Investment Manager ♦ Warren Buffett, Now Aged 90, Has Had a Celebrated Career As a Savvy Investor Who Buys and Holds Investments for Many Years

Home , GEICO

Sector: Insurance Kathleen Shanley, CFA September 2 , 20 20 [email protected] Investment Manager ♦ Warren Buffett, now aged 90, has had a celebrated career as a savvy investor who buys and holds investments for many years. But since 2018, when there was an accounting change, Berkshire Hathaway’s (BRK) reported earnings have been volatile, because changes in the fair value of equity securities flow through investment and derivative gains and losses each quarter. During the first quarter ended March 31, 2020, the company reported a net loss of $49.7 billion, reflecting the Covid-related downturn in financial markets. Then, during the second quarter, there was a net gain of $26.2 billion. Second quarter results would have been even stronger, were it not for a $10.6 billion goodwill and intangible asset impairment charge. About $10 billion of the charge covered Precision Castparts Corp. (PCC), which BRK acquired for $37.2 billion in cash and assumed debt in 2016. PCC supplies parts for aircraft makers and the oil and gas industry. Given the sharp recession in these sectors, the company slashed its workforce by about one-third in the first half of 2020. While the write down suggests that BRK overpaid for PCC, the company can easily absorb the mistake, given its large stockpile of cash and diverse portfolio of businesses. We update our investment opinion for Berkshire Hathaway. ♦ While BRK’s investments attract more attention in the press, GEICO insurance has been a strong performer since the outbreak of the pandemic. Auto insurers are benefiting from the Covid- related decline in commuting and traveling. For the first six months of 2020, the GEICO business had a pretax underwriting profit of $3.0 billion, up from $1.2 billion a year ago. The second quarter combined loss ratio was 77.2%, down from 95.6% in the year-earlier quarter. Claim frequencies are down, though BRK expects the improved results to be temporary. It will be rebating some of the savings to consumers (15% of premiums, or about $2.5 billion) through its “GEICO Giveback” program over the rest of 2020 and into the first quarter of 2021. The strong results at GEICO offset a pretax underwriting loss of $1.6 billion year-to-date at the reinsurance group. Reinsurance results were hurt by estimated provisions for claims and uncollectible premiums related to the pandemic. BRK says in latest 10-Q filing that costs related to the pandemic may be affected by judicial rulings and regulatory/legislative actions. The Wall Street Journal reported yesterday that, so far, most courts are siding with insurers, who are contending that virus-related losses don’t qualify for benefits under business interruption coverage. ♦ BRK has disclosed some changes in its investment positions. It now has at least a 5% stake in five large Japanese trading companies: Itochu, Mitsubishi, Mitsui, Sumitomo. and Marubeni. (It won’t take a position larger than 9.9% in any of these investments.) Because it also has about $6 billion in yen-denominated debt, it has only minor exposure to yen/dollar currency moves. BRK has recently sold some investments including airline stocks and some of its bank exposure (including Goldman Sachs, Wells Fargo, and JPMorgan). As of June 30, 71% of the aggregate fair value of its $207 billion equity portfolio was held in only four companies: Apple ($91.5B); Bank of America ($22.6B); Coca-Cola ($17.9B); and American Express ($14.4B). Given the continued rise in tech stocks, the relative weighting of Apple in the portfolio has increased over the past few months. In July, Berkshire Hathaway Energy (BHE) agreed to acquire Dominion’s natural gas transmission and storage business—for $4.0 billion, plus the assumption of about $5.7 billion of existing asset-related long-term debt. (See Gimme Credit report on Dominion Energy dated 7/7/20). The purchase will be funded with cash provided by the Berkshire parent. ♦ Liquidity remains strong, with over $140 billion in cash & equivalents and Treasury bills held by the insurance/other businesses as of June 30. In the first six months, BRK bought back $6.7 billion of its common shares. It is conservatively capitalized. BRK guarantees the debt of its finance company, but not the debt of BNSF or BHE or any of their subsidiaries. Nor is it required to use its capital to support these businesses. The Berkshire Hathaway Finance Corp. 1.85% notes due 3/12/30, priced in early March, are seen at T+64 . Credit score: stable; opinion: buy.

Gimme Credit LLC Analyst's Data Sheet

Berkshire Hathaway Inc. 9/2/20 Financial Results through June 30, 2020 Kathleen Shanley, CFA

Six months ended June 30 Years ended December 31 $ millions 2020 2019 2019 2018 2017 Revenues: Insurance premiums earned $ 31,343 $ 29,182 $ 61,078 $ 57,418 $ 60,597 Sales and service revenues 60,629 66,537 134,989 133,336 130,343 Leasing revenue 2,589 2,927 5,856 5,732 2,452 Interest, dividend & other investment income 4,426 4,412 9,240 7,678 6,536 Railroad, utilities and energy 19,118 21,218 43,453 43,673 40,005 Total revenues 118,105 124,276 254,616 247,837 239,933

Investment and derivative gains/losses (30,190) 30,370 72,607 (22,455) 2,128

Costs and expenses: Insurance and Other Insurance losses and loss adj expenses $ 21,045 $ 20,843 $ 44,456 $ 39,906 $ 48,891 Life, annuity and health insurance benefits 2,790 2,069 4,986 5,699 5,618 Insurance underwriting expenses 5,991 5,325 11,200 9,793 9,321 Cost of sales and services 48,608 52,814 107,041 106,083 104,343 Cost of leasing 1,751 2,020 4,003 4,061 1,455 Selling, general and administrative 9,123 9,261 19,322 18,238 19,189 Goodwill and intangible asset impairments 10,634 - - - - Interest expense 554 529 1,056 1,035 1,132 Total insurance and other 100,496 92,861 192,064 184,815 189,949 Railroad, utilities and energy 15,102 16,671 33,639 34,399 31,288 Total expenses 115,598 109,532 225,703 219,214 221,237 Pretax Income b/f equity method earnings (27,683) 45,114 101,520 6,168 20,824 Equity method earnings 43 292 1,176 (2,167) 3,014 Income taxes (4,350) 9,501 20,904 (321) (21,515) Less earnings attributable to noncontrolling interests 161 171 375 301 413 Net Income attributable to Berkshire Hathaway $ (23,451) $ 35,734 $ 81,417 $ 4,021 $ 44,940

Balance Sheet (period end): Total assets 788,133 760,108 817,729 707,794 702,095 Cash & equivalents (held at insurance & other) 32,318 41,375 61,151 27,749 28,673 Short-term investments in U.S. Treasury bills 110,518 77,745 63,822 81,506 84,371 Investments in equity securities 207,454 200,516 248,027 172,757 170,540 Equity method investments 17,132 17,208 17,505 17,325 21,024 Railroad, utilities and energy 190,399 182,525 187,157 175,487 171,928 Notes payable and other borrowings: Insurance and other $ 38,243 $ 36,025 $ 37,590 $ 34,975 $ 40,409 Railroad, utilities and energy 68,446 63,882 65,778 62,515 62,178 Berkshire Hathaway equity 393,495 382,544 424,791 348,703 348,296

Ratios: GEICO combined loss ratio 83.2% 93.4% 95.8% 92.7% 101.1% Debt/total capital* 8.9% 8.6% 8.1% 9.1% 10.4%

* Excludes railroad, utilities and energy (not parent guaranteed)

Source: company reports