Berkshire Hathaway's (NYSE:BRK.A)(NYSE:BRK.B) earnings soared in 2017, but even Warren Buffett admits that most of the earnings jump wasn't his doing. Shareholders should instead thank the government for a big tax-related boost.

Berkshire earned $32.5 billion in the fourth quarter, though $29.1 billion of that amount was driven by a one-time tax impact related to the Tax Cut and Jobs Act. Operating earnings, which exclude volatile investment gains and one-time tax items, came in at $3.3 billion, down about 24% from the year-ago period, because of large insurance losses and a one-time hit to its utilities' profits.

Here's a look into Berkshire's results, segment by segment. 

Buffett's eclectic mix of operating businesses

The manufacturing, service, and retail businesses that Berkshire owns now make up the company's largest source of profit. These businesses collectively earned $6.2 billion of profit for the full year, $1.5 billion of which came in the fourth quarter. 

The industrial businesses -- think Lubrizol, IMC, and Precision Castparts -- are Berkshire's real profit drivers. The industrial products companies generated $4.4 billion in pre-tax profits for the full year on $26.4 billion of revenue, for a pre-tax profit margin of 16.6%, an impressive result.

Precision Castparts, Berkshire's largest acquisition in its history, saw revenue grow 2.3% in 2017, helped by an increase in aerospace and oil and gas demand. Berkshire said the unit is transitioning into new products for aerospace markets, which it believes will produce future revenue, but it will come at the cost of revenue in the near term. 

Sitting on a wooden surface, a clear glass jar with its lid open is filled with hundred dollar U.S. bills

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Losses in insurance

Berkshire Hathaway's insurers are some of the best in the world, but even the greats can have a bad year. The insurance companies posted a fourth-quarter and full-year underwriting loss, breaking a winning streak that dates all the way back to 2002, the last time Berkshire reported such a loss.

In all, the insurers lost about $491 million from underwriting in the fourth quarter, capping off a year in which they lost $2.2 billion combined.


Q4 Underwriting Results Before Taxes


($188 million)

BH Reinsurance

($685 million)

BH Primary Group

$246 million

Total from underwriting

($627 million)

Data sources: annual and quarterly reports.

Astute Berkshire Hathaway investors will notice that General Re was not broken out as an operating segment, as it is now reported as part of BH Reinsurance, which has historically been the better underwriter of the reinsurance companies.

But while Berkshire Hathaway's insurers are down, they're certainly not out. While Geico generated a rare underwriting loss for the full year, because of hurricane losses and rising claims severity, its moat -- which derived from its being the low-cost operator in the car insurance industry -- is arguably growing larger. Its underwriting expenses declined to 14.5% of premiums earned in the full year, well below even its most capable peers. 

Likewise, BH Reinsurance was hard hit by catastrophe losses as well as charges stemming from a large insurance contract with AIG. Buffett said in his letter to shareholders that the premium for the AIG policy was "$10.2 billion, a world's record and one we won't come close to repeating."

Buffett still believes his insurance companies have an edge. He wrote later in his letter that "unparalleled financial strength explains why other [property and casualty] insurers come to Berkshire -- and only Berkshire -- when they, themselves, need to purchase huge reinsurance coverages for large payments they may have to make in the far future."

The train set

Berkshire's prized railroad, BNSF, makes its money moving goods all around the country, but from quarter to quarter, and year to year, profits can ebb and flow with demand for commodity shipments, which are inherently volatile. BSNF earned roughly $4 billion in 2017, with $1.1 billion earned in the fourth quarter.

Profit grew by about 11% for the full year as a rebound in commodity prices led to higher volumes and pricing, with coal and industrial product volumes increasing 6.3% and 5%, year over year, respectively. 

Profits from power

Berkshire Hathaway's utilities generate the bulk of their earnings providing power to consumers and businesses in regulated markets. As monopolies, regulated utilities generate a steady and largely predictable stream of earnings. On a combined basis, the utilities and energy businesses earned $2.1 billion for the full year, of which $103 million came in the fourth quarter. 

Don't take the fourth quarter's dismal result as anything more than an anomaly, however. In its annual report, Berkshire Hathaway explained that the utilities took a one-time charge related to repaying $1 billion of long-term debt that reduced pre-tax profit in the segment by $410 million. If not for that item, its utilities would have continued to generate the consistent earnings shareholders have come to expect.

Cash in the bank

Berkshire ended the year sitting on a record $116 billion of cash, up nearly $30 billion from last year, as cash is coming in faster than Buffett can deploy it in acquisitions. Buffett wrote that the challenge isn't finding great businesses to acquire, but finding them at a "sensible purchase price."

Buffett blamed high valuations in 2017 on the availability of cheap debt and executives' eagerness to do acquisitions, writing that "price seemed almost irrelevant to an army of optimistic purchasers." For now, Buffett seems content sitting on his hands, writing that he and Charlie Munger still believe they'll be able to make large acquisitions from time to time. 

Shareholders are happy to give Buffett the latitude to sit on cash and wait for a big deal, but as time goes on, and cash piles up, Berkshire may be forced to do the once unthinkable and start sending dividend checks to its shareholders.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.