Berkshire Hathaway 2014 Annual Report Download - page 104

Management’s Discussion (Continued)
Investment and Derivative Gains/Losses
A summary of investment and derivative gains and losses and other-than-temporary impairment losses on investments
follows. Amounts are in millions.
2014 2013 2012
Investment gains/losses ............................................................. $4,272 $4,293 $1,799
Other-than-temporary impairments .................................................... (697) (228) (337)
Derivative gains/losses .............................................................. 506 2,608 1,963
Gains/losses before income taxes and noncontrolling interests ............................... 4,081 6,673 3,425
Income taxes and noncontrolling interests ............................................... 760 2,336 1,198
Net gains/losses ................................................................... $3,321 $4,337 $2,227
Investment gains/losses arise primarily from the sale or redemption of investments or when investments are carried at fair
value with the periodic changes in fair values recorded in earnings. The timing of gains or losses from sales or redemptions can
have a material effect on periodic earnings. Investment gains and losses included in earnings usually have minimal impact on
the periodic changes in our consolidated shareholders’ equity since most of our investments are recorded at fair value with the
unrealized gains and losses included in shareholders’ equity as a component of accumulated other comprehensive income.
We believe the amount of investment gains/losses included in earnings in any given period typically has little analytical or
predictive value. Our decisions to sell securities are not motivated by the impact that the resulting gains or losses will have on
our reported earnings. Although our management does not consider investment gains and losses in a given period as necessarily
meaningful or useful in evaluating periodic earnings, we are providing information to explain the nature of such gains and losses
when reflected in earnings.
Pre-tax investment gains in 2014 were $4.3 billion, which included gains of approximately $2.1 billion realized in
connection with the exchanges of common stock of Phillips 66 and Graham Holdings Company for 100% of the common stock
of a specified subsidiary of each of those companies. Each exchange transaction was structured as a tax-free reorganization
under the Internal Revenue Code. As a result, no income taxes are payable on the excess of the fair value of the businesses
received over the tax-basis cost of the common stock of Phillips 66 and Graham Holdings Company exchanged.
Pre-tax investment gains/losses in 2013 were $4.3 billion and included approximately $2.1 billion related to our
investments in General Electric and Goldman Sachs common stock warrants and Wrigley subordinated notes. Beginning in
2013, the unrealized gains or losses associated with the warrants were included in earnings. These warrants were exercised in
October 2013 on a cashless basis in exchange for shares of General Electric and Goldman Sachs common stock with an
aggregate value of approximately $2.4 billion. The Wrigley subordinated notes were repurchased for cash of $5.08 billion,
resulting in a pre-tax investment gain of $680 million. Pre-tax investment gains were approximately $1.5 billion in 2012 and
were primarily attributable to sales of equity securities.
Other-than-temporary impairment (“OTTI”) charges in 2014 were $697 million and predominantly related to our
investments in equity securities of Tesco PLC. OTTI charges in 2013 and 2012 predominantly related to our investments in
Texas Competitive Electric Holdings bonds. Although we have periodically recorded OTTI charges in earnings in past years, we
continue to hold some of those securities. If the market values of those investments increase following the date OTTI charges
are recorded in earnings, the increases are not reflected in earnings but are instead included in shareholders’ equity as a
component of accumulated other comprehensive income. When recorded, OTTI charges have no impact whatsoever on the asset
values otherwise recorded in our Consolidated Balance Sheets or on our consolidated shareholders’ equity. In addition, the
recognition of such losses in earnings rather than in accumulated other comprehensive income does not necessarily indicate that
sales are planned and sales ultimately may not occur for a number of years. Furthermore, the recognition of OTTI charges does
not necessarily indicate that the loss in value of the security is permanent or that the market price of the security will not
subsequently increase to and ultimately exceed our original cost.
As of December 31, 2014 and 2013, consolidated gross unrealized losses on our investments in equity and fixed maturity
securities determined on an individual purchase lot basis were approximately $1.2 billion and $289 million, respectively. We
have concluded that as of December 31, 2014, these unrealized losses were not other than temporary. We consider several
factors in determining whether or not impairments are deemed to be other than temporary, including the current and expected
long-term business prospects and if applicable, the creditworthiness of the issuer, our ability and intent to hold the investment
until the price recovers and the length of time and relative magnitude of the price decline.
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