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Crucial Takeaways From Berkshire Hathaway’s 2022 Earnings And Buffett’s Annual Letter



Berkshire Hathaway’s (BRK/A, BRK/B) fourth-quarter earnings release also includes the annual letter from Warren Buffett as part of the annual report. The yearly letter continued the theme from last year as a type of owner’s handbook for Berkshire shareholders. Buffett noted that he and Charlie Munger do two main things at Berkshire. First, invest in operating businesses, usually by owning 100%. This review will focus on the performance of these operating businesses controlled by Berkshire Hathaway BRK.B . Second, buy non-controlling stakes in publicly traded stocks. An analysis of Berkshire’s publicly traded holdings is here. Buffett also noted that shareholders should focus on Berkshire’s operating earnings rather than the volatile GAAP results. He also took particular aim at those blindly deriding corporate stock repurchases. He unequivocally stated, “Gains from value-accretive repurchases, it should be emphasized, benefit all owners – in every respect.”

Berkshire Hathaway reported a gain of almost $18.2 billion in the fourth quarter versus a profit of over $39.6 billion in the same quarter of 2021. This gain broke the string of bottom-line losses thanks to the fourth-quarter rebound in the stock market since results are heavily impacted by gains or losses from the investment portfolio, with unrealized losses from their portfolio included in earnings. Operating earnings, which remove the distortion from market changes and better reflect the firm’s earnings power, fell by 8% for the quarter versus 2021. The 2022 calendar year operating earnings rose 12% over the same period in 2021. Providing an illustration of the value from share repurchases, per-share operating income for 2022 increased by 15% versus 2021.

Because the Covid-19 pandemic negatively impacted most businesses, including Berkshire, beginning in early 2020, comparing current results to pre-pandemic 2019 results is helpful. Operating earnings for the calendar year 2022 are 28% above 2019. Operating earnings increased across all primary business segments except insurance underwriting, which was well below 2019 levels. Thanks to share repurchases, operating earnings per share for 2022 were a whopping 43% above 2019.

A further look into the different operating segments for the fourth quarter of 2022 shows generally weaker results across the segments versus 2021. Interest income and Berkshire Hathaway Energy were the stronger segments in the fourth quarter. Notably, the operating income for all segments, except the Other category, was better relative to the pre-pandemic levels of 2019.


The operating segments for all of 2022 show better results than 2021, except for insurance underwriting and the railroad. Operating income for all segments, except insurance underwriting, was better for 2022 relative to the pre-pandemic levels of 2019.

Insurance: 2022 investment income was 35% higher than in 2021, primarily due to higher interest income from short-term investments. Investment income was previously depressed by ultra-low interest rates implemented in response to Covid, but the Federal Reserve raised rates aggressively in 2022 to fight inflation. Investment income should continue to see improvement as the Federal Reserve seems likely to remain in hiking mode through at least most of this year. Underwriting results were poor for 2022, but the real culprit was GEICO, with significant underwriting losses. Berkshire Hathaway Primary Group and Berkshire Hathaway Reinsurance Group had underwriting gains for 2022. GEICO continues to suffer from more frequent auto claims and rising claims severity due in part to the higher valuation of used vehicles. According to the Mannheim index, used vehicle prices have fallen from their peak, but prices are still 42% above the level at the end of 2019. GEICO expects to generate an underwriting profit in 2023 since it received approval to raise premium rates due to the increased claim costs.

The two most essential concepts in insurance investing are “float” and underwriting profit. In simple terms, float is created for insurance companies because insurance premiums are paid before any claims are made by the insured. Insurance companies can invest the float, sometimes for years, before insurance losses are reimbursed. Berkshire has a history, unlike many insurance companies, of earning an underwriting profit, meaning that their float costs them nothing and makes them money in addition to allowing them to earn a profit off of investing the float. An underwriting profit means the insurance premium exceeds all insurance claims and expenses. Despite Berkshire’s underwriting loss for 2022, it posted underwriting profits for calendar years 2021, 2020, and 2019. Berkshire’s float was higher at approximately $164 billion versus the $147 billion level on December 31, 2021, and above the $138 billion on December 31, 2020. In general, the value of float increases as yields rise. Float per share has increased to $112,066 from $98,960, also aided by share repurchases. Berkshire completed its purchase of Allegheny in October 2022, which increased float in the fourth quarter.

Railroad: Berkshire owns one of the largest railroads in North America, the Burlington Northern Santa Fe (BNSF) railroad, operating in the U.S. and Canada. Net operating earnings fell 1% versus 2021 but were 8% over pre-covid 2019. 2022 revenue was higher due to higher pricing and a fuel surcharge driven by higher fuel prices, but volume declines and higher operating costs hurt the bottom line.

Utilities and Energy: Berkshire owns 92% of Berkshire Hathaway Energy Company (BHE) which generally provides steady and growing earnings, as one would expect from what primarily consists of regulated utilities and pipeline companies. The utilities were boosted by higher customer usage and customer growth, partially offset by increased costs. The pipelines benefited from “higher regulated storage and service revenues.” Overall, BHE posted 12% higher operating earnings in 2022 relative to 2021 and 37% above 2019. Interestingly, this group also operates Berkshire Hathaway HomeServices (BHHS), the largest residential real estate brokerage firm in the country. The slowdown in housing activity is evident in the results, with 2022 net earnings 74% below 2021. The 2022 BHHS earnings suffered from lower mortgage and refinance activity thanks to higher interest rates and a decline in closed brokerage transactions.

Manufacturing, Service and Retailing: This segment consists of many diverse businesses, so this analysis will focus on a few significant themes when looking at this segment. Berkshire’s aerospace exposure remains substantial despite selling its publicly traded airline holdings earlier in 2020. Berkshire previously took a $10 billion impairment charge on the Precision Castparts PCP (PCC) business due to its exposure to the COVID-disrupted aerospace industry. PCC’s pre-tax earnings rose slightly in 2022 relative to 2021, primarily due to improved demand for aerospace products. The rebound in domestic air travel and the restart of Boeing 787 production in the third quarter has boosted the outlook for this business, which continues to be hampered by increased costs and supply chain issues. Management continues to note that future growth is predicated on increasing production since the company has suffered from worker shortages and supply chain disruptions. Berkshire’s FlightSafety and NetJets continued to see a rebound, with training hours up 11% and customer flight hours rising 9% in 2022 versus 2021.

Housing-related businesses like Clayton Homes, Shaw, Johns Manville, Acme Building Products, Benjamin Moore, and MiTek posted sharply higher earnings relative to 2021, a 40.7% increase in quarterly pre-tax profits versus 2021. Berkshire noted that higher prices and volumes offset cost pressures. Despite the good news for the year, management indicated that “comparative revenues and earnings in the near term will likely decline from current levels” due to the impact of higher interest rates on new home construction.

The most significant portion of the retailing segment is Berkshire Hathaway Automotive (BHA), owning over 80 auto dealerships. BHA had 18.4% higher earnings in 2022, driven by higher vehicle gross profit margins. These vehicle margins peaked in the first half of 2022 and declined in the second half. Berkshire noted that 2022 apparel and footwear earnings plunged 68% relative to 2021 due to lower sales and higher inventories. Management said it was “taking measures to right-size our operations for the long-term and reduce inventory to more appropriate levels.” In addition, 2022 earnings were lower for Pampered Chef, See’s Candies, and their furniture retailers, including Nebraska Furniture Mart. This weakness in some of the retailing exposed businesses is not a surprise, given similar results of declining demand and higher inventory levels from others in the industry. Berkshire added a global toy company, Jazwares, with the acquisition of Allegheny in October 2022.

Berkshire’s McLane unit had 17.8% higher profits in 2022 versus 2021. McLane is a wholesale distributor to retailers and restaurants. The increase in earnings was primarily due to “slightly higher gross margin rates.” Still, supply chain constraints, labor shortages, truck driver shortages, and higher inventory costs hurt the business last year. Berkshire had been pessimistic about McLane in 2022 but removed any forecast for 2023.

Other: The segment had a significant profit for 2022 primarily due to foreign currency gains and an increase in equity method earnings at Kraft Heinz (KHC), Pilot, and the inclusion of Occidental Petroleum OXY in the fourth quarter of 2022. This segment includes companies’ profits that must be accounted for under the equity method due to the size of ownership and influence on management. The after-tax equity method earnings have Berkshire’s proportionate share of profits attributable to its investments in Kraft Heinz (KHC), Pilot, Berkadia, Electric Transmission of Texas, and Iroquois Gas Transmission Systems. The equity method earnings include Occidental Petroleum (OXY) beginning in the fourth quarter of 2022. Berkshire now owns 21.4% of the outstanding shares of Occidental. More about the possible reasons for the Occidental investment is here.

Pilot is the largest operator of travel centers in North America, under the names Pilot and Flying J. In January 2023, Berkshire acquired an additional 41.4% ownership of Pilot for roughly $8.2 billion. As a result of the Berkshire’s ownership increasing to 80% of the entity, it will be shown as part of the consolidated financials for the operating companies in the future.

The foreign currency exchange rate gains were generated from bonds issued by Berkshire Hathaway and denominated in British Pounds, euros, and Japanese Yen. These foreign currency liabilities are not a concern as Berkshire has significant assets and earnings denominated in these foreign currencies. Investment losses from non-U.S. dollar investments generally offset these gains.

Berkshire bought back a little over $2.6 billion of its stock in the fourth quarter. Until an announcement in mid-2018, Berkshire had only made repurchases when the stock traded at less than 1.2 times the price-to-book (P/B) ratio. While that constraint is now relaxed, it is still a good indicator of the general range when aggressive repurchases will likely be seen. Berkshire’s P/B ratio was between 1.3 and almost 1.5 times during the quarter, so one might have thought the purchase amount would have been lower. Berkshire only intends to repurchase shares when the “repurchase price is below Berkshire’s intrinsic value, conservatively determined.” The P/B ratio remains a reasonable proxy for gauging Berkshire’s intrinsic value. Still, Warren Buffett and Charlie Munger’s judgment about its intrinsic value versus other available uses of capital can differ from that simple price-to-book measure.

In addition, Berkshire made other purchases but was a net seller of publicly traded stocks in the fourth quarter. Berkshire bought $1.7 billion of stocks while selling $16.3 billion for a net decreased investment of $14.6 billion in publicly traded equities. The details can be found in the 13F, which is reviewed here.

Summary: Quarterly results are generally not meaningful for Berkshire since it is managed with a focus on increasing long-term value and not meeting quarterly hurdles. This ability to take advantage of time arbitrage has served the company and shareholders well over the years. The goal in looking at the results is to see if the segments are generally operating as expected and consider the capital allocation decisions made by Warren Buffett and Charlie Munger.

Operating earnings for the fourth quarter of 2022 fell by 8% over 2021 but are 52% above pre-pandemic 2019 levels. The 2022 calendar year operating earnings growth was impressive at 12% and 28% above 2021 and 2019, respectively. In recent years, a significant capital allocation decision was made to increase share repurchases. This activity signals that Buffett and Munger believe Berkshire Hathaway’s price is below their intrinsic value estimate. If they are correct (and there is no reason to doubt them), the purchases are a value-creator for the remaining shareholders. Operating earnings per share for the 2022 calendar year were 15% above 2022 and 43% above 2019, with the additional benefit from share repurchases. The increase in repurchases in the fourth quarter was interesting, given the higher valuation of Berkshire. Still, it might have something to do with the inability of the duo to find some other opportunities with a more attractive risk versus reward for investing capital. In addition, a 1% U.S. excise tax on share buybacks became effective at the end of 2022, so the additional purchases might have been timed to avoid taxation.

The underwriting loss for the insurance businesses in 2022 is disappointing. GEICO, one of Berkshire’s crown jewels, continues to be challenged by the impact of the pandemic. Still, it is encouraging that the premium increases are in the pipeline, and management believes GEICO will revert to its typical underwriting profits in 2023. Other better news for 2022 was that the investment income from the insurance business continued to rebound sharply as the Federal Reserve aggressively raised short-term interest rates. Cost pressures from rising inflation caused non-insurance profit margins in 2022 to decline below 2021 levels, but margins remained higher than in pre-pandemic 2019.

Berkshire’s stock price handily outpaced the S&P 500 in the fourth quarter, soaring by 15.3% versus a total return of 7.6% from the S&P 500. For 2022, Berkshire’s price is +4.0%, while the S&P 500 had a total return of -18.1%. Cash levels were above last quarter. Berkshire retains a fortress balance sheet with cash and equivalents of over $128 billion, providing flexibility to take advantage of opportunities, including repurchasing its stock. Berkshire has stated that there would be no stock repurchases if it would cause cash levels to fall below $30 billion.

Berkshire’s third quarter 10Q filing noted that they “do not expect a material impact on our consolidated financial statements” from the passage of the Inflation Reduction Act of 2022. The inflation reduction act becomes effective for tax years beginning in 2023 and includes a 15% corporate minimum tax, tax credits for clean energy, and a 1% tax on stock repurchases. Berkshire’s effective income tax rate was 27.9% in 2022.

Despite the advanced age of its two top leaders, shareholders should take comfort in knowing that the firm continues to be managed to survive and emerge stronger from any economic or market downturn. Berkshire’s businesses are performing well, aside from woes at GEICO and some slowing due to macroeconomic headwinds. According to FactSet, S&P 500 earnings per share grew 3.9% in 2022 which is significantly less than Berkshire’s 15% growth in operating earnings per share. Management warned that some businesses, particularly the retailing and housing related business, have seen some softness. Berkshire retains its Fort Knox balance sheet and a diversified mix of businesses, which allows the unique ability to take advantage of significant opportunities when disruptions or crises provide them.


Bonds See 2023 Recession, Stocks Aren’t So Sure



The yield curve is one of the most robust recession predictors and has signaled a recession may be coming since mid 2022. In contrast, U.S. stocks as measured by the S&P 500 are up materially from the lows of last October and only just below year-to-date highs, seemingly rejecting recession fears. Yet, fixed income markets see the Fed potentially cutting rates by the summer, perhaps reacting to a U.S. recession.

The Evidence From The Bond Markets

The recessionary evidence, at least from fixed income markets, is mounting. The 10 yield Treasury yield has been below the 2 year yield consistently since last July. That is is called an inverted yield curve and has signaled a recession fairly reliably when compared to other leading indicators.

Building on that, fixed income markets see almost a nine in ten chance that the Federal Reserve cuts rates by September of this year. That’s something the Fed has repeatedly said they won’t do on their current forecasts. Yet, a recession could cause it to happen.

The Stock Market

In contrast, the stock market shows some optimism. The S&P 500 is up 7% year-to-date as the market has shrugged off fears of contagion from recent banking issues. In particular, tech stocks have rallied.

In contrast, more defensive sectors such as healthcare, utilities and consumer goods have lagged in 2023. This suggests that the stock market is taking more of a ‘risk on’ position and is perhaps less worried about the economy.


That said the stock market is a leading indicator of the business cycle, it may be that stocks see a recession, but are now looking past it to growth ahead and are factoring in the lower discount rates that a recession might bring as interest rates decline. Also, the U.S. stock market is relatively global, so the fate of the U.S. economy is a key factor in driving profits, but not the only one.

What’s Next?

Monitoring unemployment data will be key. Though the yield curve is a good long-term forecaster of recessions it is less precise in signaling when a recession starts. Unemployment rates can offer more accurate recession timing. Unemployment edged up in February, suggesting a recession may be near, but we’ve also seen monthly noise unemployment. Two similar monthly unemployment spikes during 2022 both proved false alarms.

However, if we see a sustained move up in unemployment from the low levels of 2022 that may be a relatively clear sign that a recession is here. Economist Claudia Sahm estimates that a sustained 0.5% increase in unemployment rate from 12-month lows is sufficient to trigger a recession. Unemployment rose 0.2% from January to February 2023, so maybe we’re on the way there. Of course, the jobs market performed better than expected in 2022 and it could do so again. Still, fixed income markets do suggest a 2023 recession is coming. Stock markets don’t necessarily share that view.

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Which States Have The Highest And Lowest Life Expectancies?



There’s a wide variance of life expectancies among the 50 states in the U.S., according to a recent report prepared by Assurance, an insurance technology platform that helps consumers with decisions related to insurance and financial well-being.

Figure 1 below shows the 10 states with the highest life expectancy, starting with Hawaii, the state with the highest life expectancy.

Figure 2 below shows the 10 states with the lowest life expectancy, starting with Mississippi, the state with the lowest life expectancy.

Assurance scoured life expectancy data prepared in January 2023 by the U.S. Centers for Disease Control and Prevention (CDC). With this data, Assurance created several easy-to-understand graphics that offer information about life expectancies.

Life expectancies are a basic measure of well-being

As measured by the CDC, life expectancies are a basic measurement of well-being in a broad population and not a prediction of how long an individual might live. The CDC measures the expected lifespan for a person born in the year of measurement. This measurement is calculated based on the assumption that the individual will live and die according to the rates of death that are prevalent in the measurement year for each age. There’s no assumed improvement or backsliding in the assumed mortality rates in future years for each age in the life expectancy calculation.


By contrast, an estimated lifespan for an individual would consider their current age, their gender, and some basic lifestyle information. It might also attempt to project future improvements or backsliding in mortality rates based on key factors.

Significant influences on life expectancy calculations

Leading causes of death in the U.S. are heart disease, cancer, and accidents in that order. These immediate causes are significantly influenced by factors in the population such as poverty rates, educational attainment, rates of obesity and smoking, access to healthcare, prevalence of violent crime, and the support people receive from federal, state, and local governments. All these factors can vary widely among different states, which can be a key reason why life expectancies vary by state.

When you think about it, all these factors also have the potential to influence a person’s quality of life. The measured life expectancy rate rolls up all these factors into one objective measurement of well-being that’s based on population data.

In addition to the factors listed above, mortality rates increased and life expectancies decreased in the past few years due to the Covid-19 pandemic. A recent article titled “Live Free And Die” summarized recent research results that show that life expectancies in most countries around the world rebounded after the Covid-19 pandemic but that they continued to decline in the United States. Many of the reasons cited in the article for the continued decline in U.S. life expectancies are the same or similar to the factors listed above.

NPR‘Live free and die?’ The sad state of U.S. life expectancy

Why should retirees care about the life expectancies reported here if these measures don’t predict your own lifespan? Life expectancy calculations indicate the general well-being of the entire population in your area. While the living conditions in your area can influence your own lifespan and quality of life, retirees should focus on their remaining life expectancy given their age. They should also consider how the factors listed above that influence life expectancies in the population might apply to them.

You can obtain customized estimates of your remaining life expectancy at the Actuaries Longevity Illustrator. Part of your planning for retirement is understanding how long you an an individual might live, instead of relying on generalized information about larger populations you see in the media.

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IRS Dirty Dozen Campaign Warns Taxpayers To Avoid Offer In Compromise ‘Mills’



Owing taxes can be stressful. Unfortunately, the actions of some companies can make it worse. As part of its “Dirty Dozen” campaign, the IRS has renewed a warning about so-called Offer in Compromise “mills” that often mislead taxpayers into believing they can settle a tax debt for pennies on the dollar—while the companies collective excessive fees.

Dirty Dozen

The “Dirty Dozen” is an annual list of common scams taxpayers may encounter. Many of these schemes peak during tax filing season as people prepare their returns or hire someone to help with their taxes. The schemes put taxpayers and tax professionals at risk of losing money, personal information, data, and more.

(You can read about other schemes on the list this year—including aggressive ERC grabs here, phishing/smishing scams here and charitable ploys here.)

Tax Debt Resolution Schemes

“Too often, we see some unscrupulous promoters mislead taxpayers into thinking they can magically get rid of a tax debt,” said IRS Commissioner Danny Werfel.

“This is a legitimate IRS program, but there are specific requirements for people to qualify. People desperate for help can make a costly mistake if they clearly don’t qualify for the program. Before using an aggressive promoter, we encourage people to review readily available IRS resources to help resolve a tax debt on their own without facing hefty fees.”


Offers In Compromise

Legitimate is a key word. Offers in Compromise are an important program to help people who can’t pay to settle their federal tax debts. But, as the IRS notes, these “mills” can aggressively promote Offers in Compromise—OIC—in misleading ways to people who don’t meet the qualifications, frequently costing taxpayers thousands of dollars.

An OIC allows you to resolve your tax obligations for less than the total amount you owe. You generally submit an OIC because you don’t believe you owe the tax, you can’t pay the tax, or
 exceptional circumstances exist.

Because of the nature of the OIC—and the dollars involved—the process can be time-consuming. It can also be confusing for taxpayers who may not have a complete grasp on their finances.

First, you must complete a detailed application, Form 656, Offer in Compromise. You must also submit Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, or Form 433-B, Collection Information Statement for Businesses, with supporting documentation (generally, bank and brokerage statements and proof of expenses).

You’ll also need to submit a non-refundable fee of $205 and payment made in good faith. The payment is typically 20% of the offer amount for a lump sum cash offer or the first month’s payment for those made over time. Generally, initial payments will not be returned but will be applied to your tax debt if your offer is not accepted. Payments and fees may be waived if the OIC is submitted based solely on the premise that you do not owe the tax or if your total monthly income falls at or below income levels based on the Department of Health and Human Services (DHSS) poverty guidelines.

The IRS will examine your application and decide whether to accept it based on many things, including the total amount due and the time remaining to collect under the statute of limitations. The IRS will also review your income—including future earnings and accounts receivables—and your reasonable expenses, as determined by their formula. The IRS will also consider the amount of equity you have in assets that you own—this would include real property, personal property (like automobiles), and bank accounts.


Before your offer can be considered, you must be compliant. That means you must have filed all your tax returns and paid off any liabilities not subject to the OIC. After you submit your offer, you must continue to timely file your tax returns, and pay all required tax, including estimated tax payments. If you don’t, the IRS will return your offer.

Additionally, you cannot currently be in an open bankruptcy proceeding, and you must resolve any open audit or outstanding innocent spouse claim issues before you submit an offer.


You can probably tell—it’s a lot to consider. You may want representation. A tax professional can help marshal you through the process and offer practical guidance, while communicating what fees could look like.

By contrast, according to the IRS, an OIC “mill” will usually make outlandish claims, frequently in radio and TV ads, about how they can settle a person’s tax debt for cheap. Also telling: the fees tend to be significant in exchange for very little work.

Those mills also knowingly advise indebted taxpayers to file an OIC application even though the promoters know the person will not qualify, costing taxpayers money and time. You can check your eligibility for free using the IRS’s Offer in Compromise Pre-Qualifier tool.

“Pennies On A Dollar”

What about those promises that taxpayers can routinely settle for pennies on a dollar? Not true. Generally, the IRS will not accept an offer if they believe you can pay your tax debt in full through an installment agreement or equity in assets, including your home. That’s why the IRS tends to reject a majority of OICs that are submitted. The acceptance rate is less than 1 in 3, according to the 2021 Data Book.

The IRS will generally approve an OIC when the amount offered represents the best opportunity for the IRS to collect the debt. It’s true that there’s a formula that the IRS uses to figure out how much they think they can collect from you. But there is some wiggle room to account for special circumstances, including a loss of income or a medical condition. It’s worth noting those are the exceptions, not the rule.


While submitting an OIC may keep the IRS from calling you, it doesn’t stop all collections activities—don’t believe companies that suggest that submitting an OIC will make your tax debt disappear. Penalties and interest will continue to accrue on your outstanding tax liability. Additionally, the IRS may keep your tax refund, including interest, through the date the IRS accepts your OIC.

You may also be liened. In most cases, the IRS will file a Notice of Federal Tax Lien to protect their interests, and the lien will generally stay in place until your tax obligation is satisfied.

Be Skeptical

An OIC is a serious effort to resolve tax debt and shouldn’t be taken lightly. Be skeptical—if it sounds too good to be true, it likely is. If you’re considering an OIC, hire a competent tax professional who understands the rules and is willing to level with you about your chances of being successful—including other options. Don’t fall into a trap that can make your situation worse.

MORE FROM FORBESIRS Urges Those Hoping To Help To Beware Of Scammers Using Fake Charities

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