10-QPeriod: Q1 FY2017

BERKSHIRE HATHAWAY INC Quarterly Report for Q1 Ended Mar 31, 2017

Filed May 5, 2017For Securities:BRK-BBRK-A

Summary

Berkshire Hathaway's first quarter 2017 report shows a substantial increase in consolidated shareholders' equity, driven by net earnings of $4.1 billion and unrealized investment gains. The company maintained a strong liquidity position, with cash, cash equivalents, and U.S. Treasury Bills totaling $79.4 billion. While overall revenues grew, driven by diverse segments including insurance, railroad, utilities, energy, and manufacturing, the net earnings were impacted by a notable $1.1 billion pre-tax investment gain in the prior year's quarter, making year-over-year comparisons challenging. Underwriting results in the insurance segment experienced a pre-tax loss of $379 million, largely due to increased loss estimates for prior years' events and catastrophe losses, particularly within the reinsurance businesses. Derivative contracts also contributed significantly to earnings volatility, with gains in the current quarter following losses in the prior year. Key financial movements include a significant increase in deferred charges reinsurance assumed, largely related to the AIG retroactive reinsurance agreement, and a notable rise in insurance liabilities. Capital expenditures remain substantial, particularly within the railroad, utilities, and energy segments, which are expected to be funded through operations and debt. The company continues its strategy of decentralized operations and significant capital allocation, with no share repurchases conducted in the quarter.

Financial Highlights

28 data points
Beta

Revenue

$64.37B

Net Income

$4.06B

6.3% Net Margin

Total Assets

$654.45B

Cash & Equivalents

$25.96B

Free Cash Flow

$15.94B

Financial Statements
Beta
Revenue$64.37B
Operating Expenses$59.74B
Net Income$4.06B

Key Highlights

  • 1Consolidated shareholders' equity increased by $9.8 billion to $292.8 billion, driven by net earnings of $4.1 billion and $5.3 billion in after-tax net unrealized investment appreciation.
  • 2Total cash, cash equivalents, and U.S. Treasury Bills stood at $79.4 billion, reflecting strong liquidity.
  • 3Insurance underwriting operations incurred a pre-tax loss of $379 million, impacted by increased loss estimates for prior accident years and catastrophe events.
  • 4Derivative contracts generated a pre-tax gain of $460 million in Q1 2017, a reversal from the $810 million pre-tax loss in Q1 2016, contributing to earnings volatility.
  • 5Railroad, Utilities and Energy segments showed improved earnings, with BNSF revenues up 8.8% and BHE earnings before corporate interest and income taxes up 5.1%.
  • 6Manufacturing, Service, and Retailing segments saw revenue growth, though pre-tax earnings were impacted by disposition losses and increased raw material costs.
  • 7Significant retroactive reinsurance agreement with AIG effective February 2017 added $10.2 billion in earned premiums and losses, increasing deferred charges and liabilities.

Frequently Asked Questions

The net earnings attributable to Berkshire Hathaway shareholders decreased from $5.589 billion in Q1 2016 to $4.060 billion in Q1 2017. This decrease was largely due to a significant investment gain of $1.85 billion realized in Q1 2016, primarily from the exchange of P&G stock for Duracell, which did not have a comparable gain in Q1 2017. Additionally, derivative contracts resulted in a $460 million gain in Q1 2017, a significant improvement from the $810 million loss in Q1 2016, but the prior year's large investment gain had a greater positive impact.

The insurance underwriting segment experienced a pre-tax loss of $379 million in Q1 2017, a decrease from the pre-tax gain of $348 million in Q1 2016. This decline was primarily driven by increased loss estimates for prior accident years' events and higher catastrophe losses, particularly within the Berkshire Hathaway Reinsurance Group (BHRG), which reported a pre-tax loss of $600 million.

Effective February 2, 2017, National Indemnity Company (a Berkshire subsidiary) entered into a significant retroactive reinsurance agreement with AIG. Under this agreement, Berkshire assumed 80% of losses and loss adjustment expenses in excess of $25 billion for certain pre-2016 commercial insurance loss events, for a cash consideration of $10.2 billion. This transaction added $10.2 billion in earned premiums and incurred losses in Q1 2017 and significantly increased Berkshire's deferred charges and unpaid losses and loss adjustment expenses.

Berkshire Hathaway holds substantial investments in equity securities, with a fair value of $135.0 billion as of March 31, 2017. The company's strategy involves holding these investments for the long term, with unrealized gains and losses historically reported in Other Comprehensive Income. However, starting in 2018, a new accounting standard will require these unrealized gains and losses on equity securities to be recognized in net earnings, which the company anticipates will significantly increase the volatility of its reported earnings due to the size and inherent price fluctuations of its equity portfolio.