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BERKSHIRE HATHAWAY INC – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Net earnings attributable to Berkshire Hathaway shareholders for each of the
past three years are disaggregated in the table that follows. Amounts are after
deducting income taxes and exclude earnings attributable to noncontrolling
interests (in millions).
2021 2020 2019
Insurance - underwriting $ 728 $ 657 $ 325
Insurance - investment income 4,807 5,039 5,530
Railroad 5,990 5,161 5,481
Utilities and energy 3,495 3,091 2,840
Manufacturing, service and retailing 11,120 8,300
9,372
Investment and derivative gains/losses 62,340 31,591
57,445
Other* 1,315 (11,318 )
424
Net earnings attributable to Berkshire Hathaway shareholders$ 89,795 $ 42,521 $ 81,417
* Includes goodwill and indefinite-lived intangible asset impairment charges
of
which includes our share of charges recorded by Kraft Heinz.
Through our subsidiaries, we engage in numerous diverse business activities. We manage our operating businesses on an unusually decentralized basis. There are few centralized or integrated business functions. 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. The business segment data (Note 25 to the accompanying Consolidated Financial Statements) should be read in conjunction with this discussion. The COVID-19 pandemic negatively affected most of our businesses beginning in March of 2020, with the effects to date ranging from relatively minor to severe. Earnings of most of our manufacturing, service and retailing businesses declined considerably, and in certain instances severely, in the second quarter of 2020. Over the second half of 2020 and continuing in 2021, many of these businesses experienced significant recoveries in revenues and earnings, in some instances exceeding pre-pandemic levels. However, many of our businesses were negatively affected by ongoing global supply chain disruptions, including those attributable to major winter storms and a hurricane inNorth America , which contributed to higher input costs. We cannot reliably predict future economic effects of the pandemic or when business activities at our operations will completely normalize. Nor can we predict how these events will alter the future consumption patterns of consumers and businesses we serve. Our insurance businesses generated after-tax earnings from underwriting of$728 million in 2021,$657 million in 2020 and$325 million in 2019. In each year, we generated underwriting earnings from primary insurance and underwriting losses from reinsurance. Insurance underwriting results included after-tax losses from significant catastrophe events of approximately$2.3 billion in 2021,$750 million in 2020 and$800 million in 2019. Underwriting results in 2021 were favorably impacted by reductions in incurred losses for prior accident years under property and casualty contracts. Underwriting results in 2021 were negatively impacted by reductions in earned premium from the GEICO Giveback program, higher private passenger auto claims frequencies and severities estimates and higher losses in the life reinsurance business. Underwriting results in 2020 included the effects of the pandemic, arising from premium reductions from the GEICO Giveback program, reduced claims frequencies for private passenger automobile insurance and increased loss estimates for certain commercial insurance and property and casualty reinsurance business. After-tax earnings from insurance investment income in 2021 decreased 4.6% compared to 2020 and declined 8.9% in 2020 versus 2019. Earnings in 2021 and 2020 were negatively affected by declines in interest rates on our substantial holdings of cash andU.S. Treasury Bills. K-32 --------------------------------------------------------------------------------
Management's Discussion and Analysis (Continued)
Results of Operations (Continued)
After-tax earnings of our railroad business in 2021 rose 16.1% compared to 2020 and decreased 5.8% in 2020 compared to 2019. The earnings increase in 2021 reflected overall higher freight volumes, higher average revenue per car/unit and improved productivity, partly offset by higher average fuel prices and volume related costs. Earnings in 2020 reflected lower railroad operating revenues from lower shipping volumes, attributable to the negative effects of the COVID-19 pandemic, partly offset by lower operating costs and the effects of productivity improvements. After-tax earnings of our utilities and energy business in 2021 increased 13.1% versus 2020 and increased 8.8% in 2020 compared to 2019. The increase in 2021 included higher earnings from the utilities and natural gas pipelines businesses, including the effects of a business acquisition, and from the real estate brokerage business, while the earnings increase in 2020 reflected increased tax benefits from renewable energy and increased earnings from the real estate brokerage business. Earnings in 2021 from our manufacturing, service and retailing businesses increased 34.0% versus 2020 and declined 11.4% in 2020 versus 2019. Many of our businesses generated significantly higher earnings in 2021 compared to 2020. While customer demand for products was relatively high during the year, several of our businesses experienced higher materials, freight and other input costs attributable to ongoing disruptions in global supply chains. The effects of the COVID-19 pandemic have varied among our businesses relative to significance and duration. Other earnings included after-tax goodwill and indefinite-lived intangible asset impairment charges of$259 million in 2021,$11.0 billion in 2020 and$435 million in 2019. Such amounts included our share of impairment charges recorded by Kraft Heinz. Approximately$9.8 billion of the charges in 2020 were attributable to impairments of goodwill and indefinite-lived intangible assets recorded in connection with Berkshire's acquisition ofPrecision Castparts in 2016. Other earnings in 2021 also included after-tax foreign exchange rate gains of$955 million and after-tax losses of$764 million in 2020 related to non-U.S. Dollar denominated debt issued by Berkshire and itsU.S. -based finance subsidiary,Berkshire Hathaway Finance Corporation ("BHFC"). Investment and derivative gains/losses in each of the three years presented predominantly derived from our investments in equity securities and included significant net unrealized gains from market price changes. We believe that investment and derivative gains/losses, whether realized from dispositions or unrealized from changes in market prices of equity securities, are generally meaningless in understanding our reported quarterly or annual results or evaluating the economic performance of our operating businesses. These gains and losses have caused and will continue to cause significant volatility in our periodic earnings.
Insurance-Underwriting
Our management views our insurance businesses as possessing two distinct activities - underwriting and investing. Underwriting decisions are the responsibility of the unit managers, while investing decisions are the responsibility of Berkshire's Chairman and CEO,Warren E. Buffett and Berkshire's corporate investment managers. Accordingly, we evaluate performance of underwriting operations without any allocation of investment income or investment gains and losses. We consider investment income as an integral component of our aggregate insurance operating results. However, we consider investment gains and losses, whether realized or unrealized, as non-operating. We believe that such gains and losses are not meaningful in understanding the periodic operating results of our insurance businesses. The timing and magnitude of catastrophe losses can produce significant volatility in our periodic underwriting results, particularly with respect to our reinsurance businesses. Generally, we consider incurred losses exceeding$100 million from a current year catastrophic event to be significant. The significant catastrophe events in 2021 included Hurricane Ida and floods inEurope in the third quarter, as well as Winter Storm Uri in the first quarter. Changes in estimates for unpaid losses and loss adjustment expenses, including amounts established for occurrences in prior years, can also significantly affect our periodic underwriting results. Unpaid loss estimates, including estimates under retroactive reinsurance contracts, were approximately$125 billion as ofDecember 31, 2021 . Our periodic underwriting results may also include significant foreign currency transaction gains and losses arising from the changes in the valuation of non-U.S. Dollar denominated liabilities of ourU.S. based insurance subsidiaries due to foreign currency exchange rate fluctuations. K-33 --------------------------------------------------------------------------------
Management's Discussion and Analysis (Continued)
Insurance-Underwriting (Continued)
Underwriting results of certain of our commercial insurance and reinsurance businesses were negatively affected in 2021 and 2020 by estimated losses and costs associated with the COVID-19 pandemic, including incremental provisions for claims and uncollectible premiums and incremental operating costs to maintain customer service levels. The effects of the pandemic on future periods may be affected by judicial rulings and regulatory and legislative actions pertaining to insurance coverage and claims and by its effects on general economic activity, which we cannot reasonably estimate at this time. We provide primary insurance and reinsurance products covering property and casualty risks, as well as life and health risks. Our insurance and reinsurance businesses are GEICO,Berkshire Hathaway Primary Group andBerkshire Hathaway Reinsurance Group . Underwriting results of our insurance businesses are summarized below (dollars in millions). 2021 2020 2019 Pre-tax underwriting earnings (loss): GEICO$ 1,259 $ 3,428 $ 1,506 Berkshire Hathaway Primary Group 607 110 383
Pre-tax underwriting earnings
936 838 417 Income taxes and noncontrolling interests 208 181 92 Net underwriting earnings$ 728 $ 657 $ 325 Effective income tax rate 22.2 % 21.5 % 24.2 % GEICO
GEICO writes private passenger automobile insurance, offering coverages to
insureds in all 50 states and the
policies mainly by direct response methods where most customers apply for
coverage directly to the company via the Internet or over the telephone. A
summary of GEICO's underwriting results follows (dollars in millions).
2021 2020 2019
Amount % Amount % Amount %
Premiums written $ 38,395 $ 34,928 $ 36,016
Premiums earned $ 37,706 100.0 $ 35,093 100.0 $ 35,572 100.0
Losses and loss adjustment expenses 30,999 82.2 26,018 74.1 28,937 81.3
Underwriting expenses 5,448 14.5 5,647 16.1 5,129 14.5
Total losses and expenses 36,447 96.7 31,665 90.2 34,066 95.8
Pre-tax underwriting earnings$ 1,259 $ 3,428 $ 1,506 GEICO's pre-tax underwriting earnings in 2021 and 2020 were significantly affected by changes in average claims frequencies. Beginning in the first quarter of 2020 and continuing through the first quarter of 2021, average claims frequencies were significantly below historical levels from the effects of less driving by policyholders during the COVID-19 pandemic. These effects were partially offset by higher average claims severities and lower premiums earned from the GEICO Giveback program, which provided for a 15% premium credit to all voluntary auto and motorcycle new policies or policies renewing betweenApril 8, 2020 andOctober 7, 2020 . Starting in the second quarter of 2021, average claims frequencies began to increase as driving by policyholders increased. In addition, average property claims severities increased due to increases in used vehicle valuations. K-34 --------------------------------------------------------------------------------
Management's Discussion and Analysis (Continued)
Insurance-Underwriting (Continued)
GEICO (Continued)
2021 versus 2020
Premiums written in 2021 increased$3.5 billion (9.9%) compared to 2020, which included a reduction of approximately$2.9 billion attributable to the GEICO Giveback program. Premiums earned in 2021 increased$2.6 billion (7.4%) compared to 2020. The GEICO Giveback Program reduced earned premiums by approximately$2.5 billion in 2020 with the remainder of the impact included in 2021. Voluntary auto policies-in-force in 2021 were slightly higher compared to 2020. Losses and loss adjustment expenses increased$5.0 billion (19.1%) compared to 2020. GEICO's ratio of losses and loss adjustment expenses to premiums earned (the "loss ratio") increased 8.1 percentage points compared to 2020. The increase in the loss ratio reflected an increase in average claims frequencies and severities and higher losses from significant catastrophe events, partially offset by increased reductions of ultimate estimated losses for claims occurring in prior years. Claims frequencies in 2021 were higher for all coverages, including property damage and bodily injury (thirteen to fourteen percent range), personal injury (sixteen to seventeen percent range) and collision (twenty-one to twenty-two percent range). Average claims severities in 2021 were also higher for property damage coverage (two to three percent range), collision coverage (fifteen to sixteen percent range) and bodily injury coverage (eight to ten percent range). Ultimate claim loss estimates for claims occurring in prior years were reduced approximately$1.8 billion in 2021 and$253 million in 2020, which produced corresponding reductions in losses and loss adjustment expenses. Losses incurred attributable to Hurricane Ida in 2021 were$375 million , while losses in 2020 included$81 million attributable to Hurricanes Laura and Sally andU.S. wildfires.
Underwriting expenses decreased
lower advertising expenses. GEICO's expense ratio (underwriting expenses to
premiums earned) decreased 1.6 percentage points in 2021, reflecting lower
nominal expenses and higher premiums earned.
2020 versus 2019
Premiums written and earned in 2020 decreased
million
reduced premiums written
Voluntary auto policies-in-force increased approximately 820,000 during 2020.
Losses and loss adjustment expenses in 2020 decreased$2.9 billion (10.1%) compared to 2019. GEICO's loss ratio was 74.1%, a decrease of 7.2 percentage points compared to 2019. The decrease in the loss ratio reflected declines in claims frequencies, partly offset by increases in claims severities and the impact of lower premiums earned attributable to the GEICO Giveback program. Claims frequencies in 2020 were lower for property damage, bodily injury and personal injury protection coverages (twenty-eight to thirty percent range) and collision coverage (twenty-three to twenty-four percent range) compared to 2019. Average claims severities in 2020 were higher for property damage and collision coverages (eight to ten percent range) and bodily injury coverage (twelve to thirteen percent range). Losses and loss adjustment expenses included net reductions of$253 million in 2020 for decreases in the ultimate loss estimates for claims occurring in prior years compared to net increases of$42 million in 2019. Losses incurred included$81 million in 2020 from Hurricanes Laura and Sally andU.S. wildfires. There were no losses from significant catastrophe events in 2019. Underwriting expenses in 2020 increased$518 million (10.1%) compared to 2019, reflecting higher employee-related, advertising and technology costs, partly offset by lower premium taxes. GEICO's expense ratio in 2020 was 16.1%, an increase of 1.6 percentage points compared to 2019. The expense ratio increase was primarily attributable to the decline in earned premiums from the GEICO Giveback program. K-35 --------------------------------------------------------------------------------
Management's Discussion and Analysis (Continued)
Insurance-Underwriting (Continued)
The Berkshire Hathaway Primary Group ("BH Primary") provides a variety of commercial insurance solutions, including healthcare professional liability, workers' compensation, automobile, general liability, property and specialty coverages for small, medium and large clients. BH Primary's larger insurers includeBerkshire Hathaway Specialty Insurance ("BH Specialty"), Berkshire Hathaway Homestate Companies ("BHHC"),MedPro Group , Berkshire Hathaway GUARD Insurance Companies ("GUARD"),National Indemnity Company ("NICO Primary") andU.S. Liability Insurance Company ("USLI"). A summary of BH Primary underwriting results follows (dollars in millions). 2021 2020 2019 Amount % Amount % Amount % Premiums written$ 12,595 $ 10,212 $ 9,843 Premiums earned$ 11,575 100.0$ 9,615 100.0$ 9,165 100.0 Losses and loss adjustment expenses 8,107 70.0 7,129 74.1 6,336 69.1 Underwriting expenses 2,861 24.8 2,376 24.7 2,446 26.7 Total losses and expenses 10,968 94.8 9,505 98.8 8,782 95.8
Pre-tax underwriting earnings$ 607 $ 110 $ 383 Premiums written increased$2.4 billion (23.3%) in 2021 compared to 2020, reflecting increases from BH Specialty (36%),MedPro Group (16%), NICO Primary (25%), GUARD (7%), BHHC (5%) and USLI (20%). The increases were across multiple coverages and occurred in several markets. Premiums written increased$369 million (3.7%) in 2020 compared to 2019, reflecting increased premiums written from BH Specialty (34%) andMedPro Group (9%), partially offset by a 13% decrease in premiums written by our other primary insurers. The decline in volume by our other primary insurers was primarily due to lower workers' compensation and commercial automobile volumes and the effect of the divestiture of Applied Underwriters inOctober 2019 . BH Primary's loss ratios were 70.0% in 2021, 74.1% in 2020 and 69.1% in 2019. Losses and loss adjustment expenses attributable to significant catastrophe events were$402 million in 2021 from Hurricane Ida and Winter Storm Uri and$207 million in 2020 from Hurricanes Laura and Sally andU.S. wildfires. Losses and loss adjustment expenses were reduced$631 million in 2021,$265 million in 2020 and$499 million in 2019 for net reductions in estimated ultimate liabilities for prior years' loss events. Losses in 2020 also included increased liabilities of$167 million attributable to the pandemic. BH Primary insurers write significant levels of commercial and professional liability and workers' compensation insurance and the related claim costs may be subject to high severity and long claim-tails. Accordingly, we could experience significant increases in claims liabilities in the future attributable to higher-than-expected claim settlements, adverse litigation outcomes or judicial rulings and other factors not currently anticipated. Underwriting expenses increased$485 million (20.4%) in 2021 compared to 2020, reflecting the increase in business, changes in business mix and the costs associated with new product development. The expense ratio in 2021 was relatively unchanged versus 2020. The expense ratio in 2020 declined 2.0 percentage points compared to 2019 and reflected changes in business mix and the impact of the Applied Underwriters divestiture.
The Berkshire Hathaway Reinsurance Group ("BHRG") offers excess-of-loss and quota-share reinsurance coverages on property and casualty risks to insurers and reinsurers worldwide through several subsidiaries, led byNational Indemnity Company ("NICO"),General Reinsurance Corporation andGeneral Reinsurance AG . We also write life and health reinsurance coverages throughGeneral Re Life Corporation ,General Reinsurance AG andBerkshire Hathaway Life Insurance Company of Nebraska ("BHLN"). We periodically assume property and casualty risks under retroactive reinsurance contracts written through NICO. In addition, we write periodic payment annuity contracts through BHLN. K-36 --------------------------------------------------------------------------------
Management's Discussion and Analysis (Continued)
Insurance-Underwriting (Continued)
Generally, we strive to generate underwriting profits. However,
time-value-of-money concepts are important elements in establishing prices for
retroactive reinsurance and periodic payment annuity businesses due to the
expected long durations of the claim liabilities. We expect to incur pre-tax
underwriting losses from such businesses, primarily through deferred charge
amortization and discount accretion charges. We receive premiums at the
inception of these contracts, which are then available for investment. A summary
of BHRG's premiums and pre-tax underwriting results follows (dollars in
millions).
Pre-tax underwriting
Premiums written Premiums earned earnings (loss)
2021 2020 2019 2021
2020 2019 2021 2020 2019
Property/casualty
Life/health
5,621 5,848 4,963 5,648 5,861 4,869 (421 ) (18 ) 159
Retroactive reinsurance 136 38 684 136 38 684 (782 ) (1,248 ) (1,265 )
Periodic payment annuity 658 566 863 658 566 863 (508 ) (617 ) (549 )
Variable annuity 15 14 14 15 14 14 114 (18 ) 167
$ 20,579 $ 19,761 $ 16,952 $ 20,197 $ 18,693 $ 16,341 $ (930 ) $ (2,700 ) $ (1,472 )
Property/casualty
A summary of property/casualty reinsurance underwriting results follows (dollars
in millions).
2021 2020 2019
Amount % Amount % Amount %
Premiums written $ 14,149 $ 13,295 $ 10,428
Premiums earned $ 13,740 100.0 $ 12,214 100.0 $ 9,911 100.0
Losses and loss adjustment
expenses 9,878 71.9 9,898 81.0 7,313 73.8
Underwriting expenses 3,195 23.2 3,115 25.5 2,582 26.0
Total losses and expenses 13,073 95.1 13,013 106.5 9,895 99.8
Pre-tax underwriting earnings
(loss) $ 667 $ (799 ) $ 16
Premiums written increased
primarily attributable to net new business, increased participations and
improved prices on renewals and favorable currency translation effects. The
increase was primarily attributable to property coverages. Premiums written
increased
primarily attributable to net new business and increased participations on
renewals.
Losses and loss adjustment expenses were relatively unchanged in 2021 compared to 2020, while the loss ratio decreased 9.1 percentage points. The loss ratio was 71.9% in 2021, 81.0% in 2020 and 73.8% in 2019. Losses incurred arising from significant catastrophe events in 2021 (Hurricane Ida, flooding inEurope and Winter Storm Uri) were$2.1 billion , which were partially offset by reductions in estimated ultimate liabilities for losses occurring in prior years of$718 million . Losses incurred in 2020 included$667 million from significant catastrophe events (Hurricanes Laura and Sally andU.S. wildfires), losses attributable to the COVID-19 pandemic of$964 million and increases in estimated ultimate liabilities for losses occurring in prior years of$162 million . Incurred losses from significant catastrophe events during 2019 were$1.0 billion and derived from Typhoons Faxai and Hagibis and variousU.S. and non-U.S. wildfires, which were partially offset by reductions in estimated ultimate liabilities for losses occurring in prior years of$295 million . Underwriting expenses are primarily commissions and brokerage costs. The expense ratio in 2021 decreased 2.3 percentage points compared to 2020, primarily attributable to changes in business mix and foreign currency effects. Underwriting expenses increased$533 million (20.6%) in 2020 compared to 2019, reflecting the increase in premiums earned. K-37 --------------------------------------------------------------------------------
Management's Discussion and Analysis (Continued)
Insurance-Underwriting (Continued)
Life/health
A summary of our life/health reinsurance underwriting results follows (dollars
in millions).
2021 2020 2019
Amount % Amount % Amount %
Premiums written $ 5,621 $ 5,848 $ 4,963
Premiums earned $ 5,648 100.0 $ 5,861 100.0 $ 4,869 100.0
Life and health insurance
benefits 4,933 87.3 4,883 83.3 3,800 78.0
Underwriting expenses 1,136 20.2 996 17.0 910 18.7
Total benefits and expenses 6,069 107.5 5,879 100.3 4,710 96.7
Pre-tax underwriting earnings
(loss) $ (421 ) $ (18 ) $ 159
Life/health premiums written decreased $227 million (3.9%) in 2021 compared to
2020. Premiums written in 2020 included $710 million from a contract that
covered U.S. health risks that incepted in the fourth quarter of 2019 and did
not renew in 2021. Otherwise, premiums written in 2021 increased 9.4% versus
2020, primarily due to volume growth in the Asia Pacific region and favorable
foreign currency translation effects. Underwriting results in 2021 were
negatively affected by significant increases in mortality in the U.S. , South
Africa , India and Latin America , attributable to the pandemic.
Life/health premiums written increased $885 million (17.8%) in 2020 compared to
2019. Approximately $480 million of the increase was attributable to the
contract covering U.S. health insurance risks, and the remainder of the increase
was primarily from volume growth in Asia and Europe . Underwriting earnings in
2020 were negatively affected by increased life benefits from COVID-19-related
claims and from increased liabilities from changes in underlying assumptions in
estimating disability benefit liabilities in Australia , which were mostly offset
by lower other life claims and reduced losses from U.S. long-term care business
that is in run-off. Results in 2019 included a one-time pre-tax underwriting
gain of $163 million attributable to an amendment of a yearly renewable term
life contract.
Retroactive reinsurance
Pre-tax underwriting losses in each year derived from the amortization of
deferred charges and changes in the estimated timing and amounts of future claim
payments. Underwriting results also include foreign currency exchange gains and
losses from the effects of changes in foreign currency exchange rates on
non-U.S. Dollar denominated liabilities of our U.S. subsidiaries. Underwriting
results included pre-tax foreign currency gains of $56 million in 2021 and
losses of $139 million in 2020 and $76 million in 2019.
Pre-tax underwriting losses before foreign currency gains/losses were $838
million in 2021, $1.1 billion in 2020 and $1.2 billion in 2019. Estimated
ultimate claim liabilities for contracts written in prior years were reduced
$974 million in 2021 and $399 million in 2020. After adjustments to the related
unamortized deferred charges from changes in the estimated timing and amount of
the future claim payments, such reductions produced pre-tax underwriting
earnings of $142 million in 2021 and $230 million in 2020.
Gross unpaid losses assumed under retroactive reinsurance contracts were $38.3
billion at December 31, 2021 , a decline of $2.7 billion since December 31, 2020 .
The decline was primarily attributable to paid claims of approximately $1.9
billion and the reduction in estimated ultimate claim liabilities. Unamortized
deferred charges related to retroactive reinsurance contracts were $10.6 billion
at December 31, 2021 , a decline of $1.8 billion since December 31, 2020 ,
attributable to the effects of the changes in the estimated timing and amount of
the future claim payments and periodic amortization. Deferred charge
amortization will be included in underwriting earnings over the expected
remaining claims settlement periods.
K-38
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Management's Discussion and Analysis (Continued)
Insurance-Underwriting (Continued)
Periodic payment annuity
Periodic payment annuity premiums earned increased$92 million (16.3%) in 2021 compared to 2020, which decreased$297 million (34.4%) versus 2019. Periodic payment annuity business is both price and demand sensitive. Our premium volumes in 2021 and 2020 were affected by pandemic-related delays in underlying claim settlements, which reduced the supply of available business. Our volumes written may also change rapidly due to changes in prices, which are affected by prevailing interest rates, the perceived risks and durations associated with the expected annuity payments, as well as the level of competition. Periodic payment annuity contracts normally produce pre-tax underwriting losses deriving from the recurring discount accretion of annuity liabilities. Underwriting results also include gains or losses from the effects of changes in mortality and interest rates and from foreign currency exchange rate changes on non-U.S. Dollar denominated liabilities of ourU.S. subsidiaries. Pre-tax underwriting results included foreign currency gains of$18 million in 2021 and losses of$67 million in 2020 and$40 million in 2019. Excluding foreign currency gains/losses, pre-tax underwriting losses from periodic payment annuity contracts were$526 million in 2021,$550 million in 2020 and$509 million in 2019. Pre-tax losses in 2021 were partially offset by the effects of higher mortality and by higher interest rates applicable to settlements under certain contracts. Discounted annuity liabilities were$15.1 billion atDecember 31, 2021 and had a weighted average discount rate of approximately 3.9%.
Variable annuity
Variable annuity guarantee reinsurance contracts produced pre-tax earnings of$114 million in 2021, losses of$18 million in 2020 and earnings of$167 million in 2019. The results from these contracts are affected by changes in securities markets, interest rates and foreign currency exchange rates, which can be volatile, and from the periodic amortization of expected profit margins. The comparative increase in underwriting earnings in 2021 was primarily attributable to the net effects of interest rate changes and, to a lesser extent, changes in securities markets. Insurance-Investment Income
A summary of net investment income attributable to our insurance operations
follows (dollars in millions).
Percentage change
2021 2020 2019 2021 vs 2020 2020 vs 2019
Interest and other investment
income $ 589 $ 1,059 $ 2,075 (44.4 )% (49.0 )%
Dividend income 5,060 4,890 4,525 3.5 8.1
Pre-tax net investment income 5,649 5,949 6,600
(5.0 ) (9.9 ) Income taxes and noncontrolling interests 842 910 1,070 Net investment income$ 4,807 $ 5,039 $ 5,530 Effective income tax rate 14.9 % 15.3 % 16.1 % Interest and other investment income declined$470 million (44.4%) in 2021 compared to 2020, which in turn, declined$1.0 billion (49.0%) compared to 2019. These declines were primarily due to lower income from short-term investments and fixed maturity securities. We continue to hold substantial balances of cash, cash equivalents and short-termU.S. Treasury Bills. Short-term interest rates declined over the second half of 2019 and throughout 2020. Low rates prevailed through 2021, which resulted in significantly lower interest income. Nevertheless, we believe that maintaining ample liquidity is paramount and we insist on safety over yield with respect to short-term investments. K-39 --------------------------------------------------------------------------------
Management's Discussion and Analysis (Continued)
Insurance-Investment Income (Continued)
Dividend income included$121 million in 2021 and$26 million in 2020 from investments in preferred stock ofBerkshire Hathaway Energy . Such amounts are deducted from earnings of the utilities and energy segment. Dividend income may vary from period to period due to changes in the investment portfolio and the frequency and timing of dividends from certain investees. Dividend income increased$365 million (8.1%) in 2020 compared to 2019. The increase was primarily attributable to dividends from the investment in$10 billion liquidation value of 8% cumulative preferred stock of Occidental Petroleum Corporation ("Occidental") onAugust 8, 2019 , partly offset by lower dividends from common stock investments. Invested assets of our insurance businesses derive from shareholder capital and from net liabilities under insurance and reinsurance contracts or "float." The major components of float are unpaid losses and loss adjustment expenses, including liabilities under retroactive reinsurance contracts, life, annuity and health insurance benefit liabilities, unearned premiums and other liabilities due to policyholders, reduced by insurance premiums and reinsurance receivables, deferred charges assumed under retroactive reinsurance contracts and deferred policy acquisition costs. Float approximated$147 billion atDecember 31, 2021 ,$138 billion atDecember 31, 2020 and$129 billion atDecember 31, 2019 . Our combined insurance operations generated pre-tax underwriting earnings in each of the past three years, and consequently, the average cost of float for each year was negative.
A summary of cash and investments held in our insurance businesses as of
December 31,
2021 2020
Cash, cash equivalents and U.S. Treasury Bills $ 90,688 $ 67,082
Equity securities 334,907 269,498
Fixed maturity securities 16,386 20,317
Other 4,296 6,220
$ 446,277 $ 363,117
Fixed maturity investments as of December 31, 2021 were as follows (in
millions).
Amortized Unrealized Carrying
cost gains/losses value
U.S. Treasury , U.S. government corporations
and agencies $ 3,278 $ 17 $ 3,295
Foreign governments 10,997 (4 ) 10,993
Corporate bonds 1,350 411 1,761
Other 292 45 337
$ 15,917 $ 469 $ 16,386
U.S. government obligations are rated AA+ or Aaa by the major rating agencies.
Approximately 93% of all foreign government obligations were rated AA or higher
by at least one of the major rating agencies. Foreign government securities
include obligations issued or unconditionally guaranteed by national or
provincial government entities.
K-40
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Management's Discussion and Analysis (Continued)
Railroad
Burlington Northern Santa Fe, LLC ("BNSF") operates one of the largest railroad systems inNorth America , with over 32,500 route miles of track in 28 states. BNSF also operates in three Canadian provinces. BNSF classifies its major business groups by type of product shipped including consumer products, industrial products, agricultural products and coal. A summary of BNSF's earnings follows (dollars in millions).
Percentage change
2021 2020 2019 2021 vs 2020 2020 vs 2019
Railroad operating revenues $ 22,513 $ 20,181 $ 22,745 11.6 % (11.3 )%
Railroad operating expenses:
Compensation and benefits 4,696 4,542 5,270 3.4 (13.8 )
Fuel 2,766 1,789 2,944 54.6 (39.2 )
Purchased services 2,033 1,954 2,049 4.0 (4.6 )
Depreciation and amortization 2,444 2,460 2,389 (0.7 ) 3.0
Equipment rents, materials and other 1,763 1,684 2,028
4.7 (17.0 ) Total 13,702 12,429 14,680 10.2 (15.3 ) Railroad operating earnings 8,811 7,752 8,065 13.7 (3.9 ) Other revenues (expenses): Other revenues 769 688 770 11.8 (10.6 ) Other expenses, net (687 ) (611 ) (515 ) 12.4 18.6 Interest expense (1,032 ) (1,037 ) (1,070 ) (0.5 ) (3.1 ) Pre-tax earnings 7,861 6,792 7,250 15.7 (6.3 ) Income taxes 1,871 1,631 1,769 14.7 (7.8 ) Net earnings$ 5,990 $ 5,161 $ 5,481 16.1 (5.8 )
Effective income tax rate 23.8 % 24.0 % 24.4 %
The following table summarizes BNSF's railroad freight volumes by business group
(cars/units in thousands).
Cars/Units Percentage change
2021 2020 2019 2021 vs 2020 2020 vs 2019
Consumer products 5,673 5,266 5,342 7.7 % (1.4 )%
Industrial products 1,709 1,622 1,931 5.4 (16.0 )
Agricultural products 1,224 1,189 1,146 2.9 3.8
Coal 1,529 1,404 1,802 8.9 (22.1 )
Total cars/units 10,135 9,481 10,221 6.9 (7.2 )
2021 versus 2020
Railroad operating revenues increased 11.6% in 2021 compared to 2020, reflecting
higher volumes of 6.9%, as well as a 3.5% increase in average revenue per
car/unit resulting from business mix changes and higher fuel surcharge revenue
attributable to higher fuel prices. Pre-tax earnings were $7.9 billion in 2021,
an increase of 15.7% from 2020. The COVID-19 pandemic caused a significant
economic slowdown that adversely affected our volumes in 2020. Revenue changes
in 2021 were driven by continued improvements from the 2020 effects of the
COVID-19 pandemic, partially offset by the ongoing disruptions in the global
supply chain.
K-41
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Management's Discussion and Analysis (Continued)
Railroad (Continued)
Operating revenues from consumer products increased 13.7% in 2021 to$8.3 billion compared to 2020, reflecting increased volumes of 7.7% and higher average revenue per car/unit. The volume increase was primarily due to growth in intermodal in both international and domestic shipments driven by increased retail sales, inventory replenishments by retailers and increased e-commerce activity. Operating revenues from industrial products were$5.3 billion in 2021, an increase of 5.0% from 2020. Volumes increased 5.4% while average revenue per car/unit was nearly unchanged from 2020. The volume increase was primarily due to improvement in theU.S. industrial economy, driving higher volumes in the construction and building sectors, partially offset by lower petroleum volumes due to unfavorable market conditions in the energy sector. Operating revenues from agricultural products increased 5.8% to$5.1 billion in 2021 compared to 2020. The revenue change reflected a volume increase of 2.9% due to higher domestic grain shipments and higher volumes of ethanol and related commodities, as well as higher revenue per car/unit. Operating revenues from coal increased 21.5% to$3.2 billion in 2021 compared to 2020 attributable to higher volumes of 8.9% in 2021, as well as higher average revenue per car/unit. The volume increase in 2021 was attributable to increased electricity generation, higher natural gas prices and improved export demand. Railroad operating expenses were$13.7 billion in 2021, an increase of$1.3 billion (10.2%) compared to 2020. The ratio of railroad operating expenses to railroad operating revenues decreased 0.7 percentage points to 60.9% in 2021 versus 2020. The increase in railroad operating expenses reflected higher volumes and higher average fuel prices, partially offset by the favorable impact of productivity improvements. Compensation and benefits expenses increased$154 million (3.4%) in 2021 compared to 2020, primarily due to increased volumes, wage inflation and health and welfare costs, partially offset by productivity improvements. Fuel expenses increased$977 million (54.6%) compared to 2020, primarily due to higher average fuel prices. Purchased service expenses increased$79 million (4.0%) compared to 2020, primarily due to higher volumes and the effects of insurance recoveries in 2020 related to 2019 flooding, partially offset by improved productivity. Equipment rents, materials and other expenses increased$79 million (4.7%) compared to 2020, due to higher volume-related costs.
2020 versus 2019
Railroad operating revenues declined 11.3% in 2020 versus 2019, reflecting a 7.2% decrease in volume and a 4.5% decrease in average revenue per car/unit. The decrease in revenue per car/unit was attributable to lower fuel surcharge revenue driven by lower fuel prices and business mix changes. The overall volume decrease was primarily due to the COVID-19 pandemic, which severely impacted volumes through the first half of 2020 and caused significant economic disruptions that adversely affected the demand for transportation services. Volumes sequentially improved during the second half of 2020 from earlier periods and recovered overall to pre-pandemic levels by the end of the year. Pre-tax earnings were$6.8 billion in 2020, a decrease of 6.3% from 2019, principally due to the negative impacts of the pandemic on volumes. In addition, pre-tax earnings in 2019 included an operating revenue increase related to the favorable outcome of an arbitration hearing and a retirement plan curtailment gain that is included in other expenses, net in the preceding table. These effects were partially offset by significant improvements in 2020 in service, system velocity and cost performance compared to 2019, along with lower costs related to severe winter weather and flooding on parts of the network, which negatively affected expenses and service levels in 2019. Operating revenues from consumer products of$7.3 billion in 2020 declined 7.6% compared to 2019, primarily due to a 6.3% decrease in average revenue per car/unit along with lower volumes. The volume decrease was primarily due to the impact of the pandemic. Lower international and automotive volumes were offset by higher domestic intermodal volumes. Increased retail sales, inventory replenishments by retailers and e-commerce activity produced recovery of intermodal volumes in the second half of 2020. K-42 --------------------------------------------------------------------------------
Management's Discussion and Analysis (Continued)
Railroad (Continued)
Operating revenues from industrial products were$5.0 billion in 2020, a decrease of 17.0% from 2019. The decrease was primarily attributable to the decline in volume and to a lesser extent lower average revenue per car/unit. Volumes decreased primarily due to lowerU.S. industrial production driven by the pandemic, including reduced production and demand in the energy sector, which lowered sand and petroleum products volume, and reduced steel demand, which lowered taconite volume. Operating revenues from agricultural products increased 2.9% to$4.8 billion in 2020 compared to 2019. The increase was due to higher volumes, partially offset by slightly lower average revenue per car/unit. The volume increase was primarily due to higher grain and meal exports, partially offset by lower ethanol and sweeteners shipments.
Operating revenues from coal decreased 28.5% to
2019. This decrease was primarily due to lower volumes, as well as lower
revenues per car/unit. Volumes decreased primarily due to lower natural gas
prices, lower electricity demand driven by the pandemic, utility coal plant
retirements and mild temperatures.
Railroad operating expenses declined 15.3% to$12.4 billion in 2020 as compared to 2019. The ratio of railroad operating expenses to railroad operating revenues declined 2.9 percentage points to 61.6% in 2020 versus 2019. Railroad operating expenses in 2020 reflected lower volume-related costs, productivity improvements, the effects of cost control initiatives and improved weather conditions compared to 2019. Compensation and benefits expenses decreased$728 million (13.8%) in 2020 compared to 2019, primarily due to lower employee counts associated with lower volume and improved workforce productivity. Fuel expenses decreased$1.2 billion (39.2%) compared to 2019, primarily due to lower average fuel prices, lower volumes and improved fuel efficiency. Purchased services expense declined$95 million (4.6%) compared to 2019. The decrease was primarily due to lower volume, improved productivity and higher insurance recoveries in 2020 related to network flooding in 2019. Equipment rents, materials and other expense decreased$344 million (17.0%) compared to 2019, primarily due to lower volume-related costs, the effects of cost controls and lower personal injury and derailment expenses. Utilities and Energy We currently own a 91.1% ownership interest inBerkshire Hathaway Energy Company ("BHE"), which operates a global energy business. BHE's domestic regulated utility interests include PacifiCorp,MidAmerican Energy Company ("MEC") and NV Energy. BHE subsidiaries also operate two regulated electricity distribution businesses referred to asNorthern Powergrid inGreat Britain . BHE's natural gas pipelines consist of five domestic regulated interstate natural gas pipeline systems and a 25% interest in a liquefied natural gas export, import and storage facility ("LNG interest"), which BHE operates and consolidates for financial reporting purposes. Three of the natural gas pipeline systems and the LNG interest were acquired onNovember 1, 2020 from Dominion Energy, Inc. ("BHE GT&S"). Other energy businesses include a regulated electricity transmission-only business inAlberta, Canada ("AltaLink, L.P. ") and a diversified portfolio of mostly renewable independent power projects and investments. BHE also operates the largest residential real estate brokerage firm and one of the largest residential real estate brokerage franchise networks inthe United States . K-43 --------------------------------------------------------------------------------
Management's Discussion and Analysis (Continued)
Utilities and Energy (Continued)
The rates our regulated businesses charge customers for energy and services are
based in large part on the costs of business operations, including income taxes
and a return on capital, and are subject to regulatory approval. To the extent
such costs are not allowed in the approved rates, operating results will be
adversely affected. A summary of BHE's net earnings follows (dollars in
millions).
2021 2020 2019
Revenues:
Energy operating revenue $ 18,935 $ 15,556 $ 15,371
Real estate operating revenue 6,215 5,396 4,473
Other income (loss) (163 ) 79 270
Total revenue 24,987 21,031 20,114
Costs and expense:
Energy cost of sales 5,504 4,187 4,586
Energy operating expense 8,535 7,539 6,824
Real estate operating costs and expense 5,710 4,885 4,251
Interest expense 2,054 1,941 1,835
Total costs and expense 21,803 18,552 17,496
Pre-tax earnings 3,184 2,479 2,618
Income tax expense (benefit)* (1,177 ) (1,010 ) (526 )
Net earnings after income taxes 4,361 3,489 3,144
Noncontrolling interests of BHE subsidiaries 399 71 18
Net earnings attributable to BHE 3,962 3,418 3,126
Noncontrolling interests and preferred stock
dividends 467 327 286
Net earnings attributable to Berkshire Hathaway
shareholders $ 3,495 $ 3,091 $ 2,840
Effective income tax rate (37.0 )% (40.7 )% (20.1 )%
*Includes significant production tax credits from wind-powered electricity
generation.
The discussion of BHE's operating results that follows is based on after-tax
earnings, reflecting how the energy businesses are managed and evaluated. A
summary of net earnings attributable to BHE follows (dollars in millions).
Percentage change
2021 2020 2019 2021 vs 2020 2020 vs 2019
PacifiCorp $ 889 $ 741 $ 773 20.0 % (4.1 )%
MidAmerican Energy Company 883 818 781 7.9 4.7
NV Energy 439 410 365 7.1 12.3
Northern Powergrid 247 201 256 22.9 (21.5 )
Natural gas pipelines 774 528 422 46.6 25.1
Other energy businesses 680 697 608 (2.4 ) 14.6
Real estate brokerage 387 375 160 3.2 134.4
Corporate interest and other (337 ) (352 ) (239 ) (4.3 ) 47.3
$ 3,962 $ 3,418 $ 3,126 15.9 9.3
2021 versus 2020
PacifiCorp operates a regulated electric utility in portions of several Western
states, including Utah , Oregon and Wyoming . After-tax earnings increased $148
million in 2021 compared to 2020. The increase reflected higher utility margin
(operating revenue less cost of sales) and increased income tax benefits from
the impacts of ratemaking as well as higher production tax credits recognized on
new wind-powered generating facilities placed in-service. The earnings increase
was partially offset by lower allowances for equity and borrowed funds used
during construction and higher operating expenses. Operating expenses in 2021
reflected increased depreciation expense from the impacts of a deprecation study
effective January 1, 2021 , and incremental costs associated with wind-powered
generating facilities placed in-service, offset by lower costs associated with
wildfires and a settlement agreement.
K-44
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Management's Discussion and Analysis (Continued)
Utilities and Energy (Continued)
PacifiCorp utility margin was$3.5 billion in 2021, an increase of$145 million compared to 2020. The increase reflected higher retail revenue from increases in customer volumes and higher wholesale and other revenue, partially offset by higher thermal generation and purchased power costs. Retail customer volumes increased 3.1% in 2021 as compared to 2020, primarily due to higher customer usage, an increase in the average number of customers and the favorable impacts of weather. MEC operates a regulated electric and natural gas utility primarily inIowa andIllinois . After-tax earnings increased$65 million in 2021 compared to 2020. The increase reflected higher electric utility margin and increased income tax benefits, partly offset by higher operating expenses. The increase in operating expenses included incremental costs associated with wind-powered generating facilities placed in-service and higher natural gas distribution costs, partially offset by lower storm restoration costs. The income tax benefit increases were mainly due to higher production tax credits recognized on new wind-powered generating facilities placed in-service, partially offset by the impacts of ratemaking. MEC electric utility margin increased$190 million to$2.0 billion in 2021 compared to 2020. The electric utility margin increase was attributable to higher operating revenue from increases in retail and wholesale customer volumes, as well as favorable wholesale prices, partially offset by higher thermal generation and purchased power costs. Electric retail customer volumes increased 5.8% in 2021 as compared to 2020, primarily due to increased usage by certain industrial customers and the favorable impacts of weather. NV Energy operates regulated electric and natural gas utilities inNevada . After-tax earnings increased$29 million in 2021 compared to 2020. The increase reflected lower operating expenses, lower net interest and finance expense and lower income tax expense from the impacts of ratemaking, partially offset by lower electric utility margin. The decreases in operating expenses were mainly due to lower earnings sharing, partially offset by higher depreciation expense from additional assets placed in-service. NV Energy's electric utility margin decreased$97 million to$1.6 billion in 2021 compared to 2020. The decrease was primarily due to revenue reductions from lower base tariff general rates in 2021 and a favorable regulatory decision in 2020, partially offset by a 3.3% increase in electric retail customer volumes. The increase in electric retail customer volumes was primarily due to an increase in the average number of customers, higher customer usage and the favorable impacts of weather.Northern Powergrid's after-tax earnings increased$46 million in 2021 compared to 2020. The increase reflected higher tariff rates and units distributed, lower write-offs of gas exploration costs, lower pension expense and favorable foreign currency exchange rate movements in 2021, partially offset by the impact of increases in theUnited Kingdom corporate income tax rate. Earnings in 2021 included deferred income tax expense of$109 million related to the enactment inJune 2021 of an increase in the income tax rate from 19% to 25%, effectiveApril 1, 2023 . Earnings in 2020 included deferred income tax expense of$35 million related to the enactment inJuly 2020 of an increase in the income tax rate from 17% to 19%, effectiveApril 1, 2020 . Natural gas pipelines' after-tax earnings increased$246 million in 2021 compared to 2020. Earnings in 2021 included BHE GT&S for the full year compared to two months in 2020. The incremental earnings in 2021 from BHE GT&S were$211 million . In addition, earnings in 2021 reflected the effects of higher margins on natural gas sales and higher transportation revenue atNorthern Natural Gas due to increased demand from theFebruary 2021 winter storms, partially offset by lower transportation revenue primarily due to lower volumes for the remainder of the year. Other energy businesses' after-tax earnings in 2021 decreased$17 million compared to 2020. The decrease was mainly due to a decline in wind tax equity investment earnings of$56 million , which included increased losses from pre-existing tax equity investments of$165 million , largely attributable to theFebruary 2021 winter storms, partially offset by increased income tax benefits from projects reaching commercial operation over the past twelve months. Earnings in 2021 from other energy projects increased due to higher operating revenue from owned renewable energy projects and a transmission investment, as well as favorable foreign currency exchange rate movements in 2021. Real estate brokerage after-tax earnings increased$12 million in 2021 compared to 2020. The increase was due to a comparative increase in closed brokerage transaction volumes in 2021, partially offset by lower funded mortgage volume due to a decrease in refinance activity. Corporate interest and other after-tax earnings increased$15 million in 2021 compared to 2020. The increase was primarily due to favorable comparative state income tax benefits and higher earnings from non-regulated energy services, offset by higher operating expenses and higher interest expense from corporate debt issued in 2020. K-45 --------------------------------------------------------------------------------
Management's Discussion and Analysis (Continued)
Utilities and Energy (Continued)
2020 versus 2019
PacifiCorp after-tax earnings decreased$32 million in 2020 compared to 2019. The decrease reflected higher operating expenses and net interest expense, partially offset by increased production tax credit benefits driven by repowered wind projects placed in-service, higher utility margin and higher other income. The increase in operating expenses was largely due to costs associated with wildfires, a settlement agreement and pension benefits. PacifiCorp utility margin was$3.3 billion in 2020, an increase of$47 million compared to 2019. The increase reflected higher operating revenue from an increase in average retail prices and lower generation and purchased power costs, partially offset by lower operating revenue from a decline in retail customer volumes. The decline in retail customer volumes was due to the impacts of the pandemic, partly offset by an increase in the average number of customers and the favorable impacts of weather. MEC after-tax earnings increased$37 million in 2020 compared to 2019. The increase reflected increased income tax benefits, primarily from production tax credits, driven by repowered and new wind projects placed in-service, and the effects of ratemaking. These effects were partially offset by higher depreciation expense from additional assets placed in-service, higher net interest expense, lower other income and lower electric and natural gas utility margins. MEC electric utility margin decreased$10 million to$1.8 billion in 2020 compared to 2019. The electric utility margin decrease was attributable to lower operating revenue from unfavorable wholesale prices and price impacts from changes in retail sales mix. These effects were mostly offset by lower generation and purchased power costs and higher operating revenue from a 1.2% increase in retail customer volumes. The increase in electric retail customer volumes was primarily due to increased usage by certain industrial customers, partially offset by the impacts of the pandemic. Natural gas utility margin decreased$9 million in 2020 compared to 2019, due to the unfavorable impacts of weather. NV Energy after-tax earnings increased$45 million in 2020 compared to 2019. The increase reflected higher electric utility margin and lower income tax expense from the favorable impacts of ratemaking, partially offset by higher operating expenses. The increase in operating expenses was mainly due to higher earnings sharing accruals for customers atNevada Power Company and higher depreciation expense from additional assets placed in-service. NV Energy electric utility margin increased$100 million to$1.7 billion in 2020 compared to 2019. The increase was primarily due to higher operating revenue from a 1.5% increase in electric retail customer volumes, including distribution-only service customers and price impacts from changes in retail sales mix. The increase in electric retail customer volumes was primarily due to the favorable impacts of weather, partially offset by the impacts of the pandemic.Northern Powergrid after-tax earnings decreased$55 million in 2020 compared to 2019. The earnings decrease reflected write-offs of gas exploration costs and higher income tax expense, in large part from a change in theUnited Kingdom corporate income tax rate, partially offset by lower pension costs and interest expense. Natural gas pipelines after-tax earnings increased$106 million in 2020 compared to 2019. The increase was primarily due to$73 million of earnings from BHE GT&S, the favorable impact of a rate case settlement atNorthern Natural Gas and higher transportation volume and rates, partially offset by higher depreciation, operating expenses and interest expenses. Other energy business after-tax earnings in 2020 increased$89 million compared to 2019. The increase was primarily due to increased income tax benefits from renewable wind tax equity investments, largely from projects reaching commercial operation, partially offset by lower operating revenue and higher operating expenses from geothermal and natural gas units. Real estate brokerage after-tax earnings increased$215 million in 2020 compared to 2019. The increase reflected higher earnings from mortgage and brokerage services. The increase in earnings from mortgage services was attributable to higher refinance activity from the favorable interest rate environment and the earnings increase from brokerage services was due to an increase of 13.1% in closed transaction dollar volume. Corporate interest and other after-tax earnings decreased$113 million in 2020 compared to 2019. The decline was primarily due to higher interest expense and lower state income tax benefits. K-46 --------------------------------------------------------------------------------
Management's Discussion and Analysis (Continued)
Manufacturing, Service and Retailing
A summary of revenues and earnings of our manufacturing, service and retailing
businesses follows (dollars in millions).
Percentage change
2021 2020 2019 2021 vs 2020 2020 vs 2019
Revenues
Manufacturing $ 68,730 $ 59,079 $ 62,730 16.3 % (5.8 )%
Service and retailing 84,282 75,018 79,945 12.3 (6.2 )
$ 153,012 $ 134,097 $ 142,675 14.1 (6.0 )
Pre-tax earnings
Manufacturing $ 9,841 $ 8,010 $ 9,522 22.9 % (15.9 )%
Service and retailing 4,711 2,879 2,843 63.6 1.3
14,552 10,889 12,365 33.6 (11.9 )
Income taxes and noncontrolling
interests 3,432 2,589 2,993
Net earnings* $ 11,120 $ 8,300 $ 9,372
Effective income tax rate 23.0 % 23.3 % 23.7 %
Pre-tax earnings as a percentage
of revenues 9.5 % 8.1 % 8.7 %
* Excludes certain acquisition accounting expenses, which primarily related to
the amortization of identified intangible assets recorded in connection with
our business acquisitions. The after-tax acquisition accounting expenses
excluded from earnings above were
and
goodwill and indefinite-lived intangible asset impairment charges of
billion. These expenses are included in "Other" in the summary of earnings
on page K-32 and in the "Other Berkshire corporate" earnings section on page
K-56.
Manufacturing
Our manufacturing group includes a variety of industrial, building and consumer
products businesses. A summary of revenues and pre-tax earnings of our
manufacturing operations follows (dollars in millions).
Percentage change
2021 2020 2019 2021 vs 2020 2020 vs 2019
Revenues
Industrial products $ 28,176 $ 25,667 $ 30,594 9.8 % (16.1 )%
Building products 24,974 21,244 20,327 17.6 4.5
Consumer products 15,580 12,168 11,809 28.0 3.0
$ 68,730 $ 59,079 $ 62,730
Pretax earnings
Industrial products $ 4,469 $ 3,755 $ 5,635 19.0 % (33.4 )%
Building products 3,390 2,858 2,636 18.6 8.4
Consumer products 1,982 1,397 1,251 41.9 11.7
$ 9,841 $ 8,010 $ 9,522
Pre-tax earnings as a percentage
of revenues
Industrial products 15.9 % 14.6 % 18.4 %
Building products 13.6 % 13.5 % 13.0 %
Consumer products 12.7 % 11.5 % 10.6 %
K-47
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Management's Discussion and Analysis (Continued)
Manufacturing, Service and Retailing (Continued)
Industrial products
The industrial products group includes metal products for aerospace, power and general industrial markets (Precision Castparts Corp. ("PCC")), specialty chemicals (The Lubrizol Corporation ("Lubrizol")), metal cutting tools/systems (IMC International Metalworking Companies ("IMC")), and Marmon, which consists of more than 100 autonomous manufacturing and service businesses, internally aggregated into eleven groups, and includes equipment leasing for the rail, intermodal tank container and mobile crane industries. The industrial products group also includes equipment and systems for the livestock and agricultural industries (CTB International ) and a variety of industrial products for diverse markets (Scott Fetzer andLiquidPower Specialty Products ).
2021 versus 2020
Revenues of the industrial products group in 2021 increased$2.5 billion (9.8%) from 2020. Pre-tax earnings increased$714 million (19.0%) compared to 2020 and pre-tax earnings as a percentage of revenues in 2021 was 15.9%, an increase of 1.3 percentage points compared 2020. PCC's revenues were$6.5 billion in 2021, a decrease of$853 million (11.6%) compared to 2020. Historically, PCC has derived significant revenues and earnings from aerospace products. The COVID-19 pandemic contributed to material declines in commercial air travel and original equipment manufacturing ("OEM") aircraft production in 2021 and 2020. While commercial air travel increased in both theU.S. and international markets in 2021 versus 2020, demand remains well below pre-pandemic levels, especially for international routes. Long-term industry forecasts continue to show growth and strong demand for travel, however, the recovery has been uneven between domestic and international markets. Air traffic recovery will continue to be impacted by the pandemic, though likely more on a seasonal or localized basis as the pandemic shifts to an endemic phase. Near term recovery in build rates will lag recovery in air travel due to the significant finished goods inventory following quality issues with the Boeing 737 and Boeing 787 planes and industry supply chain issues. PCC's pre-tax earnings in 2021 were$1.2 billion , an increase of 78.8% compared to 2020. The increase reflects the actions taken by management to resize, restructure and improve operations and to prepare for more normalized demand for PCC's products, as well as from a decline in restructuring costs. We do not expect significant increases in PCC's aerospace revenues or earnings to occur in the near term, primarily due to the relatively low aircraft build rates related to Boeing's significant inventory levels and the ongoing impact of the COVID-19 pandemic on commercial air travel. Lubrizol's revenues were$6.5 billion in 2021, an increase of 8.6% compared to 2020. The increase reflects higher average selling prices, driven by significant increases in materials and other manufacturing costs, as well as slightly higher volumes. Sales volumes in the Additives product lines were negatively affected by severe winter storms inFebruary 2021 , which caused the temporary shut-down of severalU.S. facilities, as well as other temporary production shut-downs in the second half of 2021. Lubrizol's pre-tax earnings in 2021 decreased 50.8% compared to 2020. Earnings in 2021 included significant losses related to a fire inJune 2021 at a facility ofChemtool Incorporated , a Lubrizol subsidiary, located inRockton, Illinois and impairment charges in the second half of 2021 related to an underperforming business in the Advanced Materials product lines. These losses and charges aggregated$257 million in 2021. Earnings in 2021 were also negatively impacted by the effects of accelerating raw material costs and the previously mentioned temporary shut-down of Additives production facilities, which resulted in lost sales and incremental manufacturing costs. Marmon's revenues were$9.8 billion in 2021, an increase of$2.1 billion (27.9%) compared to 2020. Revenues in 2021 from the Electrical, Metal Services and Plumbing & Refrigeration groups increased 54% over 2020, accounting for over half of the aggregate increase in Marmon's revenues. These increases were attributable to higher volumes and prices, including the impact of significantly higher average copper and metal prices. Revenues of most of Marmon's other groups, particularly those serving the construction, automotive, heavy-duty truck and restaurant markets, also increased in 2021, reflecting higher volumes and favorable foreign currency translation effects. These increases were partially offset by the impact of divestitures and business closures in the Water Technologies and Retail Solutions groups and lower lease revenues in the Rail & Leasing group, reflecting fewer railcars on lease and changes in lease mix. Marmon's pre-tax earnings in 2021 increased 40.3% compared to 2020. The increase was primarily due to earnings increases in the Electrical, Metal Services and Plumbing & Refrigeration groups due to higher volumes and average margins. Earnings of several other business groups also increased attributable to higher sales volumes, sales mix changes and lower restructuring charges, which were partially offset by lower earnings from the Rail & Leasing and Water Technologies groups. K-48
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Management's Discussion and Analysis (Continued)
Manufacturing, Service and Retailing (Continued)
Industrial products (Continued)
IMC's revenues increased 19.5% in 2021 compared to 2020, reflecting improving business conditions in most geographic regions and favorable foreign currency translation effects. IMC's pre-tax earnings increased 47.7% in 2021 versus 2020, primarily attributable to higher customer demand, improved manufacturing efficiencies, operating cost management saving initiatives and favorable foreign currency translation effects. 2020 versus 2019 Revenues of the industrial products group in 2020 declined$4.9 billion (16.1%) from 2019, while pre-tax earnings declined$1.9 billion (33.4%). Pre-tax earnings as a percentage of revenues for the group was 14.6% in 2020 compared to 18.4% in 2019. PCC's revenues were$7.3 billion in 2020, a decrease of$3.0 billion (28.9%) compared to 2019. The COVID-19 pandemic contributed to material declines in commercial air travel and aircraft production. Airlines responded to the pandemic by delaying delivery of aircraft orders or, in some cases, cancelling aircraft orders, resulting in significant reductions in build rates by aircraft manufacturers and significant inventory reduction initiatives by PCC's customers. Further, Boeing's 737 MAX aircraft production issues contributed to the declines in aerospace product sales across the industry in 2020. These factors resulted in significant declines in demand for PCC's aerospace products in 2020. PCC's sales of products for power markets increased 2.2% in 2020, primarily driven by increases in industrial gas turbine products, offset by reductions in oil and gas products. PCC's pre-tax earnings were$650 million in 2020, a decrease of 64.5% compared to 2019, which reflected the decline in aerospace product sales as well as increased manufacturing inefficiencies attributable to lower volumes. In response to the effects of the pandemic, PCC took aggressive restructuring actions to resize operations in response to reduced expected volumes in aerospace markets. PCC's worldwide workforce was reduced by about 40% from the end of 2019. PCC recorded restructuring, inventory and fixed asset charges of approximately$295 million in 2020. Earnings as a percentage of revenues were negatively impacted in 2020 due to inefficiencies associated with aligning operations to reduced aircraft build rates. Lubrizol's revenues were$5.95 billion in 2020, a decrease of 8.0% compared to 2019. The decline was primarily attributable to lower volumes from economic effects of the pandemic and a fire at an Additives manufacturing, blending and storage facility in Rouen,France at the end of the third quarter of 2019, which resulted in the temporary suspension of operations. Revenues in 2020 also reflected lower selling prices, partly offset by favorable changes in sales mix. Lubrizol's consolidated volume for the year declined 9% in 2020 compared to 2019 due to declines in the Additives and Engineered Materials product lines, partly offset by higher volumes in Life Science products. Lubrizol's pre-tax earnings in 2020 were approximately$1.0 billion , essentially unchanged compared to 2019. The effects of lower sales volumes, including the effects from the Rouen fire, and lower average selling prices were offset by lower average raw material costs, lower operating expenses and insurance recoveries in 2020 associated with the Rouen fire. Marmon's revenues were$7.6 billion in 2020, a decrease of$681 million (8.2%) compared to 2019. Excluding the effects of business acquisitions, revenues decreased in essentially all groups, primarily attributable to lower demand from the effects of the pandemic. The largest effects were experienced in the Transportation Products and Foodservice Technologies groups. Additionally, revenues decreased due to lower metal prices in the Metal Services group and the effect of business divestitures in 2019. Declines in oil prices in 2020 also adversely affected demand and revenues in the Rail & Leasing and Crane Services groups. Marmon acquired the Colson Medical companies onOctober 31, 2019 , which represents Marmon's Medical group. Marmon's pre-tax earnings in 2020 decreased$312 million (24.3%) compared to 2019. The decrease reflected the declines in revenues and increased restructuring charges. Restructuring initiatives were initiated in response to the lower product demand, particularly in the sectors most impacted by the pandemic. K-49 --------------------------------------------------------------------------------
Management's Discussion and Analysis (Continued)
Manufacturing, Service and Retailing (Continued)
Industrial products (Continued)
IMC's revenues declined 13.2% in 2020 compared to 2019, reflecting negative economic effects from the pandemic on demand for cutting tools in most geographic regions, partly offset by the effects of business acquisitions. IMC's pre-tax earnings declined 26.6% in 2020 versus 2019, attributable to declines in sales and margins due to lower volumes and to changes in sales mix.
Building products
The building products group includes manufactured and site-built home construction and related lending and financial services (Clayton Homes ), flooring (Shaw), insulation, roofing and engineered products (Johns Manville ), bricks and masonry products (AcmeBuilding Brands ), paint and coatings (Benjamin Moore ) and residential and commercial construction and engineering products and systems (MiTek). 2021 versus 2020 Revenues of the building products group increased$3.7 billion (17.6%) in 2021 and pre-tax earnings increased$532 million (18.6%) compared to 2020. Pre-tax earnings as percentages of revenues were 13.6% in 2021 and 13.5% in 2020. During 2021, our businesses experienced strong customer demand and higher sales volumes. We also experienced various forms of supply chain disruptions, which affected the general economy, and contributed to considerable raw material and logistics cost inflation and supply constraints.Clayton Homes' revenues were approximately$10.5 billion in 2021, an increase of$1.9 billion (22.2%) over 2020. Revenues from home sales increased$1.8 billion (26.5%) in 2021 to approximately$8.3 billion , reflecting increased revenue per home sold, changes in sales mix and a net increase in new units sold. Unit sales of site-built homes increased 15.8% in 2021, while factory-built manufactured home unit sales increased 1.5%. Site-built home unit sales were constrained by longer construction periods arising from supply chain constraints and labor shortages. Financial services revenues, which include mortgage origination and services, insurance and interest income from lending activities, increased 7.8% in 2021 compared to 2020. Loan balances, net of allowances for credit losses, were approximately$18.8 billion as ofDecember 31, 2021 , an increase of approximately$1.7 billion compared toDecember 31, 2020 . Pre-tax earnings ofClayton Homes were approximately$1.7 billion in 2021, an increase of$440 million (35.3%) compared to 2020. Earnings in 2021 reflected higher earnings from home sales, mortgage originations, net interest income and lower provisions for expected credit losses, partially offset by the impact of rising manufacturing and supply chain costs. The provision for expected credit losses in 2020 was unusually high and included provisions for the expected impact of the COVID-19 pandemic. The comparative decline in the provision for expected credit losses was due to fewer actual and anticipated loan foreclosures. Aggregate revenues of our other building products businesses were approximately$14.5 billion in 2021, an increase of 14.4% versus 2020. The increase was primarily due to higher average selling prices driven by significantly higher input and supply chain costs, as well as higher unit volumes for paint and coatings, flooring, insulation, roofing and other engineered products. Pre-tax earnings of the other building products businesses were approximately$1.7 billion in 2021, an increase of 5.7% over 2020. Pre-tax earnings as a percentage of revenues was 11.8% in 2021, a 1.0 percentage point decrease compared to 2020. While customer demand in 2021 was generally strong, reduced availability of materials and other product inputs from supply chain disruptions negatively affected sales and operating results. In addition, higher costs for raw materials and freight and higher restructuring and impairment charges contributed to the reduction in our pre-tax margin rates.
2020 versus 2019
Revenues of the building products group increased$917 million (4.5%) in 2020 compared to 2019 and pre-tax earnings increased$222 million (8.4%) over 2019. Pre-tax earnings as percentages of revenues were 13.5% in 2020 and 13.0% in 2019. K-50 --------------------------------------------------------------------------------
Management's Discussion and Analysis (Continued)
Manufacturing, Service and Retailing (Continued)
Building products (Continued)
Clayton Homes' revenues were approximately$8.6 billion in 2020, an increase of$1.3 billion (17.1%) over 2019. The increase was primarily due to increases in home sales of$1.0 billion (18.4%), driven by increases in units sold and revenue per home sold and by changes in sales mix. Unit sales of site-built homes increased 28.6% in 2020 over 2019, while revenue per home increased slightly. Manufactured home unit sales increased 2.8% in 2020. Financial services revenues increased 13.7% in 2020 compared to 2019, attributable to increased loan originations and average outstanding loan balances. Loan balances, net of allowances for credit losses, were approximately$17.1 billion atDecember 31, 2020 compared to$15.9 billion as ofDecember 31, 2019 . Pre-tax earnings ofClayton Homes were approximately$1.25 billion in 2020, an increase of$152 million (13.9%) compared to 2019. The earnings increase reflected higher earnings from home sales, partly offset by higher materials costs, which lowered manufactured housing gross margin rates. Earnings in 2020 also benefitted from increased interest income, lower interest expense and higher earnings from mortgage services, partly offset by increased provisions for credit and insurance losses. Aggregate revenues of our other building products businesses were approximately$12.6 billion in 2020, a decrease of 2.6% versus 2019. The revenue decrease reflected lower flooring volumes, in part attributable to the negative effects of the COVID-19 pandemic, partially offset by increased paint and coatings volumes, including volumes from a new agreement withAce Hardware Stores , and increased volumes in residential markets. Pre-tax earnings of the other building products businesses were approximately$1.6 billion in 2020, an increase of 4.6% over 2019. The earnings increase reflected the effects of lower average input costs, operating cost containment efforts and lower facilities closure costs.
Consumer products
The consumer products group includes leisure vehicles (Forest River ), several apparel and footwear operations (including Fruit of the Loom, Garan,H.H. Brown Shoe Group andBrooks Sports ) and a manufacturer of high-performance alkaline batteries (Duracell). This group also includes custom picture framing products (Larson-Juhl) and jewelry products (Richline ).
2021 versus 2020
Consumer products revenues increased$3.4 billion (28.0%) in 2021 versus 2020. Revenues fromForest River increased 40.2% in 2021 compared to 2020, driven by a 27.6% increase in recreational vehicle unit sales and higher average selling prices, primarily due to significant increases in manufacturing costs. Revenues of several of our other consumer products businesses were significantly higher in 2021 as compared to 2020. The initial impacts of the pandemic in the first half of 2020 from temporary retail store closures and reduced demand had a severe impact on most of these businesses. Apparel and footwear revenues increased 25.3% in 2021 compared to 2020, reflecting significant increases in unit sales, partly attributable to inventory restocking by certain customers, and from increased consumer demand. Revenues fromRichline increased 39.9%, while revenues from Duracell increased 2.4%. Consumer products pre-tax earnings increased$585 million (41.9%) in 2021 compared to 2020 and as a percentage of revenues in 2021 increased 1.2 percentage points to 12.7%. The increase reflected significant earnings increases at many of our businesses, driven byForest River , the apparel and footwear businesses,Richline and Larson-Juhl. However, our consumer products businesses, particularly the apparel and footwear businesses, also experienced significant cost increases and supply chain disruptions, causing pre-tax margins in the second half of 2021 to be 1.1 percentage points lower than in the first half of the year. 2020 versus 2019 Consumer products revenues increased$359 million (3.0%) in 2020 versus 2019, while pre-tax earnings increased$146 million (11.7%). Pre-tax earnings as a percentage of revenues in 2020 increased 0.9 percentage points to 11.5%. K-51 --------------------------------------------------------------------------------
Management's Discussion and Analysis (Continued)
Manufacturing, Service and Retailing (Continued)
Consumer products (Continued)
The comparative increase in revenues reflected increases fromForest River and Duracell, partially offset by lower apparel and footwear revenues.Forest River revenues increased 11.7% in 2020 compared to 2019, primarily attributable to a significant increase in recreational vehicle unit sales over the last half of the year and changes in sales mix. Unit sales in the second half of 2020 increased 31% over the second half of 2019. Revenues from Duracell increased 10.0% in 2020 compared to 2019, reflecting the effects of changes in sales mix and increased volume. Apparel and footwear revenues declined 6.1% in 2020 compared to 2019. Apparel and footwear sales volumes in the first half of 2020, particularly in the second quarter, reflected the negative effects of the pandemic, which included retail store closures, reduced or cancelled orders and pandemic-related disruptions at certain manufacturing facilities. Sales recovered somewhat in the second half of 2020, attributable to higher consumer demand and inventory restocking by retailers.Brooks Sports revenues were higher, partly attributable to the effect of the reduced sales in 2019 that were caused by shipping delays at a new distribution facility. Pre-tax earnings were$1.4 billion in 2020, an increase of$146 million (11.7%) compared to 2019. The increase was primarily attributable toForest River and Duracell, partially offset by lower earnings from apparel and footwear. The overall increase reflected the effects of sales volumes changes and ongoing expense management efforts.
Service and retailing
A summary of revenues and pre-tax earnings of our service and retailing
businesses follows (dollars in millions).
Percentage change
2021 2020 2019 2021 vs 2020 2020 vs 2019 Revenues Service$ 15,872 $ 12,346 $ 13,496 28.6 % (8.5 )% Retailing 18,960 15,832 15,991 19.8 (1.0 ) McLane 49,450 46,840 50,458 5.6 (7.2 )$ 84,282 $ 75,018 $ 79,945 Pre-tax earnings Service$ 2,672 $ 1,600 $ 1,681 67.0 % (4.8 )% Retailing 1,809 1,028 874 76.0 17.6 McLane 230 251 288 (8.4 ) (12.8 )$ 4,711 $ 2,879 $ 2,843 Pre-tax earnings as a percentage of revenues Service 16.8 % 13.0 % 12.5 % Retailing 9.5 % 6.5 % 5.5 % McLane 0.5 % 0.5 % 0.6 % Service Our service group consists of several businesses. The largest of these businesses are NetJets and FlightSafety (aviation services), which offer shared ownership programs for general aviation aircraft and high technology training products and services to operators of aircraft, and TTI, a distributor of electronics components. Our other service businesses franchise and service a network of quick service restaurants (Dairy Queen), lease transportation equipment (XTRA) and furniture (CORT), provide third party logistics services that primarily serve the petroleum and chemical industries (Charter Brokerage), distribute electronic news, multimedia and regulatory filings (Business Wire) and operate a television station inMiami, Florida (WPLG). K-52 --------------------------------------------------------------------------------
Management's Discussion and Analysis (Continued)
Manufacturing, Service and Retailing (Continued)
Service (Continued)
2021 versus 2020
Service group revenues increased$3.5 billion (28.6%) in 2021 compared to 2020, primarily attributable to higher revenues from TTI and the aviation services businesses. Revenues from TTI increased 37.4% in 2021 versus 2020, primarily attributable to significantly higher volumes across all significant markets and product categories, and to a lesser extent, higher average prices and changes in sales mix. Customer demand accelerated throughout 2021, as customers attempted to maintain adequate inventories in response to high demand for components in end products and effects of supply chain disruptions. Revenues from aviation services increased 27.5% in 2021 over low 2020 levels, primarily due to higher training hours (24%) and customer flight hours (70%). Pre-tax earnings of our service business group increased$1.1 billion (67.0%) to$2.7 billion . Pre-tax earnings of the group as a percentage of revenues were 16.8% in 2021, an increase of 3.8 percentage points compared to 2020. Earnings at nearly all service businesses increased in 2021 compared to 2020, with the largest increases from TTI, the aviation services businesses and the XTRA leasing business. TTI's earnings increase was primarily attributable to the increases in sales volumes, as well as from improved operating cost leverage and changes in sales mix. The increase in earnings from aviation services was attributable to the favorable effects of higher volume, changes in business mix, increased operating efficiencies, lower impairment charges and the effects of past restructuring efforts, partly offset by higher subcontractor costs attributable to the significant increase in flight demand.
2020 versus 2019
Service group revenues declined$1.15 billion (8.5%) in 2020 compared to 2019 and pre-tax earnings decreased$81 million (4.8%). Pre-tax earnings of the group as a percentage of revenues were 13.0% in 2020, an increase of 0.5 percentage points compared to 2019. The aggregate revenues of NetJets and FlightSafety in 2020 declined$816 million (13.5%) compared to 2019, reflecting lower demand for air travel and aviation services attributable to the COVID-19 pandemic. NetJets experienced a decline in customer flight hours of 27% and FlightSafety's commercial and corporate simulator training hours declined 30% from 2019. The comparative service group revenue decline also reflected the disposition of the newspaper operations in March of 2020 and lower revenues from CORT, which was driven by lower demand attributable to the pandemic. These declines were partially offset by revenue increases from TTI and WPLG. The decline in earnings reflected lower earnings from NetJets, TTI and CORT and the divestiture of the newspaper operations, partly offset by higher earnings from XTRA, Business Wire, WPLG and FlightSafety. TTI's earnings decline reflected lower average gross margin rates, attributable to product mix changes and sales price pressures deriving from ample inventory availability. The decline at NetJets was primarily attributable to increased asset impairment charges and restructuring costs, partly offset by lower general and administrative expenses and a slight net increase in margins. The decline at CORT was driven by lower revenues, partly offset by the effects of cost control initiatives. The increase at FlightSafety was attributable to the effects of contract losses of approximately$165 million recorded in 2019 with respect to an existing government contract and cost control efforts in 2020, which more than offset significantly lower earnings from commercial and corporate training services. Retailing Our largest retailing business isBerkshire Hathaway Automotive, Inc. ("BHA"), representing 62% of our combined retailing revenue in 2021. BHA consists of over 80 auto dealerships that sell new and pre-owned automobiles and offer repair services and related products. BHA also operates two insurance businesses, two auto auctions and an automotive fluid maintenance products distributor. Our retailing businesses also include four home furnishings retailing businesses (Nebraska Furniture Mart ,R.C. Willey ,Star Furniture andJordan's ), which sell furniture, appliances, flooring and electronics. The home furnishings group represented 21% of the combined retailing revenues in 2021.
Other retailing businesses include three jewelry retailing businesses
(Borsheims, Helzberg and
Pampered Chef (high quality kitchen tools),
supplies, school supplies and toys and novelties) and Detlev Louis Motorrad
("Louis"), a retailer of motorcycle accessories based in
K-53 --------------------------------------------------------------------------------
Management's Discussion and Analysis (Continued)
Manufacturing, Service and Retailing (Continued)
Retailing (Continued)
2021 versus 2020
Retailing group revenues in 2021 increased$3.1 billion (19.8%) compared to 2020. BHA's revenues increased 19.0% in 2021 compared to 2020, with vehicle sales, service and repair, and finance and service contract revenues each increasing versus 2020. Revenues from vehicle sales in 2021 increased$1.7 billion (20.7%) versus 2020, primarily due to higher average selling prices, as well as a 2.7% increase in units sold. However, new vehicle unit sales in the second half of 2021 declined 18% compared to the second half of 2020, reflecting significant new vehicle supply shortages at OEMs attributable to the global computer chip shortages and other supply chain disruptions. Home furnishings group revenues increased 22.0% in 2021 as compared to 2020, attributable to higher consumer demand and higher average selling prices, driven by higher inventory and freight costs. Pre-tax earnings in 2021 of the retailing group increased$781 million (76.0%) from 2020 and the pre-tax margin rate increased 3.0 percentage points to 9.5%. BHA's pre-tax earnings increased 47.5% in 2021 compared to 2020, primarily due to increased vehicle sales margins and higher earnings from finance and service contract activities. In addition, earnings in 2021 benefitted from lower floorplan interest expense, attributable to significant declines in inventory levels, and from ongoing operating cost control efforts. Home furnishings group pre-tax earnings increased 67.6% in 2021 versus 2020, reflecting generally higher average gross margin rates and sales mix changes and cost control efforts, partly offset by higher personnel costs. Aggregate pre-tax earnings for the remainder of our retailing group increased$321 million in 2021 compared to 2020. The initial effects of the pandemic in 2020 were severe for most of our other retailers due to the restricted operations at many of those businesses. Results in 2021 also benefitted from relatively strong consumer demand and the effects of restructuring efforts in 2020.
2020 versus 2019
Retailing group revenues in 2020 declined$159 million (1.0%) compared to 2019. The spread of COVID-19 resulted in the temporary closures or restricted operations at several of our retailing businesses and effected consumer spending patterns during 2020. The severity and duration of the effects from the pandemic varied widely at our retail operations. BHA's revenues decreased 2.9% in 2020 compared to 2019. BHA's revenues in 2020 reflected decreases in new and pre-owned vehicle sales of 2.6%, as well as lower vehicle service and repair revenues. Home furnishings revenues were essentially unchanged in 2020 compared to 2019. The retailing group experienced lower revenues in the first half of 2020, attributable to restricted store hours, which were substantially offset by increased revenues over the second half of the year. However, supply chain disruptions had a negative effect on obtaining product at certain times, which negatively affected sales levels. The effects of the pandemic contributed to significantly lower sales in 2020 for our jewelry stores, See'sCandies andOriental Trading Company , which were more than offset by significant revenue increases from Pampered Chef and Louis. Sales volumes generally increased and operating results improved beginning in the latter part of the second quarter as our operations slowly reopened. Retail group pre-tax earnings increased$154 million (17.6%) in 2020 from 2019. BHA's pre-tax earnings increased 37.7%, primarily due to lower selling, general and administrative expenses, lower floorplan interest expense and higher average gross sales margin rates. Aggregate pre-tax earnings for the remainder of our retailing group increased 1.1% in 2020 compared to 2019, reflecting higher earnings from the home furnishings businesses and from Pampered Chef, which were substantially offset by lower earnings from our other retailing operations. Home furnishings group pre-tax earnings increased$79 million (36%) in 2020 versus 2019, reflecting generally higher average gross margin rates, sales mix changes and fewer sales promotions and lower advertising and other operating expenses. Certain of our other operations, including Pampered Chef and Louis experienced significant earnings increases in 2020, while others, including See'sCandies andOriental Trading Company , experienced significant declines driven by the negative effects of the pandemic. K-54 --------------------------------------------------------------------------------
Management's Discussion and Analysis (Continued)
Manufacturing, Service and Retailing (Continued)
Retailing (Continued)
McLane
McLane Company, Inc. ("McLane") operates a wholesale distribution business that provides grocery and non-food consumer products to retailers and convenience stores ("grocery") and to restaurants ("foodservice"). McLane also operates businesses that are wholesale distributors of distilled spirits, wine and beer ("beverage"). The grocery and foodservice businesses generate high sales and very low profit margins. These businesses have several significant customers, including Walmart,7-Eleven , Yum! Brands and others. Grocery sales comprised about 63% of McLane's consolidated sales in 2021 with food service comprising most of the remainder. A curtailment of purchasing by any of its significant customers could have an adverse impact on periodic revenues and earnings.
2021 versus 2020
Revenues increased$2.6 billion (5.6%) in 2021 compared to 2020. Revenues from the grocery business increased 1.5% compared to 2020, while revenues from the foodservice and beverage businesses increased 13.1% and 17.8%, respectively. The foodservice business was significantly impacted by pandemic-related restaurant closures in 2020. Pre-tax earnings decreased$21 million (8.4%) in 2021 as compared to 2020. The decrease reflected significant increases in personnel, contract transportation and fuel costs, which more than offset the favorable impact of higher sales and slightly higher gross sales margins. McLane's grocery and food service operations were significantly affected in 2021 by upstream supply chain constraints, including the effects of labor and truck driver shortages, which contributed to higher inventory costs reflected in a LIFO inventory reserve increase of$130 million , and disruptions in inventory availability. These upstream supply chain effects, together with the truck driver and warehouse personnel shortages that we are experiencing, adversely affected our customer service levels and reduced our operating efficiencies. In response, our hiring and wage and benefits costs increased significantly in 2021. The increase in fuel expense was primarily attributable to significant increases in petroleum prices. We expect the current difficult operating environment to continue through 2022.
2020 versus 2019
Revenues declined$3.6 billion (7.2%) in 2020 compared to 2019. The decline was attributable to COVID-19-related restaurant closures (particularly in the casual dining category) in the foodservice business and lower sales in certain product categories within the grocery business. McLane operates on a 52/53-week fiscal year and 2020 included 52 weeks compared to 53 weeks in 2019. Otherwise, revenues declined 5.2% in the grocery business and 7.7% in the foodservice business in 2020 as compared to 2019. Pre-tax earnings decreased$37 million (12.8%) in 2020 as compared to 2019. The earnings decrease included the effects of increased LIFO inventory reserves of$22 million , credit and inventory losses of$12 million in the foodservice operations and the impact of lower sales.
Investment and Derivative Contract Gains/Losses
A summary of investment and derivative contract gains/losses follows (dollars in
millions).
2021 2020 2019
Investment gains/losses $ 77,576 $ 40,905 $ 71,123
Derivative contract gains/losses 966 (159 )
1,484
Gains/losses before income taxes and noncontrolling interests 78,542 40,746
72,607
Income taxes and noncontrolling interests 16,202 9,155 15,162 Net earnings$ 62,340 $ 31,591 $ 57,445 Effective income tax rate 20.4 % 21.7 % 20.9 % K-55
--------------------------------------------------------------------------------
Management's Discussion and Analysis (Continued)
Investment and Derivative Contract Gains/Losses (Continued)
Investment gains/losses
Unrealized gains and losses arising from changes in market prices of our investments in equity securities are included in our reported earnings, which significantly increases the volatility of our periodic net earnings due to the magnitude of our equity securities portfolio and the inherent volatility of equity securities prices. Pre-tax investment gains/losses included net unrealized gains of approximately$76.4 billion in 2021,$55.0 billion in 2020 and$69.6 billion in 2019 attributable to changes in market prices of equity securities we held at the end of each year. In each year, we also recorded pre-tax gains and losses from market value changes during each year on equity securities sold during such year, including gains of$1.0 billion in 2021, losses of$14.0 billion in 2020 and gains of$1.6 billion in 2019. Taxable investment gains on equity securities sold, which is generally the difference between sales proceeds and the original cost basis of the securities sold, were$3.6 billion in 2021,$6.2 billion in 2020 and$3.2 billion in 2019.
We believe that investment gains/losses, whether realized from sales or
unrealized from changes in market prices, are often meaningless in terms of
understanding our periodic consolidated earnings or evaluating our periodic
economic performance. We continue to believe the investment gains/losses
recorded in earnings, including the changes in market prices for equity
securities, in any given period has little analytical or predictive value.
Derivative contract gains/losses
Derivative contract gains/losses include the changes in fair value of our equity index put option contract liabilities, which relate to contracts that were originated prior toMarch 2008 . A vast majority of these contracts have since expired. Contracts comprising 63% of the remaining notional value as ofDecember 31, 2021 will expire in the first quarter of 2022. The periodic changes in the fair values of these liabilities are recorded in earnings and, historically, were significant, primarily due to the volatility of underlying equity markets. As ofDecember 31, 2021 , the intrinsic value of our equity index put option contracts was near zero and our recorded liability at fair value was approximately$99 million . Our ultimate payment obligations, if any, under our contracts will be determined as of the contract expiration dates based on the intrinsic value as defined under the contracts. The pre-tax gains and losses in each of the past three years reflected changes in the equity index values and shorter remaining contract durations. Settlement payments to counterparties over the past three years were insignificant.
Other
A summary of after-tax other earnings/losses follows (in millions).
2021 2020 2019
Equity method earnings $ 881 $ 665 $ 1,023
Acquisition accounting expenses (690 ) (783 ) (788 )
Goodwill and intangible asset impairments - (10,381 ) (96 )
Corporate interest expense, before foreign
currency effects (305 ) (334 ) (280 )
Foreign currency exchange rate gains (losses)
on Berkshire
and BHFC non-U.S. Dollar senior notes 955 (764 ) 58
Other Berkshire corporate 474 279 507
$ 1,315 $ (11,318 ) $ 424
After-tax equity method earnings include our proportionate share of earnings
attributable to our investments in Kraft Heinz, Pilot, Berkadia, Electric
Transmission of Texas and Iroquois Gas Transmission Systems. Our after-tax
earnings from Kraft Heinz were $317 million in 2021, $170 million in 2020 and
$488 million in 2019. Our earnings from Kraft Heinz included our after-tax share
of goodwill and other intangible asset impairment charges recorded by Kraft
Heinz in each year. Our after-tax share of such charges was $259 million in
2021, $611 million in 2020 and $339 million in 2019.
K-56
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Management's Discussion and Analysis (Continued)
Other (Continued)
After-tax acquisition accounting expenses include charges arising from the application of the acquisition method in connection with certain of Berkshire's past business acquisitions. Such charges arise primarily from the amortization or impairment of intangible assets recorded in connection with those business acquisitions.Goodwill and intangible asset impairments in 2020 included after-tax charges of$9.8 billion attributable to impairments of goodwill and certain identifiable intangible assets that were recorded in connection with our acquisition of PCC in 2016. See Other Critical Accounting Policies on page K-62 for additional details. Foreign currency exchange rate gains and losses pertain to Berkshire's Euro and Japanese Yen denominated debt and BHFC's GreatBritain Pound denominated debt. Changes in foreign currency exchange rates produce unrealized gains and losses from the periodic revaluation of these liabilities intoU.S. Dollars. The gains and losses recorded in any given period can be significant due to the magnitude of the borrowings and the inherent volatility in foreign currency exchange rates. Berkshire corporate items consist primarily of Berkshire parent company investment income and corporate expenses, other intercompany interest income where the interest expense is included in earnings of the operating businesses and unallocated income taxes.
Financial Condition
Our consolidated balance sheet continues to reflect very significant liquidity and a very strong capital base. Consolidated shareholders' equity atDecember 31, 2021 was$506.2 billion , an increase of$63.0 billion sinceDecember 31, 2020 . Net earnings attributable to Berkshire shareholders was$89.8 billion and included after-tax gains on our investments of approximately$61.6 billion . Over each of the last three years, investment gains and losses from changes in the market prices of our investments in equity securities produced exceptional volatility in our periodic earnings. Berkshire's common stock repurchase program, as amended, permits Berkshire to repurchase its Class A and Class B shares at prices below Berkshire's intrinsic value, as conservatively determined byWarren Buffett , Berkshire's Chairman of the Board and Chief Executive Officer, andCharlie Munger , Vice Chairman of the Board. The program does not specify a maximum number of shares to be repurchased and does not require any specified repurchase amount. The program is expected to continue indefinitely. We will not repurchase our stock if it reduces the total amount of Berkshire's consolidated cash, cash equivalents andU.S. Treasury Bill holdings below$30 billion . Financial strength and redundant liquidity will always be of paramount importance at Berkshire. Berkshire paid$27.1 billion in 2021 to repurchase shares of its Class A and B common stock. AtDecember 31, 2021 , our insurance and other businesses held cash, cash equivalents andU.S. Treasury Bills of$143.9 billion , which included$119.6 billion inU.S. Treasury Bills. Investments in equity and fixed maturity securities (excluding our investment in Kraft Heinz) were$367.2 billion . Our fixed maturity securities atDecember 31, 2021 included approximately$14.4 billion of investments that mature in 2022 and 2023. Our consolidated borrowings atDecember 31, 2021 were$114.3 billion , of which over 95% were by the Berkshire parent company, BHFC, BNSF and BHE and its subsidiaries. Expected principal and interest payments related to our consolidated borrowings in each of the next five years are (in billions):$10.2 in 2022;$14.6 in 2023;$9.7 in 2024;$9.9 in 2025; and$8.7 in 2026. Berkshire parent company debt outstanding atDecember 31, 2021 was$21.4 billion , a decrease of$1.3 billion sinceDecember 31, 2020 , which was primarily due to the effects of foreign currency exchange rate changes on Euro and Japanese Yen denominated debt. In 2021, Berkshire repaid Euro andU.S. Dollar denominated debt aggregating approximately$2.2 billion of maturing senior notes and issued Euro and Yen denominated senior notes aggregating approximately$2.2 billion with maturity dates ranging from 2026 to 2041 and a weighted average interest rate of 0.5%. InJanuary 2022 , Berkshire repaid$600 million of maturing senior notes and issued ¥128.5 billion (approximately$1.1 billion ) of senior notes with maturity dates ranging from 2027 to 2052 and a weighted average interest rate of 0.5%. Berkshire's insurance and other subsidiary outstanding borrowings were approximately$17.9 billion atDecember 31, 2021 , which included senior note borrowings of BHFC, a wholly-owned financing subsidiary, of approximately$13.1 billion . BHFC's borrowings are used to fund a portion of loans originated and acquired byClayton Homes and equipment held for lease by our railcar leasing business. In 2021, BHFC repaid$750 million of maturing senior notes and issued$750 million of 2.5% senior notes due in 2051. Berkshire guarantees BHFC's senior notes for the full and timely payment of principal and interest. K-57 --------------------------------------------------------------------------------
Management's Discussion and Analysis (Continued)
Financial Condition (Continued)
BNSF's outstanding debt was$23.2 billion as ofDecember 31, 2021 , relatively unchanged fromDecember 31, 2020 . During 2021, BNSF repaid$1.54 billion of debt and issued$1.55 billion of debentures with a weighted average interest rate of 3.1% with maturity dates in 2051 and 2052. Outstanding borrowings of BHE and its subsidiaries were$51.8 billion atDecember 31, 2021 , a decrease of$382 million sinceDecember 31, 2020 . In 2021, BHE and its subsidiaries issued new term debt of approximately$2.2 billion with maturity dates ranging from 2028 to 2052 and repaid term debt of approximately$2.5 billion . Berkshire does not guarantee the repayment of debt issued by BNSF, BHE or any of their subsidiaries. In each of the past three years, our diverse group of businesses generated net operating cash flows of approximately$39 billion . Our consolidated capital expenditures for property, plant and equipment and equipment held for lease were$13.3 billion in 2021, which included capital expenditures by our railroad, utilities and energy businesses (BNSF and BHE) of$9.5 billion . BNSF and BHE maintain very large investments in capital assets (property, plant and equipment) and will regularly make significant capital expenditures in the normal course of business. We forecast capital expenditures of these two operations will approximate$11.1 billion in 2022.
Contractual Obligations
We are party to other contracts associated with ongoing business activities, which will result in cash payments to counterparties in future periods. Certain obligations are included in our Consolidated Balance Sheets, such as operating lease liabilities and shared aircraft repurchase liabilities of NetJets. Estimated payments of these liabilities in each of the next five years are (in billions):$1.6 in 2022;$1.5 in 2023;$1.4 in 2024;$1.2 in 2025; and$1.2 in 2026. We are also obligated to pay claims arising from property and casualty insurance companies. Such liabilities, including amounts from retroactive reinsurance, were approximately$125 billion atDecember 31, 2021 . We currently forecast claim payments in 2022 of approximately$29 billion with respect to claims occurring prior to 2022. Additionally, we estimate net payments of approximately$3 billion in 2022 for life, health and annuity benefits under contracts. However, the timing and amount of the payments under insurance and reinsurance contracts are contingent upon the outcome of future events. Actual payments will likely vary, perhaps materially, from the forecasted payments, as well as from the liabilities currently recorded in our Consolidated Balance Sheet. We anticipate that these payments will be funded by operating cash flows. Other obligations pertaining to the acquisition of goods or services in the future, such as certain purchase obligations, are not currently reflected in the Consolidated Financial Statements and will be recognized in future periods as the goods are delivered or services are provided. As ofDecember 31, 2021 , the largest categories of our long-term contractual obligations primarily related to fuel, capacity, transmission and maintenance contracts and capital expenditure commitments of BHE and BNSF and aircraft purchase commitments of NetJets. We estimate future payments associated with these contracts over the next five years of approximately$19 billion , including$8 billion in 2022. We also have an agreement to acquire an additional 41.4% of Pilot in 2023 and agreements to acquire certain non-controlling interests of consolidated subsidiaries. Reference is made to Note 26 to the Consolidated Financial Statements for additional information regarding these commitments.
Critical Accounting Policies
Certain accounting policies require us to make estimates and judgments in determining the amounts reflected in our Consolidated Financial Statements. Such estimates and judgments necessarily involve varying and possibly significant degrees of uncertainty. Accordingly, certain amounts currently recorded in our Consolidated Financial Statements will likely be adjusted in the future based on new available information and changes in other facts and circumstances. A discussion of our principal accounting policies that required the application of significant judgments as ofDecember 31, 2021 follows.
Property and casualty insurance unpaid losses
We record liabilities for unpaid losses and loss adjustment expenses (also
referred to as "gross unpaid losses" or "claim liabilities") based upon
estimates of the ultimate amounts payable for loss events occurring on or before
the balance sheet date. The timing and amount of ultimate loss payments are
contingent upon, among other things, the timing of claim reporting from insureds
and ceding companies and the final determination of the loss amount through the
loss adjustment and settlement process. We use a variety of techniques in
establishing claim liabilities, which may require significant judgments and
assumptions.
As of the balance sheet date, recorded claim liabilities include estimates for
reported claims and for claims not yet reported. The period between the loss
occurrence date and loss settlement date is the "claim-tail." Property claims
usually have relatively short claim-tails, absent litigation. Casualty claims
usually have longer claim-tails, occasionally extending for decades. Casualty
claims may be more susceptible to litigation and the impact of changing contract
interpretations. The legal environment and judicial process further contribute
to extending claim-tails.
K-58
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Management's Discussion and Analysis (Continued)
Property and casualty losses (Continued)
Our consolidated claim liabilities, including liabilities from retroactive
reinsurance contracts, as of
of which 80% related to GEICO and the
Additional information regarding significant uncertainties inherent in the
processes and techniques for estimating unpaid losses of these businesses
follows.
GEICO
GEICO predominantly writes private passenger auto insurance. As ofDecember 31, 2021 , GEICO's gross unpaid losses were$23.9 billion and claim liabilities, net of reinsurance recoverable, were$22.7 billion . GEICO's claim reserving methodologies produce liability estimates based upon the individual claims. The key assumptions affecting our liability estimates include projections of ultimate claim counts ("frequency") and average loss per claim ("severity"). We utilize a combination of several actuarial estimation methods, including Bornhuetter-Ferguson and chain-ladder methodologies. Claim liability estimates for automobile liability coverages (such as bodily injury ("BI"), uninsured motorists, and personal injury protection) are more uncertain due to the longer claim-tails, so we establish additional case development estimates. As ofDecember 31, 2021 , case development liabilities averaged approximately 34% of the case reserves. We select case development factors through analysis of the overall adequacy of historical case liabilities. Incurred-but-not-reported ("IBNR") claim liabilities are based on projections of the ultimate number of claims expected (reported and unreported) for each significant coverage. We use historical claim count data to develop age-to-age projections of the ultimate counts by quarterly accident period, from which we deduct reported claims to produce the number of unreported claims. We estimate the average costs per unreported claim and apply such estimates to the unreported claim counts, producing an IBNR liability estimate. We may record additional IBNR estimates when actuarial techniques are difficult to apply.
We test the adequacy of the aggregate claim liabilities using one or more
actuarial projections based on claim closure models and paid and incurred loss
triangles. Each type of projection analyzes loss occurrence data for claims
occurring in a given period and projects the ultimate cost.
Our claim liability estimates recorded at the end of 2020 were reduced by$1.8 billion during 2021, which produced a corresponding increase to pre-tax earnings. The assumptions used to estimate liabilities atDecember 31, 2021 reflect the most recent frequency and severity estimates. Future development of recorded liabilities will depend on whether actual frequency and severity of claims are more or less than anticipated. With respect to liabilities for BI claims, we believe it is reasonably possible that average claims severities will change by at least one percentage point from the projected severities used in establishing the recorded liabilities atDecember 31, 2021 . We estimate that a one percentage point increase or decrease in BI severities would produce a$290 million increase or decrease in recorded liabilities, with a corresponding decrease or increase in pre-tax earnings. Many of the economic forces that would likely cause BI severity to differ from expectations would likely also cause severities for other injury coverages to differ in the same direction.
BHRG's liabilities for unpaid losses and loss adjustment expenses derive
primarily from reinsurance contracts issued through NICO and
summary of BHRG's property and casualty unpaid losses and loss adjustment
expenses, other than retroactive reinsurance losses and loss adjustment
expenses, as of
Property Casualty Total
Reported case liabilities $ 6,602 $ 9,630 $ 16,232
IBNR liabilities 6,780 15,227 22,007
Gross unpaid losses and loss adjustment expenses 13,382 24,857
38,239
Reinsurance recoverable 181 892
1,073
Net unpaid losses and loss adjustment expenses
$ 37,166 K-59
--------------------------------------------------------------------------------
Management's Discussion and Analysis (Continued)
Property and casualty losses (Continued)
Gross unpaid losses and loss adjustment expenses consist primarily of traditional property and casualty coverages written primarily under excess-of-loss and quota-share treaties. Under certain contracts, coverage can apply to multiple lines of business written and the ceding company may not report loss data by such lines consistently, if at all. In those instances, we allocate losses to property and casualty coverages based on internal estimates. In connection with reinsurance contracts, the nature, extent, timing and perceived reliability of loss information received from ceding companies varies widely depending on the type of coverage and the contractual reporting terms. Reinsurance contract terms, conditions and coverages also tend to lack standardization and may evolve more rapidly than primary insurance policies. The nature and extent of loss information provided under many facultative (individual risk) or per occurrence excess contracts may be comparable to the information received under a primary insurance contract. However, loss information with respect to aggregate excess-of-loss and quota-share contracts is often in a summary format rather than on an individual claim basis. Loss data includes recoverable paid losses, as well as case loss estimates. Ceding companies infrequently provide reliable IBNR loss estimates. Loss reporting to reinsurers is typically slower in comparison to primary insurers. In theU.S. , such reporting is generally required at quarterly intervals ranging from 30 to 90 days after the end of the quarterly period, while outside of theU.S. , reinsurance reporting practices may vary further. In certain countries, clients report annually from 90 to 180 days after the end of the annual period. To the extent that reinsurers assume and cede underlying risks from other reinsurers, further delays in claims reporting may occur. The relative impact of reporting delays on the reinsurer may vary depending on the type of coverage, contractual reporting terms, the magnitude of the claim relative to the attachment point of the reinsurance coverage, and for other reasons. As reinsurers, the premium and loss data we receive is at least one level removed from the underlying claimant, so there is a risk that the loss data reported is incomplete, inaccurate or the claim is outside the coverage terms. We maintain certain internal procedures to determine that the information is complete and in compliance with the contract terms. Generally, our reinsurance contracts permit us to access the ceding company's records with respect to the subject business, thus providing the ability to audit the reported information. In the normal course of business, disputes occasionally arise concerning whether claims are covered by our reinsurance policies. We resolve most coverage disputes through negotiation with the client. If disputes cannot be resolved, our contracts generally provide arbitration or alternative dispute resolution processes. There are no coverage disputes at this time for which an adverse resolution would likely have a material impact on our consolidated results of operations or financial condition. Establishing claim liability estimates for reinsurance assumed requires evaluation of loss information received from our clients. We generally rely on the ceding companies' reported case loss estimates. We independently evaluate certain reported case losses and if appropriate, we use our own case liability estimate. For instance, as ofDecember 31, 2021 , our case loss estimates exceeded ceding company estimates by approximately$700 million for certain legacy workers' compensation claims occurring over 10 years ago. We also periodically conduct detailed reviews of individual client claims, which may cause us to adjust our case estimates. Although liabilities for losses are initially determined based on pricing and underwriting analysis, we use a variety of actuarial methodologies that place reliance on the extrapolation of actual historical data, loss development patterns, industry data and other benchmarks, as appropriate. The estimate of the IBNR liabilities also requires judgment by actuaries and management to reflect the impact of additional factors like change in business mix, volume, claim reporting and handling practices, inflation, social and legal environment and the terms and conditions of the contracts. The methodologies generally fall into one of the following categories or are hybrids of one or more of the following categories: K-60 --------------------------------------------------------------------------------
Management's Discussion and Analysis (Continued)
Property and casualty losses (Continued)
Paid and incurred loss development methods - these methods consider expected case loss emergence and development patterns, together with expected loss ratios by year. Factors affecting our loss development analysis include, but are not limited to, changes in the following: client claims reporting and settlement practices; the frequency of client company claim reviews; policy terms and coverage (such as loss retention levels and occurrence and aggregate policy limits); loss trends; and legal trends that result in unanticipated losses. Collectively, these factors influence our selections of expected case loss emergence patterns. Incurred and paid loss Bornhuetter-Ferguson methods - these methods consider actual paid and incurred losses and expected patterns of paid and incurred losses, taking the initial expected ultimate losses into account to determine an estimate of the expected unpaid or unreported losses. Frequency and severity methods - these methods commonly focus on a review of the number of anticipated claims and the anticipated claims severity and may also rely on development patterns to derive such estimates. However, our processes and techniques for estimating liabilities in such analyses generally rely more on a per-policy assessment of the ultimate cost associated with the individual loss rather than with an analysis of historical development patterns of past losses. Additional analysis - in some cases we have established reinsurance claim liabilities on a contract-by-contract basis, determined from case loss estimates reported by the ceding company and IBNR liabilities that are primarily a function of an anticipated loss ratio for the contract and the reported case loss estimate. Liabilities are adjusted upward or downward over time to reflect case losses reported versus expected case losses, which we use to form revised judgement on the adequacy of the expected loss ratio and the level of IBNR liabilities required for unreported claims. Anticipated loss ratios are also revised to include estimates of known major catastrophe events. Our claim liability estimation process for short-tail lines, primarily property exposures, utilizes a combination of the paid and incurred loss development methods and the incurred and paid loss Bornhuetter-Ferguson methods. Certain catastrophe, individual risk and aviation excess-of-loss contracts tend to generate low frequency/high severity losses. Our processes and techniques for estimating liabilities under such contracts generally rely more on a per contract assessment of the ultimate cost associated with the individual loss event rather than with an analysis of the historical development patterns of past losses. For our long-tail lines, primarily casualty exposures, we may rely on different methods depending on the maturity of the business, with estimates for the most recent years being based on priced loss expectations and more mature years reflecting the paid or incurred development pattern indications. In 2021, certain workers' compensation claims reported losses were less than expected. As a result, we reduced estimated ultimate losses for prior years' loss events by$136 million . We estimate that increases of ten percent in the tail of the expected loss emergence pattern and in the expected loss ratios would produce a net increase of approximately$1.0 billion in IBNR liabilities, producing a corresponding decrease in pre-tax earnings. We believe it is reasonably possible for these assumptions to increase at these rates. For other casualty losses, excluding asbestos, environmental, and other latent injury claims, we reduced estimated ultimate liabilities for prior years' events by approximately$375 million in 2021. For certain significant casualty and general liability portfolios, we estimate that increases of five percent in the claim-tails of the expected loss emergence patterns and in the expected loss ratios would produce a net increase in our nominal IBNR liabilities and a corresponding reduction in pre-tax earnings of approximately$950 million , although outcomes of greater than or less than$950 million are possible given the diversification in worldwide business. The change in estimated ultimate liabilities for asbestos, environmental and other latent injury claims, excluding amounts assumed under retroactive reinsurance contracts was not significant in 2021. Net liabilities for such claims were approximately$2.1 billion atDecember 31, 2021 . Loss estimations for these exposures are difficult to determine due to the changing legal environment and increases may be required in the future if new exposures or claimants are identified, new claims are reported or new theories of liability emerge. K-61 --------------------------------------------------------------------------------
Management's Discussion and Analysis (Continued)
Property and casualty losses (Continued)
Retroactive reinsurance
Our retroactive reinsurance contracts cover loss events occurring before the contract inception dates. Claim liabilities associated with our retroactive reinsurance contracts predominately pertain to casualty or liability exposures. We expect the claim-tails to be very long. As ofDecember 31, 2021 , gross unpaid losses were$38.3 billion and deferred charges were$10.6 billion . Our contracts are generally subject to maximum limits of indemnifications and, as such, we currently expect that maximum remaining gross losses payable under our retroactive policies will not exceed$54 billion . Absent significant judicial or legislative changes affecting asbestos, environmental or latent injury exposures, we also currently believe it unlikely that losses will develop upward to the maximum losses payable or downward by more than 15% of our estimated gross liability. We establish liability estimates by individual contract, considering exposure and development trends. In establishing our liability estimates, we often analyze historical aggregate loss payment patterns and project expected ultimate losses under various scenarios. We assign judgmental probability factors to these scenarios and an expected outcome is determined. We then monitor subsequent loss payment activity and review ceding company reports and other available information concerning the underlying losses. We re-estimate the expected ultimate losses when significant events or significant deviations from expected results are revealed. Certain of our retroactive reinsurance contracts include asbestos, environmental and other latent injury claims. Our estimated liabilities for such claims were approximately$12.3 billion atDecember 31, 2021 . We do not consistently receive reliable detailed data regarding asbestos, environmental and latent injury claims from all ceding companies, particularly with respect to multi-line or aggregate excess-of-loss policies. When possible, we conduct a detailed analysis of the underlying loss data to make an estimate of ultimate reinsured losses. When detailed loss information is unavailable, we develop estimates by applying recent industry trends and projections to aggregate client data. Judgments in these areas necessarily consider the stability of the legal and regulatory environment under which we expect claims will be adjudicated. Legal reform and legislation could also have a significant impact on our ultimate liabilities. We reduced estimated ultimate liabilities for prior years' retroactive reinsurance contracts by$974 million in 2021, which after the changes in related deferred charges, resulted in pre-tax earnings of$142 million . In 2021, we paid losses and loss adjustment expenses of$1.9 billion with respect to our retroactive reinsurance contracts. In connection with our retroactive reinsurance contracts, we also record deferred charges, which at contract inception represents the excess, if any, of the estimated ultimate liability for unpaid losses over premiums received. We amortize deferred charges, which produces charges to pre-tax earnings in future periods based on the expected timing and amount of loss payments. We also adjust deferred charge balances due to changes in the expected timing and ultimate amount of claim payments and the effects of the adjustments are included in pre-tax earnings. Significant changes in such estimates may have a significant effect on unamortized deferred charge balances. Based on the contracts in effect as ofDecember 31, 2021 , we estimate that amortization expense in 2022 will approximate$950 million .
Other Critical Accounting Policies
Our Consolidated Balance Sheet atDecember 31, 2021 includes goodwill of acquired businesses of$73.9 billion and other indefinite-lived intangible assets of$18.5 billion . We evaluate these assets for impairment annually in the fourth quarter and on an interim basis if the facts and circumstances lead us to believe that more-likely-not there has been an impairment.Goodwill and indefinite-lived intangible asset impairment reviews include determining the estimated fair values of our reporting units and indefinite-lived intangible assets. The key assumptions and inputs used in such determinations may include forecasting revenues and expenses, cash flows and capital expenditures, as well as an appropriate discount rate and other inputs. Significant judgment by management is required in estimating the fair value of a reporting unit and in performing impairment reviews. Due to the inherent subjectivity and uncertainty in forecasting future cash flows and earnings over long periods of time, actual results may differ materially from the forecasts. If the carrying value of the indefinite-lived intangible asset exceeds fair value, the excess is charged to earnings as an impairment loss. If the carrying value of a reporting unit exceeds the estimated fair value of the reporting unit, then the excess, limited to the carrying amount of goodwill, will be charged to earnings as an impairment loss. K-62 --------------------------------------------------------------------------------
Management's Discussion and Analysis (Continued)
Other Critical Accounting Policies (Continued)
As ofDecember 31, 2021 , we concluded it is more likely than not that goodwill recorded in our Consolidated Balance Sheet was not impaired. The fair value estimates of reporting units are and will likely be significantly affected by assumptions on the severity, duration or long-term effects of the pandemic on the reporting unit's business, as well as other assumptions concerning the long-term economic performance of the reporting unit, which we cannot reliably predict. Consequently, any fair value estimates in such instances can be subject to wide variations. We primarily use discounted projected future earnings or cash flow methods in determining fair values. The key assumptions and inputs used in such methods may include forecasting revenues and expenses, cash flows and capital expenditures, as well as an appropriate discount rate and other inputs. A significant amount of judgment is required in estimating the fair value of a reporting unit and in performing goodwill impairment tests. In connection with the annual goodwill impairment review conducted in the fourth quarter of 2021, the estimated fair values of five reporting units did not exceed our carrying values by at least 20%. The most significant of these reporting units wasPrecision Castparts Corp. ("PCC"). The estimated fair value of PCC was approximately$34.5 billion , exceeding our carrying value of approximately$31.1 billion by 10.7%. Our carrying value of PCC included goodwill of approximately$7.5 billion . For the four other reporting units, our aggregate estimated fair value was approximately$2.5 billion , which exceeded our aggregate carrying value of approximately$2.3 billion by 9.2%. Our carrying value of these units included goodwill of approximately$1.2 billion . In the second quarter of 2020, we quantitively reevaluated goodwill for impairment for certain reporting units, and most significantly for PCC. As a result of our reviews, we recorded pre-tax goodwill impairment charges of$10.0 billion and indefinite-lived intangible asset impairment charges of$638 million , of which approximately$10 billion related to PCC. Prior to the reevaluation, the carrying value of PCC-related goodwill was approximately$17 billion . Additionally, the carrying value of PCC-related indefinite-lived intangible assets was approximately$14 billion . Substantially all of these amounts were recorded in connection with Berkshire's acquisition of PCC in 2016. The initial effects of the COVID-19 pandemic on commercial airlines and aircraft manufacturers were particularly severe. At that time, we considered several factors in our reevaluation, including but not limited to the announcements by airlines concerning potential future demand, employment levels and aircraft orders, announcements by manufacturers of reduced aircraft production, and the actions we were taking or may be taking in the future to restructure operations. Consequently, we deemed it prudent under the prevailing circumstances to increase discount rates and reduce prior long-term forecasts of future cash flows for purposes of reviewing for impairments.
Market Risk Disclosures
Our Consolidated Balance Sheets include substantial amounts of assets and liabilities whose fair values are subject to market risks. Our significant market risks are primarily associated with equity prices, interest rates, foreign currency exchange rates and commodity prices. The fair values of our investment portfolios remain subject to considerable volatility. The following sections address the significant market risks associated with our business activities.
Equity Price Risk
Equity securities represent a significant portion of our consolidated investment portfolio. Strategically, we strive to invest in businesses that possess excellent economics and able and honest management, and we prefer to invest a meaningful amount in each company. Historically, equity investments have been concentrated in relatively few issuers. AtDecember 31, 2021 , approximately 73% of the total fair value of equity securities was concentrated in four companies. We often hold our equity securities for long periods and short-term price volatility has occurred in the past and will occur in the future. We also strive to maintain significant levels of shareholder capital and ample liquidity to provide a margin of safety against short-term price volatility. K-63 --------------------------------------------------------------------------------
Management's Discussion and Analysis (Continued)
Equity Price Risk (Continued)
We are also subject to equity price risk with respect to our equity index put option contracts, although our equity price exposure has declined significantly as a vast majority of the contracts written to date have expired. Our ultimate liability with respect to these contracts is determined from the movement of the underlying stock index between the contract inception date and expiration date. The fair values of our liabilities arising from these contracts are also affected by changes in other factors. The following table summarizes our equity securities and equity index put option contract liabilities as ofDecember 31, 2021 and 2020 and the estimated effects of a hypothetical 30% increase and a 30% decrease in market prices as of those dates. The selected 30% hypothetical increase and decrease does not reflect the best or worst case scenario. Indeed, results from declines could be far worse due both to the nature of equity markets and the aforementioned concentrations existing in our equity investment portfolio. Dollar amounts are in millions. Estimated Fair Value after Estimated Hypothetical Hypothetical Increase (Decrease) Fair Value Price
Change Change in Prices in Net Earnings (1)
Investments in equity securities
$ 350,719 30% increase $ 452,936 $ 81,136 30% decrease 248,606 (81,053 ) Equity index put option contract liabilities 99 30% increase 5 74 30% decrease 1,088 (781 )December 31, 2020 Investments in equity securities$ 281,170 30% increase $ 362,830 $ 63,321 30% decrease 199,547 (63,293 ) Equity index put option contract liabilities 1,065 30% increase 257 638 30% decrease 2,702 (1,293 )
(1) The estimated increase (decrease) is after income taxes at the statutory
rate in effect as of the balance sheet date.
Interest Rate Risk
We may also invest in bonds, loans or other interest rate sensitive instruments. Our strategy is to acquire or originate such instruments at prices considered appropriate relative to the perceived credit risk. We also issue debt in the ordinary course of business to fund business operations, business acquisitions and for other general purposes. We attempt to maintain high credit ratings, in order to minimize the cost of our debt. We infrequently utilize derivative products, such as interest rate swaps, to manage interest rate risks and we do not attempt to match maturities of assets and liabilities. The fair values of our fixed maturity investments, loans and finance receivables, and notes payable and other borrowings will fluctuate in response to changes in market interest rates. Interest rate risks associated with the valuations of our equity index put option contract liabilities are no longer considered significant due to the short duration of remaining exposures as ofDecember 31, 2021 . Increases and decreases in interest rates generally translate into decreases and increases in fair values of these instruments. Additionally, fair values of interest rate sensitive instruments may be affected by the creditworthiness of the issuer, prepayment options, relative values of alternative investments, the liquidity of the instrument and other general market conditions. K-64 --------------------------------------------------------------------------------
Management's Discussion and Analysis (Continued)
Interest Rate Risk (Continued)
The following table summarizes the estimated effects of hypothetical changes in interest rates on our significant assets and liabilities that are subject to significant interest rate risk atDecember 31, 2021 and 2020. We assumed that the interest rate changes occur immediately and uniformly to each category of instrument and that there were no significant changes to other factors used to determine the value of the instrument. The hypothetical changes in interest rates do not reflect the best or worst case scenarios. Actual results may differ from those reflected in the table. Dollars are in millions. Estimated
Fair Value after Hypothetical Change in
Interest Rates
(bp=basis points)
Fair 100 bp 100 bp 200 bp 300 bp
Value decrease increase increase increase
December 31, 2021
Assets:
Investments in fixed maturity securities $ 16,434 $ 16,624 $ 16,231 $ 16,036 $ 15,847
Investments in equity securities* 10,864 11,457 10,313 9,798 9,319
Loans and finance receivables 22,174 22,982 21,417 20,714 20,054
Liabilities:
Notes payable and other borrowings: Insurance and other 42,339 46,559 38,724 35,683 33,104 Railroad, utilities and energy 87,065 97,474 78,472 71,289 65,246 Equity index put option contracts 99 105 94 89 84 December 31, 2020 Assets: Investments in fixed maturity securities$ 20,410 $ 20,622 $ 20,139 $ 19,879 $ 19,628 Investments in equity securities* 8,891 9,408 8,413 7,970 7,559 Loans and finance receivables 20,554 21,472 19,916 19,219 18,570
Liabilities:
Notes payable and other borrowings: Insurance and other 46,676 50,754 42,785 39,514 36,739 Railroad, utilities and energy 92,593 102,926 83,070 75,484 69,093 Equity index put option contracts 1,065 1,125 1,008 953 900
*Includes Cumulative Perpetual Preferred Stocks
Foreign Currency Risk
Certain of our subsidiaries operate in foreign jurisdictions and we transact
business in foreign currencies. In addition, we hold investments in common
stocks of major multinational companies, who have significant foreign business
and foreign currency risk of their own. We generally do not attempt to match
assets and liabilities by currency and do not use derivative contracts to manage
foreign currency risks in a meaningful way.
K-65
--------------------------------------------------------------------------------
Management's Discussion and Analysis (Continued)
Foreign Currency Risk (Continued)
Our net assets subject to financial statement translation intoU.S. Dollars are primarily in our insurance, utilities and energy and certain manufacturing and service subsidiaries. A portion of our financial statement translation-related impact from changes in foreign currency rates is recorded in other comprehensive income. In addition, we include gains or losses from changes in foreign currency exchange rates in net earnings related to non-U.S. Dollar denominated assets and liabilities of Berkshire andU.S. -based subsidiaries. A summary of these gains (losses), after-tax, for each of the years endingDecember 31, 2021 and 2020 follows (in millions). 2021 2020
Non-
(764 )
Net liabilities under certain reinsurance contracts
included in net earnings
58 (163 ) Foreign currency translation included in other comprehensive income (1,021 ) 1,264 Commodity Price Risk Our subsidiaries use commodities in various ways in manufacturing and providing services. As such, we are subject to price risks related to various commodities. In most instances, we attempt to manage these risks through the pricing of our products and services to customers. To the extent that we are unable to sustain price increases in response to commodity price increases, our operating results will likely be adversely affected. We do not utilize derivative contracts to manage commodity price risks to any significant degree.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
See "Market Risk Disclosures" contained in Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Management's Report on Internal Control Over Financial Reporting
Management of Berkshire Hathaway Inc. is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Securities Exchange Act of 1934 Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the Company's internal control over financial reporting as ofDecember 31, 2021 , as required by the Securities Exchange Act of 1934 Rule 13a-15(c). In making this assessment, we used the criteria set forth in the framework in Internal Control-Integrated Framework (2013) issued by theCommittee of Sponsoring Organizations of theTreadway Commission . Based on our evaluation under the framework in Internal Control-Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as ofDecember 31, 2021 .
The effectiveness of our internal control over financial reporting as of
registered public accounting firm, as stated in their report which appears on
page K-67.
Berkshire Hathaway Inc.February 26, 2022 K-66
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