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BRK-A > SEC Filings for BRK-A > Form 10-Q on 2-May-2014All Recent SEC Filings

Show all filings for BERKSHIRE HATHAWAY INC

Form 10-Q for BERKSHIRE HATHAWAY INC


2-May-2014

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.



                                                        First Quarter
                                                      2014         2013
           Insurance - underwriting                  $   461      $   901
           Insurance - investment income                 720          799
           Railroad                                      724          798
           Utilities and energy                          452          394
           Manufacturing, service and retailing          933          862
           Finance and financial products                238          191
           Other                                           5        (163)
           Investment and derivative gains/losses      1,172        1,110

           Net earnings attributable to Berkshire    $ 4,705      $ 4,892

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 directly 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 establishing and monitoring Berkshire's corporate governance practices, 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 20 to the Consolidated Financial Statements) should be read in conjunction with this discussion.

Our insurance businesses generated after-tax earnings from underwriting in the first quarter of 2014 of $461 million. Our railroad business generated lower after-tax earnings in the first quarter of 2014, as revenues and operating expenses were negatively impacted by adverse weather conditions and service-related challenges during the quarter. After-tax earnings of our utilities and energy businesses in 2014 included NV Energy, which was acquired in December 2013 and also included higher earnings from MidAmerican Energy Company and natural gas pipeline businesses, which were positively impacted by weather. Earnings from our manufacturing, service and retailing businesses in 2014 increased 8% in the aggregate over 2013.

Investment and derivative gains/losses in the first quarter included after-tax gains from investments of $1,019 million in 2014 and $326 million in 2013. Investment gains in the first quarter of 2014 included an after-tax gain of approximately $900 million related to the exchange of Phillips 66 common stock for 100% of the common stock of a specialty chemical products subsidiary of Phillips 66. In addition, our derivative contracts produced after-tax gains in the first quarter of $153 million in 2014 and $784 million in 2013. We believe that realized investment gains/losses, other-than-temporary impairment charges and derivative gains/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.

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.


Table of Contents

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

Insurance-Underwriting (Continued)

The timing and amount of catastrophe losses can produce significant volatility in our periodic underwriting results, particularly with respect to BHRG and General Re. For the purposes of this discussion, we categorize catastrophe losses as significant if the pre-tax losses incurred from a single event (or series of related events) exceed $100 million on a consolidated basis. In the first quarter of 2014 and 2013, there were no significant catastrophe events.

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 certain non-U.S. Dollar denominated reinsurance liabilities as a result of foreign currency exchange rate fluctuations. Historically, currency exchange rates have been volatile and the resulting impact on our periodic underwriting earnings has been relatively significant. These gains and losses are included in underwriting expenses. BHRG's underwriting results included pre-tax losses of $48 million in the first quarter of 2014 and pre-tax gains of $223 million in the first quarter of 2013 from currency exchange rate changes.

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 $129 billion at December 31, 2013. 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.

                                                          First Quarter
                                                       2014         2013
          Underwriting gain attributable to:
          GEICO                                        $  353      $   266
          General Re                                       80           95
          Berkshire Hathaway Reinsurance Group            183          974
          Berkshire Hathaway Primary Group                 99           54

          Pre-tax underwriting gain                       715        1,389
          Income taxes and noncontrolling interests       254          488

          Net underwriting gain                        $  461      $   901

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.

                                                           First Quarter
                                                   2014                     2013
                                            Amount         %         Amount         %
     Premiums earned                        $ 4,884       100.0      $ 4,399       100.0

     Losses and loss adjustment expenses      3,701        75.8        3,353        76.2
     Underwriting expenses                      830        17.0          780        17.8

     Total losses and expenses                4,531        92.8        4,133        94.0

     Pre-tax underwriting gain              $   353                  $   266

Premiums written in the first quarter of 2014 were $5,339 million, an increase of 10.3% as compared to the first quarter of 2013. Premiums earned in the first quarter of 2014 increased $485 million (11.0%) to $4,884 million. The growth in premiums earned for voluntary auto was 11.0%, reflecting policies-in-force growth of 7.2% during the past twelve months and increased premiums per policy. Voluntary auto new business sales increased about 1.0% in the first quarter of 2014 compared to the first quarter of 2013. Voluntary auto policies-in-force at March 31, 2014 were approximately 357,000 greater than at December 31, 2013. In recent years, the growth in voluntary auto policies-in-force has been the greatest during the first quarter.


Table of Contents

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

Insurance-Underwriting (Continued)

GEICO (Continued)

Losses and loss adjustment expenses incurred in the first quarter of 2014 were $3,701 million, an increase of $348 million (10.4%) over the first quarter of 2013. Our ratio of losses and loss adjustment expenses incurred to premiums earned (the "loss ratio") was 75.8% in the first quarter of 2014 compared to 76.2% in 2013. In the first quarter of 2014, claims frequencies for property damage and collision coverages increased in the seven to ten percent range due to more severe winter weather as compared to the first quarter of 2013. Claims frequencies for bodily injury coverage increased in the two to three percent range while frequencies for personal injury protection (PIP) have increased one to two percent. Physical damage severities have been relatively flat and bodily injury and PIP severities have decreased in the two to three percent range from 2013. Underwriting expenses in the first quarter of 2014 were $830 million, an increase of $50 million (6.4%) over 2013. The increase was primarily attributable to costs incurred to generate the increase in policies-in-force and to maintain service for existing policyholders.

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 in broker markets through 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.

                                                     First Quarter
                               Premiums earned             Pre-tax underwriting gain (loss)
                             2014           2013               2014                   2013
     Property/casualty      $   788        $   758          $         96              $    96
     Life/health                769            711                   (16 )                 (1 )

                            $ 1,557        $ 1,469          $         80              $    95

Property/casualty

Property/casualty premiums earned in the first quarter of 2014 were $788 million, an increase of $30 million (4%) compared to 2013. Adjusting for the differences in foreign currency exchange rates, premiums earned in the first quarter of 2014 increased $10 million (1%). Strong price competition in property and casualty markets persists. Our underwriters continue to exercise discipline by declining business where prices are deemed inadequate. We remain prepared to increase premium volume when appropriate prices are attained relative to the risks assumed.

Our property/casualty business produced first quarter net underwriting gains of $96 million in both 2014 and 2013. Our property business generated net underwriting gains of $125 million in 2014 and $110 million in 2013. We did not experience any losses from significant catastrophe events in the first quarter of either year. Property results also benefitted from reductions of estimated ultimate losses for prior years' occurrences, which resulted in pre-tax underwriting gains of $45 million in 2014 and $46 million in 2013. The favorable development in each period was primarily attributable to lower than expected losses reported by clients. 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 quarter of 2014, our casualty/workers' compensation business incurred net underwriting losses of $29 million as compared to $14 million in 2013. The pre-tax underwriting losses in our casualty/workers' compensation business were net of gains of $54 million in 2014 and $75 million in 2013 from the run-off of prior years' losses, reflecting lower than anticipated reported losses from ceding companies. Casualty losses tend to be long-tail 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.


Table of Contents

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

Insurance-Underwriting (Continued)

General Re (Continued)

Life/health

Premiums earned in the first quarter of 2014 were $769 million, an increase of $58 million (8%) compared to 2013. Adjusting for the effects of foreign currency exchange rate changes, premiums earned increased $53 million (7%) compared to the first quarter of 2013. The increases were primarily related to increased life business in non-U.S. markets. The life/health operations produced first quarter pre-tax underwriting losses of $16 million in 2014 and $1 million in 2013. In 2014, our international life/health business incurred increased losses on disability business in Europe and an increase in large claims in the Australian life business, which contributed to a $13 million decline in its net underwriting results as compared to 2013. The first quarter underwriting losses in both years also reflected periodic discount accretion on U.S. long-term care liabilities.

Berkshire Hathaway Reinsurance Group

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. Other multi-line property/casualty refers to various coverages written on both a quota-share and excess basis. BHRG's underwriting activities also include life reinsurance, structured settlement annuities and annuity reinsurance. Amounts are in millions.

                                                                     First Quarter
                                             Premiums earned              Pre-tax underwriting gain (loss)
                                           2014           2013              2014                     2013
Catastrophe and individual risk           $   175        $   173        $         165            $         178
Retroactive reinsurance                       225            319                  (53 )                    (68 )
Other multi-line property/casualty          1,029          1,322                  126                      551
Life and annuity                              593            982                  (55 )                    313

                                          $ 2,022        $ 2,796        $         183            $         974

Premiums earned in the first quarter of 2014 from catastrophe and individual risk contracts were relatively unchanged from the first quarter of 2013. The level of business written in a given period will vary significantly depending on changes in market conditions and management's assessment of the adequacy of premium rates. We have constrained the volume of business written in recent years. However, we have the capacity and desire to write substantially more business when appropriate pricing can be obtained. The timing and magnitude of losses produces extraordinary volatility in periodic underwriting results of this business.

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. At the inception of a contract, deferred charge assets are recorded as the excess, if any, of the estimated ultimate losses payable over the premiums earned. 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 quarter of 2014 and 2013 primarily represented deferred charge amortization. There were no significant adjustments to estimated ultimate losses related to prior years' contracts during the first quarter of 2014. Gross unpaid losses from retroactive reinsurance contracts were approximately $18.0 billion as of March 31, 2014 and $17.7 billion at December 31, 2013. Unamortized deferred charges related to BHRG's retroactive reinsurance contracts were approximately $4.54 billion at March 31, 2014 and $4.25 billion at December 31, 2013.


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 (Continued)

Other multi-line property and casualty premiums earned in the first quarter of 2014 were $1,029 million, a decline of $293 million (22%) versus 2013. Premiums earned in 2014 with respect to the Swiss Re quota-share contract declined $408 million from premiums earned in the first quarter of 2013, which was partially offset by increased premiums earned from property quota-share contracts. The Swiss Re quota-share contract remains in run-off with respect to subject business incepting prior to its expiration at the end of 2012.

Other multi-line property and casualty underwriting generated a pre-tax underwriting gain of $126 million in the first quarter of 2014 compared to $551 million in the first quarter of 2013. Periodic underwriting results of this business can be significantly impacted by catastrophe losses and foreign currency transaction gains or losses associated with the changes in the valuation of certain reinsurance liabilities of U.S.-based subsidiaries (primarily liabilities arising under retroactive reinsurance contracts), which are denominated in foreign currencies. Underwriting results included foreign currency exchange rate losses of $37 million for the first quarter of 2014 compared to gains of $189 million in the first quarter of 2013. In the first quarter of 2013, underwriting results also included a net gain of $235 million attributable to the Swiss Re quota-share contract, which largely related to decreased estimated ultimate liabilities for prior years' losses. This contract had an insignificant impact on underwriting results in 2014.

Life and annuity premiums earned in the first quarter of 2014 were $593 million, a decrease of $389 million (40%) from 2013. Premiums earned in the first quarter of 2013 included $1.7 billion from a new reinsurance contract, which provides guaranteed minimum death benefit coverages on a specified portfolio of variable annuity reinsurance contracts that have been in run-off for a number of years. Premiums from this contract were partially offset by the reversal of premiums previously earned (approximately $1.3 billion) under the Swiss Re Life & Health America Inc. ("SRLHA") yearly renewable term life insurance contract as a result of contract amendments. The amendments essentially commuted coverage with respect to a number of the underlying contracts in exchange for payments to SRLHA of $675 million.

Life and annuity business produced a pre-tax underwriting loss of $55 million in the first quarter of 2014 compared to a gain of $313 million in the first quarter of 2013. In 2013, underwriting results included a one-time pre-tax gain of $255 million related to aforementioned amendments to the SRLHA contract. Underwriting results in 2014 also included a pre-tax loss of approximately $28 million related to the variable annuity guarantee business compared to an underwriting gain of $19 million in the first quarter of 2013.

Underwriting results in each period include the recurring impact of the accretion of discounted annuity liabilities, adjustments for mortality experience and changes in foreign currency exchange rates applicable to certain of the contracts. Liabilities related to certain of these contracts are payable in foreign currencies and the changes in currency exchange rates produced a pre-tax loss of $11 million in the first quarter of 2014 versus a pre-tax gain of $34 million in the first quarter of 2013. At March 31, 2014 and December 31, 2013, our aggregate life and non-life annuity liabilities were approximately $6.0 billion and $5.7 billion, respectively.

Berkshire Hathaway Primary Group

The Berkshire Hathaway Primary Group ("BH Primary") consists of a wide variety of independently managed insurance businesses. These businesses include: Medical Protective Company and Princeton Insurance Company, providers of healthcare malpractice insurance coverages; National Indemnity Company's primary group, writers of commercial motor vehicle and general liability coverages; U.S. Investment Corporation, whose subsidiaries underwrite specialty insurance coverages; a group of companies referred to internally as "Berkshire Hathaway Homestate Companies," providers of commercial multi-line insurance, including workers' compensation; Central States Indemnity Company, a provider of credit and Medicare Supplement insurance; Applied Underwriters, a provider of integrated workers' compensation solutions; BoatU.S., a writer of insurance for owners of boats and small watercraft; and GUARD Insurance Group ("GUARD"), a provider of workers' compensation and complimentary commercial property and casualty insurance coverage to small and mid-sized businesses. In the second quarter of 2013, we formed Berkshire Hathaway Specialty Insurance which concentrates on providing large scale capacity solutions for commercial property and casualty risks.

Premiums earned in the first quarter aggregated $953 million in 2014 and $713 million in 2013. Premium increases were generated by each of our primary insurance businesses. For the first quarter, the BH Primary insurers produced underwriting gains of $99 million in 2014 and $54 million in 2013. The gains reflected a generally favorable claim environment. First quarter loss ratios for the group as whole were 62% in 2014 and 64% in 2013.


Table of Contents

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

Insurance-Investment Income

A summary of net investment income of our insurance operations follows. Amounts
are in millions.



                                                                            First Quarter
                                                                         2014           2013
Investment income before income taxes and noncontrolling interests       $  946         $ 996
Income taxes and noncontrolling interests                                   226           197

Net investment income                                                    $  720         $ 799

Investment income consists of interest and dividends earned on cash and investments of our insurance businesses. Pre-tax investment income in the first quarter of 2014 was $946 million, a decline of $50 million (5%) from 2013. The decline was attributable to lower interest earned from fixed maturity securities and cash and cash equivalents, partially offset by higher dividends earned from equity securities. The reduction in interest income reflected the impact of the maturities and dispositions during 2013 and the first quarter of 2014 of a number of fixed maturity securities with higher yields, including $4.4 billion par amount of Wrigley 11.45% subordinated notes in 2013. We continue to hold significant cash and cash equivalents earning very low yields. However, we believe that maintaining ample liquidity is paramount and we insist on safety over yield with respect to cash and cash equivalents. The increase in dividends earned reflected higher dividend rates for certain of our larger equity holdings as well as increased overall investments in equity securities.

Invested assets derive from shareholder capital and reinvested earnings as well as net liabilities under insurance contracts or "float." The major components of float are unpaid losses, life, annuity and health benefit liabilities, unearned premiums and other liabilities to policyholders less premiums and reinsurance . . .

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