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Berkshire Hathaway: Steady as She Goes

Berkshire Hathaway (BRK.A)(BRK.B) reported results for fiscal 2019 on Saturday morning.

For the year, Berkshire recorded $255 billion in revenues across its collection of businesses, an increase of 3%. GAAP earnings for the year were $81.4 billion, which reflects $3.7 billion in realized capital gains and an astounding $53.7 billion in unrealized capital gains. This was a primary driver of the 23% year-over-year increase in Berkshire's book value to $174 per Class B share. The more important figure for shareholders is the $24 billion in operating earnings that Berkshire generated in 2019, a low-single digit decline for the year (primarily due to lower underwriting income from the insurance businesses).

For the year, Berkshire generated $38.7 billion in cash flow from operations, up 3% from 2018. They allocated $18.6 billion to equity investments, offset by $14.3 billion in sales (that includes the $10 billion associated with the Occidental Petroleum (OXY) transaction). At year-end, Berkshire's equity investment had a total market value of nearly $250 billion, with the largest position, Apple (AAPL), accounting for 30% of the total ($77 billion). In addition to equity investments, Berkshire spent $16.0 billion on capital expenditures and another $1.7 billion for bolt-on acquisitions. Cash and short-term investments at year-end totaled $128 billion.

Insurance float at year-end was $129.4 billion, an increase of 6%. Over the past five and ten years, float has increased at a 9% and 8% compounded annual growth rate, respectively. As shown below, Berkshire's float has more than quintupled over the past two decades.

Berkshire has generated this sustained growth while simultaneously reporting sizable underwriting gains: Over the past ten years, the company's after-tax underwriting gain has totaled $8.4 billion, with only a single year of losses ($2.2 billion in 2017). In 2019, the insurance businesses collectively recorded a pre-tax underwriting gain of $400 million.

As Warren Buffett (Trades, Portfolio) noted in his most recent shareholder letter, solid underwriting results are the primary objective at Berkshire's insurance operations:

"That record is no accident: Disciplined risk evaluation is the daily focus of our insurance managers, who know that the rewards of float can be drowned by poor underwriting results. All insurers give that message lip service. At Berkshire it is a religion, Old Testament style."

GEICO had another good year, with earned premiums up 7% to $35.6 billion. The business reported a pre-tax underwriting gain of $1.5 billion, with the combined ratio climbing three points due to an outsized increase in losses and loss adjustment expenses. Over the past five years, GEICO has seen a 35% cumulative increase in policies in force (PIFs), inclusive of more than 1 million net customer additions in 2019.

As Warren Buffett noted during a recent CNBC interview, GEICO currently accounts for roughly 13.7% of the U.S. auto insurance market (compare that to a decade ago, when GEICO held roughly 8% market share). If recent results are maintained, it will account for a much larger percentage of the market when we look back a decade from now.

Earned premiums for Berkshire Hathaway Primary Group (BHPG) increased 13% in 2019, primarily reflecting growth at BH Specialty and GUARD (note that both of these businesses posted strong earned premiums growth in 2018 as well). Year-over-year underwriting gains were roughly cut in half due to a four point increase in the segment's combined ratio.

Earned premiums for Berkshire Hathaway Reinsurance Group (BHRG) increased low-single digits to $16.3 billion, primarily reflecting an easier comparison. In 2018, BHRG was lapping the large retroactive reinsurance agreement signed with American International Group (AIG) in 2017. For the year, BHRG reported a pre-tax underwriting loss of $1.5 billion, principally attributable to a large retroactive reinsurance loss.

Revenues at Burlington Northern Santa Fe (BNSF) declined 1% to $23.5 billion, with a 5% reduction in volumes partially offset by an increase in average revenue per car. Despite flooding and other weather related issues in the first half of the year, effective cost controls led to a 6% increase in pre-tax earnings, with after-tax earnings climbing 5% to $5.5 billion. While there's still a wide gap between BNSF and Union Pacific (UNP), I think investors shouldn't overlook the fact that the operating ratio at BNSF improved 230 basis points in 2019 to 64.6%.

Berkshire Hathaway Energy (BHE) reported a 1% increase in revenues to $20.1 billion. Pre-tax earnings increased at a mid-single digit rate, with net income climbing 8% to $3.1 billion (the tax rate continues to show the effects from wind-powered electricity production tax credits, with a tax benefit over the past two years totaling $1 billion). As Buffett discussed in his letter, BHE has now been part of Berkshire for two decades. In the United States, it currently serves more than five million retail customers. Over that time, BHE has never paid a dividend to the parent company and has retained $28 billion of earnings to expand its operations. The $3.1 billion that the business earned in 2019 was roughly three times higher than what it generated a decade ago. My guess is that BHE's earnings a decade from now will be materially higher as well.

Manufacturing, Service and Retailing (MSR) revenues increased 1% to $142.7 billion, driven by growth at subsidiaries like Marmon, Clayton Homes and BH Automotive (to name a few). Earnings growth primarily reflects gains in the Building Products portion of the Manufacturing businesses (namely Clayton Homes, which reported a 20% increase in pre-tax earnings to $1.1 billion).

I continue to be confident that Berkshire will quickly and intelligently allocate tens of billions of dollars in the event that we find ourselves in one of those rare opportune times. Remember that Berkshire invested $16 billion during a three-week period in 2008. In addition, it also seems likely that they will continue putting dry powder to work through share repurchases, which totaled $4.9 billion in 2019, inclusive of $2.2 billion in the fourth quarter. As Buffett noted in the shareholder letter, he believes that the Berkshire price-to-value equation was "modestly favorable at times" during 2019, resulting in a 1% reduction in the share count.

As a shareholder, I continue to be confident in the collection of businesses I own, as well as the people running them. I'm nearly certain that Berkshire will continue to be a holding in my portfolio for the long-term.

Disclosure: Long Berkshire Hathaway

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This article first appeared on GuruFocus.