senior notes due in 2048. Such borrowings are fully and unconditionally guaranteed by Berkshire. During the first nine months of 2018, BHFC repaid $4.6 billion of maturing senior notes.
As of September 30, 2018, our subsidiaries had unused lines of credit and commercial paper capacity aggregating approximately $8.4 billion to support short-term borrowing programs and provide additional liquidity. Such unused lines of credit included approximately $6.8 billion related to BHE and its subsidiaries. In addition to BHFC’s borrowings, Berkshire guaranteed approximately $1.7 billion of other subsidiary borrowings at September 30, 2018. Generally, Berkshire’s guarantee of a subsidiary’s debt obligation is an absolute, unconditional and irrevocable guarantee for the full and prompt payment when due of all payment obligations.
Notes to Consolidated Financial Statements(Continued)
Note 18.19. Fair value measurements
Our financial assets and liabilities are summarized below as of September 30, 2018March 31, 2019 and December 31, 20172018, with fair values shown according to the fair value hierarchy (in millions). The carrying values of cash and cash equivalents, U.S. Treasury Bills, receivables and accounts payable, accruals and other liabilities are considered to be reasonable estimates of their fair values.
Carrying Value | Fair Value | Quoted Prices (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Carrying Value | Fair Value | Quoted Prices (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||||||||||||||||||
September 30, 2018 | ||||||||||||||||||||||||||||||||||||||||
March 31, 2019 | ||||||||||||||||||||||||||||||||||||||||
Investments in fixed maturity securities: | ||||||||||||||||||||||||||||||||||||||||
U.S. Treasury, U.S. government corporations and agencies | $ | 3,599 | $ | 3,599 | $ | 2,378 | $ | 1,221 | $ | — | $ | 3,918 | $ | 3,918 | $ | 2,846 | $ | 1,072 | $ | — | ||||||||||||||||||||
U.S. states, municipalities and political subdivisions | 290 | 290 | — | 290 | — | |||||||||||||||||||||||||||||||||||
States, municipalities and political subdivisions | 151 | 151 | — | 151 | — | |||||||||||||||||||||||||||||||||||
Foreign governments | 7,370 | 7,370 | 5,162 | 2,208 | — | 8,091 | 8,091 | 5,840 | 2,251 | — | ||||||||||||||||||||||||||||||
Corporate bonds | 6,458 | 6,458 | — | 6,453 | 5 | 6,724 | 6,724 | — | 6,720 | 4 | ||||||||||||||||||||||||||||||
Mortgage-backed securities | 554 | 554 | — | 554 | — | 531 | 531 | — | 531 | — | ||||||||||||||||||||||||||||||
Investments in equity securities | 207,332 | 207,332 | 206,985 | 47 | 300 | 191,771 | 191,771 | 191,420 | 50 | 301 | ||||||||||||||||||||||||||||||
Investment in Kraft Heinz common stock | 17,453 | 17,935 | 17,935 | — | — | 13,686 | 10,626 | 10,626 | — | — | ||||||||||||||||||||||||||||||
Loans and finance receivables | 14,477 | 14,735 | — | 59 | 14,676 | 16,432 | 16,459 | — | 1,641 | 14,818 | ||||||||||||||||||||||||||||||
Derivative contract assets(1) | 154 | 154 | 3 | 41 | 110 | 171 | 171 | — | 52 | 119 | ||||||||||||||||||||||||||||||
Derivative contract liabilities: | ||||||||||||||||||||||||||||||||||||||||
Railroad, utilities and energy(1) | 80 | 80 | 1 | 63 | 16 | 99 | 99 | 1 | 83 | 15 | ||||||||||||||||||||||||||||||
Equity index put options | 1,869 | 1,869 | — | — | 1,869 | 1,682 | 1,682 | — | — | 1,682 | ||||||||||||||||||||||||||||||
Notes payable and other borrowings: | ||||||||||||||||||||||||||||||||||||||||
Insurance and other | 24,271 | 24,422 | — | 24,422 | — | 33,847 | 35,242 | — | 35,216 | 26 | ||||||||||||||||||||||||||||||
Railroad, utilities and energy | 62,599 | 66,823 | — | 66,823 | — | 63,346 | 69,937 | — | 69,937 | — | ||||||||||||||||||||||||||||||
Finance and financial products | 10,770 | 10,979 | — | 10,953 | 26 | |||||||||||||||||||||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||
December 31, 2018 | ||||||||||||||||||||||||||||||||||||||||
Investments in fixed maturity securities: | ||||||||||||||||||||||||||||||||||||||||
U.S. Treasury, U.S. government corporations and agencies | $ | 3,953 | $ | 3,953 | $ | 2,360 | $ | 1,593 | $ | — | $ | 4,223 | $ | 4,223 | $ | 2,933 | $ | 1,290 | $ | — | ||||||||||||||||||||
U.S. states, municipalities and political subdivisions | 854 | 854 | — | 854 | — | |||||||||||||||||||||||||||||||||||
States, municipalities and political subdivisions | 189 | 189 | — | 189 | — | |||||||||||||||||||||||||||||||||||
Foreign governments | 8,822 | 8,822 | 6,946 | 1,876 | — | 7,502 | 7,502 | 5,417 | 2,085 | — | ||||||||||||||||||||||||||||||
Corporate bonds | 6,862 | 6,862 | — | 6,856 | 6 | 7,440 | 7,440 | — | 7,434 | 6 | ||||||||||||||||||||||||||||||
Mortgage-backed securities | 862 | 862 | — | 862 | — | 544 | 544 | — | 544 | — | ||||||||||||||||||||||||||||||
Investments in equity securities | 170,540 | 170,540 | 170,494 | 46 | — | 172,757 | 172,757 | 172,253 | 203 | 301 | ||||||||||||||||||||||||||||||
Investment in Kraft Heinz common stock | 17,635 | 25,306 | 25,306 | — | — | 13,813 | 14,007 | 14,007 | — | — | ||||||||||||||||||||||||||||||
Loans and finance receivables | 13,748 | 14,136 | — | 17 | 14,119 | 16,280 | 16,377 | — | 1,531 | 14,846 | ||||||||||||||||||||||||||||||
Derivative contract assets(1) | 142 | 142 | 1 | 28 | 113 | 172 | 172 | 2 | 52 | 118 | ||||||||||||||||||||||||||||||
Derivative contract liabilities: | ||||||||||||||||||||||||||||||||||||||||
Railroad, utilities and energy(1) | 82 | 82 | 3 | 69 | 10 | 111 | 111 | 1 | 101 | 9 | ||||||||||||||||||||||||||||||
Equity index put options | 2,172 | 2,172 | — | — | 2,172 | 2,452 | 2,452 | — | — | 2,452 | ||||||||||||||||||||||||||||||
Notes payable and other borrowings: | ||||||||||||||||||||||||||||||||||||||||
Insurance and other | 27,324 | 28,180 | — | 28,180 | — | 34,975 | 35,361 | — | 35,335 | 26 | ||||||||||||||||||||||||||||||
Railroad, utilities and energy | 62,178 | 70,538 | — | 70,538 | — | 62,515 | 66,422 | — | 66,422 | — | ||||||||||||||||||||||||||||||
Finance and financial products | 13,085 | 13,582 | — | 13,577 | 5 |
(1) | Assets are included in other assets and liabilities are included in accounts payable, accruals and other liabilities. |
Notes to Consolidated Financial Statements(Continued)
Note 18. 19. Fair value measurements(Continued)
The fair values of substantially all of our financial instruments were measured using market or income approaches. The hierarchy for measuring fair value consists of Levels 1 through 3, which are described below.
Level 1 – Inputs represent unadjusted quoted prices for identical assets or liabilities exchanged in active markets.
Level 2 – Inputs include directly or indirectly observable inputs (other than Level 1 inputs), such as quoted prices for similar assets or liabilities exchanged in active or inactive markets ormarkets; quoted prices for identical assets or liabilities exchanged in inactive markets. In addition,markets; other inputs that may be considered in fair value determinations may includeof the assets or liabilities, such as interest rates and yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates,rates; and inputs that are derived principally from or corroborated by observable market data by correlation or other means. Pricing evaluations generally reflect discounted expected future cash flows, which incorporate yield curves for instruments with similar characteristics, such as credit ratings, estimated durations and yields for other instruments of the issuer or entities in the same industry sector.
Level 3 – Inputs include unobservable inputs used in the measurement of assets and liabilities. Management is required to use its own assumptions regarding unobservable inputs because there is little, if any, market activity in the assets or liabilities and it may be unable to corroborate the related observable inputs. Unobservable inputs require management to make certain projections and assumptions about the information that would be used by market participants in valuing assets or liabilities.
Reconciliations of significant assets and liabilities measured and carried at fair value on a recurring basis with the use of significant unobservable inputs (Level 3) for the ninethree months ending September 30,ended March 31, 2019 and 2018 and 2017 follow (in millions).
Investments in equity and fixed maturity securities | Net derivative contract liabilities | |||||||
Nine months ending September 30, 2018 | ||||||||
Balance at December 31, 2017 | $ | 6 | $ | (2,069) | ||||
Gains (losses) included in: | ||||||||
Earnings | — | 446 | ||||||
Regulatory assets and liabilities | — | (11) | ||||||
Acquisitions, dispositions and settlements | (1) | (141) | ||||||
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Balance at September 30, 2018 | $ | 5 | $ | (1,775) | ||||
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Nine months ending September 30, 2017 | ||||||||
Balance at December 31, 2016 | $ | 17,321 | $ | (2,824) | ||||
Gains (losses) included in: | ||||||||
Earnings | — | 822 | ||||||
Other comprehensive income | 1,157 | (3) | ||||||
Regulatory assets and liabilities | — | (5) | ||||||
Acquisitions, dispositions and settlements | (58) | (78) | ||||||
Transfers into/out of Level 3 | (18,413) | — | ||||||
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Balance at September 30, 2017 | $ | 7 | $ | (2,088) | ||||
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Net derivative contract liabilities | ||||
Three months ending March 31, 2019 | ||||
Balance at December 31, 2018 | $ | (2,343 | ) | |
Gains (losses) included in: | ||||
Earnings | 820 | |||
Other comprehensive income | — | |||
Regulatory assets and liabilities | (11 | ) | ||
Acquisitions, dispositions and settlements | (44 | ) | ||
Transfers into/out of Level 3 | — | |||
Balance at March 31, 2019 | $ | (1,578 | ) | |
Three months ending March 31, 2018 | ||||
Balance at December 31, 2017 | $ | (2,069 | ) | |
Gains (losses) included in: | ||||
Earnings | (176 | ) | ||
Other comprehensive income | (1 | ) | ||
Regulatory assets and liabilities | (9 | ) | ||
Acquisitions, dispositions and settlements | (26 | ) | ||
Balance at March 31, 2018 | $ | (2,281 | ) | |
Gains and losses included in earnings are reported as components of investment gains/losses, derivative gains/losses and other revenues, as appropriate. In 2017, gains and losses included in other comprehensive income were primarily the net change in unrealized appreciation of investments and the reclassification of investment appreciation in net earnings in our Consolidated Statements of Comprehensive Income.
On June 30, 2017, we announced our intention to exercise our investment in Bank of America Corporation Warrants (“BAC Warrants”) for common stock in the third quarter of 2017 and that we expected to use our investment in Bank of America Corporation Preferred Stock as consideration. In the second quarter of 2017, Restaurant Brands International, Inc. (“RBI”) announced its intention to redeem our investment in RBI Preferred Shares in the fourth quarter of 2017. As of June 30, 2017, we based our valuations of these investments on such expectations and we significantly reduced expected durations and effectively eliminated the discounts for transferability and other restrictions. As a result, we concluded the Level 3 inputs used in the previous fair value determinations of our investments in BAC Warrants and RBI Preferred Shares were not significant and that the valuations of such investments were deemed Level 2 measurements.
Notes to Consolidated Financial Statements(Continued)
Note 18. 19. Fair value measurements(Continued)
Quantitative information as of September 30, 2018,March 31, 2019, with respect to assets and liabilities measured and carried at fair value on a recurring basis with the use of significant unobservable inputs (Level 3) follows (in millions).
Fair Value | Principal Valuation Techniques | Unobservable Inputs | Weighted Average | |||||||||||
Derivative contract liabilities – Equity index put options | $ | 1,869 | Option pricing model | Volatility | 16% |
Fair Value | Principal Valuation Techniques | Unobservable Inputs | Weighted Average | |||||||||||
Derivative contract liabilities – Equity index put options | $ | 1,682 | Option pricing model | Volatility | 16 | % |
Our equity index put option contracts are illiquid and contain contract terms that are not standard in derivatives markets. For example, we are not required to post collateral under most of our contracts and certain of the contracts have relatively long durations. For these and other reasons, we classified these contracts as Level 3 measurements. The methods we use to measure fair valuesvalue these contracts are those that we believe market participants would use in determining exchange prices with respect to our contracts.
We value equity index put option contracts based on the Black-Scholes option valuation model. Inputs to this model include index price, contract duration and dividend and interest rate inputs (including a Berkshirenon-performance input) which are observable. However, we believe that the valuation of our longer duration contractslong-duration options using any model is inherently subjective and, given the lack of observable transactions and prices, acceptable values may be subject to wide ranges. Volatility inputs represent our expectations, which consider the remaining duration of each contract and assume that the contracts will remain outstanding until the expiration dates. Increases or decreases in the volatility inputs will produce increases or decreases in the fair values of the liabilities.
Note 19.20. Common stock
Changes in Berkshire’s issued, treasury and outstanding common stock during the nine months ending September 30, 2018first quarter of 2019 are shown in the table below. In addition to our common stock, 1,000,000 shares of preferred stock are authorized, but none are issued.
Class A, $5 Par Value (1,650,000 shares authorized) | Class B, $0.0033 Par Value (3,225,000,000 shares authorized) | |||||||||||||||||||||||
Issued | Treasury | Outstanding | Issued | Treasury | Outstanding | |||||||||||||||||||
Balance at December 31, 2017 | 762,755 | (11,680) | 751,075 | 1,342,066,749 | (1,409,762) | 1,340,656,987 | ||||||||||||||||||
Conversions of Class A common stock to Class B common stock and exercises of replacement stock options issued in a business acquisition | (16,850) | — | (16,850) | 25,886,063 | — | 25,886,063 | ||||||||||||||||||
Treasury stock acquired | — | (225) | (225) | — | (4,139,192) | (4,139,192) | ||||||||||||||||||
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|
|
|
| |||||||||||||
Balance at September 30, 2018 | 745,905 | (11,905) | 734,000 | 1,367,952,812 | (5,548,954) | 1,362,403,858 | ||||||||||||||||||
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Class A, $5 Par Value (1,650,000 shares authorized) | Class B, $0.0033 Par Value (3,225,000,000 shares authorized) | |||||||||||||||||||||||
Issued | Treasury | Outstanding | Issued | Treasury | Outstanding | |||||||||||||||||||
Balance December 31, 2018 | 742,213 | (12,897 | ) | 729,316 | 1,373,558,983 | (6,138,909 | ) | 1,367,420,074 | ||||||||||||||||
Conversions of Class A common stock to Class B common stock and exercises of replacement stock options | (4,303 | ) | — | (4,303 | ) | 6,616,673 | — | 6,616,673 | ||||||||||||||||
Treasury stock acquired | — | (1,258 | ) | (1,258 | ) | — | (6,519,830 | ) | (6,519,830 | ) | ||||||||||||||
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Balance at March 31, 2019 | 737,910 | (14,155 | ) | 723,755 | 1,380,175,656 | (12,658,739 | ) | 1,367,516,917 | ||||||||||||||||
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Each Class A common share is entitled to one vote per share. Class B common stock possesses dividend and distribution rights equal toone-fifteen-hundredth (1/1,500) of such rights of Class A common stock. Each Class B common share possesses voting rights equivalent toone-ten-thousandth (1/10,000) of the voting rights of a Class A share. Unless otherwise required under Delaware General Corporation Law, Class A and Class B common shares vote as a single class. Each share of Class A common stock is convertible, at the option of the holder, into 1,500 shares of Class B common stock. Class B common stock is not convertible into Class A common stock. On an equivalent Class A common stock basis, there were 1,642,2691,635,433 shares outstanding as of September 30, 2018March 31, 2019 and 1,644,8461,640,929 shares outstanding as of December 31, 2017.2018.
Since we have two classes of common stock, we provide earnings per share data on the Consolidated Statements of Earnings for average equivalent Class A shares outstanding and average equivalent Class B shares outstanding. Class B shares are economically equivalent toone-fifteen-hundredth (1/1,500) of a Class A share. Average equivalent Class A shares outstanding represents average Class A shares outstanding plusone-fifteen-hundredth (1/1,500) of the average Class B shares outstanding. Average equivalent Class B shares outstanding represents average Class B shares outstanding plus 1,500 times average Class A shares outstanding.
Notes to Consolidated Financial Statements(Continued)
Note 20. Common stock(Continued)
For several years, Berkshire had a common stock repurchase program, which permitted Berkshire to repurchase its Class A and Class B shares at prices no higher than a 20% premium over the book value of the shares. On July 17, 2018, Berkshire’s Board of Directors authorized an amendment to the program, permitting Berkshire to repurchase shares any time that Warren Buffett, Berkshire’s Chairman of the Board and Chief Executive Officer, and Charlie Munger, a Vice-ChairmanVice Chairman of the Board, believe that the repurchase price is below Berkshire’s intrinsic value, conservatively determined. The program continues to allow share repurchases in the open market or through privately negotiated transactions and does not specify a maximum number of shares to be repurchased. However, repurchases will not be made if they would reduce the total value of Berkshire’s consolidated cash, cash equivalents and U.S. Treasury Bills holdings below $20 billion. The repurchase program does not obligate Berkshire to repurchase any specific dollar amount or number of Class A or Class B shares and there is no expiration date to the program.
Note 21. Accumulated other comprehensive income
Unrealized appreciation of investments, net | Foreign currency translation | Defined benefit pension plans | Other | Accumulated other comprehensive income | ||||||||||||||||
2019 | ||||||||||||||||||||
Balance at December 31, 2018 | $ | 370 | $ | (4,603 | ) | $ | (816 | ) | $ | 34 | $ | (5,015 | ) | |||||||
Other comprehensive income, net before reclassifications | 89 | 157 | 38 | (13 | ) | 271 | ||||||||||||||
Reclassifications into net earnings: | ||||||||||||||||||||
Reclassifications before income taxes | 5 | — | 16 | 2 | 23 | |||||||||||||||
Applicable income taxes | (1 | ) | — | (4 | ) | (1 | ) | (6 | ) | |||||||||||
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Balance at March 31, 2019 | $ | 463 | $ | (4,446 | ) | $ | (766 | ) | $ | 22 | $ | (4,727 | ) | |||||||
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2018 | ||||||||||||||||||||
Balance at December 31, 2017 | $ | 62,093 | $ | (3,114 | ) | $ | (420 | ) | $ | 12 | $ | 58,571 | ||||||||
Reclassifications to retained earnings upon adoption of new accounting standards | (61,340 | ) | (65 | ) | 36 | (6 | ) | (61,375 | ) | |||||||||||
Other comprehensive income, net before reclassifications | (74 | ) | 585 | (17 | ) | 2 | 496 | |||||||||||||
Reclassifications into net earnings: | ||||||||||||||||||||
Reclassifications before income taxes | (221 | ) | — | 10 | (5 | ) | (216 | ) | ||||||||||||
Applicable income taxes | 46 | — | (1 | ) | 2 | 47 | ||||||||||||||
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Balance at March 31, 2018 | $ | 504 | $ | (2,594 | ) | $ | (392 | ) | $ | 5 | $ | (2,477 | ) | |||||||
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Note 22. Income taxes
Our consolidated effective income tax rates for the first quarter of 2019 and 2018 were 21.4% and 29.7%, respectively. Our effective income tax rate normally reflects recurring benefits from dividends-received deductions applicable to investments in equity securities and production tax credits related to wind-powered electricity generation placed in service in the U.S. Our periodic effective income tax rate will also vary due to the changes in mix ofpre-tax earnings and underlying income tax rates applicable in the various taxing jurisdictions. In the first quarter of 2019, we recorded income tax expense of $377 million for uncertain tax positions related to investments in certain tax equity investment funds that generated income tax benefits from 2015 through 2018. We now believe that it is more likely than not those income tax benefits are not valid.
Notes to Consolidated Financial Statements(Continued)
Note 20. Accumulated23. Revenues from contracts with customers
On January 1, 2018, we adopted ASC 606 “Revenues from Contracts with Customers.” Under ASC 606, revenues are recognized when a good or service is transferred to a customer. A good or service is transferred when (or as) the customer obtains control of that good or service. Revenues are based on the consideration we expect to receive in connection with our promises to deliver goods and services to our customers.
The following tables summarize customer contract revenues disaggregated by reportable segment and the source of the revenue for the first quarters of 2019 and 2018 (in millions). Other revenues included in consolidated revenues were primarily insurance premiums earned, interest, dividend and other comprehensiveinvestment income and leasing revenues which are not within the scope of ASC 606.
Manufacturing | McLane Company | Service and Retail | BNSF | Berkshire Hathaway Energy | Insurance, Corporate and other | Total | ||||||||||||||||||||||
Three months ending March 31, 2019 | ||||||||||||||||||||||||||||
Manufactured products: | ||||||||||||||||||||||||||||
Industrial and commercial products | $ | 6,459 | $ | — | $ | 46 | $ | — | $ | — | $ | — | $ | 6,505 | ||||||||||||||
Building products | 3,552 | — | — | — | — | — | 3,552 | |||||||||||||||||||||
Consumer products | 3,290 | — | — | — | — | — | 3,290 | |||||||||||||||||||||
Grocery and convenience store distribution | — | 8,035 | — | — | — | — | 8,035 | |||||||||||||||||||||
Food and beverage distribution | — | 4,125 | — | — | — | — | 4,125 | |||||||||||||||||||||
Auto sales | — | — | 1,937 | — | — | — | 1,937 | |||||||||||||||||||||
Other retail and wholesale distribution | 544 | — | 2,921 | — | — | — | 3,465 | |||||||||||||||||||||
Service | 348 | 20 | 990 | 5,713 | 725 | — | 7,796 | |||||||||||||||||||||
Electricity and natural gas | — | — | — | — | 3,687 | — | 3,687 | |||||||||||||||||||||
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Total | 14,193 | 12,180 | 5,894 | 5,713 | 4,412 | — | 42,392 | |||||||||||||||||||||
Other revenue | 865 | 19 | 1,110 | 12 | 260 | 16,020 | 18,286 | |||||||||||||||||||||
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$ | 15,058 | $ | 12,199 | $ | 7,004 | $ | 5,725 | $ | 4,672 | $ | 16,020 | $ | 60,678 | |||||||||||||||
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Manufacturing | McLane Company | Service and Retail | BNSF | Berkshire Hathaway Energy | Insurance, Corporate and other | Total | ||||||||||||||||||||||
Three months ending March 31, 2018 | ||||||||||||||||||||||||||||
Manufactured products: | ||||||||||||||||||||||||||||
Industrial and commercial products | $ | 6,554 | $ | — | $ | 54 | $ | — | $ | — | $ | — | $ | 6,608 | ||||||||||||||
Building products | 2,920 | — | — | — | — | — | 2,920 | |||||||||||||||||||||
Consumer products | 3,696 | — | — | — | — | — | 3,696 | |||||||||||||||||||||
Grocery and convenience store distribution | — | 8,158 | — | — | — | — | 8,158 | |||||||||||||||||||||
Food and beverage distribution | — | 3,997 | — | — | — | — | 3,997 | |||||||||||||||||||||
Auto sales | — | — | 1,931 | — | — | — | 1,931 | |||||||||||||||||||||
Other retail and wholesale distribution | 498 | — | 2,712 | — | — | — | 3,210 | |||||||||||||||||||||
Service | 218 | 17 | 950 | 5,580 | 700 | — | 7,465 | |||||||||||||||||||||
Electricity and natural gas | — | — | — | — | 3,524 | — | 3,524 | |||||||||||||||||||||
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Total | 13,886 | 12,172 | 5,647 | 5,580 | 4,224 | — | 41,509 | |||||||||||||||||||||
Other revenue | 812 | 17 | 1,140 | 10 | 288 | 14,697 | 16,964 | |||||||||||||||||||||
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$ | 14,698 | $ | 12,189 | $ | 6,787 | $ | 5,590 | $ | 4,512 | $ | 14,697 | $ | 58,473 | |||||||||||||||
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Notes to Consolidated Financial Statements(Continued)
Note 23. Revenues from contracts with customers(Continued)
A summary of the net changestransaction price allocated to the significant unsatisfied remaining performance obligations relating to contracts with expected durations inafter-tax accumulated other comprehensive income attributable to Berkshire Hathaway shareholders and amounts reclassified out excess of accumulated other comprehensive income for the nine months ending September 30, 2018 and 2017one year as of March 31, 2019 follows (in millions).
Unrealized appreciation of investments, net | Foreign currency translation | Prior service and actuarial gains/losses of defined benefit pension plans | Other | Accumulated other comprehensive income | ||||||||||||||||
2018 | ||||||||||||||||||||
Balance at December 31, 2017 | $ | 62,093 | $ | (3,114) | $ | (420) | $ | 12 | $ | 58,571 | ||||||||||
Reclassifications to retained earnings upon adoption of new accounting standards | (61,340) | (65) | 36 | (6) | (61,375) | |||||||||||||||
Other comprehensive income, net before reclassifications | (142) | (776) | (33) | (19) | (970) | |||||||||||||||
Reclassifications into net earnings | (236) | — | 76 | 7 | (153) | |||||||||||||||
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Balance at September 30, 2018 | $ | 375 | $ | (3,955) | $ | (341) | $ | (6) | $ | (3,927) | ||||||||||
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Reclassifications into net earnings: | ||||||||||||||||||||
Reclassifications before income taxes | $ | (299) | $ | — | $ | 101 | $ | 10 | $ | (188) | ||||||||||
Applicable income taxes | (63) | — | 25 | 3 | (35) | |||||||||||||||
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$ | (236) | $ | — | $ | 76 | $ | 7 | $ | (153) | |||||||||||
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2017 | ||||||||||||||||||||
Balance at December 31, 2016 | $ | 43,176 | $ | (5,268) | $ | (593) | $ | (17) | $ | 37,298 | ||||||||||
Other comprehensive income, net before reclassifications | 11,734 | 1,946 | (90) | 19 | 13,609 | |||||||||||||||
Reclassifications into net earnings | (803) | — | 61 | 18 | (724) | |||||||||||||||
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Balance at September 30, 2017 | $ | 54,107 | $ | (3,322) | $ | (622) | $ | 20 | $ | 50,183 | ||||||||||
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Reclassifications into net earnings: | ||||||||||||||||||||
Reclassifications before income taxes | $ | (1,235) | $ | — | $ | 82 | $ | 32 | $ | (1,121) | ||||||||||
Applicable income taxes | (432) | — | 21 | 14 | (397) | |||||||||||||||
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$ | (803) | $ | — | $ | 61 | $ | 18 | $ | (724) | |||||||||||
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Performance obligations expected to be satisfied: | ||||||||||||
Less than 12 months | Greater than 12 months | Total | ||||||||||
Electricity and natural gas | $ | 918 | $ | 5,796 | $ | 6,714 | ||||||
Other sales and service contracts | 1,278 | 1,750 | 3,028 |
Note 21.24. Contingencies and Subsequent EventCommitments
We are parties in a variety of legal actions that routinely arise out of the normal course of business, including legal actions seeking to establish liability directly through insurance contracts or indirectly through reinsurance contracts issued by Berkshire subsidiaries. Plaintiffs occasionally seek punitive or exemplary damages. We do not believe that such normal and routine litigation will have a material effect on our financial condition or results of operations. Berkshire and certain of its subsidiaries are also involved in other kinds of legal actions, some of which assert or may assert claims or seek to impose fines and penalties. We believe that any liability that may arise as a result of other pending legal actions will not have a material effect on our consolidated financial condition or results of operations.
In 2016, NICO entered intoOn April 30, 2019, Berkshire committed to invest a definitive agreementtotal of $10 billion in Occidental Petroleum Corporation (“Occidental”) in connection with Occidental’s proposal to acquire Medical Liability Mutual Insurance Company,Anadarko Petroleum Corporation (“Medical Liability Mutual”Anadarko”),. The investment is contingent upon Occidental entering into and completing its proposed acquisition of Anadarko. If completed, Berkshire’s investment would include newly issued Occidental Cumulative Perpetual Preferred Stock with an aggregate liquidation value of $10 billion, together with warrants to purchase up to 80.0 million shares of Occidental common stock at an exercise price of $62.50 per share. The preferred stock will accrue dividends at 8% per annum and will be redeemable at the option of Occidental commencing on the tenth anniversary of issuance at a writer of medical professional liability insurance domiciled in New York. The acquisitionredemption price was approximately $2.5 billion. The acquisition involved the conversion of Medical Liability Mutual from a mutual companyequal to a stock company. The closing105% of the transaction was subject to various regulatory approvals, customary closing conditionsliquidation preference plus any accumulated and unpaid dividends, or mandatorily under certain specified capital return events. Dividends will be paid in cash or, at Occidental’s option, in shares of Occidental common stock. The warrants issued with the approvalpreferred stock may be exercised in whole or in part until one year after the redemption of the Medical Liability Mutual policyholders eligible to vote on the proposed demutualization and sale. The acquisition closed on October 1, 2018, at which time, Medical Liability Mutual’s name was changed to the MLMIC Insurance Company (“MLMIC”). The results of MLMIC will be included in Berkshire’s consolidated results beginning as of that date. As of the acquisition date, the preliminary fair values of MLMIC’s assets were approximately $6.3 billion, consisting primarily of cash and investments, and liabilities were approximately $3.8 billion, consisting primarily of unpaid losses and loss adjustment expenses and unearned insurance premiums. We believe goodwill arising from this acquisition will be insignificant. MLMIC’s premiums earned for the first nine months of 2018 were approximately $300 million.preferred stock.
Notes to Consolidated Financial Statements(Continued)
Note 22.25. Business segment data
Our operating businesses include a large and diverse group of insurance, railroad, utilities and energy, finance, manufacturing, service and retailing businesses. OurWe organize our reportable business segments are organized in a manner that reflects how management views those business activities. Certain businesses have beenare grouped together for segment reporting based upon similar products or product lines, marketing, selling and distribution characteristics, even though those business units are operated under separate local management. The accompanying business segment information for the first quarter of 2018 reflects certain reclassifications to conform to presentations as of December 31, 2018. Specifically, business units that previously were reported as the finance and financial products segment in the first quarter of 2018 were reclassified to manufacturing (Clayton Homes and UTLX), services and retailing (CORT and XTRA leasing) and corporate and other (principally investment income).
Notes to Consolidated Financial Statements(Continued)
Note 25. Business segment data(Continued)
Revenues and earnings or loss before income taxes by segment for the thirdfirst quarter of 2019 and first nine months of 2018 and 2017 were as follows (in millions).
Third Quarter | First Nine Months | First Quarter | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | |||||||||||||||||||
Operating Businesses: | ||||||||||||||||||||||||
Revenues of Operating Businesses: | ||||||||||||||||||||||||
Insurance: | ||||||||||||||||||||||||
Underwriting: | ||||||||||||||||||||||||
GEICO | $ | 8,506 | $ | 7,543 | $ | 24,705 | $ | 21,632 | $ | 8,622 | $ | 7,915 | ||||||||||||
Berkshire Hathaway Reinsurance Group | 3,777 | 3,954 | 11,229 | 20,550 | 3,546 | 3,540 | ||||||||||||||||||
Berkshire Hathaway Primary Group | 2,050 | 1,852 | 5,921 | 5,287 | 2,151 | 1,918 | ||||||||||||||||||
Investment income | 1,446 | 1,248 | 4,058 | 3,664 | 1,487 | 1,213 | ||||||||||||||||||
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Total insurance | 15,779 | 14,597 | 45,913 | 51,133 | 15,806 | 14,586 | ||||||||||||||||||
BNSF | 6,147 | 5,314 | 17,649 | 15,749 | 5,762 | 5,624 | ||||||||||||||||||
Berkshire Hathaway Energy | 5,706 | 5,351 | 15,268 | 14,184 | 4,672 | 4,512 | ||||||||||||||||||
Manufacturing | 13,552 | 12,819 | 40,339 | 37,654 | 15,070 | 14,722 | ||||||||||||||||||
McLane Company | 12,822 | 12,798 | 37,438 | 37,480 | 12,199 | 12,189 | ||||||||||||||||||
Service and retailing | 6,974 | 6,527 | 20,623 | 19,170 | 7,025 | 6,815 | ||||||||||||||||||
Finance and financial products | 2,432 | 2,153 | 6,861 | 6,019 | ||||||||||||||||||||
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| 60,534 | 58,448 | |||||||||||||||||||
63,412 | 59,559 | 184,091 | 181,389 | |||||||||||||||||||||
Reconciliation of segments to consolidated amount: | ||||||||||||||||||||||||
Corporate, eliminations and other | 38 | (52) | 32 | (256) | 144 | 25 | ||||||||||||||||||
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$ | 63,450 | $ | 59,507 | $ | 184,123 | $ | 181,133 | $ | 60,678 | $ | 58,473 | |||||||||||||
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First Quarter | ||||||||||||||||||||||||
2019 | 2018 | |||||||||||||||||||||||
Earnings (Loss) Before Income Taxes of Operating Businesses: | ||||||||||||||||||||||||
Insurance: | ||||||||||||||||||||||||
Underwriting: | ||||||||||||||||||||||||
GEICO | $ | 770 | $ | 677 | ||||||||||||||||||||
Berkshire Hathaway Reinsurance Group | (253 | ) | (258 | ) | ||||||||||||||||||||
Berkshire Hathaway Primary Group | (30 | ) | 99 | |||||||||||||||||||||
Investment income | 1,485 | 1,205 | ||||||||||||||||||||||
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Total insurance | 1,972 | 1,723 | ||||||||||||||||||||||
BNSF | 1,665 | 1,513 | ||||||||||||||||||||||
Berkshire Hathaway Energy | 540 | 487 | ||||||||||||||||||||||
Manufacturing | 2,194 | 2,207 | ||||||||||||||||||||||
McLane Company | 111 | 60 | ||||||||||||||||||||||
Service and retailing | 621 | 573 | ||||||||||||||||||||||
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7,103 | 6,563 | |||||||||||||||||||||||
Reconciliation of segments to consolidated amount: | ||||||||||||||||||||||||
Investment and derivative gains (losses) | 20,322 | (8,015 | ) | |||||||||||||||||||||
Interest expense, not allocated to segments | (109 | ) | (120 | ) | ||||||||||||||||||||
Equity method investments | 168 | 401 | ||||||||||||||||||||||
Corporate, eliminations and other | 163 | (352 | ) | |||||||||||||||||||||
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$ | 27,647 | $ | (1,523 | ) | ||||||||||||||||||||
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Earnings before income taxes by segment for the third quarter and first nine months of 2018 and 2017 were as follows (in millions).
Third Quarter | First Nine Months | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Operating Businesses: | ||||||||||||||||
Insurance: | ||||||||||||||||
Underwriting: | ||||||||||||||||
GEICO | $ | 627 | $ | (416) | $ | 1,977 | $ | (122) | ||||||||
Berkshire Hathaway Reinsurance Group | (163) | (1,845) | (124) | (2,963) | ||||||||||||
Berkshire Hathaway Primary Group | 135 | 52 | 468 | 473 | ||||||||||||
Investment income | 1,455 | 1,246 | 4,052 | 3,658 | ||||||||||||
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Total insurance | 2,054 | (963) | 6,373 | 1,046 | ||||||||||||
BNSF | 1,879 | 1,710 | 5,047 | 4,592 | ||||||||||||
Berkshire Hathaway Energy | 1,165 | 1,243 | 2,238 | 2,481 | ||||||||||||
Manufacturing | 2,012 | 2,002 | 6,002 | 5,428 | ||||||||||||
McLane Company | 44 | 45 | 171 | 202 | ||||||||||||
Service and retailing | 628 | 491 | 1,840 | 1,439 | ||||||||||||
Finance and financial products | 530 | 496 | 1,589 | 1,438 | ||||||||||||
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8,312 | 5,024 | 23,260 | 16,626 | |||||||||||||
Reconciliation of segments to consolidated amount: | ||||||||||||||||
Investment and derivative contract gains/losses | 14,706 | 965 | 13,053 | 1,965 | ||||||||||||
Interest expense, not allocated to segments | (60) | (386) | (77) | (1,243) | ||||||||||||
Equity method investments | 316 | 305 | 1,044 | 932 | ||||||||||||
Corporate, eliminations and other | (127) | (278) | (558) | (833) | ||||||||||||
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$ | 23,147 | $ | 5,630 | $ | 36,722 | $ | 17,447 | |||||||||
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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).
Third Quarter | First Nine Months | First Quarter | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | |||||||||||||||||||
Insurance – underwriting | $ | 441 | $ | (1,439) | $ | 1,791 | $ | (1,728) | $ | 389 | $ | 407 | ||||||||||||
Insurance – investment income | 1,239 | 1,044 | 3,393 | 2,917 | 1,237 | 1,012 | ||||||||||||||||||
Railroad | 1,393 | 1,042 | 3,847 | 2,838 | 1,253 | 1,145 | ||||||||||||||||||
Utilities and energy | 1,091 | 952 | 2,257 | 1,941 | 605 | 585 | ||||||||||||||||||
Manufacturing, service and retailing | 2,097 | 1,694 | 6,060 | 4,673 | 2,200 | 2,127 | ||||||||||||||||||
Finance and financial products | 390 | 319 | 1,193 | 933 | ||||||||||||||||||||
Investment and derivative gains/losses | 11,660 | 623 | �� | 10,352 | 1,270 | 16,106 | (6,426 | ) | ||||||||||||||||
Other | 229 | (168) | 520 | (455) | (129 | ) | 12 | |||||||||||||||||
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Net earnings attributable to Berkshire Hathaway shareholders | $ | 18,540 | $ | 4,067 | $ | 29,413 | $ | 12,389 | ||||||||||||||||
Net earnings (loss) attributable to Berkshire Hathaway shareholders | $ | 21,661 | $ | (1,138 | ) | |||||||||||||||||||
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Through our subsidiaries, we engage in a number of diverse business activities. We manage our operating businesses on an unusually decentralized basis. There are essentially no centralized or integrated business functions and there is minimal involvement by our corporate headquarters in theday-to-day business activities of the operating businesses. Our senior corporate management team participates in and is ultimately responsible for significant capital allocation decisions, investment activities and the selection of the Chief Executive to head each of the operating businesses. The business segment data (Note 25 to the accompanying Consolidated Financial Statements) should be read in conjunction with this discussion.
Beginning in 2018, our periodic net earnings include changes in unrealized gains and losses on our investments in equity securities. These gains and losses are likely to be very significantexceptionally large given the size of our current holdings and the inherent volatility in securities prices. Prior to 2018, the changes in unrealized gains and losses pertaining to such investments were recorded in other comprehensive income. Thus, the new accounting treatment has no effect on consolidated shareholders’ equity. The business segment data (Note 22 to the accompanying Consolidated Financial Statements) should be read in conjunction with this discussion.
Ourafter-tax earnings in the third quarter and first nine months of 2018 were favorably affected by lower U.S. income tax expense, primarily attributable to a reduction in the U.S. statutory income tax rate from 35% to 21% effective January 1, 2018 in connection with the Tax Cuts and Jobs Act of 2017 (“TCJA”) enacted on December 22, 2017. The effect of the lower U.S. statutory income tax rate in 2018 generally resulted in increased comparativeafter-tax earnings of our various business operations, although the effects varied, reflecting the differences in the mix of earnings subject to income tax, income tax credits and the varying effects of state and local income taxes.
Our insurance businesses generatedafter-tax earnings from underwriting of $441$389 million and $1.8 billion in the thirdfirst quarter of 2019 and first nine months of$407 million in 2018. Results in 2019 and 2018 respectively, compared toincluded net underwriting gains from primary insurance and net underwriting losses of $1.4 billion and $1.7 billion, respectively,from reinsurance.After-tax earnings in the corresponding 2017 periods. Results in 2018 included reductions of estimated ultimate liabilities for prior years’ property/casualty loss events, gains from foreign currency exchange rate changes on certainnon-U.S. Dollar denominated liabilities of U.S subsidiaries and a lower effective income tax rate. Underwriting results in the thirdfirst quarter of 2017 included estimatedpre-tax losses of approximately $3.0 billion ($1.95 billionafter-tax) attributable to three major hurricanes in the U.S.2019 from insurance investments increased 22.2% over 2018, reflecting increased short-term interest rates and Puerto Rico and an earthquake in Mexico. Underwriting results in 2017 also included foreign currency exchange rate losses from the revaluation of certainnon-U.S. Dollar denominated liabilities.dividend income.
Our railroad business generated increased a 9.4% increase inafter-tax earnings in the thirdfirst quarter and first nine months of 20182019 compared to 2017, reflecting an increase2018. Results in unit volume,2019 benefited from higher average revenuerates per car/unit and a lower effective income tax rate,curtailment gain related to an amendment to a retirement plan, partly offset by increased fuellower unit volume. Severe winter weather and otherflooding across themid-U.S. in the first quarter of 2019 had a significant negative impact on freight volumes and operating costs. results.
Our utilities and energy businessesbusiness produced highera 3.4% increase inafter-tax earnings in the thirdfirst quarter and first nine months of 20182019 compared to 2017, primarily due to a lower overall effective income tax rate and increasedpre-tax earnings from renewables and natural gas pipelines. After-tax earnings2018. Earnings from our manufacturing, service and retailing businesses in the thirdfirst quarter andof 2019 increased 3.4% over 2018. First quarter 2019 results of our underlying business operations were mixed, with several of these businesses experiencing lower first nine monthsquarter earnings from a variety of 2018 increased 24% and 30%, respectively, over 2017, due to lower effective income tax rates and a 13% increase inyear-to-datepre-tax earnings.factors.
After-tax investment and derivative gains in the thirdfirst quarter and first nine months of 2018 from investments2019 were $16.1 billion compared toafter-tax losses of $6.4 billion in 2018. In the table above, investment and derivative contracts were $11.7gains/losses include a gain of approximately $15.1 billion in 2019 and $10.4a loss of approximately $7.0 billion respectively. Investment gains/losses includedin 2018 due to changes during the first quarters of 2019 and 2018 in the amount of unrealized gains that existed in our equity security investment holdings and also includeafter-tax realized gains on sales of approximately $11.4 billion in the third quarterequity and $9.6 billion infixed maturity securities of $392 million and $747 million during the first nine months from changes in market valuesquarters of our investments in equity securities held at September 30, 2018. In 2017,after-tax investment gains on equity securities arose from the disposition or exchange of securities during the period based on the cost of the disposed security. In the first nine months of 2017, we recordedafter-tax unrealized gains on our investments in equity securities of approximately $10.9 billion in other comprehensive income.2019 and 2018, respectively. We believe that investment and derivative gains/losses, whether realized from dispositions or settlements or unrealized from changes in market prices of equity securities, are generally meaningless in understanding our reported results or evaluating theour economic performance of our businesses. These gains and losses have caused and will continue to cause significant volatility in our periodic earnings.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)
Insurance—Underwriting
We engage in both primary insurance and reinsurance of property/casualty, life and health risks. In primary insurance activities, we assume defined portions of the risks of loss from persons or organizations that are directly subject to the risks. In reinsurance activities, we assume defined portions of similar or dissimilar risks that other insurers or reinsurers have subjected themselves to in their own insuring activities. Our insurance and reinsurance businesses are GEICO, Berkshire Hathaway Reinsurance Group (“BHRG”) and Berkshire Hathaway Primary Group.
Our management views our insurance businesses as possessing two distinct operationsactivities – underwriting and investing. Underwriting decisions are the responsibility of the unit managers, while investing decisions are the responsibility of Berkshire’s Chairman and CEO, Warren E. Buffett and Berkshire’s corporate investment managers. Accordingly, we evaluate performance of underwriting operations without any allocation of investment income or investment gains/losses. We consider investment income as a component of our aggregate insurance operating results. However, we consider investment gains and losses, whether realized or unrealized asnon-operating, based on our long-held philosophy of acquiring securities and holding those securities for long periods. Accordingly, we believe that such gains and losses are not predictable or necessarily meaningful in understanding the operating results of our insurance businesses.operations.
The timing and amount of catastrophe losses can produce significant volatility in our periodic underwriting results, particularly with respect to our reinsurance businesses. Generally, we consider catastrophe losses in excess of $100 million(pre-tax) from a current year event as significant. We incurred estimatedpre-tax losses of $372 million from two significant catastrophe events in the third quarter of 2018. In the third quarter of 2017, we incurredpre-tax losses of approximately $3.0 billion from four significant catastrophe events. In October 2018, Hurricane Michael hit the Southeastern United States. Incurred losses in the fourth quarter from this event are currently estimated to be in the $350 million to $550 million range.
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 $106$111 billion as of September 30, 2018.March 31, 2019. Our periodic underwriting results may also include significant foreign currency transaction gains and losses arising from the changes in the valuation ofnon-U.S. Dollar denominated reinsurance liabilities of our U.S. based insurance subsidiaries due to foreign currency exchange rate fluctuations.
We engage in both primary insurance and reinsurance of property/casualty, life and health risks. In primary insurance activities, we assume defined portions of the risks of loss from persons or organizations that are directly subject to the risks. In reinsurance activities, we assume defined portions of similar or dissimilar risks that other insurers or reinsurers have subjected themselves to in their own insuring activities. Our insurance and reinsurance businesses are GEICO, Berkshire Hathaway Reinsurance Group (“BHRG”) and Berkshire Hathaway Primary Group.
Underwriting results of our insurance businesses are summarized below (in(dollars in millions).
Third Quarter | First Nine Months | First Quarter | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | |||||||||||||||||||
Underwriting gain (loss): | ||||||||||||||||||||||||
GEICO | $ | 627 | $ | (416) | $ | 1,977 | $ | (122) | $ | 770 | $ | 677 | ||||||||||||
Berkshire Hathaway Reinsurance Group | (163) | (1,845) | (124) | (2,963) | (253 | ) | (258 | ) | ||||||||||||||||
Berkshire Hathaway Primary Group | 135 | 52 | 468 | 473 | (30 | ) | 99 | |||||||||||||||||
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Pre-tax underwriting gain (loss) | 599 | (2,209) | 2,321 | (2,612) | ||||||||||||||||||||
Pre-tax underwriting gain | 487 | 518 | ||||||||||||||||||||||
Income taxes and noncontrolling interests | 158 | (770) | 530 | (884) | 98 | 111 | ||||||||||||||||||
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Net underwriting gain (loss) | $ | 441 | $ | (1,439) | $ | 1,791 | $ | (1,728) | ||||||||||||||||
Net underwriting gain | $ | 389 | $ | 407 | ||||||||||||||||||||
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Effective income tax rate | 25.9% | 35.1% | 22.6% | 34.4% | 22.5% | 21.4% | ||||||||||||||||||
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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).
Third Quarter | First Nine Months | First Quarter | ||||||||||||||||||||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||||
Amount | % | Amount | % | Amount | % | Amount | % | Amount | % | Amount | % | |||||||||||||||||||||||||||||||||||||
Premiums written | $ | 8,952 | $ | 8,130 | $ | 25,878 | $ | 22,987 | $ | 9,263 | $ | 8,689 | ||||||||||||||||||||||||||||||||||||
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Premiums earned | $ | 8,506 | 100.0 | $ | 7,543 | 100.0 | $ | 24,705 | 100.0 | $ | 21,632 | 100.0 | $ | 8,622 | 100.0 | $ | 7,915 | 100.0 | ||||||||||||||||||||||||||||||
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Losses and loss adjustment expenses | 6,725 | 79.1 | 6,933 | 91.9 | 19,305 | 78.1 | 18,631 | 86.1 | 6,556 | 76.1 | 6,075 | 76.7 | ||||||||||||||||||||||||||||||||||||
Underwriting expenses | 1,154 | 13.5 | 1,026 | 13.6 | 3,423 | 13.9 | 3,123 | 14.5 | 1,296 | 15.0 | 1,163 | 14.7 | ||||||||||||||||||||||||||||||||||||
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Total losses and expenses | 7,879 | 92.6 | 7,959 | 105.5 | 22,728 | 92.0 | 21,754 | 100.6 | 7,852 | 91.1 | 7,238 | 91.4 | ||||||||||||||||||||||||||||||||||||
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Pre-tax underwriting gain (loss) | $ | 627 | $ | (416) | $ | 1,977 | $ | (122) | ||||||||||||||||||||||||||||||||||||||||
Pre-tax underwriting gain | $ | 770 | $ | 677 | ||||||||||||||||||||||||||||||||||||||||||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)
Insurance—Insurance—Underwriting(Continued)
GEICO (Continued)
Premiums written and earned in the thirdfirst quarter of 2019 increased 6.6% and first nine months of 2018 were approximately $9.0 billion and $25.9 billion, respectively, representing increases of 10.1% and 12.6%8.9%, respectively, compared to 2017.2018. These increases reflected increases in voluntary autopolicies-in-forcepolicy-in-force growth of 3.7%3.6% and increased premiums per auto policy of approximately 7.8%4.0% over the past twelve months. The increase in premiums per policy was attributable to rate increases from 2018, coverage changes and changes in state and risk mix. The rate increases in rates were in response to accelerating claim costs in recent years. Althoughpolicies-in-force increased 461,000 during the first nine months of 2018, the rate of increase slowed, as voluntarylosses. Voluntary auto new business sales decreased 6.6%in the first quarter of 2019 increased 6.2% compared to 2017.the first quarter of 2018, while our voluntary autopolicies-in-force increased approximately 342,000 during the first quarter of 2019.
Losses and loss adjustment expenses decreased $208 million (3.0%) in the third quarter and increased $674 million (3.6%) in the first nine monthsquarter of 20182019 were approximately $6.6 billion, an increase of $481 million (7.9%) compared to 2017. Our ratios2018. GEICO’s ratio of losses and loss adjustment expenses to premiums earned (the “loss ratio”) forin the thirdfirst quarter and first nine months of 2018 were 79.1% and 78.1%2019 was 76.1%, respectively, declinesa decline of 12.8 and 8.00.6 percentage points compared to the third quarter and first nine months of 2017, respectively. In the third quarter of 2018, we recorded estimated losses of $30 million related to Hurricane Florence. In the third quarter of 2017, we incurred estimated losses related to Hurricanes Harvey and Irma of approximately $500 million (6.6% of premiums earned in the third quarter and 2.3% in the first nine months).2018.
Our losses and loss adjustment expenses incurred in the first nine months of 2018 also included reductions of $478 million with respect toGEICO reduced ultimate claim loss estimates for prior years’ loss events whichby $83 million in the first quarter of 2019 and $407 million in 2018. These reductions produced a corresponding increase inpre-tax underwriting gains. By comparison, we increased loss estimates for prior years’ eventsThe gains in 2019 were primarily due to lower losses from collision, property damage and bodily injury claims, partially offset by $37 million in the first nine months of 2017.higher losses from personal injury protection claims. Claims frequencies in the first nine monthsquarter of 20182019 for property damage and collision and bodilycoverages and personal injury protection coverages declinedcoverage were down (two to threefour percent range) compared to 2017.2018 and were flat for bodily injury coverage. Average claims severities in the first nine monthsquarter of 2018 increased2019 were higher for property damage and collision coverages (four to six percent range) and bodily injury coverage (five(six to seveneight percent range).
Our underwritingUnderwriting expenses in the first nine monthsquarter of 20182019 were approximately $3.4$1.3 billion, an increase of $300$133 million (9.6%(11.4%) over 2017. Our2018. GEICO’s expense ratio (underwriting expenses to premiums earned) forin the first nine monthsquarter of 2018 decreased 0.62019 was 15.0%, an increase of 0.3 percentage points compared to 2017.2018. The increases in underwriting expenses wereexpense increase was primarily attributable to increases in advertising expenses, insurance premium taxes and employee-related costs, which includedreflected wage and staffing increases.
Berkshire Hathaway Reinsurance Group
We offerexcess-of-loss and quota-share reinsurance coverages on property and casualty risks and life and health reinsurance to insurers and reinsurers worldwide through several legal entities,subsidiaries, led by National Indemnity Company (“NICO Group”NICO”), Berkshire Hathaway Life Insurance Company of Nebraska (“BHLN Group”BHLN”), and General Reinsurance Corporation, General Reinsurance AG and General Re Life Corporation (collectively, “General Re Group”Re”). We also periodically assume property and casualty risks under retroactive reinsurance contracts written through NICO. In addition, the BHLN Group writeswe write periodic payment annuity contracts.contracts predominantly through BHLN.
With the exception of our retroactive reinsurance and periodic payment annuity businesses,product lines, we strive to generatepre-tax underwriting profits.Time-value-of-money concepts are important elements in establishing prices for our retroactive reinsurance and periodic payment annuity businessespremiums due to the expected long durations of the liabilities. We expect to incurpre-tax underwriting losses from such businesses, primarilythese products 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 theBHRG’s premiums andpre-tax underwriting results of our reinsurance business follows (in(dollars in millions).
Premiums earned | Pre-tax underwriting gain (loss) | First Quarter | ||||||||||||||||||||||||||||||||||||||||||||||
Third Quarter | First Nine Months | Third Quarter | First Nine Months | Premiums earned | Pre-tax underwriting gain (loss) | |||||||||||||||||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||
Property/casualty | $ | 2,157 | $ | 2,061 | $ | 6,479 | $ | 5,763 | $ | 67 | $ | (1,486) | $ | 535 | $ | (1,856) | $ | 2,322 | $ | 2,026 | $ | (40 | ) | $ | 130 | |||||||||||||||||||||||
Retroactive reinsurance | 1 | 550 | 1 | 10,736 | (246) | (287) | (704) | (881) | 3 | — | (323 | ) | (311 | ) | ||||||||||||||||||||||||||||||||||
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2,158 | 2,611 | 6,480 | 16,499 | (179) | (1,773) | (169) | (2,737) | |||||||||||||||||||||||||||||||||||||||||
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Life/health | 1,307 | 1,146 | 3,855 | 3,404 | 108 | 113 | 324 | 302 | 1,027 | 1,234 | 280 | 96 | ||||||||||||||||||||||||||||||||||||
Periodic payment annuity | 312 | 197 | 894 | 647 | (92) | (185) | (279) | (528) | 194 | 280 | (170 | ) | (173 | ) | ||||||||||||||||||||||||||||||||||
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1,619 | 1,343 | 4,749 | 4,051 | 16 | (72) | 45 | (226) | $ | 3,546 | $ | 3,540 | $ | (253 | ) | $ | (258 | ) | |||||||||||||||||||||||||||||||
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$ | 3,777 | $ | 3,954 | $ | 11,229 | $ | 20,550 | $ | (163) | $ | (1,845) | $ | (124) | $ | (2,963) | |||||||||||||||||||||||||||||||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)
Insurance—Underwriting(Continued)
Berkshire Hathaway Reinsurance Group (Continued)
Property/casualty
A summary of premiums andproperty/casualty reinsurance underwriting results of our property/casualty reinsurance businesses follows (in(dollars in millions).
Premiums earned | Pre-tax underwriting gain (loss) | |||||||||||||||||||||||||||||||
Third Quarter | First Nine Months | Third Quarter | First Nine Months | |||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
NICO Group | $ | 1,077 | $ | 1,217 | $ | 3,394 | $ | 3,488 | $ | (29) | $ | (927) | $ | 272 | $ | (1,144) | ||||||||||||||||
General Re Group | 1,080 | 844 | 3,085 | 2,275 | 96 | (559) | 263 | (712) | ||||||||||||||||||||||||
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$ | 2,157 | $ | 2,061 | $ | 6,479 | $ | 5,763 | $ | 67 | $ | (1,486) | $ | 535 | $ | (1,856) | |||||||||||||||||
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First Quarter | ||||||||||||||||
2019 | 2018 | |||||||||||||||
Amount | % | Amount | % | |||||||||||||
Premiums written | $ | 3,542 | $ | 3,346 | ||||||||||||
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Premiums earned | $ | 2,322 | 100.0 | $ | 2,026 | 100.0 | ||||||||||
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Losses and loss adjustment expenses | 1,774 | 76.4 | 1,391 | 68.7 | ||||||||||||
Underwriting expenses | 588 | 25.3 | 505 | 24.9 | ||||||||||||
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Total losses and expenses | 2,362 | 101.7 | 1,896 | 93.6 | ||||||||||||
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NICO Group’sProperty/casualty premiums earned in the thirdfirst quarter and first nine months of 2018 decreased 11.5% and 2.7%, respectively,2019 were approximately $2.3 billion, an increase of $296 million (14.6%) compared to 2017. Premiums earned in the third quarter of 2017 included additional amounts related to certain contracts where policy limits were fully exhausted due to catastrophe losses during the quarter. Such amounts would have been earned in future periods.2018. The effect of significant catastrophe losses in 2018 on the timing of premiums earned was relatively insignificant. For the first nine months of 2018, approximately 40% of NICO Group’s premiums earned derived from a10-year, 20% quota-share contract with Insurance Australia Group Ltd. that expires in 2025. General Re Group’s premiums earned in the third quarter and first nine months of 2018 increased $236 million (28.0%) and $810 million (35.6%), respectively, compared to 2017. The increasesincrease primarily reflected higher direct and broker markets business and derived primarily from new business and increased participations for renewal business in both property and casualty lines.
On a combined basis, our property/casualty reinsurance business generatedpre-tax underwriting gains of $67 million and $535 million in the third quarter and first nine months of 2018, respectively, andpre-tax losses of approximately $1.5 billion in the third quarter and $1.9 billion in the first nine months of 2017. We incurred estimated losses of approximately $267 million in the third quarter of 2018 related to Hurricane Florence and Typhoon Jebi and approximately $2.29 billion in the third quarter of 2017 related to Hurricanes Harvey, Irma and Maria and an earthquake in Mexico. Our losses from significant catastrophe events were approximately $2.45 billion for the first nine months of 2017.
In addition, we reduced estimated ultimate claims liabilities in the first nine months of 2018 for prior years’ loss events by $581 million. We increased estimated ultimate liabilities for prior years’ loss events by $108 million in the first nine months of 2017, which reflected the U.K. Ministry of Justice’s decision in the first quarter to reduce the fixed discount rate required in lump sum settlement calculations of U.K. personal injury claims and unanticipated property claims from events in 2016.
Retroactive reinsurance
Premiums earned in the first nine months of 2017quarter included $10.2 billion$432 million in 2019 and $448 million in 2018 from an aggregateaexcess-of-loss10-year, retroactive reinsurance agreement20% quota-share contract entered into by NICO with various subsidiaries of American InternationalInsurance Australia Group Inc. (the “AIG Agreement”),Limited, which became effective on February 2, 2017. We also recorded lossesexpires in 2025.
Losses and loss adjustment expenses incurredin 2019 were approximately $1.8 billion, an increase of $10.2 billion at the inception of the AIG Agreement, representing our initial estimate of the unpaid losses$383 million (27.5%) compared to 2018. Losses and loss adjustment expenses assumedin the first quarter of $16.4 billion, partly offset by an initial deferred charge asset2019 included increases in estimated ultimate claim liabilities attributable to prior years’ loss events of $6.2 billion. Thus, on the effective date, the AIG Agreement had no effect on our$212 million compared to decreases of $182 million in 2018, which produced corresponding decreases and increases inpre-tax underwriting results.gains. Such gains and losses were less than 1% of the unpaid claim liabilities as of the beginning of the applicable year. Losses and loss adjustment expenses in 2019 also reflected a decline in the overall loss ratio for current accident year business as compared to the first quarter of 2018. There were no significant catastrophe loss events in the first quarter of 2019 or 2018.
Retroactive reinsurance
There were no new retroactive reinsurance contracts written in the first quarter of 2019 or 2018.Pre-tax underwriting losses from retroactive reinsurance contracts in the thirdfirst quarter were $323 million in 2019 and first nine months of 2018 were $246$311 million and $704 million, respectively, compared to $287 million and $881 million, respectively, in the same periods in 2017.2018. Certain liabilities relatingrelated to retroactive reinsurance contracts written by our U.S. subsidiaries are denominated in foreign currencies. Underwriting results include gainsin the first quarter includedpre-tax losses of $52 million in 2019 and losses from$60 million in 2018 associated with there-measurement of such liabilities due to changes in foreign currency exchange rates. Changes in exchange rates generatedpre-tax gains of $35 million and $99 million in the third quarter and first nine months of 2018, respectively, compared topre-tax losses in the third quarter and first nine months of $60 million and $251 million, respectively, in 2017.
Pre-tax underwriting losses before foreign currency gains/losses in the first nine monthsquarter were $271 million in 2019 and $251 million in 2018, which derived from deferred charge amortization and changes in the estimated timing and amount of 2018future claim payments. Deferred charge amortization in the first quarter included approximately $156 million in 2019 and 2017 were $803$147 million and $630 million, respectively. The increase inpre-tax losses was primarily due to amortization charges 2018 related to the AIG Agreement, which included the effectsan aggregateexcess-of-loss retroactive reinsurance agreement with various subsidiaries of increases to our ultimate claim liability estimates (approximately $1.8 billion) and related deferred charge asset (approximately $1.7 billion) in the fourth quarter of 2017.American International Group, Inc.
Gross unpaid losses assumed under retroactive reinsurance contracts were approximately $41.9$41.6 billion at September 30, 2018March 31, 2019 and $42.9$41.8 billion at December 31, 2017.2018. Unamortized deferred charge assets related to such reinsurance contracts were approximately $14.5$13.8 billion at September 30, 2018March 31, 2019 and $15.3$14.1 billion at December 31, 2017.2018. Deferred charge asset balancesassets will be amortized as chargescharged topre-tax earnings over the expected remaining claims settlement periods.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)
Insurance—Underwriting(Continued)
Berkshire Hathaway Reinsurance Group (Continued)
Life/health
Premiums earned andpre-tax underwriting resultsA summary of our life/health reinsurance businesses are further summarized asunderwriting results follows (in(dollars in millions).
Premiums earned | Pre-tax underwriting gain (loss) | |||||||||||||||||||||||||||||||
Third Quarter | First Nine Months | Third Quarter | First Nine Months | |||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
General Re Group | $ | 964 | $ | 786 | $ | 2,819 | $ | 2,324 | $ | 38 | $ | 57 | $ | 152 | $ | 96 | ||||||||||||||||
BHLN Group | 343 | 360 | 1,036 | 1,080 | 70 | 56 | 172 | 206 | ||||||||||||||||||||||||
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$ | 1,307 | $ | 1,146 | $ | 3,855 | $ | 3,404 | $ | 108 | $ | 113 | $ | 324 | $ | 302 | |||||||||||||||||
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First Quarter | ||||||||||||||||
2019 | 2018 | |||||||||||||||
Amount | % | Amount | % | |||||||||||||
Premiums written | $ | 1,027 | $ | 1,237 | ||||||||||||
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Premiums earned | $ | 1,027 | 100.0 | $ | 1,234 | 100.0 | ||||||||||
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Life and health insurance benefits | 598 | 58.2 | 936 | 75.9 | ||||||||||||
Underwriting expenses | 149 | 14.5 | 202 | 16.4 | ||||||||||||
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Total benefits and expenses | 747 | 72.7 | 1,138 | 92.3 | ||||||||||||
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Pre-tax underwriting gain (loss) | $ | 280 | $ | 96 | ||||||||||||
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General Re Group’sLife/health premiums earned in the thirdfirst quarter and first nine months of 2018 increased $1782019 were approximately $1.0 billion, a decrease of $207 million (22.6%(16.8%) and $495 million (21.3%), respectively, compared to 2017.2018. The increases weredecrease was primarily attributable to the effects of an amendment in the first quarter of 2019 to a reinsurance contract, partially offset by growth in the Asia life markets. In the first quarter of 2019, BHLN amended its yearly renewable term life insurance contract with a major U.S. reinsurer. The amendment effectively eliminates BHLN’s exposure under the contract in the future. BHLN recorded a reduction in earned premiums on this contract of $49 million in the first quarter of 2019, largely attributable to the contract amendment. Premiums earned from this contract were $189 million in the first quarter of 2018 and Australia markets and foreign currency translation effects of a comparatively weaker U.S. Dollar. approximately $1 billion for the year ending December 31, 2018.
The General Re Grouplife/health business producedpre-tax underwriting gains of $280 million in the first nine monthsquarter of $152 million in 2018 and2019 compared to $96 million in 2017. The comparative increase in the first nine months reflected increased earnings from international business, primarily due to increased volumes and foreign currency translation, improved earnings from life business in North America and lower losses from the run-off of long-term care and disability business.
BHLN Group’s life reinsurance premiums earned in the third quarter and first nine months of 2018 were $340 million and $1,025 million, respectively, compared to $355 million and $1,067 million, respectively, in the corresponding 2017 periods. BHLN Group’s business during the last two years covered predominantly life risks in North America, with approximatelytwo-thirds of the premiums earned deriving from one reinsurance contract. BHLN Group’s life reinsurance business produced near break-even results in each of the first nine months of 2018 and 2017.
BHLN Group’spre-tax underwriting2018. Underwriting results in the first nine monthsquarter of 20182019 included aone-timepre-tax gain of approximately $160 million attributable to the BHLN contract amendment, which resulted in reductions of benefits incurred and 2017premiums earned. First quarter underwriting results in 2019 also includedpre-tax increased gains of $166 million and $197 million, respectively, from therun-off of variable annuity contracts, partially offset by increased losses from U.S. individual life business and therun-off of U.S. long-term care business. Variable annuity guarantee reinsurance contracts that provide guarantees on closed blocksproducedpre-tax underwriting gains of variable annuity business. Periodic underwriting$89 million in the first quarter of 2019 versus $45 million in 2018. Underwriting results from this business reflect changes in estimated liabilities for guaranteed benefits, which result from changes in securities markets and interest rates and from the periodic amortization of expected profit margins. Underwriting results from variable annuity contracts can be volatile, reflecting the volatility of securities markets, interest rates and foreign currency exchange rates. Estimated variable annuity guarantee liabilities were approximately $1.6 billion at September 30, 2018 and $1.8 billion at December 31, 2017.
Periodic payment annuity
Periodic payment annuity premiums earned in the thirdfirst quarter and first nine months of 2018 increased $1152019 were $194 million, (58.4%) and $247a decrease of $86 million (38.2%(30.7%), respectively, compared to 2017. 2018. Periodic payment business is price sensitive. The volumes written can change rapidly due to changes in prices, which are affected by prevailing interest rates, the perceived risks and durations associated with the expected annuity payments, and the level of competition.
Periodic payment annuity contracts producedpre-tax losses in the first quarter of $92 million and $279$170 million in the third quarter2019 and first nine months of 2018, respectively, compared topre-tax losses of $185$173 million and $528 million, respectively, for the same periods in 2017.2018. Certain contracts written by our U.S. subsidiaries are denominated in foreign currencies, primarily the Great Britain Pound Sterling.currencies. First quarterPre-taxpre-tax underwriting results in 2018 includedpre-tax gainslosses of $21$28 million in the third quarter2019 and $57$70 million in the first nine months from2018 associated with there-measurement of such liabilities due to changes in exchange rates compared torates.
Before foreign currency gains and losses,pre-tax underwriting losses of $63 million in the third quarter and $173were $142 million in the first nine monthsquarter of 2017. Before the effect of foreign currency gains2019 and losses, this business generatedpre-tax underwriting losses of $336$103 million in the first nine monthsquarter of 2018 and $355 million in the first nine months of 2017.2018. These losses werederived primarily attributable tofrom the recurring discount accretion of annuity liabilities.liabilities, as well as the impact of mortality and interest rate changes. Discounted annuity liabilities approximated $12.2$12.7 billion at September 30, 2018March 31, 2019 and $11.2$12.5 billion at December 31, 2017,2018, reflecting a weighted average discount rate of approximately 4.1%.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)
Insurance—Underwriting(Continued)
Berkshire Hathaway Primary Group
The Berkshire Hathaway Primary Group (“BH Primary”) consists of a wide variety of independently managed insurance underwriting businesses that primarily provideprovides a variety of commercial insurance solutions, including healthcare malpractice, workers’ compensation, automobile, general liability, property and various specialty coverages for small, medium and large clients. The largest of these insurers includeare Berkshire Hathaway Specialty Insurance (“BH Specialty”), Berkshire Hathaway Homestate Companies (“BHHC”), MedPro Group, Berkshire Hathaway GUARD Insurance Companies (“GUARD”), and National Indemnity Company (“NICO Primary”). Other BH Primary insurers include U.S. Liability Insurance Company, Applied Underwriters, and Central States Indemnity Company.Company and MLMIC Insurance Company, acquired October 1, 2018.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Insurance—Underwriting(Continued)
Berkshire Hathaway Primary Group (Continued)
A summary of BH Primary underwriting results follows (dollars in millions).
Third Quarter | First Nine Months | First Quarter | ||||||||||||||||||||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||||
Amount | % | Amount | % | Amount | % | Amount | % | Amount | % | Amount | % | |||||||||||||||||||||||||||||||||||||
Premiums written | $ | 2,227 | $ | 1,995 | $ | 6,498 | $ | 5,645 | $ | 2,341 | $ | 2,161 | ||||||||||||||||||||||||||||||||||||
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Premiums earned | $ | 2,050 | 100.0 | $ | 1,852 | 100.0 | $ | 5,921 | 100.0 | $ | 5,287 | 100.0 | $ | 2,151 | 100.0 | $ | 1,918 | 100.0 | ||||||||||||||||||||||||||||||
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Losses and loss adjustment expenses | 1,419 | 69.2 | 1,342 | 72.5 | 3,884 | 65.6 | 3,426 | 64.8 | 1,570 | 73.0 | 1,251 | 65.2 | ||||||||||||||||||||||||||||||||||||
Underwriting expenses | 496 | 24.2 | 458 | 24.7 | 1,569 | 26.5 | 1,388 | 26.3 | 611 | 28.4 | 568 | 29.6 | ||||||||||||||||||||||||||||||||||||
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Total losses and expenses | 1,915 | 93.4 | 1,800 | 97.2 | 5,453 | 92.1 | 4,814 | 91.1 | 2,181 | 101.4 | 1,819 | 94.8 | ||||||||||||||||||||||||||||||||||||
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Pre-tax underwriting gain | $ | 135 | $ | 52 | $ | 468 | $ | 473 | ||||||||||||||||||||||||||||||||||||||||
Pre-tax underwriting gain (loss) | $ | (30 | ) | $ | 99 | |||||||||||||||||||||||||||||||||||||||||||
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Premiums written and earned in the thirdfirst quarter of 2019 increased 8.3% and first nine months of 2018 increased 11.6% and 15.1%12.1%, respectively, compared to the corresponding 2017 periods. These2018. The increases in premiums written were primarily attributable to BH Specialty MedPro Group,(19.6%), GUARD (19.0%) and BHHC. PremiumsNICO Primary (11.9%). The increase in premiums earned in the first nine monthsquarter of 2018 increased $634 million (12.0%) compared to2019 also reflected the first nine monthsimpact of 2017, reflecting the written premium increases of these businesses.MLMIC acquisition.
BH Primary producedpre-tax underwriting gainslosses of $135 million and $468$30 million in the thirdfirst quarter and first nine months of 2018, respectively,2019 compared to $52 million and $473pre-tax gains of $99 million in 2018. BH Primary’s aggregate loss ratios for the thirdfirst quarter were 73.0% in 2019 and first nine months of 2017, respectively. Underwriting results65.2% in the third quarter included estimated losses of approximately $75 million in 2018 from Hurricane Florence and $225 million in 2017 from Hurricanes Harvey, Irma and Maria.
2018. Losses and loss adjustment expenses incurred in the first nine months also included net reductions of estimated ultimate liabilitiesquarter for prior years’ loss events included reductions of $507$17 million in 20182019 and $606$164 million in 2017, which produced corresponding increases2018. In the first quarter of 2019, we recorded additional estimated claim liabilities for legacy casualty exposures. In addition, the net gains from the reductions of prior accident years’ liabilities inpre-tax underwriting gains. The liability reductions in each year primarily related 2019 were lower as compared to healthcare malpractice and workers’ compensation business. 2018.
BH Primary writesunits write significant levels of commercial and professional liability and workers’ compensation insurance and the related claim costs may be subject to higher severity and longer claim-tails, whichclaim-tails. Accordingly, we could give rise toexperience 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.
Insurance—Investment Income
A summary of net investment income generated from investments held byattributable to our insurance operations follows (in(dollars in millions).
Third Quarter | First Nine Months | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Interest and other investment income | $ | 495 | $ | 344 | $ | 1,346 | $ | 870 | ||||||||
Dividend income | 960 | 902 | 2,706 | 2,788 | ||||||||||||
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Investment income before income taxes and noncontrolling interests | 1,455 | 1,246 | 4,052 | 3,658 | ||||||||||||
Income taxes and noncontrolling interests | 216 | 202 | 659 | 741 | ||||||||||||
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Net investment income | $ | 1,239 | $ | 1,044 | $ | 3,393 | $ | 2,917 | ||||||||
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Effective income tax rate | 14.7% | 16.2% | 16.2% | 20.2% | ||||||||||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)
Insurance—Investment Income(Continued)
First Quarter | ||||||||
2019 | 2018 | |||||||
Interest and other investment income | $ | 513 | $ | 452 | ||||
Dividend income | 972 | 753 | ||||||
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Investment income before income taxes and noncontrolling interests | 1,485 | 1,205 | ||||||
Income taxes and noncontrolling interests | 248 | 193 | ||||||
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Net investment income | $ | 1,237 | $ | 1,012 | ||||
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Effective income tax rate | 16.6% | 15.9% | ||||||
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Pre-tax interest and other investment income in the thirdfirst quarter and first nine months of 20182019 increased $151$61 million (43.9%(13.5%) and $476 million (54.7%), respectively, compared to the same periods2018, attributable to an increase in 2017. The increases reflected the effect ofinterest income, primarily due to higher short-term interest rates in 2018 andon short-term investments, partially offset by lower income from a limited partnership investmentinvestments. Dividend income in the first quarter partly offset by lower interest from reduced investmentsof 2019 increased $219 million (29.1%) compared to the first quarter of 2018. The increase in fixed maturity securities. Our invested assetsdividend income was attributable to an overall increase in investment levels over the past year and higher dividend rates. We continue to include significant levelshold large balances of short-term investments.cash, cash equivalents and U.S. Treasury Bills. We believe that maintaining ample liquidity is paramount and we insist on safety over yield with respect to suchshort-term investments.
Dividend income increased $58 million (6.4%) in the third quarter and decreased $82 million (2.9%) in the first nine months of 2018 as compared to the same periods in 2017. The comparative changes in dividend income reflected the impact of Restaurant Brands International’s redemption of our $3 billion investment in 9% preferred stock in December 2017 and increases in our portfolio of marketable equity securities.
Invested assets of our insurance businesses derive from shareholder capital, including reinvested earnings, and from net liabilities under insurance and reinsurance contracts or “float.” The major components of float are unpaid losses and loss adjustment expenses, including liabilities under retroactive reinsurance contracts, life, annuity and health insurance benefit liabilities, unearned premiums and other liabilities due to policyholders, less premium and reinsurance receivables, deferred charges assumed under retroactive reinsurance contracts and deferred policy acquisition costs. Float approximated $118$124 billion at September 30, 2018March 31, 2019 and $114$123 billion at December 31, 2017. Our combined insurance operations generatedpre-tax underwriting earnings of $2.3 billion in the first nine months of 2018, and consequently, the average cost of float for that period was negative.2018. Our average cost of float forwas negative in the year ending December 31, 2017 was approximately 3%, reflectingfirst quarter of 2019 as our underwriting operations generatedpre-tax underwriting lossesearnings of approximately $3.2 billion, most$487 million.
Item 2. Management’s Discussion and Analysis of which was incurred in the second halfFinancial Condition and Results of the year.Operations
Insurance—Investment Income(Continued)
A summary of cash and investments held in our insurance businesses as of September 30, 2018March 31, 2019 and December 31, 20172018 follows (in millions).
September 30, 2018 | December 31, 2017 | March 31, 2019 | December 31, 2018 | |||||||||||||
Cash, cash equivalents and U.S. Treasury Bills | $ | 59,292 | $ | 73,285 | $ | 66,969 | $ | 64,548 | ||||||||
Equity securities | 199,860 | 163,134 | 184,953 | 166,385 | ||||||||||||
Fixed maturity securities | 18,057 | 21,092 | 19,226 | 19,690 | ||||||||||||
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$ | 277,209 | $ | 257,511 | $ | 271,148 | $ | 250,623 | |||||||||
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Fixed maturity investmentssecurities as of September 30, 2018March 31, 2019 were as follows (in millions).
Amortized cost | Unrealized gains/losses | Carrying value | Amortized cost | Unrealized gains | Carrying value | |||||||||||||||||||
U.S. Treasury, U.S. government corporations and agencies | $ | 3,618 | $ | (26) | $ | 3,592 | $ | 3,893 | $ | 17 | $ | 3,910 | ||||||||||||
States, municipalities and political subdivisions | 259 | 14 | 273 | 141 | 6 | 147 | ||||||||||||||||||
Foreign governments | 7,360 | 8 | 7,368 | 8,045 | 44 | 8,089 | ||||||||||||||||||
Corporate bonds, investment grade | 5,321 | 388 | 5,709 | 5,627 | 435 | 6,062 | ||||||||||||||||||
Corporate bonds,non-investment grade | 563 | 42 | 605 | 498 | 29 | 527 | ||||||||||||||||||
Mortgage-backed securities | 457 | 53 | 510 | 429 | 62 | 491 | ||||||||||||||||||
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$ | 17,578 | $ | 479 | $ | 18,057 | $ | 18,633 | $ | 593 | $ | 19,226 | |||||||||||||
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U.S. government obligationssecurities are rated AA+ or Aaa by the major rating agencies. Approximately 88% of all state, municipal and political subdivisions, foreign government obligationssecurities and mortgage-backed securities were rated AA or higher.Non-investment grade securities represent securities rated belowBBB- or Baa3. Foreign government securities include obligations issued or unconditionally guaranteed by national or provincial government entities.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)
Railroad (“Burlington Northern Santa Fe”)
Burlington Northern Santa Fe, LLC (“BNSF”) operates one of the largest railroad systems in North America. BNSF operatesAmerica, with approximately 32,500 route miles of track in 28 states, as well asstates. BNSF also operates in three Canadian provinces. BNSF classifies its major business groups by type of product shipped whichand include consumer products, coal, industrial products and agricultural products. A summary of BNSF’s earnings follows (in(dollars in millions).
First Quarter | ||||||||
2019 | 2018 | |||||||
Revenues | $ | 5,762 | $ | 5,624 | ||||
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Operating expenses: | ||||||||
Compensation and benefits | 1,400 | 1,315 | ||||||
Fuel | 711 | 767 | ||||||
Purchased services | 713 | 692 | ||||||
Depreciation and amortization | 591 | 571 | ||||||
Equipment rents, materials and other | 414 | 510 | ||||||
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Total operating expenses | 3,829 | 3,855 | ||||||
Interest expense | 268 | 256 | ||||||
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Pre-tax earnings | 1,665 | 1,513 | ||||||
Income taxes | 412 | 368 | ||||||
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Net earnings | $ | 1,253 | $ | 1,145 | ||||
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Effective income tax rate | 24.7 | % | 24.3 | % | ||||
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Third Quarter | First Nine Months | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Revenues | $ | 6,147 | $ | 5,314 | $ | 17,649 | $ | 15,749 | ||||||||
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Operating expenses: | ||||||||||||||||
Compensation and benefits | 1,378 | 1,173 | 4,021 | 3,725 | ||||||||||||
Fuel | 859 | 595 | 2,456 | 1,777 | ||||||||||||
Purchased services | 718 | 608 | 2,124 | 1,843 | ||||||||||||
Depreciation and amortization | 580 | 591 | 1,726 | 1,756 | ||||||||||||
Equipment rents, materials and other | 471 | 384 | 1,501 | 1,295 | ||||||||||||
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Total operating expenses | 4,006 | 3,351 | 11,828 | 10,396 | ||||||||||||
Interest expense | 262 | 253 | 774 | 761 | ||||||||||||
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4,268 | 3,604 | 12,602 | 11,157 | |||||||||||||
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Pre-tax earnings | 1,879 | 1,710 | 5,047 | 4,592 | ||||||||||||
Income taxes | 486 | 668 | 1,200 | 1,754 | ||||||||||||
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Net earnings | $ | 1,393 | $ | 1,042 | $ | 3,847 | $ | 2,838 | ||||||||
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Effective income tax rate | 25.9% | 39.1% | 23.8% | 38.2% | ||||||||||||
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BNSF’s revenues in the third quarter and first nine months of 2018 were $6.1 billion and $17.6 billion, respectively, representing increases of $833 million (15.7%) and $1.9 billion (12.1%), respectively, versus the corresponding periods in 2017. During the first nine months of 2018, our overall average revenue per car/unit increased 6.1% and our aggregate volume increased 4.6%. Ouryear-to-date volume was approximately 8.0 million cars/units compared to 7.6 million in 2017. The increase in average revenue per car/unit was attributable to business mix changes, higher fuel surcharge revenue driven primarily by higher fuel prices, and increased rates per car/unit.Pre-tax earnings were approximately $1.9 billion and $5.0 billion in the third quarter and first nine months of 2018, respectively, increases of 9.9% compared to the corresponding periods in 2017.
Revenues from consumer products were $2.0 billion in the third quarter and $5.8 billion in the first nine months of 2018, representing increases of 11.7% and 12.0%, respectively, from 2017. The increases reflected higher average revenue per unit and volume increases of 0.9% in the third quarter and 3.9% in the first nine months. The volume increases were attributable to the intermodal business, due to general economic growth and tight truck capacity leading to conversion from highway to rail, as well as growth in imports and containerized agricultural product exports, partially offset by a sizable contract loss.
Revenues from industrial products in 2018 were $1.6 billion in the third quarter and $4.4 billion for the first nine months, or increases of 24.3% and 17.3%, respectively, from the comparable 2017 periods. These increases were attributable to volume increases of 13.1% in the third quarter and 10.9% in the first nine months as well as higher average revenue per car. Volumes in 2018 were higher primarily due to strength in the industrial and energy sectors, which drove higher demand for petroleum products, rocks, steel, and plastics. Volumes in the first nine months of 2018 were also higher for sand and taconite.
Revenues from agricultural products in 2018 increased 17.4% in the third quarter to $1.2 billion and increased 10.2% to $3.5 billion for the first nine months when compared to the same periods in 2017. The third quarter revenue increase reflected a 16.3% increase in volumes and higher average revenue per car. In the first nine months, the increase in revenues was attributable to volume increases of 10.5%, partially offset by slightly lower average revenue per car. Volumes in 2018 increased due to strong export and domestic grain shipments, as well as higher fertilizer and other grain products volumes.
Revenues from coal in 2018 increased 5.9% in the third quarter to $1.1 billion and 1.6% in the first nine months to $2.9 billion compared to 2017. These increases reflected higher average revenue per car partially offset by lower volumes of 4.6% in the third quarter and 2.6%year-to-date. The volume decreases in 2018 were due mainly to plant retirements combined with competition from natural gas and renewables, partially offset by market share gains and improved export volumes.
Operating expenses in the third quarter and first nine months of 2018 were $4.0 billion and $11.8 billion, respectively, increases of $655 million (19.5%) and $1.4 billion (13.8%), respectively, compared to the same periods in 2017. Our ratios of operating expenses to revenues were 65.2% in the third quarter and 67.0% for the first nine months of 2018, or increases of 2.1 and 1.0 percentage points, respectively, versus the corresponding prior year periods.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)
Railroad (“Burlington Northern Santa Fe”)(Continued)
BNSF’s revenues were approximately $5.8 billion in the first quarter of 2019, an increase of $138 million (2.5%) versus 2018. During the first quarter of 2019, BNSF’s revenues reflected an 8.5% comparative increase in average revenue per car/unit, driven by increased rates per car/unit and higher fuel surcharge revenue. Aggregate volumes in the first quarter of 2019 were approximately 2.5 million cars, a decrease of 5.4% from 2.6 million cars in the first quarter of 2018.Pre-tax earnings were approximately $1.7 billion in the first quarter of 2019, an increase of 10.0% compared to 2018. BNSF experienced severe winter weather and flooding on parts of the network in the first quarter of 2019, which negatively affected revenues, expenses and service levels. BNSF’s first quarter results also included a revenue increase related to the favorable outcome of an arbitration hearing and a reduction to expense for a curtailment gain arising from an amendment to a retirement plan.
Revenues from consumer products were $2.0 billion in the first quarter of 2019, representing an increase of 7.6% compared to 2018. The increase reflected higher average revenue per car/unit, partially offset by volume decreases of 5.7%. The volume decrease was attributable to lower international intermodal market share, increased truck competition, and the adverse weather conditions.
Revenues from industrial products were $1.5 billion in the first quarter of 2019, an increase of 8.4% from 2018. The increase was attributable to higher average revenue per car/unit and a volume increase of 1.3%. Volumes in the first quarter of 2019 were higher primarily due to strength in the energy and industrial sectors, which drove higher demand for petroleum products, liquefied petroleum gas, and aggregates, partially offset by lower sand and taconite volumes as well as the aforementioned weather conditions.
Revenues from agricultural products in the first quarter of 2019 were $1.1 billion, a decrease of 3.4% compared to 2018. The revenue decline reflected lower volumes of 7.4%, partially offset by higher average revenue per car/unit. Volumes decreased primarily due to the weather conditions, partially offset by higher soybean exports.
Revenues from coal in the first quarter of 2019 were $869 million, a decrease of 8.3% compared to 2018. This decrease reflected lower volumes of 10.3%, partially offset by higher average revenue per car/unit. The volume decrease in the first quarter of 2019 was primarily attributable to the weather conditions, partially offset by higher market share.
BNSF’s operating expenses were $3.8 billion in the first quarter of 2019, a decrease of $26 million (0.7%) compared to 2018. The ratio of operating expenses to revenues in the first quarter of 2019 decreased 2.0 percentage points to 66.5% versus 2018. BNSF’s expenses reflected lower volume-related costs and the aforementioned retirement plan curtailment gain, substantially offset by the impact of the adverse weather conditions. Compensation and benefits expenses increased $205$85 million (17.5%(6.5%) for the third quarter of 2018 and $296 million (7.9%) for the first nine months of 2018,compared to 2018. The increase was primarily due to wage inflation including a change in estimate of the effect of a pending labor agreement recorded in 2017, increased headcount and higher employee counts and related training costs. Fuel expenses increased $264decreased $56 million (44.4%(7.3%) for the third quarter and $679 million (38.2%) for the first nine months ofcompared to 2018, primarily due to higherlower average fuel prices and increased volumes.
Purchased services expenses increased $110 million (18.1%) in the third quarter and $281 million (15.2%) in the first nine months of 2018 as compared to 2017. The increases were due to higher purchased transportation costs of our logistics services business, as well as increased intermodal ramping, drayage and other volume-related costs.
In the third quarter and first nine months of 2018, equipmentlower fuel volumes, partially offset by unfavorable efficiency. Equipment rents, materials and other expense increased $87decreased $96 million (22.7%(18.8%) and $206 million (15.9%), respectively, compared to 2017. These increases resulted from2018. The decrease was primarily attributable to the retirement plan curtailment gain, partially offset by higher locomotive materials, personal injury expenses and property taxes. The first nine months also included higher derailment-relatedcasualty-related costs.
BNSF’s effective income tax rate was 25.9% and 23.8% for the third quarter and first nine months of 2018, respectively, as compared to 39.1% and 38.2%, respectively, in the corresponding periods in 2017. The reduction in the U.S. statutory income tax rate under the TCJA, effective January 1, 2018, drove most of the effective income tax rate reduction. In addition, certain states enacted income tax rate reductions in 2018.
Utilities and Energy (“Berkshire Hathaway Energy Company”)
We currently own 90.4%90.9% of the outstanding common stock of Berkshire Hathaway Energy Company (“BHE”), which operates a global energy business. BHE’s domestic regulated utility interests are comprised of PacifiCorp, MidAmerican Energy Company (“MEC”) and NV Energy. In Great Britain, BHE subsidiaries operate two regulated electricity distribution businesses referred to as Northern Powergrid. BHE also owns two domestic regulated interstate natural gas pipeline companies. Other energy businesses include a regulated electricity transmission-only business in Alberta, Canada (“AltaLink, L.P.”) and a diversified portfolio of mostly renewable independent power projects. In addition, BHE also operates the second-largestlargest residential real estate brokerage firm and one of the largest residential real estate brokerage franchise networks in the United States.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Utilities and Energy (“Berkshire Hathaway Energy Company”) (Continued)
The rates our regulated businesses charge customers for energy and services are based in large part on the costs of business operations, including income taxes and a return on capital, and are subject to regulatory approval. To the extent these regulated operationssuch costs are not allowed to include such costs in the approved rates, operating results will be adversely affected. Among its provisions,The legislation known as the TCJATax Cuts and Jobs Act of 2017 (“TCJA”) was enacted in December 2017, which reduced the U.S. federal statutory corporate income tax rate of our domestic regulated utilities from 35% to 21%. In 2018, BHE’s regulated subsidiaries anticipatebegan passing the benefits of lower income tax expense attributable to the TCJA to customers through various regulatory mechanisms, including lower rates, higher depreciation and reductions to rate base, which would produce lower revenue and pre-tax earnings in 2018 and future years when compared to 2017. We do not expect the TCJA and related regulatory treatment to have a material adverse impact on BHE’s long-term operating cash flows, subject to actual rulings by regulatory commissions that are expected in 2018 and 2019.base. Revenues and earnings of BHE are summarized below (in(dollars in millions).
Third Quarter | First Nine Months | |||||||||||||||||||||||||||||||
Revenues | Earnings | Revenues | Earnings | |||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
PacifiCorp | $ | 1,386 | $ | 1,443 | $ | 319 | $ | 389 | $ | 3,786 | $ | 3,991 | $ | 704 | $ | 912 | ||||||||||||||||
MidAmerican Energy Company | 857 | 832 | 251 | 250 | 2,354 | 2,209 | 347 | 402 | ||||||||||||||||||||||||
NV Energy | 1,071 | 1,057 | 268 | 347 | 2,456 | 2,412 | 403 | 539 | ||||||||||||||||||||||||
Northern Powergrid | 233 | 220 | 58 | 48 | 756 | 685 | 217 | 215 | ||||||||||||||||||||||||
Natural gas pipelines | 268 | 198 | 104 | 60 | 889 | 706 | 376 | 303 | ||||||||||||||||||||||||
Other energy businesses | 669 | 636 | 184 | 179 | 1,764 | 1,670 | 318 | 245 | ||||||||||||||||||||||||
Real estate brokerage | 1,222 | 965 | 83 | 81 | 3,263 | 2,511 | 180 | 197 | ||||||||||||||||||||||||
Corporate interest | — | — | (102) | (111) | — | — | (307) | (332) | ||||||||||||||||||||||||
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$ | 5,706 | $ | 5,351 | $ | 15,268 | $ | 14,184 | |||||||||||||||||||||||||
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Pre-tax earnings |
| 1,165 | 1,243 | 2,238 | 2,481 | |||||||||||||||||||||||||||
Income taxes |
| (49) | 177 | (279) | 296 | |||||||||||||||||||||||||||
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Net earnings |
| 1,214 | 1,066 | 2,517 | 2,185 | |||||||||||||||||||||||||||
Noncontrolling interests |
| 123 | 114 | 260 | 244 | |||||||||||||||||||||||||||
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Net earnings attributable to Berkshire Hathaway shareholders |
| $ | 1,091 | $ | 952 | $ | 2,257 | $ | 1,941 | |||||||||||||||||||||||
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Effective income tax rate |
| (4.2)% | 14.2% | (12.5)% | 11.9% | |||||||||||||||||||||||||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)
Utilities and Energy (“Berkshire Hathaway Energy Company”)(Continued)
First Quarter | ||||||||||||||||
Revenues | Earnings | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
PacifiCorp | $ | 1,281 | $ | 1,202 | $ | 222 | $ | 173 | ||||||||
MidAmerican Energy Company | 872 | 767 | 84 | 40 | ||||||||||||
NV Energy | 628 | 625 | 36 | 40 | ||||||||||||
Northern Powergrid | 263 | 275 | 99 | 109 | ||||||||||||
Natural gas pipelines | 376 | 379 | 238 | 219 | ||||||||||||
Other energy businesses | 464 | 500 | (7) | 20 | ||||||||||||
Real estate brokerage | 788 | 764 | (24) | (10) | ||||||||||||
Corporate interest | — | — | (108) | (104) | ||||||||||||
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$ | 4,672 | $ | 4,512 | |||||||||||||
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Pre-tax earnings |
| 540 | 487 | |||||||||||||
Income tax benefit |
| (130) | (167) | |||||||||||||
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Net earnings |
| $ | 670 | $ | 654 | |||||||||||
Noncontrolling interests |
| 65 | 69 | |||||||||||||
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Net earnings attributable to Berkshire Hathaway shareholders |
| $ | 605 | $ | 585 | |||||||||||
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Effective income tax rate |
| (24.1)% | (34.3)% | |||||||||||||
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PacifiCorp
PacifiCorp operates a regulated electric utility in portions of several Western states, including Utah, Oregon and Wyoming. Revenues in the thirdfirst quarter and first nine months of 2018 decreased 4% and 5%, respectively,2019 were $1.3 billion, an increase of $79 million (7%) compared to the same periodsperiod in 2017.2018. Retail revenues in the thirdfirst quarter of 2018 decreased $402019 increased $95 million and $218 million in the first nine months, compared to 2017. The declines reflected the effects of lower average rates ($185 millionyear-to-date), including the impact of the TCJA ($53 million2018, reflecting a 4.3% increase in the third quarter and $159 million in the first nine months), and ayear-to-date reduction in volumes (0.9%), largely attributable to weather and higher average rates ($39 million) due to lower net tax deferrals related to the impacts of weather.TCJA and to business mix changes. Wholesale and other revenues decreased $20 million due to lower volumes and rates.
Pre-tax earnings decreased $70increased $49 million (18%) in the third quarter and $208 million (23%(28%) in the first nine monthsquarter of 20182019 as compared to the same periodsperiod in 2017.2018. Utility margin (operating revenues less cost of fuel and purchased energy costs)energy) in the thirdfirst quarter and first nine months of 2018 were $9042019 was $794 million, and $2,446 million, respectively, representing decreasesan increase of $61$43 million (6%) and $205 million (8%), respectively, versus the comparable periods2018. The increase in 2017. These decreases were primarilyutility margin was due to the declinesincrease in revenues, which included the effects of the TCJA.partially offset by higher energy costs. PacifiCorp’safter-tax earnings in the thirdfirst quarter and first nine months of 20182019 were $270$180 million, and $603 million, respectively, representing an increase of $7$32 million (3%(22%) in the third quarter and a decrease of $15 million (2%) from the first nine months of 2017.compared to 2018.
MidAmerican Energy Company
MEC operates a regulated electric and natural gas utility primarily in Iowa and Illinois. Revenues in the thirdfirst quarter and first nine months of 2018 increased $252019 were $872 million, (3%) and $145an increase of $105 million (7%(14%), respectively, as compared to the same periods in 2017. Electric operating revenues in 2018 increased $20 million in the third quarter and $108 million in the first nine months versus 2017. The third quarter increase was due to higher wholesale and other revenues due to increases in volumes and average prices. The increase in the first nine months was primarily attributable to higher retail revenues of $96 million, reflecting higher recoveries through bill riders (substantially offset in cost of sales, operating expenses and income tax expense) and volumes, partially offset by lower average rates, predominantly from the impact of the TCJA.2018. In the first nine monthsquarter of 2018,2019, electric operating revenues increased $73 million and natural gas revenues increased $20 million versus 2018. The increase in electric revenues was attributable to higher retail revenues ($55 million), reflecting increases in aggregate volumes and average rates from higher recoveries through bill riders, including a favorable ratemaking outcome in 2018 related to 2017 tax reform, and increased wholesale and other revenue ($18 million). The increase in natural gas revenues was primarily due to increased volumes, partially offset by a lower averageper-unit pricevolumes.
Item 2. Management’s Discussion and the effectsAnalysis of the TCJA.Financial Condition and Results of Operations
Utilities and Energy (“Berkshire Hathaway Energy Company”)(Continued)
MidAmerican Energy Company (“Continued”)
Pre-tax earnings in the thirdfirst quarter of 2018 were relatively unchanged and in the first nine months decreased $552019 increased $44 million (14%) compared to the same periodsperiod in 2017.2018. Electric utility margin in the thirdfirst quarter and first nine months of 20182019 was $587$428 million, and $1,419an increase of $67 million respectively, increases of $10 million and $84 million, respectively, over the corresponding 2017 periods, which were primarily duecompared to the net increase in retail revenues in the first nine months. However, theyear-to-date2018. The increase in electric utility margin was more thanpartially offset by increased depreciation ($19 million) and maintenance and other operating expenses.expenses ($17 million). Theyear-to-date depreciation increase reflected increases in depreciation expense included $83 million from Iowa revenue sharing and $47 million from additional windnew wind-powered generation and other plant placedin-service.
additions. MEC’safter-tax earnings in the third quarter and first nine months of 2018 were $479 million and $685 million, respectively, increases of $96 million (25%) and $69 million (11%), respectively, as compared to the same periods in 2017. MEC’safter-tax earnings in 2018 and 2017 were significantlyare greater than itspre-tax earnings due to the significant production income tax credits received relatingrelated to its wind-powered generating facilities. MEC’safter-tax earnings in the first quarter of 2019 were $190 million, an increase of $87 million (84%) compared to 2018.
NV Energy
NV Energy operates regulated electric and natural gas utilities in Nevada. Revenues in the thirdfirst quarter and first nine months of 2018 increased 1% and 2%, respectively,2019 were $628 million, an increase of $3 million compared to the same periods in 2017. Electric2018, reflecting increased other income partly offset by lower operating revenues increased $12 million in the third quarter and $34revenues. Natural gas operating revenue decreased $4 million in the first nine monthsquarter of 2018, reflecting increased pass-through cost adjustments and higher volumes largely attributable2019, primarily due to the impacts of weather and retail customer growth, partlylower rates, partially offset by reductions from the impact of the TCJA andhigher customer usage. Retail electric operating revenues were relatively unchanged as lower retail rates resulting from a 2017 regulatory rate review. Natural gas operating revenue increased $8 million inreductions effective April 1, 2018 related to the first nine months of 2018, primarily due to a higher averageper-unit price, partiallyTCJA were largely offset by lowerhigher retail customer usage.
Item 2. Management’s Discussionvolumes and Analysis of Financial Condition and Results of Operations(Continued)
Utilities and Energy (“Berkshire Hathaway Energy Company”)(Continued)
NV Energy (Continued)
wholesale revenue.
Pre-tax earnings in the thirdfirst quarter and first nine months of 20182019 decreased $79$4 million (23%(10%) and $136 million (25%), respectively, compared to the same periods in 2017. The decreases were primarily due to lower electric utility margin and increased depreciation, maintenance and other operating costs.2018. Electric utility margin in the thirdfirst quarter and first nine months of 20182019 was $623$321 million, and $1,366a decrease of $7 million respectively, representing decreases of $17 million (3%) and $38 million (3%) versus the comparable periods in 2017.compared to 2018. The decreases weredecrease was primarily due to the effects of the TCJA offset by the higher sales volumes.lower retail operating revenues. NV Energy’safter-tax earnings in the thirdfirst quarter and first nine months of 20182019 were $201$29 million, and $311a decrease of $4 million respectively, declines of 10% from each of the corresponding 2017 periods.(12%) compared to 2018.
Northern Powergrid
Revenues increased $13 million and $71decreased $12 million in the thirdfirst quarter and first nine months of 20182019 compared to same periods in 2017,2018, primarily due to the favorableunfavorable foreign currency translation effects of a weakerstronger average U.S. Dollar in the first nine months of 2018 and increased smart meter and distribution revenues.2019.Pre-tax earnings in the thirdfirst quarter of 2018 increased2019 decreased $10 million (21%(9%) and $2 million (1%) in the first nine months of 2018 compared to 2017,2018, primarily due to favorable foreign currency translation effects and the increases in revenues, partly offset by higher depreciation and other operating expenses, including higher pension settlement losses in 2018.lower revenues.
Natural gas pipelines
Revenues increased $70 million (35%) in the third quarter and $183 million (26%) in the first nine monthsquarter of 20182019 declined $3 million (1%) compared to 2017,2018. The decline was primarily due to higherlower transportation revenues of $58$19 million at Kern River (largely offset by lower depreciation) and $102 million, respectively, from higher volumes and rates due to unique market opportunities and increasedlower gas sales volumes related to system balancing activities at Northern Natural Gas, which were largely offset in cost of sales.sales, partially offset by higher transportation revenues at Northern Natural Gas of $20 million.Pre-tax earnings increased $44$19 million (73%) and $73 million (24%(9%) in the thirdfirst quarter and first nine months of 2018, respectively,2019 compared to 2017.2018. The increases wereincrease was primarily due to the increasesincrease in transportation revenues and lower depreciation expense,at Northern Natural Gas, partly offset by a comparative increasesincrease in operations and maintenanceoperating expenses.
Other energy businesses
Revenues increased $33 million (5%) in the third quarter and $94 million (6%)Other energy revenues in the first nine monthsquarter of 20182019 declined $36 million (7%) compared to the same periodsperiod in 2017, reflecting2018. The decline included comparativeyear-to-date increases decreases of 17% from renewable energy and a comparative decline of 10% and from7% at AltaLink, L.P. of 4%.Pre-tax earnings in the thirdfirst quarter and first nine months of 2018 increased $52019 decreased $27 million and $73 million, respectively, compared to the same periodsperiod in 2017. The increases were primarily attributable to the2018, which reflected increased revenuespre-tax losses from tax equity renewable energy and AltaLink, L.P., partlyinvestments. Thepre-tax losses from these investments were substantially offset by increased depreciation expense and higherincome tax benefits.After-tax earnings from other operating expenses.energy activities in the first quarter of 2019 were $104 million versus $110 million in 2018.
Real estate brokerage
Revenues in the thirdfirst quarter and first nine months of 20182019 increased 27% and 30%, respectively,3% as compared to the same periodsperiod in 2017, primarily2018 due to recent business acquisitions.acquisitions, partially offset by an 11% decrease in closed units at existing brokerage businesses.Pre-tax earnings decreased $17losses increased $14 million in the first nine monthsquarter of 20182019 as compared to 2017,2018, primarily due to lower net revenues at existing brokerage businesses and higher operating costs and interest expense, partially offset by higher margin.lower operating expenses.
Corporate interest
Corporate interest includes interest on unsecured debt issued by the BHE holding company and borrowings from Berkshire insurance subsidiaries in connection with certain of BHE’s business acquisitions. The borrowings from Berkshire insurance subsidiaries were repaid in the third quarter of 2017.company. Corporate interest declined 7.5% in the first ninethree months of 20182019 increased 4% as compared to 2017,2018, primarily due to lowerhigher average borrowings.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Utilities and Energy (“Berkshire Hathaway Energy Company”)(Continued)
Income taxes
BHE’s consolidated effective income tax raterates for the first nine monthsquarter of 2019 and 2018 were approximately (24.1%) and 2017 was (12.5)% and 11.9%(34.3%), respectively. BHE’s effective income tax rates regularly reflect significant production tax credits from wind-powered electricity generation placed in service by our domestic regulated utilities and other energy businesses. The effective tax rate in the first nine monthsquarter of 2018 decreased2019 increased primarily due to benefits recognized in 2018 related to foreign earnings and the reductionaccrued repatriation tax on undistributed foreign earnings in connection with the U.S. federal corporate income tax rate, as well as from lower state income tax expense,TCJA, partially offset by an increase in recognized production tax credits lower U.S. income taxes on foreign earnings and favorable impacts of rate making.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)
Manufacturing, Service and Retailing
A summary of revenues and earnings of our manufacturing, service and retailing businesses follows (in(dollars in millions).
Third Quarter | First Nine Months | First Quarter | ||||||||||||||||||||||||||||||||||||||||||||||
Revenues | Earnings * | Revenues | Earnings * | Revenues | Earnings * | |||||||||||||||||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||
Manufacturing | $ | 13,552 | $ | 12,819 | $ | 2,012 | $ | 2,002 | $ | 40,339 | $ | 37,654 | $ | 6,002 | $ | 5,428 | $ | 15,070 | $ | 14,722 | $ | 2,194 | $ | 2,207 | ||||||||||||||||||||||||
Service and retailing | 19,796 | 19,325 | 672 | 536 | 58,061 | 56,650 | 2,011 | 1,641 | 19,224 | 19,004 | 732 | 633 | ||||||||||||||||||||||||||||||||||||
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$ | 33,348 | $ | 32,144 | $ | 98,400 | $ | 94,304 | $ | 34,294 | $ | 33,726 | |||||||||||||||||||||||||||||||||||||
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Pre-tax earnings | Pre-tax earnings |
| 2,684 | 2,538 | 8,013 | 7,069 | 2,926 | 2,840 | ||||||||||||||||||||||||||||||||||||||||
Income taxes and noncontrolling interests | Income taxes and noncontrolling interests |
| 587 | 844 | 1,953 | 2,396 | 726 | 713 | ||||||||||||||||||||||||||||||||||||||||
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$ | 2,097 | $ | 1,694 | $ | 6,060 | $ | 4,673 | $ | 2,200 | $ | 2,127 | |||||||||||||||||||||||||||||||||||||
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Effective income tax rate | Effective income tax rate |
| 21.3% | 32.7% | 23.8% | 33.3% | 24.5% | 24.5% | ||||||||||||||||||||||||||||||||||||||||
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* | Excludes certain acquisition accounting expenses, which were primarily from the amortization of identified intangible assets recorded in connection with our business acquisitions. Theafter-tax acquisition accounting expenses excluded from earnings in the preceding table were $192 million in 2019 and |
Manufacturing
Our manufacturing group includes a variety of businesses that produce and distribute industrial, building and consumer products. Industrial products businesses includebusinesses. The industrial products group includes specialty chemicals (The Lubrizol Corporation (“Lubrizol”)), complex metal products for aerospace, power and general industrial markets (Precision Castparts Corp. (“PCC”)), metal cutting tools/systems (IMC International Metalworking Companies (“IMC”)), equipment and systems for the livestock and agricultural industries (CTB International (“CTB”)), and a variety of industrial products for diverse markets (Marmon, Scott Fetzer and LiquidPower Specialty Products (“LSPI”)). Marmon includes UTLX Company (“UTLX”), which provides various products and services (including equipment leasing) for the rail and mobile crane industries.
OurThe building products businesses includegroup includes homebuilding and manufactured housing finance (Clayton Homes), flooring (Shaw), insulation, roofing and engineered products (Johns Manville), bricks and masonry products (Acme Building Brands), paint and coatings (Benjamin Moore), and residential and commercial construction and engineering products and systems (MiTek). OurThe consumer products businesses includegroup includes leisure vehicles (Forest River), several apparel and footwear operations (including Fruit of the Loom, Garan, H.H. Brown Shoe Group and Brooks Sports) and the Duracell Company (“Duracell”), a manufacturer of high performance alkaline batteries. This group also includes custom picture framing products (Larson Juhl) and jewelry products (Richline). A summary of revenues andpre-tax earnings of our manufacturing operations follows (in(dollars in millions).
Third Quarter | First Nine Months | First Quarter | ||||||||||||||||||||||||||||||||||||||||||||||
Revenues | Pre-tax earnings | Revenues | Pre-tax earnings | Revenues | Pre-tax earnings | |||||||||||||||||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2019 | �� | 2018 | 2019 | 2018 | ||||||||||||||||||||||||||||||||||||
Industrial products | $ | 7,119 | $ | 6,657 | $ | 1,297 | $ | 1,247 | $ | 21,483 | $ | 19,802 | $ | 4,012 | $ | 3,508 | $ | 7,677 | $ | 7,619 | $ | 1,431 | $ | 1,467 | ||||||||||||||||||||||||
Building products | 3,389 | 3,124 | 375 | 407 | 9,563 | 8,983 | 1,042 | 1,057 | 4,562 | 4,080 | 482 | 447 | ||||||||||||||||||||||||||||||||||||
Consumer products | 3,044 | 3,038 | 340 | 348 | 9,293 | 8,869 | 948 | 863 | 2,831 | 3,023 | 281 | 293 | ||||||||||||||||||||||||||||||||||||
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$ | 13,552 | $ | 12,819 | $ | 2,012 | $ | 2,002 | $ | 40,339 | $ | 37,654 | $ | 6,002 | $ | 5,428 | $ | 15,070 | $ | 14,722 | $ | 2,194 | $ | 2,207 | |||||||||||||||||||||||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Manufacturing, Service and Retailing(Continued)
Manufacturing (Continued)
Aggregate revenues of our manufacturing businesses in the thirdfirst quarter and first nine months of 20182019 were approximately $13.6$15.1 billion, and $40.3 billion, increases of $733 million (5.7%) and approximately $2.7 billion (7.1%), respectively, compared to the same periods in 2017.Pre-tax earnings in the third quarter of 2018 were approximately $2.0 billion, relatively unchanged from 2017, and $6.0 billion in the first nine months of 2018, an increase of $574$348 million (10.6%(2.4%) compared to 2017.2018.Pre-tax earnings in the first nine monthsquarter of 2017 includedpre-tax losses2019 were approximately $2.2 billion, a decrease of approximately $190$13 million (predominantly in the first quarter) in connection with the disposition of an underperformingbolt-on business acquired by Lubrizol in 2014. Excluding these losses,pre-tax earnings in the first nine months of 2018 increased 6.8% compared to 2017. Results of our manufacturing businesses in 2018 generally reflected higher revenues compared to 2017. However, manufacturing costs and operating expenses were also higher, partly offsetting the revenue increases, particularly in the third quarter.(0.6%) from 2018.
Industrial products
Revenues fromof the industrial products businessesgroup in the first quarter of 2019 were approximately $7.1$7.7 billion, inan increase of $58 million (0.8%) versus 2018.Pre-tax earnings of the third quarter and $21.5group were approximately $1.4 billion in the first nine monthsquarter of 2018, or increases2019, a decrease of $462$36 million (6.9%(2.5%) and $1.7 billion (8.5%), respectively, compared to 2017. 2018.Pre-tax earnings of the group as a percentage of revenues for the first quarter were 18.6% in 2019 and 19.3% in 2018.
PCC’s revenues in the thirdfirst quarter and first nine months of 2018 increased2019 were approximately 5.9% and 6.3%, respectively,$2.6 billion, an increase of 3.1% over the same periods in 2017.2018. The increasesincrease reflected increasedhigher demand in aerospace markets in connection with new aircraft programs, partly offset by lower demand for industrial gas turbine products.
Lubrizol’s revenues in the first quarter of 2019 were approximately $1.7 billion, a decrease of 3.6% compared to 2018. The decline was primarily due to lower volumes and unfavorable foreign currency translation effects, partly offset by higher average selling prices. Lubrizol continued to experience increases in average material unit costs, necessitating increases in sales prices. Lubrizol’s consolidated volume in the first quarter of 2019 declined 4% from 2018, reflecting reduced volumes in the Additives product lines, partially offset by volume increases in the Advanced Materials product lines.
Lubrizol’spre-tax earnings decreased 5.2% in the first quarter of 2019 compared to 2018. Results in the first quarter of 2019 were negatively affected by the reduction in sales volume, unfavorable foreign currency translation effects, increased operating expenses and raw materials costs.
Marmon’s revenues in the first quarter of 2019 were approximately $2.0 billion, an increase of 1.2% as compared to 2018. First quarter revenues were higher in the Transportation Products (heavy-duty trucks and trailers), Retail Solutions and Crane Services sectors, partially offset by decreases across the other sectors. The comparative first quarter revenue declines were primarily in the Food & Beverage Equipment and Plumbing & Refrigeration sectors, which included the effects of a 2018 divestiture of a beverage equipment parts business, lower metals prices and volumes and unfavorable foreign currency translation effects of a stronger U.S Dollar.
Marmon’spre-tax earnings in the first quarter of 2019 decreased 3.1% compared to 2018.Pre-tax earnings as a percentage of sales fell to 14.9% in the first quarter of 2019 as compared to 15.5% in 2018.Pre-tax earnings in the first quarter of 2019 of the Rail Products & Leasing sector declined $10 million, which was attributable to lower average railcar lease rates. In addition, we experienced lower earnings from sales volume declines in the Metal Services and Plumbing & Refrigeration sectors, and depressed margins in the Retail Solutions and Industrial Products sectors, with the latter negatively affected by U.S. tariffs. These earnings declines were partially offset by increased earnings in the Transportation Products and Electrical Products sectors and from the effects of 2018 business acquisitions.
IMC’s revenues in the first quarter of 2019 were relatively unchanged from the first quarter of 2018, reflecting increased revenues from recent business acquisitions, offset by unfavorable foreign currency translation effects from a stronger U.S. Dollar. IMC’spre-tax earnings declined in the first quarter of 2019 versus 2018, reflecting increased average raw material costs, unfavorable foreign currency translation effects and changes in business mix.
CTB’s revenues increased 3.9% in the first quarter of 2019 versus 2018, primarily due to increased revenues from grain systems and processing equipment, partially offset by lower protein production revenues and the unfavorable foreign currency translation effects of a stronger U.S. Dollar. CTB’spre-tax earnings in the first quarter of 2019 increased 16.3% versus 2018, primarily due to the increase in revenues, moderation of average costs of certain raw materials, pricing efficiency and ongoing efforts to control operating expenses.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)
Manufacturing, Service and Retailing ( (Continued)
Industrial products (Continued)Continued)
Lubrizol’s revenues in the third quarter and first nine months of 2018 increased 7.3% and 7.6%, respectively, compared to 2017, primarily due to higher prices, changes in product mix and favorable foreign currency translation. Lubrizol experienced a significant increase in average material unit costs during 2018 and 2017, necessitating increases in sales prices. Lubrizol’s consolidated sales volumes increased 6% and 3%, respectively, in the third quarter and first nine months of 2018, as compared to 2017. IMC’s revenues increased 11.7% in the third quarter and 20.0% in the first nine months of 2018 compared to 2017, due to a combination of factors, including increased unit sales (particularly over the first half of the year), business acquisitions and foreign currency translation effects from a weaker U.S. Dollar in the first half of 2018.
Marmon’s revenues in the third quarter and first nine months of 2018 increased 4.0% and 7.6%, respectively, as compared to 2017. Revenue increases were primarily attributable to higher average metals prices, business acquisitions and growth in heavy-duty transportation product lines, partially offset by lower sales from the beverage and retail products businesses and lower steel distribution volume. CTB’s revenues increased 6.0% in the first nine months of 2018 versus 2017, due to favorable foreign currency effects and modest sales growth in protein production and grain systems during the third quarter.
Pre-tax earnings of the industrial products group were $1.3 billion in the third quarter and $4.0 billion in the first nine months of 2018, representing increases of $50 million (4.0%) and $504 million (14.4%), respectively, compared to 2017. Our results in the first nine months of 2017 includedpre-tax losses of approximately $190 million, substantially all of which were in the first quarter, related to Lubrizol’s disposition of an underperformingbolt-on business and related intangible asset impairments and restructuring charges. Excluding the effects of these losses,pre-tax earnings of the industrial products group increased 8.5% in the first nine months of 2018 as compared to 2017.
PCC’spre-tax earnings decreased 2.0% in the third quarter and 6.2% in the first nine months of 2018 compared to 2017. Results in 2018 were negatively affected by costs associated with the temporary unplanned shut-downs of certain metals facilities, metal press outages and lower earnings from the industrial gas turbine business. The closed facilities are gradually resuming production, with most expected to becoming fully operational by the end of 2018. In addition, the aforementioned new aircraft programs involve relatively complex manufacturing processes and manufacturing costs (including personnel training costs) have been relatively highto-date, but we expect costs will decline as processes and efficiencies develop.
Lubrizol’spre-tax earnings, excluding the effects of the losses on the disposition of a bolt-on business in 2017, increased approximately 16% in the first nine months of 2018 compared to 2017. The increase was primarily due to increases in sales volumes and selling prices, as well as by lower interest expense and the favorable effects of foreign currency translation, somewhat offset by higher raw material costs and operating expenses. IMC’spre-tax earnings increased significantly in the first nine months of 2018 compared to the same periods in 2017, reflecting a combination of increased sales, increased manufacturing efficiencies, the effects of business acquisitions and ongoing expense control efforts, partly offset by the effects of rising raw material costs.
Marmon’spre-tax earnings in 2018 increased 3.2% in the third quarter and 12.3% in the first nine months compared to the same periods in 2017. The increase in the first nine months was primarily due to anon-recurring gain of $43 million from the sale of certain assets of its beverage products business in the second quarter.
Building products
Revenues of the building products group in the thirdfirst quarter and first nine months of 20182019 were approximately $3.4$4.6 billion, an increase of $482 million (11.8%) compared to 2018.Pre-tax earnings of the group in the first quarter of 2019 were $482 million, an increase of 7.8% versus 2018.Pre-tax earnings represented 10.6% and $9.6 billion, respectively, increases11.0% of $265revenues in the first quarter of 2019 and 2018, respectively.
Clayton Homes produced revenues of $1,554 million (8.5%in the first quarter of 2019, an increase of $307 million (25%) over 2018. The comparative increase was primarily due to increased home sales of $281 million (33%) and $580 million (6.5%), respectively,increased interest income from lending activities. The sales increase reflected changes in sales mix. Unit sales of site built homes in the first quarter of 2019 increased 157% over 2018, primarily due to business acquisitions completed during 2018, while manufactured homes sold at retail and wholesale declined 10%. The increase in income from lending activities was primarily due to increased average outstanding loan balances. As of March 31, 2019, aggregate loan balances outstanding were approximately $14.8 billion, compared to $13.8 billion as of March 31, 2018.
Pre-tax earnings of Clayton Homes for the corresponding 2017 periods. Forfirst quarter of 2019 were $216 million, an increase of $21 million (11%) compared to 2018. The increase was primarily attributable to home building activities, which reflected the thirdincrease in home sales. A significant part of Clayton Homes’ earnings derives from manufactured housing lending activities.Pre-tax earnings from lending activities in 2019 were relatively unchanged compared to 2018, as the increase in income from lending activities was substantially offset by higher interest expense, attributable to higher average outstanding debt and interest rates and to higher operating costs.
In the first quarter of 2019, our other building products businesses generated a comparative increase in revenues of 6%, primarily attributable to higher hard surface flooring products and first nine months of 2018, the increases reflected higherroofing systems volumes, partly offset by lower carpet volumes. Additionally, average selling prices product mix changes and unit increases with respectof these businesses were generally higher in the first quarter of 2019 as compared to certain flooring and insulation products. The selling price increases in 2018, which were in response to significantrising raw material cost increasesand other production costs over the past two years.year.
Pre-tax earnings of the other building products groupbusinesses in the thirdfirst quarter andof 2019 were $266 million, an increase of 6% over 2018. The ratio ofpre-tax earnings to revenues was relatively unchanged from the first nine monthsquarter of 2018 were $375 million and $1,042 million, respectively, decreases of 7.9% and 1.4%, respectively, versus the corresponding 2017 periods. Raw2018. As previously noted, rising raw material and production costs rosecost increases prevailed over the first nine months of 2018, which together with increased facilities closure costs, more than offset most of the increases in revenues.past year. In particular, coststhe cost increases for steel, titanium dioxide, and certain petrochemicals were substantially higher in 2018 than in 2017. Thesignificant. In the first quarter of 2019, these cost increases in selling prices have lagged the increases in raw materials costs and, consequently, gross margin rates have deteriorated.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)
Manufacturing, Service and Retailing (Continued)
moderated.
Consumer products
Revenues of the consumerConsumer products grouprevenues were approximately $2.8 billion in the thirdfirst quarter of 2018 were approximately $3.0 billion, essentially unchanged2019, a decrease of $192 million (6.4%) versus 2018. The first quarter revenue decline was primarily attributable to decreases at Forest River and Duracell, partly offset by higher revenues from 2017. Our apparel and footwear businesses generated a comparative thirdbusinesses. First quarter revenue increase2019 revenues of 6%, offset by lower revenues from Forest River and Duracell. These increases and decreases were primarily attributable to changes in unit sales, and to a lesser extent, selling prices and sales mix changes. Most significantly, Forest River experienced a comparative 7%declined 16% versus 2018, reflecting an 18% decline in third quarter unit sales. Revenues of Duracell declined 6% in the first nine monthsquarter of 2018 were approximately $9.3 billion, an increase of $424 million (4.8%)2019 compared to the first nine monthsprior year period due to lower sales in foreign markets and the unfavorable effects of 2017. Theyear-to-date increase included increases from Forest River (5%) and our apparelforeign currency translation. Apparel and footwear businesses (6%)revenues in the first quarter of 2019 increased 6%, which weredue primarily due to increased volume fromincreases of Brooks Sports and Garan.
Pre-tax earnings of the consumer products group were $340 million in the third quarter of 2018, a decrease of 2.3% from 2017. The decline reflected lower earnings from Forest River (24%), partially offset by increased earnings from the apparel and footwear businesses (5%) and Duracell (8%).Pre-tax earnings for the first nine months of 2018 were $948 million, an increase of $85 million (9.8%) compared to 2017. The comparative increase inyear-to-date earnings reflected increases from Duracell (47%(22%) and the apparel group (5%).
Consumer productspre-tax earnings were $281 million in the first quarter of 2019, a decrease of $12 million (4.1%) compared to 2018.Pre-tax earnings as a percentage of revenues were 9.9% in 2019 and footwear businesses (9%),9.7% in 2018. The decrease inpre-tax earnings reflected a 24% comparative decline at Forest River, partly offset by lower earnings from Forest River and Larson Juhl.
During 2018, and in the third quarter in particular, Forest River’s results were affected by higher material costs, which together with the effects of lower sales volume in the third quarter, contributed to reductions in its gross sales margin rates andpre-tax earnings. The comparative earnings increases offrom Brooks Sports, the apparel businesses and footwear businesses in 2018 were primarily attributable to revenue increases. Duracell’s earnings increases in 2018 reflected the favorable effects of ongoing operational restructuring efforts and comparatively lower restructuring charges.Richline.
Service and retailing
A summary of revenues andpre-tax earnings of our service and retailing businesses follows (in millions).
Third Quarter | First Nine Months | First Quarter | ||||||||||||||||||||||||||||||||||||||||||||||
Revenues | Pre-tax earnings | Revenues | Pre-tax earnings | Revenues | Pre-tax earnings | |||||||||||||||||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||
Service | $ | 3,141 | $ | 2,775 | $ | 444 | $ | 315 | $ | 9,219 | $ | 8,184 | $ | 1,268 | $ | 926 | $ | 3,418 | $ | 3,173 | $ | 472 | $ | 415 | ||||||||||||||||||||||||
Retailing | 3,833 | 3,752 | 184 | 176 | 11,404 | 10,986 | 572 | 513 | 3,607 | 3,642 | 149 | 158 | ||||||||||||||||||||||||||||||||||||
McLane Company | 12,822 | 12,798 | 44 | 45 | 37,438 | 37,480 | 171 | 202 | 12,199 | 12,189 | 111 | 60 | ||||||||||||||||||||||||||||||||||||
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$ | 19,796 | $ | 19,325 | $ | 672 | $ | 536 | $ | 58,061 | $ | 56,650 | $ | 2,011 | $ | 1,641 | $ | 19,224 | $ | 19,004 | $ | 732 | $ | 633 | |||||||||||||||||||||||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Manufacturing, Service and Retailing(Continued)
Service
Our service businesses offerbusiness group offers fractional ownership programs for general aviation aircraft (NetJets) and high technology training to operators of aircraft (FlightSafety). We also distribute electronic components (TTI) and franchise and service a network of quick service restaurants (Dairy Queen). ServiceOther service businesses also include thetransportation equipment leasing (XTRA) and furniture leasing (CORT), electronic news distribution, of corporate news, multimedia and regulatory filings (Business Wire), publication of newspapers and other publications (Buffalo News and the BH Media Group) and operation of a television station in Miami, Florida (WPLG). We also offer third party logistics services that primarily serve the petroleum and chemical industries (Charter Brokerage).
Revenues of the service group were approximately $3.1 billion in the third quarter and $9.2 billion in the first nine monthsquarter of 2018, representing increases2019 were approximately $3.4 billion, an increase of $366$245 million (13.2%(7.7%) and $1.0 billion (12.6%), respectively, as compared to the same periods in 2017. TTI’s2018. The increase was primarily attributable to TTI and NetJets. First quarter 2019 revenues in the third quarter and first nine months of 2018TTI increased approximately 35%15% compared to the same periods in 2017. The increases reflected an2018, reflecting industry-wide increase inincreased demand throughout 2018 for electronic components in many geographic markets around the world that began in 2017, and from the effects of business acquisitions, andpartly offset by foreign currency translation due toeffects of a weakerstronger average U.S. Dollar. While TTI’s revenue increases were significant, weWe believe thatthe strong growth in electronic components demand experienced recently is beginning to moderate. Otherwise, Charter Brokerage, FlightSafety and WPLG generated comparativeNetJets revenue increased 5% in the first quarter of 2019, due to increases in the first nine monthsnumber of 2018, while the revenues from most of our other service businesses declined from 2017.aircraft on lease and in flight hours.
Pre-tax earnings of the service group in the thirdfirst quarter and first nine months of 20182019 were $444$472 million, and $1.3 billion, respectively, increasesan increase of $129$57 million (41.0%(13.7%) and $342 million (36.9%), respectively, compared to 2018.Pre-tax earnings of the same periodsgroup were 13.8% of first quarter revenues in 2017.2019 compared to 13.1% in 2018. The increase in comparative increases infirst quarter earnings in 2018 were driven by the aforementioned revenue increases atwas primarily attributable to TTI which accounted for almost 70% of these increases, as well as from earnings increases at Charter Brokerage and NetJets.
Retailing
Our retailers include Berkshire Hathaway Automotive (“BHA”). BHA includes over 80 auto dealerships that sell new andpre-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.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)
Manufacturing, Service and Retailing (Continued)
Retailing (Continued)
Our otherOther 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 Germany-based retailer of motorcycle accessories.
Revenues of the retailing businessgroup in the thirdfirst quarter and first nine months of 20182019 were $3.8approximately $3.6 billion, and $11.4 billion, respectively, increasesa decrease of $81$35 million (2.2%(1.0%) and $418 million (3.8%), respectively, compared to the same periods in 2017.2018. BHA’s revenues, which represented approximately 64%65% of theyear-to-dateour aggregate retailing revenues, in 2018, increased 2.1% in the third quarter and 4.0%1.3% in the first nine monthsquarter of 2018 as2019 compared to 2017.2018. The increases derivedincrease was primarily from increaseda 7% increase inpre-owned vehicle sales and higher revenues from finance and service contract activities, partly offset by a 4% reduction in new auto sales. Revenues from new vehicle sales were down 2.3% in the third quarterof See’s Candies and relatively unchanged for the first nine months. In addition, Louis revenues increased 9.1%Oriental Trading declined 19% and 11%, respectively, in the first nine monthsquarter of 2019 compared to 2018, due primarily attributable to foreign currency translationthe seasonal effects and comparatively higher sales.of the timing of the Easter holiday. Revenues of our home furnishings businesses increased 5.4%declined 4% in the first nine monthsquarter of 2019 versus 2018 comparedattributable to 2017, due to higher volumesslowing consumer demand and unfavorable weather in certain geographic markets and the effect of a new store, which opened in 2018.regions.
Pre-tax earnings of the retailing group in the thirdfirst quarter of 2019 were $149 million, a decrease of $9 million (5.7%) from 2018. Our home furnishings retailers experienced a 42% decline in comparative first quarter earnings, reflecting lower revenues and generally higher operating expenses.Pre-tax earnings of See’s Candies and Oriental Trading also declined in the first nine monthsquarter of 2019 compared to 2018, from retailing were $184 million and $572 million, respectively, increases of $8 million (4.5%) and $59 million (11.5%), respectively, over 2017. The increases were primarily attributable to BHA and Louis. Thethe lower revenues previously noted. These earnings increasesdeclines were partly offset by increased earnings of BHA, were primarilydue to increased earnings from finance and insuranceservice contract activities, while the increases at Louis were primarily attributable to the revenue increases.partly offset by higher floorplan interest expense.
McLane Company
McLane operates a wholesale distribution business that provides grocery andnon-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 unitsbusinesses generate high sales volumes and very low operating margins andprofit margins. These businesses have several significant customers, including Walmart,Wal-Mart,7-Eleven7-Eleven, Yum! Brands and Yum! Brands.others. Grocery sales comprise approximatelytwo-thirds of McLane’s consolidated sales with food service comprising 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.
Revenues for the thirdfirst quarter andof 2019 were $12.2 billion, relatively unchanged from the first nine monthsquarter of 2018, were $12.8 billion and $37.4 billion, respectively, relatively unchanged compared to the same periodsreflecting a 1.5% decrease in 2017. On ayear-to-date basis, grocery sales increased 0.8% and foodservice sales declined 2.4%, compared to 2017. The declinea 2.7% increase in foodservice revenues was primarily due to a net loss of customers.
sales.Pre-tax earnings in the thirdfirst quarter of 20182019 were $44$111 million, essentially unchangedan increase of $51 million (85%) compared to 2018. The comparative improvement in first quarter earnings was primarily due to the effects of lower LIFO inventory valuation allowances from 2017, whilepre-tax earningslower inventory levels and gains from increased prices related to certain inventory items. Otherwise, pretax-earnings in the first nine monthsquarter of 2018 of $171 million declined $31 million (15.3%), compared to 2017. McLane’s grocery and foodservice businesses continue2019 were substantially unchanged from 2018. McLane continues to operate in a highlyan intensely competitive business environment, which is negatively affecting its current operating results. Gross margin rates increased slightly over the first nine months of 2018, but were more than offset by increases in fuel, depreciationresults and certain other operating expenses, producing a decline in itscontributing to low operating margin rate compared to 2017.rates. We expect the currentthese unfavorable operating conditions will continue intoin 2019.
Finance and Financial Products
Our finance and financial products businesses include manufactured and site built housing and finance (Clayton Homes), transportation equipment manufacturing and leasing businesses (UTLX and XTRA, and together, “transportation equipment leasing”), as well as other leasing and financing activities. A summary of earnings from our finance and financial products businesses follows (in millions).
Third Quarter | First Nine Months | |||||||||||||||||||||||||||||||
Revenues | Earnings | Revenues | Earnings | |||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
Manufactured housing and finance | $ | 1,580 | $ | 1,318 | $ | 205 | $ | 173 | $ | 4,336 | $ | 3,591 | $ | 634 | $ | 546 | ||||||||||||||||
Transportation equipment leasing | 674 | 652 | 209 | 219 | 2,000 | 1,928 | 624 | 649 | ||||||||||||||||||||||||
Other | 178 | 183 | 116 | 104 | 525 | 500 | 331 | 243 | ||||||||||||||||||||||||
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$ | 2,432 | $ | 2,153 | $ | 6,861 | $ | 6,019 | |||||||||||||||||||||||||
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Pre-tax earnings | 530 | 496 | 1,589 | 1,438 | ||||||||||||||||||||||||||||
Income taxes and noncontrolling interests | 140 | 177 | 396 | 505 | ||||||||||||||||||||||||||||
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$ | 390 | $ | 319 | $ | 1,193 | $ | 933 | |||||||||||||||||||||||||
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Effective income tax rate | 26.6% | 35.6% | 25.0% | 35.1% | ||||||||||||||||||||||||||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)
Finance and Financial Products(Continued)
Manufactured housing and finance
Clayton Homes’ revenues in the third quarter and first nine months of 2018 were approximately $1.6 billion and $4.3 billion, respectively, increases of $262 million (19.9%) and $745 million (20.7%), respectively, over the corresponding 2017 periods. The increases reflectedyear-to-date increases in home sales of 29% and in financial services revenue of approximately 4%. The increase in home sales was primarily due to a 104%year-to-date increase in unit sales of site built homes attributable to business acquisitions during the last two years, and to increased unit sales of manufactured homes. Average unit prices of site built homes are considerably higher than our traditional manufactured homes. The increase in financial services revenue was primarily attributable to increased interest income from a comparative increase in average loan balances of approximately 5% over the first nine months of 2018 as compared to 2017. As of September 30, 2018, Clayton Homes’ loan balances were approximately $14.4 billion.
Pre-tax earnings in the third quarter and first nine months of 2018 were $205 million and $634 million, respectively, increases of $32 million (18.5%) and $88 million (16.1%), respectively, compared to the same periods in 2017. The increases in earnings reflected increased manufactured and site built home sales and financial services interest income, lower corporate overhead costs and credit losses, partly offset by increased interest expense and the effects of an $11 million gain from a legal settlement in 2017.
Transportation equipment leasing
Transportation equipment leasing revenues in 2018 were $674 million in the third quarter and $2.0 billion in the first nine months, increases of 3.4% and 3.7%, respectively, over the comparable 2017 periods. Revenues in 2018 of ourover-the-road trailer leasing business increased 14% in the third quarter and 13% in the first nine months over the same periods in 2017, primarily due to increased units on lease. Revenues in the third quarter of 2018 of our railcar and crane services businesses were relatively unchanged compared to 2017, while revenues in the first nine months increased $32 million (2%) compared to 2017. The increase inyear-to-date revenues was attributable to increased railcar equipment sales, railcar repair services and crane services, partly offset by lower railcar lease revenues. Throughout 2018, we have experienced negative impacts from lower railcar lease renewal rates versus the higher rates on expiring leases.
Pre-tax earnings in 2018 were $209 million in the third quarter and $624 million in the first nine months, decreases of $10 million (4.6%) and $25 million (3.9%), respectively, compared to the same periods in 2017. The decreases were due to lower earnings from the railcar leasing business, attributable to the decline in lease revenues and higher repair costs, partly offset by increased earnings of ourover-the-road trailer and crane services businesses. Significant components of the operating costs of these businesses, such as depreciation, interest and certain other operating costs, do not vary proportionately to revenue changes. Thus, changes in revenues can disproportionately affect earnings.
Other
Other earnings from our finance activities include CORT furniture leasing and other investment income. Other earnings also include interest income on loans to finance Clayton Homes’ loan portfolio and transportation equipment held for lease (charged as interest expense in the results of those businesses) and interest expense on related borrowings of Berkshire Hathaway Finance Corporation (“BHFC”). The net interest (income, net of expense) related to such loans increased $81 million in the first nine months of 2018 compared to 2017, which reflected increased interest income and lower interest expense of BHFC.
Investment and Derivative Gains/Losses
A summary of investment and derivative gains and gains/losses follows (in(dollars in millions).
Third Quarter | First Nine Months | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Investment gains/losses | $ | 14,569 | $ | 657 | $ | 12,750 | $ | 1,262 | ||||||||
Derivative gains/losses | 137 | 308 | 303 | 703 | ||||||||||||
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Gains/losses before income taxes and noncontrolling interests | 14,706 | 965 | 13,053 | 1,965 | ||||||||||||
Income taxes and noncontrolling interests | 3,046 | 342 | 2,701 | 695 | ||||||||||||
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Net gains/losses | $ | 11,660 | $ | 623 | $ | 10,352 | $ | 1,270 | ||||||||
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Effective income tax rate | 20.5% | 35.3% | 20.8% | 35.3% | ||||||||||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)
Investment and Derivative Gains/Losses(Continued)
First Quarter | ||||||||
2019 | 2018 | |||||||
Investment gains (losses) | $ | 19,552 | $ | (7,809) | ||||
Derivative gains (losses) | 770 | (206) | ||||||
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Gains (losses) before income taxes and noncontrolling interests | 20,322 | (8,015) | ||||||
Income taxes and noncontrolling interests | 4,216 | (1,589) | ||||||
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Net gains (losses) | $ | 16,106 | $ | (6,426) | ||||
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Effective income tax rate | 20.7% | 19.6% | ||||||
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Investment gains/losses
As discussed in Note 2Due to the accompanying Consolidated Financial Statements, on January 1, 2018, we adopted a new accounting pronouncement (“ASUadopted as of January 1, 2018,2016-01”),pre-tax which requiresinvestment gains/losses reported in earnings in the recognition offirst quarter included net unrealized gains of approximately $19.4 billion in 2019 and net unrealized losses arisingof approximately $7.8 billion in 2018 from changes in market values ofour investments in equity securities instill held the Consolidated Statementsend of Earnings.each period. Prior to 2018, investment gains/losses related toon equity securities were generally recorded aswhen the securities were sold redeemed or exchanged and were based on the cost of the disposed securities. While ASU2016-01the new accounting standard does not change the affect on our consolidated shareholders’ equity or total comprehensive income, it is expected tohas significantly increaseincreased the volatility of our periodic net earnings givendue to the magnitude of our existing equity securities portfolio and the inherent volatility of equity securities prices. Investment gains and gains/losses have caused andfrom periodic changes in securities prices will continue to cause significant volatility in earnings reported in our Consolidated Statements of Earnings.
Pre-tax investment gains/losses reflected in earnings in 2018 included net unrealized gains of approximately $14.3 billion in the third quarter and $12.1 billion for the first nine months from investments in equity securities still held at September 30, 2018. Prior to the adoption of ASU2016-01, such unrealized gains and losses were included in other comprehensive income. ASU2016-01 did not permit the restatement of prior years’ statements ofconsolidated earnings.
We believe that investment gains/losses, whether realized from sales or unrealized from changes in market prices, are often meaningless in terms of understanding our reported resultsconsolidated earnings or evaluating our periodic economic performance. We continue to believe the amount of investment gains/losses included in earnings, in any given period typically has little analytical or predictive value. The effects ofincluding the changes in market prices for equity securities now reported in earnings are unpredictable over any quarterlygiven period, has little analytical or annual period.predictive value.
Derivative gains/losses
Derivative contract gains/losses representinclude the changes in fair value of our equity index put option contract liabilities. These liabilities relate to contracts entered into before March 2008 and that2008. Substantially all of these contracts will expire between April 2019 and January 2026.February 2023. The periodic changes in the fair values of these liabilities are recorded in earnings and can be significant, reflecting the volatility of underlying equity markets and the changes in the inputs used to measure such liabilities.
As of September 30, 2018,March 31, 2019, the intrinsic value of our equity index put option contracts was approximately $919 million$1.0 billion and our recorded liabilities at fair value were approximately $1.9$1.7 billion. Our ultimate payment obligations, if any, under our contracts will be determined as of the contract expiration dates and will be based on the intrinsic value as defined under the contracts. Derivative contracts producedpre-tax gains inContracts with an aggregate notional value of approximately $12.2 billion will expire over the first nine monthsremainder of 2018 of $303 million, which were primarily due to foreign currency exchange rate changes and the effects of shorter average contract durations, partially offset by lower values on certain indexes. 2019.
Derivative contracts producedpre-tax gains of $703$770 million in the first nine monthsquarter of 2017, which2019 compared topre-tax losses of $206 million in 2018. The gains in 2019 were primarily attributabledue to higher equity index values, and shorter contract durations, partly offset by unfavorablechanges in foreign currency exchange rate changes.rates and shorter average contract durations.
Other
A summary ofafter-tax other earnings (losses)earnings/losses follows (in millions).
Third Quarter | First Nine Months | First Quarter | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | |||||||||||||||||||
Equity method earnings | $ | 269 | $ | 248 | $ | 894 | $ | 807 | $ | 166 | $ | 340 | ||||||||||||
Acquisition accounting expenses | (199) | (196) | (637) | (518) | (192) | (218) | ||||||||||||||||||
Corporate interest expense, before foreign currency exchange rate effects | (77) | (66) | (236) | (198) | ||||||||||||||||||||
Corporate interest expense, Euro note foreign currency exchange rate effects | 56 | (172) | 216 | (571) | ||||||||||||||||||||
Corporate interest expense, before foreign currency effects | (74) | (77) | ||||||||||||||||||||||
Corporate interest expense, Euro note foreign exchange rate effects | 134 | (163) | ||||||||||||||||||||||
Income tax expense adjustment | (377) | — | ||||||||||||||||||||||
Other | 180 | 18 | 283 | 25 | 214 | 130 | ||||||||||||||||||
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Net earnings (losses) attributable to Berkshire Hathaway shareholders | $ | 229 | $ | (168) | $ | 520 | $ | (455) | $ | (129) | $ | 12 | ||||||||||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Other (Continued)
After-tax equity method earnings includesinclude Berkshire’s share of earnings attributable to Kraft Heinz, Pilot Flying J, Berkadia and Electric Transmission of Texas. As discussed in Note 5 to the accompanying unaudited interim Consolidated Financial Statements, financial statements of Kraft Heinz for the first quarter of 2019 were not made available to us. Accordingly, our consolidated financial statements do not include our share of Kraft Heinz’s earnings for that period.After-tax otherequity method earnings (losses) alsofrom Kraft Heniz were $234 million in the first quarter of 2018. We will include our share of Kraft Heinz’s first quarter 2019 earnings in our earnings in the period such information is made available to Berkshire.
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 were primarily from the amortization or impairment of intangible assets recorded in connection with those business acquisitions. Berkshire issued
The aggregate par amount of Berkshire’s outstanding Euro denominated debt in 2015, 2016 and 2017 and at September 30, 2018, the aggregate par amount outstanding was €6.85 billion.billion during the first quarter of 2019 and 2018. Changes in foreign currency exchange rates in 2018 and 2017 produced sizablenon-cash unrealized gains in the first quarter of 2019 and losses in the first quarter of 2018 from the periodic revaluation of these liabilities into U.S. Dollars.
Item 2. Management’s DiscussionThe income tax expense adjustment relates to investments that we made between 2015 and Analysis2018 in certain tax equity investment funds. Our investments in these funds aggregated approximately $340 million. In December 2018 and during the first quarter of Financial Condition and Results2019, we learned of Operations(Continued)
allegations by federal authorities of fraudulent income conduct by the sponsor of these funds. As a result of our investigation into these allegations, we now believe that it is more likely than not that the income tax benefits that we recognized are not valid.
Financial Condition
Our consolidated balance sheet continues to reflect significant liquidity and a strong capital base. Our consolidatedConsolidated shareholders’ equity at September 30, 2018March 31, 2019 was $375.6approximately $369 billion, increasesan increase of $17.5 billion since June 30, 2018 and $27.3$20.2 billion since December 31, 2017.2018. Net earnings attributable to Berkshire shareholders in the first nine monthsquarter of 20182019 were $29.4$21.7 billion, which includedafter-tax gains on our investments of approximately $10.1 billion. Most of these gains derived from changes$15.5 billion, which was primarily due to increases during the first quarter in market prices forof the equity securities we owned at September 30, 2018.March 31, 2019.
At September 30, 2018,March 31, 2019, our insurance and other businesses held cash, cash equivalents and U.S. Treasury Bills of approximately $96.5$110.5 billion, which included $74.5$89.9 billion in U.S. Treasury Bills. Investments in equity and fixed maturity securities (excluding our investment in Kraft Heinz) were $219.5approximately $211.2 billion.
Berkshire parent company debt outstanding at September 30, 2018March 31, 2019 was approximately $17.0$16.7 billion, a decrease of $1.8 billion from$167 million since December 31, 2017, reflecting maturities of $1.55 billion in term debt and a $273 millionyear-to-date decrease2018, which was attributable to foreign currency exchange rate changes applicable to the €6.85 billion par amount of Euro denominated senior notes. The next maturity of Berkshire parent company debt isof $750 million matures in August 2019.
Berkshire’s insurance and other subsidiary outstanding borrowings declined approximately $1 billion in the first quarter of 2019 to approximately $17.1 billion at March 31, 2019, primarily attributable to a net decrease in borrowings of Berkshire Hathaway Finance Corporation (“BHFC”), a wholly-owned financing subsidiary. BHFC’s senior note borrowings are used to fund loans originated and acquired by Clayton Homes and a portion of assets held for lease by our UTLX railcar leasing business. In the first quarter of 2019, BHFC repaid $2.7 billion of maturing senior notes and issued $2.0 billion of 4.25% senior notes due in 2049. An additional $1.25 billion of BHFC senior notes will mature in August 2019. Berkshire guarantees the full and timely payment of principal and interest with respect to BHFC’s senior notes.
Our railroad, utilities and energy businesses (conducted by BNSF and BHE) maintain very large investments in capital assets (property, plant and equipment) and will regularly make significant capital expenditures in the normal course of business. We forecast capitalCapital expenditures of these two operations will approximate $9.8 billion for the year ending December 31, 2018, of which approximately $6.4 billion was expended duringin the first nine months.quarter of 2019 were $2.0 billion and we forecast additional capital expenditures of approximately $9.0 billion over the remainder of 2019.
BNSF’s outstanding debt approximated $23.3$23.2 billion as of September 30, 2018, an increase of $758 millionMarch 31, 2019, which was substantially unchanged since December 31, 2017. In August 2018,2018. BNSF issueddebentures of $750 million of 4.15% senior unsecured debentures duewill mature in 2048.2019. Outstanding borrowings of BHE and its subsidiaries were approximately $39.3$40.1 billion at September 30, 2018, a decreaseMarch 31, 2019, an increase of $337$840 million since December 31, 2017.2018. In July 2018,the first quarter of 2019, BHE and its subsidiaries issued $1.0debt aggregating $3.0 billion with maturity dates ranging from 2029 to 2050 and repaid approximately $1.4 billion of 4.45% senior unsecured debt that matures in 2049. BHE subsidiaries also issued debt in July 2018, aggregating $1.05 billion and due in 2049.maturing term debt. The proceeds from these financings were used to repay borrowings, to fund capital expenditures and for other general corporate purposes. Approximately $500 million of BHE subsidiary term debt of $666 million will mature inover the fourth quarter of 2018, and another $1.4 billion will mature in the first quarterremainder of 2019. 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.
Finance
Item 2. Management’s Discussion and financial products assets were approximately $38.3 billion asAnalysis of September 30, 2018, a decreaseFinancial Condition and Results of $3.6 billion since December 31, 2017. Finance assets consist primarily of loans and finance receivables, various types of property held for lease, cash, cash equivalents and U.S. Treasury Bills. Finance and financial products liabilities declined $2.3 billion in the first nine months of 2018 to approximately $14.4 billion at September 30, 2018, primarily attributable to a net decrease in borrowings of a wholly-owned financing subsidiary, Berkshire Hathaway Finance Corporation (“BHFC”). During the first nine months of 2018, BHFC repaid $4.6 billion of maturing senior notes and in August 2018 issued $2.35 billion of 4.2% senior notes due in 2048. In the first quarter of 2019, an additional $2.7 billion of BHFC senior notes will mature. BHFC’s senior note borrowings are used to fund loans originated and acquired by Clayton Homes and a portion of assets held for lease by our UTLX railcar leasing business. Berkshire guarantees the full and timely payment of principal and interest with respect to BHFC’s senior notes.Operations
Berkshire has a
Financial Condition(Continued)
Berkshire’s common stock repurchase program which, aswas amended on July 17, 2018, permitspermitting 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, a Vice-ChairmanVice Chairman of the Board. The program allows share repurchases in the open market or through privately negotiated transactions and does not specify a maximum number of shares to be repurchased. The program is expected to continue indefinitely. We will not repurchase our stock if it reduces the total amount of Berkshire’s consolidated cash, cash equivalents and U.S. Treasury Bills holdings below $20 billion. Financial strength and redundant liquidity will always be of paramount importance at Berkshire. In the thirdfirst quarter of 2018,2019, Berkshire paid $928 million to repurchaserepurchased shares of Class A and B common stock under the program.for an aggregate cost of approximately $1.7 billion.
Contractual Obligations
We are party to contracts associated with ongoing business and financing activities, which will result in cash payments to counterparties in future periods. Certain obligations are included in our Consolidated Balance Sheets, such as notes payable, which require future payments on contractually specified dates and in fixed and determinable amounts. Other obligations pertaining to the acquisition of goods or services in the future such as minimum rentals under operating leases and certain purchase obligationsare not currently reflected in the financial statements, and will be recognized in future periods as the goods are delivered or services are provided. Beginning in 2019, operating lease obligations are included in the consolidated balance sheet as a result of the adoption of a new accounting pronouncement. The timing and amount of the payments under certain contracts, such as insurance and reinsurance contracts, are contingent upon the outcome of future events and claim settlements.events. Actual payments will likely vary, perhaps materially, from the estimated liabilities currently recorded in our Consolidated Balance Sheet.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)
Contractual Obligations(Continued)
OurExcept as otherwise disclosed in this Quarterly Report, our contractual obligations as of DecemberMarch 31, 20172019 were, in the aggregate, not materially different from those disclosed in the “Contractual Obligations” section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Berkshire’s Annual Report on Form10-K for the year ended December 31, 2017. During the first nine months of 2018, our subsidiaries issued term debt of approximately $9.4 billion, which included approximately $5.2 billion in the third quarter. The borrowings in 2018 were used to repay existing debt, as well as for other corporate purposes. Interest and principal payments in connection with these new borrowings in the aggregate are due as follows: 2019 and 2020 — $1.3 billion; 2021 and 2022 — $1.1 billion; and thereafter $16.4 billion.2018.
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 currently recorded in the financial statements will likely be adjusted in the future based on new available information and changes in other facts and circumstances. 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 Form10-K for the year ended December 31, 2017.2018.
Our Consolidated Balance Sheet as of September 30, 2018March 31, 2019 includes estimated liabilities for unpaid losses and loss adjustment expenses from property and casualty insurance and reinsurance contracts of approximately $106$111 billion. Due to the inherent uncertainties in the process of establishing loss reserve amounts, the actual ultimate claim amounts will likely differ from the currently recorded amounts. A very small percentage change in estimates of this magnitude will result in a material effect on periodic earnings. The effects from changes in these estimates are recorded as a component of insurance losses and loss adjustment expenses in the period of the change.
Our Consolidated Balance Sheet as of September 30, 2018March 31, 2019 includes goodwill of acquired businesses of approximately $81 billion. We evaluate goodwill for impairment at least annually and we conducted our most recent annual review during the fourth quarter of 2017.2018. Although we believe that the goodwill reflected in the accompanying Consolidated Balance Sheet is not impaired, goodwill may subsequently become impaired as a result ofdue to changes in facts and circumstances affecting the valuation of the reporting unit. A goodwill impairment charge could have a material effect on periodic earnings.
Our Consolidated Balance Sheets include derivative contract liabilities with respect to our equity index put option contracts. The fair values recorded for these liabilities are based on valuation models that utilize various inputs and assumptions that we believe are used by market participants. We further believe that fair values based on such models are inherently subjective and the values in an actual transaction may differ significantly from the model values. Changes in the assumptions utilized within the valuation models may have a significant effect on recorded fair values and periodic earnings.
Information concerning new accounting pronouncements is included in Note 2 to the accompanying Consolidated Financial Statements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Investors are cautioned that certain statements contained in this document as well as some statements in periodic press releases and some oral statements of Berkshire officials during presentations about Berkshire or its subsidiaries are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). Forward-looking statements include statements thatwhich are predictive in nature, which depend upon or refer to future events or conditions, and maywhich 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, as well as economic and market factors and the industries in which we do business, among other things. These statements are not guarantees of future performance and we have no specific intention to update these statements.
Actual events and results may differ materially from those expressed or forecasted in forward-looking statements due to a number of factors. The importantprincipal 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, 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Reference is made to Berkshire’s most recently issued Annual Report and in particular the “Market Risk Disclosures” included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” As of September 30, 2018,March 31, 2019, there were no material changes in the market risks described in Berkshire’s Annual Report on Form10-K for the year ended December 31, 2017.2018.
Item 4. Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form10-Q, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chairman (Chief Executive Officer) and the Senior Vice President (Chief Financial Officer), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule13a-15. Based upon that evaluation, the Chairman (Chief Executive Officer) and the Senior Vice President (Chief Financial Officer) concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings. During the quarter, there have been no significant changes in the Company’s internal control over financial reporting or in other factors that could significantly affect internal control over financial reporting.
Berkshire and its subsidiaries are parties in a variety of legal actions that routinely arise out of the normal course of business, including legal actions seeking to establish liability directly through insurance contracts or indirectly through reinsurance contracts issued by Berkshire subsidiaries. Plaintiffs occasionally seek punitive or exemplary damages. We do not believe that such normal and routine litigation will have a material effect on our financial condition or results of operations. Berkshire and certain of its subsidiaries are also involved in other kinds of legal actions, some of which assert or may assert claims or seek to impose fines and penalties. We believe that any liability that may arise as a result of other pending legal actions will not have a material effect on our consolidated financial condition or results of operations.
Our significant business risks are described in Item 1A to Form10-K for the year ended December 31, 20172018 to which reference is made herein.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Repurchases of Equity Securities
For several years, Berkshire had a common stock repurchase program, which permitted Berkshire to repurchase its Class A and Class B shares at prices no higher than a 20% premium over the book value of the shares. On July 17, 2018, Berkshire’s Board of Directors authorized an amendment to the program, permitting Berkshire to repurchase shares any time that Warren Buffett, Berkshire’s Chairman of the Board and Chief Executive Officer, and Charles Munger, a Vice-ChairmanVice Chairman of the Board, believe that the repurchase price is below Berkshire’s intrinsic value, conservatively determined. Repurchases may be in the open market or through privately negotiated transactions. Information with respect to Berkshire’s Class A and Class B common stock repurchased during the thirdfirst quarter of 20182019 follows.
Period | Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of publicly announced program | Maximum number or value of shares that yet may be repurchased under the program | Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of publicly announced program | Maximum number or value of shares that yet may be repurchased under the program | ||||||||||||||||||||||
August 7 through August 24: | ||||||||||||||||||||||||||||||
February 26 through February 28: | ||||||||||||||||||||||||||||||
Class A common stock | 225 | $312,806.74 | 225 | * | 293 | $ | 302,622.16 | 293 | * | |||||||||||||||||||||
Class B common stock | 595,412 | $ | 201.73 | 595,412 | * | |||||||||||||||||||||||||
March 1 through March 29: | ||||||||||||||||||||||||||||||
Class A common stock | 965 | $ | 304,175.15 | 965 | * | |||||||||||||||||||||||||
Class B common stock | 4,139,192 | $207.09 | 4,139,192 | * | 5,924,418 | $ | 200.63 | 5,924,418 | * |
* | The program does not specify a maximum number of shares to be repurchased or obligate Berkshire to repurchase any specific dollar amount or number of Class A or Class B shares and there is no expiration date to the repurchase program. Berkshire will not repurchase its common stock if the repurchases reduce the total value of Berkshire’s consolidated cash, cash equivalents and U.S. Treasury Bills holdings to less than $20 billion. |
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
Information regarding the Company’s mine safety violations and other legal matters disclosed in accordance with Section 1503(a) of the Dodd-Frank Reform Act is included in Exhibit 95 to this Form10-Q.
None
a. Exhibits | ||
3(i) | Restated Certificate of Incorporation Incorporated by reference to Exhibit 3(i) to Form10-K filed on March 2, 2015. | |
3(ii) | By-Laws Incorporated by reference to Exhibit 3(ii) to Form8-K filed on May 4, 2016. | |
31.1 | ||
31.2 | ||
32.1 | ||
32.2 | ||
95 | ||
101 | The following financial information from Berkshire Hathaway Inc.’s Quarterly Report on Form10-Q for the quarter ended |
Pursuant to the requirement of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
BERKSHIRE HATHAWAY INC. | ||||||
(Registrant) | ||||||
Date: | /S/ MARC D. HAMBURG | |||||
(Signature) | ||||||
Marc D. Hamburg, | ||||||
Senior Vice President and | ||||||
Principal Financial Officer |
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