10-Q 1 d425185d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

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 number 001-14905

 

 

BERKSHIRE HATHAWAY INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   47-0813844

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

3555 Farnam Street, Omaha, Nebraska 68131

(Address of principal executive office)

(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 and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨      Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

Number of shares of common stock outstanding as of October 25, 2012:

 

Class A —

     919,298   

Class B —

     1,099,792,631   

 

 

 


Table of Contents

BERKSHIRE HATHAWAY INC.

 

     Page No.  

Part I – Financial Information

  

Item 1.

 

Financial Statements

  
 

Consolidated Balance Sheets—
September 30, 2012 and December 31, 2011

     2   
 

Consolidated Statements of Earnings—
Third Quarter and First Nine Months 2012 and 2011

     3   
 

Consolidated Statements of Comprehensive Income—
Third Quarter and First Nine Months 2012 and 2011

     4   
 

Consolidated Statements of Changes in Shareholders’ Equity—
First Nine Months 2012 and 2011

     4   
 

Consolidated Statements of Cash Flows—
First Nine Months 2012 and 2011

     5   
 

Notes to Consolidated Financial Statements

     6-20   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     21-36   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     37   

Item 4.

 

Controls and Procedures

     37   

Part II – Other Information

  

Item 1.

 

Legal Proceedings

     37   

Item 1A.

 

Risk Factors

     37   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Repurchases of Equity Securities

     37   

Item 3.

 

Defaults Upon Senior Securities

     37   

Item 4.

 

Mine Safety Disclosures

     37   

Item 5.

 

Other Information

     38   

Item 6.

 

Exhibits

     38   

Signature

     38   

 

1


Table of Contents

Part I Financial Information

Item 1. Financial Statements

BERKSHIRE HATHAWAY INC.

and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(dollars in millions)

 

     September 30,
2012
    December 31,
2011
 
     (Unaudited)        

ASSETS

    

Insurance and Other:

    

Cash and cash equivalents

   $ 41,820      $ 33,513   

Investments:

    

Fixed maturity securities

     31,021        31,222   

Equity securities

     87,088        76,063   

Other

     14,980        13,111   

Receivables

     21,327        19,012   

Inventories

     9,476        8,975   

Property, plant and equipment

     18,924        18,177   

Goodwill

     33,015        32,125   

Other

     17,582        18,121   
  

 

 

   

 

 

 
     275,233        250,319   
  

 

 

   

 

 

 

Railroad, Utilities and Energy:

    

Cash and cash equivalents

     4,119        2,246   

Property, plant and equipment

     85,923        82,214   

Goodwill

     20,092        20,056   

Other

     13,076        12,861   
  

 

 

   

 

 

 
     123,210        117,377   
  

 

 

   

 

 

 

Finance and Financial Products:

    

Cash and cash equivalents

     1,837        1,540   

Investments in fixed maturity securities

     868        966   

Other investments

     4,719        3,810   

Loans and finance receivables

     13,230        13,934   

Goodwill

     1,036        1,032   

Other

     3,982        3,669   
  

 

 

   

 

 

 
     25,672        24,951   
  

 

 

   

 

 

 
   $ 424,115      $ 392,647   
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Insurance and Other:

    

Losses and loss adjustment expenses

   $ 63,382      $ 63,819   

Unearned premiums

     11,042        8,910   

Life, annuity and health insurance benefits

     10,394        9,924   

Accounts payable, accruals and other liabilities

     18,978        18,466   

Notes payable and other borrowings

     13,405        13,768   
  

 

 

   

 

 

 
     117,201        114,887   
  

 

 

   

 

 

 

Railroad, Utilities and Energy:

    

Accounts payable, accruals and other liabilities

     12,924        13,016   

Notes payable and other borrowings

     35,732        32,580   
  

 

 

   

 

 

 
     48,656        45,596   
  

 

 

   

 

 

 

Finance and Financial Products:

    

Accounts payable, accruals and other liabilities

     1,208        1,224   

Derivative contract liabilities

     10,090        10,139   

Notes payable and other borrowings

     13,372        14,036   
  

 

 

   

 

 

 
     24,670        25,399   
  

 

 

   

 

 

 

Income taxes, principally deferred

     44,514        37,804   
  

 

 

   

 

 

 

Total liabilities

     235,041        223,686   
  

 

 

   

 

 

 

Shareholders’ equity:

    

Common stock

     8        8   

Capital in excess of par value

     37,890        37,807   

Accumulated other comprehensive income

     27,050        17,654   

Retained earnings

     119,721        109,448   

Treasury stock, at cost

     (67     (67
  

 

 

   

 

 

 

Berkshire Hathaway shareholders’ equity

     184,602        164,850   

Noncontrolling interests

     4,472        4,111   
  

 

 

   

 

 

 

Total shareholders’ equity

     189,074        168,961   
  

 

 

   

 

 

 
   $ 424,115      $ 392,647   
  

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

2


Table of Contents

BERKSHIRE HATHAWAY INC.

and Subsidiaries

CONSOLIDATED STATEMENTS OF EARNINGS

(dollars in millions except per share amounts)

 

    Third Quarter     First Nine Months  
    2012     2011     2012     2011  
    (Unaudited)     (Unaudited)  

Revenues:

       

Insurance and Other:

       

Insurance premiums earned

  $ 8,851      $ 7,645      $ 25,344      $ 24,076   

Sales and service revenues

    20,982        18,573        61,060        53,681   

Interest, dividend and other investment income

    994        1,051        3,481        3,754   

Investment gains/losses

    725        100        1,057        1,314   

Other-than-temporary impairment losses on investments

    —          (8     (337     (514
 

 

 

   

 

 

   

 

 

   

 

 

 
    31,552        27,361        90,605        82,311   
 

 

 

   

 

 

   

 

 

   

 

 

 

Railroad, Utilities and Energy:

       

Operating revenues

    8,353        7,781        23,971        22,594   

Other

    66        47        154        115   
 

 

 

   

 

 

   

 

 

   

 

 

 
    8,419        7,828        24,125        22,709   
 

 

 

   

 

 

   

 

 

   

 

 

 

Finance and Financial Products:

       

Interest, dividend and other investment income

    366        384        1,113        1,141   

Investment gains/losses

    192        —          216        174   

Derivative gains/losses

    (118     (2,443     (184     (2,356

Other

    639        609        1,868        1,754   
 

 

 

   

 

 

   

 

 

   

 

 

 
    1,079        (1,450     3,013        713   
 

 

 

   

 

 

   

 

 

   

 

 

 
    41,050        33,739        117,743        105,733   
 

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

       

Insurance and Other:

       

Insurance losses and loss adjustment expenses

    5,016        3,827        14,373        16,107   

Life, annuity and health insurance benefits

    1,284        1,041        3,727        3,032   

Insurance underwriting expenses

    1,943        1,082        5,594        4,527   

Cost of sales and services

    16,992        15,281        49,409        44,095   

Selling, general and administrative expenses

    2,573        2,105        7,477        6,262   

Interest expense

    105        79        314        216   
 

 

 

   

 

 

   

 

 

   

 

 

 
    27,913        23,415        80,894        74,239   
 

 

 

   

 

 

   

 

 

   

 

 

 

Railroad, Utilities and Energy:

       

Cost of sales and operating expenses

    5,930        5,675        17,567        16,898   

Interest expense

    439        428        1,306        1,280   
 

 

 

   

 

 

   

 

 

   

 

 

 
    6,369        6,103        18,873        18,178   
 

 

 

   

 

 

   

 

 

   

 

 

 

Finance and Financial Products:

       

Interest expense

    148        162        459        493   

Other

    684        696        2,035        1,961   
 

 

 

   

 

 

   

 

 

   

 

 

 
    832        858        2,494        2,454   
 

 

 

   

 

 

   

 

 

   

 

 

 
    35,114        30,376        102,261        94,871   
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings before income taxes

    5,936        3,363        15,482        10,862   

Income tax expense

    1,882        953        4,831        3,307   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

    4,054        2,410        10,651        7,555   

Less: Earnings attributable to noncontrolling interests

    134        132        378        349   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings attributable to Berkshire Hathaway shareholders

  $ 3,920      $ 2,278      $ 10,273      $ 7,206   
 

 

 

   

 

 

   

 

 

   

 

 

 

Average common shares outstanding *

    1,652,184        1,651,290        1,651,549        1,649,585   

Net earnings per share attributable to Berkshire Hathaway shareholders *

  $ 2,373      $ 1,380      $ 6,220      $ 4,368   
 

 

 

   

 

 

   

 

 

   

 

 

 

  

 

*

Average shares outstanding include average Class A common shares and average Class B common shares determined on an equivalent Class A common stock basis. Net earnings per common share attributable to Berkshire Hathaway shown above represents net earnings per equivalent Class A common share. Net earnings per Class B common share is equal to one-fifteen-hundredth (1/1,500) of such amount.

See accompanying Notes to Consolidated Financial Statements

 

3


Table of Contents

BERKSHIRE HATHAWAY INC.

and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(dollars in millions)

 

     Third Quarter     First Nine Months  
     2012     2011     2012     2011  

Comprehensive income attributable to Berkshire Hathaway shareholders:

        

Net earnings

   $ 3,920      $ 2,278      $ 10,273      $ 7,206   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income:

        

Net change in unrealized appreciation of investments

     5,034        (7,318     14,888        (6,720

Applicable income taxes

     (1,703     2,575        (5,170     2,398   

Reclassification of investment appreciation in earnings

     (718     (57     (693     (977

Applicable income taxes

     252        20        243        342   

Foreign currency translation

     446        (610     128        34   

Applicable income taxes

     (16     29        (9     (6

Prior service cost and actuarial gains/losses of defined benefit plans

     (2     34        47        45   

Applicable income taxes

     (3     (14     (19     (18

Other, net

     (21     16        (19     24   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net

     3,269        (5,325     9,396        (4,878
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Berkshire Hathaway shareholders

   $ 7,189      $ (3,047   $ 19,669      $ 2,328   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income of noncontrolling interests

   $ 172      $ 2      $ 395      $ 239   
  

 

 

   

 

 

   

 

 

   

 

 

 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

(dollars in millions)

 

           Berkshire Hathaway shareholders’ equity     Non-
controlling
interests
 
   Common stock
and capital in
excess of par
value
    Accumulated
other
comprehensive
income
    Retained
earnings
     Treasury
stock
    Total    

Balance at December 31, 2010

   $ 37,541      $ 20,583      $ 99,194       $ —        $ 157,318      $ 5,616   

Net earnings

     —          —          7,206         —          7,206        349   

Other comprehensive income, net

     —          (4,878     —           —          (4,878     (110

Issuance of common stock and other transactions

     392        —          —           (18     374        —     

Changes in noncontrolling interests:

             

Interests acquired and other transactions

     (139     76        —           —          (63     (1,931
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at September 30, 2011

   $ 37,794      $ 15,781      $ 106,400       $ (18   $ 159,957      $ 3,924   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

   $ 37,815      $ 17,654      $ 109,448       $ (67   $ 164,850      $ 4,111   

Net earnings

     —          —          10,273         —          10,273        378   

Other comprehensive income, net

     —          9,396        —           —          9,396        17   

Issuance of common stock and other transactions

     83        —          —           —          83        —     

Changes in noncontrolling interests:

             

Interests acquired and other transactions

     —          —          —           —          —          (34
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

   $ 37,898      $ 27,050      $ 119,721       $ (67   $ 184,602      $ 4,472   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

4


Table of Contents

BERKSHIRE HATHAWAY INC.

and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(dollars in millions)

 

     First Nine Months  
     2012     2011  

Cash flows from operating activities:

    

Net earnings

   $ 10,651      $ 7,555   

Adjustments to reconcile net earnings to operating cash flows:

    

Investment (gains) losses and other-than-temporary impairment losses

     (936     (974

Depreciation

     3,814        3,418   

Other

     641        374   

Changes in operating assets and liabilities before business acquisitions:

    

Losses and loss adjustment expenses

     (435     3,478   

Deferred charges reinsurance assumed

     204        (525

Unearned premiums

     2,136        1,599   

Receivables and originated loans

     (1,759     (1,847

Derivative contract assets and liabilities

     (104     2,222   

Income taxes

     724        1,024   

Other assets

     (316     (1,427

Other liabilities

     1,540        1,085   
  

 

 

   

 

 

 

Net cash flows from operating activities

     16,160        15,982   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of fixed maturity securities

     (6,684     (6,122

Purchases of equity securities

     (6,454     (11,351

Purchases of other investments

     —          (5,000

Sales of fixed maturity securities

     2,607        1,612   

Redemptions and maturities of fixed maturity securities

     4,646        5,419   

Sales of equity securities

     7,006        885   

Redemptions of other investments

     —          9,345   

Purchases of loans and finance receivables

     (546     (1,615

Collections on loans and finance receivables

     1,098        2,683   

Acquisitions of businesses, net of cash acquired

     (1,831     (7,984

Purchases of property, plant and equipment

     (7,193     (5,673

Other

     (115     15   
  

 

 

   

 

 

 

Net cash flows from investing activities

     (7,466     (17,786
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from borrowings of insurance and other businesses

     1,796        2,063   

Proceeds from borrowings of railroad, utilities and energy businesses

     4,699        2,290   

Proceeds from borrowings of finance businesses

     2,357        1,528   

Repayments of borrowings of insurance and other businesses

     (1,962     (2,272

Repayments of borrowings of railroad, utilities and energy businesses

     (1,137     (1,158

Repayments of borrowings of finance businesses

     (3,009     (1,847

Change in short term borrowings, net

     (989     (552

Acquisitions of noncontrolling interests and other

     (76     (1,810
  

 

 

   

 

 

 

Net cash flows from financing activities

     1,679        (1,758
  

 

 

   

 

 

 

Effects of foreign currency exchange rate changes

     104        111   
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     10,477        (3,451

Cash and cash equivalents at beginning of year *

     37,299        38,227   
  

 

 

   

 

 

 

Cash and cash equivalents at end of first nine months *

   $ 47,776      $ 34,776   
  

 

 

   

 

 

 

* Cash and cash equivalents are comprised of the following:

    

Beginning of year—

    

Insurance and Other

   $ 33,513      $ 34,767   

Railroad, Utilities and Energy

     2,246        2,557   

Finance and Financial Products

     1,540        903   
  

 

 

   

 

 

 
   $ 37,299      $ 38,227   
  

 

 

   

 

 

 

End of first nine months—

    

Insurance and Other

   $ 41,820      $ 30,587   

Railroad, Utilities and Energy

     4,119        2,965   

Finance and Financial Products

     1,837        1,224   
  

 

 

   

 

 

 
   $ 47,776      $ 34,776   
  

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

5


Table of Contents

BERKSHIRE HATHAWAY INC.

and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

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 Form 10-K (“Annual Report”) that included 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. Certain immaterial amounts in 2011 have been reclassified to conform to the current year presentation. Financial information in this report reflects any 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 relatively more significant to results of interim periods than to results for a full year. Variations in the amount and timing of investment gains/losses can cause significant variations in periodic net earnings. Investment gains/losses are recorded when investments are disposed or are other-than-temporarily impaired. In addition, changes in the fair value of derivative assets/liabilities associated with derivative contracts can cause significant variations in periodic net earnings.

Note 2. New accounting pronouncements

As of January 1, 2012, we adopted FASB Accounting Standards Update (“ASU”) 2010-26, “Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts.” ASU 2010-26 specifies that only direct incremental costs associated with successful efforts in acquiring or renewing of insurance contracts should be capitalized and amortized over the policy term. All other costs are required to be expensed as incurred. Capitalized costs include certain advertising costs if the primary purpose of the advertising is to elicit sales to customers who could be shown to have responded directly to the advertising and the probable future revenues generated are in excess of expected future costs to be incurred in realizing those revenues. Berkshire adopted ASU 2010-26 on a prospective basis. The impact of the adoption of this new standard primarily relates to certain advertising costs of GEICO, which were capitalized prior to the adoption of ASU 2010-26, but are no longer eligible to be capitalized. The adoption of this new standard did not have a material effect on our Consolidated Financial Statements.

As of January 1, 2012, we also adopted ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” As a result of adopting ASU 2011-04, we have expanded our fair value disclosures.

In December 2011, the FASB issued ASU 2011-11, “Disclosures about Offsetting Assets and Liabilities.” ASU 2011-11 enhances disclosures surrounding offsetting (netting) assets and liabilities. The standard applies to financial instruments and derivatives and requires companies to disclose both gross and net information about financial instruments and derivatives eligible for offset in financial statements and financial instruments and derivatives subject to master netting arrangements. ASU 2011-11 is effective for fiscal years beginning on or after January 1, 2013 and is required to be applied retrospectively. In July 2012, the FASB issued ASU 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment.” ASU 2012-02 allows an entity to first assess qualitative factors in determining whether events and circumstances indicate that it is more-likely-than not that an indefinite-lived intangible asset is impaired. If an entity determines that it is not more-likely-than not that the indefinite-lived intangible asset is impaired, then the entity is not required to perform a quantitative impairment test. ASU 2012-02 is effective for fiscal years beginning after September 15, 2012. We are currently evaluating the effects these new standards will have on our Consolidated Financial Statements.

Note 3. Significant business acquisitions

Our long-held acquisition strategy is to acquire businesses with consistent earning power, good returns on equity and able and honest management at sensible prices. In the first nine months of 2012, we completed several smaller-sized business acquisitions, which we consider as “bolt-on” acquisitions to several of our existing business operations. Aggregate consideration paid for these acquisitions was approximately $1.8 billion. We do not believe that these acquisitions are material, individually or in the aggregate, to our Consolidated Financial Statements.

 

6


Table of Contents

Notes To Consolidated Financial Statements (Continued)

 

Note 3. Significant business acquisitions (Continued)

 

On September 16, 2011, Berkshire completed the acquisition of The Lubrizol Corporation (“Lubrizol”) pursuant to a merger agreement, under which Berkshire acquired all of the outstanding shares of Lubrizol common stock for cash of $135 per share (approximately $8.7 billion in the aggregate). Lubrizol, based in Cleveland, Ohio, is an innovative specialty chemical company that produces and supplies technologies to customers in the global transportation, industrial and consumer markets. These technologies include additives for engine oils, other transportation-related fluids and industrial lubricants, as well as additives for gasoline and diesel fuel. In addition, Lubrizol makes ingredients and additives for personal care products and pharmaceuticals; specialty materials, including plastics; and performance coatings. Lubrizol’s industry-leading technologies in additives, ingredients and compounds enhance the quality, performance and value of customers’ products, while reducing their environmental impact. We accounted for the Lubrizol acquisition pursuant to the acquisition method. The valuation of the identified assets and liabilities and the resulting excess amount recorded as goodwill as of the acquisition date was completed as of December 31, 2011. Lubrizol’s financial results are included in our Consolidated Financial Statements beginning as of September 16, 2011.

We have owned a controlling interest in Marmon Holdings, Inc. (“Marmon”) since 2008. In the first quarter of 2011, we increased our ownership in Marmon to 80.2% as a result of acquiring 16.6% of Marmon’s outstanding common stock for approximately $1.5 billion. We are contractually required to acquire substantially all of the remaining noncontrolling interests of Marmon no later than March 31, 2014, for an amount that will be based on Marmon’s future operating results. In June 2011, we acquired all of the noncontrolling interests in Wesco Financial Corporation for aggregate consideration of $543 million, consisting of cash of approximately $298 million and 3,253,472 shares of Berkshire Class B common stock.

Note 4. Investments in fixed maturity securities

Investments in securities with fixed maturities as of September 30, 2012 and December 31, 2011 are summarized by type below (in millions).

 

     Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
    Fair
Value
 

September 30, 2012

          

U.S. Treasury, U.S. government corporations and agencies

   $ 2,546       $ 37       $ —        $ 2,583   

States, municipalities and political subdivisions

     2,642         187         —          2,829   

Foreign governments

     11,225         341         (36     11,530   

Corporate bonds

     10,179         2,164         (5     12,338   

Mortgage-backed securities

     2,273         344         (8     2,609   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 28,865       $ 3,073       $ (49   $ 31,889   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2011

          

U.S. Treasury, U.S. government corporations and agencies

   $ 2,894       $ 41       $ —        $ 2,935   

States, municipalities and political subdivisions

     2,862         208         —          3,070   

Foreign governments

     10,608         283         (48     10,843   

Corporate bonds

     11,120         1,483         (155     12,448   

Mortgage-backed securities

     2,564         343         (15     2,892   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 30,048       $ 2,358       $ (218   $ 32,188   
  

 

 

    

 

 

    

 

 

   

 

 

 

Investments in fixed maturity securities are reflected in our Consolidated Balance Sheets as follows (in millions).

 

     September 30,
2012
     December 31,
2011
 

Insurance and other

   $ 31,021       $ 31,222   

Finance and financial products

     868         966   
  

 

 

    

 

 

 
   $ 31,889       $ 32,188   
  

 

 

    

 

 

 

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, 2012, approximately 96% of foreign government holdings were rated AA or higher by at least one of the major rating agencies. Investments in obligations issued or guaranteed by Germany, the United Kingdom, Canada, Australia and the Netherlands represented approximately 80% of the investments in foreign government obligations. Unrealized losses on all fixed maturity investments in a continuous unrealized loss position for more than twelve consecutive months were $10 million as of September 30, 2012 and $20 million as of December 31, 2011.

 

7


Table of Contents

Notes To Consolidated Financial Statements (Continued)

 

Note 4. Investments in fixed maturity securities (Continued)

 

The amortized cost and estimated fair value of securities with fixed maturities at September 30, 2012 are summarized below by contractual maturity dates. Actual maturities will differ from contractual maturities because issuers of certain of the securities retain early call or prepayment rights. Amounts are in millions.

 

     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

   $ 6,268       $ 13,255       $ 4,662       $ 2,407       $ 2,273       $ 28,865   

Fair value

     6,309         14,503         5,458         3,010         2,609         31,889   

Note 5. Investments in equity securities

Investments in equity securities as of September 30, 2012 and December 31, 2011 are summarized based on the primary industry of the investee in the table below (in millions).

 

     Cost Basis      Unrealized
Gains
     Unrealized
Losses
    Fair
Value
 

September 30, 2012

          

Banks, insurance and finance

   $ 18,025       $ 14,360       $ (17   $ 32,368   

Consumer products

     8,160         15,630         (3     23,787   

Commercial, industrial and other

     23,938         8,152         (218     31,872   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 50,123       $ 38,142       $ (238   $ 88,027   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2011

          

Banks, insurance and finance

   $ 16,697       $ 9,480       $ (1,269   $ 24,908   

Consumer products

     12,390         14,320         —          26,710   

Commercial, industrial and other

     20,523         4,973         (123     25,373   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 49,610       $ 28,773       $ (1,392   $ 76,991   
  

 

 

    

 

 

    

 

 

   

 

 

 

Investments in equity securities are reflected in our Consolidated Balance Sheets as follows (in millions).

 

     September 30,
2012
     December 31,
2011
 

Insurance and other

   $ 87,088       $ 76,063   

Railroad, utilities and energy *

     392         488   

Finance and financial products *

     547         440   
  

 

 

    

 

 

 
   $ 88,027       $ 76,991   
  

 

 

    

 

 

 

 

*

Included in other assets.

As of September 30, 2012, unrealized losses on equity securities in a continuous unrealized loss position for more than twelve consecutive months were $45 million. There were none as of December 31, 2011. As of September 30, 2012 and December 31, 2011, we concluded that the unrealized losses were temporary. Our conclusions were based on: (a) our ability and intent to hold the securities to recovery; (b) our assessment that the underlying business and financial condition of each of these issuers was favorable; (c) our opinion that the relative price declines were not significant; and (d) our belief that it was reasonably possible that market prices will increase to and exceed our cost in a relatively short period of time.

 

8


Table of Contents

Notes To Consolidated Financial Statements (Continued)

 

Note 6. Other investments

Other investments include fixed maturity and equity securities of The Goldman Sachs Group, Inc. (“GS”), General Electric Company (“GE”), Wm. Wrigley Jr. Company (“Wrigley”), The Dow Chemical Company (“Dow”) and Bank of America Corporation (“BAC”). A summary of other investments follows (in millions).

 

     Cost      Net
Unrealized
Gains
     Fair
Value
     Carrying
Value
 

September 30, 2012

           

Other fixed maturity and equity securities:

           

Insurance and other

   $ 13,054       $ 2,851       $ 15,905       $ 14,980   

Finance and financial products

     3,198         1,531         4,729         4,719   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 16,252       $ 4,382       $ 20,634       $ 19,699   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

           

Other fixed maturity and equity securities:

           

Insurance and other

   $ 13,051       $ 1,055       $ 14,106       $ 13,111   

Finance and financial products

     3,198         623         3,821         3,810   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 16,249       $ 1,678       $ 17,927       $ 16,921   
  

 

 

    

 

 

    

 

 

    

 

 

 

In 2008, we acquired 50,000 shares of 10% Cumulative Perpetual Preferred Stock of GS (“GS Preferred”) and warrants to purchase 43,478,260 shares of common stock of GS (“GS Warrants”) for a combined cost of $5 billion. The GS Preferred was redeemable at any time by GS at a price of $110,000 per share ($5.5 billion in aggregate). On April 18, 2011, GS fully redeemed our GS Preferred investment. We continue to hold the GS Warrants, which expire on October 1, 2013. The GS Warrants are exercisable for an aggregate cost of $5 billion ($115/share).

In 2008, we acquired 30,000 shares of 10% Cumulative Perpetual Preferred Stock of GE (“GE Preferred”) and warrants to purchase 134,831,460 shares of common stock of GE (“GE Warrants”) for a combined cost of $3 billion. The GE Preferred was redeemable by GE beginning in October 2011 at a price of $110,000 per share ($3.3 billion in aggregate). On October 17, 2011, GE fully redeemed our GE Preferred investment. We continue to hold the GE Warrants, which expire on October 16, 2013. The GE Warrants are exercisable for an aggregate cost of $3 billion ($22.25/share).

In 2008, we acquired $4.4 billion par amount of 11.45% Wrigley subordinated notes maturing in 2018 and $2.1 billion of 5% Wrigley preferred stock. The subordinated notes may be called prior to maturity at par plus the prepayment premium applicable at that time. In 2009, we also acquired $1.0 billion par amount of Wrigley senior notes maturing in 2013 and 2014. We currently own $800 million of the Wrigley senior notes and an unconsolidated joint venture in which we hold a 50% economic interest owns $200 million. The Wrigley subordinated and senior notes are classified as held-to-maturity and we carry these investments at cost, adjusted for foreign currency exchange rate changes that apply to certain of the senior notes. The Wrigley preferred stock is classified as available-for-sale and recorded in our financial statements at fair value.

In 2009, we acquired 3,000,000 shares of Series A Cumulative Convertible Perpetual Preferred Stock of Dow (“Dow Preferred”) for a cost of $3 billion. Under certain conditions, we can convert each share of the Dow Preferred into 24.201 shares of Dow common stock (equivalent to a conversion price of $41.32 per share). Beginning in April 2014, if Dow’s common stock price exceeds $53.72 per share for any 20 trading days in a consecutive 30-day window, Dow, at its option, at any time, in whole or in part, may convert the Dow Preferred into Dow common stock at the then applicable conversion rate. The Dow Preferred is entitled to dividends at a rate of 8.5% per annum.

On September 1, 2011, we acquired 50,000 shares of 6% Cumulative Perpetual Preferred Stock of BAC (“BAC Preferred”) and warrants to purchase 700,000,000 shares of common stock of BAC (“BAC Warrants”) for a combined cost of $5 billion. The BAC Preferred is redeemable at any time by BAC at a price of $105,000 per share ($5.25 billion in aggregate). The BAC Warrants expire in 2021 and are exercisable for an additional aggregate cost of $5 billion ($7.142857/share).

 

9


Table of Contents

Notes To Consolidated Financial Statements (Continued)

 

Note 7. Investment gains/losses and other-than-temporary impairment losses on investments

Investment gains/losses are summarized below (in millions).

 

     Third Quarter     First Nine Months  
     2012     2011     2012     2011  

Fixed maturity securities —

        

Gross gains from sales and other disposals

   $ 77      $ 31      $ 168      $ 207   

Gross losses from sales and other disposals

     —          (1     (345     (5

Equity securities —

        

Gross gains from sales and other disposals

     645        40        1,218        1,308   

Gross losses from sales and other disposals

     (4     (5     (11     (19

Other

     199        35        243        (3
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 917      $ 100      $ 1,273      $ 1,488   
  

 

 

   

 

 

   

 

 

   

 

 

 

Investment gains/losses are reflected in the Consolidated Statements of Earnings as follows.

 

     Third Quarter      First Nine Months  
     2012      2011      2012      2011  

Insurance and other

   $ 725       $ 100       $ 1,057       $ 1,314   

Finance and financial products

     192         —           216         174   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 917       $ 100       $ 1,273       $ 1,488   
  

 

 

    

 

 

    

 

 

    

 

 

 

During the first nine months of 2011, we realized an investment gain of $1.25 billion from the redemption of our investment in GS Preferred.

Other-than-temporary impairment (“OTTI”) losses were as follows (in millions).

 

     Third Quarter      First Nine Months  
     2012      2011      2012      2011  

Equity securities

   $ —         $ —         $ —         $ 506   

Fixed maturity securities

     —           8         337         8   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —         $ 8       $ 337       $ 514   
  

 

 

    

 

 

    

 

 

    

 

 

 

We record investments in equity and fixed maturity securities classified as available-for-sale at fair value and record the difference between fair value and cost in other comprehensive income. OTTI losses recognized in earnings represent reductions in the cost basis of the investment, but not the fair value. Accordingly, such losses that are included in earnings are generally offset by a corresponding credit to other comprehensive income and therefore have no net effect on shareholders’ equity as of the balance sheet date.

In the first quarter of 2012, we recorded OTTI losses of $337 million on certain fixed maturity investments issued by Texas Competitive Electric Holdings where we concluded that we were unlikely to receive all of the remaining contractual interest and principal amounts when due. In the first quarter of 2011, we recorded OTTI losses of $506 million related to certain of our investments in equity securities. The OTTI losses included $337 million with respect to 103.6 million shares of our investment in Wells Fargo & Company (“Wells Fargo”) common stock. These shares had an aggregate original cost of $3,621 million. At that time, we also held an additional 255.4 million shares of Wells Fargo which were acquired at an aggregate cost of $4,394 million and which had unrealized gains of $3,704 million as of March 31, 2011. Due to the length of time that certain of our Wells Fargo shares were in a continuous unrealized loss position and because we account for realized gains and losses from dispositions on a specific identification basis, accounting regulations required us to record the unrealized losses in earnings. However, the unrealized gains were not reflected in earnings but were instead recorded directly in shareholders’ equity as a component of accumulated other comprehensive income.

Note 8. Receivables

Receivables of insurance and other businesses are comprised of the following (in millions).

 

     September 30,
2012
    December 31,
2011
 

Insurance premiums receivable

   $ 8,239      $ 6,663   

Reinsurance recoverable on unpaid losses

     2,706        2,953   

Trade and other receivables

     10,760        9,772   

Allowances for uncollectible accounts

     (378     (376
  

 

 

   

 

 

 
   $ 21,327      $ 19,012   
  

 

 

   

 

 

 

 

10


Table of Contents

Notes To Consolidated Financial Statements (Continued)

 

Note 8. Receivables (Continued)

 

Loans and finance receivables of finance and financial products businesses are comprised of the following (in millions).

 

     September 30,
2012
    December 31,
2011
 

Consumer installment loans and finance receivables

   $ 12,992      $ 13,463   

Commercial loans and finance receivables

     614        860   

Allowances for uncollectible loans

     (376     (389
  

 

 

   

 

 

 
   $ 13,230      $ 13,934   
  

 

 

   

 

 

 

Allowances for uncollectible loans predominantly relate to consumer installment loans. Provisions for consumer loan losses were $243 million in the first nine months of 2012 and $255 million for the first nine months of 2011. Loan charge-offs, net of recoveries, for the first nine months were $256 million in 2012 and $239 million in 2011. Consumer loan amounts are net of unamortized acquisition discounts of $475 million at September 30, 2012 and $500 million at December 31, 2011. At September 30, 2012, approximately 96% of consumer installment loan balances were evaluated collectively for impairment, whereas about 77% of commercial loan balances were evaluated individually for impairment. As a part of the evaluation process, credit quality indicators are reviewed and loans are designated as performing or non-performing. At September 30, 2012, approximately 98% of consumer installment and commercial loan balances were determined to be performing and approximately 93% of those balances were current as to payment status.

Note 9. Inventories

Inventories are comprised of the following (in millions).

 

     September 30,
2012
     December 31,
2011
 

Raw materials

   $ 1,734       $ 1,598   

Work in process and other

     941         897   

Finished manufactured goods

     3,207         3,114   

Goods acquired for resale

     3,594         3,366   
  

 

 

    

 

 

 
   $ 9,476       $ 8,975   
  

 

 

    

 

 

 

Note 10. Goodwill and other intangible assets

A reconciliation of the change in the carrying value of goodwill for the nine months ended September 30, 2012 and the year ended December 31, 2011 follows (in millions).

 

     September 30,
2012
    December 31,
2011
 

Balance at beginning of year

   $ 53,213      $ 49,006   

Acquisitions of businesses

     1,064        4,179   

Other, including foreign currency translation

     (134     28   
  

 

 

   

 

 

 

Balance at end of period

   $ 54,143      $ 53,213   
  

 

 

   

 

 

 

Intangible assets other than goodwill are included in other assets and are summarized by type as follows (in millions).

 

     September 30, 2012      December 31, 2011  
     Gross carrying
amount
     Accumulated
amortization
     Gross carrying
amount
     Accumulated
amortization
 

Insurance and other

   $ 11,366       $ 2,826       $ 11,016       $ 2,319   

Railroad, utilities and energy

     2,101         861         2,088         623   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 13,467       $ 3,687       $ 13,104       $ 2,942   
  

 

 

    

 

 

    

 

 

    

 

 

 

Trademarks and trade names

   $ 2,684       $ 265       $ 2,655       $ 219   

Patents and technology

     4,984         1,927         4,900         1,496   

Customer relationships

     4,232         1,071         4,060         840   

Other

     1,567         424         1,489         387   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 13,467       $ 3,687       $ 13,104       $ 2,942   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

11


Table of Contents

Notes To Consolidated Financial Statements (Continued)

 

Note 10. Goodwill and other intangible assets (Continued)

 

Amortization expense was $760 million for the first nine months of 2012 and $565 million for the first nine months of 2011. Intangible assets with indefinite lives as of September 30, 2012 and December 31, 2011 were $2,273 million and $2,250 million, respectively.

Note 11. Property, plant and equipment

Property, plant and equipment of our insurance and other businesses are comprised of the following (in millions).

 

     Ranges of
estimated useful life
     September  30,
2012
    December  31,
2011
 
         

Land

     —         $ 990      $ 940   

Buildings and improvements

     3 – 40 years         5,694        5,429   

Machinery and equipment

     3 – 25 years         14,119        13,589   

Furniture, fixtures and other

     2 – 20 years         2,829        2,397   

Assets held for lease

     12 – 30 years         6,611        5,997   
     

 

 

   

 

 

 
        30,243        28,352   

Accumulated depreciation

        (11,319     (10,175
     

 

 

   

 

 

 
      $ 18,924      $ 18,177   
     

 

 

   

 

 

 

Depreciation expense of insurance and other businesses for the first nine months of 2012 and 2011 was $1,443 million and $1,191 million, respectively.

Property, plant and equipment of our railroad, utilities and energy businesses are comprised of the following (in millions).

 

     Ranges of
estimated useful life
              
      September 30,
2012
    December 31,
2011
 

Railroad:

       

Land

     —         $ 5,942      $ 5,925   

Track structure and other roadway

     5 – 100 years         37,790        36,760   

Locomotives, freight cars and other equipment

     5 – 37 years         6,358        5,533   

Construction in progress

     —           1,072        885   

Utilities and energy:

       

Utility generation, distribution and transmission system

     5 – 80 years         41,813        40,180   

Interstate pipeline assets

     3 – 80 years         6,323        6,245   

Independent power plants and other assets

     3 – 30 years         1,129        1,106   

Construction in progress

     —           2,639        1,559   
     

 

 

   

 

 

 
        103,066        98,193   

Accumulated depreciation

        (17,143     (15,979
     

 

 

   

 

 

 
      $ 85,923      $ 82,214   
     

 

 

   

 

 

 

Railroad property, plant and equipment includes the land, other roadway, track structure and rolling stock (primarily locomotives and freight cars) of BNSF. The utility generation, distribution and transmission system and interstate pipeline assets are the regulated assets of public utility and natural gas pipeline subsidiaries. Depreciation expense of the railroad, utilities and energy businesses for the first nine months of 2012 and 2011 was $2,235 million and $2,093 million, respectively.

 

12


Table of Contents

Notes To Consolidated Financial Statements (Continued)

 

Note 12. Derivative contracts

As of September 30, 2012, derivative contracts are used primarily in our finance and financial products and energy businesses. Substantially all of the derivative contracts of our finance and financial products businesses are not designated as hedges for financial reporting purposes. Changes in the fair values of such contracts are reported in earnings as derivative gains/losses. We entered into these contracts with the expectation that the premiums received would exceed the amounts ultimately paid to counterparties. A summary of derivative contracts of our finance and financial products businesses follows (in millions).

 

     September 30, 2012     December 31, 2011  
     Assets (3)     Liabilities     Notional
Value
    Assets (3)     Liabilities     Notional
Value
 

Equity index put options

   $ —        $ 9,517      $ 34,028 (1)    $ —        $ 8,499      $ 34,014 (1) 

Credit default contracts

     54        492        14,615 (2)      55        1,527        24,194 (2) 

Other

     324        124          268        156     

Counterparty netting

     (68     (43       (67     (43  
  

 

 

   

 

 

     

 

 

   

 

 

   
   $ 310      $ 10,090        $ 256      $ 10,139     
  

 

 

   

 

 

     

 

 

   

 

 

   

 

(1) 

Represents the aggregate undiscounted amount payable at the contract expiration dates assuming that the value of each index is zero at the contract expiration date.

(2) 

Represents the maximum undiscounted future value of losses payable under the contracts. The number of losses required to exhaust contract limits under substantially all of the contracts is dependent on the loss recovery rate related to the specific obligor at the time of a default.

(3)

Included in other assets of finance and financial products businesses.

Derivative gains/losses of our finance and financial products businesses included in our Consolidated Statements of Earnings were as follows (in millions).

 

     Third Quarter     First Nine Months  
     2012     2011     2012     2011  

Equity index put options

   $ (534   $ (2,089   $ (1,018   $ (2,137

Credit default obligations

     316        (247     827        (35

Other

     100        (107     7        (184
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ (118   $ (2,443   $ (184   $ (2,356
  

 

 

   

 

 

   

 

 

   

 

 

 

The equity index put option contracts are European style options written on four major equity indexes. Future payments, if any, under these contracts will be required if the underlying index value is below the strike price at the contract expiration dates. We received the premiums on these contracts in full at the contract inception dates and therefore have no counterparty credit risk. We have written no new contracts since February 2008.

At September 30, 2012, the aggregate intrinsic value (which is the undiscounted liability assuming the contracts are settled on their future expiration dates based on the September 30, 2012 index values and foreign currency exchange rates) was approximately $5.4 billion. At December 31, 2011, the aggregate intrinsic value of these contracts, assuming the contracts were settled on that date, was approximately $6.2 billion. However, these contracts may not be unilaterally terminated or fully settled before the expiration dates which occur between June 2018 and January 2026. Therefore, the ultimate amount of cash basis gains or losses on these contracts will not be determined for many years. The remaining weighted average life of all contracts was approximately 8.2 years at September 30, 2012.

Our credit default contracts were written on various indexes of non-investment grade (or “high yield”) corporate issuers, as well as investment grade corporate and state/municipal debt issuers. These contracts cover the loss in value of specified debt obligations of the issuers arising from default events, which are usually from their failure to make payments or bankruptcy. Loss amounts are subject to aggregate contract limits. We have written no new contracts since February 2009.

State/municipality credit contract exposures as of September 30, 2012 relate to more than 500 debt issues with maturities ranging from 2019 to 2054 and having a weighted average term of 19 years. Pursuant to the contract terms, future loss payments, if any, cannot be settled before the maturity dates of the underlying obligations. In August 2012, contracts with notional values of $8.25 billion were terminated. We have no further obligations with respect to the terminated contracts.

 

13


Table of Contents

Notes To Consolidated Financial Statements (Continued)

 

Note 12. Derivative contracts (Continued)

 

All individual investment grade and high-yield corporate contracts in-force as of September 30, 2012 expire between December 2012 and December 2013, including $6.1 billion of notional value under contracts expiring by September 30, 2013. Future losses, if any, under substantially all of the high yield index contracts currently in-force are subject to sizable aggregate deductibles that must be satisfied before we have any payment obligations.

Premiums under individual corporate credit default contracts are, generally, due from counterparties on a quarterly basis over the terms of the contracts. Otherwise, we have no counterparty credit risk under our credit default contracts because all premiums were received at the inception of the contracts.

With limited exceptions, our equity index put option and credit default contracts contain no 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 September 30, 2012, our collateral posting requirement under contracts with collateral provisions was $150 million compared to $238 million at December 31, 2011. If Berkshire’s credit ratings (currently AA+ from Standard & Poor’s and Aa2 from Moody’s) are downgraded below either A- by Standard & Poor’s or A3 by Moody’s, additional collateral of up to $1.1 billion could be required to be posted.

Our regulated utility subsidiaries are exposed to variations in the market prices in the purchases and sales of natural gas and electricity and in the purchases of fuel. Derivative instruments, including forward purchases and sales, futures, swaps and options, are used to manage a portion of these price risks. Unrealized gains and losses under the contracts of our regulated utilities that are probable of recovery through rates are recorded as regulatory assets or liabilities. Unrealized gains or losses on contracts accounted for as cash flow or fair value hedges are recorded in accumulated other comprehensive income or in net earnings, as appropriate. Derivative contract assets are included in other assets of railroad, utilities and energy businesses and were $33 million and $71 million as of September 30, 2012 and December 31, 2011, respectively. Derivative contract liabilities are included in accounts payable, accruals and other liabilities of railroad, utilities and energy businesses and were $230 million and $336 million as of September 30, 2012 and December 31, 2011, respectively.

Note 13. Supplemental cash flow information

A summary of supplemental cash flow information for the first nine months of 2012 and 2011 is presented in the following table (in millions).

 

     First Nine Months  
     2012      2011  

Cash paid during the period for:

     

Income taxes

   $ 2,896       $ 1,352   

Interest:

     

Interest of insurance and other businesses

     290         155   

Interest of railroad, utilities and energy businesses

     1,393         1,390   

Interest of finance and financial products businesses

     471         475   

Non-cash investing and financing activities:

     

Liabilities assumed in connection with business acquisitions

     793         4,991   

Common stock issued in connection with acquisition of noncontrolling interests in Wesco Financial Corporation

     —           245   

Borrowings assumed in connection with certain property, plant and equipment additions

     306         376   

 

 

14


Table of Contents

Notes To Consolidated Financial Statements (Continued)

 

Note 14. 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 September 30, 2012.

 

     Weighted
Average
Interest Rate
              
       September 30,
2012
     December 31,
2011
 

Insurance and other:

       

Issued by Berkshire parent company due 2013-2047

     2.3   $ 8,319       $ 8,287   

Short-term subsidiary borrowings

     0.3     1,225         1,490   

Other subsidiary borrowings due 2012-2035

     5.9     3,861         3,991   
    

 

 

    

 

 

 
     $ 13,405       $ 13,768   
    

 

 

    

 

 

 

In connection with the BNSF acquisition in 2010, the Berkshire parent company issued $8.0 billion aggregate par amount of senior unsecured notes, including $1.1 billion of floating rate and $600 million of 1.4% notes that matured in February 2012. In January 2012, the Berkshire parent company issued $1.1 billion of 1.9% senior notes due in 2017 and $600 million of 3.4% senior notes due in 2022.

 

     Weighted
Average
Interest Rate
              
       September 30,
2012
     December 31,
2011
 

Railroad, utilities and energy:

       

Issued by MidAmerican Energy Holdings Company (“MidAmerican”) and its subsidiaries:

       

MidAmerican senior unsecured debt due 2012-2037

     6.3   $ 5,113       $ 5,363   

Subsidiary and other debt due 2012-2042

     5.3     16,021         14,552   

Issued by BNSF due 2012-2097

     5.5     14,598         12,665   
    

 

 

    

 

 

 
     $ 35,732       $ 32,580   
    

 

 

    

 

 

 

MidAmerican subsidiary debt represents amounts issued pursuant to separate financing agreements. All, or substantially all, of the assets of certain MidAmerican subsidiaries are, or may be, pledged or encumbered to support or otherwise secure the debt. These borrowing arrangements generally contain various covenants including, but not limited to, leverage ratios, interest coverage ratios and debt service coverage ratios. In the first nine months of 2012, MidAmerican subsidiaries issued approximately $2.5 billion of new debt with interest rates from 1.43% to 5.75% and maturities ranging from 2013 to 2042. In the fourth quarter of 2012, MidAmerican and subsidiary debt of approximately $850 million will mature. In March and August 2012, BNSF issued in the aggregate $2.5 billion in debentures, comprised of $1,225 million of 3.05% debentures due in 2022, $625 million of 4.40% debentures due in 2042 and $650 million of 4.375% debentures due in 2042. BNSF’s borrowings are primarily unsecured. As of September 30, 2012, BNSF and MidAmerican and their subsidiaries were in compliance with all applicable covenants. Berkshire does not guarantee any debt or other borrowings of BNSF, MidAmerican or their subsidiaries.

 

     Weighted
Average
Interest Rate
              
       September 30,
2012
     December 31,
2011
 

Finance and financial products:

       

Issued by Berkshire Hathaway Finance Corporation (“BHFC”) due 2013-2042

     4.1   $ 11,186       $ 11,531   

Issued by other subsidiaries due 2012-2036

     4.7     2,186         2,505   
    

 

 

    

 

 

 
     $ 13,372       $ 14,036   
    

 

 

    

 

 

 

BHFC is a 100% owned finance subsidiary of Berkshire, which has fully and unconditionally guaranteed BHFC’s borrowings. During the first nine months of 2012, $2.7 billion of BHFC notes matured. In May and September 2012, BHFC issued in the aggregate $2.35 billion of senior notes consisting of $1,075 million of 1.6% notes due in 2017, $550 million of 3.0% notes due in 2022 and $725 million of 4.4% notes due in 2042.

Certain of our subsidiaries in the aggregate have approximately $5.1 billion of unused lines of credit and commercial paper capacity at September 30, 2012, to support short-term borrowing programs and provide additional liquidity. In addition to borrowings of BHFC, Berkshire guarantees approximately $4.5 billion of other subsidiary borrowings as of September 30, 2012. 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 present and future payment obligations.

 

15


Table of Contents

Notes To Consolidated Financial Statements (Continued)

 

Note 15. Fair value measurements

Our financial assets and liabilities are summarized below according to the fair value hierarchy. The carrying values of cash and cash equivalents, accounts receivable and accounts payable, accruals and other liabilities are considered to be reasonable estimates of their fair values. As of September 30, 2012 and December 31, 2011, the carrying values and fair values of financial assets and liabilities were as follows (in millions).

 

    Carrying
Value
    Fair Value     Quoted
Prices
(Level 1)
    Significant Other
Observable Inputs
(Level 2)
    Significant
Unobservable Inputs
(Level 3)
 

September 30, 2012—Assets and liabilities carried at fair value:

         

Investments in fixed maturity securities:

         

U.S. Treasury, U.S. government corporations and agencies

  $ 2,583      $ 2,583      $ 1,111      $ 1,470      $ 2   

States, municipalities and political subdivisions

    2,829        2,829        —          2,829        —     

Foreign governments

    11,530        11,530        4,694        6,836        —     

Corporate bonds

    12,338        12,338        —          11,687        651   

Mortgage-backed securities

    2,609        2,609        —          2,609        —     

Investments in equity securities

    88,027        88,027        87,928        64        35   

Other investments

    14,445        14,445        —          —          14,445   

Derivative contract assets (1)

    343        343        —          245        98   

Derivative contract liabilities:

         

Railroad, utilities and energy (2)

    230        230        11        212        7   

Finance and financial products:

         

Equity index put options

    9,517        9,517        —          —          9,517   

Credit default obligations

    492        492        —          —          492   

Other

    81        81        —          81        —     

September 30, 2012—Assets and liabilities not carried at fair value:

         

Other investments

    5,254        6,189        —          —          6,189   

Loans and finance receivables

    13,230        12,713        —          968        11,745   

Notes payable and other borrowings:

         

Insurance and other

    13,405        14,198        —          14,198        —     

Railroad, utilities and energy

    35,732        42,084        —          42,084        —     

Finance and financial products

    13,372        14,372        —          13,529        843   

December 31, 2011—Assets and liabilities carried at fair value:

         

Investments in fixed maturity securities:

         

U.S. Treasury, U.S. government corporations and agencies

    2,935        2,935        843        2,090        2   

States, municipalities and political subdivisions

    3,070        3,070        —          3,069        1   

Foreign governments

    10,843        10,843        4,444        6,265        134   

Corporate bonds

    12,448        12,448        —          11,801        647   

Mortgage-backed securities

    2,892        2,892        —          2,892        —     

Investments in equity securities

    76,991        76,991        76,906        63        22   

Other investments

    11,669        11,669        —          —          11,669   

Derivative contract assets (1)

    327        327        —          205        122   

Derivative contract liabilities:

         

Railroad, utilities and energy (2)

    336        336        12        320        4   

Finance and financial products:

         

Equity index put options

    8,499        8,499        —          —          8,499   

Credit default obligations

    1,527        1,527        —          —          1,527   

Other

    113        113        —          113        —     

 

(1)

Included in other assets.

(2) 

Included in accounts payable, accruals and other liabilities.

 

16


Table of Contents

Notes To Consolidated Financial Statements (Continued)

 

Note 15. Fair value measurements (Continued)

 

As of December 31, 2011, the carrying values and fair values of financial assets and liabilities that are not carried at fair value were as follows (in millions).

 

     Carrying
Value
     Fair Value  

Other investments

   $ 5,252       $ 6,258   

Loans and finance receivables

     13,934         13,126   

Notes payable and other borrowings:

     

Insurance and other

     13,768         14,334   

Railroad, utilities and energy

     32,580         38,257   

Finance and financial products

     14,036         14,959   

The fair values of substantially all of our financial instruments were measured using market or income approaches. Considerable judgment may be required in interpreting market data used to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized in an actual current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value.

The hierarchy for measuring fair value consists of Levels 1 through 3.

Level 1 – Inputs represent unadjusted quoted prices for identical assets or liabilities exchanged in active markets. Substantially all of our investments in equity securities are traded on an exchange in active markets and fair values are based on the closing prices as of the balance sheet date.

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; quoted prices for identical assets or liabilities exchanged in inactive markets; other inputs that may be considered in fair value determinations of the assets or liabilities, such as interest rates and yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates; and inputs that are derived principally from or corroborated by observable market data by correlation or other means. Fair values of investments in fixed maturity securities and notes payable and other borrowings are primarily based on price evaluations which incorporate market prices for identical instruments in inactive markets and market data available for instruments with similar characteristics. Pricing evaluations generally reflect discounted expected future cash flows, which incorporate yield curves for instruments with similar characteristics, such as credit rating, estimated duration 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 we 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 pricing assets or liabilities. Fair value measurements of non-exchange traded derivative contracts and certain other investments are based primarily on valuation models, discounted cash flow models or other valuation techniques that are believed to be used by market participants.

A reconciliation of assets and liabilities measured and carried at fair value on a recurring basis with the use of significant unobservable inputs (Level 3) for the first nine months of 2011 follows (in millions).

 

     Investments
in fixed
maturity
securities
    Investments
in equity
securities
    Other
investments
    Net
derivative
contract
(liabilities)
 

Balance at December 31, 2010

   $ 801      $ 35      $ 17,589      $ (8,222

Gains (losses) included in:

        

Earnings

     —          —          —          (2,244

Other comprehensive income

     7        (19     (1,813     —     

Regulatory assets and liabilities

     —          —          —          87   

Acquisitions

     6        —          5,000        —     

Dispositions

     (34     —          —          —     

Settlements

     —          —          —          (25

Transfers out of Level 3

     —          —          (8,800     1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2011

   $ 780      $ 16      $ 11,976      $ (10,403
  

 

 

   

 

 

   

 

 

   

 

 

 

 

17


Table of Contents

Notes To Consolidated Financial Statements (Continued)

 

Note 15. Fair value measurements (Continued)

 

A reconciliation of assets and liabilities measured and carried at fair value on a recurring basis with the use of significant unobservable inputs (Level 3) for the first nine months of 2012 follows (in millions).

 

     Investments
in fixed
maturity
securities
    Investments
in equity
securities
     Other
investments
     Net
derivative
contract
(liabilities)
 

Balance at December 31, 2011

   $ 784      $ 22       $ 11,669       $ (9,908

Gains (losses) included in:

          

Earnings

     —          —           —           (199

Other comprehensive income

     6        13         2,776         3   

Regulatory assets and liabilities

     —          —           —           —     

Dispositions

     (8     —           —           —     

Settlements, net

     —          —           —           186   

Transfers out of Level 3

     (129     —           —           —     
  

 

 

   

 

 

    

 

 

    

 

 

 

Balance at September 30, 2012

   $ 653      $ 35       $ 14,445       $ (9,918
  

 

 

   

 

 

    

 

 

    

 

 

 

During the first nine months of 2011, we transferred our investments in GS Preferred Stock and GE Preferred Stock from Level 3 to Level 2 given the then pending redemptions of the investments which occurred on April 18, 2011 and October 17, 2011, respectively. There were no transfers into Level 3 for the first nine months of 2012 or 2011. On September 1, 2011, we acquired preferred stock and common stock warrants of the Bank of America Corporation at an aggregate cost of $5 billion.

Gains and losses included in earnings are included as components of investment gains/losses, derivative gains/losses and other revenues, as appropriate and are related to changes in valuations of derivative contracts and settlement transactions. Gains and losses included in other comprehensive income are included as components of the net change in unrealized appreciation of investments and the reclassification of investment appreciation in earnings, as appropriate in the Consolidated Statements of Comprehensive Income.

Quantitative information as of September 30, 2012, 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 Input

  Weighted
Average

Other investments:

       

Preferred stocks

  $ 11,749      Discounted cash flow   Expected duration   10 years
      Discount for transferability restrictions and subordination   97 basis
points

Common stock warrants

    2,696      Warrant pricing model   Discount for transferability and hedging restrictions   19%

Net derivative liabilities:

       

Equity index put options

    9,517      Option pricing model   Volatility   22%

Credit default-states/municipalities

    472      Discounted cash flow   Credit default spreads   100 basis
points

For certain credit default and other derivative contracts where we could not corroborate that the fair values or the inputs were observable in the market, fair values were based on non-binding price indications obtained from third party sources. Management reviewed these values relative to the terms of the contracts, the current facts, circumstances and market conditions, and concluded they were reasonable. We did not adjust these prices and therefore, they have been excluded from the preceding table.

Our other investments that are carried at fair value consist of a few relatively large private placement transactions and include perpetual preferred stocks and common stock warrants. These investments are subject to contractual restrictions on transferability and/or provisions that prevent us from economically hedging our investments. In applying discounted estimated cash flow techniques in valuing the perpetual preferred stocks, we made assumptions regarding the expected durations of the investments, as the issuers may have the right to redeem or convert these investments. We also made estimates regarding the impact of subordination, as the preferred stocks have a lower priority in liquidation than the investment grade debt instruments of the issuers, which affected the discount rates. In valuing the common stock warrants, we used a warrant valuation model. While most of the inputs to the model are observable, we are subject to the aforementioned contractual restrictions. We have applied discounts with respect to the contractual restrictions. Increases or decreases to these inputs would result in decreases or increases to the fair values.

 

18


Table of Contents

Notes To Consolidated Financial Statements (Continued)

 

Note 15. Fair value measurements (Continued)

 

Our equity index put option and credit default contracts are not exchange traded and certain contract terms are not standard in derivatives markets. For example, we are not required to post collateral under most of our contracts and many contracts have long durations, and therefore are illiquid. For these and other reasons, we classified these contracts as Level 3. The methods we use to value 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 current index price, contract duration, dividend and interest rate inputs (which include a Berkshire non-performance input) which are observable. However, the valuation of long-duration options is inherently subjective, given the lack of observable transactions and prices, and acceptable values may be subject to wide ranges. Expected volatility inputs represent our expectations after considering the remaining duration of each contract and that the contracts will remain outstanding until the expiration dates without offsetting transactions occurring in the interim. Increases or decreases in the volatility inputs will produce increases or decreases in the fair values.

Our state and municipality credit default contract values reflect credit default spreads, contract durations, interest rates, bond prices and other inputs believed to be used by market participants in estimating fair value. We utilize discounted cash flow valuation models, which incorporate the aforementioned inputs as well as our own estimates of credit default spreads for states and municipalities where there is no observable input. Increases or decreases to the credit default spreads will produce increases or decreases in the fair values.

Note 16. Common stock

Changes in Berkshire’s issued and outstanding common stock during the first nine months of 2012 are shown in the table below.

 

 

     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, 2011

     938,342        (98     938,244        1,069,645,361         (801,985     1,068,843,376   

Conversions of Class A common stock to Class B common stock and exercises of replacement stock options issued in a business acquisition

     (16,498     —          (16,498     27,119,144         —          27,119,144   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance at September 30, 2012

     921,844        (98     921,746        1,096,764,505         (801,985     1,095,962,520   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Each Class A common share is entitled to one vote per share. Class B common stock possesses dividend and distribution rights equal to one-fifteen-hundredth (1/1,500) of such rights of Class A common stock. Each Class B common share possesses voting rights equivalent to one-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 1,652,388 shares outstanding as of September 30, 2012 and 1,650,806 shares outstanding as of December 31, 2011. In addition to our common stock, 1,000,000 shares of preferred stock are authorized, but none are issued and outstanding.

In September 2011, our Board of Directors approved a common stock repurchase program whereby it authorized Berkshire to repurchase its Class A and Class B shares at prices no higher than a 10% premium over the book value of the shares. Berkshire may repurchase shares in the open market or through privately negotiated transactions, at management’s discretion. Berkshire’s Board of Directors’ authorization does not specify a maximum number of shares to be repurchased. However, repurchases will not be made if they would reduce Berkshire’s consolidated cash equivalent holdings below $20 billion. The repurchase program is expected to continue indefinitely and the amount of repurchases will depend entirely upon the level of cash available, the attractiveness of investment and business opportunities either at hand or on the horizon and the degree of discount of the market price relative to management’s estimate of intrinsic value. The repurchase program does not obligate Berkshire to repurchase any dollar amount or number of Class A or Class B shares.

 

19


Table of Contents

Notes To Consolidated Financial Statements (Continued)

 

Note 17. Business segment data

Revenues by segment for the third quarter and first nine months of 2012 and 2011 were as follows (in millions).

 

     Third Quarter     First Nine Months  
     2012      2011     2012      2011  

Operating Businesses:

          

Insurance group:

          

Premiums earned:

          

GEICO

   $ 4,240       $ 3,907      $ 12,388       $ 11,400   

General Re

     1,445         1,438        4,342         4,319   

Berkshire Hathaway Reinsurance Group

     2,578         1,839        6,983         7,051   

Berkshire Hathaway Primary Group

     588         461        1,631         1,306   

Investment income

     981         1,042        3,436         3,718   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total insurance group

     9,832         8,687        28,780         27,794   

BNSF

     5,343         4,961        15,407         14,284   

Finance and financial products

     1,006         995        2,981         2,899   

Marmon

     1,795         1,800        5,451         5,255   

McLane Company

     9,534         8,708        26,611         24,919   

MidAmerican

     3,076         2,867        8,718         8,425   

Other businesses *

     9,616         7,951        28,800         23,168   
  

 

 

    

 

 

   

 

 

    

 

 

 
     40,202         35,969        116,748         106,744   

Reconciliation of segments to consolidated amount:

          

Investment and derivative gains/losses

     799         (2,351     752         (1,382

Eliminations and other

     49         121        243         371   
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 41,050       $ 33,739      $ 117,743       $ 105,733   
  

 

 

    

 

 

   

 

 

    

 

 

 

Earnings before income taxes by segment for the third quarter and first nine months of 2012 and 2011 were as follows (in millions).

 

     Third Quarter     First Nine Months  
     2012     2011     2012     2011  

Operating Businesses:

        

Insurance group:

        

Underwriting gain (loss):

        

GEICO

   $ 435      $ 114      $ 714      $ 610   

General Re

     154        148        373        (46

Berkshire Hathaway Reinsurance Group

     (102     1,375        320        (322

Berkshire Hathaway Primary Group

     121        58        243        168   

Net investment income

     976        1,038        3,421        3,703   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total insurance group

     1,584        2,733        5,071        4,113   

BNSF

     1,508        1,236        3,903        3,271   

Finance and financial products

     175        147        527        480   

Marmon

     293        257        869        752   

McLane Company

     130        124        305        311   

MidAmerican

     542        489        1,349        1,260   

Other businesses *

     1,210        964        3,609        2,615   
  

 

 

   

 

 

   

 

 

   

 

 

 
     5,442        5,950        15,633        12,802   

Reconciliation of segments to consolidated amount:

        

Investment and derivative gains/losses

     799        (2,351     752        (1,382

Interest expense, excluding interest allocated to operating businesses

     (52     (61     (196     (162

Eliminations and other

     (253     (175     (707     (396
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 5,936      $ 3,363      $ 15,482      $ 10,862   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

*

Includes Lubrizol from the acquisition date of September 16, 2011.

 

20


Table of Contents

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  
     2012     2011     2012     2011  

Insurance – underwriting

   $ 392      $ 1,089      $ 1,065      $ 261   

Insurance – investment income

     733        783        2,592        2,730   

Railroad

     937        766        2,440        2,063   

Utilities and energy

     438        372        1,029        888   

Manufacturing, service and retailing *

     991        836        2,870        2,183   

Finance and financial products

     108        103        332        309   

Other

     (200     (137     (544     (325

Investment and derivative gains/losses

     521        (1,534     489        (903
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings attributable to Berkshire

   $ 3,920      $ 2,278      $ 10,273      $ 7,206   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

*

Includes earnings of Lubrizol from the acquisition date of September 16, 2011.

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 establishing and monitoring 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 at the operating businesses, and participating in the resolution of governance-related issues as needed. The business segment data (Note 17 to the Consolidated Financial Statements) should be read in conjunction with this discussion.

In 2012, insurance underwriting activities generated after-tax earnings of $392 million for the third quarter and $1,065 million for the first nine months. In the first nine months of 2012, the aggregate impact of catastrophe losses, changes in retroactive reinsurance liabilities and foreign currency gains and losses was relatively insignificant. Insurance underwriting earnings for the third quarter of 2011 included an after-tax gain of $855 million from the reduction in estimated liabilities related to retroactive reinsurance contracts which was primarily attributable to lower than expected loss experience of one ceding company and from reductions in certain reinsurance contract liabilities that are settled in foreign currencies due to changes in currency exchange rates. During the first nine months of 2011, our reinsurance operations also incurred insurance losses of approximately $1.3 billion, after tax, from several significant catastrophe events, most of which occurred in the first quarter.

Our railroad and utilities and energy businesses continued to generate significant earnings in 2012. Earnings from our manufacturing, service and retailing businesses in 2012 increased significantly over 2011 due primarily to the acquisition of The Lubrizol Corporation (“Lubrizol”), which was completed on September 16, 2011. Lubrizol’s results are fully included for the third quarter and first nine months of 2012 and for the post-September 16 periods of 2011, as a component of manufacturing, service and retailing businesses in the preceding table. Excluding the impact of Lubrizol, earnings from our manufacturing, service and retailing businesses were mixed, reflecting modest improvements in building and construction in the U.S., and deterioration in several foreign markets affecting certain of our manufacturing and service operations.

In the third quarter and first nine months of 2012, investment and derivative gains/losses included after-tax losses from derivative contracts of $76 million and $119 million, respectively. In 2011, derivative contracts produced after-tax losses of $1,587 million in the third quarter and $1,531 million in the first nine months. In the third quarter of 2012, we also recognized after-tax investment gains of $597 million from sales of securities and repayments of certain loan portfolios. In the second quarter of 2011, we recognized an after-tax gain of approximately $806 million from the redemption of our investment in Goldman Sachs 10% Preferred Stock. We believe that realized investment gains/losses are often meaningless in terms of understanding our reported results or evaluating our economic performance. The timing and magnitude of investment and derivative gains and losses has 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 and casualty 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. General Re and BHRG also reinsure life and health risks.

 

21


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 or investment gains/losses.

Our periodic underwriting results are affected significantly by changes in estimates for unpaid losses and loss adjustment expenses, including amounts established for loss occurrences in prior years. In the first nine months of 2012, we recorded net reductions of approximately $150 million with respect to unpaid losses on retroactive reinsurance contracts. In the third quarter of 2011, we reduced unpaid losses related to certain retroactive reinsurance contracts by approximately $875 million. In addition, the timing and amount of catastrophe losses can produce significant volatility in our periodic underwriting results, particularly with respect to BHRG and General Re. Incurred losses from catastrophes occurring in the first nine months of 2012 were relatively insignificant. In the first nine months of 2011, we recorded aggregate pre-tax provisions for estimated catastrophe losses of approximately $2 billion arising from several events, including the earthquakes in Japan and New Zealand, as well as weather related events in Australia and the U.S. Our 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. In recent years, currency exchange rates have been volatile and the resulting impact on our underwriting results has been significant.

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 $95 billion at December 31, 2011. This superior capital strength creates opportunities to negotiate and enter into insurance and reinsurance contracts specially designed to meet the unique needs of insurance and reinsurance buyers.

Underwriting results of our insurance businesses are summarized as follows. Amounts are in millions.

 

     Third Quarter      First Nine Months  
     2012     2011      2012      2011  

Underwriting gain (loss) attributable to:

          

GEICO

   $ 435      $ 114       $ 714       $ 610   

General Re

     154        148         373         (46

Berkshire Hathaway Reinsurance Group

     (102     1,375         320         (322

Berkshire Hathaway Primary Group

     121        58         243         168   
  

 

 

   

 

 

    

 

 

    

 

 

 

Pre-tax underwriting gain

     608        1,695         1,650         410   

Income taxes and noncontrolling interests

     216        606         585         149   
  

 

 

   

 

 

    

 

 

    

 

 

 

Net underwriting gain

   $ 392      $ 1,089       $ 1,065       $ 261   
  

 

 

   

 

 

    

 

 

    

 

 

 

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  
     2012      2011      2012      2011  
     Amount      %      Amount      %      Amount      %      Amount      %  

Premiums earned

   $ 4,240         100.0       $ 3,907         100.0       $ 12,388         100.0       $ 11,400         100.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Losses and loss adjustment expenses

     3,011         71.0         3,100         79.3         9,089         73.4         8,707         76.4   

Underwriting expenses

     794         18.7         693         17.8         2,585         20.8         2,083         18.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total losses and expenses

     3,805         89.7         3,793         97.1         11,674         94.2         10,790         94.7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Pre-tax underwriting gain

   $ 435          $ 114          $ 714          $ 610      
  

 

 

       

 

 

       

 

 

       

 

 

    

 

22


Table of Contents

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

 

Insurance —Underwriting (Continued)

 

GEICO (Continued)

 

Premiums earned in the third quarter and first nine months of 2012 increased $333 million (8.5%) and $988 million (8.7%), respectively, compared to premiums earned in the corresponding 2011 periods. The growth in premiums earned for voluntary auto was 8.7% as a result of a 5.9% increase in policies-in-force and a 2.8% increase in average premium per policy over the past twelve months. Voluntary auto new business sales in the first nine months of 2012 declined slightly compared with 2011. Voluntary auto policies-in-force at September 30, 2012 were approximately 547,000 greater than at December 31, 2011.

Losses and loss adjustment expenses incurred in the third quarter of 2012 declined $89 million (2.9%) and increased $382 million (4.4%) in the first nine months compared to the corresponding 2011 periods. The loss ratio (the ratio of losses and loss adjustment expenses incurred to premiums earned) was 73.4% in the first nine months of 2012 and 76.4% in the first nine months of 2011. In 2012, losses and loss adjustment expenses reflected no significant changes in collision and physical damage frequencies, a sharp decline in comprehensive frequencies (due to lower catastrophe losses) and modestly higher average claims severities in most of the significant coverage categories. In the first nine months of 2012, bodily injury severities generally increased in the two to four percent range versus 2011, while physical damage severities increased in the three to five percent range. In 2012, catastrophe losses were $15 million in the third quarter and $151 million in the first nine months. In 2011, catastrophe losses were $116 million in the third quarter and $240 million in the first nine months.

Underwriting expenses incurred in the third quarter and first nine months of 2012 increased $101 million (14.6%) and $502 million (24.1%), respectively, over underwriting expenses incurred in the third quarter and first nine months of 2011. The increases were primarily the result of 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. Upon adoption of the new accounting standard as of January 1, 2012, GEICO ceased deferring a large portion of its direct advertising costs. The new accounting standard was adopted on a prospective basis and as a result, DPAC recorded as of December 31, 2011 is being amortized to expense over the remainder of the related policy periods and policy acquisition costs related to policies written and renewed after December 31, 2011 are being deferred at lower levels than in the past. The new accounting standard for DPAC does not impact the cash basis periodic underwriting costs or our assessment of GEICO’s underwriting performance. However, the new accounting standard 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 and that, as a result, GEICO’s expense ratio (the ratio of underwriting expenses to premiums earned) in 2012 would have been less than in 2011. The effect of transitioning to this new accounting standard was substantially completed as of September 30, 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. The timing and magnitude of catastrophe and large individual losses has produced and is expected to continue to produce significant volatility in General Re’s periodic underwriting results. 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  
     2012      2011      2012      2011      2012      2011      2012      2011  

Property/casualty

   $ 727       $ 750       $ 2,164       $ 2,220       $ 118       $ 114       $ 354       $ (169

Life/health

     718         688         2,178         2,099         36         34         19         123   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,445       $ 1,438       $ 4,342       $ 4,319       $ 154       $ 148       $ 373       $ (46
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Property/casualty

Property/casualty premiums earned in the third quarter and first nine months of 2012 declined $23 million (3.1%) and $56 million (2.5%), respectively, versus the corresponding 2011 periods. Excluding the effects of foreign currency exchange rate changes, premiums earned in the first nine months of 2012 increased $34 million (1.5%). Price competition in most property and casualty lines persists and the volume of business written in recent years has been less than our capacity. Our underwriters continue to exercise discipline by not accepting offers to write business where prices are deemed inadequate. We remain prepared to increase premium volumes should market conditions improve.

 

23


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 produced net underwriting gains of $118 million and $354 million in the third quarter and the first nine months of 2012, respectively. For the first nine months of 2012, underwriting results included net underwriting gains of $343 million from property business and $11 million from casualty/workers’ compensation business. The property underwriting results during the first nine months of 2012 reflected an absence of significant catastrophe losses during the year as well as underwriting gains from the run-off of prior years’ business, including reductions of liabilities established for prior years’ catastrophe losses. The underwriting gains from casualty/workers’ compensation business included favorable run-off of prior years’ business, offset in part by $79 million of loss reserve discount accretion and deferred charge amortization.

The property/casualty operations generated underwriting gains of $114 million in the third quarter of 2011 and underwriting losses of $169 million for the first nine months of 2011. In 2011, the property business produced underwriting gains of $86 million in the third quarter and net underwriting losses of $267 million for the first nine months. In 2011, property underwriting results included catastrophe losses of $126 million in the third quarter and $787 million in the first nine months related to a number of events including the earthquakes in Japan and New Zealand and various tornado and other weather related loss events in the United States, Europe and Australia. The casualty/workers’ compensation business generated underwriting gains of $98 million for the first nine months of 2011, reflecting overall reductions in estimated prior years’ casualty loss reserves.

Life/health

Premiums earned in 2012 increased $30 million (4.4%) in the third quarter and $79 million (3.8%) in the first nine months over the premiums earned in the corresponding 2011 periods. Adjusting for the effects of foreign currency exchange rate changes, premiums earned in the first nine months of 2012 increased $211 million (10.1%) versus 2011, which was primarily attributable to increased non-U.S. life business.

Life/health operations produced net underwriting gains of $36 million in the third quarter of 2012 and $19 million during the first nine months of 2012. Underwriting results in 2012 reflected favorable claims experience across most regions in Europe and reductions in estimated liabilities related to the 2011 earthquakes in New Zealand and Japan. However, in 2012, underwriting results 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 increased losses in the U.S. health business. In 2011, life/health operations produced underwriting gains of $34 million in the third quarter and $123 million for the first nine months. The third quarter underwriting gains were driven by lower than expected mortality in our international operations. Underwriting results in the first nine months of 2011 were negatively affected by losses attributable to the earthquakes in Japan and New Zealand and losses attributable to increased frequency and severity of life claims in the U.S.

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 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 business refers to other property and casualty business written on both a quota-share and excess basis and includes a quota-share contract with Swiss Reinsurance Company Ltd. (“Swiss Re”) covering a 20% share of substantially all of Swiss Re’s property/casualty contracts incepting between January 1, 2008 and December 31, 2012. We currently do not anticipate that the Swiss Re quota-share contract will be renewed or extended. BHRG also underwrites life reinsurance and annuity risks. BHRG’s underwriting results are summarized in the table below. Amounts are in millions.

 

     Premiums earned      Pre-tax underwriting gain/loss  
     Third Quarter      First Nine Months      Third Quarter     First Nine Months  
     2012      2011      2012      2011      2012     2011     2012     2011  

Catastrophe and individual risk

   $ 215       $ 192       $ 600       $ 551       $ 86      $ 35      $ 342      $ (130

Retroactive reinsurance

     278         104         649         1,923         (48     750        (160     495   

Other multi-line property/casualty

     1,341         1,012         3,734         3,055         (85     609        311        (621

Life and annuity

     744         531         2,000         1,522         (55     (19     (173     (66
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
   $ 2,578       $ 1,839       $ 6,983       $ 7,051       $ (102   $ 1,375      $ 320      $ (322
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

24


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 third quarter and first nine months of 2012 from catastrophe and individual risk contracts exceeded premiums earned in the corresponding 2011 periods by $23 million (12%) and $49 million (9%), respectively. Catastrophe reinsurance premiums written in the third quarter and first nine months of 2012 were approximately 20% greater than premiums written in the comparable 2011 periods. 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. In recent years, we have generally constrained the volume of business written as premium rates have not been attractive enough to warrant increasing volume. However, we have the capacity and will to write substantially more business when appropriate pricing can be obtained.

Catastrophe and individual risk underwriting results for the first nine months of 2012 reflected no significant losses from catastrophe events. Catastrophe and individual risk underwriting results for the first nine months of 2011 included estimated losses of $454 million, which were attributable to the earthquakes in Japan and New Zealand. The timing and magnitude of losses produces extraordinary volatility in periodic underwriting results of this business.

Premiums earned under retroactive reinsurance contracts in the first nine months of 2012 primarily derived from four new contracts. In the first nine months of 2011 premiums earned included approximately $1.7 billion from a single reinsurance contract with Eaglestone Reinsurance Company, a subsidiary of American International Group, Inc. (“AIG”). Under the contract, we agreed to reinsure the bulk of AIG’s U.S. asbestos liabilities. The AIG agreement provides for a maximum limit of indemnification of $3.5 billion.

Retroactive reinsurance policies generally provide very large, but limited, indemnification of losses and loss adjustment expenses with respect to past loss events. Such losses are recognized at the estimated ultimate amount and are usually expected to be paid over long periods of time. At the inception of a contract, deferred charge assets are recorded as the excess, if any, of the estimated ultimate losses over the premiums earned. Deferred charge balances are subsequently amortized over the estimated claims payment period using the interest method, which reflects estimates of the timing and amount of loss payments. Deferred charge balances are also adjusted to reflect changes in the timing and amount of actual and re-estimated future loss payments. The recurring periodic amortization of deferred charges and deferred charge adjustments resulting from changes to the estimated timing and amount of loss payments are included in earnings as a component of losses and loss adjustment expenses.

The underwriting results from retroactive policies in 2012 and 2011 reflected the recurring periodic amortization of deferred charges. In 2012, amortization charges were partially offset by net reductions in estimated unpaid losses of about $150 million with respect to contracts written in prior years. During the third quarter of 2011, we recognized a net reduction in estimated unpaid losses with respect to contracts written in prior years of approximately $875 million, which was primarily attributable to lower than expected loss experience related to one contract. At September 30, 2012 and December 31, 2011, unamortized deferred charges for all of BHRG’s retroactive contracts were approximately $3.8 billion and $4.0 billion, respectively. Gross unpaid losses from retroactive reinsurance contracts were approximately $18.3 billion at September 30, 2012, compared to approximately $18.8 billion as of December 31, 2011.

Premiums earned in the third quarter and first nine months of 2012 from other multi-line property and casualty business increased $329 million (33%) and $679 million (22%), respectively, over the corresponding 2011 periods. Premiums earned in the third quarter and first nine months of 2012 included $848 million and $2,408 million, respectively, from the Swiss Re quota-share contract. Premiums earned in the third quarter and first nine months of 2011 from this contract were $686 million and $2,061 million, respectively. In 2012, premiums earned also included increased amounts earned under other quota-share contracts. There were no significant catastrophe loss events in 2012. We incurred catastrophe losses of $724 million in the first nine months of 2011, which were primarily in connection with the Swiss Re quota-share contract and arose primarily from the earthquakes in Japan and New Zealand. In 2012, other multi-line property and casualty underwriting results also included foreign currency transaction losses of $118 million in the third quarter and $81 million in the first nine months arising from the conversion of certain reinsurance liabilities denominated in foreign currencies into U.S. Dollars. In the comparable periods of 2011, we recorded foreign currency transaction gains of $434 million and $41 million, respectively. The foreign currency transaction gains and losses reflected the volatility in exchange rates, primarily between the U.S. Dollar and the Swiss Franc and U.K. Pound Sterling.

Life and annuity premiums earned in the third quarter and first nine months of 2012 increased $213 million (40%) and $478 million (31%), respectively, over premiums earned in the comparable 2011 periods. Substantially all of the increases were attributable to new annuity contracts. Underwriting losses in 2012 from the life and annuity business were $55 million for the third quarter and $173 million for the first nine months. During the first nine months of 2012, the life reinsurance business produced underwriting losses of $56 million in 2012 versus underwriting gains of $11 million in the comparable prior year period. The underwriting losses

 

25


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)

 

in 2012 were attributed to higher than expected mortality. The annuity business generated underwriting losses of $117 million in the first nine months of 2012 and $77 million in the comparable prior year period. Annuity underwriting losses reflect the periodic discount accretion of the discounted liabilities established for such contracts as well as adjustments for mortality experience. At September 30, 2012 and December 31, 2011, annuity liabilities were approximately $2.7 billion and $2.1 billion, respectively.

Berkshire Hathaway Primary Group

Our primary insurance group consists of a wide variety of independently managed insurance businesses that principally write liability coverages for commercial accounts. These businesses include: Medical Protective Corporation and Princeton Insurance Company (acquired as of December 30, 2011), providers of professional liability insurance to physicians, dentists and other healthcare providers; 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 disability insurance to individuals nationwide through financial institutions; Applied Underwriters, a provider of integrated workers’ compensation solutions; and BoatU.S., a writer of insurance for owners of boats and small watercraft.

Premiums earned in the third quarter and first nine months of 2012 by our various primary insurers increased $127 million (28%) and $325 million (25%), respectively, over the corresponding prior year amounts. The increases in premiums earned in 2012 were primarily due to increased volume of workers’ compensation insurance from the Berkshire Hathaway Homestate Companies and premiums from Princeton Insurance Company. Premium volume of certain of our primary insurers continues to be constrained by market conditions. We have the capacity and desire to write substantially more volume when market conditions improve. For the first nine months, our primary insurers produced underwriting gains of $243 million in 2012 and $168 million in 2011. Underwriting gains as percentages of premiums earned in the first nine months were approximately 15% in 2012 and 13% in 2011.

Insurance—Investment Income

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

 

     Third Quarter      First Nine Months  
     2012      2011      2012      2011  

Investment income before income taxes and noncontrolling interests

   $ 976       $ 1,038       $ 3,421       $ 3,703   

Income taxes and noncontrolling interests

     243         255         829         973   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net investment income

   $ 733       $ 783       $ 2,592       $ 2,730   
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment income consists of interest and dividends earned on cash and investments of our insurance businesses. Pre-tax investment income in the third quarter and first nine months of 2012 declined $62 million (6%) and $282 million (8%) from investment income earned in the comparable 2011 periods. The declines in investment income in 2012 reflected the redemptions in 2011 of our investments in Goldman Sachs 10% Preferred Stock (insurance subsidiaries held 87% of the $5 billion aggregate investment) and in General Electric 10% Preferred Stock ($3 billion aggregate investment). Dividends earned by our insurance subsidiaries from these investments were $75 million in the third quarter and $416 million in the first nine months of 2011. Investment income in the 2012 periods reflected dividends earned from our investment in Bank of America 6% Preferred Stock (insurance subsidiaries hold 80% of the $5 billion aggregate investment) and increased dividend rates with respect to several of our common stock holdings. Our investment income over the remainder of 2012 will continue to be negatively affected by the aforementioned redemptions, given the comparatively lower yields currently available from new investment opportunities. We also continue to hold significant cash and cash equivalent balances earning near zero yields. However, our management believes that maintaining ample liquidity is paramount and strongly insists on safety over yield with respect to cash and cash equivalents.

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 receivables, deferred charges assumed under retroactive reinsurance contracts and deferred policy acquisition costs. Float approximated $72.0 billion at September 30, 2012 and $70.6 billion at December 31, 2011. For the first nine months of 2012 and 2011, the cost of float, as represented by the ratio of our underwriting gain or loss to average float, was negative as our insurance group generated a net underwriting gain in each period.

 

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

 

Insurance—Investment Income (Continued)

 

A summary of cash and investments held in our insurance businesses follows. Other investments include our investments in Wrigley, Dow Chemical and Bank of America preferred stock as well as warrants to acquire common shares of Goldman Sachs, General Electric and Bank of America (see Note 6 to the Consolidated Financial Statements). Amounts are in millions.

 

     September 30,      December 31,  
     2012      2011  

Cash and cash equivalents

   $ 25,004       $ 21,571   

Equity securities

     86,697         75,759   

Fixed maturity securities

     29,661         29,899   

Other investments

     14,980         13,111   
  

 

 

    

 

 

 
   $ 156,342       $ 140,340   
  

 

 

    

 

 

 

Fixed maturity investments as of September 30, 2012 were as follows. Amounts are in millions.

 

     Amortized
cost
     Unrealized
gains/losses
     Fair
value
 

U.S. Treasury, U.S. government corporations and agencies

   $ 2,546       $ 37       $ 2,583   

States, municipalities and political subdivisions

     2,642         187         2,829   

Foreign governments

     9,978         305         10,283   

Corporate bonds, investment grade

     5,205         831         6,036   

Corporate bonds, non-investment grade

     4,384         1,296         5,680   

Mortgage-backed securities

     1,964         286         2,250   
  

 

 

    

 

 

    

 

 

 
   $ 26,719       $ 2,942       $ 29,661   
  

 

 

    

 

 

    

 

 

 

All U.S. government obligations are rated AA+ or Aaa by the major rating agencies and approximately 85% of all state, municipal and political subdivisions, foreign government obligations and mortgage-backed securities are rated AA or higher. Non-investment grade securities represent securities that are rated below BBB- or Baa3. Foreign government securities include obligations issued or unconditionally guaranteed by national or provincial government entities.

Railroad (“BNSF”)

We acquired control of Burlington Northern Santa Fe Corporation (“BNSF”) in February 2010. BNSF operates one of the largest railroad systems in North America with approximately 32,000 route miles of track in 28 states and two Canadian provinces. BNSF’s major business groups are classified by product shipped and include consumer products, coal, industrial products and agricultural products. Earnings of BNSF are summarized below (in millions).

 

 

     Third Quarter      First Nine Months  
     2012      2011      2012      2011  

Revenues

   $ 5,343       $ 4,961       $ 15,407       $ 14,284   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating expenses:

           

Compensation and benefits

     1,149         1,069         3,344         3,216   

Fuel

     1,089         1,089         3,286         3,124   

Purchased services

     601         571         1,784         1,667   

Depreciation and amortization

     475         454         1,408         1,350   

Equipment rents

     204         192         605         575   

Materials and other

     160         208         617         665   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     3,678         3,583         11,044         10,597   

Interest expense

     157         142         460         416   
  

 

 

    

 

 

    

 

 

    

 

 

 
     3,835         3,725         11,504         11,013   
  

 

 

    

 

 

    

 

 

    

 

 

 

Pre-tax earnings

     1,508         1,236         3,903         3,271   

Income taxes

     571         470         1,463         1,208   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings

   $ 937       $ 766       $ 2,440       $ 2,063   
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenues during the third quarter and first nine months of 2012 were approximately $5.3 billion and $15.4 billion, respectively, representing increases of $382 million (8%) and $1,123 million (8%), respectively, over 2011. Overall, the increases in revenues in 2012 reflected higher average revenues per car/unit of approximately 2% for the third quarter and 4% for the first nine months as well

 

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Table of Contents

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

 

Railroad (“BNSF”) (Continued)

 

as increases in cars/units handled (“volume”) of 5% for the third quarter and 3% for the first nine months. Revenues in each period include fuel surcharges to customers under programs intended to recover incremental fuel costs when fuel prices exceed threshold fuel prices. Fuel surcharges decreased by 4% for the third quarter and increased 6% for the first nine months as compared to 2011, and are reflected in average revenue per car/unit.

The increase in overall volume during the third quarter of 2012 included increases in consumer products (4%), industrial products (14%), coal (4%) and agricultural products (3%). The increase in overall volume during the first nine months of 2012 included increases in consumer products (5%) and industrial products (13%). Those increases were offset by declines in volume for coal (3%) and for agricultural products (3%). The consumer products volume increase was primarily attributable to higher domestic intermodal and automotive volume. Industrial products volume increased primarily as a result of increased shipments of petroleum products, as well as increased sand shipments. The increase in coal unit volume in the third quarter 2012 as compared to the third quarter 2011 was due to impacts of severe flooding along key coal routes during the third quarter of 2011. The overall decline in coal unit volume for the first nine months of 2012 was attributable to decreased coal demand as a result of low natural gas prices, a mild winter and spring and high utility stockpiles. Agricultural product volume increased during the third quarter of 2012 as compared to the third quarter of 2011 due to higher soybean shipments. Agricultural product volume decreased during the first nine months of 2012 compared to 2011 due to a decline in wheat and corn shipments for export partially offset by higher soybean and U.S. corn shipments.

Operating expenses in 2012 for the third quarter and first nine months increased $95 million (3%) and $447 million (4%), respectively, compared to 2011. Compensation and benefits expenses in the third quarter and first nine months of 2012 increased $80 million and $128 million, respectively, compared to 2011 primarily reflecting volume-related increases. Fuel expenses in the third quarter of 2012 were the same as fuel expenses in 2011, while fuel expenses in the first nine months of 2012 increased $162 million (5%) over 2011 due to higher fuel prices and volume increases, partially offset by improved fuel efficiency. Fuel efficiency in the second and third quarters of 2011 was negatively impacted by severe weather conditions. Purchased services costs in the third quarter and first nine months of 2012 increased $30 million (5%) and $117 million (7%), respectively, compared to 2011 due primarily to higher volume-related costs, including purchased transportation for BNSF Logistics, a wholly-owned third-party logistics company, and increased equipment maintenance costs, partially offset by weather impacts in 2011. Interest expense in 2012 increased $15 million (11%) in the third quarter and $44 million (11%) in the first nine months versus 2011 due principally to higher average outstanding debt balances.

Utilities and Energy (“MidAmerican”)

We hold an 89.8% ownership interest in MidAmerican Energy Holdings Company (“MidAmerican”), which operates an international energy business. MidAmerican’s domestic regulated energy interests are comprised of two regulated utility companies, PacifiCorp and MidAmerican Energy Company (“MEC”). MidAmerican also owns two interstate natural gas pipeline companies. In the United Kingdom, MidAmerican owns two electricity distribution businesses, operating as Northern Powergrid Holdings Company (“Northern Powergrid”). The rates that utility and natural gas pipeline companies charge customers for energy and other services are generally subject to regulatory approval. Rates are based in large part on the costs of business operations, including a return on capital. To the extent these operations are not allowed to include such costs in the approved rates, operating results will be adversely affected. In addition, MidAmerican also owns a diversified portfolio of independent power projects, including recently-acquired solar and wind projects, and the second-largest residential real estate brokerage firm in the United States. Revenues and earnings from MidAmerican are summarized below. Amounts are in millions.

 

     Third Quarter     First Nine Months  
     Revenues      Earnings     Revenues      Earnings  
     2012      2011      2012     2011     2012      2011      2012     2011  

PacifiCorp

   $ 1,344       $ 1,209       $ 307      $ 233      $ 3,721       $ 3,446       $ 695      $ 606   

MidAmerican Energy Company

     836         873         109        112        2,431         2,667         209        230   

Natural gas pipelines

     209         208         51        64        706         711         261        262   

Northern Powergrid

     240         237         82        100        747         729         305        319   

Real estate brokerage

     378         290         31        22        986         774         65        35   

Other

     69         50         41        39        127         98         55        49   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
   $ 3,076       $ 2,867           $ 8,718       $ 8,425        
  

 

 

    

 

 

        

 

 

    

 

 

      

Earnings before corporate interest and income taxes

           621        570              1,590        1,501   

Corporate interest

           (79     (84           (241     (253

Income taxes and nonco