PacifiCorp, MEC and NV Energy own electric transmission and distribution systems, including approximately 25,200 miles of transmission lines and approximately 1,690 substations, gas distribution facilities, including approximately 27,500 miles of gas mains and service lines.
Northern Natural’s pipeline system consists of approximately 14,600 miles of natural gas pipelines, including approximately 6,100 miles of mainline transmission pipelines and approximately 8,500 miles of branch and lateral pipelines. Northern Natural’s end-use and distribution market area includes points in Iowa, Nebraska, Minnesota, Wisconsin, South Dakota, Michigan and Illinois and its natural gas supply and delivery service area includes points in Kansas, Texas, Oklahoma and New Mexico. Storage services are provided through the operation of one underground natural gas storage field in Iowa, two underground natural gas storage facilities in Kansas and two liquefied natural gas storage peaking units, one in Iowa and one in Minnesota.
Through our subsidiaries, we engage in a number of diverse business activities. We manage our operating businesses on an unusually decentralized basis. There are essentially no centralized or integrated business functions and there is minimal involvement by our corporate headquarters in the day-to-day business activities of the operating businesses. Our senior corporate management team participates in and is ultimately responsible for significant capital allocation decisions, investment activities and the selection of the Chief Executive to head each of the operating businesses. The business segment data (Note 27 to the accompanying Consolidated Financial Statements) should be read in conjunction with this discussion.
Beginning in 2018, our periodic net earnings include changes in unrealized gains and losses on our investments in equity securities. These gains and losses have been very significant given the size of our holdings and the inherent volatility in securities prices, producing extraordinary volatility in our reported net earnings for 2019 and 2018. Prior to 2018, the changes in unrealized gains and losses pertaining to such investments were recorded in other comprehensive income. The new accounting treatment has no effect on our consolidated shareholders’ equity.
Net earnings in 2017 included approximately $29.1 billion attributable to a one-time net benefit from the enactment of the Tax Cuts and Jobs Act of 2017 (“TCJA”) on December 22, 2017. This benefit included approximately $29.6 billion related to a one-time non-cash reduction of net deferred income tax liabilities from the reduction in the statutory U.S. corporate income tax rate from 35% to 21%, and a net benefit of approximately $900 million primarily attributable to our earnings from Kraft Heinz, partly offset by a one-time income tax expense of approximately $1.4 billion on the deemed repatriation of certain accumulated undistributed earnings of foreign subsidiaries. Due to the significance, we presented these one-time effects as a distinct item in the preceding table. Accordingly, the after-tax figures presented for 2017 in the discussion of our various operating businesses and other activities exclude the one-time effects of the TCJA.
After-tax earnings of our business operations in 2019 and 2018 were favorably affected by lower U.S. income tax expense compared to 2017, primarily attributable to a reduction in the statutory U.S. corporate income tax rate from 35% to 21%. The effect of the lower U.S. statutory income tax rate on the comparative after-tax earnings of our various business operations varied, reflecting the differences in the mix of earnings subject to income tax, income tax credits and the effects of state and local income taxes.
After-tax earnings from insurance investment income in 2019 increased 21.4% over 2018, which increased 17.2% over 2017. These increases reflected increases in interest and dividend income.
After-tax earnings of our railroad business increased 5.0% in 2019 compared to 2018. Earnings in 2019 benefitted from higher rates per car/unit, a curtailment gain related to an amendment to defined benefit retirement plans and ongoing operating cost control initiatives, partly offset by lower freight volumes and incremental costs associated with the persistent flooding conditions and severe winter weather in the first half of the year. All key routes impacted by flooding resumed service by the third quarter. Our railroad business generated a 31.8% increase in after-tax earnings in 2018 compared to 2017, reflecting an increase in unit volume, higher average revenue per car/unit and a lower effective income tax rate, partly offset by increased fuel and other operating costs.
Investment and derivative gains/losses in 2019 and 2018 included significant unrealized gains and losses from market price changes on our holdings of equity securities. After-tax unrealized gains on equity securities were approximately $53.7 billion in 2019 compared to after-tax losses of $20.6 billion in 2018. After-tax investment gains in 2019 also included after-tax realized gains on sales of equity and fixed maturity securities of $2.6 billion compared to $3.1 billion in 2018. We believe that investment and derivative gains/losses, whether realized from dispositions or unrealized from changes in market prices of equity securities, are generally meaningless in understanding our reported results or evaluating the economic performance of our businesses. These gains and losses have caused and will continue to cause significant volatility in our periodic earnings.
After-tax other earnings included equity method investment earnings of $1.0 billion in 2019, losses of $1.4 billion in 2018 and earnings of $1.1 billion in 2017. The losses in 2018 were attributable to Kraft Heinz, partly offset by earnings from other equity method investments. Other earnings also included foreign currency exchange rate gains of $58 million in 2019, $289 million in 2018, and losses of $655 million in 2017 related to non-U.S. Dollar denominated debt issued by Berkshire and its U.S. based financing subsidiary, Berkshire Hathaway Finance Corporation (“BHFC”).
Premiums written and earned in 2019 increased 5.5% and 6.6%, respectively, compared to 2018. These increases were primarily attributable to voluntary auto policies-in-force growth of 6.4% over the past twelve months, partially offset by a decrease in average premiums per auto policy due to coverage changes and changes in state and risk mix. The increase in voluntary auto policies-in-force primarily resulted from an increase in new business sales of 10.9% and a decrease in the number of policies not renewed. Voluntary auto policies-in-force increased approximately 1,068,000 during 2019.
Losses and loss adjustment expenses in 2019 increased 10.1% to $28.9 billion. GEICO’s losses and loss adjustment expenses ratio in 2019 was 81.3%, an increase of 2.5 percentage points over 2018. The loss ratio increase in 2019 reflected continuing increases in loss severities, slightly offset by lower storm-related losses.
Underwriting expenses in 2019 were $5.1 billion, an increase of $493 million (10.6%) over 2018. GEICO’s underwriting expense ratio in 2019 was 14.5%, an increase of 0.6 percentage points compared to 2018. The underwriting expense increase was primarily attributable to increases in advertising expenses and employee-related costs, which reflected wage and staffing increases.
Losses and loss adjustment expenses in 2018 were $26.3 billion, an increase of $781 million (3.1%) compared to 2017. GEICO’s losses and loss adjustment expenses ratio for 2018 was 78.8%, a decline of 7.8 percentage points compared to 2017. Losses from significant catastrophe events were $105 million in 2018 (Hurricanes Florence and Michael and the wildfires in California) and approximately $450 million in 2017 (Hurricanes Harvey and Irma). GEICO reduced ultimate claim loss estimates for prior years’ loss events by $222 million in 2018 and increased estimated prior year ultimate liabilities by $517 million in 2017.
Premiums written in 2019 increased approximately $1.3 billion (15.0%) compared to 2018. The increase was primarily attributable to volume increases from BH Specialty (30%), GUARD (28%) and MedPro Group (14%) and from the effects of the MLMIC acquisition, partially offset by the effects of the divestiture of Applied Underwriters and lower volume at BHHC. The increases in premiums earned in 2019 reflected the overall volume increase over the past year.
Premiums written and earned in 2018 increased 14.4% and 13.6%, respectively, compared to 2017. The increases were primarily attributable to written premium growth at BH Specialty (33%), GUARD (19%), NICO Primary (14%) and BHHC (8%). BH Primary’s loss ratios were 64.9% in 2018 and 63.1% in 2017. Losses and loss adjustment expenses included losses from significant catastrophe events of $190 million in 2018 from Hurricanes Florence and Michael and the wildfires in California and $225 million in 2017 from Hurricanes Harvey, Irma and Maria. Losses and loss adjustment expenses also included net gains from the reductions of estimated ultimate liabilities for prior years’ loss events of $715 million in 2018 and $766 million in 2017. The liability reductions in each year primarily related to healthcare malpractice and workers’ compensation business.
Property/casualty premiums written in 2019 of $10.4 billion represented an increase of 10.8% compared to 2018. Premiums earned in 2019 increased $983 million (11.0%) versus 2018. The increase in premiums written reflected overall growth in U.S. and international markets. The growth was primarily attributable to new business, net of non-renewals, and increased participations for renewal business, partly offset by the unfavorable foreign currency translation effects of a stronger U.S. Dollar. Property/casualty premiums written in 2018 were $9.4 billion, an increase of 22.0% over 2017. The increase was primarily attributable to new business and increased participations for renewal business in both property and casualty lines. Premiums earned included $1.7 billion in 2019 and $1.8 billion in both 2018 and 2017 from a 10-year, 20% quota-share contract with Insurance Australia Group Limited, which expires in 2025.
Losses and loss adjustment expenses were $7.3 billion in 2019, $6.9 billion in 2018 and $7.2 billion in 2017 and losses and loss adjustment expense ratios were 73.8% in 2019, 77.6% in 2018 and 95.6% in 2017. Losses and loss adjustment expenses included incurred losses from significant catastrophe events occurring each year, including approximately $1.0 billion in 2019 ($700 million in the fourth quarter), $1.3 billion in 2018 ($1.1 billion in the fourth quarter) and $2.4 billion in 2017. Losses in 2019 derived from Typhoons Faxia and Hagibis and wildfires in California and Australia. Losses in 2018 derived from Hurricanes Florence and Michael, Typhoon Jebi and wildfires in California. Losses in 2017 derived from Hurricanes Harvey, Irma and Maria, an earthquake in Mexico, a cyclone in Australia and wildfires in California.
Before the effects of significant catastrophe events, losses and loss adjustment expense ratios were 64% in 2019, 63% in 2018 and 64% in 2017. Losses and loss adjustment expenses also included gains from net decreases in estimated ultimate claim liabilities attributable to prior years’ loss events of approximately $295 million in 2019, $469 million in 2018 and $295 million in 2017. Such decreases as percentages of the related net unpaid claim liabilities as of the beginning of the applicable year were 1.0% in 2019, 1.7% in 2018 and 1.2% in 2017.
Life/health premiums earned in 2018 were $5.3 billion, an increase of $535 million (11.1%) over 2017. The increase was primarily attributable to growth in the North America, Asia and Australia life insurance markets. Our life/health business produced pre-tax underwriting earnings of $216 million in 2018 and losses of $52 million in 2017. The underwriting earnings in 2018 reflected lower losses from the run-off of U.S. long-term care business, partially offset by lower earnings from the run-off of variable annuity guarantee contracts. In the fourth quarter of 2017, we recorded pre-tax losses of $450 million from discount rate reductions and changes in other actuarial assumptions associated with long-term care liabilities. Pre-tax earnings from variable annuity guarantee contracts were $34 million in 2018 and $256 million in 2017.
Pre-tax underwriting losses in each year derived from deferred charge amortization and changes in the estimated timing and amount of future claim payments, as well as from foreign currency gains/losses arising from the periodic remeasurement of liabilities related to contracts written by our U.S. subsidiaries that are denominated in foreign currencies. Foreign currency remeasurement produced pre-tax losses of $76 million in 2019, gains of $169 million in 2018 and losses of $264 million in 2017.
Retroactive reinsurance contracts generated pre-tax underwriting losses before foreign currency gains/losses of $1,189 million in 2019, $947 million in 2018 and $1,066 million in 2017. Losses included deferred charge amortization of $646 million in 2019, $611 million in 2018 and $527 million in 2017 related to the AIG Agreement. In 2019, we increased estimated ultimate liabilities for prior years’ retroactive reinsurance contracts by $378 million compared to a decrease of $341 million in 2018. After adjustments to the related unamortized deferred charges from changes in the estimated timing and amount of the future claim payments, such changes produced pre-tax underwriting losses of approximately $125 million in 2019 and earnings of $185 million in 2018.
Gross unpaid losses assumed under retroactive reinsurance contracts were $42.4 billion at December 31, 2019 and $41.8 billion at December 31, 2018. Unamortized deferred charge assets related to such reinsurance contracts were $13.7 billion at December 31, 2019 and $14.1 billion at December 31, 2018. Deferred charge assets will be charged to earnings over the expected remaining claims settlement periods through periodic amortization.
Periodic payment annuity contracts normally produce pre-tax underwriting losses deriving from the recurring discount accretion of annuity liabilities. Underwriting results also include the effects of mortality and interest rate changes and remeasurement gains and losses related to foreign currency denominated liabilities of certain contracts written by our U.S. subsidiaries. Foreign currency remeasurement losses were $40 million in 2019 compared to gains of $93 million in 2018 and losses of $190 million in 2017.
Invested assets of our insurance businesses derive from shareholder capital, including reinvested earnings, and from net liabilities under insurance and reinsurance contracts or “float.” The major components of float are unpaid losses and loss adjustment expenses, including liabilities under retroactive reinsurance contracts, life, annuity and health insurance benefit liabilities, unearned premiums and other liabilities due to policyholders, less insurance premiums and reinsurance receivables, deferred charges assumed under retroactive reinsurance contracts and deferred policy acquisition costs. Float approximated $129 billion at December 31, 2019, $123 billion at December 31, 2018 and $114 billion at December 31, 2017. Our combined insurance operations generated pre-tax underwriting earnings of approximately $417 million in 2019 and $2.0 billion in 2018, and consequently, the average cost of float for each of those periods was negative. Pre-tax underwriting losses were approximately $3.2 billion in 2017 and our average cost of float in 2017 was approximately 3.0%.
A summary of cash and investments held in our insurance businesses as of December 31, 2019 and 2018 follows (in millions).
Fixed maturity investments as of December 31, 2019 were as follows (in millions).
U.S. government obligations are rated AA+ or Aaa by the major rating agencies. Approximately 87% of all foreign government obligations were rated AA or higher. Non-investment grade corporate securities represent securities rated below BBB- or Baa3. Foreign government securities include obligations issued or unconditionally guaranteed by national or provincial government entities.
BNSF’s revenues were $23.5 billion in 2019, a decrease of $340 million (1.4%) versus 2018. During 2019, BNSF’s revenues reflected a 3.6% comparative increase in average revenue per car/unit and a 4.5% decrease in volume. Volume was 10.2 million cars/units compared to 10.7 million in 2018. The increase in average revenue per car/unit was attributable to increased rates per car/unit and a favorable outcome of an arbitration hearing. Pre-tax earnings in 2019 were approximately $7.3 billion, an increase of 5.6% over 2018. BNSF experienced severe winter weather and flooding on parts of the network, which negatively affected revenues, expenses and service levels. In addition to the impact of an increase in average revenue per car/unit, BNSF's earnings in 2019 benefitted from a reduction in total operating expenses.
Revenues from industrial products were $6.1 billion in 2019, an increase of 1.7% from 2018. The increase was attributable to higher average revenue per car/unit, partially offset by a volume decrease of 3.0%. Volumes decreased primarily due to overall softness in the industrial sector, lower sand volumes, and reduced car loadings due to the challenging weather conditions in 2019. Strength in the energy sector, which drove higher demand for petroleum products and liquefied petroleum gas, partially offset the decreases in volumes.
Revenues from agricultural products decreased 0.3% in 2019 to $4.7 billion compared to 2018. The decrease was due to lower volumes of 5.1% and higher average revenue per car/unit. The volume decreases were attributable to export competition from non-U.S. sources, the impacts of international trade policies, and the challenging weather conditions in 2019.
Fuel expenses decreased $402 million (12.0%) compared to 2018, primarily due to lower average fuel prices, lower volumes, and improved fuel efficiency. Purchased services expense decreased $170 million (5.9%) compared to 2018. The decrease was due to lower purchased transportation costs of our logistics services business, lower drayage, lower services expense, and higher insurance recoveries. Equipment rents, materials and other expense decreased $223 million (11.0%) compared to 2018. The decrease was primarily due to a $120 million curtailment gain from the amendment to the company-sponsored defined benefit retirement plans, as well as from lower locomotive and various other costs associated with lower volumes and cost controls.
BNSF’s revenues were $23.9 billion in 2018, an increase of $2.5 billion (11.5%) over 2017. BNSF’s revenues in 2018 reflected a 6.2% comparative increase in average revenue per car/unit and a 4.1% increase in volume. Combined volume was 10.7 million cars/units compared to 10.3 million in 2017. The increase in average revenue per car/unit was attributable to increased rates per car/unit, higher fuel surcharge revenue driven by higher fuel prices, and business mix changes. Pre-tax earnings were approximately $6.9 billion in 2018, an increase of 8.5% compared to 2017.
Total operating expenses were $16.0 billion in 2018, an increase of $1.9 billion (13.6%) compared to 2017. Our ratio of operating expenses to revenues increased 1.2 percentage points to 66.9% in 2018 versus 2017. Compensation and benefits expenses increased $371 million (7.4%) compared to 2017. The increase was primarily due to wage inflation and increased headcount and associated training costs. Fuel expenses increased $828 million (32.9%) compared to 2017 primarily due to higher average fuel prices and increased volumes. Purchased services expense increased $356 million (14.2%) compared to 2017, due to higher purchased transportation costs of our logistics services business, as well as increased intermodal ramping, drayage, and other volume-related costs. Equipment rents, materials and other expense increased $388 million (23.7%) compared to 2017, reflecting higher locomotive material expenses, personal injury expenses, derailment-related costs, and property taxes, as well as the impact of a benefit in 2017 from the enactment of the TCJA on an equity method investee.
The rates our regulated businesses charge customers for energy and services are based in large part on the costs of business operations, including income taxes and a return on capital, and are subject to regulatory approval. To the extent these regulated operations are not allowed to include such costs in the approved rates, operating results will be adversely affected. The TCJA reduced the U.S. federal statutory income tax rate from 35% to 21%. In 2018, BHE’s regulated subsidiaries began passing the benefits of lower income tax expense attributable to the TCJA to customers through various regulatory mechanisms, including lower rates, higher depreciation and reductions to rate base. A summary of BHE’s net earnings follows (dollars in millions).
The discussion of BHE’s operating results that follows is based on after-tax earnings, reflecting how the energy businesses are managed and evaluated. A summary of net earnings attributable to BHE follows (in millions).
Net earnings after income taxes were $669 million in 2018, an increase of $72 million (12.1%) compared to 2017, reflecting higher electric utility margin, higher depreciation and operating expenses and higher income tax benefits, partly due to higher production tax credits. Electric utility margin was $1.8 billion in 2018, an increase of $122 million (7%) compared to 2017, which was primarily due to higher retail revenues of $102 million, reflecting higher recoveries through bill riders and volumes, partially offset by lower rates, predominantly from the impact of the TCJA. The increase in depreciation expense included $65 million from additional wind generation and other plant placed in-service and $44 million from Iowa revenue sharing.
Net earnings after income taxes in 2019 were $608 million, an increase of $119 million (24.3%) compared to 2018. The increase was primarily due to improved earnings from renewable wind energy projects ($49 million from tax equity investments and $25 million from new and existing projects and activities), higher after-tax income from geothermal and natural gas units of $53 million, largely due to higher generation and favorable margins and lower operating expenses, partly offset by lower earnings at a hydroelectric facility in the Philippines due to lower rainfall. The increase in earnings also reflected the effects of favorable regulatory decisions received in 2019 and the unfavorable impacts of a regulatory rate order received in 2018 at AltaLink L.P.
Net earnings after income taxes were $145 million in 2018, an increase of $27 million (22.9%) compared to 2017. The increase reflected earnings from acquired businesses, higher comparative operating expenses and lower margins at existing businesses and lower income tax expense due to the impact of the TCJA.
The building products group includes homebuilding and manufactured housing finance (Clayton Homes), flooring (Shaw), insulation, roofing and engineered products (Johns Manville), bricks and masonry products (Acme Building Brands), paint and coatings (Benjamin Moore), and residential and commercial construction and engineering products and systems (MiTek). The consumer products group includes leisure vehicles (Forest River), several apparel and footwear operations (including Fruit of the Loom, Garan, H.H. Brown Shoe Group and Brooks Sports) and a manufacturer of high-performance alkaline batteries (Duracell). This group also includes custom picture framing products (Larson Juhl) and jewelry products (Richline). A summary of revenues and pre-tax earnings of our manufacturing operations follows (dollars in millions).
Lubrizol’s pre-tax earnings in 2019 for the fourth quarter and year decreased 50.5% and 14.6%, respectively, compared to the same periods in 2018. Earnings in 2019 were significantly impacted by costs and lost business associated with the Rouen fire. Lubrizol’s operating results in 2019 were also negatively affected by lower sales volumes, higher manufacturing expenses and unfavorable foreign currency translation effects, partly offset by improved material margins.
Marmon’s revenues were $8.3 billion in 2019, an increase of $146 million (1.8%) compared to 2018. The revenue increase reflected the effects of business acquisitions over the past year, higher volumes in several business sectors, which were largely offset by lower distribution volumes in the Metals Services sector, unfavorable foreign currency translation, and the impact of lower metal prices in the Electrical and Plumbing & Refrigeration sectors. Marmon’s business acquisitions included the acquisition of the Colson Medical companies on October 31, 2019, resulting in a new Medical sector. Marmon’s Rail & Leasing and Crane Services sectors benefitted from higher railcar equipment sales, railcar fleet utilization, railcar repair services, intermodal container leasing revenue and improved crane rental demand in the U.S. and Australia.
Marmon’s pre-tax earnings in 2019 increased $12 million (1.0%) as compared to 2018. The earnings increase reflected the effects of business acquisitions, partly offset by lower gains from business divestitures. Earnings in 2019 also reflected increased earnings in several sectors that experienced sales volume increases, which were substantially offset by lower earnings in the Metal Services and certain other sectors, the unfavorable impacts of foreign currency translation and increased interest and other expenses.
IMC’s revenues in 2019 declined 1.3% in 2019 as compared to 2018, reflecting unfavorable foreign currency translation effects of a stronger U.S. Dollar and lower sales in several regions, including Asia and Europe, mostly offset by increased revenues from recent business acquisitions. IMC’s pre-tax earnings declined 12.8% in 2019 versus 2018, attributable to unfavorable foreign currency translation effects, changes in business mix to lower margin items and the effects of the U.S./China trade disputes.
Lubrizol’s pre-tax earnings in 2018 increased 43.5% compared to 2017, which included pre-tax losses of approximately $190 million related to Lubrizol’s disposition of an underperforming bolt-on business and related intangible asset impairments and restructuring charges. Before such charges, Lubrizol’s earnings increased 17%, reflecting the previously mentioned increases in sales volumes and selling prices, as well as lower other restructuring charges, lower net interest expense, and the favorable effects of foreign currency translation and ongoing expense control efforts, partly offset by higher raw material costs.
Marmon’s pre-tax earnings in 2018 decreased 5.6% compared to 2017. The decrease was primarily due to lower pre-tax earnings from the Rail Products and Services sector ($126 million) and the Foodservice Technologies and Retail Solutions sectors ($33 million), partially offset by increased earnings from the Transportation Products sector and a gain in 2018 from the sale of certain assets of the Beverage Technologies sector of $44 million. The Rail Products and Services earnings decline was attributable to lower railcar leasing revenues and higher lease fleet repair costs.
Pre-tax earnings of Clayton Homes were $1.1 billion in 2019, an increase of $182 million (20.0%) compared to 2018. The earnings increase in 2019 was attributable to home building activities, which reflected the increases in home sales, and manufactured housing lending activities. Pre-tax earnings from lending and finance activities in 2019 increased 12%, primarily due to an increase in interest income attributable to higher average loan balances, increased other financial services earnings and lower credit losses, partially offset by higher interest expense, attributable to higher average borrowings and interest rates, and by higher other operating costs.
Revenues of the building products group in 2018 were approximately $18.7 billion, an increase of 10.2% compared to 2017. Pre-tax earnings of the building products group were approximately $2.3 billion in 2018, an increase of 8.8% versus 2017. Overall, pre-tax earnings as a percentage of revenues were 12.5% in 2018 and 12.7% in 2017.
Clayton Homes’ pre-tax earnings were $911 million in 2018, an increase of $145 million (19.0%) compared to 2017. The increase was primarily attributable to a significant increase in earnings from home building (manufactured housing and site-built homes) activities, which reflected the impact of increased home sales and margins. Pre-tax earnings from lending activities in 2018 declined 2% compared to 2017, as increased interest expense, attributable to higher average debt balances and interest rates, and higher operating costs more than offset the increase in interest income. At December 31, 2018 and 2017, aggregate loan balances outstanding were approximately $14.7 billion and $13.7 billion, respectively.
Revenues of our other building products businesses increased 5.8% in 2018 to approximately $12.6 billion compared to 2017. In 2018, Shaw’s sales increased 7.9% and Johns Manville’s sales increased 7.2% as compared to 2017. The increases reflected higher average selling prices, product mix changes and overall unit volume increases.
Consumer products revenues were approximately $12.5 billion in 2018, an increase of 3.2% compared to 2017, which was primarily due to revenue increases at Forest River and at our apparel and footwear businesses. Forest River’s revenues increased 2.6% in 2018, reflecting relatively unchanged unit sales versus 2017. However, over the second half of the year, comparative sales at Forest River declined 5%, reflecting a 7% decline in units sold. Apparel and footwear revenues increased 4.6% to approximately $4.3 billion, primarily due to increased sales volume at Brooks Sports and Garan.
Pre-tax earnings were $1.2 billion in 2018, an increase of 8.6% compared to 2017. Pre-tax earnings as a percentage of revenues were 9.6% in 2018 and 9.2% in 2017. The increase in earnings reflected increases from Duracell and the apparel and footwear businesses, partly offset by lower earnings from Forest River and Larson Juhl.
Pre-tax earnings of the apparel and footwear businesses increased 6.4% in 2018 compared to 2017, primarily attributable to the overall increase in revenues and sales mix changes. Duracell’s pre-tax earnings increased in 2018 compared to 2017, reflecting the favorable effects of ongoing operational improvement efforts and a comparative decline in restructuring charges.
Our service business group offers fractional ownership programs for general aviation aircraft (NetJets) and high technology training products and services to operators of aircraft (FlightSafety). We also distribute electronic components (TTI) and franchise and service a network of quick service restaurants (Dairy Queen). Other service businesses include transportation equipment leasing (XTRA) and furniture leasing (CORT), electronic news distribution, multimedia and regulatory filings (Business Wire), publication of newspapers and other publications (Buffalo News and the BH Media Group) and operation of a television station in Miami, Florida (WPLG). We also offer third party logistics services that primarily serve the petroleum and chemical industries (Charter Brokerage).
Service group revenues in 2019 also reflected increases in aviation-related services (NetJets and to a lesser extent FlightSafety) and the leasing businesses, and decreases from the media businesses and Charter Brokerage, which divested a high revenue, low margin business in mid-2019. The increase in NetJets revenues in 2019 reflected increased lease revenue, primarily attributable to an increase in aircraft on lease and increased flight hours, partly offset by lower revenue from prepaid flight cards.
Pre-tax earnings of the service group were $1.7 billion in 2019, a decrease of $155 million (8.4%) compared to 2018. Pre-tax earnings of the group as a percentage of revenues were 12.5% in 2019 compared to 13.8% in 2018. The comparative declines in earnings in 2019 were primarily due to lower earnings from TTI and FlightSafety, partly offset by higher earnings from NetJets. TTI’s earnings decline was attributable to lower gross margin, unfavorable foreign currency translation effects and higher operating expenses, partly offset by earnings from businesses acquired. FlightSafety’s earnings decline was attributable to significant losses related to an existing government contract that were recorded in the fourth quarter, partly offset by lower training equipment impairment charges. Earnings from NetJets increased in 2019, primarily attributable to increased revenues and improved fleet and operating efficiencies, which improved operating margins.
Revenues of the service group were approximately $13.3 billion in 2018, an increase of approximately 9.7% compared to 2017. TTI’s revenues increased approximately 33.7% compared to 2017, reflecting industry-wide increases in demand for electronic components in many geographic markets around the world, the effects of recent business acquisitions and favorable foreign currency translation effects. While TTI’s revenue increase in 2018 was significant, revenue growth began to moderate in the fourth quarter, in part attributable to the impact of U.S. trade tariffs. WPLG generated a revenue increase of 20.8% in 2018 over 2017, primarily due to increased political advertising revenue. Revenues of Charter Brokerage increased 53.3%, reflecting increased fees earned and product mix changes. Revenues of the CORT and XTRA leasing businesses increased 8.4% in 2018 compared to 2017 due to increased over-the road trailer units on lease and increased furniture rental income.
Other retailing businesses include three jewelry retailing businesses (Borsheims, Helzberg and Ben Bridge), See’s Candies (confectionary products), Pampered Chef (high quality kitchen tools), Oriental Trading Company (party supplies, school supplies and toys and novelties) and Detlev Louis Motorrad (“Louis”), a Germany-based retailer of motorcycle accessories.
Retailing group revenues were $16.0 billion in 2019, an increase of 2.5% compared to 2018. BHA’s revenues in 2019, which represented approximately 64% of our retailing revenues, increased 4.1% over 2018. BHA’s revenue increase reflected an 11.5% increase in pre-owned vehicle sales, vehicle pricing increases, improvement in vehicle finance and service contract activities and vehicle repair work as compared to 2018. New vehicle sales in 2019 were relatively unchanged from 2018.
Home furnishings group revenues, which represented about 20% of the aggregate retailing group revenues, declined 1.3% in 2019 compared to 2018. Sales in 2019 were relatively unchanged or lower in each of our home furnishings operations.
Revenues of the retailing group were approximately $15.6 billion in 2018, an increase of 3.6% compared to 2017. BHA’s revenues, which represented approximately 63% of the aggregate retailing revenues, increased 4.0% as compared to 2017. The increase derived primarily from increased pre-owned vehicle sales and service contract revenues. Revenues from new vehicle sales were relatively unchanged. Louis revenues increased 7.8% in 2018 versus 2017, primarily due to the translation effects of a weaker average U.S. Dollar. Home furnishings revenues increased 4.7% in 2018 over 2017, reflecting increased sales in certain geographic markets and the effect of a new store.
Revenues were $50.5 billion in 2019, an increase of 0.9% compared to 2018. McLane operates on 52/53-week fiscal year and 2019 included an extra week compared to 2018. Otherwise, revenues in 2019 decreased roughly 3% in the grocery business and increased 3% in the foodservice business as compared to 2018. Pre-tax earnings increased $42 million (17.1%) as compared to 2018. The earnings increase in 2019 reflected an increase in average gross margin rates and changes in business mix, partly offset by increased operating expenses, the largest portion of which were employee costs. McLane continues to operate in an intensely competitive business environment, which is negatively affecting its current operating results. We expect these operating conditions will continue.
Revenues were approximately $50.0 billion in 2018, slightly higher than 2017, reflecting a slight increase in grocery sales (1%) and a slight decrease in foodservice sales (1%). The decline in foodservice revenues was primarily due to a net loss of customers. Pre-tax earnings were $246 million, a decline of 17.7%, compared to 2017. McLane’s grocery and foodservice businesses continue to operate in a highly competitive business environment, which negatively affected operating results. While gross margin rates increased slightly over 2018, increases in fuel, depreciation and certain other operating expenses more than offset the increase, producing a decline in pre-tax earnings compared to 2017.
Due to a new accounting pronouncement adopted as of January 1, 2018, pre-tax investment gains/losses reported in earnings include unrealized gains and losses arising from changes in market prices on investments in equity securities. Prior to 2018, investment gains/losses related to equity securities were generally recorded as the securities were sold, redeemed or exchanged based on the cost of the disposed securities and the unrealized gains and losses were recorded in other comprehensive income. While the new accounting pronouncement does not affect our consolidated shareholders’ equity or total comprehensive income, it has significantly increased the volatility of our periodic net earnings due to the magnitude of our equity securities portfolio and the inherent volatility of equity securities prices. Investment gains and losses from periodic changes in securities prices will continue to cause significant volatility in our consolidated earnings.
Derivative contract gains/losses include the changes in fair value of our equity index put option contract liabilities, which relate to contracts that were originated prior to March 2008. Substantially all remaining contracts will expire by February 2023. The periodic changes in the fair values of these liabilities are recorded in earnings and can be significant, primarily due to the volatility of underlying equity markets.
Pre-tax gains from equity index put option contracts were $1.5 billion in 2019 compared to pre-tax losses of $300 million in 2018 and gains of $718 million in 2017. The gains in 2019 and 2017 reflected increases in the equity index values and shorter remaining contract durations while the losses in 2018 were primarily due to lower equity index values.
After-tax equity method earnings include Berkshire’s share of earnings attributable to Kraft Heinz, Pilot, Berkadia and Electric Transmission of Texas. After-tax equity method earnings related to our Kraft Heinz investment were earnings of $488 million in 2019, losses of $1,859 million in 2018 and earnings of $972 million in 2017. The after-tax equity method losses in 2018 included approximately $2.7 billion for our share of intangible asset impairment charges recorded by Kraft Heinz.
Foreign currency exchange rate gains and losses pertain to Berkshire’s outstanding Euro denominated debt (€6.85 billion par) and Japanese Yen denominated debt (¥430 billion par), issued in September 2019, and BHFC’s Great Britain Pound denominated debt (£1.75 billion par), issued in June 2019. Changes in foreign currency exchange rates produced non-cash unrealized gains and losses from the periodic revaluation of these liabilities into U.S. Dollars. The gains and losses recorded in any given period can be significant due the magnitude of the borrowings and the inherent volatility in foreign currency exchange rates.
A summary of our contractual obligations as of December 31, 2019 follows (in millions). Actual payments will likely vary, perhaps significantly, from estimates reflected in the table.
GEICO predominantly writes private passenger auto insurance. As of December 31, 2019, GEICO’s gross unpaid losses were $22.0 billion. Claim liabilities, net of reinsurance recoverable were $20.9 billion.
Incurred-but-not-reported (“IBNR”) claims liabilities are based on projections of the ultimate number of claims expected (reported and unreported) for each significant coverage. We use historical claim count data to develop age-to-age projections of the ultimate counts by quarterly accident period, from which we deduct reported claims to produce the number of unreported claims. We estimate the average costs per unreported claim and apply such estimates to the unreported claim counts, producing an IBNR liability estimate. We may record additional IBNR estimates when actuarial techniques are difficult to apply.
We test the adequacy of the aggregate claim liabilities using one or more actuarial projections based on claim closure models and paid and incurred loss triangles. Each type of projection analyzes loss occurrence data for claims occurring in a given period and projects the ultimate cost.
In connection with reinsurance contracts, the nature, extent, timing and perceived reliability of premium and loss information received from ceding companies varies widely depending on the type of coverage and the contractual reporting terms. Contract terms, conditions and coverages also tend to lack standardization and may evolve more rapidly than primary insurance policies.
As reinsurers, the premium and loss data we receive is at least one level removed from the underlying claimant, so there is a risk that the loss data reported is incomplete, inaccurate or the claim is outside the coverage terms. We maintain certain internal procedures in order to determine that the information is complete and in compliance with the contract terms. Generally, our reinsurance contracts permit us to access the ceding company’s books and records with respect to the subject business, thus providing the ability to audit the reported information. In the normal course of business, disputes occasionally arise concerning whether claims are covered by our reinsurance policies. We resolve most coverage disputes through negotiation with the client. If disputes cannot be resolved, our contracts generally provide arbitration or alternative dispute resolution processes. There are no coverage disputes at this time for which an adverse resolution would likely have a material impact on our consolidated results of operations or financial condition.
Although liabilities for losses are initially determined based on pricing and underwriting analysis, BHRG uses a variety of actuarial methodologies that place reliance on the extrapolation of actual historical data, loss development patterns, industry data, and other benchmarks as appropriate. The estimate of the required IBNR liabilities also requires judgment by actuaries and management to reflect the impact of additional factors like change in business mix, volume, claim reporting and handling practices, inflation, social and legal environment and the terms and conditions of the contracts. The methodologies generally fall into one of the following categories or are hybrids of one or more of the following categories:
Additional Analysis - in some cases we have established reinsurance claim liabilities on a contract-by-contract basis, determined from case loss estimates reported by the ceding company and IBNR liabilities that are primarily a function of an anticipated loss ratio for the contract and the reported case loss estimate. Liabilities are adjusted upward or downward over time to reflect case losses reported versus expected case losses, which we use to form revised judgement on the adequacy of the expected loss ratio and the level of IBNR liabilities required for unreported claims. Anticipated loss ratios are also revised to include estimates of known major catastrophe events.
Our claim liability estimation process for short-tail lines, primarily property exposures, utilizes a combination of the paid and incurred loss development methods and the incurred and paid loss Bornhuetter-Ferguson methods. Certain catastrophe, individual risk and aviation excess-of-loss contracts tend to generate low frequency/high severity losses. Our processes and techniques for estimating liabilities under such contracts generally rely more on a per contract assessment of the ultimate cost associated with the individual loss event rather than with an analysis of the historical development patterns of past losses.
Estimated ultimate liabilities for asbestos, environmental and other latent injury claims were increased approximately $150 million in 2019, which produced a corresponding reduction in pre-tax earnings. Net liabilities for such claims, excluding amounts assumed under retroactive reinsurance contracts, were approximately $1.7 billion at December 31, 2019. Loss estimations for these exposures are difficult to determine due to the changing legal environment and increases may be required in the future if new exposures or claimants are identified, new claims are reported or new theories of liability emerge.
Our contracts are generally subject to maximum limits of indemnifications and, as such, we currently expect that maximum remaining gross losses payable under our retroactive policies will not exceed $56 billion. Absent significant judicial or legislative changes affecting asbestos, environmental or latent injury exposures, we also currently believe it unlikely that losses will develop upward to the maximum losses payable or downward by more than 15% of our $42.4 billion estimated liability.
Certain of our retroactive reinsurance contracts include asbestos, environmental and other latent injury claims. Our estimated liabilities for such claims were approximately $12.9 billion at December 31, 2019. We do not consistently receive reliable detailed data regarding asbestos, environmental and latent injury claims from all ceding companies, particularly with respect to multi-line or aggregate excess-of-loss policies. When possible, we conduct a detailed analysis of the underlying loss data to make an estimate of ultimate reinsured losses. When detailed loss information is unavailable, we develop estimates by applying recent industry trends and projections to aggregate client data. Judgments in these areas necessarily consider the stability of the legal and regulatory environment under which we expect these claims will be adjudicated. Legal reform and legislation could also have a significant impact on our ultimate liabilities.
We primarily use discounted projected future earnings or cash flow methods in determining fair values. The key assumptions and inputs used in such methods may include forecasting revenues and expenses, cash flows and capital expenditures, as well as an appropriate discount rate and other inputs. A significant amount of judgment is required in estimating the fair value of a reporting unit and in performing goodwill impairment tests.
Due to the inherent uncertainty in forecasting cash flows and earnings, actual results may vary significantly from the forecasts. If the carrying value of the indefinite-lived intangible asset exceeds fair value, the excess is charged to earnings as an impairment loss. If the carrying value of a reporting unit exceeds the estimated fair value of the reporting unit, then, as required by GAAP, the excess, limited to the carrying amount of goodwill, will be charged to earnings as an impairment loss.
We are also subject to equity price risk with respect to our equity index put option contracts. While our ultimate liability with respect to these contracts is determined from the movement of the underlying stock index between the contract inception date and expiration date, fair values of these contracts are also affected by changes in other factors such as interest rates, expected dividend rates and the remaining duration of the contracts.
The following table summarizes the estimated effects of hypothetical changes in interest rates on our significant assets and liabilities that are subject to significant interest rate risk at December 31, 2019 and 2018. We assumed that the interest rate changes occur immediately and uniformly to each category of instrument and that there were no significant changes to other factors used to determine the value of the instrument. The hypothetical changes in interest rates do not reflect the best or worst case scenarios. Actual results may differ from those reflected in the table. Dollars are in millions.
Certain of our subsidiaries operate in foreign jurisdictions and we transact business in foreign currencies. In addition, we hold investments in common stocks of major multinational companies, such as The Coca-Cola Company, who have significant foreign business and foreign currency risk of their own. We generally do not attempt to match assets and liabilities by currency and do not use derivative contracts to manage foreign currency risks in any meaningful way.
Our subsidiaries use commodities in various ways in manufacturing and providing services. As such, we are subject to price risks related to various commodities. In most instances, we attempt to manage these risks through the pricing of our products and services to customers. To the extent that we are unable to sustain price increases in response to commodity price increases, our operating results will likely be adversely affected. We do not utilize derivative contracts to manage commodity price risks to any significant degree.
We have audited the accompanying consolidated balance sheets of Berkshire Hathaway Inc. and subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of earnings, comprehensive income, changes in shareholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Unpaid Losses and Loss Adjustment Expenses- Refer to Notes 1 and 15 to the financial statements
We tested the operating effectiveness of controls over claim liabilities, including those over the key assumptions.
We evaluated the methods and assumptions used by management to estimate the claim liabilities by:
Unpaid Losses and Loss Adjustment Expenses Under Retroactive Reinsurance Contracts - Refer to Notes 1 and 16 to the financial statements
We tested the operating effectiveness of controls over claim liabilities and related assets, including those over the key assumptions.
We tested the effectiveness of controls over goodwill and indefinite-lived intangible assets, including those over the forecasts of future revenue and EBIT.
With the assistance of our fair value specialists, we evaluated the valuation methodologies, the long-term growth rates and discount rates, including testing the underlying source information and the mathematical accuracy of the calculations, and developed a range of independent estimates and compared those to the long-term growth rates and discount rates selected by management.
We classify investments in fixed maturity securities at the acquisition date and re-evaluate the classification at each balance sheet date. Securities classified as held-to-maturity are carried at amortized cost, reflecting the ability and intent to hold the securities to maturity. Securities classified as trading are acquired with the intent to sell in the near term and are carried at fair value with changes in fair value reported in earnings. All other securities are classified as available-for-sale and are carried at fair value with net unrealized gains or losses reported in accumulated other comprehensive income. As of December 31, 2019, substantially all of our investments in fixed maturity securities were classified as available-for-sale. We amortize the difference between the original cost and maturity value of a fixed maturity security to earnings using the interest method.
Investment gains and losses for available-for-sale fixed maturity securities are recorded when the securities are sold, as determined on a specific identification basis. If the fair value of a fixed maturity security is less than cost, we evaluate the security for other-than-temporary impairment. We recognize an other-than-temporary impairment if we (a) intend to sell or expect to be required to sell the security before its amortized cost is recovered or (b) do not expect to ultimately recover the amortized cost basis even if we do not intend to sell the security. Under scenario (a), we recognize the loss in earnings and under scenario (b), we recognize the credit loss component in earnings and the remainder in other comprehensive income.
As defined under GAAP, fair value is the price that would be received to sell an asset or paid to transfer a liability between market participants in the principal market or in the most advantageous market when no principal market exists. Adjustments to transaction prices or quoted market prices may be required in illiquid or disorderly markets in order to estimate fair value. Alternative valuation techniques may be appropriate under the circumstances to determine the value that would be received to sell an asset or paid to transfer a liability in an orderly transaction. Market participants are assumed to be independent, knowledgeable, able and willing to transact an exchange and not acting under duress. Our nonperformance or credit risk is considered in determining the fair value of liabilities. Considerable judgment may be required in interpreting market data used to develop the estimates of fair value. Accordingly, estimates of fair value presented herein are not necessarily indicative of the amounts that could be realized in a current or future market exchange.
We depreciate property, plant and equipment used by our other businesses to estimated salvage value primarily using the straight-line method over estimated useful lives. Ranges of estimated useful lives of depreciable assets used in our other businesses are as follows: buildings and improvements - 5 to 50 years, machinery and equipment - 3 to 25 years and furniture, fixtures and other - 3 to 15 years. Ranges of estimated useful lives of depreciable assets unique to our railroad business are as follows: track structure and other roadway - 10 to 100 years and locomotives, freight cars and other equipment - 6 to 41 years. Ranges of estimated useful lives of assets unique to our regulated utilities and energy businesses are as follows: utility generation, transmission and distribution systems - 5 to 80 years, interstate natural gas pipeline assets - 3 to 80 years and independent power plants and other assets - 3 to 30 years.
We are party to contracts where we lease property to others (“lessor” contracts) and where we lease property from others (“lessee” contracts). We record additions to equipment that we lease to others at cost. We depreciate equipment held for lease to estimated salvage value primarily using the straight-line method over estimated useful lives ranging from 5 to 35 years. We use declining balance deprecation methods for assets when the revenue-earning power of the asset is relatively greater during the earlier years of its life and maintenance and repair costs increase during the later years. We also evaluate equipment held for lease for impairment consistent with policies for property, plant and equipment.
On January 1, 2018, we adopted Accounting Standards Codification (“ASC”) 606 “Revenues from Contracts with Customers.” Except as described in Note 1(x), our revenue recognition practices for contracts with customers under ASC 606 do not differ significantly from prior practices. Under ASC 606, revenues are recognized when a good or service is transferred to a customer. A good or service is transferred when (or as) the customer obtains control of that good or service. Revenues are based on the consideration we expect to receive in connection with our promises to deliver goods and services to our customers.
Our energy revenue derives primarily from tariff based sales arrangements approved by various regulatory commissions. These tariff based revenues are mainly comprised of energy, transmission, distribution and natural gas and have performance obligations to deliver energy products and services to customers which are satisfied over time as energy is delivered or services are provided. Our nonregulated energy revenue primarily relates to our renewable energy business. Energy revenues are equivalent to the amounts we have the right to invoice and correspond directly with the value to the customer of the performance to date and include billed and unbilled amounts. Payments from customers are generally due from the customer within 30 days of billing. Rates charged for energy products and services are established by regulators or contractual arrangements that establish the transaction price, as well as the allocation of price among the separate performance obligations. When preliminary regulated rates are permitted to be billed prior to final approval by the applicable regulator, certain revenue collected may be subject to refund and a liability for estimated refunds is accrued.
The primary performance obligation under our freight rail transportation service contracts is to move freight from a point of origin to a point of destination. The performance obligations are represented by bills of lading which create a series of distinct services that have a similar pattern of transfer to the customer. The revenues for each performance obligation are based on various factors including the product being shipped, the origin and destination pair, and contract incentives which are outlined in various private rate agreements, common carrier public tariffs, interline foreign road agreements and pricing quotes. The transaction price is generally a per car amount to transport railcars from a specified origin to a specified destination. Freight revenues are recognized over time as the service is performed because the customer simultaneously receives and consumes the benefits of the service. Revenues recognized represent the proportion of the service completed as of the balance sheet date. Invoices for freight transportation services are generally issued to customers and paid within 30 days or less. Customer incentives, which are primarily provided for shipping a specified cumulative volume or shipping to/from specific locations, are recorded as a reduction to revenue on a pro-rata basis based on actual or projected future customer shipments.
Leasing revenue is generally recognized ratably over the term of the lease or based on usage, if applicable under the terms of the contract. A substantial portion of our leases are classified as operating leases. Prior to January 1, 2018, we recognized revenues from the sales of fractional ownership interests in aircraft over the term of the related management services agreements, as the transfers of the ownership interests were inseparable from the management services agreements. These agreements also include provisions that require us to repurchase the fractional interest at fair market value at contract termination or upon the customer’s request following the end of a minimum commitment period. ASC 606 provides that such contracts are subject to accounting guidance for lease contracts and not ASC 606. The re-characterization of these fractional ownership interests as operating leases did not have a significant effect on our consolidated revenues or earnings.
We record liabilities for unpaid losses and loss adjustment expenses assumed under property/casualty insurance and reinsurance contracts for loss events that have occurred on or before the balance sheet date. Such liabilities represent the estimated ultimate payment amounts without discounting for time value.
We record liabilities for unpaid losses and loss adjustment expenses assumed under retroactive reinsurance of short duration contracts consistent with other short duration property/casualty insurance and reinsurance contracts discussed in Note 1(p). With respect to retroactive reinsurance contracts, we also record deferred charge assets at the inception of the contracts, representing the excess, if any, of the estimated ultimate claim liabilities over the premiums earned. We subsequently amortize the deferred charge assets over the expected claim settlement periods using the interest method. Changes to the estimated timing or amount of future loss payments also produce changes in deferred charge balances. We apply changes in such estimates retrospectively and the resulting changes in deferred charge balances, together with periodic amortization, are included in insurance losses and loss adjustment expenses in the Consolidated Statements of Earnings.
We capitalize the incremental costs that directly relate to the successful sale of insurance contracts, subject to ultimate recoverability, and we subsequently amortize such costs to underwriting expenses as the related premiums are earned. Direct incremental acquisition costs include commissions, premium taxes and certain other costs associated with successful efforts. We expense all other underwriting costs as incurred. The recoverability of capitalized insurance policy acquisition costs generally reflects anticipation of investment income. The unamortized balances are included in other assets and were $2,937 million and $2,658 million at December 31, 2019 and 2018, respectively.
We compute our liabilities for insurance benefits under life contracts based upon estimated future investment yields, expected mortality, morbidity, and lapse or withdrawal rates as well as estimates of premiums we expect to receive and expenses we expect to incur in the future. These assumptions, as applicable, also include a margin for adverse deviation and may vary with the characteristics of the contract’s date of issuance, policy duration and country of risk. The interest rate assumptions used may vary by contract or jurisdiction. We discount periodic payment annuity liabilities based on the implicit rate as of the inception of the contracts such that the present value of the liabilities equals the premiums. Discount rates generally range from 3% to 7.5%.
With respect to ASU 2016-01, beginning in 2018, unrealized gains and losses from the changes in the fair values of our equity securities during the period are included within investment gains/losses in the Consolidated Statements of Earnings. As of January 1, 2018, we reclassified net after-tax unrealized gains on equity securities from accumulated other comprehensive income to retained earnings. In adopting ASU 2018-02, we reclassified the stranded deferred income tax effects arising from the reduction in the U.S. statutory income tax rate under the Tax Cuts and Jobs Act of 2017 that were included in accumulated other comprehensive income as of January 1, 2018 to retained earnings.
In adopting ASC 606, we recorded increases to certain assets and other liabilities, with the cumulative net effect recorded to retained earnings. Prior to January 1, 2018, we recognized revenues from the sales of fractional ownership interests in aircraft over the term of the related management services agreements. As discussed in Note 1(o), ASC 606 provides that such contracts are subject to accounting guidance for lease contracts. The principal effects of this re-characterization were to increase equipment held for lease and aircraft repurchase liabilities and unearned lease revenues by approximately $3.5 billion.
On April 30, 2019, Berkshire committed to invest a total of $10 billion in connection with Occidental Petroleum Corporation’s (“Occidental”) proposal to acquire Anadarko Petroleum Corporation (“Anadarko”). The Anadarko shareholders approved the acquisition by Occidental on August 8, 2019 and the acquisition and our investment in Occidental closed on August 8, 2019. Our investments in Occidental are included in the commercial, industrial and other category in the preceding table.
Berkshire’s investments in Occidental include newly issued Occidental Cumulative Perpetual Preferred Stock with an aggregate liquidation value of $10 billion, together with warrants to purchase up to 80 million shares of Occidental common stock at an exercise price of $62.50 per share. The preferred stock accrues dividends at 8% per annum and is redeemable at the option of Occidental commencing on the tenth anniversary of issuance at a redemption price equal to 105% of the liquidation preference plus any accumulated and unpaid dividends, or mandatorily under certain specified capital return events. Dividends on the preferred stock may be paid in cash or, at Occidental’s option, in shares of Occidental common stock. The warrants are exercisable in whole or in part until one year after the redemption of the preferred stock.
Berkshire and its subsidiaries hold investments in certain businesses that are accounted for pursuant to the equity method. Currently, the most significant of these is our investment in the common stock of The Kraft Heinz Company (“Kraft Heinz”). Kraft Heinz is one of the world’s largest manufacturers and marketers of food and beverage products, including condiments and sauces, cheese and dairy, meals, meats, refreshment beverages, coffee and other grocery products. Berkshire currently owns 325,442,152 shares of Kraft Heinz common stock representing 26.6% of the outstanding shares.
Other investments accounted for pursuant to the equity method include our investments in Berkadia Commercial Mortgage LLC (“Berkadia”), Pilot Travel Centers LLC (“Pilot”) and Electric Transmission Texas, LLC (“ETT”). The carrying value of our investments in these entities was approximately $3.7 billion as of December 31, 2019 and $3.5 billion as of December 31, 2018. Our equity method earnings in these entities were $683 million in 2019, $563 million in 2018 and $76 million in 2017. Additional information concerning these investments follows.
Prior to 2018, we recognized investment gains and losses in earnings when we sold or otherwise disposed of equity securities based on the difference between the proceeds from the sale and the cost of the securities and also when we recognized other-than-temporary impairment losses. Beginning in 2018, investment gains and losses included in earnings also include unrealized gains and losses from changes in fair values during the period on equity securities we still own. Prior to 2018, we recorded the changes in unrealized gains and losses on our investments in equity securities in other comprehensive income.
As reflected in the Consolidated Statements of Cash Flows, we received proceeds of approximately $14.3 billion in 2019 and $18.8 billion in 2018 from sales of equity securities. In the preceding table, investment gains/losses on equity securities sold during 2019 and 2018 reflect the difference between proceeds from sales and the fair value of the equity security sold at the beginning of the period or the purchase date, if later. Our taxable gains on equity securities sold during the year, which are generally the difference between the proceeds from sales and our original cost, were $3.2 billion in 2019 and $3.3 billion in 2018.
Loans and finance receivables are predominantly installment loans originated or acquired by our manufactured housing business. Provisions for loan losses for 2019 and 2018 were $125 million and $141 million, respectively. Loan charge-offs, net of recoveries, were $135 million in 2019 and $144 million in 2018. At December 31, 2019, approximately 98% of the manufactured housing loan balances were evaluated collectively for impairment, with the remainder evaluated individually. As part of the evaluation process, credit quality indicators are reviewed and loans are designated as performing or non-performing. At December 31, 2019, we considered approximately 99% of the loan balances to be performing and approximately 96% of the loan balances to be current as to payment status.
Additionally, in 2018, we entered into an agreement with Seritage Growth Properties to provide a $2.0 billion term loan facility, which matures on July 31, 2023. As of December 31, 2019, the outstanding loans under the facility were approximately $1.6 billion.
Depreciation expense for each of the three years ending December 31, 2019 is summarized below (in millions).
Operating lease revenues were $5,732 million in 2018 and $2,452 million in 2017. In 2018, due to the adoption of ASC 606, $3,280 million was recorded as operating lease revenues that in previous years would have been recorded as sales and service revenues.
Intangible asset amortization expense was $1,317 million in 2019, $1,393 million in 2018 and $1,469 million in 2017. Estimated amortization expense over the next five years is as follows (in millions): 2020 - $1,275; 2021 - $1,144; 2022 - $1,082; 2023 - $993 and 2024 - $913. Intangible assets with indefinite lives were $19.0 billion as of December 31, 2019 and $18.9 billion as of December 31, 2018 and primarily related to certain customer relationships and trademarks and trade names.
We recorded derivative contract gains of $1,484 million in 2019, losses of $300 million in 2018 and gains of $718 million in 2017, with respect to our equity index put option contracts. The gains in 2019 were primarily due to increases in equity index values.
Estimated ultimate liabilities for prior years’ loss events related to primary insurance were reduced by $457 million in 2019, $937 million in 2018 and $249 million in 2017. The decrease in 2019 was primarily attributable to lower than anticipated medical professional liability and workers’ compensation losses, partially offset by higher commercial auto and other liability losses. The decreases in 2018 and 2017 were primarily related to workers’ compensation and medical professional liability claims. Liabilities for prior years’ private passenger auto claims were reduced in 2018 and increased in 2017. Estimated ultimate liabilities for prior years’ loss events related to property and casualty reinsurance were reduced $295 million in 2019, $469 million in 2018 and $295 million in 2017.
A reconciliation of the disaggregated net unpaid losses and allocated loss adjustment expenses (the latter referred to as “ALAE”) of GEICO, Berkshire Hathaway Primary Group (“BH Primary”) and Berkshire Hathaway Reinsurance Group (“BHRG”) to our consolidated unpaid losses and loss adjustment expenses as of December 31, 2019 follows (in millions).
We establish average liabilities based on expected severities for newly reported physical damage and liability claims prior to establishing an individual case reserve when we have insufficient time or information to make specific claim estimates and for a large number of minor physical damage claims that once reported are quickly settled. We establish liability case loss estimates, which include loss adjustment expenses, once the facts and merits of the claim are evaluated.
BH Primary’s liabilities for unpaid losses and loss adjustment expenses primarily derive from medical professional liability and workers’ compensation and other casualty insurance, including commercial auto and general liability insurance. Incurred and paid losses and ALAE are summarized by accident year in the following tables, disaggregated by medical professional liability coverages and workers’ compensation and other casualty coverages. IBNR and case development liabilities are as of December 31, 2019. The cumulative number of reported claims reflects the number of individual claimants and includes claims that ultimately resulted in no liability or payment. Dollars are in millions.
We estimate the ultimate expected incurred losses and loss adjustment expenses for medical professional claim liabilities using commonly accepted actuarial methodologies such as the paid and incurred development method, Bornhuetter-Ferguson based methods, hindsight outstanding severity method, trended severity method and trended pure premium method. These methodologies produce loss estimates from which we determine our best estimate. Periodically, we study developments in older accident years and adjust initial loss estimates to reflect recent development based upon claim age, coverage and litigation experience.
Our claims liabilities are principally a function of reported losses from ceding companies, case development and IBNR liability estimates. Case loss estimates are reported under our contracts either individually or in bulk as provided under the terms of the contracts. We may independently evaluate case losses reported by the ceding company, and if deemed appropriate, we may establish case liabilities based on our estimates.
Estimated IBNR liabilities are affected by expected case loss emergence patterns and expected loss ratios, which are evaluated as groups of contracts with similar exposures or on a contract-by-contract basis. Case and IBNR liability estimates for major catastrophe events are generally based on a per-contract assessment of the ultimate cost associated with the individual loss event. Claim count data is not provided consistently by ceding companies under our contracts or is otherwise considered unreliable.
Incurred and paid losses and ALAE of BHRG are disaggregated based on losses that are expected to have shorter claim-tails (property) and losses expected to have longer claim-tails (casualty). Under certain contracts, the coverage can apply to multiple lines of business written by the ceding company, whether property, casualty or combined, and the ceding company may not report loss data by such lines consistently, if at all. In those instances, we allocated losses to property and casualty coverages based on internal estimates. BHRG’s disaggregated incurred and paid losses and ALAE are summarized by accident year, net of reinsurance. IBNR and case development liabilities are as of December 31, 2019. Dollars are in millions.
In the first quarter of 2017, we entered into an agreement with various subsidiaries of American International Group, Inc. (collectively, “AIG”) to indemnify AIG for 80% of up to $25 billion of losses and allocated loss adjustment expenses in excess of $25 billion retained by AIG, with respect to certain commercial insurance loss events occurring prior to 2016. At the inception of the contract, we recorded premiums earned of $10.2 billion, and we also recorded a liability for unpaid losses and loss adjustment expenses of $16.4 billion and a deferred charge reinsurance assumed asset of $6.2 billion.
Incurred losses and loss adjustment expenses related to contracts written in prior years were $1,188 million in 2019, $919 million in 2018 and $458 million in 2017, which included recurring amortization of deferred charges and the effect of changes in the timing and amount of expected future loss payments.
Notes payable and other borrowings are summarized below (in millions). The weighted average interest rates and maturity date ranges shown in the following tables are based on borrowings as of December 31, 2019.
Borrowings of BHFC, a wholly-owned finance subsidiary of Berkshire, consist of senior unsecured notes used to fund manufactured housing loans originated or acquired and equipment held for lease of certain subsidiaries. During 2019, BHFC repaid $3.95 billion of maturing senior notes. In 2019, BHFC issued $2.0 billion of 4.25% senior notes due in 2049 and £1.75 billion of senior notes consisting of £1.0 billion of 2.375% senior notes due in 2039 and £750 million of 2.625% senior notes due in 2059. Such borrowings are fully and unconditionally guaranteed by Berkshire.
In addition to BHFC borrowings, at December 31, 2019, Berkshire has guaranteed approximately $1.2 billion of other subsidiary borrowings. Generally, Berkshire’s guarantee of a subsidiary’s debt obligation is an absolute, unconditional and irrevocable guarantee for the full and prompt payment when due of all payment obligations.
BHE subsidiary debt represents amounts issued pursuant to separate financing agreements. Substantially all of the assets of certain BHE subsidiaries are, or may be, pledged or encumbered to support or otherwise secure debt. These borrowing arrangements generally contain various covenants, including covenants which pertain to leverage ratios, interest coverage ratios and/or debt service coverage ratios. During 2019, BHE and its subsidiaries issued approximately $4.6 billion of long-term debt, with maturity dates ranging from 2029 to 2059 and with a weighted average interest rate of 3.6%. In January 2020, a BHE subsidiary issued $725 million of term debt consisting of $425 million of 2.4% notes due in 2030 and $300 million of 3.125% notes due in 2050.
In 2017, upon the enactment of the TCJA, we recorded a reduction in our deferred income tax liabilities of approximately $35.6 billion for the effect of the reduction in the U.S. statutory income tax rate. As a result, we recorded an income tax benefit of approximately $29.6 billion and we increased regulatory liabilities of our regulated utility subsidiaries by approximately $6.0 billion for the portion of the deferred income tax liability reduction that we will be required to, effectively, refund to customers in the rate setting process. We also recognized an income tax charge of approximately $1.4 billion with respect to the deemed repatriation of the accumulated undistributed post-1986 earnings of our foreign subsidiaries. Thus, upon the enactment of the TCJA, we included a net income tax benefit in our 2017 earnings of approximately $28.2 billion. In 2018, we reduced our estimate of the income taxes on the deemed repatriation of earnings of foreign subsidiaries and recognized additional deferred income tax rate change effects.
Income tax expense reflected in our Consolidated Statements of Earnings for each of the three years ending December 31, 2019 is as follows (in millions).
We file income tax returns in the United States and in state, local and foreign jurisdictions. We have settled income tax liabilities with the U.S. federal taxing authority (“IRS”) for tax years through 2011. The IRS is auditing Berkshire’s consolidated U.S. federal income tax returns for the 2012 through 2016 tax years. We are also under audit or subject to audit with respect to income taxes in many state and foreign jurisdictions. It is reasonably possible that certain of these income tax examinations will be settled in 2020. We currently do not believe that the outcome of unresolved issues or claims will be material to our Consolidated Financial Statements.
At December 31, 2019 and 2018, net unrecognized tax benefits were $952 million and $549 million, respectively. Included in the balance at December 31, 2019, were $795 million of tax positions that, if recognized, would impact the effective tax rate. The remaining balance in net unrecognized tax benefits principally relates to tax positions where the ultimate recognition is highly certain but there is uncertainty about the timing of recognition. Because of the impact of deferred income tax accounting, these positions, when recognized, would not affect the annual effective income tax rate. In 2019, we recorded income tax expense of $377 million for uncertain tax positions related to investments by a subsidiary in certain tax equity investment funds that generated income tax benefits from 2015 through 2018. We now believe that it is more likely than not those income tax benefits are not valid. As of December 31, 2019, we do not expect any material increases to the estimated amount of unrecognized tax benefits in the next twelve months.
Combined shareholders’ equity of U.S. based insurance subsidiaries determined pursuant to statutory accounting rules (Surplus as Regards Policyholders) was approximately $216 billion at December 31, 2019 and $162 billion at December 31, 2018. Statutory surplus differs from the corresponding amount based on GAAP due to differences in accounting for certain assets and liabilities. For instance, deferred charges reinsurance assumed, deferred policy acquisition costs, unrealized gains on certain investments and related deferred income taxes are recognized for GAAP but not for statutory reporting purposes. In addition, the carrying values of certain assets, such as goodwill and the carrying values of non-insurance entities owned by our insurance subsidiaries, are not fully recognized for statutory reporting purposes.
Reconciliations of assets and liabilities measured and carried at fair value on a recurring basis with the use of significant unobservable inputs (Level 3) for each of the three years ending December 31, 2019 follow (in millions).
We acquired investments in Occidental Cumulative Perpetual Preferred Stock (“Occidental Preferred”) and Occidental common stock warrants in August 2019 at an aggregate cost of $10 billion. We currently consider the fair value measurements to contain Level 3 inputs. See Note 4. We acquired preferred stock and common stock warrants of Bank of America Corporation (“BAC”) in 2011. We exercised the BAC warrants to acquire BAC common stock in August 2017. As payment of the cost to acquire the BAC common stock, we surrendered substantially all of the BAC preferred stock. Additionally, in December 2017, Restaurant Brands International Inc. (“RBI”) redeemed a $3 billion private placement security that we acquired in 2014. During 2017, we concluded the Level 3 inputs used in the previous fair value determinations of the BAC warrants, BAC preferred stock and RBI investments were not significant and we transferred these measurements from Level 3 to Level 2.
Quantitative information as of December 31, 2019, with respect to assets and liabilities measured and carried at fair value on a recurring basis with the use of significant unobservable inputs (Level 3) follows (in millions).
On January 1, 2018, we adopted ASC 606 “Revenues from Contracts with Customers.” Under ASC 606, revenues are recognized when a good or service is transferred to a customer. A good or service is transferred when or as the customer obtains control of that good or service. Revenues are based on the consideration we expect to receive in connection with our promises to deliver goods and services to our customers.
The following tables summarize customer contract revenues disaggregated by reportable segment and the source of the revenue for the years ended December 31, 2019 and 2018 (in millions). Other revenues included in consolidated revenues were primarily insurance premiums earned, interest, dividend and other investment income and leasing revenues which are not within the scope of ASC 606.
Several of our subsidiaries sponsor defined benefit pension plans covering certain employees. Benefits under the plans are generally based on years of service and compensation, although benefits under certain plans are based on years of service and fixed benefit rates. Our subsidiaries may make contributions to the plans to meet regulatory requirements and may also make discretionary contributions. The components of our net periodic pension expense for each of the three years ending December 31, 2019 were as follows (in millions).
Weighted average assumptions used in determining PBOs and net periodic pension expense were as follows.
Benefit payments expected over the next ten years are as follows (in millions): 2020 - $1,059; 2021 - $997; 2022 - $1,003; 2023 - $1,009; 2024 - $1,017; and 2025 to 2029 - $5,035. Sponsoring subsidiaries expect to contribute $191 million to defined benefit pension plans in 2020.
Fair value measurements of plan assets as of December 31, 2019 and 2018 follow (in millions).
Refer to Note 20 for a discussion of the three levels in the hierarchy of fair values. Plan assets are generally invested with the long-term objective of producing earnings to adequately cover expected benefit obligations, while assuming a prudent level of risk. Allocations may change as a result of changing market conditions and investment opportunities. The expected rates of return on plan assets reflect subjective assessments of expected invested asset returns over a period of several years. Generally, past investment returns are not given significant consideration when establishing assumptions for expected long-term rates of return on plan assets. Actual experience will differ from the assumed rates.
Our operating businesses include a large and diverse group of insurance, manufacturing, service and retailing businesses. We organize our reportable business segments in a manner that reflects how management views those business activities. Certain businesses are grouped together for segment reporting based upon similar products or product lines, marketing, selling and distribution characteristics, even though those business units are operated under separate local management.