In the ordinary course of business, BNSF makes significant capital investments to expand and improve its railroad network. BNSF incurs significant costs in repairing and maintaining its properties. In 2017, BNSF recorded approximately $2 billion in repairs and maintenance expense.
BHE’s energy properties consist of the physical assets necessary to support its electricity and natural gas businesses. Properties of BHE’s electricity businesses include electric generation, transmission and distribution facilities, as well as coal mining assets that support certain of BHE’s electric generating facilities. Properties of BHE’s natural gas businesses include natural gas distribution facilities, interstate pipelines, storage facilities, compressor stations and meter stations. The transmission and distribution assets are primarily within each of BHE’s utility service territories. In addition to these physical assets, BHE has rights-of-way, mineral rights and water rights that enable BHE to utilize its facilities. Pursuant to separate financing agreements, a majority of these properties are pledged or encumbered to support or otherwise provide the security for the related subsidiary debt. BHE or its affiliates own or have interests in the following types of electric generating facilities at December 31, 2017:
As of December 31, 2017, BHE’s subsidiaries also have electric generating facilities that are under construction in Iowa, Illinois and Minnesota having total Facility Net Capacity and Net Owned Capacity of 1,902 MW.
PacifiCorp, MEC and NV Energy own electric transmission and distribution systems, including approximately 24,800 miles of transmission lines and approximately 1,690 substations, gas distribution facilities, including approximately 26,800 miles of gas mains and service lines, and an estimated 39 million tons of recoverable coal reserves in mines owned or leased in Wyoming and Colorado.
(1) Includes after-tax investment and derivative gains/losses of $1.4 billion in 2017, $6.5 billion in 2016, $6.7 billion in 2015, $3.3 billion in 2014 and $4.3 billion in 2013. Net earnings in 2017 includes a one-time net benefit of $29.1 billion attributable to the enactment of the Tax Cuts and Jobs Act of 2017.
(3) Beginning in 2017, discounting of certain workers’ compensation claim liabilities for financial reporting purposes was discontinued. The effect of the change was immaterial to the Consolidated Statements of Earnings from 2013 through 2016, and such amounts were not restated. The after-tax net discount as of December 31, 2016 of $931 million was charged to retained earnings as of the earliest period presented. Accordingly, shareholders’ equity and shareholders’ equity per Class A equivalent common share for the years 2013-2016 have been restated from the amounts previously reported.
After-tax earnings of our railroad business in 2017 were $4.0 billion, an increase of 10.9% compared to 2016, reflecting increased unit volume. Our railroad business generated lower net earnings in 2016 compared to 2015, primarily due to a 5.0% decline in unit volume. After-tax earnings of our utility and energy business in 2017 declined $204 million compared to 2016. Earnings in 2017 were negatively affected by losses from the prepayment of certain long-term debt. After-tax earnings of our utilities and energy businesses increased in 2016 compared to 2015, attributable to increased pre-tax earnings and a lower effective income tax rate.
After-tax earnings of our manufacturing, service and retailing businesses in 2017 were $6.2 billion, an increase of 10.2% compared to 2016. Earnings in 2017 reflected comparatively higher earnings from several of our larger operations and the impact of businesses acquired in 2016 and 2017. After-tax earnings in 2016 of our manufacturing, service and retailing businesses increased compared to 2015, primarily due to earnings from Precision Castparts, which was acquired on January 29, 2016, partly offset by comparatively lower overall earnings from the other businesses within this group.
After-tax unrealized gains in 2017 related to our investments in equity securities included in other comprehensive income were approximately $19 billion. Beginning in 2018, unrealized gains and losses on equity securities will be included in net earnings due to a new accounting standard. We believe that investment and derivative gains/losses, whether realized from sales or unrealized from changes in market prices, are often meaningless in terms of understanding our reported results or evaluating our periodic economic performance. Investment and derivative gains and losses have caused and will continue to cause significant volatility in our earnings.
The timing and amount of catastrophe losses can produce significant volatility in our periodic underwriting results, particularly with respect to our reinsurance businesses. Generally, we consider pre-tax catastrophe losses in excess of $100 million from a current year event as significant, and we had six such events in 2017. There were no significant events in either 2016 or 2015. Changes in estimates for unpaid losses and loss adjustment expenses, including amounts established for occurrences in prior years can also significantly affect our periodic underwriting results. Unpaid loss estimates, including estimates under retroactive reinsurance contracts as of December 31, 2017 were approximately $104 billion. These estimates will be revised upward or downward in future periods, which could produce significant decreases or increases to pre-tax earnings. Our periodic underwriting results may also include significant foreign currency transaction gains and losses arising from the changes in the valuation of non-U.S. Dollar denominated reinsurance liabilities of our U.S. based insurance subsidiaries due to foreign currency exchange rate fluctuations. Foreign currency exchange rates can be volatile and the resulting impact on our underwriting earnings can be relatively significant.
GEICO writes private passenger automobile insurance, offering coverages to insureds in all 50 states and the District of Columbia. GEICO markets its policies mainly by direct response methods where most customers apply for coverage directly to the company via the Internet or over the telephone. A summary of GEICO’s underwriting results follows (dollars in millions).
Premiums written in 2017 were $30.5 billion, an increase of 16.1% compared to 2016. Premiums earned in 2017 were $29.4 billion, exceeding 2016 by approximately $4.0 billion (15.5%). During 2017, our voluntary auto policies-in-force grew approximately 8.6% and premiums per auto policy increased 6.9%. The increase in average premiums per policy was attributable to rate increases, coverage changes and changes in state and risk mix. Voluntary auto new business sales in 2017 increased 10.5% compared to 2016. Voluntary auto policies-in-force increased approximately 1,276,000 during 2017.
Premiums written in 2016 increased 12.5% to $26.3 billion and premiums earned increased approximately $2.8 billion (12.2%) to $25.5 billion, compared to 2015. These increases reflected voluntary auto policies-in-force growth of 7% and increased average premiums per auto policy. Voluntary auto new business sales in 2016 increased 10.9% compared to the prior year. Voluntary auto new business growth accelerated over the last half of 2016 and, for the year, voluntary auto policies-in-force increased 974,000.
We offer excess-of-loss and quota-share reinsurance coverages on property and casualty risks and life and health reinsurance to insurers and reinsurers worldwide through several legal entities, led by National Indemnity Company (“NICO Group”), Berkshire Hathaway Life Insurance Company of Nebraska (“BHLN Group”), and General Reinsurance Corporation, General Reinsurance AG and General Re Life Corporation (collectively, “General Re Group”). We also periodically assume property and casualty risks under retroactive reinsurance contracts written through NICO. In addition, the BHLN Group writes periodic payment annuity contracts.
With the exception of our retroactive reinsurance and periodic payment annuity businesses, we strive to generate pre-tax underwriting profits in all product lines. Time-value-of-money concepts are important elements in establishing prices for our retroactive reinsurance and periodic payment annuity businesses due to the expected long durations of the liabilities. We expect to incur pre-tax underwriting losses from such businesses, primarily through deferred charge amortization and discount accretion charges. Premiums received at inception under these contracts are often large, which are then available for investment. A summary of the premiums and pre-tax underwriting results of our reinsurers follows (in millions).
On a combined basis, our property/casualty reinsurance business sustained pre-tax underwriting losses of $1.6 billion in 2017. We incurred estimated losses of approximately $2.4 billion in 2017 from several significant catastrophe loss events occurring during the year including hurricanes Harvey, Irma and Maria, an earthquake in Mexico, a cyclone in Australia and wildfires in California. There were no significant catastrophe loss events in 2016 or 2015.
Gross unpaid losses assumed under retroactive reinsurance contracts were approximately $42.9 billion at December 31, 2017 and $25.0 billion at December 31, 2016. Unamortized deferred charge assets related to such reinsurance contracts were approximately $15.3 billion at December 31, 2017 and $8.0 billion at December 31, 2016. The increases in unpaid losses and deferred charges were predominantly attributable to the AIG Agreement. Our deferred charge asset balances will be amortized as charges to pre-tax earnings over the expected remaining claims settlement period.
General Re Group’s premiums earned increased $238 million (8%) in 2017 compared to 2016, which reflected growth in the U.S., Asia, Europe and Australia markets. Premiums earned declined $102 million (3%) in 2016 compared to 2015, primarily attributable to foreign currency translation effects and lower volume in Canada, partly offset by increased volume in the United Kingdom and Asia markets. Approximately 65% of BHLN Group’s premiums earned in each of the past three years was derived primarily from a single yearly renewable term life agreement in the U.S. with a major reinsurer.
The General Re Group produced pre-tax underwriting losses of $369 million in 2017, gains of $73 million in 2016 and losses of $18 million in 2015. Pre-tax underwriting losses in 2017 included losses of approximately $450 million from the run-off of our U.S. long-term care business driven by discount rate reductions and changes in other actuarial assumptions in the fourth quarter, which increased our estimated benefit liabilities. In 2016, underwriting results reflected increased underwriting gains from our international life business, lower claim severity in North America, and lower losses from changes in actuarial assumptions related to the long-term care business as compared to 2015.
BHLN Group’s pre-tax underwriting results included pre-tax gains of $256 million in 2017, $231 million in 2016 and $193 million in 2015 from the run-off of variable annuity business (reinsurance contracts that provide guarantees on closed blocks of variable annuity business). Periodic underwriting results from this business reflect changes in remaining liabilities for guaranteed benefits, resulting from changes in securities markets and interest rates and from the periodic amortization of expected profit margins. Periodic underwriting results from these variable annuity contracts can be volatile, reflecting the volatility of securities markets, interest rates and foreign currency exchange rates. Estimated liabilities for variable annuity guarantees were approximately $1.8 billion at December 31, 2017 and $2.1 billion at December 31, 2016. BHLN Group’s life reinsurance business produced pre-tax gains of $61 million in 2017 and $1 million in 2016 and losses of $45 million in 2015.
Periodic payment annuity premiums earned declined $184 million (17%) in 2017 compared to 2016, due to lower volumes. Premiums earned decreased $204 million (16%) in 2016 compared to 2015. Premiums earned in 2015 included $425 million from a single reinsurance contract.
Certain periodic payment annuity liabilities are denominated in foreign currencies, primarily the GBP. Underwriting results included pre-tax losses of $190 million in 2017 and pre-tax gains of $313 million in 2016 and $103 million in 2015 associated with the re-measurement of such liabilities due to changes in exchange rates.
The Berkshire Hathaway Primary Group (“BH Primary”) consists of a wide variety of independently managed insurance underwriting businesses that primarily provide a variety of commercial insurance solutions, including healthcare malpractice, workers’ compensation, automobile, general liability, property and various specialty coverages for small, medium and large clients. The largest of these insurers include Berkshire Hathaway Specialty Insurance (“BH Specialty”), Berkshire Hathaway Homestate Companies (“BHHC”), MedPro Group, Berkshire Hathaway GUARD Insurance Companies (“GUARD”), and National Indemnity Company (“NICO Primary”). Other BH Primary insurers include U.S. Liability Insurance Company, Applied Underwriters and Central States Indemnity Company. A summary of BH Primary underwriting results follows (dollars in millions).
A summary of net investment income generated from investments held by our insurance operations follows (in millions).
Pre-tax investment income increased $420 million (9%) in 2017 compared to 2016, attributable to an increase in interest income which reflected higher interest rates on short-term investments and increased other investment income. Pre-tax investment income in 2016 declined $68 million (1.5%) compared to 2015, reflecting lower dividend income attributable to portfolio changes, partly offset by an increase in interest income. We continue to hold significant amounts of cash and cash equivalents and U.S. Treasury Bills earning low yields. We believe that maintaining ample liquidity is paramount and we insist on safety over yield with respect to such balances.
Dividend income in 2017 was relatively unchanged compared to 2016 reflecting increased dividend rates and increased overall investment levels, offset by the impact of the conversion of our $3 billion investment in Dow Chemical Company (“Dow”) 8.5% preferred stock into Dow common stock at the end of 2016. Prior to its conversion, we received dividends of $255 million per annum. In December 2017, RBI redeemed our $3 billion investment in 9% RBI Preferred stock investment, which will negatively affect investment income in 2018 when compared to 2017.
Invested assets of our insurance businesses derive from shareholder capital, including reinvested earnings, and from net liabilities under insurance 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 benefit liabilities, unearned premiums and other liabilities due to policyholders, less premium and reinsurance receivables, deferred charges assumed under retroactive reinsurance contracts and deferred policy acquisition costs. Float approximated $114 billion at December 31, 2017 and $91 billion at December 31, 2016. The increase in float in 2017 reflected increases in unpaid losses and loss adjustment expenses, including liabilities assumed under retroactive reinsurance contracts written in 2017 and estimated liabilities related to catastrophe events, and overall growth of our insurance operations, partly offset by an increase in deferred charges on retroactive reinsurance contracts. Our pre-tax underwriting losses were approximately $3.2 billion in 2017 and our average cost of float was approximately 3.0%. During the prior fourteen years, the cost of float was negative as our insurance business generated pre-tax underwriting gains in each year.
A summary of cash and investments held in our insurance businesses as of December 31, 2017 and 2016 follows (in millions).
Fixed maturity investments as of December 31, 2017 were as follows (in millions).
Consolidated revenues were $21.4 billion in 2017, representing an increase of $1.6 billion (7.9%) versus 2016. Pre-tax earnings increased 11.2% in 2017 compared to 2016. During 2017, consolidated revenues reflected a 2.4% comparative increase in average revenue per car/unit and a 5.3% increase in volume. Our volume was 10.3 million cars/units in 2017 compared to 9.8 million in 2016. Our overall volume growth moderated in the second half of the year compared to the growth experienced in the first half of the year. While we believe the general economy will continue to be strong in 2018, we expect a slower pace of volume growth. The increase in average revenue per car/unit was primarily attributable to higher fuel surcharge revenue, increased rates per car/unit and business mix changes.
Revenues from coal increased 13.7% to $3.8 billion in 2017 compared to 2016. This increase reflected higher average revenue per car/unit as well as 6.3% higher volumes. The volume increases in 2017 were due to continued effects of higher natural gas prices, which led to increased utility coal usage. This was partially offset by the effects of unit retirements at coal generating facilities, increased renewable generation and coal inventory adjustments at customer facilities.
Operating expenses were $14.0 billion in 2017, an increase of $899 million (6.8%) compared to 2016. Our ratio of operating expenses to revenues decreased 0.6 percentage points to 65.7% in 2017 versus 2016. Compensation and benefits expenses increased $200 million (4.2%) compared to 2016. The increase was primarily due to higher health and welfare costs and volume-related increases, partially offset by lower headcount. Fuel expenses increased $584 million (30.2%) compared to 2016 primarily due to higher average fuel prices and increased volumes.
Depreciation and amortization expense increased $224 million (10.5%) compared to 2016 due to a larger base of depreciable assets in service. Equipment rents, materials and other expense declined $205 million (10.8%) compared to 2016. These declines resulted from the impact of the enactment of the TCJA on an equity method subsidiary, as well as lower personal injury and casualty related costs.
Revenues from consumer products were $6.5 billion in 2016, a decline of 0.9% from 2015, reflecting lower average revenue per car/unit, partially offset by volume increases of 1%. Consumer products volumes increased primarily due to higher domestic intermodal volumes and the addition of a new automotive customer, partially offset by lower international intermodal volumes.
Revenues from agricultural products remained relatively unchanged in 2016 at $4.2 billion compared to 2015. Agricultural product volume increased by 6.3%, primarily due to higher corn, soybean and wheat exports, which offset a decrease in average revenue per car/unit.
Revenues from coal decreased 26.9% to $3.4 billion in 2016 compared to 2015, reflecting a 21.1% decline in volumes and a lower average rate per car/unit. Demand for coal declined due to reduced energy consumption, coal unit retirements, high coal stockpiles and low natural gas prices.
PacifiCorp operates a regulated electric utility in portions of several Western states, including Utah, Oregon and Wyoming. Revenues increased 1% in 2017 compared to 2016. Wholesale and other revenues increased, reflecting higher volumes and average rates, and retail revenues decreased slightly, attributable to lower average rates, partly offset by higher volumes. Pre-tax earnings increased $26 million (2%) in 2017 as compared to 2016. The increase in earnings reflected higher gross margins (operating revenues less cost of sales), lower operations and maintenance expenses, and increased depreciation and amortization attributable to additional plant in-service.
MEC operates a regulated electric and natural gas utility primarily in Iowa and Illinois. Revenues increased $238 million (9%) in 2017 as compared to 2016, primarily attributable to higher electric operating revenues ($123 million) and increased natural gas operating revenues ($82 million). Our retail electric revenues increased $84 million in 2017 compared to 2016, primarily attributable to higher recoveries through bill riders (which are substantially offset by increases in costs of sales and other expenses) and from non-weather usage and growth and rate factors, partially offset by the unfavorable impact of milder temperatures in 2017. Our wholesale electric and other revenues increased $39 million in 2017 versus 2016, attributable to comparative increases in volumes, average rates and transmission fees. The natural gas operating revenues increase was primarily due to higher average per-unit costs of gas sold, which was offset by an increase in cost of sales. Pre-tax earnings declined $20 million (5%) in 2017 compared to 2016, reflecting increased depreciation, maintenance and other operating expenses and interest expense and debt extinguishment costs, partially offset by comparative increases in electric gross sales margins of $76 million.
Revenues increased $23 million (2%) in 2017 compared to 2016. Northern Natural Gas produced higher transportation revenues and higher gas sales, primarily from system balancing activities (largely offset in cost of sales), which were partly offset by lower transportation revenues at Kern River. Pre-tax earnings increased $33 million (8%) in 2017 compared to 2016. The increase was primarily due to the increase in transportation revenues and a reduction in expenses and regulatory liabilities related to the impact of an alternative rate structure approved by Kern River’s regulators in the first quarter of 2017, partially offset by higher operating expenses.
Revenues declined $98 million (4.2%) in 2016 compared to 2015. The decline in comparative revenues was principally attributable to lower revenues from AltaLink and from our unregulated retail services business. AltaLink’s revenue decline reflected the impact of the aforementioned regulatory decision by AltaLink’s regulator. Pre-tax earnings declined $17 million (4.3%) compared to 2015, primarily due to lower earnings from our renewable energy businesses, primarily due to higher depreciation expense from additional assets placed in service.
Revenues increased 23% in 2017 compared to 2016, primarily due to business acquisitions and an increase in average home sales prices. Pre-tax earnings decreased 2% in 2017 as compared to 2016. Earnings in 2017 included increased earnings from franchise businesses, partially offset by lower earnings from brokerage businesses, primarily due to higher operating expenses.
* Excludes certain acquisition accounting expenses, which primarily related to the amortization of identified intangible assets recorded in connection with our business acquisitions. The after-tax acquisition accounting expenses excluded from earnings above were $896 million in 2017, $771 million in 2016 and $476 million in 2015. These expenses are included in “Other” in the summary of earnings on page K-32 and in the “Other” earnings section on page K-51.
Pre-tax earnings of our industrial products businesses in 2017 increased $158 million (3.8%) compared to 2016. Overall, pre-tax earnings as a percentage of revenues were 16.6% in 2017 and 17.0% in 2016.
Revenues increased $456 million (4.4%) in 2016 compared to 2015, reflecting volume-driven revenue increases by MiTek, Johns Manville, Acme and Shaw, as well as revenues from bolt-on acquisitions by Shaw and MiTek. The revenue increase reflected increased unit sales across several product categories, partly offset by lower average sales prices and changes in product mix. Pre-tax earnings increased $11 million (0.9%) in 2016 compared to 2015. The favorable effects of increased sales volume and lower manufacturing costs in 2016 attributable to deflation in certain commodity unit costs, were substantially offset by increased charges for asset impairments, pension settlements and environmental claims.
Consumer products revenues were approximately $12.1 billion in 2017, an increase of $1.1 billion (10%) compared to 2016, driven by comparative revenue increases from Duracell and Forest River. Duracell’s revenues increased 25.3% in 2017 compared to the ten-month post-acquisition period in 2016. Forest River’s revenues increased 13.7% in 2017 compared to 2016, reflecting a 13.5% comparative increase in units sold. Apparel and footwear revenues were approximately $4.2 billion in 2017, an increase of 1.6% compared to 2016.
Our service and retailing businesses are comprised of a large group of independently managed businesses engaged in a variety of activities. A summary of revenues and pre-tax earnings of these operations follows (in millions).
Pre-tax earnings were $1.2 billion in 2016, relatively unchanged versus 2015, reflecting increased earnings from NetJets and lower earnings from our newspaper operations. NetJets’ earnings increased 19%, primarily due to lower subcontracting expense and a decline in losses from aircraft impairments and dispositions, partly offset by increases in depreciation and restructuring charges and reduced aircraft sales margins. TTI’s earnings were relatively unchanged, as changes in geographic sales mix and price competition produced lower gross margin rates, substantially offsetting the aforementioned revenue increase.
Retailing revenues increased $1.8 billion (13.8%) in 2016 to $15.1 billion as compared to 2015. The acquisitions of BHA and Louis accounted for approximately $1.6 billion of the comparative increase. Home furnishings’ revenues increased $227 million (7.8%), primarily due to new stores opened in 2015 by Nebraska Furniture Mart and Jordan’s, as well as modest organic growth. Pre-tax earnings increased $95 million (16.8%) in 2016 compared to 2015. The increase reflected the impact of the BHA and Louis acquisitions and increased earnings from most of our other retailers, which benefitted from a combination of revenue increases and cost savings initiatives.
McLane’s revenues were approximately $49.8 billion in 2017, an increase of 3.5% compared to 2016. The increase in revenues was primarily due to a 4.7% increase in grocery business sales. Pre-tax earnings in 2017 were $299 million, a decrease of $132 million (31%) compared to 2016. The earnings decline reflected a 57% decline in earnings from our grocery operations, partly offset by a $39 million increase in gains from asset sales. Throughout 2017, significant pricing pressures and an increasingly competitive business environment negatively affected our operating results, particularly with respect to the grocery business. These conditions contributed to declining gross margin rates, which together with increases in fuel, depreciation and certain other operating expenses produced a 29 basis point decline in our consolidated operating margin rate (ratio of pre-tax earnings to revenues) in 2017 compared to 2016. Our grocery and foodservice businesses will likely continue to be subject to intense competition in 2018.
Pre-tax earnings declined $90 million (9%) in 2017 compared to 2016. Earnings as a percentage of revenues decreased from 36.2% in 2016 to 33.3% in 2017. These decreases reflected the aforementioned lease revenue declines and higher railcar repair, storage costs and depreciation expense. Significant components of our operating costs, such as depreciation expense, do not vary proportionately to revenue changes and therefore changes in revenues can produce a disproportionate effect on earnings. In response to weakened demand in the railcar and oil and gas industries, we undertook overhead cost reduction initiatives.
Pre-tax earnings increased $50 million (5.5%) in 2016 compared to 2015. The increase was primarily attributable to revenue growth and lower depreciation rates on certain tank car assets, partially offset by higher repair costs and interest expense on borrowings from a Berkshire financing subsidiary.
Other finance activities include CORT furniture leasing, our share of the earnings of a commercial mortgage servicing business (“Berkadia”) in which we own a 50% interest, and interest and dividends from loans and equity security investments. Pre-tax earnings were $424 million in 2017, relatively unchanged from 2016, and reflected lower earnings from CORT, partly offset by slightly higher interest and finance income. Other earnings also includes income from interest rate spreads charged on borrowings by a Berkshire financing subsidiary that are used to finance installment loans made by Clayton Homes and assets held for lease by UTLX. Other earnings in 2016 were $427 million, a decrease of $44 million compared to 2015. The decline reflected lower earnings from investment securities, partly offset by increased earnings from CORT and Berkadia.
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 we do not consider investment gains and losses as necessarily meaningful or useful in evaluating our periodic results, we provide information to explain the nature of such gains and losses when reflected in our earnings.
Pre-tax investment gains were approximately $1.4 billion in 2017, $7.6 billion in 2016 and $9.4 billion in 2015. Investment gains in 2016 included $4.2 billion from the redemptions of our Wrigley and Kraft Heinz preferred stock investments and from the sales of Dow Chemical common stock that was received upon the conversion of our Dow Chemical preferred stock investment. We also realized pre-tax gains of $1.1 billion in connection with the tax-free exchange of our shares of P&G common stock for 100% of the common stock of Duracell. Income tax expense allocated to investment gains in 2016 included a benefit from the reduction of certain deferred income tax liabilities in connection with the exchange of P&G common stock for Duracell. Our after-tax gain from this transaction was approximately $1.9 billion. Pre-tax investment gains in 2015 included non-cash holding gains related to our investment in Kraft Heinz of $6.8 billion. In connection with its acquisition of Kraft Foods on July 2, 2015, Kraft Heinz issued new shares of its common stock in exchange for the outstanding shares of Kraft Foods common stock, thus reducing Berkshire’s ownership interest in Kraft Heinz by approximately 50%. Under the equity method of accounting, such transactions are treated by the investor as if it sold a portion of its interests.
Derivative gains/losses primarily represented the changes in fair value of our equity index put option contract liabilities. The periodic changes in the fair values of these liabilities are recorded in earnings and can be significant, reflecting the volatility of underlying equity markets and the changes in the inputs used to measure such liabilities.
Changes in the values of our equity index put option contract liabilities produced pre-tax gains of $718 million in 2017, $662 million in 2016 and $1.0 billion in 2015. The gains in each year reflected the effects of shorter remaining contract durations and overall higher index values.
In July 2016, our last credit default contract was terminated by mutual agreement with the counterparty and we paid the counterparty $195 million. This contract produced pre-tax earnings of $89 million in 2016 and pre-tax losses of $34 million in 2015.
Our after-tax Kraft Heinz earnings includes Berkshire’s share of Kraft Heinz’s earnings attributable to common shareholders determined pursuant to the equity method. Our after-tax Kraft Heinz earnings in 2017 excludes approximately $1.1 billion from the net effects of the TCJA on Kraft Heinz’s net earnings. Kraft Heinz earnings included pre-tax dividend income from our preferred stock investment of $180 million in 2016 and $852 million in 2015. Kraft Heinz redeemed the preferred stock in June 2016.
BNSF’s outstanding debt approximated $22.5 billion as of December 31, 2017, an increase of $455 million since December 31, 2016. In March 2017, BNSF issued $1.25 billion of senior unsecured debentures with $500 million due in 2027 and $750 million due in 2047. BNSF debentures of $650 million par amount will mature in March 2018. Outstanding borrowings of BHE and its subsidiaries were approximately $39.7 billion at December 31, 2017, an increase of $2.6 billion since December 31, 2016. During 2017, BHE and its subsidiaries issued approximately $1.9 billion of debt with maturity dates ranging from 2022 to 2057. In January 2018, BHE issued senior unsecured debt of $2.2 billion with maturities ranging from 2021 to 2048. The proceeds from these borrowings were used to repay certain short-term borrowings and for other general corporate purposes. Within the next twelve months, approximately $3.4 billion of BHE and subsidiary term debt will mature. Berkshire does not guarantee the repayment of debt issued by BNSF, BHE or any of their subsidiaries and is not committed to provide capital to support BNSF, BHE or any of their subsidiaries.
Finance and financial products assets were approximately $41.9 billion as of December 31, 2017, a decrease of $175 million from December 31, 2016. Finance assets consist primarily of loans and finance receivables, various types of property held for lease, cash, cash equivalents and U.S. Treasury Bills. Finance and financial products liabilities declined $3.0 billion to approximately $16.7 billion as of December 31, 2017. The decrease was primarily due to a reduction in borrowings of approximately $2.3 billion, reflecting repayments of $3.6 billion, partly offset by $1.3 billion of senior unsecured notes issued in January by a wholly-owned financing subsidiary, Berkshire Hathaway Finance Corporation (“BHFC”). The new BHFC notes mature in 2019 and 2020. BHFC’s outstanding borrowings were $12.9 billion at December 31, 2017. In January 2018, $600 million par amount of BHFC senior notes matured and an additional $4.0 billion will mature over the remainder of 2018. BHFC’s senior note borrowings are used to fund loans originated and acquired by Clayton Homes and a portion of assets held for lease by our UTLX railcar leasing business. Berkshire guarantees the full and timely payment of principal and interest with respect to BHFC’s senior notes.
We are party to contracts associated with ongoing business and financing activities, which will result in cash payments to counterparties in future periods. Certain obligations included in our Consolidated Balance Sheets, such as notes payable, require future payments on contractually specified dates and in fixed and determinable amounts. Other obligations pertain to the acquisition of goods or services in the future, such as minimum rentals under operating leases and certain purchase obligations, and are not currently reflected in our financial statements. These obligations will be recognized in future periods as the goods are delivered or services are provided.
A summary of our contractual obligations as of December 31, 2017 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, 2017, GEICO’s gross unpaid losses were $18.1 billion. Claim liabilities, net of reinsurance recoverable were $17.2 billion.
Claim liability estimates for automobile liability coverages (such as bodily injury (“BI”), uninsured motorists, and personal injury protection) are more uncertain due to the longer claim-tails, so we establish additional case development estimates. As of December 31, 2017, case development liabilities averaged approximately 30% of the case reserves. We select case development factors through analysis of the overall adequacy of historical case liabilities.
For 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.
Our claim liability estimates recorded at the end of 2016 increased $517 million during 2017, which produced a corresponding decrease to pre-tax earnings. We modified the assumptions used to estimate liabilities at December 31, 2017 to reflect the most recent frequency and severity results. Future development of recorded liabilities will depend on whether actual frequency and severity are more or less than anticipated.
With respect to liabilities for BI claims, our most significant claim category, we believe it is reasonably possible that average severities will change by at least one percentage point from the severities used in establishing the recorded liabilities at December 31, 2017. We estimate that a one percentage point increase or decrease in BI severities would produce a $275 million increase or decrease in recorded liabilities, with a corresponding decrease or increase in pre-tax earnings. Many of the economic forces that would likely cause BI severity to differ from expectations would likely also cause severities for other injury coverages to differ in the same direction.
BHRG’s liabilities for unpaid losses and loss adjustment expenses derive primarily from reinsurance contracts issued through the NICO Group and the General Re Group. 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. When received, we review the information for completeness and 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.
With respect to the General Re Group, we use a variety of actuarial methodologies to establish unpaid losses and loss adjustment expenses. Certain methodologies, such as paid and incurred loss development techniques, incurred and paid loss Bornhuetter-Ferguson techniques and frequency and severity techniques, are utilized, as well as ground-up techniques when appropriate. The critical processes involved in estimating unpaid losses and loss adjustment expenses include the establishment of case liability estimates, the determination of expected loss ratios and loss reporting patterns, which drive IBNR liability estimates, and the comparison of reported activity to the expected loss reporting patterns.
For the NICO Group, we generally also establish reinsurance claim liabilities on a contract-by-contract basis determined from reported case loss estimates reported by ceding companies and IBNR liabilities that are primarily a function of an anticipated loss ratio for the contract and the reported case loss estimates. Liabilities are subsequently adjusted over time to reflect case losses reported versus expected case losses, which are used to form judgments 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 the impact of major catastrophe events as they become known.
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-policy assessment of the ultimate cost associated with the individual loss event rather than with an analysis of the historical development patterns of past losses.
In the aggregate, we reduced net losses for prior years’ occurrences by $295 million in 2017, which produced a corresponding increase in pre-tax earnings. Reported claims for prior years’ property loss events were less than anticipated and we reduced our estimated ultimate liabilities by $152 million. However, property losses incurred during any given period may be more volatile because of the effect of catastrophe and large individual property loss events.
In 2017, reported nominal losses for prior years’ workers’ compensation claims of the General Re Group were less than expected. After reevaluating expected remaining IBNR estimates, we reduced our liabilities by $160 million. An increase of ten percent in the tail of the expected loss emergence pattern and an increase of ten percent in the expected loss ratios would produce a net increase in workers’ compensation IBNR liabilities of approximately $1 billion, producing a corresponding decrease in pre-tax earnings. We believe it is reasonably possible for these assumptions to increase at these rates.
Overall industry-wide loss experience data and informed judgment are used when internal loss data is of limited reliability, such as for asbestos, environmental and latent injury liability estimates. Our combined net liabilities for such losses at December 31, 2017, were approximately $1.6 billion, which included an increase in estimated ultimate losses of approximately $145 million during 2017, which produced a corresponding reduction in pre-tax earnings. 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. In addition to the previously described methodologies, we consider “survival ratios”, which is the average net claim payments in recent years in relation to net unpaid losses, as a rough guide to reserve adequacy. Our survival ratio was approximately 15 years as of December 31, 2017.
In connection with our retroactive reinsurance contracts, we also record deferred charge assets, which at contract inception represents the excess, if any, of the estimated ultimate liability for unpaid losses over premiums. We amortize deferred charge assets, which produces charges to pre-tax earnings in future periods based on the expected timing and amount of loss payments. We also adjust deferred charge balances due to changes in the expected timing and ultimate amount of claim payments. Significant changes in such estimates may have a significant effect on unamortized deferred charge balances and the amount of periodic amortization. Based on the contracts in effect as of December 31, 2017, we currently estimate that amortization expense in 2018 will approximate $1.2 billion.
Our Consolidated Balance Sheet at December 31, 2017 included goodwill of acquired businesses of $81.3 billion. We evaluate goodwill for impairment at least annually and we conducted our most recent annual review during the fourth quarter of 2017. Our review includes determining the estimated fair values of our reporting units. There are several methods of estimating a reporting unit’s fair value, including market quotations, underlying asset and liability fair value determinations and other valuation techniques, such as discounted projected future net earnings or net cash flows and multiples of earnings. We primarily use discounted projected future earnings or cash flow methods. The key assumptions and inputs used in such methods may include forecasting revenues and expenses, operating 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 amount of a reporting unit, including goodwill, exceeds the estimated fair value, then, as required by GAAP, we estimate the fair values of the identifiable assets and liabilities of the reporting unit. The excess of the estimated fair value of the reporting unit over the estimated fair value of its net assets establishes the implied value of goodwill. The excess of the recorded amount of goodwill over the implied goodwill value is charged to earnings as an impairment loss.
We often hold our equity investments for long periods and short-term price volatility has occurred in the past and will occur in the future. We strive to maintain significant levels of shareholder capital and ample liquidity to provide a margin of safety against short-term price volatility.
The following table summarizes our equity securities and derivative contract liabilities with significant equity price risk as of December 31, 2017 and 2016 and the estimated effects of a hypothetical 30% increase and a 30% decrease in market prices as of those dates. The selected 30% hypothetical increase and decrease does not reflect the best or worst case scenario. Indeed, results from declines could be far worse due both to the nature of equity markets and the aforementioned concentrations existing in our equity investment portfolio. Dollar amounts are in millions.
We may also invest in bonds, loans or other interest rate sensitive instruments. Our strategy is to acquire or originate such instruments at prices considered appropriate relative to the perceived credit risk. We recognize and accept that credit losses may occur. We also issue debt in the ordinary course of business to fund business operations, business acquisitions and for other general purposes. We strive to maintain high credit ratings, in order to minimize the cost of our debt. We rarely utilize derivative products, such as interest rate swaps, to manage interest rate risks.
Our net assets subject to financial statement translation into U.S. Dollars are primarily in our insurance, utilities and energy and certain manufacturing and services subsidiaries. This translation related impact may be offset by gains or losses included in net earnings related to net liabilities of Berkshire and certain of its U.S. subsidiaries that are denominated in foreign currencies, due to changes in exchange rates. A summary of these gains (losses), after-tax, for each of the years ending December 31, 2017 and 2016 follows (in millions).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
* Net earnings per average equivalent Class B share outstanding are one-fifteen-hundredth of the equivalent Class A amount.
Cash and cash equivalents and Short-term investments in U.S. Treasury Bills
Cash equivalents consist of demand deposit and money market accounts and investments with maturities of three months or less when purchased. Short-term investments in U.S. Treasury Bills have remaining maturities exceeding three months at the time of purchase and are stated at amortized cost. Our aggregate investments in U.S. Treasury Bills at December 31, 2017 were $90.1 billion, which consisted of $5.7 billion included in cash and cash equivalents and $84.4 billion included in short-term investments in U.S. Treasury Bills in our Consolidated Balance Sheet.
Receivables of the insurance and other businesses are stated net of estimated allowances for uncollectible balances. Allowances for uncollectible balances are provided when it is probable counterparties or customers will be unable to pay all amounts due based on the contractual terms. Receivables are generally written off against allowances after all reasonable collection efforts are exhausted.
We carry derivative contracts in our Consolidated Balance Sheets at fair value, net of reductions permitted under master netting agreements with counterparties. The changes in fair value of derivative contracts that do not qualify as hedging instruments for financial reporting purposes are recorded in earnings or by our regulated utilities businesses as regulatory assets or liabilities, as applicable, when inclusion in regulated rates is probable.
Inventories consist of manufactured goods and goods acquired for resale. Manufactured inventory costs include raw materials, direct and indirect labor and factory overhead. As of December 31, 2017, approximately 41% of our consolidated inventory cost was determined using the last-in-first-out (“LIFO”) method, with the remainder determined under first-in-first-out and average cost methods. Non-LIFO inventories are stated at the lower of cost or net realizable value. The difference between costs determined under LIFO and current costs was not material as of December 31, 2017.
Additions to property, plant and equipment used in operations and leased assets are recorded at cost and consist of additions, improvements and betterments. With respect to constructed assets, all construction related material, direct labor and contract services as well as certain indirect costs are capitalized. Indirect costs include interest over the construction period. With respect to constructed assets of our regulated utility and energy subsidiaries that are subject to authoritative guidance for regulated operations, capitalized costs also include an equity allowance for funds used during construction, which represents the cost of equity funds used to finance the construction of the regulated facilities. Also see Note 1(r).
Depreciation of assets of our regulated utilities and railroad is generally determined using group depreciation methods where rates are based on periodic depreciation studies approved by the applicable regulator. Under group depreciation, a single depreciation rate is applied to the gross investment in a particular class of property, despite differences in the service life or salvage value of individual property units within the same class. When our regulated utilities or railroad retires or sells a component of the assets accounted for using group depreciation methods, no gain or loss is recognized. Gains or losses on disposals of all other assets are recorded through earnings. Ranges of estimated useful lives of depreciable assets unique to our railroad business are as follows: track structure and other roadway - 9 to 100 years, 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 evaluate property, plant and equipment for impairment when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable or when the assets are held for sale. Upon the occurrence of a triggering event, we assess whether the estimated undiscounted cash flows expected from the use of the asset and the residual value from the ultimate disposal of the asset exceeds the carrying value. If the carrying value exceeds the estimated recoverable amounts, we reduce the carrying value to fair value and record an impairment loss in earnings, except with respect to impairment of assets of our regulated utility and energy subsidiaries when the impacts of regulation are considered in evaluating the carrying value of regulated assets.
Railroad transportation revenues are recognized based upon the proportion of service provided as of the balance sheet date. Customer incentives, which are primarily provided for shipping a specified cumulative volume or shipping to/from specific locations, are recorded as pro-rata reductions to revenue based on actual or projected future customer shipments. When using projected shipments, we rely on historic trends as well as economic and other indicators to estimate the recorded liability for customer incentives.
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(m). 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 using the interest method over the expected claim settlement periods. Changes to the estimated timing or amount of future loss payments also produce changes in deferred charge balances. Changes in such estimates are applied 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.
Deferred income tax assets and liabilities are computed on differences between the financial statement bases and tax bases of assets and liabilities at the enacted tax rates. Changes in deferred income tax assets and liabilities associated with components of other comprehensive income are charged or credited directly to other comprehensive income. Otherwise, changes in deferred income tax assets and liabilities are included as a component of income tax expense. The effect on deferred income tax assets and liabilities attributable to changes in enacted tax rates are charged or credited to income tax expense in the period of enactment. Valuation allowances are established for certain deferred tax assets when realization is not likely.
The Financial Accounting Standards Board (“FASB”) issued ASU 2016-01 “Financial Instruments-Recognition and Measurement of Financial Assets and Financial Liabilities” in 2016, which requires that investments in equity securities (excluding equity method investments) be measured at fair value with changes in fair value recognized in net earnings. Under existing GAAP, changes in fair value of available-for-sale equity securities are recorded in other comprehensive income. Given the magnitude of our investments in equity securities and the inherent volatility of prices for equity securities, the adoption of ASU 2016-01 will have a significant impact on our future reported net earnings, although it will not affect our comprehensive income or total shareholders’ equity. We adopted ASU 2016-01 as of January 1, 2018. As of that date, we reclassified the accumulated net unrealized appreciation relating to our investments in equity securities at December 31, 2017 (approximately $61.5 billion) from accumulated other comprehensive income to retained earnings.
In 2016, the FASB issued ASU 2016-02 “Leases.” ASU 2016-02 requires a lessee to recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term and also requires additional qualitative and quantitative disclosures. ASU 2016-02 is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the effect this standard will have on our Consolidated Financial Statements.
On January 29, 2016, Berkshire acquired all outstanding common stock of Precision Castparts Corp. (“PCC”) for $235 per share in cash pursuant to a definitive merger agreement dated August 8, 2015. The aggregate consideration paid was approximately $32.7 billion, which included the value of PCC shares we already owned. We funded the acquisition with a combination of existing cash balances and proceeds from a temporary credit facility. PCC is a worldwide, diversified manufacturer of complex metal components and products, serving the aerospace, power and general industrial markets. PCC manufactures complex structural investment castings and forged components for aerospace markets, machined airframe components and highly engineered critical fasteners for aerospace applications, and in manufacturing airfoil castings for the aerospace and industrial gas turbine markets. PCC also produces titanium and nickel superalloy melted and mill products for the aerospace, chemical processing, oil and gas and pollution control industries, and manufactures extruded seamless pipe, fittings and forgings for power generation and oil and gas applications.
On February 29, 2016, we acquired a recapitalized Duracell Company (“Duracell”) from The Procter & Gamble Company (“P&G”) in exchange for shares of P&G common stock held by Berkshire subsidiaries, which had a fair value of approximately $4.2 billion. Duracell manufactures high-performance alkaline batteries and wireless charging technologies. Goodwill from these acquisitions is not amortizable for income tax purposes. The fair values of identified assets acquired and liabilities assumed and residual goodwill at their respective acquisition dates are summarized as follows (in millions).
Over the three years ending December 31, 2017, we completed several smaller-sized business acquisitions, most of which we consider as “bolt-on” acquisitions to several of our existing business operations. Aggregate consideration paid in 2017, 2016 and 2015 for bolt-on acquisitions was approximately $2.7 billion, $1.4 billion and $1.1 billion, respectively. We do not believe that these acquisitions are material, individually or in the aggregate to our Consolidated Financial Statements.
Investments in fixed maturity securities as of December 31, 2017 and 2016 are summarized by type below (in millions).
Investments in foreign government securities were issued by national and provincial government entities as well as instruments that are unconditionally guaranteed by such entities. As of December 31, 2017, approximately 92% of our foreign government holdings were rated AA or higher by at least one of the major rating agencies. Approximately 81% of foreign government holdings were issued or guaranteed by the United Kingdom, Germany, Australia or Canada.
The amortized cost and estimated fair value of fixed maturity securities at December 31, 2017 are summarized below by contractual maturity dates. Actual maturities may differ from contractual maturities due to early call or prepayment rights held by issuers. Amounts are in millions.
Investments in equity securities as of December 31, 2017 and 2016 are summarized based on the primary industry of the investee in the table below (in millions).
* Approximately 60% of the aggregate fair value was concentrated in five companies (American Express Company - $11.2 billion; Bank of America Corporation - $14.5 billion; The Coca-Cola Company - $16.6 billion; International Business Machines Corporation - $13.5 billion and Wells Fargo & Company - $27.6 billion).
On December 12, 2014, we acquired Class A 9% Cumulative Compounding Perpetual Preferred Shares of Restaurant Brands International, Inc. (“RBI”) having a stated value of $3 billion (“RBI Preferred”). RBI is domiciled in Canada. On December 12, 2017, RBI redeemed of all of our RBI Preferred investment. Prior to its redemption, we were entitled to dividends on the RBI Preferred at 9% per annum plus an additional amount, if necessary, to produce an after-tax yield as if the dividends were paid by a U.S.-based company.
In June 2013, Berkshire invested $12.25 billion in a newly-formed company, H.J. Heinz Holding Corporation (“Heinz Holding”). The investment consisted of 425,000,000 shares of common stock, warrants to acquire approximately 46,000,000 additional shares of common stock at $0.01 per share and cumulative compounding preferred stock (“Preferred Stock”) with a liquidation preference of $8 billion. An affiliate of the global investment firm 3G Capital (such affiliate, “3G”) also acquired 425,000,000 shares of Heinz Holding common stock for $4.25 billion. At that time, Berkshire and 3G each owned a 50% share of Heinz Holding common stock. Heinz Holding then acquired H.J. Heinz Company.
Berkshire currently owns 26.7% of the outstanding shares of Kraft Heinz common stock. The carrying value of this investment was approximately $17.6 billion at December 31, 2017 and $15.3 billion at December 31, 2016. Our earnings determined under the equity method during 2017 were $2.9 billion, which includes certain one-time effects of the Tax Cuts and Jobs Act of 2017 on Kraft Heinz’s net earnings. We received dividends on the common stock of $797 million during 2017 and $952 million in 2016, which we recorded as reductions of our investment. During 2016, we also received dividends of $180 million on our Preferred Stock investment, which Kraft Heinz redeemed for cash of $8.32 billion on June 7, 2016.
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. Summarized consolidated financial information of Kraft Heinz follows (in millions).
Investment gains/losses for each of the three years ending December 31, 2017 are summarized below (in millions).
Assets held for lease and property, plant and equipment of our finance and financial products businesses are summarized below (in millions). Assets held for lease includes railcars, intermodal tank containers, cranes, over-the-road trailers, storage units and furniture. As of December 31, 2017, the minimum future lease rentals to be received on assets held for lease (including rail cars leased from others) were as follows (in millions): 2018 - $1,103; 2019 - $857; 2020 - $641; 2021 - $439; 2022 - $283; and thereafter - $407.
(9) Property, plant and equipment and assets held for lease (Continued)
Intangible asset amortization expense was $1,469 million in 2017, $1,490 million in 2016 and $1,106 million in 2015. Estimated amortization expense over the next five years is as follows (in millions): 2018 - $1,400; 2019 - $1,270; 2020 - $1,175; 2021 - $1,086 and 2022 - $1,031. Intangible assets with indefinite lives as of December 31, 2017 and 2016 were $18,930 million and $18,705 million, respectively, and primarily related to certain customer relationships and trademarks and trade names.
We are party to derivative contracts primarily through our finance and financial products and our utilities and energy businesses. Currently, the derivative contracts of our finance and financial products businesses consist of equity index put option contracts written between 2004 and 2008. The liabilities and related notional values of such contracts follows (in millions).
We record derivative contract liabilities at fair value and include the changes in the fair values of such contracts in earnings as derivative gains/losses. A summary of the derivative gains/losses included in our Consolidated Statements of Earnings in each of the three years ending December 31, 2017 follows (in millions).
Our regulated utility subsidiaries are exposed to variations in the prices of fuel required to generate electricity, wholesale electricity purchased and sold and natural gas supplied for customers. Derivative instruments, including forward purchases and sales, futures, swaps and options, are used to manage a portion of these price risks. Derivative contract assets are included in other assets and were $142 million as of December 31, 2017 and 2016. Derivative contract liabilities are included in accounts payable, accruals and other liabilities and were $82 million as of December 31, 2017 and $145 million as of December 31, 2016. Most of the net derivative contract assets or liabilities of our regulated utilities are probable of recovery through rates and are offset by regulatory liabilities or assets. Unrealized gains or losses on contracts accounted for as cash flow or fair value hedges are recorded in other comprehensive income or in net earnings, as appropriate.
A summary of supplemental cash flow information for each of the three years ending December 31, 2017 is presented in the following table (in millions).
Our liabilities for unpaid losses and loss adjustment expenses (also referred to as “claim liabilities”) under short duration property and casualty insurance and reinsurance contracts are based upon estimates of the ultimate claim costs associated with claim occurrences as of the balance sheet date and include estimates for incurred-but-not-reported (“IBNR”) claims. A reconciliation of the changes in claim liabilities, excluding liabilities under retroactive reinsurance contracts (see Note 14), for each of the three years ending December 31, 2017 is as follows (in millions).
A reconciliation of certain net unpaid losses and allocated loss adjustment expenses (the latter referred to as “ALAE”) of GEICO, Berkshire Hathaway Reinsurance Group (“BHRG”, which includes the NICO Group and General Re Group) and Berkshire Hathaway Primary Group (“BH Primary”) to our consolidated unpaid losses and loss adjustment expenses as of December 31, 2017, along with a discussion regarding each group’s liability estimation processes, follows (in millions).
GEICO’s aggregate incurred and paid loss and ALAE data by accident year for these claims, net of reinsurance, follows. IBNR and case development liabilities are as of December 31, 2017. Claim counts are established when accidents that may result in a liability are reported and are based on policy coverage. Each claim event may generate claims under multiple coverages, and thus may result in multiple counts. The “Cumulative Number of Reported Claims” includes the combined number of reported claims for all policy coverages and excludes projected IBNR claims. Dollars are in millions.
BH Primary’s liabilities for unpaid losses and ALAE primarily derive from workers’ compensation, medical professional and other liability insurance. Other liability insurance includes commercial auto and general liability policies. We periodically evaluate ultimate unpaid loss and ALAE estimates for the workers’ compensation and general liability lines using a combination of commonly accepted actuarial methodologies, such as the Bornhuetter-Ferguson and chain-ladder approaches using paid and incurred loss data. Paid and incurred loss data is segregated into groups such as coverages, territories or other characteristics. We establish case liabilities for reported claims based upon the facts and circumstances of the claim. The excess of the ultimate projected losses, including the expected development of case estimates, and the case-basis liabilities is included in IBNR liabilities. For medical professional liabilities, we use a combination of the aforementioned methods, as well as other loss severity based methods. From these estimates, 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. The cumulative number of reported claims reflects the number of individual claimants, and includes claims that ultimately result in no liability or payment.
Retroactive reinsurance policies provide indemnification of losses and loss adjustment expenses of short-duration insurance contracts with respect to underlying loss events that occurred prior to the contract inception date. Claims payments may commence immediately after the contract date or, if applicable, once a contractual retention amount has been reached. Reconciliations of the changes in estimated liabilities for retroactive reinsurance unpaid losses and loss adjustment expenses (“claim liabilities”) and related deferred charge reinsurance assumed assets for each of the three years ended December 31, 2017 follows (in millions).
In the fourth quarter of 2017, we increased our estimated ultimate claim liabilities under the aforementioned AIG contract by approximately $1.8 billion based on higher than expected loss payments reported by AIG under the contractual retention. We also increased the related deferred charge asset by $1.7 billion based on our re-estimation of the amounts and timing of future claim payments. As of yearend 2017, our net liability from this contract was approximately $10.7 billion, representing the excess of the estimated ultimate claim liabilities of approximately $18.2 billion over the remaining deferred charge asset balance of approximately $7.5 billion.
Our retroactive reinsurance claim liabilities include estimated liabilities for environmental, asbestos and other latent injury exposures of approximately $14.0 billion at December 31, 2017 and $13.7 billion at December 31, 2016. Retroactive reinsurance contracts are generally subject to aggregate policy limits and thus, our exposure to such claims under these contracts is likewise limited. We monitor evolving case law and its effect on environmental and other latent injury claims. Changing government regulations, newly identified toxins, newly reported claims, new theories of liability, new contract interpretations and other factors could result in increases in these liabilities, which could be material to our results of operations. We are unable to reliably estimate the amount of additional net loss or the range of net loss that is reasonably possible.
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, but not limited to, leverage ratios, interest coverage ratios and debt service coverage ratios, among other covenants. During 2017, BHE and its subsidiaries issued approximately $1.9 billion of term debt with maturity dates ranging from 2022 to 2057 with a weighted average interest rate of 3.2%.
BHE’s short-term debt outstanding increased, in part to fund the prepayment of approximately $1.0 billion of BHE senior unsecured debt in connection with a tender offer in December 2017. BHE recognized a pre-tax loss of $410 million, which was included in interest expense in the Consolidated Statement of Earnings. In January 2018, BHE issued $2.2 billion of senior notes with maturity dates ranging from 2021 to 2048 with a weighted average interest rate of 3.2%. Proceeds from this debt issuance were used to repay short-term debt and for general corporate purposes.
In January 2017, BHFC issued $1.3 billion of senior notes consisting of $950 million of floating rate notes due in 2019 and $350 million of floating rate notes due in 2020. During 2017, senior notes of $2.8 billion matured. The borrowings of BHFC, a wholly owned finance subsidiary of Berkshire, are fully and unconditionally guaranteed by Berkshire.
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 aforementioned change 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.
We have not established deferred income taxes on accumulated undistributed earnings of certain foreign subsidiaries, which are expected to be reinvested indefinitely. Repatriation of all accumulated earnings of foreign subsidiaries would be impracticable to the extent that such earnings represent capital to support normal business operations. Although no U.S. federal taxes will be imposed on future distributions of foreign earnings, in certain jurisdictions the distributions could be subject to withholding and other local taxes.
Income tax expense reflected in our Consolidated Statements of Earnings for each of the three years ending December 31, 2017 is as follows (in millions).
Combined shareholders’ equity of U.S. based insurance subsidiaries determined pursuant to statutory accounting rules (Surplus as Regards Policyholders) was approximately $170 billion at December 31, 2017 and $136 billion at December 31, 2016. 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.
Level 3 - Inputs include unobservable inputs used in the measurement of assets and liabilities. Management is required to use its own assumptions regarding unobservable inputs because there is little, if any, market activity in the assets or liabilities and it may be unable to corroborate the related observable inputs. Unobservable inputs require management to make certain projections and assumptions about the information that would be used by market participants in valuing assets or liabilities.
As disclosed in Note 4, we exercised our BAC Warrants to acquire BAC common stock on August 24, 2017. As payment of the cost to acquire the BAC common stock, we surrendered substantially all of our BAC Preferred. Additionally, RBI redeemed our RBI Preferred investment on December 12, 2017. In the second quarter of 2017, we concluded the Level 3 inputs used in the previous fair value determinations of the BAC Warrants, BAC Preferred Stock and RBI Preferred were not significant and we transferred these measurements from Level 3 to Level 2. In 2016, our Wrigley preferred stock investment was disposed and our Dow preferred stock investment was converted into Dow common stock.
Quantitative information as of December 31, 2017, 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).
Our equity index put option contracts are illiquid and contain contract terms that are not standard in derivatives markets. For example, we are not required to post collateral under most of our contracts and certain of the contracts have relatively long durations. For these and other reasons, we classified these contracts as Level 3. The methods we use to value these contracts are those that we believe market participants would use in determining exchange prices with respect to our contracts.
Reconciliations of the changes in plan assets and PBOs related to BHE’s pension plans and all other pension plans for each of the two years ending December 31, 2017 are in the following tables (in millions). The costs of pension plans covering employees of certain regulated subsidiaries of BHE are generally recoverable through the regulated rate making process.
Benefits payments expected over the next ten years are as follows (in millions): 2018 - $1,058; 2019 - $1,004; 2020 - $1,024; 2021 - $1,019; 2022 - $1,019; and 2023 to 2027 - $5,095. Sponsoring subsidiaries expect to contribute $251 million to defined benefit pension plans in 2018.
Fair value measurements of plan assets as of December 31, 2017 and 2016 follow (in millions).
Several of our subsidiaries also sponsor defined contribution retirement plans, such as 401(k) or profit sharing plans. Employee contributions are subject to regulatory limitations and the specific plan provisions. Several plans provide for employer matching contributions up to levels specified in the plans and provide for additional discretionary contributions as determined by management. Employer contributions expensed with respect to our defined contribution plans were $1,001 million in 2017, $912 million in 2016 and $739 million in 2015.
We lease certain manufacturing, warehouse, retail and office facilities as well as certain equipment. Rent expense under operating leases was $1,579 million in 2017, $1,573 million in 2016 and $1,516 million in 2015. Future minimum rental payments for operating leases having non-cancellable terms in excess of one year are as follows (in millions).
On October 3, 2017, we entered into an investment agreement and an equity purchase agreement whereby we acquired a 38.6% interest in Pilot Travel Centers LLC, d/b/a Pilot Flying J (“Pilot Flying J”). Pilot Flying J, headquartered in Knoxville, Tennessee, is one of the largest operators of travel centers in North America, with more than 27,000 team members, 750 locations across the U.S. and Canada, and approximately $20 billion in annual revenues. The Haslam family currently owns a 50.1% interest in Pilot Flying J and a third party owns the remaining 11.3% interest. We also entered into an agreement to acquire in 2023 an additional 41.4% interest in Pilot Flying J with the Haslam family retaining a 20% interest. As a result, Berkshire will become the majority owner of Pilot Flying J in 2023.
We own a 50% interest in a joint venture, Berkadia Commercial Mortgage LLC (“Berkadia”), with Leucadia National Corporation (“Leucadia”) owning the other 50% interest. Berkadia is a servicer of commercial real estate loans in the U.S., performing primary, master and special servicing functions for U.S. government agency programs, commercial mortgage-backed securities transactions, banks, insurance companies and other financial institutions. A significant source of funding for Berkadia’s operations is through the issuance of commercial paper, which is supported by a surety policy issued by a Berkshire insurance subsidiary. Leucadia is obligated to indemnify us for one-half of any losses incurred under the policy. Berkadia’s maximum outstanding balance of commercial paper borrowings is currently limited to $1.5 billion. On December 31, 2017, Berkadia’s commercial paper outstanding was $1.47 billion.
Underwriting excess-of-loss, quota-share and facultative reinsurance worldwide (General Re Group and NICO Group)
Operation of one of the largest railroad systems in North America
Manufactured housing and related consumer financing, transportation equipment, manufacturing and leasing and furniture leasing