How Berkshire Hathaway Makes Money: Insurance, Rail Transport, Energy

Berkshire Hathaway Inc. (BRK.B) is a diversified holding company whose subsidiaries engage in insurance, freight rail transportation, energy generation and distribution, manufacturing, and retailing. Berkshire also holds a large portfolio of equity securities and derivatives, which are reported separately from these main business activities.

The company’s list of competitors reflects Berkshire’s diverse family of businesses and includes: insurance companies All State Corp. (ALL), Progressive Corp. (PGR), and Jefferies Financial Group Inc. (JEF); freight rail companies Union Pacific Corp. (UNP) and CSX Corp. (CSX); and utility and electricity companies General Electric Co. (GE) and NextEra Energy Inc. (NEE). Berkshire also competes with various manufacturers and retailers.

Berkshire posted total revenue of $254.6 billion in fiscal year (FY) 2019, which ended December 31. The 2.7% revenue increase in 2019 was slower than 3.3% growth in FY 2018, and marked a dramatic downshift from 11.5% growth in FY 2017.

Earnings growth was extremely volatile during the same period. Net earnings rose a dramatic 1,792.5% to $81.8 billion during FY 2019 after plummeting 90.5% during FY 2018. The volatility was largely attributable to a change in accounting rules that requires companies to include unrealized gains and losses on investments in its income statement rather than in other comprehensive income. Since Berkshire manages a large portfolio of equity securities whose prices fluctuate annually, the rules will continue to cause reported earnings to fluctuate. Also, the earnings decline in FY 2018 was also much larger than it otherwise would have been because a change in the U.S. tax law artificially inflated net earnings in FY 2017.

Berkshire provides a breakdown for 6 major segments for revenue and earnings before taxes (EBT), a measure of profitability before taxes. Total revenue and EBT for these segments in FY 2019 was $254.0 billion and $29.3 billion, not including gains/losses from investments and derivatives.

Berkshire’s underwriting businesses include: GEICO, private passenger automobile insurance; Berkshire Hathaway Primary Group, property and casualty policies for commercial accounts; and Berkshire Hathaway Reinsurance Group, for excess-of-loss, quota-share, and facultative reinsurance. The segment also includes investment income.

Revenue grew 7.6% in FY 2019 to $67.7 billion as EBT fell 6.6% to $7.0 billion. Revenue comprised almost 27% of the total and EBT 24% of total profit.

Berkshire’s freight rail transportation business operates one of the largest systems in North America. BNSF Railway ships coal as well as consumer, industrial, and agricultural products.

BNSF Railway’s revenue fell 1.4% in FY 2019 to $23.5 billion as EBT rose 5.6% to $7.3 billion. Even though rail transport comprised only 9% of Berkshire’s total revenue, it produced more profit than the insurance business. BNSF Railway’s EBT comprised almost 25% of total EBT.

Berkshire Hathaway Energy is a global energy company with subsidiaries that generate, transmit, store, distribute, and supply energy. The segment’s revenue grew 0.6% during FY 2019 to $20.1 billion while EBT increased 5.9% to $2.6 billion. Revenue comprised about 8% of Berkshire’s total, and EBT accounted for nearly 9% of profit.

Berkshire’s manufacturing businesses fall into three categories: industrial products, building products, and consumer products. Manufacturing revenue rose 1.4% in FY 2019 to $62.7 billion on a 1.7% increase in EBT to $9.5 billion. Manufacturing accounted for 25% of total revenue and for about 32% of total EBT, the largest share among all segments.

McLane is a wholesale distributor that serves businesses including convenience stores, discount retailers, wholesale clubs, and drug stores. It’s separated into three units: grocery distribution, foodservice distribution, and beverage distribution. Revenue grew 0.9% during FY 2019 to $50.5 billion as EBT rose a robust 17.1% to $288 million. McLane comprises nearly 20% of total revenue, but only 1% of EBT.

The service businesses includes grocery and foodservice distribution, professional aviation training, and fractional aircraft ownership. The retail businesses include automotive and home furnishings. Segment revenue grew 1.9% in FY 2019 to $29.5 billion while EBT fell 5.2% to $2.6 billion. The segment comprised 12% of total revenue and about 9% of total EBT.

Berkshire Hathaway also owns a large portfolio of equity securities and derivatives. Some of the company’s top equity holdings include Apple Inc. (AAPL), Bank of America Corp. (BAC), and Coca-Cola Co. (KO). That portfolio posted a gain of $72.6 billion in FY 2019, which explains why Berkshire Hathaway’s net earnings were significantly higher than operating earnings from its regular businesses. The portfolio posted a loss of $22.5 billion in FY 2018. This loss combined with the large gain in 2019 were the main contributors to the significant volatility in net earnings over these years, as mentioned. Berkshire says that these gains/losses from its portfolio are generally meaningless for understanding reported results or for evaluating the performance of its businesses.