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BRK-A > SEC Filings for BRK-A > Form 10-Q on 1-Nov-2013All Recent SEC Filings

Show all filings for BERKSHIRE HATHAWAY INC

Form 10-Q for BERKSHIRE HATHAWAY INC


1-Nov-2013

Quarterly Report


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

Results of Operations

Net earnings attributable to Berkshire are disaggregated in the table that
follows. Amounts are after deducting income taxes and exclude earnings
attributable to noncontrolling interests. Amounts are in millions.



                                              Third Quarter              First Nine Months
                                            2013          2012          2013          2012
 Insurance - underwriting                  $   170       $   392       $  1,601      $  1,065
 Insurance - investment income                 861           733          2,804         2,592
 Railroad                                      989           937          2,671         2,440
 Utilities and energy                          472           438          1,145         1,029
 Manufacturing, service and retailing        1,162           991          3,180         2,870
 Finance and financial products                160           108            404           332
 Other                                        (152 )        (200 )         (442 )        (544 )
 Investment and derivative gains/losses      1,391           521          3,123           489

 Net earnings attributable to Berkshire    $ 5,053       $ 3,920       $ 14,486      $ 10,273

Through our subsidiaries, we engage in a number of diverse business activities. Our operating businesses are managed on an unusually decentralized basis. There are essentially no centralized or integrated business functions (such as sales, marketing, purchasing, legal or human resources) and there is minimal involvement by our corporate headquarters in the day-to-day business activities of the operating businesses. Our senior corporate management team participates in and is ultimately responsible for significant capital allocation decisions, investment activities and the selection of the Chief Executive to head each of the operating businesses. It also is responsible for coordinating Berkshire's corporate governance efforts, including, but not limited to, communicating the appropriate "tone at the top" messages to its employees and associates, monitoring governance efforts, including those at the operating businesses, and participating in the resolution of governance-related issues as needed. The business segment data (Note 19 to the Consolidated Financial Statements) should be read in conjunction with this discussion.

Our insurance businesses generated significant after-tax earnings from underwriting in the first nine months of 2013 and 2012. In the first nine months of 2013, we incurred after-tax losses of approximately $275 million from significant catastrophe events. In the first nine months of 2012, there were no significant catastrophe events. Our railroad and utilities and energy businesses continued to generate significant earnings in 2013. Earnings from our manufacturing, service and retailing businesses in 2013 were generally higher than in 2012. As indicated in the table above, earnings from these businesses increased about 17.3% during the third quarter and 10.8% during the first nine months of 2013, which was partially attributable to bolt-on business acquisitions completed in 2012 and 2013 and reductions in earnings attributable to noncontrolling interests.

Investment and derivative gains/losses in the third quarter and first nine months of 2013 included after-tax gains from derivative contracts of $277 million and $1.36 billion, respectively, which were primarily attributable to changes in fair value estimates of our equity index put option derivative contracts. In the third quarter and first nine months of 2012, after-tax losses from derivative contracts were $76 million and $119 million, respectively. After-tax investment gains (including other-than-temporary impairment losses) for the third quarter and first nine months of 2013 were approximately $1.11 billion and $1.76 billion, respectively. In 2013, after-tax investment gains of approximately $875 million in the third quarter and $1.35 billion in the first nine months were associated with our investments in GS Warrants, GE Warrants and Wrigley subordinated notes. In the third quarter of 2012, we recognized after-tax investment gains of approximately $600 million from sales of securities and repayments of certain loan portfolios. We believe that realized investment gains/losses and other-than-temporary impairment losses are often meaningless in terms of understanding our reported results or evaluating our economic performance. These gains and losses and changes in the equity and credit markets from period to period have caused and will likely continue to cause significant volatility in our periodic earnings.

Insurance-Underwriting

We engage in both primary insurance and reinsurance of property/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:
(1) GEICO, (2) General Re, (3) Berkshire Hathaway Reinsurance Group ("BHRG") and
(4) Berkshire Hathaway Primary Group.


Table of Contents

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Insurance-Underwriting (Continued)

Our management views insurance businesses as possessing two distinct operations
- underwriting and investing. Underwriting decisions are the responsibility of the unit managers; investing decisions, with limited exceptions, are the responsibility of Berkshire's Chairman and CEO, Warren E. Buffett. Accordingly, we evaluate the performance of underwriting operations without any allocation of investment income. Underwriting results represent insurance premiums earned less insurance losses, benefits and underwriting expenses incurred.

The timing and amount of catastrophe losses can also produce significant volatility in our periodic underwriting results, particularly with respect to BHRG and General Re. In the first nine months of 2013, we incurred pre-tax losses of approximately $425 million related to floods and a hailstorm in Europe. In the first nine months of 2012, there were no significant catastrophe events. For the purposes of this discussion, we consider catastrophe losses significant if the pre-tax losses incurred from a single event (or series of related events) exceed $75 million on a consolidated basis. Our periodic underwriting results may be affected significantly by changes in estimates for unpaid losses and loss adjustment expenses, including amounts established for occurrences in prior years. Periodic underwriting results may also include significant foreign currency transaction gains and losses arising from the changes in the valuations of non-U.S. Dollar denominated reinsurance liabilities of certain of our U.S. based insurance subsidiaries as a result of foreign currency exchange rate fluctuations. These gains and losses are included in underwriting expenses. In addition, BHRG's results for the first nine months of 2013 included a one-time pre-tax gain of $255 million arising from amendments to a life reinsurance contract. In 2012, GEICO's underwriting results reflected unusually high underwriting expenses due to a change in U.S. GAAP.

A key marketing strategy followed by all of our insurance businesses is the maintenance of extraordinary capital strength. Statutory surplus of our insurance businesses was approximately $106 billion at December 31, 2012. This superior capital strength creates opportunities, especially with respect to reinsurance activities, to negotiate and enter into insurance and reinsurance contracts specially designed to meet the unique needs of insurance and reinsurance buyers.

A summary follows of underwriting results from our insurance businesses. Amounts are in millions.

                                                Third Quarter            First Nine Months
                                              2013         2012          2013          2012
 Underwriting gain (loss) attributable to:
 GEICO                                        $  307       $  435       $    909      $   714
 General Re                                       63          154            182          373
 Berkshire Hathaway Reinsurance Group           (206 )       (102 )        1,159          320
 Berkshire Hathaway Primary Group                 99          121            228          243

 Pre-tax underwriting gain                       263          608          2,478        1,650
 Income taxes and noncontrolling interests        93          216            877          585

 Net underwriting gain                        $  170       $  392       $  1,601      $ 1,065

GEICO

Through GEICO, we primarily write private passenger automobile insurance, offering coverages to insureds in all 50 states and the District of Columbia. GEICO's policies are marketed mainly by direct response methods in which customers apply for coverage directly to the company via the Internet or over the telephone. This is a significant element in our strategy to be a low-cost auto insurer. In addition, we strive to provide excellent service to customers, with the goal of establishing long-term customer relationships. GEICO's underwriting results are summarized below. Dollars are in millions.

                                                      Third Quarter                                    First Nine Months
                                              2013                     2012                     2013                      2012
                                       Amount         %         Amount         %         Amount          %         Amount          %
Premiums earned                       $  4,730       100.0     $  4,240       100.0     $  13,726       100.0     $  12,388       100.0

Losses and loss adjustment expenses      3,622        76.6        3,011        71.0        10,490        76.4         9,089        73.4
Underwriting expenses                      801        16.9          794        18.7         2,327        17.0         2,585        20.8

Total losses and expenses                4,423        93.5        3,805        89.7        12,817        93.4        11,674        94.2

Pre-tax underwriting gain              $   307                  $   435                  $    909                  $    714


Table of Contents

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Insurance-Underwriting (Continued)

GEICO (Continued)

Premiums written in the third quarter and first nine months of 2013 were $5.0 billion and $14.4 billion, respectively, representing increases of 11.3% and 11.4%, respectively, over the premiums written in the corresponding 2012 periods. Premiums earned in the third quarter and first nine months of 2013 increased $490 million (11.6%) and $1,338 million (10.8%), respectively, compared to premiums earned in the corresponding 2012 periods. The growth in premiums earned reflected an increase in voluntary policies-in-force of 8.2% over the past year and, to a lesser degree, higher average premiums per policy. The increase in policies-in-force reflected a 14.4% increase in voluntary auto new business sales. Voluntary auto policies-in-force at September 30, 2013 were approximately 769,000 greater than at December 31, 2012.

Losses and loss adjustment expenses incurred in the third quarter and first nine months of 2013 increased $611 million (20.3%) and $1,401 million (15.4%), respectively, from the same periods of 2012. The loss ratio (the ratio of losses and loss adjustment expenses incurred to premiums earned) was 76.4% in the first nine months of 2013 compared to 73.4% in 2012. In the first nine months of 2013, claims frequencies for property damage and collision coverages generally increased in the two to three percent range compared to the first nine months of 2012. Physical damage claim severities increased in the three to five percent range in 2013. In addition, average bodily injury claims frequencies increased in the one to two percent range. Bodily injury claims severities increased in the two to three percent range, although severities for personal injury protection coverage declined, primarily in Florida.

Underwriting expenses incurred in the third quarter of 2013 were relatively unchanged from the third quarter of 2012, and declined $258 million (10.0%) in the first nine months of 2013 compared with the first nine months of 2012. Underwriting expenses in 2012 were impacted by a change in U.S. GAAP concerning deferred policy acquisition costs ("DPAC"). DPAC represents the underwriting costs that are eligible to be capitalized and expensed as premiums are earned over the policy period. The new accounting standard, which was adopted on a prospective basis as of January 1, 2012, accelerates the timing of when certain underwriting costs are recognized in earnings. We estimate that GEICO's underwriting expenses for the first nine months of 2012 would have been about $410 million less had we computed DPAC under the prior accounting standard. The effect of transitioning to this new accounting standard was substantially completed as of September 30, 2012. Excluding the effects of the accounting change in 2012, the ratio of underwriting expenses to premiums earned in the first nine months of 2013 declined by approximately 0.6 percentage points from the first nine months of 2012.

General Re

Through General Re, we conduct a reinsurance business offering property and casualty and life and health coverages to clients worldwide. We write property and casualty reinsurance in North America on a direct basis through General Reinsurance Corporation and internationally through Germany-based General Reinsurance AG and other wholly-owned affiliates. Property and casualty reinsurance is also written through brokers with respect to Faraday in London. Life and health reinsurance is written in North America through General Re Life Corporation and internationally through General Reinsurance AG. General Re strives to generate underwriting profits in essentially all of its product lines. Our management does not evaluate underwriting performance based upon market share and our underwriters are instructed to reject inadequately priced risks. General Re's underwriting results are summarized in the following table. Amounts are in millions.

                                                     Premiums earned                               Pre-tax underwriting gain (loss)
                                         Third Quarter           First Nine Months            Third Quarter             First Nine Months
                                       2013         2012         2013          2012        2013           2012          2013           2012
Property/casualty                     $   743      $   727      $  2,236      $ 2,164      $    4        $   118       $     66        $ 354
Life/health                               711          718         2,186        2,178          59             36            116           19

                                      $ 1,454      $ 1,445      $  4,422      $ 4,342      $   63        $   154       $    182        $ 373

Property/casualty

Property/casualty premiums earned in the third quarter and first nine months of 2013 increased $16 million (2.2%) and $72 million (3.3%), respectively, versus the corresponding 2012 periods. Excluding the effects of foreign currency exchange rate changes, premiums earned in the first nine months of 2013 increased $66 million (3.1%), which was primarily due to increases in international treaty business. Price competition in most property and casualty lines persists. Our underwriters continue to exercise discipline by declining offers to write business where prices are deemed inadequate. However, we remain prepared to increase premium volumes should market conditions improve.


Table of Contents

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Insurance-Underwriting (Continued)

General Re (Continued)

Property/casualty (Continued)

Property/casualty operations in the third quarter and first nine months of 2013 produced net underwriting gains of $4 million and $66 million, respectively, compared to net underwriting gains of $118 million and $354 million, respectively, in the corresponding 2012 periods. For the first nine months of 2013 and 2012, property business generated net underwriting gains of $23 million and $343 million, respectively. In 2013, property underwriting results included losses of approximately $400 million from a hail storm in Europe in the third quarter and floods in Europe in the second quarter. There were no significant catastrophe events in the first nine months of 2012. The timing and magnitude of catastrophe and large individual losses has produced and is expected to continue to produce significant volatility in periodic underwriting results. In the first nine months, property underwriting results also included gains from reductions in prior years' loss reserves of $247 million in 2013 and $224 million in 2012 as a result of lower than expected losses reported from ceding companies.

Our casualty/workers' compensation business produced net underwriting gains of $43 million in the first nine months of 2013 and $11 million in the corresponding 2012 period. Underwriting results in each year included gains from the reductions of estimated unpaid losses for prior years' events and underwriting losses for current year business. The gains associated with prior years' events were attributable to lower than anticipated claim reports. However, casualty/workers' compensation business tends to have long claim-tails and it should not be assumed that favorable loss experience in a given period means that the loss reserve estimates currently established will continue to develop favorably.

Life/health

Premiums earned in the third quarter and first nine months of 2013 were $711 million and $2,186 million, respectively, which were relatively unchanged from premiums earned in the comparable 2012 periods. Adjusting for the effects of foreign currency exchange rate changes, premiums earned in the first nine months of 2013 increased $34 million (1.6%) versus 2012, which was primarily attributable to increased non-U.S. life business.

Life/health operations produced net underwriting gains of $59 million in the third quarter and $116 million during the first nine months of 2013. The underwriting gains in 2013 were driven by lower than expected mortality in both the U.S. and international life businesses, offset in part by discount accretion in the long-term care business. The underwriting gain in 2012 reflected favorable claims experience across most regions in Europe and reductions in liability estimates related to the 2011 earthquakes in New Zealand and Japan. However, underwriting results in 2012 were negatively impacted by greater than expected claims frequency and duration in the individual and group disability business in Australia and to a lesser extent, by losses in the U.S. health business.

Berkshire Hathaway Reinsurance Group ("BHRG")

Through BHRG, we underwrite excess-of-loss reinsurance and quota-share coverages on property and casualty risks for insurers and reinsurers worldwide. BHRG's business includes catastrophe excess-of-loss reinsurance and excess primary insurance and facultative reinsurance for large or otherwise unusual property risks referred to as individual risk. BHRG also writes retroactive reinsurance, which provides indemnification of losses and loss adjustment expenses with respect to past loss events. Multi-line property/casualty refers to various coverages written on both a quota-share and excess basis and includes a 20% quota-share contract with Swiss Reinsurance Company Ltd. ("Swiss Re") covering substantially all of Swiss Re's property/casualty risks that incepted between January 1, 2008 and December 31, 2012. The Swiss Re quota-share contract was not renewed in 2013 and is now in run-off. BHRG's underwriting activities also include life reinsurance and annuity businesses. Amounts are in millions.

                                                  Premiums earned                               Pre-tax underwriting gain/loss
                                      Third Quarter           First Nine Months           Third Quarter            First Nine Months
                                    2013         2012         2013          2012        2013         2012          2013          2012
Catastrophe and individual risk    $   195      $   215      $    568      $   600      $   80       $   86       $    372       $  342
Retroactive reinsurance                  1          278           320          649         (74 )        (48 )         (226 )       (160 )
Multi-line property/casualty           939        1,341         3,367        3,734        (170 )        (85 )          666          311
Life and annuity                     1,084          744         2,663        2,000         (42 )        (55 )          347         (173 )

                                   $ 2,219      $ 2,578      $  6,918      $ 6,983      $ (206 )     $ (102 )     $  1,159       $  320


Table of Contents

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Insurance-Underwriting (Continued)

Berkshire Hathaway Reinsurance Group ("BHRG") (Continued)

Premiums earned in the first nine months of 2013 from catastrophe and individual risk contracts declined 5% compared to the first nine months of 2012. The level of business written in a given period will vary significantly due to changes in market conditions and management's assessment of the adequacy of premium rates. Catastrophe and individual risk contracts may provide exceptionally large limits of indemnification. The timing and magnitude of losses produces extraordinary volatility in periodic underwriting results of this business. Underwriting results for the first nine months of 2013 included an estimated loss of $26 million from floods in Europe. In the first nine months of 2012, there were no significant losses from catastrophe events. The first nine months' underwriting results also included a gain of $16 million in 2013 and a loss of $45 million in 2012 from changes in estimates of prior years' catastrophe loss reserves.

Retroactive reinsurance policies provide indemnification of unpaid losses and loss adjustment expenses with respect to past loss events, and related claims are generally expected to be paid over long periods of time. Premiums and limits of indemnification are often very large in amount. Substantially all of the premiums earned in the first nine months of 2013 were attributed to a single contract written in the first quarter covering workers' compensation exposures that are expected to have a very long duration.

Underwriting results attributable to retroactive reinsurance include the recurring periodic amortization of deferred charges that are established with respect to these contracts. At the inception of a contract, deferred charges represent the difference between the premium received and the estimated ultimate losses payable. Deferred charges are subsequently amortized over the estimated claims payment period using the interest method, which reflects estimates of the timing and amount of loss payments. The original estimates of the timing and amount of loss payments are periodically analyzed against actual experience and revised based on an actuarial evaluation of the expected remaining losses. Amortization charges and deferred charge adjustments resulting from changes to the estimated timing and amount of future loss payments are included as a component of losses and loss adjustment expenses.

The underwriting losses from retroactive policies for the first nine months of 2013 and 2012 primarily represented the amortization of deferred charges. In the first nine months of 2013 and 2012, the amortization charges were partially offset by reductions in unpaid loss estimates related to one large contract. At September 30, 2013 and December 31, 2012, unamortized deferred charges for retroactive contracts were approximately $4.1 billion and $3.9 billion, respectively. Gross unpaid losses and loss adjustment expenses of retroactive reinsurance contracts were approximately $17.8 billion at September 30, 2013 compared to approximately $18.0 billion as of December 31, 2012.

In 2013, premiums earned from multi-line property/casualty business declined $402 million (30%) in the third quarter and $367 million (10%) for the first nine months compared to premiums earned in the comparable 2012 periods. As previously noted, the Swiss Re 20% quota-share contract expired on December 31, 2012. As a result, premiums earned in 2013 from that contract declined $560 million (66%) in the third quarter and $1,102 million (46%) for the first nine months compared with 2012. Premiums earned in the third quarter and first nine months of 2013 from multi-line business, other than from the Swiss Re quota-share contract, increased $158 million (32%) and $735 million (55%), respectively, over 2012, which was primarily attributable to increased property quota-share business.

In the third quarter, multi-line property/casualty generated pre-tax underwriting losses of $170 million in 2013 and $85 million in 2012. For the first nine months, this business generated underwriting gains of $666 million in 2013 and $311 million in 2012. Multi-line property/casualty underwriting results regularly include foreign currency transaction gains or losses associated with the changes in the valuation of certain reinsurance liabilities of U.S.-based subsidiaries (including liabilities arising under retroactive reinsurance contracts), which are denominated in foreign currencies.

In 2013, multi-line property/casualty underwriting results included foreign currency transaction losses of $186 million in the third quarter and foreign currency transaction gains of $31 million for the first nine months. In 2012, multi-line property and casualty underwriting results included foreign currency transaction losses of $118 million in the third quarter and $81 million in the first nine months. Multi-line property/casualty periodic underwriting results can be significantly impacted by the timing and magnitude of catastrophe losses. There were no significant catastrophe loss events in the first nine months of 2013 or 2012. For the first nine months of 2013, the Swiss Re quota-share contract contributed a net underwriting gain of $336 million, an increase of $91 million over 2012. The underwriting results attributable to the Swiss Re quota-share contract included gains of $219 million and $84 million in the first nine months of 2013 and 2012, respectively, from reductions in estimated liabilities for prior years' losses.

In 2013, life and annuity premiums earned in the third quarter and first nine months of 2013 increased $340 million (46%) and $663 million (33%), respectively over premiums earned in the comparable 2012 periods. Premiums earned in the third quarter of 2013 included $470 million from one annuity reinsurance contract, which was partially offset by a decrease in life reinsurance premiums . . .

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