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BERKSHIRE HATHAWAY INC – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Net earnings/loss attributable to Berkshire Hathaway shareholders are
disaggregated in the table that follows. Amounts are after deducting income
taxes and exclude earnings attributable to noncontrolling interests (in
millions).
Third Quarter First Nine Months
2022 2021 2022 2021
Insurance - underwriting $ (962 ) $ (784 ) $ (334 ) $ 356
Insurance - investment income 1,408 1,161 4,484 3,588
Railroad 1,442 1,538 4,477 4,305
Utilities and energy 1,585 1,496 3,101 2,939
Manufacturing, service and retailing 3,247 2,706 9,521 8,329
Investment and derivative contract gains
(losses) (10,449 ) 3,878 (65,067 ) 29,979
Other 1,041 349 2,835 653
Net earnings (loss) attributable to
Berkshire Hathaway shareholders $ (2,688 ) $ 10,344 $
(40,983 )
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 23 to the accompanying Consolidated Financial Statements) should be read in conjunction with this discussion. In varying degrees, the COVID-19 pandemic has affected our operating businesses. In addition, significant disruptions of supply chains and higher costs emerged in 2021 and have persisted in 2022. Further, geopolitical conflicts, including theRussia -Ukraine conflict, have developed in 2022. We cannot reliably predict future economic effects of these events on our businesses or when our operations will normalize. Nor can we reliably predict how these events will alter the future consumption patterns of consumers and businesses we serve. Insurance underwriting after-tax earnings decreased$178 million in the third quarter and$690 million in the first nine months of 2022 versus 2021. After-tax incurred losses attributable to significant catastrophe occurrences in the third quarter were approximately$2.7 billion from Hurricane Ian in 2022 and$1.7 billion from Hurricane Ida and floods inEurope in 2021. Underwriting results in 2022 were also negatively impacted by increases in private passenger automobile claims frequencies and severities, and favorably impacted by higher foreign currency exchange rate gains arising from the remeasurement of non-U.S. Dollar denominated liabilities of ourU.S. insurance subsidiaries and improved life and health reinsurance results. After-tax earnings from insurance investment income increased$247 million in the third quarter and$896 million in the first nine months of 2022 compared to 2021, attributable to increased dividend income and higher interest rates. After-tax earnings of our railroad, BNSF, declined 6.2% in the third quarter and increased 4.0% in the first nine months of 2022 compared to 2021. The comparative changes in earnings in 2022 reflected higher revenue per car/unit, lower overall freight volumes and higher fuel and other operating costs. After-tax earnings of our utilities and energy business increased 5.9% in the third quarter and 5.5% in the first nine months of 2022 compared to 2021. The increases reflected higher earnings from tax equity investments and from the natural gas pipeline andNorthern Powergrid businesses, partly offset by lower earnings from theU.S. regulated utilities and real estate brokerage businesses. After-tax earnings from our manufacturing, service and retailing businesses increased 20.0% in the third quarter and 14.3% in the first nine months of 2022 versus 2021. Results were mixed among our various businesses. While customer demand for products and services was relatively good in 2022, demand began to weaken in the third quarter at certain of our businesses. We continue to experience the negative effects of higher materials, freight, labor and other input costs. Investment and derivative contract gains and losses in 2022 and 2021 predominantly derived from our investments in equity securities and includes unrealized gains and losses from market price changes during the period. 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 in evaluating the economic performance of our businesses. These gains and losses have caused and will continue to cause significant volatility in our periodic earnings. Other earnings included after-tax foreign currency exchange gains related to non-U.S. Dollar denominated debt of$858 million in the third quarter and$2.4 billion in the first nine months of 2022, compared to$196 million and$676 million in the third quarter and first nine months of 2021, respectively. 26 --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 quarterly or annual 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. Significant catastrophe events in 2022 included Hurricane Ian in the third quarter and floods inAustralia andSouth Africa during the first six months, while significant events in 2021 included Hurricane Ida and floods inEurope in the third quarter and Winter Storm Uri in the first quarter. We recorded estimated pre-tax losses of$3.4 billion from Hurricane Ian in the third quarter of 2022 and$2.2 billion from Hurricane Ida and European floods in the third quarter of 2021. 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$128 billion as ofSeptember 30, 2022 . Our periodic underwriting results may also include significant foreign currency transaction gains and losses arising from the changes in the valuation of non-U.S. Dollar denominated liabilities of ourU.S. based insurance subsidiaries from foreign currency exchange rate changes. Underwriting results of certain of our commercial insurance and reinsurance businesses have been affected by estimated losses and costs associated with the COVID-19 pandemic. While pandemic-related losses in the first nine months of 2022 were insignificant, results in future periods may be affected by legal and regulatory actions pertaining to insurance coverage, which we cannot reasonably estimate at this time. We provide primary insurance and reinsurance products covering property and casualty risks, as well as life and health risks. OnOctober 19, 2022 , Berkshire acquired Alleghany Corporation ("Alleghany"), which operates property and casualty insurance and reinsurance businesses. These businesses will be incorporated into our reinsurance and primary insurance results beginning as of the acquisition date. Our insurance and reinsurance businesses are GEICO,Berkshire Hathaway Primary Group andBerkshire Hathaway Reinsurance Group . Underwriting results of our insurance businesses are summarized below (dollars in millions). Third Quarter First Nine Months 2022 2021 2022 2021 Pre-tax underwriting earnings (loss): GEICO$ (759 ) $ (289 ) $ (1,424 ) $ 1,360 Berkshire Hathaway Primary Group (281 ) (23 ) 53 349 Berkshire Hathaway Reinsurance Group (110 ) (708 ) 1,013 (1,298 ) Pre-tax underwriting earnings (1,150 ) (1,020 ) (358 ) 411 Income taxes and noncontrolling interests (188 ) (236 ) (24 ) 55 Net underwriting earnings (loss)$ (962 ) $ (784 ) $ (334 ) $ 356 Effective income tax rate 16.3 % 23.0 % 6.6 % 13.6 % 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).
Third Quarter First Nine Months
2022 2021 2022 2021
Amount % Amount % Amount % Amount %
Premiums written $ 10,137 $ 10,097 $ 29,818 $ 29,333
Premiums earned $ 9,808 100.0 $ 9,604 100.0 $ 29,169 100.0 $ 28,073 100.0
Losses and loss adjustment
expenses 9,515 97.0 8,486 88.4 27,164 93.1 22,566 80.4
Underwriting expenses 1,052 10.7 1,407 14.6 3,429 11.8 4,147 14.8
Total losses and expenses 10,567 107.7 9,893 103.0 30,593 104.9 26,713 95.2
Pre-tax underwriting
earnings (loss) $ (759 ) $ (289 ) $ (1,424 ) $ 1,360
27
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Insurance-Underwriting (Continued)
GEICO (Continued)
GEICO's pre-tax underwriting losses in 2022 reflected increased claims severities, primarily due to significant cost inflation in property and physical damage claims, which began to accelerate in the second half of 2021 and have continued through 2022. Increases in used car prices are producing increased claims severities on total losses and shortages of car parts are contributing to elevated claims severities on partial losses. In addition, injury claims severities continue to trend higher. Premiums written were relatively unchanged in the third quarter and the first nine months of 2022 compared to 2021, reflecting increases in average premiums per auto policy due to rate increases, which were substantially offset by a decrease in policies-in-force. Voluntary auto policies-in-force declined 4.6% over the first nine months of 2022 while average premiums per voluntary auto policy increased by approximately 5.4%. Premiums earned increased$204 million (2.1%) in the third quarter and$1.1 billion (3.9%) in the first nine months of 2022 compared to 2021. Premiums earned in the first nine months of 2021 included a reduction of approximately$475 million attributable to the remaining impact of the GEICO Giveback program that provided a 15% premium credit to new and renewing voluntary auto and motorcycle policies written betweenApril 8, 2020 andOctober 7, 2020 . Losses and loss adjustment expenses increased$1.0 billion (12.1%) in the third quarter and$4.6 billion (20.4%) in the first nine months of 2022 compared to 2021. GEICO's ratio of losses and loss adjustment expenses to premiums earned was 97.0% in the third quarter and 93.1% in the first nine months of 2022, increases of 8.6 percentage points and 12.7 percentage points, respectively, compared to the same periods in 2021. The increases were primarily attributable to higher claims frequencies and severities, as well as lower reductions of loss estimates for prior years' loss events and an increase in significant catastrophe losses. Claims frequencies in the first nine months of 2022 were higher for all coverages, including property damage (one to two percent range), bodily injury and personal injury (four to five percent range) and collision (six to seven percent range). Average claims severities in the first nine months of 2022 were higher for property damage and collision coverages (seventeen to nineteen percent range) and bodily injury coverage (nine to eleven percent range). Losses and loss adjustment expenses reflected reductions in the ultimate loss estimates for prior years' loss events of$386 million in the first nine months of 2022 compared to$1.2 billion in 2021. The reductions in 2022 reflected decreases in all major coverages except collision and property damage coverages, while the reductions in 2021 were across all major coverages. Losses and loss adjustment expenses in the third quarter were approximately$600 million from Hurricane Ian in 2022 and$400 million from Hurricane Ida in 2021. Underwriting expenses decreased$355 million (25.2%) in the third quarter and$718 million (17.3%) in the first nine months of 2022 compared to 2021, primarily due to significant reductions in advertising costs in both periods and lower employee-related costs in the first nine months. GEICO's expense ratio (underwriting expense to premiums earned) was 10.7% in the third quarter and 11.8% in the first nine months of 2022, decreases of 3.9 percentage points and 3.0 percentage points, respectively, compared to the same periods in 2021, attributable to both the decreases in expenses as well as the increases in earned premiums.
The Berkshire Hathaway Primary Group ("BH Primary") provides a variety of commercial insurance solutions, including healthcare professional liability, workers' compensation, automobile, general liability, property and specialty coverages for small, medium and large clients. BH Primary's larger insurers includeBerkshire Hathaway Specialty Insurance ("BH Specialty"), Berkshire Hathaway Homestate Companies ("BHHC"),MedPro Group , Berkshire Hathaway GUARD Insurance Companies ("GUARD"),National Indemnity Company ("NICO Primary") andU.S. Liability Insurance Company ("USLI"). A summary of BH Primary underwriting results follows (dollars in millions). Third Quarter First Nine Months 2022 2021 2022 2021 Amount % Amount % Amount % Amount % Premiums written$ 3,895 $ 3,506 $ 10,791 $ 9,357 Premiums earned$ 3,485 100.0$ 2,964 100.0$ 9,916 100.0$ 8,373 100.0 Losses and loss adjustment expenses 2,825 81.1 2,240 75.6 7,342 74.0 6,044 72.2 Underwriting expenses 941 27.0 747 25.2 2,521 25.5 1,980 23.6 Total losses and expenses 3,766 108.1 2,987 100.8 9,863 99.5 8,024 95.8 Pre-tax underwriting earnings (loss)$ (281 ) $ (23 ) $ 53 $ 349 Premiums written increased$389 million (11.1%) in the third quarter and$1.4 billion (15.3%) in the first nine months of 2022 compared to 2021, reflecting year-to-date increases at BH Specialty (20%), USLI (17%) and BHHC (15%). The increases were across a variety of property and casualty coverages and across several markets. 28 --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Insurance-Underwriting (Continued)
BH Primary's loss ratio was 81.1% in the third quarter and 74.0% in the first nine months of 2022, an increase of 5.5 percentage points in the third quarter and 1.8 percentage points in the first nine months compared to 2021. Losses from catastrophe events in 2022 were approximately$660 million in the third quarter (Hurricane Ian) and$740 million in the first nine months. Losses from catastrophe events in 2021 were approximately$260 million in the third quarter (largely Hurricane Ida) and$420 million in the first nine months. Losses and loss adjustment expenses also included net reductions in estimated ultimate liabilities for prior years' loss events in the first nine months of$348 million in 2022 and$420 million in 2021. BH Primary insurers write significant levels of workers' compensation, commercial and professional liability insurance and the related claim costs may be subject to high severity and long claim-tails. Claims liabilities could be greater than anticipated due to a variety of factors. Underwriting expenses increased$194 million (26.0%) in the third quarter and$541 million (27.3%) in the first nine months of 2022 compared to the same periods in 2021. The expense ratio increased 1.8 percentage points in the third quarter and 1.9 percentage points in the first nine months of 2022 compared to 2021. These increases reflected costs associated with new business development programs and changes in business mix.
The Berkshire Hathaway Reinsurance Group ("BHRG") offers excess-of-loss and quota-share reinsurance coverages on property and casualty risks to insurers and reinsurers worldwide through several subsidiaries, led byNational Indemnity Company ("NICO"),General Reinsurance Corporation andGeneral Reinsurance AG . We also write life and health reinsurance coverages throughGeneral Re Life Corporation ,General Reinsurance AG andBerkshire Hathaway Life Insurance Company of Nebraska ("BHLN"). We periodically assume property and casualty risks under retroactive reinsurance contracts written through NICO. In addition, we write periodic payment annuity contracts through BHLN. Generally, we strive to generate underwriting profits. However, time-value-of-money concepts are important elements in establishing prices for retroactive reinsurance and periodic payment annuity business due to the expected long durations of the claim liabilities. We expect to incur pre-tax underwriting losses from such business, primarily through deferred charge amortization and discount accretion charges. We receive premiums at the inception of these contracts, which are then available for investment. A summary of BHRG's premiums and pre-tax underwriting results follows (in millions). Third Quarter First Nine Months Pre-tax underwriting Pre-tax underwriting Premiums earned earnings (loss) Premiums earned earnings (loss) 2022 2021 2022 2021 2022 2021 2022 2021 Property/casualty$ 4,013 $ 3,637 $ 23 $ (247 ) $ 10,943 $ 10,385 $ 1,404 $ 121 Life/health 1,309 1,328 67 (181 ) 3,822 3,932 130 (522 )
Retroactive reinsurance - - (83 ) (158 ) - 82 (325 ) (620 )
Periodic payment annuity 192 191 (149 ) (94 ) 529 458 (279 ) (374 )
Variable annuity 3 3 32 (28 ) 10 11 83 97
$ 5,517 $ 5,159 $ (110 ) $ (708 ) $ 15,304 $ 14,868 $ 1,013 $ (1,298 )
Property/casualty
A summary of property/casualty reinsurance underwriting results follows (dollars
in millions).
Third Quarter First Nine Months
2022 2021 2022 2021
Amount % Amount % Amount % Amount %
Premiums written $ 4,574 $ 4,115 $ 13,119 $ 11,924
Premiums earned $ 4,013 100.0 $ 3,637 100.0 $ 10,943 100.0 $ 10,385 100.0
Losses and loss adjustment
expenses 3,451 86.0 2,986 82.1 7,825 71.5 7,689 74.0
Underwriting expenses 539 13.4 898 24.7 1,714 15.7 2,575 24.8
Total losses and expenses 3,990 99.4 3,884 106.8 9,539 87.2 10,264 98.8
Pre-tax underwriting
earnings (loss) $ 23 $ (247 ) $ 1,404 $ 121
29
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Insurance-Underwriting (Continued)
Property/casualty (Continued)
Premiums written increased$459 million (11.2%) in the third quarter and$1.2 billion (10.0%) in the first nine months of 2022 compared to the same periods in 2021, primarily due to net increases in new property business and higher rates, partially offset by unfavorable foreign currency translation effects. Losses and loss adjustment expenses increased$465 million (15.6%) in the third quarter and$136 million (1.8%) in the first nine months of 2022 compared to 2021. Losses incurred from catastrophe events were$1.9 billion in the third quarter (primarily Hurricane Ian) and$2.6 billion in the first nine months of 2022 and were$1.5 billion in the third quarter and$1.9 billion in the first nine months of 2021. Reductions in estimated ultimate liabilities for losses occurring in prior years were$833 million in the third quarter and$1.4 billion in the first nine months of 2022 and were$599 million in the third quarter and$564 million in the first nine months of 2021. Underwriting expenses as percentages of premiums earned decreased 11.3 percentage points in the third quarter and 9.1 percentage points in the first nine months of 2022 compared to 2021, primarily attributable to foreign currency exchange rate effects and changes in business mix. Underwriting expenses included foreign currency exchange gains of$315 million in the third quarter and$704 million in the first nine months of 2022, primarily related to a third quarter 2021 intercompany reinsurance agreement in which a non-U.S. based Berkshire subsidiary ceded non-U.S. Dollar denominated liabilities to aU.S. based Berkshire subsidiary. The foreign currency exchange gains in the third quarter of 2021 were not significant. UnderU.S. GAAP, the effects of exchange rate changes from the remeasurement of liabilities assumed by theU.S. subsidiary are reflected in earnings as its functional currency is theU.S. Dollar. The net foreign currency exchange rate effects from translating the financial statements of the non-U.S. subsidiary to theU.S. Dollar are included in other comprehensive income.
Life/health
A summary of our life/health reinsurance underwriting results follows (dollars
in millions).
Third Quarter First Nine Months
2022 2021 2022 2021
Amount % Amount % Amount % Amount %
Premiums written $ 1,251 $ 1,332 $ 3,743 $ 3,929
Premiums earned $ 1,309 100.0 $ 1,328 100.0 $ 3,822 100.0 $ 3,932 100.0
Life and health insurance
benefits 1,013 77.4 1,247 93.9 3,028 79.2 3,733 94.9
Underwriting expenses 229 17.5 262 19.7 664 17.4 721 18.4
Total benefits and expenses 1,242 94.9 1,509 113.6 3,692 96.6 4,454 113.3
Pre-tax underwriting
earnings (loss) $ 67 $ (181 ) $ 130 $ (522 )
Life/health premiums written decreased $81 million (6.1%) in the third quarter
and $186 million (4.7%) in the first nine months of 2022 compared to the same
periods in 2021, primarily due to unfavorable foreign currency translation
effects. Life and health benefits declined $234 million (18.8%) in the third
quarter and $705 million (18.9%) in the first nine months of 2022 compared to
2021, primarily due to relatively high pandemic-related mortality claims in the
U.S. , South Africa , India and Latin America in 2021.
Retroactive reinsurance
Pre-tax underwriting losses in each period 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 ourU.S. subsidiaries. Foreign currency exchange gains were$130 million in the third quarter and$287 million in the first nine months of 2022 compared to$70 million in the first nine months of 2021, substantially all of which was in the third quarter. Pre-tax underwriting losses before foreign currency exchange effects were$213 million in the third quarter and$612 million in the first nine months of 2022 compared to$227 million in the third quarter and$690 million in the first nine months of 2021. Unpaid losses assumed under retroactive reinsurance contracts declined$1.6 billion in the first nine months of 2022 to$36.7 billion atSeptember 30, 2022 , primarily due to loss payments. Unamortized deferred charges related to retroactive reinsurance contracts declined$649 million in the first nine months of 2022 to$10.0 billion atSeptember 30, 2022 , primarily attributable to periodic amortization. Deferred charge amortization will be included in underwriting earnings over the expected remaining claims settlement periods. 30 --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Insurance-Underwriting (Continued)
Periodic payment annuity
Periodic payment annuity premiums earned were relatively unchanged in the third quarter and increased 15.5% in the first nine months of 2022 compared to the same periods in 2021. Periodic payment annuity business is both price and demand sensitive and the supply of available business is affected by the timing of underlying legal claim settlements. Our volumes written may 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. Our periodic payment annuity contracts normally produce pre-tax underwriting losses, deriving from the recurring accretion of time-value discounted annuity liabilities, which includes discount accrual on liabilities of contracts without life contingencies. Underwriting results also include gains or losses 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$119 million in the third quarter and$279 million in the first nine months of 2022 compared to$45 million in the third quarter and$25 million in the first nine months of 2021. Pre-tax underwriting losses before foreign currency exchange effects were$268 million in the third quarter and$558 million in the first nine months of 2022 and$139 million in the third quarter and$399 million in the first nine months of 2021. Pre-tax losses in the third quarter of 2022 included approximately$130 million attributable to an agreement to terminate an existing reinsurance contract, in which the settlement payable exceeded the carrying value of the liabilities. Discounted annuity liabilities were$15.2 billion atSeptember 30, 2022 , which included$3.9 billion for contracts without life contingencies, and had a weighted average discount rate of approximately 3.9%. Upon the adoption of ASU 2018-12 in 2023, the discount rates will be adjusted quarterly based upon prevailing interest rates which could have a significant effect on our recorded annuity liabilities. The periodic effect from discount rate changes will be largely reflected in other comprehensive income.
Variable annuity
Variable annuity guarantee reinsurance contracts produced pre-tax gains of$32 million in the third quarter and$83 million in the first nine months of 2022 compared to pre-tax losses of$28 million in the third quarter and gains of$97 million in the first nine months of 2021. 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. Underwriting earnings in the first nine months of 2022 and 2021 were primarily attributable to the net effects of interest rate increases and changes in securities markets which were unfavorable in 2022 and favorable in 2021. Underwriting results in the third quarter of 2021 included losses from lower underlying lapse rate assumptions.
Insurance-Investment Income
A summary of net investment income attributable to our insurance operations
follows (dollars in millions).
Third Quarter First Nine Months Percentage Change
Third First Nine
2022 2021 2022 2021 Quarter Months
Dividend income $ 1,281 $ 1,196 $ 4,533 $ 3,747 7.1 % 21.0 %
Interest and other
investment income 397 141 789 458 181.6 72.3
Pre-tax net investment
income 1,678 1,337 5,322 4,205 25.5 26.6
Income taxes and
noncontrolling interests 270 176 838 617
Net investment income $ 1,408 $ 1,161 $ 4,484 $ 3,588
Effective income tax rate 16.1 % 13.1 % 15.7 % 14.7 %
Dividend income increased 7.1% in the third quarter and 21.0% in the first nine
months of 2022 compared to 2021. The increases in 2022 reflected an overall
increase in equity security investments during 2022. Dividend income also varies
from period to period due to changes in the investment portfolio and the
frequency and timing of dividends from certain investees. Dividend income
included $8 million in the third quarter and $37 million in the first nine
months of 2022 and $26 million in the third quarter and $101 million in the
first nine months of 2021 from investments in preferred stock of Berkshire
Hathaway Energy . Such amounts are deducted from earnings of the utilities and
energy segment.
Interest and other investment income increased $256 million (181.6%) in the
third quarter and $331 million (72.3%) in the first nine months of 2022 compared
to the same periods in 2021. The increases were primarily due to increases in
short-term interest rates. We continue to hold substantial balances of cash,
cash equivalents and short-term U.S. Treasury Bills. While exceptionally low
interest rates prevailed in recent years, interest rates increased significantly
over the first nine months of 2022. We continue to believe that maintaining
ample liquidity is paramount and we insist on safety over yield with respect to
short-term investments.
31
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Insurance-Investment Income (Continued)
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 benefit liabilities, unearned premiums and other liabilities due to policyholders, which are reduced by insurance premiums receivable, reinsurance receivables, deferred charges assumed under retroactive reinsurance contracts and deferred policy acquisition costs. Float approximated$150 billion atSeptember 30, 2022 and$147 billion atDecember 31, 2021 . Our combined insurance operations generated pre-tax underwriting losses of$358 million in the first nine months of 2022 and, consequently, the average cost of float for that period was 0.24%. InOctober 2022 , Berkshire acquired Alleghany, which operates insurance and reinsurance businesses. Estimated float of Alleghany's businesses approximated$13.5 billion based on its historical balance sheet atSeptember 30, 2022 . A summary of cash and investments held in our insurance businesses as ofSeptember 30, 2022 andDecember 31, 2021 follows (in millions).September 30 ,
2022
2021
Cash, cash equivalents and
90,688
Equity securities 295,387 334,907
Fixed maturity securities 18,476 16,386
Other 3,252 4,296
$ 376,814 $ 446,277
Fixed maturity securities as of September 30, 2022 were as follows (in
millions).
Amortized Unrealized Carrying
Cost Gains (Losses) Value
U.S. Treasury , U.S. government corporations
and agencies $ 9,023 $ (264 ) $ 8,759
Foreign governments 8,630 (196 ) 8,434
Corporate bonds 821 200 1,021
Other 244 18 262
$ 18,718 $ (242 ) $ 18,476
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 as of September 30, 2022 . Foreign
government securities include obligations issued or unconditionally guaranteed
by national or provincial government entities.
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). Third Quarter First Nine
Months
2022 2021 2022
2021
Railroad operating revenues$ 6,530 $ 5,591 $ 18,761 $ 16,421 Railroad operating expenses: Compensation and benefits 1,479 1,168 3,916 3,477 Fuel 1,272 705 3,409 1,948 Purchased services 530 510 1,538 1,525 Depreciation and amortization 633 608 1,875
1,832
Equipment rents, materials and other 508 338 1,494
1,262 Total 4,422 3,329 12,232 10,044 Railroad operating earnings 2,108 2,262 6,529 6,377 Other revenues (expenses): Other revenues 163 199 540 579 Other expenses, net (129 ) (176 ) (458 ) (514 ) Interest expense (258 ) (256 ) (767 ) (775 ) Pre-tax earnings 1,884 2,029 5,844 5,667 Income taxes 442 491 1,367 1,362 Net earnings$ 1,442 $ 1,538 $ 4,477 $ 4,305 Effective income tax rate 23.5 % 24.2 % 23.4 % 24.0 % 32
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Railroad (Continued)
The following table summarizes BNSF's railroad freight volumes by business group
(cars/units in thousands).
Cars/Units Percentage Change
Third Quarter First Nine Months Third First Nine
2022 2021 2022 2021 Quarter Months
Consumer
products 1,323 1,425 3,977 4,307 (7.2 )% (7.7 )%
Industrial
products 413 443 1,237 1,280 (6.8 ) (3.4 )
Agricultural
products 276 265 884 896 4.2 (1.3 )
Coal 399 404 1,158 1,127 (1.2 ) 2.8
2,411 2,537 7,256 7,610 (5.0 ) (4.7 )
Railroad operating revenues increased 16.8% in the third quarter and 14.3% in
the first nine months of 2022 compared to 2021, attributable to increases in
average revenue per car/unit resulting from higher fuel surcharge revenue driven
by higher fuel prices, along with increased rates per car/unit, partially offset
by lower volumes. BNSF's pre-tax earnings decreased 7.1% in the third quarter
and increased 3.1% in the first nine months of 2022 compared to 2021. Results
for the third quarter were impacted by lower freight volumes and higher fuel and
other operating costs, partially offset by higher revenue per car.
Operating revenues from consumer products were $2.4 billion in the third quarter
and $7.0 billion in the first nine months of 2022, increases of 15.3% and 14.5%,
respectively, from 2021. The increases reflected higher average revenue per
car/unit, partially offset by volume decreases of 7.2% in the third quarter and
7.7% in the first nine months of 2022 compared to 2021. The volume decreases
were primarily due to lower international intermodal shipments resulting from
supply chain disruptions. Operating revenues from industrial products were $1.5
billion in the third quarter and $4.2 billion in the first nine months of 2022,
increases of 7.1% and 6.9%, respectively, from 2021. The increases reflected
higher average revenue per car/unit, partially offset by volume decreases of
6.8% in the third quarter and 3.4% in the first nine months of 2022 compared to
2021. The volume decreases in both the third quarter and first nine months were
primarily due to lower petroleum and building products shipments.
Operating revenues from agricultural products were $1.3 billion in the third
quarter and $4.1 billion in the first nine months of 2022, increases of 25.7%
and 12.0%, respectively, compared to 2021. The increases were primarily
attributable to higher average revenue per car/unit. Volumes increased 4.2% in
the third quarter due to higher domestic grain shipments and increased renewable
diesel and oil feedstock shipments, while volumes decreased 1.3% in the first
nine months of 2022, primarily due to lower grain exports, partially offset by
higher volumes of domestic grains, renewable diesel and oil feedstocks.
Operating revenues from coal were $1.1 billion in the third quarter and $3.0
billion in the first nine months of 2022, increases of 27.0% and 28.8%,
respectively, from 2021. The increases were primarily attributable to higher
average revenue per car/unit. Volumes decreased 1.2% in the third quarter
primarily due to network challenges, while volumes increased 2.8% in the first
nine months of 2022 due to increased electricity generation, higher natural gas
prices and improved export demand.
Railroad operating expenses were $4.4 billion in the third quarter and $12.2
billion in the first nine months of 2022, increases of $1.1 billion (32.8%) and
$2.2 billion (21.8%), respectively, compared to 2021. The increases were
primarily due to significant increases in the cost of fuel, as well as higher
compensation and benefits expenses. Our ratio of railroad operating expenses to
railroad operating revenues increased 8.2 percentage points to 67.7% in the
third quarter and 4.0 percentage points to 65.2% in the first nine months of
2022 versus the comparable 2021 periods. Compensation and benefits expenses
increased $311 million (26.6%) in the third quarter and $439 million (12.6%) in
the first nine months of 2022 compared to 2021, primarily due to wage inflation,
including the impact from tentative or ratified union labor agreements, higher
health and welfare costs and lower productivity. Fuel expenses increased $567
million (80.4%) in the third quarter and $1.5 billion (75.0%) in the first nine
months of 2022 compared to 2021, primarily due to higher fuel prices, partially
offset by lower volumes. Equipment rents, materials and other expenses increased
$170 million (50.3%) in the third quarter and $232 million (18.4%) in the first
nine months of 2022 compared to 2021, primarily due to general inflation, lower
gains from land and easement sales and higher casualty costs.
Approximately 30,500 of BNSF's employees are members of a labor union. The U.S.
Class I railroads and rail labor unions were engaged in negotiations from
January 2020 through June 2022 . Federal mediation was included in that
timeframe, followed by a release from the National Mediation Board for a
Presidential Emergency Board (PEB). In accordance with the Railway Labor Act
(RLA), the PEB issued its report and recommendations to settle the bargaining
disputes on August 16, 2022 . Tentative agreements based on these recommendations
were reached with all labor unions in September 2022 . To date, six unions have
ratified those agreements. Two labor unions did not ratify their tentative
agreement, and the parties have agreed to maintain the status quo as discussions
continue. Ratification results for the remaining unions are scheduled to be
announced through November 2022 . Where settlements have not been successful
following the RLA process, Congress may act by extending the status quo period
or passing a law imposing a resolution on the parties.
33
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Utilities and Energy We currently own 92% ofBerkshire 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. 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 a residential real estate brokerage business and a large network of residential real estate brokerage franchises inthe United States . The rates our regulated businesses charge customers for energy and services are largely based 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). Third Quarter First Nine Months 2022 2021 2022 2021 Revenues: Energy operating revenue$ 6,095 $ 5,225 $ 15,858 $ 14,375 Real estate operating revenue 1,405 1,743 4,284 4,738 Other income (loss) 31 45 (110 ) (91 ) Total revenue 7,531 7,013 20,032 19,022 Costs and expense: Energy cost of sales 1,959 1,385 4,944 4,064 Energy operating expense 2,362 2,132 6,858 6,302 Real estate operating costs and expense 1,352 1,608 4,086 4,312 Interest expense 537 513 1,583 1,547 Total costs and expense 6,210 5,638 17,471 16,225 Pre-tax earnings 1,321 1,375 2,561 2,797 Income tax expense (benefit)* (570 ) (398 ) (1,274 ) (842 ) Net earnings after income taxes 1,891 1,773 3,835 3,639 Noncontrolling interests of BHE subsidiaries 147 103 376 311 Net earnings attributable to BHE 1,744 1,670 3,459 3,328 Noncontrolling interests and preferred stock dividends 159 174 358 389 Net earnings attributable to Berkshire Hathaway shareholders$ 1,585 $ 1,496 $ 3,101 $ 2,939 Effective income tax rate (43.1 )% (28.9 )% (49.7 )% (30.1 )%
* 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).
Third Quarter First Nine Months Percentage Change
Third First Nine
2022 2021 2022 2021 Quarter Months
PacifiCorp $ 409 $ 333 $ 622 $ 728 22.8 % (14.6 )%
MidAmerican Energy Company 300 373 745 728 (19.6 ) 2.3
NV Energy 270 282 392 416 (4.3 ) (5.8 )
Northern Powergrid 100 83 282 162 20.5 74.1
Natural gas pipelines 232 144 729 627 61.1 16.3
Other energy businesses 243 230 726 521 5.7 39.3
Real estate brokerage 29 102 134 321 (71.6 ) (58.3 )
Corporate interest and other 161 123 (171 ) (175 ) 30.9 (2.3 )
$ 1,744 $ 1,670 $ 3,459 $ 3,328 4.4 3.9
34
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Utilities and Energy (Continued)
PacifiCorp operates a regulated electric utility in portions of several Western states, includingUtah ,Oregon andWyoming . After-tax earnings increased$76 million in the third quarter and decreased$106 million in the first nine months of 2022 compared to 2021. The changes reflected increases in utility margin (operating revenue less cost of sales) and higher production tax credits recognized in the third quarter and higher operating expenses. The increases in operating expenses reflected higher accruals in the first nine months of 2022 associated with wildfires in 2020, higher general and plant maintenance costs and incremental costs from additional assets placed in-service. PacifiCorp's utility margin was$1.1 billion in the third quarter and$2.7 billion in the first nine months of 2022, increases of$68 million and$88 million , respectively, from the comparable periods in 2021. The increases reflected higher operating revenue from favorable retail and wholesale pricing and increases in retail customer volumes, partially offset by higher purchased power and thermal generation costs. Retail customer volumes increased 3.5% in the third quarter and 0.8% in the first nine months of 2022 compared to 2021, primarily due to an increase in the average number of customers and the favorable impact of weather, partially offset by lower customer usage. MEC operates a regulated electric and natural gas utility primarily inIowa andIllinois . After-tax earnings decreased$73 million in the third quarter and increased$17 million in the first nine months of 2022 compared to 2021. The changes reflected increases in electric utility margin offset by higher operating expenses and lower other income. Additionally, comparative income tax benefits were lower in the third quarter and higher in the first nine months of 2022, as higher production tax credits recognized on new wind-powered and solar-powered generating facilities placed in-service ($14 million in the third quarter and$106 million in the first nine months) were offset by the impacts of ratemaking. The increase in operating expenses included higher costs associated with certain regulatory mechanisms. MEC's electric utility margin was$774 million in the third quarter and$1.8 billion in the first nine months of 2022, increases of 12% and 15%, respectively, versus 2021. The increases were attributable to higher operating revenue from increased retail and wholesale customer volumes and favorable wholesale pricing, partially offset by higher purchased power costs. Electric retail customer volumes increased 3.1% in the third quarter and 4.0% in the first nine months of 2022 compared to 2021, primarily due to higher customer usage. NV Energy operates regulated electric and natural gas utilities inNevada . After-tax earnings decreased$12 million in the third quarter and$24 million in the first nine months of 2022 compared to 2021. The decreases reflected higher operating expenses from increased plant operations and maintenance expenses, higher accruals for earnings sharing and incremental costs from additional assets placed in-service, partially offset by higher interest income from carrying charges on regulatory balances. NV Energy's electric utility margin was$622 million in the third quarter and$1.3 billion in the first nine months of 2022, relatively unchanged compared to 2021. Electric retail customer volumes increased 0.3% in the third quarter and 1.3% in the first nine months of 2022 compared to 2021, primarily due to an increase in the average number of customers, partially offset by the unfavorable impact of weather.Northern Powergrid's after-tax earnings increased$17 million in the third quarter and$120 million in the first nine months of 2022 compared to 2021. Earnings in the first nine months of 2021 included deferred income tax expense of$109 million related to the enactment inJune 2021 of an increase in theUnited Kingdom income tax rate from 19% to 25%, effectiveApril 1, 2023 . In addition, earnings increased atCE Gas from new projects placed in-service in March andJuly 2022 and improved distribution business results largely from higher tariff rates, which were partially offset by unfavorable foreign currency translation effects in 2022. Natural gas pipelines' after-tax earnings increased$88 million in the third quarter and$102 million in the first nine months of 2022 compared to 2021. The increases were primarily due to higher earnings at BHE GT&S, largely from the impacts of a general rate case, favorable income tax adjustments and lower operating expenses. The year-to-date increase was partially offset by reduced margins in 2022 due to higher natural gas sales and higher transportation revenue in 2021, attributable to an increase in demand as a result of theFebruary 2021 winter storms. Other energy businesses' after-tax earnings increased$13 million in the third quarter and$205 million in the first nine months of 2022 compared to 2021. The increases in earnings were primarily due to increased wind tax equity investment earnings of$24 million in the third quarter and$182 million in the first nine months of 2022 as well as from higher operating revenue from owned renewable energy projects, partly offset by lower earnings from natural gas generating facilities. The increases in wind tax equity investment earnings reflected increased income tax benefits from projects reaching commercial operation over the past twelve months. The comparative increase in year-to-date earnings also reflected the impact of losses in 2021 on pre-existing tax equity investments due to theFebruary 2021 winter storms. 35 --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Utilities and Energy (Continued)
Real estate brokerage after-tax earnings decreased$73 million in the third quarter and$187 million in the first nine months of 2022 compared to 2021. The decreases in earnings were primarily attributable to lower earnings from mortgage services due to a decrease in funded volume primarily from a decline in refinancing activity and lower earnings from brokerage and settlement services from a decrease in closed units, partially offset by lower operating expenses. Corporate interest and other after-tax earnings increased$38 million in the third quarter and was relatively unchanged for the first nine months of 2022 compared to 2021, reflecting higher federal income tax credits recognized, partially offset by higher interest expense and lower earnings from non-regulated energy services in the first nine months.
Manufacturing, Service and Retailing
A summary of revenues and earnings of our manufacturing, service and retailing
businesses follows (dollars in millions).
Third Quarter First Nine Months Percentage Change
First Nine
2022 2021 2022 2021 Third Quarter Months
Revenues
Manufacturing $ 19,000 $ 17,496 $ 57,193 $ 50,821 8.6 % 12.5 %
Service and retailing 23,136 21,291 67,645 62,143 8.7 8.9
$ 42,136 $ 38,787 $ 124,838 $ 112,964
Pre-tax earnings
Manufacturing $ 2,883 $ 2,445 $ 8,735 $ 7,595 17.9 % 15.0 %
Service and retailing 1,314 1,102 3,806 3,413
19.2 11.5
4,197 3,547 12,541
11,008
Income taxes and noncontrolling interests 950 841 3,020 2,679 Net earnings*$ 3,247 $ 2,706 $ 9,521 $
8,329
Effective income tax rate 22.1 % 22.9 % 23.6 % 23.7 % Pre-tax earnings as a percentage of revenues 10.0 % 9.1 % 10.0 % 9.7 % * Excludes certain acquisition accounting expenses, primarily related to the amortization of identifiable intangible assets recorded in connection with our business acquisitions. The after-tax acquisition accounting expenses excluded from earnings were$161 million in the third quarter and$484 million in the first nine months of 2022 and$169 million in the third quarter and$532 million in the first nine months of 2021. These expenses are included in "Other" in the summary of earnings on page 26 and in the "Other" earnings section on page 42.
Manufacturing
Our manufacturing group includes a variety of industrial, building and consumer
products businesses. A summary of revenues and pre-tax earnings of these
operations follows (dollars in millions).
Third Quarter First Nine Months
2022 2021 2022 2021
Revenues
Industrial products $ 7,723 $ 7,192 $ 22,912 $ 21,050
Building products 7,589 6,374 22,011 18,404
Consumer products 3,688 3,930 12,270 11,367
$ 19,000 $ 17,496 $ 57,193 $ 50,821
Pre-tax earnings
Industrial products $ 1,375 $ 1,124 $ 3,861 $ 3,508
Building products 1,236 833 3,687 2,576
Consumer products 272 488 1,187 1,511
$ 2,883 $ 2,445 $ 8,735 $ 7,595
Pre-tax earnings as a percentage of revenues
Industrial products 17.8 % 15.6 % 16.9 % 16.7 %
Building products 16.3 % 13.1 % 16.8 % 14.0 %
Consumer products 7.4 % 12.4 % 9.7 % 13.3 %
36
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 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 ). Revenues of the industrial products group increased$531 million (7.4%) in the third quarter and$1.9 billion (8.8%) in the first nine months of 2022 compared to 2021. Pre-tax earnings increased$251 million (22.3%) in the third quarter and$353 million (10.1%) in the first nine months of 2022 compared to 2021. Pre-tax earnings as a percentage of revenues for the group were 16.9% for the first nine months of 2022, an increase of 0.2 percentage points compared to 2021. Operating results in 2022 were negatively affected by a combination of higher materials and energy costs, manufacturing inefficiencies attributable to supply chain disruptions and labor shortages and asset impairment charges, which largely offset the impacts of increased average selling prices and increased demand for certain product categories. Operating results of this group's international businesses were also negatively impacted in 2022 by the strongerU.S. Dollar. PCC's revenues were$1.9 billion in the third quarter and$5.5 billion in the first nine months of 2022, increases of 17.5% in the third quarter and 14.5% in the first nine months compared to 2021. PCC derives significant revenues and earnings from sales of aerospace products. The revenue increases in 2022 were primarily attributable to higher demand for aerospace products. While commercial air travel increased in both theU.S. and international markets, traffic remains below pre-COVID-19 pandemic levels, especially for international routes. Further recovery likely will be uneven, attributable in part to travel restrictions imposed from time-to-time to control the spread of variants of COVID-19, as well as from the changes in supply chain conditions, including the availability of workers. Commercial aircraft delivery rates by original equipment manufacturers ("OEMs") of narrow-body aircraft have rebounded since the onset of the pandemic. However, deliveries of wide-body aircraft remain relatively low, in part attributable to the pause in the Boeing 787 program, which resumed deliveries in the third quarter of 2022. Long-term industry forecasts continue to show growth and strong demand for air travel and aerospace products. PCC's pre-tax earnings declined$37 million in the third quarter and$13 million in the first nine months of 2022 compared to 2021, reflecting the impacts of a year-to-date reduction in pension plan income of$43 million , as well as increased costs related to labor, materials and utilities and supply chain disruptions. PCC management continues to take actions to improve operations, maintain safety and prepare for increased demand for PCC's products. Growth in PCC's revenues and earnings will be predicated on the ability to successfully increase production levels to match the expected growth in aerospace demand, including managing through the current supply chain and employment environments. Lubrizol's revenues were approximately$1.7 billion in the third quarter and$5.1 billion in the first nine months of 2022, increases of 6.5% in the third quarter and 2.4% in the first nine months compared to 2021. The revenue increases reflected higher average selling prices, partially offset by lower volumes and adverse foreign currency translation effects from the strongerU.S. Dollar. Sales volumes through the first nine months of 2022 were restricted by unplanned temporary maintenance shutdowns and raw material supply constraints, which limited Lubrizol's production capabilities. The increase in average selling prices was driven by escalating prices for raw materials, including oil feedstocks, as well as for utilities, packaging, shipping and freight costs. Lubrizol's pre-tax earnings increased$251 million in the third quarter and$249 million in the first nine months of 2022 compared to 2021. The increase in earnings was driven by fire-related insurance recoveries in 2022, while earnings in 2021 were negatively impacted by significant losses related to a fire inJune 2021 at a facility located inRockton, Illinois and impairment charges in the third quarter of 2021 related to an underperforming business in the Advanced Materials product lines. Insurance recoveries related to a fire in 2019 at theRouen, France facility and theRockton, Illinois facility fire were$142 million in the third quarter and$242 million in the first nine months of 2022 compared to$10 million of insurance recoveries in the third quarter and$55 million in the first nine months of 2021. The fire losses related to theRockton, Illinois fire and impairment charges in 2021 aggregated$73 million in the third quarter and$229 million in the first nine months of 2021. Earnings in 2022 were also negatively impacted by rising raw material costs, lower sales volumes, higher expenses from the unplanned temporary maintenance shutdowns and unfavorable foreign currency translation effects, partially offset by higher selling prices. Earnings in 2021 were also negatively impacted by the weather-related temporary shut-down of Additives facilities in theU.S. in the first quarter, which resulted in lost sales and various incremental and non-recurring manufacturing and other operating costs. 37 --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Manufacturing, Service and Retailing (Continued)
Industrial products (Continued)
Marmon's revenues were$2.7 billion in the third quarter and$8.1 billion in the first nine months of 2022, increases of 4.3% in the third quarter and 12.8% in the first nine months compared to 2021. Nearly all of Marmon's business groups generated higher revenues in the first nine months of 2022, led by significant increases in the Transportation, Metal Services, Industrial and Electrical products groups, which contributed approximately 76% of the increase. These increases generally reflected favorable volume and sales mix and higher metals prices, partially offset by unfavorable foreign currency translation effects. Metals prices in the third quarter of 2022 began to moderate and in certain instances declined. Revenues of the Rail & Leasing group in the third quarter and first nine months of 2022 declined versus 2021, due primarily to low product sales volumes and declining lease rates. Marmon's pre-tax earnings increased 13.3% in the third quarter and 14.1% in the first nine months of 2022 compared to 2021. Earnings in the first nine months of 2022 included losses of approximately$90 million in the Rail & Leasing group related to the shutdown in the second quarter of its business inRussia . In the first nine months of 2022, the Transportation, Metal Services, Plumbing, Electrical, Retail and Industrial Products groups contributed meaningful increases in earnings, due to a combination of higher sales volumes and margins. These increases were partially offset by lower earnings from the Rail & Leasing group. IMC's revenues were$905 million in the third quarter and$2.8 billion in the first nine months of 2022, increases of 5.0% compared to the same periods in 2021. Revenues in 2022 reflected increased sales in several geographic regions, partially offset by lower revenues inAsia and effects from foreign currency translation and theRussia -Ukraine conflict. IMC's pre-tax earnings decreased 1.3% in the first nine months of 2022 compared to 2021, as the revenue increases were more than offset by higher raw material costs, changes in sales mix and unfavorable effects of foreign currency translation and theRussia -Ukraine conflict.
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). Revenues of the building products group increased$1.2 billion (19.1%) in the third quarter and$3.6 billion (19.6%) in the first nine months of 2022 and pre-tax earnings increased$403 million (48.4%) in the third quarter and$1.1 billion (43.1%) in the first nine months of 2022 compared to 2021. Our building products businesses have benefited in recent years from the low interest rate environment. However, interest rates in theU.S. increased significantly over the first nine months of 2022. As a result, the significant increase in home mortgage interest rates has slowed demand for new home construction. As such, comparative revenues and earnings in the near term will likely decline from current levels.Clayton Homes' revenues increased 24.8% to$3.3 billion in the third quarter and 24.9% to$9.5 billion in the first nine months of 2022 compared to 2021. Revenues from home sales increased$1.8 billion (30.2%) in the first nine months of 2022, primarily due to higher average selling prices and increased volume. New home unit sales increased 9.5% in the first nine months of 2022, reflecting a 10.5% increase in factory-built manufactured home unit sales and a 5.4% increase in site-built home unit sales. We expect unit sales will likely decline in the near term, as a consequence of higher interest rates. Financial services revenues, which include mortgage origination and services, insurance and interest income from lending activities, increased 4.1% in the first nine months of 2022 compared to 2021. Loan balances, net of allowances for credit losses, were approximately$20.4 billion as ofSeptember 30, 2022 , an increase of approximately$1.6 billion fromDecember 31, 2021 . Pre-tax earnings ofClayton Homes increased$249 million (63.8%) in the third quarter and$512 million (41.3%) in the first nine months of 2022 compared to 2021. Earnings in 2022 reflected higher home sales, gross margin rates and net interest income, as well as relatively low credit losses. Aggregate revenues of our other building products businesses were approximately$4.3 billion in the third quarter and$12.5 billion in the first nine months of 2022, increases of$565 million (15.1%) in the third quarter and$1.7 billion (15.9%) in the first nine months versus 2021. The increases were primarily due to higher average selling prices, and to a lesser extent, from higher unit volumes in certain product lines and product mix changes. Pre-tax earnings of our other building products businesses increased$154 million (34.9%) in the third quarter and$600 million (44.9%) in the first nine months of 2022 compared to 2021. Earnings as a percentage of revenues in the first nine months of 2022 increased 3.1 percentage points versus 2021. Earnings in 2022 benefitted from higher selling prices and strong demand in certain product categories, as well as a comparative increase in pre-tax gains from business divestitures and asset sales of$58 million in the third quarter and$169 million in the first nine months. The increase in earnings in 2022 also reflected the negative impact of severe winter storms in the first quarter of 2021, which reduced sales and increased production and other operating costs. 38 --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Manufacturing, Service and Retailing (Continued)
Consumer products
The consumer products group includes recreational vehicles (Forest River ), several apparel and footwear operations (including Fruit of the Loom, Garan,Fechheimer ,H.H. Brown Shoe Group andBrooks Sports ) and high-performance batteries (Duracell). This group also includes custom picture framing products (Larson-Juhl) and jewelry products (Richline ). Consumer products group revenues decreased$242 million (6.2%) in the third quarter and increased$903 million (7.9%) in the first nine months of 2022 compared to 2021.Forest River's revenues declined 7.2% in the third quarter and increased 22.1% in the first nine months of 2022 compared to 2021.Forest River's unit sales declined 27.9% in the third quarter and 5.3% in the first nine months of 2022 versus 2021. The comparative decline in unit volume in the third quarter was attributable to reduced consumer demand. Over the first nine months of 2022,Forest River's revenues reflected higher average selling prices, resulting from higher material prices and supply chain costs. Revenues of our apparel and footwear businesses declined$27 million (2.0%) in the third quarter and$165 million (4.2%) in the first nine months of 2022 compared to 2021, reflecting lower revenues from apparel (5.6% in the third quarter and 8.5% in the first nine months), partly offset by higher revenues from footwear. The declines in apparel revenues were driven by lower volumes, as retailers reduced orders in response to rising inventories. Duracell's revenues in first nine months of 2022 declined 6.9% versus 2021, primarily due to lower volumes and unfavorable foreign currency translation effects of the strongerU.S. Dollar. Pre-tax earnings of our consumer products group declined$216 million (44.3%) in the third quarter and$324 million (21.4%) in the first nine months of 2022 versus 2021. Pre-tax earnings as a percentage of revenues decreased 3.6 percentage points in the first nine months of 2022 compared to 2021. The declines in earnings in 2022 reflected lower aggregate earnings from the apparel and footwear businesses and from Duracell. The comparative decline in earnings in the first nine months was partially offset by higher earnings fromForest River . Apparel and footwear earnings declined about 75% in the third quarter and 58% in the first nine months of 2022 compared to 2021. Our apparel businesses continue to be negatively affected by lower sales volumes, reduced manufacturing efficiencies and higher input costs, including raw materials, freight, labor and other operating costs. We expect that the comparative operating earnings will likely be lower in the fourth quarter, due to low customer demand and high costs. Duracell's earnings in 2022 declined, primarily due to lower sales, cost inflation and foreign currency translation effects. Earnings fromForest River were essentially unchanged in the third quarter and higher in the first nine months of 2022, primarily due to the increase in unit sales in the first half of the year and higher average selling prices, partly offset by higher materials costs. We currently expect demand for recreational vehicles will continue to slow andForest River's comparative revenues and earnings to decline over the remainder of 2022 and into 2023.
Service and retailing
A summary of revenues and pre-tax earnings of our service and retailing
businesses follows (dollars in millions).
Third Quarter First Nine Months
2022 2021 2022 2021
Revenues
Service $ 4,771 $ 4,131 $ 14,031 $ 11,718
Retailing 4,796 4,548 14,268 13,896
McLane 13,569 12,612 39,346 36,529
$ 23,136 $ 21,291 $ 67,645 $ 62,143
Pre-tax earnings
Service $ 806 $ 696 $ 2,286 $ 2,013
Retailing 396 414 1,250 1,221
McLane 112 (8 ) 270 179
$ 1,314 $ 1,102 $ 3,806 $ 3,413
Pre-tax earnings as a percentage
of revenues
Service 16.9 % 16.8 % 16.3 % 17.2 %
Retailing 8.3 % 9.1 % 8.8 % 8.8 %
McLane 0.8 % (0.1 )% 0.7 % 0.5 %
39
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Manufacturing, Service and Retailing (Continued)
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). Service group revenues increased$640 million (15.5%) in the third quarter and$2.3 billion (19.7%) in the first nine months of 2022 compared to 2021. Revenues from TTI increased 16.6% in the third quarter and 20.3% in the first nine months of 2022 versus 2021, reflecting strong demand in nearly all significant markets. However, during the third quarter of 2022, new orders slowed in certain regions and markets, in part attributable to inventory levels within the supply chain. Revenues from aviation services (NetJets and FlightSafety) increased 14.2% in the third quarter and 19.9% in the first nine months of 2022 compared to 2021. The revenue increases reflected year-to-date increases in training hours (17%), customer flight hours (14%), most of which occurred in the first half of the year, and fuel surcharges to customers due to the increase in customer flight hours and significant increases in fuel prices. These increases were partially offset by the effects from changes in sales mix. Pre-tax earnings of the service group increased$110 million (15.8%) in the third quarter and$273 million (13.6%) in the first nine months of 2022 compared to 2021. Pre-tax earnings as a percentage of revenues decreased 0.9 percentage points in the first nine months of 2022 compared to 2021. The earnings increase in the third quarter of 2022 was primarily attributable to aviation services, reflecting a significant comparative decline in subcontract aircraft utilization, and to a lesser extent, increased earnings from several of our other businesses. The comparative increase in earnings in the first nine months reflected higher earnings from TTI, primarily attributable to the increases in sales and improved operating cost leverage, partially offset by unfavorable foreign currency effects in 2022 and a favorable legal settlement in 2021. Earnings from aviation services for the first nine months of 2022 decreased compared to 2021, attributable to a significant increase in subcontracted aircraft utilization due to the increase in customer flight hours in the first half of the year, and from higher equipment maintenance and other operating costs, which more than offset the increase in revenues.
Retailing
Our largest retailing business isBerkshire Hathaway Automotive, Inc. ("BHA"), representing 66% of our combined retailing revenue in the first nine months of 2022. BHA consists of over 80 auto dealerships that sell new and pre-owned automobiles and offer repair services and related products. BHA also offers vehicle service contracts and operates two insurance businesses. 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 20% of the combined retailing revenues in the first nine months of 2022.
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
Retailing group revenues increased$248 million (5.5%) in the third quarter and$372 million (2.7%) in the first nine months of 2022 compared to 2021 reflecting increases at BHA, partially offset by combined lower revenues from our other retailers. BHA's revenues in the third quarter and first nine months of 2022 increased 11.3% and 6.3%, respectively, compared to the same periods in 2021. Revenues from new and used vehicle sales increased 10.9% in the third quarter and 5.4% in the first nine months of 2022 compared to 2021. Revenues from vehicle sales reflected higher average vehicle transaction prices, partly offset by lower unit sales on a year-to-date comparative basis. Unit sales continue to be constrained by low new vehicle production by OEMs, attributable to the ongoing global computer chip shortages and other supply chain disruptions. Revenues from service and repair and finance and service contract revenues each increased versus 2021. Retailing group pre-tax earnings decreased$18 million (4.3%) in the third quarter and increased$29 million (2.4%) in the first nine months of 2022 compared to 2021. BHA's pre-tax earnings increased 24.7% in the third quarter and 22.7% in the first nine months of 2022 compared to 2021, primarily due to increases in vehicle gross profit margins and finance and service contract earnings per vehicle sold and from operating cost control efforts. BHA's comparative new vehicle gross profit margin rates began to accelerate during the second half of 2021, as a consequence of low available inventory attributable to supply chain constraints impacting the OEMs. Aggregate pre-tax earnings for the remainder of our retailing group decreased$68 million (32.2%) in the third quarter and$103 million (15.9%) in the first nine months of 2022 compared to 2021, primarily due to declining earnings from the furniture retailers and Pampered Chef. 40 --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Manufacturing, Service and Retailing (Continued)
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 61% of McLane's
consolidated sales in the first nine months of 2022, with foodservice
representing most of the remainder. A curtailment of purchasing by any of its
significant customers could have an adverse impact on McLane's periodic revenues
and earnings.
Revenues increased $957 million (7.6%) in the third quarter and $2.8 billion
(7.7%) in the first nine months of 2022 compared to 2021, reflecting
year-to-date increases of 3.9% from the grocery business and 15.2% from the
foodservice business. Pre-tax earnings increased $120 million in the third
quarter and $91 million (50.8%) in the first nine months of 2022 compared to
2021. The increases in earnings reflected slightly higher gross margin rates in
the grocery and foodservice businesses, partly offset by higher personnel costs,
fuel expense and insurance costs. McLane's grocery and food service operating
results continue to be adversely affected by supply chain constraints, including
the effects of labor and truck driver shortages and higher inventory costs. We
expect the current difficult operating environment to continue for the remainder
of 2022.
Investment and Derivative Contract Gains/Losses
A summary of investment and derivative contract gains/losses follows (dollars in
millions).
Third Quarter First Nine Months
2022 2021 2022 2021
Investment gains (losses) $ (13,500 ) $ 4,851 $ (82,089 ) $ 37,235
Derivative contract gains (losses) 35 70 (273 ) 780
Gains (losses) before income taxes and
noncontrolling interests (13,465 ) 4,921 (82,362 ) 38,015
Income taxes and noncontrolling
interests (3,016 ) 1,043 (17,295 ) 8,036
Net earnings (loss) $ (10,449 ) $ 3,878 $ (65,067 ) $ 29,979
Effective income tax rate 20.9 % 20.7 % 20.8 % 20.9 %
Investment gains/losses
Unrealized gains and losses arising from changes in market prices of 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. Unrealized gains and losses also include the effects of changes in
foreign currency exchange rates on investments in non-U.S. issuers that are held
by our U.S. based subsidiaries. Pre-tax investment gains/losses included net
unrealized losses of $12.9 billion in the third quarter and $80.5 billion in the
first nine months of 2022 compared to net unrealized gains of $4.8 billion in
the third quarter and $36.2 billion in the first nine months of 2021 on
securities we held at the end of the applicable period. Taxable investment
gains/losses on equity securities sold is generally the difference between sales
proceeds and the original cost of the securities sold. Sales of equity
securities produced taxable gains of $3 million in the third quarter and taxable
losses of $660 million in the first nine months of 2022 compared to taxable
gains of $0.9 billion in the third quarter and $2.9 billion in the first nine
months of 2021.
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 reported consolidated earnings or evaluating our periodic
economic performance. We continue to believe the investment gains/losses
recorded in earnings 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 few remaining equity index put option contract liabilities. The gains and losses from the changes in the fair values of these liabilities are recorded in earnings. As ofSeptember 30, 2022 , our recorded liability at fair value was less than$1 million . Our ultimate payment obligations, if any, under these contracts will be determined as of the contract expiration dates based on the intrinsic value as defined in the contracts. 41 --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Other
A summary of after-tax other earnings/losses follows (in millions).
Third Quarter First Nine Months
2022 2021 2022 2021
Equity method earnings $ 362 $ 310 $ 874 $ 665
Acquisition accounting expenses (161 ) (169 ) (484 ) (532 )
Corporate interest expense, before foreign
currency effects (66 ) (75 ) (203 ) (232 )
Foreign currency exchange rate gains on
Berkshire and BHFC
non-U.S. Dollar senior notes 858 196 2,441 676
Other 48 87 207 76
$ 1,041 $ 349 $ 2,835 $ 653
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. Equity method
earnings increased $209 million in the first nine months of 2022 versus 2021,
primarily due to higher earnings from Kraft Heinz and Pilot. Beginning in the
fourth quarter of 2022, equity method earnings will also include Occidental
Petroleum. See Note 5 to the Consolidated Financial Statements.
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
of intangible assets recorded in connection with those business acquisitions.
Foreign currency exchange rate gains and losses pertain to Berkshire's Euro and
Japanese Yen denominated debt and BHFC's Euro and Great Britain Pound
denominated debt. Changes in foreign currency exchange rates produce unrealized
gains and losses from the periodic revaluation of these liabilities into U.S.
Dollars. In 2022, we recorded significant foreign currency exchange rate gains
on these debt issues, due to strengthening of the U.S. Dollar, which reduced the
U.S Dollar carrying value of the debt. These gains were largely offset by losses
included in investment gains/losses, pertaining to non-U.S. Dollar denominated
investments held by our U.S. based subsidiaries. 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. Other
earnings/losses 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 attributable to Berkshire shareholders atSeptember 30, 2022 was$455.4 billion , a decrease of$50.8 billion sinceDecember 31, 2021 . Net loss attributable to Berkshire shareholders was$41.0 billion in the first nine months of 2022, which included after-tax losses on our investments of$64.9 billion . Investment gains and losses from changes in the market prices of our investments in equity securities will produce significant volatility in our 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 Bills holdings below$30 billion . Financial strength and redundant liquidity will always be of paramount importance at Berkshire. Berkshire paid$5.2 billion in the first nine months of 2022 to repurchase shares of its Class A and B common stock. AtSeptember 30, 2022 , our insurance and other businesses held cash, cash equivalents andU.S. Treasury Bills of$105.2 billion , which included$77.9 billion inU.S. Treasury Bills. Investments in equity and fixed maturity securities (excluding our investments in Kraft Heinz and Occidental common stock) were$324.8 billion . During the first nine months of 2022, we paid cash of$66.2 billion to acquire equities securities and we received proceeds of$17.3 billion from sales of equity securities. OnOctober 19, 2022 , we acquired Alleghany Corporation for cash consideration of$11.6 billion , which was funded by existing cash balances. Our consolidated borrowings atSeptember 30, 2022 were$116.5 billion , of which over 95% were by the Berkshire parent company, BHFC, BNSF and BHE and its subsidiaries. In the first nine months of 2022, Berkshire and certain of its subsidiaries issued term debt of approximately$10.2 billion in the aggregate and paid approximately$3.3 billion on maturing term debt. 42 --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition (Continued)
Berkshire parent company outstanding debt atSeptember 30, 2022 was$19.2 billion , a decrease of$2.2 billion sinceDecember 31, 2021 . 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 borrowings decreased$2.7 billion in the first nine months of 2022 from changes in foreign currency exchange rates on its non-U.S. Dollar denominated debt. Berkshire parent company debt maturities over the next twelve months approximate$4.2 billion , all of which is in the first six months of 2023. Berkshire's insurance and other subsidiary outstanding borrowings were$22.3 billion atSeptember 30, 2022 , which included senior note borrowings of BHFC, a wholly-owned financing subsidiary, of approximately$17.6 billion . BHFC's borrowings are used to fund a portion of loans originated byClayton Homes and equipment held for lease by our railcar leasing business. InMarch 2022 , BHFC issued$4.5 billion of senior notes with maturity dates ranging from 2027 to 2052 and a weighted average interest rate of 3.4% and issued €1.25 billion of senior notes maturing in 2030 and 2034 with a weighted average interest rate of 1.8%. Aggregate maturities of BHFC debt in the first nine months of 2022 were$775 million . Berkshire guarantees BHFC's senior notes for the full and timely payment of principal and interest. BNSF's outstanding debt was$23.3 billion as ofSeptember 30, 2022 , an increase of$83 million fromDecember 31, 2021 . InJune 2022 , BNSF issued$1.0 billion of 4.45% debentures due in 2053. During the first nine months of 2022, BNSF repaid approximately$900 million of term debt. Outstanding borrowings of BHE and its subsidiaries were$51.7 billion atSeptember 30, 2022 , a decrease of$112 million fromDecember 31, 2021 . InApril 2022 , BHE issued$1.0 billion of 4.6% senior notes due in 2053, and during the first nine months of 2022, subsidiaries issued approximately$1.3 billion of fixed and variable rate term debt with a weighted average interest rate of 3.9% as ofSeptember 30, 2022 and maturity dates ranging from 2024 to 2052. Aggregate debt maturities for BHE and BNSF over the next twelve months approximate$3.6 billion . Berkshire does not guarantee the repayment of debt issued by BNSF, BHE or any of their subsidiaries. In the first nine months of 2022, our diverse group of businesses generated net operating cash flows of approximately$27.0 billion . Our consolidated capital expenditures for property, plant and equipment and equipment held for lease were$10.9 billion in the first nine months of 2022, which included capital expenditures by our railroad, utilities and energy businesses (BNSF and BHE) of$7.9 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. Forecasted capital expenditures for BHE and BNSF over the remainder of 2022 approximate$3.7 billion . OnAugust 16, 2022 , the Inflation Reduction Act of 2022 ("the 2022 act") was signed into law. The 2022 act contains numerous provisions, including a 15% corporate alternative minimum income tax on "adjusted financial statement income", expanded tax credits for clean energy incentives and a 1% excise tax on corporate stock repurchases. The provisions of the 2022 act become effective for tax years beginning afterDecember 31, 2022 . We currently do not expect a material impact on our consolidated financial statements. However, we expect future guidance from theTreasury Department and will continue to evaluate the impact of the Act as more guidance becomes available.
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. We are also obligated to pay claims arising from property and casualty insurance companies. Such liabilities, including amounts from retroactive reinsurance, were$128.3 billion atSeptember 30, 2022 . 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 any 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 ofSeptember 30, 2022 , 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. 43 --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Contractual Obligations (Continued)
OnMarch 20, 2022 , we agreed to acquire all of the outstanding shares of Alleghany common stock for cash consideration of approximately$11.6 billion . OnOctober 19, 2022 , the acquisition of Alleghany closed. 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 as described in Note 26 to the Consolidated Financial Statements included in Item 8 of Berkshire's Annual Report on Form 10-K for the year endedDecember 31, 2021 .
Except as otherwise disclosed in this Quarterly Report, our contractual
obligations as of
different from those disclosed in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained in Berkshire's Annual
Report on Form 10-K for the year ended
Critical Accounting Policies
Certain accounting policies require us to make estimates and judgments that affect the amounts reflected in the Consolidated Financial Statements. Such estimates and judgments necessarily involve varying, and possibly significant, degrees of uncertainty. Accordingly, certain amounts recorded in the financial statements will likely be adjusted in the future based on new available information and changes in other facts and circumstances. Reference is made to "Critical Accounting Policies" discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Berkshire's Annual Report on Form 10-K for the year endedDecember 31, 2021 . Our Consolidated Balance Sheet as ofSeptember 30, 2022 includes estimated liabilities of$128.3 billion for unpaid losses and loss adjustment expenses from property and casualty insurance and reinsurance contracts. Due to the inherent uncertainties in the processes of establishing these liabilities, the actual ultimate claim amounts will likely differ from the currently recorded amounts. A very small percentage change in estimates of this magnitude can result in a material effect on periodic earnings. The effects from changes in these estimates are recorded as a component of insurance losses and loss adjustment expenses in the period of the change. Our Consolidated Balance Sheet as ofSeptember 30, 2022 included goodwill of acquired businesses of$73.3 billion and indefinite-lived intangible assets of$18.4 billion . We evaluate these assets for impairment at least annually and we conducted our most recent annual review during the fourth quarter of 2021. In connection with that annual goodwill impairment review, 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 .Goodwill and indefinite-lived intangible asset impairment reviews include determining the estimated fair values of our reporting units and 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 tests. Due to the inherent subjectivity and uncertainty in forecasting future cash flows and earnings over long periods of time, actual results may vary materially from the forecasts. As ofSeptember 30, 2022 , we concluded it is more likely than not that goodwill recorded in our Consolidated Balance Sheet was not impaired. The long-term adverse consequences of the COVID-19 pandemic, geopolitical conflicts and changes in business conditions on certain of our reporting units may prove to be worse than we currently anticipate, and we may need to record goodwill or indefinite-lived intangible asset impairment charges in future periods. Making estimates of the fair value of reporting units and judgments on goodwill impairments at this time are and will likely continue to be significantly affected by assumptions on the severity, duration or long-term effects of adverse events on a reporting unit's business, which we cannot reliably predict. Consequently, any fair value estimates in such instances can be subject to wide variations.
Information concerning new accounting pronouncements is included in Note 2 to
the accompanying Consolidated Financial Statements.
44 --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements Investors are cautioned that certain statements contained in this document as well as some statements in periodic press releases and some oral statements of Berkshire officials during presentations about Berkshire or its subsidiaries are "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Act"). Forward-looking statements include statements which are predictive in nature, which depend upon or refer to future events or conditions, or which include words such as "expects," "anticipates," "intends," "plans," "believes," "estimates" or similar expressions. In addition, any statements concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects and possible future Berkshire actions, which may be provided by management, are also forward-looking statements as defined by the Act. Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties and assumptions about Berkshire and its subsidiaries, economic and market factors and the industries in which we do business, among other things. These statements are not guarantees of future performance and we have no specific intention to update these statements. Actual events and results may differ materially from those expressed or forecasted in forward-looking statements due to a number of factors. The principal risk factors that could cause our actual performance and future events and actions to differ materially from such forward-looking statements include, but are not limited to, changes in market prices of our investments in fixed maturity and equity securities; losses realized from derivative contracts; the occurrence of one or more catastrophic events, such as an earthquake, hurricane, act of terrorism or cyber-attack that causes losses insured by our insurance subsidiaries and/or losses to our business operations; the frequency and severity of epidemics, pandemics or other outbreaks, including COVID-19, that negatively affect our operating results and restrict our access to borrowed funds through the capital markets at reasonable rates; the adverse impacts from geopolitical events; changes in laws or regulations affecting our insurance, railroad, utilities and energy and finance subsidiaries; changes in federal income tax laws; and changes in general economic and market factors that affect the prices of securities or the industries in which we do business.
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