Chapter 7 Part 4: Berkshire 2012-2013

The Complete Financial History of Berkshire Hathaway | Adam J. Mead | ISBN: 978-0-85719-912-6

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Adam Mead’s Chapter 7 coverage lands in 2012 and 2013, and these two years feel like a turning point. Berkshire is still compounding, but the story shifts from crisis-era lending to big partnership deals, utility expansion, and a stock market that finally starts catching up to intrinsic value.

2012: A “subpar” year that was still pretty good

Buffett opened 2012 by calling a $24.1 billion gain in book value “subpar.” Berkshire’s book value rose 14.4%, but the S&P 500 beat it by 1.6 points. That was only the ninth time in 48 years Berkshire trailed the index in a single year. Over five-year stretches, it had outperformed forty-three times in a row.

The real story was underneath. Every major operating segment grew earnings. Insurance delivered its tenth straight year of underwriting profit ($1.6 billion pre-tax). GEICO pushed through Hurricane Sandy. Float grew to $73 billion even though Buffett had predicted it would barely move.

Berkshire put capital to work in smaller ways when the elephant deals did not show up:

• $2.3 billion on 26 bolt-on acquisitions
• $1.4 billion for another 10% of Marmon
• $4.6 billion in capex above depreciation (mostly railroad and utilities)
• $1.3 billion in share repurchases
• $712 million net into equities (more IBM and Wells Fargo)

Shares traded around 0.69x Mead’s estimated intrinsic value. Buffett bought back stock at $131,000 per A share and said it was like buying dollar bills for 80 cents.

The buybacks were also a quiet signal: Berkshire had more cash than obvious uses. But Buffett spent three pages explaining why dividends still made no sense. Retained earnings created value above book. Shareholders who wanted income could sell shares. And dividends got fully taxed while selling let you pay tax only on the gain.

Insurance: shooting the lights out

GEICO earned $680 million despite Sandy hitting New York hard. General Re bounced back. Ajit Jain’s reinsurance group flipped from a $714 million loss in 2011 to a $304 million profit. The Primary Group added GUARD Insurance and Princeton Insurance.

Mead walks through reserve adequacy too. General Re held fifteen years of mass tort payouts on its books while the industry average was under nine years. That conservatism is not exciting, but it is how Berkshire survives bad years without blowing up.

Operating businesses: mostly grinding forward

Manufacturing, Service, and Retailing (MSR) pre-tax earnings rose 22% to $6.1 billion. Marmon, McLane (with the Meadowbrook Meat deal), Forest River, and Lubrizol all contributed.

Two moments stood out beyond the numbers. Buffett replaced the CEO at Benjamin Moore after the company tried selling through a big-box retailer, breaking a promise to independent dealers. Autonomy has limits when reputation is on the line.

And Berkshire bought 28 daily newspapers for about $344 million. Buffett admitted nostalgia played a role. But he also said a few local papers with loyal readers could work at the right price, even if earnings would shrink over time.

BNSF and MidAmerican kept spending heavily on capex. BNSF put $3.5 billion into the railroad. MidAmerican poured billions into wind and solar. Buffett’s line holds: money flows toward opportunity in America.

2013: Heinz and the capital deployment burst

2013 looked much better operationally, but Berkshire lagged the S&P by 14.2 points because the market ripped higher. Buffett had warned that could happen.

The capital deployment list is the headline:

• $12.25 billion for Heinz (with 3G Capital)
• $5.6 billion for NV Energy
• $3.5 billion to finish buying Marmon and Iscar
• $3.1 billion in bolt-ons
• $11.1 billion in capex
• $4.7 billion net into stocks

The Heinz deal

This was the new Berkshire template: 3G runs operations, Berkshire supplies capital. Heinz ketchup had a 60% U.S. market share and averaged 56% pre-tax returns on tangible capital. The total price was $29.1 billion, or 7.7x tangible capital. The going-in return looked mid-single digits.

Buffett said they stretched because of the brand and the 3G team. Berkshire put in $4.25 billion for half the equity plus $8 billion of 9% preferred stock. 3G wanted more leverage. Berkshire wanted a safer seat in the capital stack. Both sides got what they wanted.

Insurance had another banner year: $3.1 billion in underwriting profit, float up 6% to $77 billion, and a negative 4.1% cost of float. GEICO passed Allstate to become the number two auto insurer. Jain launched Berkshire Hathaway Specialty Insurance and kept writing retro deals that most competitors avoid.

Mead also flags something subtle in MSR: cash was piling up at subsidiaries faster than they could reinvest it. Net debt at the segment flipped to a net cash position for the first time. Great businesses, but harder to keep every dollar working at high returns.

What this chapter teaches

2012 and 2013 show Berkshire in transition. The crisis lending era is fading. The Heinz partnership with 3G opens a new deal type. Utilities and railroads soak up capital. Insurance keeps funding everything with cheap float.

And the stock finally starts closing the gap to intrinsic value, which means buybacks pause because shares are no longer obviously cheap.

Buffett’s frustration in 2012 (“I came up short again on a major acquisition”) turns into 2013’s spending spree. Patience, then action when the right deal appears. That rhythm is the whole Berkshire playbook in miniature.

← Prev: Chapter 7 Part 3: Berkshire 2010-2011 | Next: Chapter 7 Part 5: 2014 and Decade Review →