10-Q 1 d562133d10q.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 June 30, 2013

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 July 25, 2013:

 

Class A —

     868,448   

Class B —

     1,162,977,534   

 

 

 


Table of Contents

BERKSHIRE HATHAWAY INC.

 

     Page No.  

Part I – Financial Information

  

Item 1.  Financial Statements

  

 

Consolidated Balance Sheets—
June 30, 2013 and December 31, 2012

     2   
 

Consolidated Statements of Earnings—
Second Quarter and First Six Months 2013 and 2012

     3   
 

Consolidated Statements of Comprehensive Income—
Second Quarter and First Six Months 2013 and 2012

     4   
 

Consolidated Statements of Changes in Shareholders’ Equity—
First Six Months 2013 and 2012

     4   
 

Consolidated Statements of Cash Flows—
First Six Months 2013 and 2012

     5   
 

Notes to Consolidated Financial Statements

     6-21   

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

     22-37   

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

     38   

Item 4.  Controls and Procedures

     38   

Part II – Other Information

  

Item 1.

 

Legal Proceedings

     39   

Item 1A.

 

Risk Factors

     39   

Item 2.

 

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

     39   

Item 3.

 

Defaults Upon Senior Securities

     39   

Item 4.

 

Mine Safety Disclosures

     39   

Item 5.

 

Other Information

     39   

Item 6.

 

Exhibits

     39   

Signature

     40   

 

1


Table of Contents

Part I Financial Information

Item 1. Financial Statements

BERKSHIRE HATHAWAY INC.

and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(dollars in millions)

 

     June 30,
2013
     December 31, 
2012
 
    

 

 (Unaudited) 

       

ASSETS

    

Insurance and Other:

    

Cash and cash equivalents

    $ 31,216       $ 42,358   

Investments:

    

Fixed maturity securities

     28,756        31,449   

Equity securities

     101,933        86,467   

Other investments

     29,484        16,057   

Receivables

     21,956        21,753   

Inventories

     9,877        9,675   

Property, plant and equipment

     19,150        19,188   

Goodwill

     33,178        33,274   

Other

     18,982        17,875   
  

 

 

   

 

 

 
     294,532        278,096   
  

 

 

   

 

 

 

Railroad, Utilities and Energy:

    

Cash and cash equivalents

     2,564        2,570   

Property, plant and equipment

     89,199        87,684   

Goodwill

     20,158        20,213   

Other

     14,696        13,441   
  

 

 

   

 

 

 
     126,617        123,908   
  

 

 

   

 

 

 

Finance and Financial Products:

    

Cash and cash equivalents

     1,915        2,064   

Investments in fixed maturity securities

     749        842   

Other investments

     5,235        4,952   

Loans and finance receivables

     12,855        12,809   

Goodwill

     1,036        1,036   

Other

     3,624        3,745   
  

 

 

   

 

 

 
     25,414        25,448   
  

 

 

   

 

 

 
    $ 446,563       $ 427,452   
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Insurance and Other:

    

Losses and loss adjustment expenses

    $ 64,423       $ 64,160   

Unearned premiums

     11,360        10,237   

Life, annuity and health insurance benefits

     10,520        10,943   

Accounts payable, accruals and other liabilities

     21,278        21,149   

Notes payable and other borrowings

     13,261        13,535   
  

 

 

   

 

 

 
     120,842        120,024   
  

 

 

   

 

 

 

Railroad, Utilities and Energy:

    

Accounts payable, accruals and other liabilities

     13,186        13,113   

Notes payable and other borrowings

     37,861        36,156   
  

 

 

   

 

 

 
     51,047        49,269   
  

 

 

   

 

 

 

Finance and Financial Products:

    

Accounts payable, accruals and other liabilities

     1,067        1,099   

Derivative contract liabilities

     6,241        7,933   

Notes payable and other borrowings

     12,831        13,045   
  

 

 

   

 

 

 
     20,139        22,077   
  

 

 

   

 

 

 

Income taxes, principally deferred

     49,547        44,494   
  

 

 

   

 

 

 

Total liabilities

     241,575        235,864   
  

 

 

   

 

 

 

Shareholders’ equity:

    

Common stock

     8        8   

Capital in excess of par value

     36,101        37,230   

Accumulated other comprehensive income

     33,565        27,500   

Retained earnings

     133,705        124,272   

Treasury stock, at cost

     (1,363     (1,363
  

 

 

   

 

 

 

Berkshire Hathaway shareholders’ equity

     202,016        187,647   

Noncontrolling interests

     2,972        3,941   
  

 

 

   

 

 

 

Total shareholders’ equity

     204,988        191,588   
  

 

 

   

 

 

 
    $ 446,563       $ 427,452   
  

 

 

   

 

 

 

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)

 

     Second Quarter           First Six Months  
    

 

2013

     2012           2013           2012  
     (Unaudited)    (Unaudited)  

Revenues:

                 

Insurance and Other:

                 

Insurance premiums earned

    $ 8,815            $ 8,428               $ 18,192           $ 16,493    

Sales and service revenues

     23,873             20,814                46,291            40,078    

Interest, dividend and other investment income

     1,610             1,420                2,621            2,487    

Investment gains/losses

     455             102                889            (5)   
  

 

 

    

 

 

       

 

 

       

 

 

 
     34,753             30,764                67,993            59,053    
  

 

 

    

 

 

       

 

 

       

 

 

 

Railroad, Utilities and Energy:

                 

Operating revenues

     8,310             7,769                16,661            15,618    

Other

     68             41                117            88    
  

 

 

    

 

 

       

 

 

       

 

 

 
     8,378             7,810                16,778            15,706    
  

 

 

    

 

 

       

 

 

       

 

 

 

Finance and Financial Products:

                 

Interest, dividend and other investment income

     342             372                683            747    

Investment gains/losses

     37             23                108            24    

Derivative gains/losses

     461             (1,068)               1,667            (66)   

Other

     722             645                1,331            1,229    
  

 

 

    

 

 

       

 

 

       

 

 

 
     1,562             (28)               3,789            1,934    
  

 

 

    

 

 

       

 

 

       

 

 

 
     44,693             38,546                88,560            76,693    
  

 

 

    

 

 

       

 

 

       

 

 

 

Costs and expenses:

                 

Insurance and Other:

                 

Insurance losses and loss adjustment expenses

     5,269             4,586                10,413            9,357    

Life, annuity and health insurance benefits

     1,063             1,351                2,324            2,443    

Insurance underwriting expenses

     1,657             1,534                3,240            3,651    

Cost of sales and services

     19,373             16,821                37,657            32,417    

Selling, general and administrative expenses

     2,926             2,476                5,780            4,904    

Interest expense

     107             106                208            209    
  

 

 

    

 

 

       

 

 

       

 

 

 
     30,395             26,874                59,622            52,981    
  

 

 

    

 

 

       

 

 

       

 

 

 

Railroad, Utilities and Energy:

                 

Cost of sales and operating expenses

     6,094             5,767                12,205            11,637    

Interest expense

     452             439                899            867    
  

 

 

    

 

 

       

 

 

       

 

 

 
     6,546             6,206                13,104            12,504    
  

 

 

    

 

 

       

 

 

       

 

 

 

Finance and Financial Products:

                 

Interest expense

     132             151                270            311    

Other

     729             700                1,378            1,351    
  

 

 

    

 

 

       

 

 

       

 

 

 
     861             851                1,648            1,662    
  

 

 

    

 

 

       

 

 

       

 

 

 
     37,802             33,931                74,374            67,147    
  

 

 

    

 

 

       

 

 

       

 

 

 

Earnings before income taxes

     6,891             4,615                14,186            9,546    

Income tax expense

     2,279             1,384                4,557            2,949    
  

 

 

    

 

 

       

 

 

       

 

 

 

Net earnings

     4,612             3,231                9,629            6,597    

Less: Earnings attributable to noncontrolling interests

     71             123                196            244    
  

 

 

    

 

 

       

 

 

       

 

 

 

Net earnings attributable to Berkshire Hathaway

    $ 4,541            $ 3,108               $ 9,433           $ 6,353    
  

 

 

    

 

 

       

 

 

       

 

 

 

Average common shares outstanding *

       1,643,599               1,651,511                  1,643,391              1,651,228    

Net earnings per share attributable to Berkshire Hathaway shareholders *

    $ 2,763            $ 1,882               $ 5,740           $ 3,847    
  

 

 

    

 

 

       

 

 

       

 

 

 

 

 

*

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)

 

     Second Quarter      First Six Months  
     2013      2012      2013     2012  

Net earnings

    $   4,612         $ 3,231         $ 9,629       $ 6,597   
  

 

 

    

 

 

    

 

 

   

 

 

 

Other comprehensive income:

          

Net change in unrealized appreciation of investments

     1,411          (1,788)         11,052        9,854   

Applicable income taxes

     (518)         584          (3,844     (3,467

Reclassification of investment appreciation in net earnings

     (271)         (107)         (775     25   

Applicable income taxes

     95          37          271        (9

Foreign currency translation

     (203)         (537)         (853     (318

Applicable income taxes

     42                  93        7   

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

     25          37          112        49   

Applicable income taxes

     (7)         (10)         (30     (16

Other, net

                     20        (19
  

 

 

    

 

 

    

 

 

   

 

 

 

Other comprehensive income, net

     578          (1,777)         6,046        6,106   
  

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income

     5,190          1,454          15,675        12,703   

Comprehensive income attributable to noncontrolling interests

     64          82          165        223   
  

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income attributable to Berkshire Hathaway shareholders

    $ 5,126         $ 1,372         $ 15,510       $ 12,480   
  

 

 

    

 

 

    

 

 

   

 

 

 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

(dollars in millions)

 

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

Balance at December 31, 2011

    $ 37,815         $ 17,654         $ 109,448        $ (67)        $ 4,111         $ 168,961    

Net earnings

     —          —          6,353         —          244          6,597    

Other comprehensive income, net

     —          6,127                 —          (21)         6,106    

Issuance (repurchase) of common stock

     51          —                 —          —         51    

Changes in noncontrolling interests:

                 

Interests acquired and other transactions

     (2)         —                 —                  —   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance at June 30, 2012

    $ 37,864         $ 23,781         $ 115,801        $ (67)        $ 4,336         $ 181,715    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance at December 31, 2012

    $ 37,238         $ 27,500         $ 124,272        $ (1,363)        $ 3,941         $ 191,588    

Net earnings

     —          —          9,433         —          196          9,629    

Other comprehensive income, net

     —          6,077          —          —          (31)         6,046    

Issuance (repurchase) of common stock

     70          —          —          —                 70    

Changes in noncontrolling interests:

                 

Interests acquired and other transactions

     (1,199)         (12)         —          —          (1,134)         (2,345)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance at June 30, 2013

    $ 36,109         $ 33,565         $  133,705        $ (1,363)        $ 2,972         $ 204,988    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

4


Table of Contents

BERKSHIRE HATHAWAY INC.

and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in millions)

 

     First Six Months  
     2013     2012  
     (Unaudited)  

Cash flows from operating activities:

    

Net earnings

    $ 9,629       $ 6,597   

Adjustments to reconcile net earnings to operating cash flows:

    

Investment (gains) losses

     (997     (19

Depreciation

     2,682        2,518   

Other

     450        428   

Changes in operating assets and liabilities before business acquisitions:

    

Losses and loss adjustment expenses

     583        (539

Deferred charges reinsurance assumed

     (309     176   

Unearned premiums

     1,154        1,722   

Receivables and originated loans

     (180     (1,565

Derivative contract assets and liabilities

     (1,543     36   

Income taxes

     1,908        647   

Other assets

     (435     (973

Other liabilities

     (31     481   
  

 

 

   

 

 

 

Net cash flows from operating activities

     12,911        9,509   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of fixed maturity securities

     (4,083     (4,605

Purchases of equity securities

     (6,052     (5,277

Purchases of other investments

     (12,250      

Sales of fixed maturity securities

     1,719        1,403   

Redemptions and maturities of fixed maturity securities

     3,827        3,268   

Sales of equity securities

     1,454        3,828   

Purchases of loans and finance receivables

     (326     (471

Collections of loans and finance receivables

     330        425   

Acquisitions of businesses, net of cash acquired

     (154     (469

Purchases of property, plant and equipment

     (4,758     (4,579

Other

     (2,170     (336
  

 

 

   

 

 

 

Net cash flows from investing activities

     (22,463     (6,813
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from borrowings of insurance and other businesses

     2,596        1,761   

Proceeds from borrowings of railroad, utilities and energy businesses

     3,049        2,849   

Proceeds from borrowings of finance businesses

     1,510        1,586   

Repayments of borrowings of insurance and other businesses

     (2,775     (1,915

Repayments of borrowings of railroad, utilities and energy businesses

     (311     (524

Repayments of borrowings of finance businesses

     (1,725     (2,167

Change in short-term borrowings, net

     (973     (912

Acquisitions of noncontrolling interests and other

     (3,076     (19
  

 

 

   

 

 

 

Net cash flows from financing activities

     (1,705     659   
  

 

 

   

 

 

 

Effects of foreign currency exchange rate changes

     (40     7   
  

 

 

   

 

 

 

Increase in cash and cash equivalents

     (11,297     3,362   

Cash and cash equivalents at beginning of year *

     46,992        37,299   
  

 

 

   

 

 

 

Cash and cash equivalents at end of first six months *

    $ 35,695       $ 40,661   
  

 

 

   

 

 

 

* Cash and cash equivalents are comprised of the following:

    

Beginning of year—

    

Insurance and Other

    $ 42,358       $ 33,513   

Railroad, Utilities and Energy

     2,570        2,246   

Finance and Financial Products

     2,064        1,540   
  

 

 

   

 

 

 
    $ 46,992       $ 37,299   
  

 

 

   

 

 

 

End of first six months—

    

Insurance and Other

    $ 31,216       $ 36,812   

Railroad, Utilities and Energy

     2,564        2,598   

Finance and Financial Products

     1,915        1,251   
  

 

 

   

 

 

 
    $ 35,695       $ 40,661   
  

 

 

   

 

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

5


Table of Contents

BERKSHIRE HATHAWAY INC.

and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2013

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. In this Report, certain immaterial amounts related to 2012 periods 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 or when investments are carried at fair value and the unrealized gains and losses are included in earnings. 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

In February 2013, the FASB issued ASU 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” ASU 2013-02 requires additional disclosures concerning the amounts reclassified out of each component of accumulated other comprehensive income and into net earnings during the reporting period. We adopted ASU 2013-02 on January 1, 2013 and included the required disclosures in Note 17.

In December 2011, the FASB issued ASU 2011-11, “Disclosures about Offsetting Assets and Liabilities” and in January 2013, the FASB issued ASU 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” ASU 2011-11, as clarified, enhances disclosures surrounding offsetting (netting) assets and liabilities. The standard applies to derivatives, repurchase agreements and securities lending transactions and requires companies to disclose gross and net information about financial instruments and derivatives eligible for offset and to disclose financial instruments and derivatives subject to master netting arrangements in financial statements. 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’s 2011-11 and 2012-02 were adopted on January 1, 2013 and had an immaterial effect on our Consolidated Financial Statements.

In February 2013, the FASB issued ASU 2013-04, “Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date.” ASU 2013-04 requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date as the amount the reporting entity agreed to pay plus additional amounts the reporting entity expects to pay on behalf of its co-obligors. The guidance further provides for disclosure of the nature and amount of the obligation. ASU 2013-04 is effective for interim and annual reporting periods beginning after December 15, 2013. We are currently evaluating the effect this standard will have on our Consolidated Financial Statements.

 

6


Table of Contents

Notes To Consolidated Financial Statements (Continued)

 

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 and at sensible prices. During the year ended December 31, 2012, we completed several smaller-sized business acquisitions, most of which were considered as “bolt-on” acquisitions to several of our existing business operations. Aggregate consideration paid in 2012 for acquisitions was approximately $3.2 billion, which included $438 million for entities that will develop, construct and subsequently operate renewable energy generation facilities. We do not believe that these acquisitions are material, individually or in the aggregate, to our Consolidated Financial Statements.

Note 4. Investments in fixed maturity securities

Investments in securities with fixed maturities as of June 30, 2013 and December 31, 2012 are summarized by type below (in millions).

 

     Amortized
Cost
      Unrealized 
Gains
      Unrealized 
Losses
    Fair
Value
 

June 30, 2013

          

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

    $ 2,799        $ 22        $ (10    $ 2,811   

States, municipalities and political subdivisions

     2,600         152         (4     2,748   

Foreign governments

     10,222         156         (140     10,238   

Corporate bonds

     9,600         1,880         (16     11,464   

Mortgage-backed securities

     2,000         252         (8     2,244   
  

 

 

    

 

 

    

 

 

   

 

 

 
    $ 27,221        $ 2,462        $ (178    $ 29,505   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2012

          

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

    $ 2,742        $ 33        $         —        $ 2,775   

States, municipalities and political subdivisions

     2,735         178         —         2,913   

Foreign governments

     11,098         302         (45     11,355   

Corporate bonds

     10,410         2,254         (3     12,661   

Mortgage-backed securities

     2,276         318         (7     2,587   
  

 

 

    

 

 

    

 

 

   

 

 

 
    $   29,261        $ 3,085        $ (55    $ 32,291   
  

 

 

    

 

 

    

 

 

   

 

 

 

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

 

     June 30,      December 31,  
     2013      2012  

Insurance and other

    $  28,756        $ 31,449   

Finance and financial products

     749         842   
  

 

 

    

 

 

 
    $  29,505        $ 32,291   
  

 

 

    

 

 

 

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 June 30, 2013, approximately 94% of foreign government holdings were rated AA or higher by at least one of the major rating agencies and securities issued or guaranteed by Germany, the United Kingdom, Australia, Canada and The Netherlands represented approximately 80% of the investments. Unrealized losses on all fixed maturity investments in a continuous unrealized loss position for more than twelve consecutive months were $13 million as of June 30, 2013 and $9 million as of December 31, 2012.

The amortized cost and estimated fair value of securities with fixed maturities at June 30, 2013 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

    $ 6,639        $ 11,669        $ 4,495        $   2,418        $ 2,000        $ 27,221   

Fair value

     6,781         12,652         5,045         2,783         2,244         29,505   

 

7


Table of Contents

Notes To Consolidated Financial Statements (Continued)

 

Note 5. Investments in equity securities

Investments in equity securities as of June 30, 2013 and December 31, 2012 are summarized based on the primary industry of the investee in the table below (in millions).

     Cost Basis      Unrealized
Gains
      Unrealized 
Losses
    Fair
Value
 

June 30, 2013

          

Banks, insurance and finance

    $  20,259        $  21,600        $ —        $ 41,859   

Consumer products

     7,272         17,178         —         24,450   

Commercial, industrial and other

     28,272         9,030         (337     36,965   
  

 

 

    

 

 

    

 

 

   

 

 

 
    $ 55,803        $ 47,808        $ (337    $  103,274   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2012

          

Banks, insurance and finance

    $ 18,600        $ 14,753        $ (2    $ 33,351   

Consumer products

     7,546         14,917         —         22,463   

Commercial, industrial and other

     24,361         7,687         (200     31,848   
  

 

 

    

 

 

    

 

 

   

 

 

 
    $ 50,507        $ 37,357        $ (202    $ 87,662   
  

 

 

    

 

 

    

 

 

   

 

 

 

As of June 30, 2013, approximately 58% of the fair value of our equity securities was concentrated within four companies. As of June 30, 2013 and December 31, 2012, we concluded that there were no unrealized losses that were other-than-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. As of June 30, 2013 and December 31, 2012, unrealized losses on equity securities in a continuous unrealized loss position for more than twelve consecutive months were $135 million and $45 million, respectively.

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

 

     June 30,      December 31,  
     2013      2012  

Insurance and other

    $ 101,933        $ 86,467   

Railroad, utilities and energy *

     745         675   

Finance and financial products *

     596         520   
  

 

 

    

 

 

 
    $ 103,274        $ 87,662   
  

 

 

    

 

 

 

 

*

Included in other assets.

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”). In 2013, other investments also include investments in H.J. Heinz Holding Corporation (“Heinz Holding”), a newly formed holding company that acquired the H.J. Heinz Company (“Heinz”) on June 7, 2013. A summary of other investments follows (in millions).

     Cost
Basis
     Unrealized
Gains
     Fair
Value
     Carrying
Value
 

June 30, 2013

           

Fixed maturity and equity securities:

           

Insurance and other

    $ 13,741        $      4,233        $ 17,974        $ 17,234   

Finance and financial products

     3,254         1,981         5,235         5,235   

Investments in Heinz Holding

     12,250         —          12,250         12,250   
  

 

 

    

 

 

    

 

 

    

 

 

 
    $ 29,245        $ 6,214        $ 35,459        $ 34,719   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2012

           

Fixed maturity and equity securities:

           

Insurance and other

    $ 13,109        $ 3,823        $ 16,932        $ 16,057   

Finance and financial products

     3,148         1,804         4,952         4,952   
  

 

 

    

 

 

    

 

 

    

 

 

 
    $ 16,257        $ 5,627        $ 21,884        $ 21,009   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

8


Table of Contents

Notes To Consolidated Financial Statements (Continued)

 

Note 6. Other investments (Continued)

 

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 fully redeemed by GS on April 18, 2011. The GS Warrants remain outstanding and expire on October 1, 2013 and when originally issued were 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 fully redeemed by GE on October 17, 2011. The GE Warrants remain outstanding and expire on October 16, 2013 and when originally issued were exercisable for an aggregate cost of $3 billion ($22.25/share).

In the first quarter of 2013, the GE Warrants and GS Warrants agreements were amended to provide solely for cashless exercises. Upon exercise, we will receive shares of GE and GS based on the excess, if any, of the market price, as defined, over the exercise price, without payment of additional consideration. The aggregate net unrealized gains associated with these investments ($728 million) were included in earnings in 2013 and were reflected in the cost figures in the preceding table as of June 30, 2013.

In 2008, we acquired $4.4 billion par amount of 11.45% Wrigley subordinated notes due 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 on the prepayment date. In 2009, we also acquired $1.0 billion par amount of Wrigley senior notes due in December 2013 and 2014. We currently own $800 million and an unconsolidated joint venture in which we hold a 50% economic interest owns $200 million of the Wrigley senior notes. 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).

On February 13, 2013, Berkshire and an affiliate of the global investment firm 3G Capital (such affiliate, “3G”), through a newly formed holding company, Heinz Holding, entered into a definitive merger agreement to acquire Heinz. The transaction to acquire Heinz was completed on June 7, 2013. Under the terms of the agreement, Heinz shareholders received $72.50 in cash for each outstanding share of common stock, or approximately $23.25 billion in the aggregate. On June 7, 2013, Berkshire and 3G each made equity investments in Heinz Holding, which, together with debt financing obtained by Heinz Holding, was used to acquire Heinz.

Heinz is one of the world’s leading marketers and producers of healthy, convenient and affordable foods specializing in ketchup, sauces, meals, soups, snacks and infant nutrition. Heinz is a global family of leading branded products, including Heinz® Ketchup, sauces, soups, beans, pasta and infant foods (representing over one third of Heinz’s total sales), Ore-Ida® potato products, Weight Watchers® Smart Ones® entrées, T.G.I. Friday’s® snacks, and Plasmon® infant nutrition.

Berkshire’s investments in Heinz Holding consist of 425 million shares of common stock, warrants to acquire additional shares of common stock, and cumulative compounding preferred stock (“preferred stock”) with a liquidation preference of $8 billion. The aggregate cost of these investments was $12.25 billion. 3G acquired 425 million shares of Heinz Holding common stock for $4.25 billion. In addition, Heinz Holding has reserved 39.6 million shares of common stock for issuance under stock options to management of Heinz.

The preferred stock possesses no voting rights except as required by law or for certain matters specified in the Heinz Holding charter. The preferred stock is entitled to dividends at 9% per annum whether or not declared, is senior in priority to the common stock and is callable after June 7, 2016 at the liquidation value plus an applicable premium and any accrued and unpaid dividends. Under the Heinz Holding charter and a shareholders’ agreement entered into as of the acquisition date (the “shareholders’ agreement”), after June 7, 2021, Berkshire can cause Heinz Holding to sell shares of common stock through public offerings or other issuances (“redemption offerings”), the proceeds of which would be required to be used to redeem any outstanding shares of preferred stock. The warrants are exercisable into approximately 46 million shares of common stock (subject to certain anti-dilution adjustments) for one cent per share and expire on June 7, 2018.

 

9


Table of Contents

Notes To Consolidated Financial Statements (Continued)

 

Note 6. Other investments (Continued)

 

Berkshire and 3G each currently own 50% of the outstanding shares of common stock and possess equal voting interests in Heinz Holding. Under the shareholders’ agreement, unless and until Heinz Holding engages in a public offering, Berkshire and 3G each must approve all significant transactions and governance matters involving Heinz Holding and Heinz so long as Berkshire and 3G each continue to hold at least 66% of their initial common stock investments, except for (i) the declaration and payment of dividends on the preferred stock, and actions related to a Heinz Holding call of the preferred stock, for which Berkshire does not have a vote or approval right, and (ii) redemption offerings and redemptions resulting therefrom, which may only be triggered by Berkshire. No dividends may be paid on the common stock if there are any unpaid dividends on the preferred stock.

Berkshire is accounting for its investments in common stock and common stock warrants on the equity method. Accordingly, Berkshire will recognize its proportionate share of net earnings and other comprehensive income available to common stockholders in its earnings and other comprehensive income beginning as of June 7, 2013. Berkshire has concluded that its investment in preferred stock currently represents an equity investment. The preferred stock does not have a readily determinable market value. Accordingly, this investment is carried at cost in our Consolidated Balance Sheet.

Note 7. Investment gains/losses

Investment gains/losses, including other-than-temporary impairment (“OTTI”) losses, are summarized below (in millions).

 

     Second Quarter     First Six Months  
     2013     2012     2013      2012  

Fixed maturity securities —

         

Gross gains from sales and other disposals

    $ 67       $ 58       $ 82            $ 91      

Gross losses from sales and other disposals

     (38     (329     (92)            (345)     

Equity securities —

         

Gross gains from sales and other disposals

     261        385        370             573      

Gross losses from sales and other disposals

     (19     (7     (20)            (7)     

OTTI losses

     —         —         (85)            (337)     

Other

     221        18        742             44      
  

 

 

   

 

 

   

 

 

    

 

 

 
    $ 492       $ 125       $  997            $ 19      
  

 

 

   

 

 

   

 

 

    

 

 

 

 

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

 

  

Insurance and other

    $ 455       $ 102       $ 889            $ (5)     

Finance and financial products

     37        23        108             24      
  

 

 

   

 

 

   

 

 

    

 

 

 
    $ 492       $ 125       $ 997            $ 19      
  

 

 

   

 

 

   

 

 

    

 

 

 

We record investments in equity and fixed maturity securities that are classified as available-for-sale at fair value with the difference between fair value and cost recorded in other comprehensive income. OTTI losses recognized in earnings represent reductions in the cost basis of the investment, but not the fair value. Accordingly, the OTTI 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 six months of 2013 and 2012, the OTTI losses related to bonds issued by Texas Competitive Electric Holdings. In recognizing these OTTI losses, we concluded that we were unlikely to receive all of the remaining contractual interest and principal amounts when due. Other investment gains/losses in 2013 primarily consisted of net gains related to the GS and GE warrants.

Note 8. Receivables

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

 

     June 30,     December 31,  
     2013     2012  

Insurance premiums receivable

    $ 8,197       $ 7,845   

Reinsurance recoverable on unpaid losses

     2,951        2,925   

Trade and other receivables

     11,189        11,369   

Allowances for uncollectible accounts

     (381     (386
  

 

 

   

 

 

 
    $ 21,956       $ 21,753   
  

 

 

   

 

 

 

 

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).

 

     June 30,     December 31,  
     2013     2012  

Consumer installment loans and finance receivables

    $ 12,570       $ 12,701   

Commercial loans and finance receivables

     623        469   

Allowances for uncollectible loans

     (338     (361
  

 

 

   

 

 

 
    $  12,855       $ 12,809   
  

 

 

   

 

 

 

Allowances for uncollectible loans predominantly relate to consumer installment loans. Provisions for consumer loan losses for the first six months of 2013 and 2012 were $128 million and $161 million, respectively. Loan charge-offs, net of recoveries, for the first six months were $151 million in 2013 and $170 million in 2012. Consumer loan amounts are net of unamortized acquisition discounts of $434 million at June 30, 2013 and $459 million at December 31, 2012. At June 30, 2013, approximately 98% of consumer installment loan balances were evaluated collectively for impairment whereas about 71% 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 June 30, 2013, approximately 98% of consumer installment and commercial loan balances were determined to be performing and approximately 94% of those balances were current as to payment status.

Note 9. Inventories

Inventories are comprised of the following (in millions).

 

      June 30,       December 31,  
     2013      2012  

Raw materials

    $     1,719        $ 1,699   

Work in process and other

     861         883   

Finished manufactured goods

     3,296         3,187   

Goods acquired for resale

     4,001         3,906   
  

 

 

    

 

 

 
    $ 9,877        $ 9,675   
  

 

 

    

 

 

 

Note 10. Property, plant and equipment

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

 

     Ranges of
 estimated useful life 
     June 30,
2013
    December 31,
2012
 

Land

     —         $ 1,055       $ 1,048   

Buildings and improvements

     2 – 40 years           6,052        6,074   

Machinery and equipment

     3 – 20 years           15,677        15,436   

Furniture, fixtures and other

     2 – 20 years           2,945        2,736   

Assets held for lease

     12 –30 years           6,956        6,731   
     

 

 

   

 

 

 
        32,685        32,025   

Accumulated depreciation

        (13,535     (12,837
     

 

 

   

 

 

 
       $ 19,150       $ 19,188   
     

 

 

   

 

 

 

Depreciation expense of insurance and other businesses for the first six months of 2013 and 2012 was $994 million and $955 million, respectively.

 

11


Table of Contents

Notes To Consolidated Financial Statements (Continued)

 

Note 10. Property, plant and equipment (Continued)

 

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

 

     Ranges of
 estimated useful life 
     June 30,
2013
    December 31,
2012
 

Railroad:

       

Land

     —         $ 5,970       $ 5,950   

Track structure and other roadway

     5 – 100 years         38,798        38,255   

Locomotives, freight cars and other equipment

     5 – 37 years         6,804        6,528   

Construction in progress

     —          1,160        963   

Utilities and energy:

       

Utility generation, distribution and transmission system

     5 – 80 years         43,162        42,682   

Interstate pipeline assets

     3 – 80 years         6,357        6,354   

Independent power plants and other assets

     3 – 30 years         2,311        1,860   

Construction in progress

     —          2,819        2,647   
     

 

 

   

 

 

 
        107,381        105,239   

Accumulated depreciation

        (18,182     (17,555
     

 

 

   

 

 

 
       $ 89,199       $ 87,684   
     

 

 

   

 

 

 

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 six months of 2013 and 2012 was $1,597 million and $1,476 million, respectively.

Note 11. Goodwill and other intangible assets

A reconciliation of the change in the carrying value of goodwill is as follows (in millions).

 

     June 30,     December 31,  
     2013     2012  

Balance at beginning of year

    $  54,523       $ 53,213   

Acquisitions of businesses

     15        1,442   

Other, including foreign currency translation

     (166     (132
  

 

 

   

 

 

 

Balance at end of period

    $ 54,372       $ 54,523   
  

 

 

   

 

 

 

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

 

     June 30, 2013      December 31, 2012  
     Gross carrying
amount
     Accumulated
amortization
     Gross carrying
amount
     Accumulated
amortization
 

Insurance and other

    $ 11,715        $ 3,330        $ 11,737        $ 2,994   

Railroad, utilities and energy

     2,164         1,070         2,163         913   
  

 

 

    

 

 

    

 

 

    

 

 

 
    $ 13,879        $ 4,400        $ 13,900        $ 3,907   
  

 

 

    

 

 

    

 

 

    

 

 

 

Trademarks and trade names

    $ 2,801        $ 310        $ 2,819        $ 278   

Patents and technology

     5,035         2,329         5,014         2,059   

Customer relationships

     4,538         1,325         4,565         1,155   

Other

     1,505         436         1,502         415   
  

 

 

    

 

 

    

 

 

    

 

 

 
    $ 13,879        $ 4,400        $ 13,900        $ 3,907   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

12


Table of Contents

Notes To Consolidated Financial Statements (Continued)

 

Note 11. Goodwill and other intangible assets (Continued)

 

Amortization expense was $535 million for the first six months of 2013 and $502 million for the first six months of 2012. Intangible assets with indefinite lives as of June 30, 2013 and December 31, 2012 were $2,319 million and $2,328 million, respectively.

Note 12. Derivative contracts

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).

 

     June 30, 2013     December 31, 2012  
     Assets (3)      Liabilities      Notional
Value
    Assets (3)      Liabilities      Notional
Value
 

Equity index put options

   $ —        $ 5,874       $ 30,936 (1)    $ —        $ 7,502       $ 33,357 (1) 

Credit default

     14         348         10,035 (2)      41         429         11,691 (2) 

Other, principally interest rate and foreign currency

     10         19           130         2      
  

 

 

    

 

 

      

 

 

    

 

 

    
   $ 24       $ 6,241         $ 171       $ 7,933      
  

 

 

    

 

 

      

 

 

    

 

 

    

 

 

(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, if all underlying issuers default and the residual value of the specified obligations is zero.

(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).

 

     Second Quarter     First Six Months  
     2013     2012     2013      2012  

Equity index put options

    $   390       $ (1,173    $ 1,636           $ (484)     

Credit default

     99        171        85              511      

Other, principally interest rate and foreign currency

     (28     (66     (54)           (93)     
  

 

 

   

 

 

   

 

 

    

 

 

 
    $ 461       $ (1,068    $ 1,667           $ (66)     
  

 

 

   

 

 

   

 

 

    

 

 

 

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.

The aggregate intrinsic value (which is the undiscounted liability assuming the contracts are settled based on the index values and foreign currency exchange rates as of the balance sheet date) of our equity index put option contracts was approximately $3.2 billion at June 30, 2013 and $3.9 billion at December 31, 2012. 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 7.5 years at June 30, 2013.

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 contract limits. We have written no new contracts since February 2009.

 

13


Table of Contents

Notes To Consolidated Financial Statements (Continued)

 

Note 12. Derivative contracts (Continued)

 

State/municipality credit contract exposures currently relate to more than 500 debt issues with maturities ranging from 2019 to 2054 and have an aggregate notional value of approximately $7.8 billion. The underlying debt issues have a weighted average maturity of approximately 18.2 years. Pursuant to the contract terms, future loss payments, if any, cannot be settled before the maturity dates of the underlying obligations.

Individual investment grade and high-yield corporate contracts in-force as of June 30, 2013 had an aggregate notional value of approximately $2.2 billion. All of these contracts will expire in 2013. 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 June 30, 2013, our collateral posting requirements under contracts with collateral provisions were $5 million compared to $40 million at December 31, 2012. 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 prices of fuel required to generate electricity, wholesale electricity purchased and sold and natural gas supplied for customers. Derivative instruments, including forward purchases and sales, futures, swaps and options, are used to manage a portion of these price risks. Derivative contract assets are included in other assets of railroad, utilities and energy businesses and were $43 million and $49 million as of June 30, 2013 and December 31, 2012, respectively. Derivative contract liabilities are included in accounts payable, accruals and other liabilities of railroad, utilities and energy businesses and were $178 million and $234 million as of June 30, 2013 and December 31, 2012, respectively. 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.

Note 13. Supplemental cash flow information

A summary of supplemental cash flow information for the first six months of 2013 and 2012 is presented in the following table (in millions).

 

     First Six Months  
     2013      2012  

Cash paid during the period for:

     

Income taxes

   $  2,724       $  1,378   

Interest:

     

Insurance and other businesses

     178         167   

Railroad, utilities and energy businesses

     918         890   

Finance and financial products businesses

     284         317   

 

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 June 30, 2013.

 

     Weighted
Average
Interest Rate
    June 30,
2013
     December 31,
2012
 

Insurance and other:

       

Issued by Berkshire parent company due 2013-2047

     2.7    $ 8,312        $ 8,323   

Short-term subsidiary borrowings

     0.3     1,281         1,416   

Other subsidiary borrowings due 2013-2035

     6.0     3,668         3,796   
    

 

 

    

 

 

 
      $  13,261        $ 13,535   
    

 

 

    

 

 

 

In January 2013, Berkshire issued $2.6 billion of senior notes with interest rates ranging from 0.8% to 4.5% and maturities that range from 2016 to 2043. In February 2013, Berkshire repaid $2.6 billion of maturing senior notes.

 

     Weighted
Average
Interest Rate
    June 30,
2013
     December 31,
2012
 

Railroad, utilities and energy:

       

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

       

MidAmerican senior unsecured debt due 2014-2037

     6.3    $ 4,621        $ 4,621   

Subsidiary and other debt due 2013-2042

     5.1     17,360         17,002   

Issued by BNSF due 2013-2097

     5.3     15,880         14,533   
    

 

 

    

 

 

 
      $  37,861        $ 36,156   
    

 

 

    

 

 

 

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. During the first six months of 2013, MidAmerican subsidiaries issued term debt of $1.55 billion in the aggregate. MidAmerican and subsidiaries repaid approximately $1.0 billion of debt in 2013. In March 2013, BNSF issued $1.5 billion in new debentures consisting of $700 million of 3.0% debentures due in 2023 and $800 million of 4.45% debentures due in 2043. BNSF’s borrowings are primarily unsecured. As of June 30, 2013, BNSF and MidAmerican and their subsidiaries were in compliance with all applicable debt covenants. Berkshire does not guarantee any debt or other borrowings of BNSF, MidAmerican or their subsidiaries.

 

     Weighted
Average
Interest Rate
    June 30,
2013
     December 31,
2012
 

Finance and financial products:

       

Issued by Berkshire Hathaway Finance Corporation (“BHFC”) due 2013-2043

     3.8    $ 11,185        $ 11,186   

Issued by other subsidiaries due 2013-2036

     4.6     1,646         1,859   
    

 

 

    

 

 

 
      $  12,831        $ 13,045   
    

 

 

    

 

 

 

The borrowings of BHFC, a wholly owned finance subsidiary of Berkshire, are fully and unconditionally guaranteed by Berkshire. In January 2013, BHFC issued $500 million aggregate of new senior notes consisting of $275 million of 1.6% senior notes due in 2017 and $225 million of 3.0% senior notes due in 2022 and repaid $500 million of maturing senior notes. In May 2013, BHFC issued $1 billion aggregate of new senior notes consisting of $500 million of 1.3% senior notes due in 2018 and $500 million of 4.3% senior notes due in 2043 and repaid $1 billion of maturing senior notes.

Our subsidiaries have approximately $4.7 billion in the aggregate of unused lines of credit and commercial paper capacity at June 30, 2013, to support short-term borrowing programs and provide additional liquidity. In addition to borrowings of BHFC, as of June 30, 2013, Berkshire guaranteed approximately $4.3 billion of other subsidiary borrowings. 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 as of June 30, 2013 and December 31, 2012 with fair values shown according to the fair value hierarchy (in millions). 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.

 

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

June 30, 2013

            

Investments in fixed maturity securities:

            

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

   $ 2,811      $ 2,811      $ 1,128       $ 1,682       $ 1   

States, municipalities and political subdivisions

     2,748        2,748        —          2,748         —    

Foreign governments

     10,238        10,238        4,079         6,159         —    

Corporate bonds

     11,464        11,464        —          10,833         631   

Mortgage-backed securities

     2,244        2,244        —          2,244         —    

Investments in equity securities

     103,274        103,274        103,205         62         7   

Other investments carried at fair value

     17,200        17,200        —          1,703         15,497   

Other investments carried at cost

     17,519        18,259        —          —          18,259   

Loans and finance receivables

     12,855        12,032        —          481         11,551   

Derivative contract assets (1)

     67        67        1         15         51   

Derivative contract liabilities:

            

Railroad, utilities and energy (1)

     178        178        5         164         9   

Finance and financial products:

            

Equity index put options

     5,874        5,874        —          —          5,874   

Credit default

     348        348        —          —          348   

Other

     19        19        —          19         —    

Notes payable and other borrowings:

            

Insurance and other

     13,261        13,612        —          13,612         —    

Railroad, utilities and energy

     37,861        41,194        —          41,194         —    

Finance and financial products

     12,831        13,234        —          12,509         725   

December 31, 2012

            

Investments in fixed maturity securities:

            

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

   $ 2,775      $ 2,775      $ 1,225       $ 1,549       $ 1   

States, municipalities and political subdivisions

     2,913        2,913        —          2,912         1   

Foreign governments

     11,355        11,355        4,571         6,784         —    

Corporate bonds

     12,661        12,661        —          12,011         650   

Mortgage-backed securities

     2,587        2,587        —          2,587         —    

Investments in equity securities

     87,662        87,662        87,563         64         35   

Other investments carried at fair value

     15,750        15,750        —          —          15,750   

Other investments carried at cost

     5,259        6,134        —          —          6,134   

Loans and finance receivables

     12,809        11,991        —          304         11,687   

Derivative contract assets (1)

     220        220        1         128         91   

Derivative contract liabilities:

            

Railroad, utilities and energy (1)

     234        234        10         217         7   

Finance and financial products:

            

Equity index put options

     7,502        7,502        —          —          7,502   

Credit default

     429        429        —          —          429   

Other

     2        2        —          2         —    

Notes payable and other borrowings:

            

Insurance and other

     13,535        14,284        —          14,284         —    

Railroad, utilities and energy

     36,156        42,074        —          42,074         —    

Finance and financial products

     13,045        14,005        —          13,194         811   

 

(1)

Assets are included in other assets and liabilities are included in accounts payable, accruals and other liabilities.

 

16


Table of Contents

Notes To Consolidated Financial Statements (Continued)

 

Note 15. Fair value measurements (Continued)

 

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 are not necessarily indicative of the amounts that could be realized in an actual current market exchange. The use of alternative 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, which are described below.

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.

Reconciliations 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 six months of 2013 and 2012 follow (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

     —         —         —         23   

Other comprehensive income

     5        16        1,770        3   

Regulatory assets and liabilities

     —         —         —         3   

Acquisitions, dispositions and settlements

     (7     —         —         13   

Transfers into (out of) Level 3

     (129     —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

   $ 653      $ 38      $ 13,439      $ (9,866
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2012

   $ 652      $ 35      $ 15,750      $ (7,847

Gains (losses) included in:

        

Earnings

     —         3        520        1,715   

Other comprehensive income

     (12     —         722        (5

Regulatory assets and liabilities

     —         —         —         2   

Dispositions

     (8     —         —         —    

Settlements, net

     —         (31     —         (45

Transfers into (out of) Level 3

     —         —         (1,495     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2013

   $ 632      $ 7      $ 15,497      $ (6,180
  

 

 

   

 

 

   

 

 

   

 

 

 

 

17


Table of Contents

Notes To Consolidated Financial Statements (Continued)

 

Note 15. Fair value measurements (Continued)

 

Gains and losses included in earnings are included as components of investment gains/losses, derivative gains/losses and other revenues, as appropriate and are primarily related to changes in the values 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.

In the second quarter of 2013, we transferred the fair value measurements of the GS Warrants and GE Warrants from Level 3 to Level 2 because we concluded that the unobservable inputs were no longer significant.

Quantitative information as of June 30, 2013, 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

   $  11,696      

Discounted cash flow

  Expected duration    7 years
       

Discount for transferability restrictions and subordination

   97 basis

    points

Common stock warrants

     3,801      

Warrant pricing model

 

Discount for transferability and hedging restrictions

   22%

Net derivative liabilities:

          

Equity index put options

     5,874      

Option pricing model

  Volatility    21%

Credit default-states/municipalities

     337      

Discounted cash flow

  Credit spreads    76 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 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 of the investments.

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, we believe that the valuation of long-duration options using any model 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 of the liabilities.

 

18


Table of Contents

Notes To Consolidated Financial Statements (Continued)

 

Note 15. Fair value measurements (Continued)

 

Our state and municipality credit default contract values reflect credit 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 spreads for states and municipalities where there is no observable input. Increases or decreases to the credit spreads will produce increases or decreases in the fair values of the liabilities.

Note 16. Common stock

Changes in Berkshire’s issued and outstanding common stock during the first six months of 2013 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, 2012

     904,528        (9,573     894,955        1,123,393,956         (1,408,484     1,121,985,472   

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

     (10,681     —         (10,681     17,218,449         —         17,218,449   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance at June 30, 2013

     893,847        (9,573     884,274        1,140,612,405         (1,408,484     1,139,203,921   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

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 1,643,743 shares outstanding as of June 30, 2013 and 1,642,945 shares outstanding as of December 31, 2012. In addition to our common stock, 1,000,000 shares of preferred stock are authorized, but none of which are issued and outstanding.

In 2011, Berkshire’s Board of Directors (“Berkshire’s Board”) approved a common stock repurchase program. Under the program, as amended in December 2012, Berkshire may repurchase its Class A and Class B shares at prices no higher than a 20% premium over the book value of the shares. Berkshire may repurchase shares in the open market or through privately negotiated transactions. Berkshire’s Board 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. Accumulated other comprehensive income

A summary of the net changes in after-tax accumulated other comprehensive income and significant amounts reclassified out of accumulated other comprehensive income attributable to Berkshire Hathaway shareholders for the six-month period ended June 30, 2013 follows (in millions).

 

     Unrealized
appreciation of
investments, net
    Foreign
currency
translation
    Prior service
and actuarial
gains/losses of
defined benefit
pension plans
     Other      Accumulated
other
comprehensive
income
 

Balance at December 31, 2012

    $ 29,254       $ (120    $ (1,601    $ (33    $ 27,500   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) before reclassifications

     7,196        (669     17        4        6,548   

Amounts reclassified from accumulated other comprehensive income

     (504     (29     59        3        (471

Transactions with noncontrolling interests

     —         (12     —         —         (12
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income

     6,692        (710     76        7        6,065   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2013

    $ 35,946       $ (830    $ (1,525    $ (26    $ 33,565   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts reclassified from other comprehensive income into net earnings for the first six months of 2013 are included on the following line items:

          

Investment gains/losses:

          

Insurance and other

    $ (707    $ —        $ —        $ —        $ (707

Finance and financial products

     (68     —         —         —         (68

Other (1)

     —         (29     83        7        61   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reclassifications before income taxes

     (775     (29     83        7        (714

Applicable income taxes

     (271     —         24        4        (243
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    $ (504    $ (29    $ 59       $ 3       $ (471
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(1)

Amounts are included on various line items, and are immaterial individually and in the aggregate.

Note 18. Contingencies and Commitments

We have owned a controlling interest in Marmon Holdings, Inc. (“Marmon”) since 2008. On June 28, 2013, Berkshire acquired approximately 16% of the then outstanding Marmon noncontrolling interests for approximately $238 million and we currently own about 91.7% of Marmon’s outstanding common stock. 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 2013 operating results. On April 29, 2013, Berkshire acquired the remaining noncontrolling interests of IMC International Metalworking Companies B.V., the parent company of Iscar, for consideration of $2.05 billion. Berkshire now owns 100% of IMC International Metalworking Companies B.V. The differences between the consideration paid and the carrying amounts of these acquired noncontrolling interests were recorded as reductions in Berkshire’s shareholders’ equity of approximately $1.2 billion.

On May 29, 2013, MidAmerican announced that it would acquire NV Energy, Inc. (“NV Energy”), an energy holding company serving approximately 1.3 million electric and natural gas customers in Nevada. Under the terms of the agreement, MidAmerican will purchase all outstanding shares of NV Energy’s common stock for $23.75 per share in cash, or approximately $5.6 billion in the aggregate. The acquisition is subject to customary closing conditions, including the approval of the transaction by NV Energy’s shareholders and the receipt of required state and federal approvals. The transaction is expected to be completed in the first quarter of 2014.

 

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Table of Contents

Notes To Consolidated Financial Statements (Continued)

 

Note 19. Business segment data

Revenues by segment for the second quarter and first six months of 2013 and 2012 were as follows (in millions).

 

     Second Quarter     First Six Months  
     2013     2012     2013     2012  

Operating Businesses:

        

Insurance group:

        

Premiums earned:

        

GEICO

   $ 4,597      $ 4,132      $ 8,996      $ 8,148   

General Re

     1,499        1,426        2,968        2,897   

Berkshire Hathaway Reinsurance Group

     1,903        2,334        4,699        4,405   

Berkshire Hathaway Primary Group

     816        536        1,529        1,043   

Investment income

     1,543        1,399        2,544        2,455   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total insurance group

     10,358        9,827        20,736        18,948   

BNSF

     5,322        5,062        10,606        10,064   

Finance and financial products

     1,064        1,016        2,014        1,975   

Marmon

     1,816        1,863        3,546        3,656   

McLane Company

     11,375        9,004        22,160        17,077   

MidAmerican

     3,056        2,748        6,172        5,642   

Other businesses

     10,856        9,888        20,801        19,184   
  

 

 

   

 

 

   

 

 

   

 

 

 
     43,847        39,408        86,035        76,546   

Reconciliation of segments to consolidated amount:

        

Investment and derivative gains/losses

     953        (943     2,664        (47

Eliminations and other

     (107     81        (139     194   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 44,693      $ 38,546      $ 88,560      $ 76,693   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings before income taxes by segment for the second quarter and first six months of 2013 and 2012 were as follows (in millions).

     Second Quarter     First Six Months  
     2013     2012     2013     2012  

Operating Businesses:

        

Insurance group:

        

Underwriting gain (loss):

        

GEICO

   $ 336      $ 155      $ 602      $ 279   

General Re

     24        138        119        219   

Berkshire Hathaway Reinsurance Group

     391        613        1,365        422   

Berkshire Hathaway Primary Group

     75        51        129        122   

Net investment income

     1,535        1,393        2,531        2,445   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total insurance group

     2,361        2,350        4,746        3,487   

BNSF

     1,397        1,280        2,686        2,395   

Finance and financial products

     209        189        378        352   

Marmon

     314        307        580        576   

McLane Company

     114        73        246        175   

MidAmerican

     435        324        988        807   

Other businesses

     1,383        1,330        2,474        2,399   
  

 

 

   

 

 

   

 

 

   

 

 

 
     6,213        5,853        12,098        10,191   

Reconciliation of segments to consolidated amount:

        

Investment and derivative gains/losses

     953        (943     2,664        (47

Interest expense, excluding interest allocated to operating businesses

     (74     (78     (146     (144

Eliminations and other

     (201     (217     (430     (454
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 6,891      $ 4,615      $ 14,186      $ 9,546   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

21


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.

 

     Second Quarter     First Six Months  
     2013     2012     2013      2012  

Insurance – underwriting

    $ 530       $ 619       $ 1,431           $ 673      

Insurance – investment income

     1,144        1,068        1,943            1,859      

Railroad

     884        802        1,682            1,503      

Utilities and energy

     279        253        673            591      

Manufacturing, service and retailing

     1,074        1,025        2,018            1,879      

Finance and financial products

     135        120        244            224      

Other

     (127     (167     (290)           (344)     

Investment and derivative gains/losses

     622        (612     1,732            (32)     
  

 

 

   

 

 

   

 

 

    

 

 

 

Net earnings attributable to Berkshire

    $ 4,541       $ 3,108       $ 9,433           $ 6,353      
  

 

 

   

 

 

   

 

 

    

 

 

 

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

Our insurance businesses generated significant underwriting gains in the first six months of 2013 and 2012. Our railroad and utilities and energy businesses continued to generate significant earnings in 2013. Earnings from our manufacturing, service and retailing businesses in 2013 were mixed, but as indicated in the table above earnings from these businesses increased about 4.8% during the second quarter and 7.4% during the first six months.

Investment and derivative gains/losses in the second quarter and first six months of 2013 included after-tax gains from derivative contracts of $300 million and $1,084 million, respectively, which were primarily attributable to changes in fair value estimates of our equity index put option derivative contracts. Investment and derivative gains/losses in the second quarter and first six months of 2012 included after-tax losses from derivative contracts of $693 million and $43 million, respectively. We believe that realized investment gains/losses and other-than-temporary impairment losses are often meaningless in terms of understanding our reported results or evaluating our economic performance. These gains and losses and changes in the equity and credit markets from period to period have caused and will likely continue to cause significant volatility in our periodic earnings.

Insurance—Underwriting

We engage in both primary insurance and reinsurance of property/casualty, life and health risks. In primary insurance activities, we assume defined portions of the risks of loss from persons or organizations that are directly subject to the risks. In reinsurance activities, we assume defined portions of similar or dissimilar risks that other insurers or reinsurers have subjected themselves to in their own insuring activities. Our insurance and reinsurance businesses are: (1) GEICO, (2) General Re, (3) Berkshire Hathaway Reinsurance Group (“BHRG”) and (4) Berkshire Hathaway Primary Group.

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

 

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Table of Contents

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

 

Insurance—Underwriting (Continued)

 

The timing and amount of catastrophe losses can also produce significant volatility in our periodic underwriting results, particularly with respect to BHRG and General Re. In the second quarter of 2013, we incurred pre-tax losses of $189 million related to floods in Europe. In the first six months of 2012, losses from catastrophes were not significant. For the purposes of this discussion, we consider catastrophe losses significant if the pre-tax losses incurred from a single event (or series of related events) exceed $75 million on a consolidated basis. Our periodic underwriting results may be affected significantly by changes in estimates for unpaid losses and loss adjustment expenses, including amounts established for occurrences in prior years. Periodic underwriting results may also include significant foreign currency transaction gains and losses arising from the changes in the valuations of certain non-U.S. Dollar denominated reinsurance liabilities as a result of foreign currency exchange rate fluctuations. BHRG’s underwriting results included pre-tax gains of $251 million in the first six months of 2013 and $36 million in the first six months of 2012 from such foreign currency exchange rate changes, which were included in underwriting expenses. In addition, BHRG’s results for the first six months of 2013 included a one-time pre-tax gain of $255 million arising from amendments to a life reinsurance contract. In 2012, GEICO’s underwriting results reflected unusually high underwriting expenses due to a change in U.S. GAAP.

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

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

 

     Second Quarter      First Six Months  
     2013      2012      2013      2012  

Underwriting gain (loss) attributable to:

           

GEICO

   $ 336       $ 155       $ 602       $ 279   

General Re

     24         138         119         219   

Berkshire Hathaway Reinsurance Group

     391         613         1,365         422   

Berkshire Hathaway Primary Group

     75         51         129         122   
  

 

 

    

 

 

    

 

 

    

 

 

 

Pre-tax underwriting gain

     826         957         2,215         1,042   

Income taxes and noncontrolling interests

     296         338         784         369   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net underwriting gain

   $ 530       $ 619       $ 1,431       $ 673   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

     Second Quarter      First Six Months  
     2013      2012      2013      2012  
     Amount           %      Amount           %      Amount           %      Amount      %  

Premiums earned

    $  4,597            100.0        $  4,132            100.0        $  8,996            100.0        $  8,148         100.0   
  

 

 

       

 

 

    

 

 

       

 

 

    

 

 

       

 

 

    

 

 

    

 

 

 

Losses and loss adjustment expenses

     3,515            76.5         3,145            76.1         6,868            76.3         6,078         74.6   

Underwriting expenses

     746            16.2         832            20.1         1,526            17.0         1,791         22.0   
  

 

 

       

 

 

    

 

 

       

 

 

    

 

 

       

 

 

    

 

 

    

 

 

 

Total losses and expenses

     4,261            92.7         3,977            96.2         8,394            93.3         7,869         96.6   
  

 

 

       

 

 

    

 

 

       

 

 

    

 

 

       

 

 

    

 

 

    

 

 

 

Pre-tax underwriting gain

    $ 336              $ 155              $ 602              $ 279      
  

 

 

          

 

 

          

 

 

          

 

 

    

Premiums written in the second quarter and first six months of 2013 were $4,548 million and $9,389 million, respectively, representing increases of 11.7% and 11.5%, respectively, compared to the corresponding 2012 periods. Premiums earned in the second quarter and first six months of 2013 increased $465 million (11.3%) and $848 million (10.4%), respectively, compared to premiums earned in the corresponding 2012 periods. The growth in premiums earned for voluntary auto was 10.4%, reflecting an increase in policies-in-force of 8.2% over the past year, and to a lesser degree, higher average premiums per policy. The increase in policies-in-force reflects a 16.6% increase in voluntary auto new business sales. Voluntary auto policies-in-force at June 30, 2013 were approximately 587,000 greater than at December 31, 2012.

 

23


Table of Contents

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

 

Insurance—Underwriting (Continued)

 

GEICO (Continued)

 

Losses and loss adjustment expenses incurred in the second quarter and first six months of 2013 increased $370 million (11.8%) and $790 million (13.0%), respectively, from the same periods of 2012. The loss ratio (the ratio of losses and loss adjustment expenses incurred to premiums earned) was 76.3% in the first six months of 2013 compared to 74.6% in 2012. In the first six months of 2013, claims frequencies and severities for property damage and collision coverages generally increased in the two to four percent range compared to the first six months of 2012. In addition, average bodily injury severities increased in the two to three percent range, although severities for personal injury protection coverage declined, primarily in Florida.

Underwriting expenses incurred in the second quarter and first six months of 2013 declined $86 million (10.3%) and $265 million (14.8%), respectively, compared with the second quarter and first six months of 2012. Underwriting expenses in 2012 were impacted by a change in U.S. GAAP concerning deferred policy acquisition costs (“DPAC”). DPAC represents the underwriting costs that are eligible to be capitalized and expensed as premiums are earned over the policy period. Policy acquisition costs related to policies written and renewed after December 31, 2011 are deferred at lower levels than before that date. The new accounting standard essentially accelerates the timing of when certain underwriting costs are recognized in earnings. The new accounting standard was adopted on a prospective basis on January 1, 2012. Excluding the effects of the accounting change in 2012, the ratio of underwriting expenses to premiums earned in the first six months of 2013 declined by approximately 0.6 percentage points from the first six months of 2012. The new accounting standard for DPAC does not impact the cash basis periodic underwriting costs or our assessment of GEICO’s underwriting performance.

General Re

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

 

     Premiums earned        Pre-tax underwriting gain (loss)  
     Second Quarter        First Six Months        Second Quarter     First Six Months  
     2013        2012        2013        2012        2013     2012     2013      2012  

Property/casualty

    $ 735          $ 702          $ 1,493          $ 1,437          $ (34    $ 190       $ 62        $ 236   

Life/health

     764           724           1,475           1,460           58        (52     57         (17
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

   

 

 

   

 

 

    

 

 

 
    $ 1,499          $ 1,426          $ 2,968          $ 2,897          $ 24       $ 138       $ 119        $ 219   
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

   

 

 

   

 

 

    

 

 

 

Property/casualty

Property/casualty premiums earned in the second quarter and first six months of 2013 increased $33 million (4.7%) and $56 million (3.9%), respectively, versus the corresponding 2012 periods. Excluding the effects of foreign currency exchange rate changes, premiums earned in the first six months of 2013 increased $64 million (4.5%), which was primarily due to increases in international treaty business. Price competition in most property and casualty lines persists. Our underwriters continue to exercise discipline by declining offers to write business where prices are deemed inadequate. We remain prepared to increase premium volumes should market conditions improve.

Property/casualty operations produced a net underwriting loss of $34 million in the second quarter and a net underwriting gain of $62 million for the first six months of 2013 compared to net underwriting gains of $190 million and $236 million, respectively, in the corresponding 2012 periods. For the first six months of 2013 and 2012, property business generated net underwriting gains of $74 million and $210 million, respectively. In 2013, property underwriting results included catastrophe losses of $124 million from floods in Europe, which occurred during the second quarter. There were no significant catastrophe events in the first six months of 2012. The timing and magnitude of catastrophe and large individual losses has produced and is expected to continue to produce significant volatility in periodic underwriting results. In the first six months, property underwriting results also included gains from reductions in prior years’ loss reserves of $114 million in 2013 and $165 million in 2012 as a result of lower than expected losses reported from ceding companies.

 

24


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)

 

Our casualty/workers’ compensation business produced net underwriting losses of $12 million in the first six months of 2013 compared to a net underwriting gain of $26 million in the corresponding 2012 period. Underwriting results in each year included gains from the reductions of estimated unpaid losses for prior years’ events and underwriting losses for current year business. The gains associated with prior years’ events were attributable to lower than anticipated claim reports. However, casualty business tends to have long claim-tails and it should not be assumed that favorable loss experience in a given period means that the loss reserve estimates currently established will continue to develop favorably.

Life/health

Premiums earned in 2013 increased $40 million (5.5%) for the second quarter and $15 million (1.0%) for the first six months over the comparable 2012 periods. Adjusting for the effects of foreign currency exchange rate changes, premiums earned in the first six months of 2013 increased $43 million (2.9%) versus 2012, which was primarily attributable to increased non-U.S. life business.

Life/health operations produced net underwriting gains of $58 million in the second quarter and $57 million during the first six months of 2013. The underwriting gains in 2013 were driven by lower than expected mortality in both the U.S. and international life businesses, offset in part by discount accretion in the long-term care business. The underwriting losses in 2012 were driven by increases in claim liabilities, which were attributable to greater than expected claims frequency and duration in the individual and group disability business in Australia, partially offset by reductions in liability estimates related to the 2011 earthquakes in New Zealand and Japan.

Berkshire Hathaway Reinsurance Group (“BHRG”)

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

 

    Premiums earned        Pre-tax underwriting gain/loss  
    Second Quarter        First Six Months        Second Quarter      First Six Months  
    2013        2012        2013        2012        2013        2012      2013      2012  

Catastrophe and individual risk

   $ 200           $ 251           $ 373           $ 385           $ 114           $ 174        $ 292        $ 256   

Retroactive reinsurance

    —             73            319            371            (84)           (39      (152      (112

Multi-line property/casualty

    1,106            1,268            2,428            2,393            285            526         836         396   

Life and annuity

    597            742            1,579            1,256            76            (48      389         (118
 

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

    

 

 

    

 

 

 
   $ 1,903           $ 2,334           $ 4,699           $ 4,405           $  391           $   613        $ 1,365        $ 422   
 

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

    

 

 

    

 

 

 

Premiums earned in the first six months of 2013 from catastrophe and individual risk contracts declined 3% compared to the first six months of 2012. The level of business written in a given period will vary significantly due to changes in market conditions and management’s assessment of the adequacy of premium rates. We have generally constrained the volume of business written in recent years as premium rates have not been attractive enough to warrant increasing volume. However, we have the capacity and desire to write substantially more business when appropriate pricing can be obtained.

Catastrophe and individual risk contracts may provide exceptionally large limits of indemnification. The timing and magnitude of losses produces extraordinary volatility in periodic underwriting results of this business. Underwriting results for the first six months of 2013 and 2012 were favorable due to the absence of exceptionally large catastrophe events. In the second quarter of 2013, underwriting results included an estimated loss of $40 million from floods in Europe. In the first six months of 2012, there were no significant losses from catastrophe events. The first six months underwriting results also included a gain of $15 million in 2013 and a loss of $45 million in 2012 from changes in estimates of prior years’ catastrophe loss reserves.

 

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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)

 

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

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

The underwriting losses from retroactive policies for the first six months of 2013 and 2012 primarily represent the amortization of deferred charges. In 2013 and 2012, the amortization charges were partially offset by reductions in unpaid loss estimates related to one large contract. At June 30, 2013 and December 31, 2012, unamortized deferred charges for retroactive contracts were approximately $4.2 billion and $3.9 billion, respectively. Gross unpaid losses and loss adjustment expenses of retroactive reinsurance contracts were approximately $18.2 billion at June 30, 2013 compared to approximately $18.0 billion as of December 31, 2012.

Premiums earned from multi-line property/casualty business in the second quarter and first six months of 2013 included $462 million and $1,018 million, respectively, from the Swiss Re 20% quota-share contract. In 2012, premiums earned from this contract were $814 million in the second quarter and $1,560 million for the first six months. As previously noted, the Swiss Re quota-share contract expired on December 31, 2012. As of June 30, 2013, unearned premiums related to this contract were $579 million, which will be earned as the contract runs off, with a substantial majority of that amount to be earned in the second half of 2013. Premiums earned in the second quarter and first six months of 2013 from multi-line business, other than from the Swiss Re quota-share contract, increased $190 million and $577 million, respectively, over 2012, which was primarily attributable to an increase in property quota-share business.

Multi-line property/casualty underwriting generated pre-tax underwriting gains of $285 million in the second quarter and $836 million in the first six months of 2013 compared to pre-tax gains of $526 million in the second quarter and $396 million in the first six months of 2012. Multi-line property/casualty underwriting results regularly include foreign currency transaction gains or losses associated with the changes in the valuation of certain reinsurance liabilities of U.S. based subsidiaries (including liabilities arising under retroactive reinsurance contracts), which are denominated in foreign currencies.

Multi-line property/casualty underwriting results included foreign currency exchange rate gains of $28 million and $217 million in the second quarter and first six months of 2013 compared to gains of $172 million and $37 million in the second quarter and first six months of 2012. Multi-line property/casualty periodic underwriting results can be significantly impacted by the timing and magnitude of catastrophe losses. Underwriting results in 2013 included estimated losses of $25 million from floods in Europe during the second quarter. There were no significant catastrophe loss events in the first six months of 2012. For the first six months of 2013, the Swiss Re quota-share contract produced underwriting gains of $362 million, an increase of $129 million over 2012. The underwriting results attributable to the Swiss Re quota-share contract included gains of $275 million and $64 million in the first six months of 2013 and 2012, respectively, from reductions in estimated liabilities for prior years’ losses.

Life and annuity premiums earned in the second quarter of 2013 decreased $145 million (20%) from the second quarter of 2012 and for the first six months of 2013 increased $323 million (26%) over 2012. In the first quarter of 2013, premiums of $1.7 billion were earned in connection with a new reinsurance contract under which BHRG assumed certain guaranteed minimum death benefit coverages on a portfolio of variable annuity reinsurance contracts that have been in run-off for a number of years. Substantially all of the premiums expected under this contract were earned at the inception of the contract. In addition, in the first quarter of 2013 BHRG agreed to amend certain provisions of its reinsurance agreement with Swiss Re Life & Health America Inc. (“SRLHA”) covering yearly renewable life insurance business. The amendments essentially commuted coverage with respect to a number of the underlying contracts in exchange for payments to SRLHA of $675 million. The amendments resulted in a reversal of previously recorded premiums of approximately $1.3 billion, which was exceeded by the reversal of life benefits incurred, generating a one-time pre-tax gain of $255 million, which partially offset the significant underwriting losses incurred over the previous three years.

 

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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 the second quarter and first six months of 2013, the life and annuity business produced pre-tax underwriting gains of $76 million and $389 million, respectively, versus underwriting losses of $48 million for the second quarter and $118 million for the first six months of 2012. The underwriting gain in the first six months of 2013 was primarily due to the impact of the aforementioned amendments to the SRLHA contract as well as foreign currency exchange gains of $34 million. In the first six months of 2012, foreign currency gains and losses were insignificant. These foreign currency gains and losses are associated with the conversion of non-U.S. denominated liabilities into U.S. Dollars. At June 30, 2013 and December 31, 2012, aggregate annuity liabilities were approximately $4.4 billion and $3.8 billion, respectively.

Berkshire Hathaway Primary Group

The Berkshire Hathaway Primary Group (“BH Primary”) consists of a wide variety of independently managed insurance businesses. These businesses include: Medical Protective Company (“MedPro”) and Princeton Insurance Company, providers of healthcare malpractice insurance to physicians, dentists and other healthcare providers and healthcare facilities; 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. In the fourth quarter of 2012, we acquired GUARD Insurance Group (“GUARD”), a provider of commercial property and casualty insurance coverage to small and mid-sized businesses.

Premiums earned in the second quarter and first six months of 2013 by BH Primary aggregated $816 million and $1,529 million, respectively, representing increases of $280 million (52%) and $486 million (47%), respectively, over 2012. The increases were primarily due to the inclusion of GUARD and increased volume from the Berkshire Hathaway Homestate Companies and National Indemnity Company’s primary group. For the first six months, our primary insurers produced underwriting gains of $129 million in 2013 and $122 million in 2012.

Insurance—Investment Income

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

 

     Second Quarter        First Six Months  
     2013        2012        2013        2012  

Investment income before income taxes and noncontrolling interests

    $ 1,535            $ 1,393           $ 2,531            $ 2,445     

Income taxes and noncontrolling interests

     391             325            588             586     
  

 

 

      

 

 

      

 

 

      

 

 

 

 

Net investment income

  

 

 $

 

1,144  

 

  

    

 

 $

 

1,068 

 

  

    

 

 $

 

1,943  

 

  

    

 

 $

 

1,859  

 

  

  

 

 

      

 

 

      

 

 

      

 

 

 

Investment income consists of interest and dividends earned on cash and investments of our insurance businesses. Pre-tax investment income in the second quarter and first six months of 2013 increased $142 million (10%) and $86 million (4%), respectively, compared to the second quarter and first six months of 2012. The increases in pre-tax investment income in 2013 were primarily attributable to increased dividends earned on equity investments. The increases in dividends earned reflected increased rates for certain of our major equity holdings as well as increased overall investments in equity securities. Our investment income was somewhat greater in the second quarter of 2013 and 2012 than the first quarter of each year, as annual dividends were paid by foreign issuers during the second quarter. We continue to hold significant cash and cash equivalents 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 $75 billion at June 30, 2013 and $73 billion at December 31, 2012. In the first six months of 2013, 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.

 

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Table of Contents

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 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.

 

     June 30,
2013
     Dec. 31,
2012
 

Cash and cash equivalents

    $ 24,458        $ 26,458   

Equity securities

     101,425         86,080   

Fixed maturity securities

     27,138         29,984   

Other investments

     17,234         16,057   
  

 

 

    

 

 

 
    $ 170,255        $ 158,579   
  

 

 

    

 

 

 

Fixed maturity securities as of June 30, 2013 were as follows. Amounts are in millions.

 

        Amortized 
cost
       Net
 unrealized 
gains
       Fair
value
 

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

      $ 2,799          $ 12          $ 2,811   

States, municipalities and political subdivisions

       2,600           148           2,748   

Foreign governments

       8,606           15           8,621   

Corporate bonds, investment grade

       5,835           633           6,468   

Corporate bonds, non-investment grade

       3,351           1,216           4,567   

Mortgage-backed securities

       1,711           212           1,923   
    

 

 

      

 

 

      

 

 

 
      $ 24,902          $     2,236          $ 27,138   
    

 

 

      

 

 

      

 

 

 

All U.S. government obligations are rated AA+ or Aaa by the major rating agencies and approximately 83% of all state, municipal and political subdivisions, foreign government obligations and mortgage-backed securities were rated AA or higher. Non-investment grade securities represent securities that are rated below BBB- or Baa3.

Railroad (“BNSF”)

Burlington Northern Santa Fe Corporation (“BNSF”) operates one of the largest railroad systems in North America with approximately 32,500 route miles of track in 28 states and two Canadian provinces. BNSF’s major business groups are classified by product/commodity shipped and include consumer products, coal, industrial products and agricultural products. Earnings of BNSF are summarized below (in millions).

 

     Second Quarter      First Six Months  
     2013        2012      2013      2012  

Revenues

    $ 5,322          $ 5,062        $ 10,606         $ 10,064     
  

 

 

      

 

 

    

 

 

    

 

 

 

Operating expenses:

             

Compensation and benefits

     1,128           1,078         2,267          2,195     

Fuel

     1,076           1,102         2,198          2,197     

Purchased services

     617           614         1,234          1,183     

Depreciation and amortization

     489           470         972          933     

Equipment rents

     205           199         403          401     

Materials and other

     233           164         491          457     
  

 

 

      

 

 

    

 

 

    

 

 

 

Total operating expenses

     3,748           3,627         7,565          7,366     

Interest expense

     177           155         355          303     
  

 

 

      

 

 

    

 

 

    

 

 

 
     3,925           3,782         7,920          7,669     
  

 

 

      

 

 

    

 

 

    

 

 

 

Pre-tax earnings

     1,397</