10-QPeriod: Q3 FY2018

BERKSHIRE HATHAWAY INC Quarterly Report for Q3 Ended Sep 30, 2018

Filed November 5, 2018For Securities:BRK-BBRK-A

Summary

Berkshire Hathaway Inc. reported strong financial performance for the nine months ended September 30, 2018, with net earnings attributable to shareholders reaching $29.4 billion, a significant increase from $12.4 billion in the same period of 2017. This growth was substantially influenced by a change in accounting policy for equity securities, which now includes unrealized gains and losses in earnings, contributing approximately $10.1 billion in after-tax gains in the first nine months of 2018. Excluding these accounting-driven investment gains, the underlying operating businesses also demonstrated resilience and growth across various segments. The insurance underwriting segment swung from a loss of $1.7 billion in the first nine months of 2017 to an underwriting gain of $1.8 billion in the same period of 2018, driven by improved results at GEICO and the Berkshire Hathaway Reinsurance Group, aided by favorable prior-year loss development and lower catastrophe losses compared to a severe 2017. The railroad, utilities and energy, and manufacturing, service, and retailing segments all showed increased pre-tax earnings, benefiting from higher revenues, operational efficiencies, and the lower U.S. statutory income tax rate following the Tax Cuts and Jobs Act of 2017.

Financial Highlights

29 data points
Beta

Revenue

$63.45B

Net Income

$18.54B

29.2% Net Margin

Total Assets

$736.46B

Cash & Equivalents

$42.10B

Free Cash Flow

$6.75B

Financial Statements
Beta
Revenue$63.45B
Operating Expenses$55.33B
Net Income$18.54B

Key Highlights

  • 1Net earnings attributable to Berkshire Hathaway shareholders were $29.4 billion for the first nine months of 2018, up from $12.4 billion in the prior year, heavily influenced by new accounting for unrealized equity investment gains.
  • 2Insurance underwriting swung from a loss of $1.7 billion in the first nine months of 2017 to a gain of $1.8 billion in the same period of 2018, reflecting improved performance across key insurance operations and a reduction in catastrophe losses compared to 2017.
  • 3Operating revenues across all segments increased to $184.1 billion for the first nine months of 2018, up from $181.1 billion in 2017, demonstrating broad-based business activity.
  • 4The effective income tax rate for Berkshire Hathaway significantly decreased due to the Tax Cuts and Jobs Act of 2017, contributing to improved net earnings across most business segments.
  • 5Berkshire Hathaway's "float" (net liabilities of insurance operations) remained substantial at approximately $118 billion, with the insurance operations generating positive pre-tax underwriting earnings, resulting in a negative cost of float.
  • 6The company repurchased $928 million of its Class A and Class B common stock during the third quarter of 2018, under a revised share repurchase program focused on buying back shares when deemed below intrinsic value.
  • 7Consolidated shareholders' equity grew to $375.6 billion as of September 30, 2018, reflecting strong net earnings and continued capital accumulation.

Frequently Asked Questions

Effective January 1, 2018, Berkshire Hathaway adopted ASU 2016-01, which requires unrealized gains and losses on equity securities to be included in net earnings each period. This change significantly increased the reported net earnings for the nine months ended September 30, 2018, by approximately $10.1 billion after tax, and is expected to cause greater volatility in future reported earnings.

The insurance underwriting segment showed a significant turnaround, moving from a pre-tax loss of $2.6 billion in the first nine months of 2017 to a pre-tax gain of $2.3 billion in the same period of 2018. This improvement was driven by better results at GEICO and Berkshire Hathaway Reinsurance Group, reduced losses from major catastrophes compared to 2017, and favorable development in prior-year loss reserves. GEICO's premiums written increased, and its loss ratio improved.

Berkshire Hathaway's insurance operations generate "float," which is the net liabilities from insurance and reinsurance contracts that are available for investment. As of September 30, 2018, this float approximated $118 billion. Importantly, in the first nine months of 2018, the insurance operations generated positive pre-tax underwriting earnings, resulting in a negative cost of float, meaning the company earned money on its underwriting activities while holding this capital.

The reduction in the U.S. federal corporate income tax rate from 35% to 21% due to the TCJA had a favorable impact on Berkshire Hathaway's financial results. This led to a lower effective income tax rate across most business segments, contributing to increased net earnings and improved profitability, particularly for domestic operations like BNSF and Berkshire Hathaway Energy.