Berkshire Hathaway Inc. 10-Q Summary: Q2 2022
Business Context and Reporting Period
This filing covers the quarterly period ended June 30, 2022. Berkshire Hathaway operates a diversified portfolio including insurance (GEICO, Reinsurance Group), railroad (BNSF), utilities and energy (BHE), and various manufacturing, service, and retailing businesses. The company reported a significant net loss for the quarter and the first six months of 2022, primarily driven by unrealized losses on its equity investment portfolio.
Key Financial Metrics
| Metric | Q2 2022 | Q2 2021 | YTD 2022 | YTD 2021 |
|---|---|---|---|---|
| Total Revenues | $76.2 billion | $69.1 billion | $147.0 billion | $133.7 billion |
| Net Earnings (Loss) Attributable to Shareholders | $(43.8) billion | $28.1 billion | $(38.3) billion | $39.8 billion |
| Investment & Derivative Gains (Losses) | $(66.9) billion | $27.4 billion | $(68.9) billion | $33.1 billion |
| Operating Cash Flows (YTD) | $15.4 billion | $19.6 billion | $15.4 billion | $19.6 billion |
| Cash & Equivalents (Insurance & Other) | $26.5 billion | $85.3 billion | $26.5 billion | $85.3 billion |
| Total Debt | $119.1 billion | $114.3 billion | $119.1 billion | $114.3 billion |
| Shareholders' Equity | $461.2 billion | $478.8 billion | $461.2 billion | $478.8 billion |
Material Changes vs. Prior Period
- Investment Portfolio Volatility: The primary driver of the net loss was a pre-tax unrealized loss of $66.9 billion on equity securities in Q2 2022, compared to a gain of $27.0 billion in Q2 2021. This reflects the broader market decline in equity prices.
- Insurance Underwriting: GEICO reported a pre-tax underwriting loss of $487 million in Q2 2022, a reversal from a $626 million profit in Q2 2021, due to increased claims frequency and severity. Conversely, the Reinsurance Group reported a pre-tax underwriting profit of $967 million, up from a $327 million loss in the prior year.
- Operating Segments:
- BNSF: Pre-tax earnings increased 8.7% to $2.2 billion, driven by higher revenue per car/unit despite lower freight volumes.
- BHE: Pre-tax earnings decreased to $564 million from $739 million, impacted by lower production tax credits and higher operating expenses.
- Manufacturing: Pre-tax earnings rose 11.6% to $3.0 billion, with strong performance in building products offsetting declines in consumer products.
- Liquidity: Cash and cash equivalents in the "Insurance and Other" segment dropped significantly from $85.3 billion to $26.5 billion, largely due to the purchase of $57.3 billion in equity securities and $100.4 billion in fixed maturity securities/T-bills during the first six months.
Guidance, Outlook, and Risks
- Management Commentary: Management reiterates that investment gains and losses are often meaningless for evaluating periodic economic performance due to market volatility. They emphasize that maintaining ample liquidity is paramount.
- Share Repurchases: The company repurchased $4.2 billion of its own stock in the first six months of 2022. The program continues indefinitely but will not reduce consolidated cash, cash equivalents, and U.S. Treasury Bills below $30 billion.
- Acquisitions: Berkshire agreed to acquire Alleghany Corporation for approximately $11.6 billion, expected to close in Q4 2022. Additionally, Berkshire plans to acquire an additional 41.4% interest in Pilot Travel Centers in 2023.
- Risks:
- Geopolitical & Supply Chain: Ongoing disruptions from the Russia-Ukraine conflict and supply chain constraints continue to increase costs for commodities and goods.
- Insurance: Catastrophe losses and changes in estimates for unpaid losses remain significant risks. The company noted that the long-term effects of the pandemic on underwriting results remain uncertain.
- Interest Rates: Rising interest rates are impacting the valuation of fixed maturity securities and increasing borrowing costs, though they also boost investment income on short-term holdings.
Investor Verification Checklist
- Investment Portfolio Composition: Verify the concentration of the equity portfolio (approx. 69% in five companies: Apple, Bank of America, Coca-Cola, Chevron, American Express) and the impact of market fluctuations on reported earnings.
- GEICO Loss Ratios: Monitor the trend in GEICO's loss ratio, which increased to 92.8% in Q2 2022, driven by inflation in auto repair and injury costs.
- Cash Deployment: Track the reduction in cash reserves from $85.3 billion to $26.5 billion and the specific allocation of capital into equities versus fixed income.
- Debt Maturities: Review the $119.1 billion debt load, noting that over 95% is held by the parent company, BHFC, BNSF, and BHE, with significant maturities in 2023.
- Goodwill Impairment: Assess the $73.6 billion in goodwill, particularly for Precision Castparts Corp. (PCC), where fair value exceeded carrying value by only 10.7% in the last annual review.