Berkshire Hathaway Inc. (BRK.A) Business Profile

What it does

Berkshire Hathaway is a holding company that owns businesses in insurance, freight rail, utilities and energy, manufacturing, services and retailing. It is headquartered in Omaha, Nebraska.

Its insurers sell policies directly to people and businesses and provide reinsurance to other insurers. Reinsurance transfers a defined portion of another insurer’s risks to Berkshire. The group covers property, liability, life and health risks around the world. GEICO principally sells private passenger auto insurance to individuals, while other Berkshire insurers serve customers ranging from small businesses to healthcare providers and large commercial organizations.

Burlington Northern Santa Fe, or BNSF, transports manufactured goods, agricultural products, natural resources and other freight. Berkshire also owns utility and energy generation and distribution businesses. Its other operations include manufacturing and retailing, as well as services such as shared aircraft ownership, aviation training, electronic components distribution and restaurant franchising.

Berkshire’s subsidiaries are managed on a decentralized basis, with few centralized or integrated business functions. The chief executive is responsible for major capital allocation and investment decisions and for evaluating the operating businesses.

How it makes money

Berkshire earns money from insurance underwriting and investments, freight transportation, utilities and energy, and its manufacturing, service and retailing businesses. Its operating subsidiaries run independently, while major investment and capital allocation decisions sit with the chief executive.

Insurance customers pay premiums for coverage. Berkshire earns an underwriting profit when premiums earned exceed claims, benefits and underwriting expenses. It expects to achieve an underwriting profit over time, except in retroactive reinsurance and periodic payment annuities. Those products receive money upfront for obligations that can extend for decades; Berkshire generally expects their eventual payments to exceed premiums, producing underwriting losses.

Insurance also supplies funds for investment. Premiums can arrive before claims are paid, leaving policyholder funds, known as float, available to invest. Berkshire invests those funds alongside shareholder capital in assets including publicly traded equities, short-term investments and fixed maturity securities. Investment income is separate from underwriting profit. Berkshire’s equity portfolio can also produce realized or unrealized gains and losses as market prices change.

BNSF earns freight revenue under contracts of varying duration, published prices and company quotations. Shipment volumes and rates depend on demand for the goods carried and competition from other freight providers. Berkshire’s regulated energy businesses charge customers rates based on business costs, subject to regulatory approval.

GEICO sells policies largely through direct applications by internet or telephone. Its agency also offers policies written by other insurers, generating commissions. Berkshire’s other businesses earn revenue from their respective goods and services, including aircraft ownership programs, aviation training, distribution and retailing.

Customers and how it sells

Berkshire serves individuals, businesses, other insurers and freight customers. GEICO’s principal customers are individuals buying private passenger automobile coverage. It sells throughout the United States and the District of Columbia, primarily through applications submitted directly online or by telephone, and to a lesser extent through agencies. Its agency also offers third-party policies for needs such as homeowners and renters insurance.

Berkshire Hathaway Primary Group serves a range of commercial customers, including employers, healthcare professionals, hospitals and small and medium-sized businesses. Its insurers use different distribution channels: some sell through agents and brokers, while Berkshire Hathaway Direct uses internet-based platforms. Berkshire Hathaway Specialty Insurance writes policies through wholesale and retail brokers and managing general agents.

Berkshire Hathaway Reinsurance Group provides coverage to insurers and reinsurers worldwide. Its life and health reinsurance premiums written in the latest fiscal year were primarily in the Asia-Pacific, U.S. and Western Europe regions.

BNSF serves customers shipping consumer, industrial, agricultural and energy products, as well as coal. Its routes reach cities and ports in the western and southern U.S. and parts of Canada and Mexico. Its work with shortline railroads extends service to smaller markets.

Suppliers and costs

Insurance claims are the principal cost of Berkshire’s property and casualty insurance business. The company receives premiums before covered losses are paid, and some claims take decades to settle. Claim estimates are inherently imprecise, and legal developments, litigation costs and jury awards can increase liability costs after policies are written.

Insurance underwriting also involves policy acquisition and other operating expenses. At GEICO, underwriting expenses increased in the latest fiscal year, driven by higher advertising and other policy acquisition expenses. GEICO primarily uses its own claims staff to manage and settle claims.

BNSF and Berkshire Hathaway Energy require ongoing capital to maintain and develop their networks and systems. A significant portion of capital improvements may be funded through debt. Railroad operations also face environmental costs and potential cleanup liabilities, including those associated with hazardous materials transportation.

Berkshire’s decentralized subsidiaries hire and retain personnel under their own policies and practices. Labor disruptions at subsidiaries, customers or within supply chains could reduce sales and increase costs. Berkshire employed 387,800 people worldwide at the end of the latest fiscal year.

Competitive position

GEICO competes for private passenger auto customers with State Farm, Progressive, Allstate and USAA. The market includes insurers that sell directly and those using agency sales forces. Competition tends to focus on price and customer service. GEICO sells primarily through direct-response methods and uses its own claims staff; its name and trademarks are protected through registrations.

Berkshire’s insurers also compete on financial strength, reliability, ratings, service, price, capacity and policy terms. Berkshire’s U.S.-based insurers maintain statutory surplus. Insurance and reinsurance are regulated worldwide, but Berkshire identifies virtually no barriers to entry apart from regulatory considerations.

BNSF’s primary rail competitor in the western U.S. is Union Pacific Railroad Company. Depending on the market, BNSF also faces competition from motor carriers, other railroads, barges, ships and pipelines. Its routes provide access to cities and ports, and connections with shortline railroads extend its reach.

Our reading: Insurance capital is a meaningful competitive strength because it supports the financial capacity customers consider when buying coverage, although insurance markets remain open to many competitors. Our reading: GEICO’s direct distribution and established name can support its position, but customers can compare it with other direct and agency-based insurers. Our reading: BNSF’s network and connections provide an established route to customers, while alternative carriers constrain pricing and service.

Growth opportunities

Berkshire seeks long-term sustainable growth by developing and strengthening competitive advantages across its operating businesses. It also allocates capital and makes investments at the holding-company level. The chief executive is responsible for major capital allocation and investment decisions.

Insurance growth can come from writing more policies or increasing premiums, subject to market conditions and the adequacy of prices and coverage terms. GEICO’s premiums written increased in the latest fiscal year, primarily because policies in force increased. Berkshire’s reinsurance volume can fluctuate with premium rates, coverage terms and the timing of large transactions.

Insurance float provides funds for investment. Float has increased over time. Investment results depend partly on the income generated by the portfolio and changes in asset values.

BNSF’s freight volumes and rates are affected by supply and demand for the products it carries, as well as competition. Its marketing agreements with other rail carriers expand their reach to customers. BNSF intends to continue improving fuel efficiency and increasing its use of renewable diesel.

Structural risks

• Insurance losses: Berkshire is willing to assume substantial risk from individual events. A natural disaster, terrorist attack or cyberattack could generate a significant loss, and policy exclusions or limitations may not operate as intended. Claims estimates may also prove inadequate years after policies are written.
• Investment concentration: Insurance subsidiaries hold equity investments concentrated in relatively few issuers. A significant fall in their values could reduce Berkshire’s earnings and shareholders’ equity, as well as its insurers’ statutory surplus and capacity to write business.
• Regulation and capital: Insurance rules can restrict rates, investments and dividends to the parent. BNSF and Berkshire Hathaway Energy face extensive regulation and require continuing capital investment; restricted access to debt markets could affect their operations and liquidity.
• Weather and wildfire: Extreme weather can damage non-insurance assets and cause insurance losses. Regulated energy subsidiaries also face wildfire losses and litigation, and may not recover all costs through approved customer rates.
• Technology and personnel: Cyberattacks or technology failures could interrupt services, compromise information and create remediation costs. Berkshire also depends on key capital-allocation personnel and qualified managers at its decentralized subsidiaries.

Bottom line

Our reading

Our reading: Berkshire combines operating businesses with an insurance-funded investment portfolio, so its results depend on both business performance and the use of capital. Its insurance strength and BNSF network support its competitive position, but catastrophe losses, concentrated equity holdings and the capital needs of regulated businesses remain important exposures.