Berkshire Hathaway Inc. 10-Q Summary: Q3 2019
Business Context and Reporting Period
This filing covers the quarterly period ended September 30, 2019. Berkshire Hathaway Inc. operates a diversified portfolio including insurance (GEICO, Reinsurance Group, Primary Group), railroad (BNSF), utilities and energy (Berkshire Hathaway Energy), and a wide array of manufacturing, service, and retailing businesses. The company reported strong liquidity and significant investment gains driven by unrealized appreciation in its equity portfolio.
Key Financial Metrics
| Metric | Q3 2019 | Q3 2018 | 9 Months 2019 | 9 Months 2018 |
|---|---|---|---|---|
| Total Revenues | $64.97 billion | $63.45 billion | $189.25 billion | $184.12 billion |
| Net Earnings (Attributable to Shareholders) | $16.52 billion | $18.54 billion | $52.26 billion | $29.41 billion |
| Investment Gains (Pre-tax) | $10.69 billion | $14.57 billion | $40.08 billion | $12.75 billion |
| Operating Cash Flow (9 Months) | $26.61 billion | |||
| Cash & Equivalents (Insurance & Other) | $71.06 billion (as of Sept 30, 2019) | |||
| Total Debt (Notes Payable) | $102.19 billion (as of Sept 30, 2019) |
Note: Net earnings are heavily influenced by unrealized investment gains. Operating earnings (excluding investment gains/losses) were $8.54 billion for Q3 2019 and $23.44 billion for the first nine months.
Material Changes vs. Prior Period
- Investment Portfolio: Equity securities increased to $220.05 billion (from $172.76 billion at year-end 2018), driven by market appreciation and a new $10 billion investment in Occidental Petroleum preferred stock and warrants.
- Insurance Underwriting: Pre-tax underwriting earnings were $581 million in Q3 2019, slightly down from $599 million in Q3 2018. GEICO's loss ratio increased to 81.6% due to higher loss severities, while the Reinsurance Group reported a pre-tax loss of $305 million for the first nine months, primarily due to retroactive reinsurance amortization.
- Railroad (BNSF): Revenues decreased 2.0% in Q3 2019 due to lower volumes and severe weather (flooding), though earnings increased 3.3% due to cost controls and rate increases.
- Utilities & Energy: Earnings increased 8.0% in Q3 2019, driven by production tax credits and real estate brokerage growth, despite lower earnings from some regulated utilities.
- Manufacturing: Revenues increased 1.3% in Q3 2019. Building products saw significant growth (Clayton Homes), while consumer products declined due to lower RV sales and apparel volumes.
Guidance, Outlook, and Risks
- Management Commentary: Warren Buffett and Charlie Munger continue to repurchase shares when the price is below intrinsic value, provided cash holdings remain above $20 billion. $2.8 billion was spent on buybacks in the first nine months of 2019.
- Investment Volatility: Management reiterates that investment gains/losses (both realized and unrealized) are volatile and often meaningless for evaluating periodic economic performance.
- Risks and Contingencies:
- Catastrophe Losses: Typhoon Hagibis struck Japan in October 2019; management expects Q4 underwriting results to be negatively affected, though specific loss estimates are not yet available.
- Derivatives: Equity index put option liabilities stood at $1.24 billion. If credit ratings are downgraded below A-/A3, up to $1.1 billion in collateral may be required.
- Tax Equity Funds: A $377 million income tax expense was recorded in Q1 2019 related to invalid tax benefits from certain tax equity investment funds.
- Foreign Currency: A stronger U.S. Dollar negatively impacted international revenues and earnings in several segments.
Key Facts for Investor Verification
- Cash Position: Verify the total of cash, cash equivalents, and U.S. Treasury Bills held by insurance and other businesses ($116.3 billion net of payables) to assess liquidity and capacity for future acquisitions or buybacks.
- Occidental Investment: Confirm the terms and valuation of the $10 billion preferred stock and warrant investment in Occidental Petroleum, which impacts future dividend income and potential equity upside.
- Insurance Reserves: Monitor the $113.4 billion in unpaid loss reserves; small percentage changes in these estimates can materially impact earnings.
- Q4 Catastrophe Impact: Watch for Q4 2019 reporting regarding the financial impact of Typhoon Hagibis on the reinsurance portfolio.
- Share Repurchases: Track ongoing buyback activity against the $20 billion cash floor constraint.