Boosting Buybacks the COVID-19 Pandemic Had a Mixed Impact on Berkshire Hathaway’S (BRK) Financial Results in 2020
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Sector: Insurance Kathleen Shanley, CFA March 9, 2021 [email protected] Boosting Buybacks The COVID-19 pandemic had a mixed impact on Berkshire Hathaway’s (BRK) financial results in 2020. GEICO insurance had a strong year, with pretax underwriting earnings of $3.4 billion, up from $1.5 billion in 2019, reflecting a drop in the frequency of auto accidents, since so many of its customers were camped out in their living rooms. But there were some pandemic-related losses at Berkshire Hathaway Reinsurance Group, and a $10.6 billion write-off of goodwill and intangibles at Precision Castparts Corp. (PCC), tied in part to the sharp decline in airline travel last year. On a reported basis, net income attributable to Berkshire Hathaway was $42.5 billion, down from $81.4 billion in 2019, but up from $4.0 billion in 2018. Reported earnings are volatile because changes in the fair value of equity securities flow through investment and derivative gains and losses each quarter. Berkshire Hathaway’s credit fundamentals remain strong and are supported by a diverse mix of businesses and investments and ample liquidity. The write-off at PCC cannot be blamed entirely (or even mostly) on COVID-19. In his annual letter to shareholders, Warren Buffett said “that ugly $11 billion write-down” was the “quantification of a mistake” made in 2016, when Berkshire acquired PCC for $37.2 billion in cash and assumed debt. PCC manufactures complex metal components and products for aerospace, power, and energy applications. The downturn in the energy sector, the grounding of the Boeing 737 MAX, and the sudden shutdown of global travel all contributed to a 29% decline in revenues at PCC last year, to $7.3 billion. Pretax earnings at the unit were down 65% to $650 million. Last year, PCC reduced its workforce by about 40%, and booked $295 million in restructuring charges. While the downturn at PCC was disappointing, the write-down and reduced operating performance scarcely put a dent in Berkshire’s balance sheet, given its $443 billion in equity. At GEICO, losses and loss adjustment expenses fell to $26.0 billion last year, down 10% from $28.9 billion in 2019. Claim frequencies declined materially (partially offset by higher severity), driving higher profits at the auto insurance unit, even though GEICO provided a 15% credit to policyholders who renewed their policies between April and October. There were COVID-19 related losses at the Berkshire Hathaway Reinsurance Group: $964 million in property-casualty losses (along with $667 million in catastrophe losses from hurricanes and wildfires) and $275 million in life benefits. However, the reinsurance business had strong premium growth last year, with premiums written up 27.5% year-over-year. Berkshire’s investments in equity securities totaled $281 billion at the end of 2020 ($173 billion in unrealized gains), with 68% of the fair value held in four companies: American Express ($18.3 billion); Apple ($120.4 billion); Bank of America ($31.3 billion); and Coca-Cola ($21.9 billion). The company’s 26.6% stake in Kraft Heinz common stock is accounted for as an equity method investment. Liquidity remains a strong point. As of 12/31/20, the company’s insurance and other businesses held $135 billion in cash, cash equivalents and U.S. Treasury Bills, including $113 billion in T-Bills (see datasheet). In 2020, the company repurchased $24.7 billion of common stock, an increase over prior years. Buybacks totaled $4.9 billion in 2019 and $1.3 billion in 2018, Berkshire’s stock purchase plan allows the company to buy back shares at prices below “intrinsic value, as conservatively determined” by Mr. Buffett and Charlie Munger. While the buybacks were more aggressive than usual in 2020, the company did not complete any major acquisitions over the past year, and it retains ample resources to take advantage of future opportunities while maintaining a strong balance sheet. Berkshire does not guarantee the debt issued by its Railroad, Utilities and Energy subsidiaries. Excluding those businesses, the debt/capital ratio is less than 10%. The Berkshire Hathaway Finance Corp. 1.45% notes due 10/15/30 are seen at T+41. BHFC borrowings are used to fund manufacturing housing loans and equipment held for lease and are fully and unconditionally guaranteed by Berkshire. Credit score: stable; opinion: buy. © 2021 Gimme Credit LLC. All Rights Reserved Gimme Credit LLC Analyst's Data Sheet Berkshire Hathaway Inc. 3/9/21 Financial Results through December 31, 2020 Kathleen Shanley, CFA Years ended December 31 $ millions 2020 2019 2018 2017 2016 Revenues: Insurance premiums earned $ 63,401 $ 61,078 $ 57,418 $ 60,597 $ 45,881 Sales and service revenues 127,044 134,989 133,336 130,343 123,053 Leasing revenue 5,209 5,856 5,732 2,452 2,553 Railroad, utilities and energy 41,764 43,453 43,673 40,005 37,447 Interest, dividend & other investment income 8,092 9,240 7,678 6,536 6,180 Total revenues 245,510 254,616 247,837 239,933 215,114 Investment and derivative gains/losses 40,746 72,607 (22,455) 2,128 8,304 Costs and expenses: Insurance and Other Insurance losses and loss adj expenses $ 43,951 $ 44,456 $ 39,906 $ 48,891 $ 30,906 Life, annuity and health insurance benefits 5,812 4,986 5,699 5,618 5,131 Insurance underwriting expenses 12,798 11,200 9,793 9,321 7,713 Cost of sales and services 101,091 107,041 106,083 104,343 97,867 Cost of leasing 3,520 4,003 4,061 1,455 1,335 Selling, general and administrative 19,809 19,226 17,856 19,189 17,973 Goodwill and intangible asset impairments 10,671 96 382 - - Interest expense 1,105 1,056 1,035 1,132 1,099 Total insurance and other 198,757 192,064 184,815 189,949 162,024 Railroad, utilities and energy 32,532 33,639 34,399 31,288 28,836 Total expenses 231,289 225,703 219,214 221,237 190,860 Pretax Income b/f equity method earnings 54,967 101,520 6,168 20,824 32,558 Equity method earnings 726 1,176 (2,167) 3,014 1,109 Income taxes 12,440 20,904 (321) (21,515) 9,240 Less earnings attributable to noncontrolling interests 732 375 301 413 353 Net Income attributable to Berkshire Hathaway $ 42,521 $ 81,417 $ 4,021 $ 44,940 $ 24,074 Balance Sheet (period end): Total assets (consolidated) 873,729 817,729 707,794 702,095 620,854 Cash & equivalents (held at insurance & other) 44,714 61,151 27,749 28,673 23,581 Short-term investments in U.S. Treasury bills 90,300 63,822 81,506 84,371 47,338 Investments in equity securities 281,170 248,027 172,757 170,540 134,835 Equity method investments 17,303 17,505 17,325 21,024 15,345 Railroad, utilities and energy (Total assets) 209,708 187,157 175,487 171,928 169,816 Notes payable and other borrowings: Insurance and other $ 41,522 $ 37,590 $ 34,975 $ 40,409 $ 42,559 Railroad, utilities and energy 75,373 65,778 62,515 62,178 59,085 Berkshire Hathaway equity 443,164 424,791 348,703 348,296 282,070 Ratios: GEICO combined loss ratio 90.2% 95.8% 92.7% 101.1% 98.2% Debt/total capital* 8.6% 8.1% 9.1% 10.4% 13.1% * Excludes railroad, utilities and energy (not parent guaranteed) Source: company reports ©2021 Gimme Credit LLC.