PacifiCorp, MEC and NV Energy own electric transmission and distribution systems, including approximately 24,700 miles of transmission lines and approximately 1,700 substations, gas distribution facilities, including approximately 26,600 miles of gas mains and service lines, and an estimated 44 million tons of recoverable coal reserves in mines owned or leased in Wyoming and Colorado.
Includes after-tax investment and derivative gains/losses of $6.5 billion in 2016, $6.7 billion in 2015, $3.3 billion in 2014, $4.3 billion in 2013 and $2.2 billion in 2012.
Represents net earnings per equivalent Class A common share. Net earnings per Class B common share is equal to 1/1,500 of such amount.
Our insurance businesses generated after-tax earnings from underwriting of $1.4 billion in 2016, an increase of $208 million from 2015, primarily due to increased earnings from Berkshire Hathaway Reinsurance Group and General Re, partly offset by lower net underwriting gains from primary insurance. Our railroad business generated lower net earnings in 2016, primarily due to a 5.0% decline in unit volume. Earnings of our utilities and energy businesses increased in 2016, attributable to increased pre-tax earnings and a lower effective income tax rate. The increase in after-tax earnings in 2016 as compared to 2015 of our manufacturing, service and retailing businesses was primarily due to earnings from PCC, partly offset by comparatively lower overall earnings from the other businesses within this group.
After-tax investment and derivative gains were approximately $6.5 billion in 2016, $6.7 billion in 2015 and $3.3 billion in 2014. After-tax investment gains in 2016 included approximately $2.7 billion from the disposition or conversion of our Wrigley, Kraft Heinz and Dow preferred stock investments and non-cash gains of approximately $1.9 billion related to the exchange of P&G common stock for 100% of the common stock of Duracell. After-tax investment and derivative gains in 2015 included non-cash holding gains of approximately $4.4 billion in connection with our investment in Kraft Heinz common stock. In 2014, after-tax gains included approximately $2.0 billion related to the exchanges of Phillips 66 common stock and Graham Holdings Company common stock for a specified subsidiary of each of those companies. Derivative contracts contributed after-tax gains of $488 million in 2016, $633 million in 2015 and $329 million in 2014. We believe that investment and derivative gains/losses are often meaningless in terms of understanding our reported results or evaluating our economic performance. Investment and derivative gains and losses have caused and will likely continue to cause significant volatility in our periodic earnings.
GEICO writes private passenger automobile insurance, offering coverages to insureds in all 50 states and the District of Columbia. GEICO’s policies are marketed mainly by direct response methods in which most customers apply for coverage directly to the company via the Internet or over the telephone. GEICO’s underwriting results are summarized below (in millions).
Underwriting expenses in 2016 were $4.0 billion, an increase of $366 million (10.1%) over 2015. Our expense ratio (underwriting expenses to premiums earned) in 2016 decreased 0.3 percentage points compared to 2015. The largest components of underwriting expenses are employee-related expenses (salaries and benefits) and advertising costs. The increase in underwriting expenses reflected the increase in policies-in-force.
Premiums written and earned in 2015 increased 11.5% and 10.8% over 2014. The increases in premiums reflected growth in voluntary auto policies-in-force (5.4%) and rate increases. Voluntary auto new business sales in 2015 exceeded 2014 by about 1%. In 2015, our voluntary auto policies-in-force grew by 707,000 policies.
Underwriting expenses in 2015 increased 5.8% to $3.6 billion. During 2015, advertising and employee-related costs grew at a slower rate than premiums. As a result, our expense ratio in 2015 declined 0.7 percentage points compared to 2014.
General Re conducts a reinsurance business offering property and casualty coverages to clients worldwide through General Reinsurance Corporation, Germany-based General Reinsurance AG, Faraday Holdings in London and other wholly-owned affiliates. We write property and casualty reinsurance primarily on a direct basis, but is also written through brokers and intermediaries. We write life and health reinsurance primarily on a direct basis through General Re Life Corporation and General Reinsurance AG. We strive to generate underwriting profits in essentially all of our product lines. Our management does not evaluate underwriting performance based upon market share and our underwriters are instructed to reject inadequately priced risks. General Re’s underwriting results are summarized in the following table (in millions).
Our property/casualty business produced pre-tax underwriting gains of $117 million in 2016 and $150 million in 2015. Results included pre-tax underwriting gains from property business of $211 million in 2016, a decline of $78 million compared to 2015. The decline was primarily due to lower gains from reductions of estimated losses on prior years’ property business. There were no significant catastrophe or large property losses in each of the past three years.
Our casualty/workers’ compensation business produced pre-tax underwriting losses of $94 million in 2016 and $139 million in 2015. Underwriting results in each year included net losses on current year business and charges for recurring discount accretion on workers’ compensation liabilities and deferred charge amortization on retroactive reinsurance contracts, partially offset by gains from reductions of estimated losses on prior years’ business. Discount accretion and deferred charge amortization produced pre-tax underwriting losses of $89 million in 2016 and $94 million in 2015. Casualty losses tend to be long-tailed and the favorable loss experience is not a guarantee that the current ultimate liability estimates will develop favorably in the future.
Premiums earned in 2016 increased $233 million (5.3%) reflecting an increase from the 10-year, 20% quota-share contract with Insurance Australia Group Ltd. (“IAG”), which became effective on July 1, 2015, partly offset by declines from property catastrophe and other quota-share business. The IAG quota-share contract represented 37% of our property/casualty earned premiums in 2016. Our premium volume is generally constrained for most property/casualty reinsurance coverages as rates, in our view, are generally inadequate. Consistent with General Re, we have the capacity and desire to write more business when appropriate pricing can be attained.
Our property/casualty business generated pre-tax underwriting gains of $767 million in 2016 and $944 million in 2015. The decline in pre-tax underwriting gains in 2016 was primarily due to a comparative decline in gains from reductions of estimated prior years’ loss reserves. We experienced no significant catastrophe loss events during the last three years.
We periodically write retroactive reinsurance contracts, which provide indemnification of losses and loss adjustment expenses with respect to past loss events. Retroactive reinsurance premiums earned in 2016 primarily derived from three new contracts, including $670 million from a contract with Hartford Fire Insurance Company covering the adverse development of certain asbestos and pollution claims losses, subject to an aggregate limit of $1.5 billion. Premiums earned in 2014 included $3 billion from a contract with Liberty Mutual Insurance Company (“LMIC”), which covers claim liabilities from specified asbestos and environmental exposures under policies incepting before 2005, and workers’ compensation occurrences arising before 2014.
The underwriting results of retroactive reinsurance include the periodic amortization of deferred charge assets established in connection with these contracts. At the inception of a contract, we recognize deferred charge assets for the excess, if any, of the estimated ultimate losses payable over the premiums earned. We subsequently amortize the deferred charges over the estimated claims payment period based on estimates of the timing and amount of future loss payments. Amortization charges and deferred charge adjustments resulting from changes to the estimated timing and amount of future loss payments are included in earnings.
As discussed in Note 25 to the accompanying Consolidated Financial Statements, we entered into a retroactive reinsurance agreement with affiliates of American International Group, Inc. (collectively, “AIG”) in January 2017. Our premiums with respect to this contract are about $10 billion and our net aggregate limit is $20 billion.
Gross unpaid losses assumed under retroactive reinsurance contracts were approximately $24.7 billion at December 31, 2016 and $23.7 billion at December 31, 2015. Unamortized deferred charges related to such reinsurance contracts were approximately $8.0 billion at December 31, 2016 and $7.6 billion at December 31, 2015. We currently estimate pre-tax losses in 2017 from deferred charge amortization of approximately $950 million, including approximately $375 million related to the new AIG agreement.
A summary BHRG’s life and annuity underwriting results follows (in millions).
Generally, we receive premiums under periodic payment annuity contracts in full at inception and we make annuity payments over time, often extending for decades. At inception, we discount annuity liabilities for time value and recognize no gains or losses in earnings. Pre-tax underwriting losses are recognized over the annuity payment period from the recurring accretion of discounted annuity liabilities.
Periodic payment annuity contracts generated pre-tax underwriting losses of $128 million in 2016, $202 million in 2015 and $197 million in 2014. Liabilities under certain contracts of a U.S. subsidiary are denominated in foreign currencies, most significantly the GBP. Changes in the exchange rates produce changes in the values of related liabilities, which are reflected in underwriting results. Exchange rate changes resulted in pre-tax gains of $313 million in 2016, $103 million in 2015 and $102 million in 2014.
Life reinsurance premiums increased 1.4% in 2016 compared to 2015, which declined 4.8% compared to 2014. The life reinsurance business produced near break-even results in 2016 and a pre-tax loss of $45 million in 2015. Underwriting losses in 2015 included losses of $53 million incurred in connection with certain terminated business.
Our variable annuity business primarily consists of reinsurance contracts that provide guarantees on closed blocks of variable annuity business written by other insurers. Our pre-tax underwriting gains in each period of the past three years reflected changes in liabilities for guaranteed benefits, which were affected by changes in securities markets and interest rates, as well as from the periodic amortization of expected profit margins included in our liability estimates.
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 the MedPro Group, National Indemnity Company (“NICO Primary”), Berkshire Hathaway Homestate Companies (“BHHC”), Berkshire Hathaway Specialty Insurance (“BH Specialty”) and Berkshire Hathaway GUARD Insurance Companies (“GUARD”). Other BH Primary insurers include U.S. Liability Insurance Company, Applied Underwriters and Central States Indemnity Company.
Interest earned declined $121 million (12%) in 2015 versus 2014. The reduction reflected the maturities and dispositions of fixed maturity securities with higher interest rates. Dividend income increased $314 million (9%) in 2015 versus 2014. Dividend income in 2015 included income from our investment in Restaurant Brands International, Inc. 9% Preferred Stock ($3 billion stated value), which was acquired in December 2014.
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, life, annuity and health benefit liabilities, unearned premiums and other liabilities to policyholders less premium and reinsurance receivables, deferred charges assumed under retroactive reinsurance contracts and deferred policy acquisition costs. Float approximated $91 billion at December 31, 2016, $88 billion at December 31, 2015 and $84 billion at December 31, 2014. The cost of float was negative over the last three years as our insurance business generated pre-tax underwriting gains in each year.
Fixed maturity investments as of December 31, 2016 were as follows (in millions).
Burlington Northern Santa Fe, LLC (“BNSF”) operates one of the largest railroad systems in North America. BNSF operates approximately 32,500 route miles of track in 28 states and also operates in three Canadian provinces. BNSF’s major business groups are classified by type of product shipped and include consumer products, coal, industrial products and agricultural products. A summary of BNSF’s earnings follows (in millions).
Freight revenues from consumer products were $6.5 billion in 2016, a decline of 0.9% from 2015. The revenue decline reflected 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. Lower international intermodal volumes attributable to soft economic activity and excess retail inventories partially offset these increases.
Operating expenses were $13.1 billion in 2016, a decrease of $1.1 billion (7.9%) compared to 2015, and our ratio of operating expenses to revenues increased 1.4 percentage points to 66.3%. Compensation and benefits expenses decreased $274 million (5.4%) compared to 2015. The decline was primarily due to lower employment levels resulting from lower freight volumes and productivity improvements, partially offset by inflation. Fuel expenses declined $722 million (27.2%) compared to 2015, due to lower average fuel prices and lower volumes. Purchased services declined $128 million (5.0%) due to lower volumes and cost reductions. Depreciation and amortization expense increased $127 million (6.3%) compared to 2015 due to increased assets in service reflecting our ongoing capital additions and improvement programs. Equipment rents, materials and other expense declined $123 million (6.1%) compared to 2015, primarily due to lower freight volumes and productivity improvements.
Interest expense was $992 million in 2016, an increase of $64 million (6.9%) compared to 2015. Interest expense in 2015 was $928 million, an increase of $95 million (11%) compared to 2014. BNSF funds its capital expenditures with cash flow from operations and new debt issuances. The comparative increases in each period resulted from higher average outstanding debt.
Operating expenses were $14.3 billion in 2015, a decrease of $2 billion (12%) compared to 2014. The ratio of operating expenses to revenues declined 4.9 percentage points to 64.9% as compared to 2014. Compensation and benefits expenses were relatively flat versus 2014. In response to weakening customer demand in the latter half of 2015, employment levels were reduced. Fuel expenses declined $1.8 billion (41%) compared to 2014, reflecting significantly lower average fuel prices, improved efficiency and lower gross ton miles volume. Depreciation and amortization expense decreased $122 million (6%) compared to 2014 as a result of lower capitalized software amortization expenses, partially offset by increased depreciation expense attributable to increased levels of railroad assets in service.
PacifiCorp operates a regulated electric utility in portions of several Western states, including Utah, Oregon and Wyoming. PacifiCorp’s revenues were $5.25 billion in 2016, slightly lower than 2015. Revenues reflected increased retail revenues and lower wholesale and other operating revenues. The increase in retail revenues was primarily due to higher retail rates as volumes were relatively unchanged. The declines in wholesale revenues were attributable to lower volumes and average prices. EBIT in 2016 increased $79 million (7.7%) from 2015, primarily due to increased gross margins (operating revenues less cost of sales), reflecting lower fuel prices and changes in fuel mix.
EBIT increased $22 million (8%) in 2015 compared to 2014, reflecting an increase in gross margins ($107 million), partially offset by increases in depreciation expense from new wind generation and other plant-in-service ($56 million), interest expense ($17 million) and lower allowances for equity funds used during construction ($19 million). The increase in gross margins derived primarily from the regulated electric business, which benefitted from the aforementioned changes in Iowa rates and rate structure and lower fuel and purchased power costs. In addition, EBIT included a gain of $13 million in 2015 from the sale of a generating facility lease.
Revenues and EBIT were $3.4 billion and $586 million in 2015, representing increases of $103 million (3%) and $37 million (7%) over 2014. The increase in revenues was due primarily to higher retail electric revenues reflecting increased customers and higher volumes. The increase in EBIT was attributable to an increase in gross margins ($82 million) and lower interest expense ($22 million), partially offset by increased depreciation and amortization ($31 million) and higher other operating expenses, including increased energy efficiency costs.
Revenues declined $144 million (12.6%) to $997 million in 2016, primarily due to the impact of a stronger U.S. Dollar ($127 million) and lower distribution revenues. EBIT declined $93 million (20.2%) to $367 million. The decline was due to lower distribution revenues and the stronger U.S. Dollar, as well as increases in depreciation expense from increased assets in service and higher asset impairment charges.
Revenues declined $32 million (3.1%) in 2016 as compared to 2015, primarily due to the impact of lower gas sales from balancing activities and lower transportation revenues from lower volumes and rates, in part due to comparatively milder temperatures in the first quarter of 2016. EBIT increased $12 million (3.0%) versus 2015, reflecting lower interest expense, resulting from lower average debt balances and lower operating expenses, partly offset by the lower transportation revenues.
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 year-to-date revenue decline reflected the impact of a regulatory decision in the second quarter of 2016 that resulted in one-time net reductions in revenue, which more than offset increased revenues from additional assets placed in service. The regulatory decision changed the timing of when construction-in-progress expenditures included in the rate base are billable to customers and earned in revenues, but had no impact on net earnings, as one-time reductions in expenses offset the one-time revenue reduction. EBIT 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 of other energy businesses increased $739 million (46.7%) in 2015 over revenues in 2014, while EBIT increased $130 million (49%) versus 2014. Revenues and EBIT in 2015 reflect the acquisition of AltaLink on December 1, 2014. AltaLink’s revenues and EBIT in 2015 were $621 million and $170 million, respectively. The remaining increase in revenues was primarily due to an increase in solar capacity placed in service. Excluding the acquisition of AltaLink, the impact of higher revenues in 2015 was more than offset by higher operating, depreciation and interest expenses.
Revenues increased 11.0% to $2.8 billion in 2016 compared to 2015. The increase was primarily attributable to increased closed brokerage transactions (primarily resulting from business acquisitions) and a 2% increase in average home sales prices, as well as higher mortgage revenues. EBIT increased $34 million (17.8%) in 2016 compared to 2015, primarily due to the increases in mortgage revenues.
Real estate brokerage revenues and EBIT increased 17% and 37%, respectively, in 2015 compared to 2014. The revenue increase reflected comparative increases in closed transactions and average home prices and the impact of business acquisitions. The increase in EBIT was primarily due to the increased revenues, net of commission expense, as well as a lower operating expense to revenue ratio as compared to 2014.
BHE’s consolidated effective income tax rates were approximately 14% in 2016, 16% in 2015, and 23% in 2014. BHE’s effective income tax rates regularly reflect significant production tax credits from wind-powered electricity generation placed in service. In addition, pre-tax earnings of Northern Powergrid and AltaLink are taxed at lower statutory rates in the United Kingdom and Canada compared to the U.S. statutory tax rate. BHE’s effective rates in 2016 and 2015 also included reductions in deferred income tax liabilities resulting from enacted statutory income tax rate decreases in the United Kingdom and deferred state income tax benefits.
A summary of revenues and earnings of our manufacturing, retailing and service businesses follows (in millions).
* Excludes certain acquisition accounting expenses, which were primarily from the amortization of identified intangible assets recorded in connection with our business acquisitions. The after-tax acquisition accounting expenses excluded from earnings above were $771 million in 2016, $476 million in 2015 and $496 million in 2014. These expenses are included in “other” in the summary of earnings on page 32 and in the “other” earnings section on page 51.
Our manufacturing group includes a variety of businesses that produce industrial, building and consumer products. Industrial products businesses include specialty chemicals (The Lubrizol Corporation (“Lubrizol”)), metal cutting tools/systems (IMC International Metalworking Companies (“IMC”)), equipment and systems for the livestock and agricultural industries (CTB International), and a variety of industrial products for diverse markets (Marmon and Scott Fetzer). Beginning on January 29, 2016, our industrial products group also includes Precision Castparts Corp. (“PCC”), a leading manufacturer of complex metal products for aerospace, power and general industrial markets.
Pre-tax earnings increased $1.2 billion (40.6%) in 2016 compared to 2015, reflecting the inclusion of PCC, partially offset by comparative earnings declines from our other businesses. Lubrizol’s earnings in 2016 included pre-tax losses of $365 million in 2016 related to the disposition in the fourth quarter of an underperforming business. Earnings from several of Marmon’s manufacturing businesses and Lubrizol’s continuing operations declined, while earnings from IMC increased slightly. Generally, our industrial products manufacturers experienced a combination of weaker customer demand, sales price and mix changes, and increased restructuring costs, which were partly offset by benefits from cost containment initiatives and lower average material prices.
Consumer products revenues were approximately $11.0 billion in 2016, an increase of approximately $2.0 billion (21.8%) compared to 2015. The increase reflected the inclusion of Duracell and a 12% increase in Forest River’s revenues, which was primarily attributable to increased unit sales. Apparel revenues in 2016 declined $81 million (1.9%) compared to 2015, reflecting lower footwear sales and the impact of a divestiture by Fruit of the Loom in 2015.
Our service businesses offer fractional ownership programs for general aviation aircraft (NetJets) and high technology training to operators of aircraft (FlightSafety). We also distribute electronic components (TTI) and franchise and service a network of quick service restaurants (Dairy Queen). Services also include the electronic distribution of corporate news, 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 revenues increased 1.8% to approximately $10.4 billion in 2016 compared to 2015, primarily due to revenue increases from TTI and Charter Brokerage partly offset by a revenue decrease from NetJets. TTI’s revenues increased 7.2%, primarily due to sales volume increases in Asia, Europe and through the Internet, while the increase from Charter Brokerage primarily derived from a commodity trading business launched in 2015. NetJets’ revenues decreased 2.0% reflecting lower aircraft sales.
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 sale 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 increase in revenues reflected the impact of the BHA and Louis acquisitions during 2015, which 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 operates a wholesale distribution business that provides grocery and non-food consumer products to retailers and convenience stores (“grocery”) and to restaurants (“foodservice”). McLane also operates businesses that are wholesale distributors of distilled spirits, wine and beer (“beverage”). The grocery and foodservice businesses generate high sales volumes and very low profit margins and have several significant customers, including Wal-Mart, 7-Eleven and Yum! Brands. A curtailment of purchasing by any of its significant customers could have an adverse impact on McLane’s periodic revenues and earnings.
Revenues increased $1.6 billion (3%) in 2015 compared to 2014, reflecting revenue increases in the foodservice unit (6%), beverage unit (8%) and grocery unit (2%). Pre-tax earnings increased $67 million (15%) in 2015 versus 2014. Pre-tax earnings in 2015 included the aforementioned gain from the sale of a subsidiary and otherwise benefitted from lower fuel and trucking costs.
Our finance and financial products businesses include manufactured housing and finance (Clayton Homes), transportation equipment manufacturing and leasing businesses (UTLX and XTRA, and together, “transportation equipment leasing”), as well as other leasing and financing activities. A summary of revenues and earnings from our finance and financial products businesses follows (in millions).
Clayton Homes’ revenues increased $654 million (18%) in 2016 compared to 2015, attributable to a 30% increase in revenues from home sales, primarily due to a 25% increase in units sold and product mix changes. Interest and other financial service income increased 1.8% from 2015. Pre-tax earnings increased $38 million (5.4%) compared to 2015. Earnings benefitted from increased home sales and improved manufacturing and retailing operating margins, partly offset by lower earnings from lending and financial services, which were negatively impacted by increased insurance losses. A significant portion of Clayton’s earnings are generated from lending activities, which in recent years benefitted from relatively low delinquency rates and loan losses and from declining borrowing costs attributable to lower average interest rates. As of December 31, 2016, Clayton Homes’ installment loan portfolio was approximately $13.3 billion and approximately 94% of the loan balances were current in terms of payment status.
Pre-tax earnings increased $82 million (10%) in 2015 compared to 2014. The increase was primarily attributable to the positive impact of the revenue growth discussed above, which more than offset the unfavorable impact of foreign currency translation and higher railcar repair and warranty costs and depreciation attributable to a larger fleet size.
A summary of investment and derivative gains and losses and other-than-temporary impairment losses on investments follows (in millions).
Pre-tax investment gains were $7.6 billion in 2016 and included gains of $2.4 billion from the sale to Mars Inc. of our Wrigley preferred stock investment, $610 million from the Kraft Heinz Preferred Stock redemption, $1.2 billion from the Dow Preferred Stock conversion into common stock, and $1.1 billion from the exchange of shares of P&G common stock for 100% of the common stock of Duracell. Income tax expense allocated to investment gains included a benefit from the reduction of certain deferred income tax liabilities in connection with the exchange of P&G common stock for Duracell. Pre-tax investment gains included non-cash holding gains related to our investment in Kraft Heinz of $6.8 billion in 2015. 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 credit default and 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 credit and 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 $662 million in 2016, which were primarily due to increases in the index values, favorable foreign currency exchange rate changes and shorter remaining contract durations, partly offset by lower interest rates. Our equity index put option contracts produced pre-tax gains of approximately $1.0 billion in 2015, which were primarily attributable to a stronger U.S. Dollar and shorter remaining durations. These contracts produced pre-tax gains of $108 million in 2014. Such gains reflected the favorable impact of foreign currency exchange rate changes and generally higher index values, partially offset by the effect of lower interest rate assumptions.
The reduced earnings in 2016 from our investments in Kraft Heinz were due to lower dividends from our Preferred Stock investment, which was redeemed in June 2016, somewhat offset by increased equity method earnings from our common stock investment. Other earnings also include charges from the application of the acquisition method in connection with Berkshire’s business acquisitions. Such charges were primarily from the amortization of intangible assets recorded in connection with those business acquisitions, which we view as corporate expenses. Corporate interest expense includes after-tax foreign exchange gains of $159 million in 2016 and losses of $45 million in 2015 with respect to Euro denominated debt issued by Berkshire in March 2015 (3.0 billion par) and March 2016 (2.75 billion par). Excluding foreign currency effects, after-tax corporate interest expense was $256 million in 2016 and $146 million in 2015. The increase in 2016 was attributable to increased average outstanding debt.
Our balance sheet continues to reflect significant liquidity and a strong capital base. Our consolidated shareholders’ equity at December 31, 2016 was $283.0 billion, an increase of $27.5 billion since December 31, 2015. Net earnings attributable to Berkshire shareholders in 2016 were $24.1 billion. At December 31, 2016, our insurance and other businesses held cash, cash equivalents and U.S. Treasury Bills of $70.9 billion, and investments (excluding our investment in Kraft Heinz) of $158.3 billion.
In January 2016, we used cash of approximately $32.1 billion to fund the acquisition of PCC, which we funded through a combination of cash on hand and $10 billion borrowed under a 364-day revolving credit agreement. We repaid these borrowings following our issuance in March 2016, of 2.75 billion and $5.5 billion of senior unsecured notes. In August 2016, we issued $750 million of senior unsecured notes to replace $750 million of maturing notes. In January 2017, Berkshire issued new senior notes aggregating 1.1 billion and repaid $1.1 billion of maturing senior notes. There are no other parent company term debt maturities in 2017.
Our railroad, utilities and energy businesses (conducted by BNSF and BHE) maintain very large investments in capital assets (property, plant and equipment) and will regularly make significant capital expenditures in the normal course of business. In 2016, capital expenditures included $5.1 billion by BHE and $3.8 billion by BNSF. Aggregate capital expenditures of these businesses are forecasted to be $8.6 billion in 2017. We expect future capital expenditures will be funded by cash flows from operations and debt issuances.
Finance and financial products assets were approximately $41.7 billion as of December 31, 2016, an increase of approximately $2.7 billion since December 31, 2015. Finance assets consist primarily of loans and finance receivables, various types of property held for lease, and cash, cash equivalents, U.S. Treasury Bills and other investments. In September 2016, a Berkshire finance subsidiary received approximately $4.6 billion from the sale of its Wrigley preferred stock investment.
Certain accounting policies require us to make estimates and judgments that affect the amounts reflected in the Consolidated Financial Statements. Such estimates and judgments necessarily involve varying, and possibly significant, degrees of uncertainty. Accordingly, certain amounts currently recorded in the financial statements will likely be adjusted in the future based on new available information and changes in other facts and circumstances.
We record liabilities for unpaid losses and loss adjustment expenses based upon estimates of the ultimate amounts payable for losses occurring on or before the balance sheet date. Except for certain workers’ compensation reinsurance claims, we record all liabilities for unpaid losses and loss adjustment expenses (referred to in this section as “gross unpaid losses”) in the Consolidated Balance Sheets without discounting for time value. The timing and amount of ultimate loss payments are contingent upon, among other things, the timing of claim reporting from insureds and ceding companies and the final determination of the loss amount through the loss adjustment process. We use a variety of techniques in establishing liabilities and all techniques require significant judgments and assumptions. We believe the processes and techniques utilized best suit the underlying claims and available data.
For unreported claims, IBNR 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.
Liabilities for unpaid property and casualty losses and loss adjustment expenses of General Re and BHRG derive primarily from reinsurance contracts. In connection with reinsurance contracts, the nature, extent, timing and perceived reliability of 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.
The premium and loss data we receive is through at least one intermediary (the primary insurer), 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.
Our process for estimating unpaid losses and loss adjustment expenses begins with case loss estimates made by the ceding company. Upon notification of a reinsurance claim from a ceding company, we independently evaluate the case losses reported and if appropriate, we use our own case liability estimate. As of December 31, 2016, our case loss estimates exceeded ceding company estimates by approximately $2.2 billion, which were concentrated in the workers’ compensation line. We also periodically conduct detailed reviews of individual client claims, which may cause us to adjust our case estimates.
In estimating IBNR liabilities, we consider expected case loss emergence and development patterns, together with expected loss ratios by year. In this process, we classify all loss and premium data into segments (“cells”) based primarily on product type (e.g., treaty, facultative and program), line of business (e.g., auto liability, property and workers’ compensation) and geographic jurisdiction. For each cell, we aggregate premiums and losses by accident year, policy year or underwriting year and analyze the data over time. There are several hundred cells. We use loss triangles to determine the expected development of reported claims for most coverages, which, together with the expected loss ratios, are used to calculate IBNR liability estimates. We select expected loss ratios by cell and by year based upon indicated ultimate loss ratios and forecasted losses obtained from pricing statistics. Indicated ultimate loss ratios are determined from the selected loss emergence pattern, reported losses and earned premiums. Factors affecting our loss development triangles include, but are not limited to, changes in the following: client claims practices; the frequency of client company claim reviews; policy terms and coverage (such as loss retention levels and occurrence and aggregate policy limits); loss trends, and legal trends that result in unanticipated losses. Collectively, these factors influence our selections of expected loss emergence patterns.
Once the IBNR liabilities are determined, we estimate the expected case loss emergence for the upcoming calendar year, based on the prior year-end expected loss emergence patterns and expected loss ratios. We allocate the expected losses into interim estimates, which we compare to actual reported losses. This comparison provides a test of the adequacy of prior year-end IBNR liabilities and forms the basis for possibly changing IBNR liability assumptions during the course of the year.
During 2016, we reduced net losses for prior years’ occurrences by $280 million in the aggregate. This reduction produced a corresponding increase in pre-tax earnings.
In 2016, reported nominal losses for prior years’ workers’ compensation were less than expected, which after reevaluating expected remaining IBNR estimates, resulted in a reduction of nominal liabilities by $165 million. However, we discount workers’ compensation liabilities and after adjusting for changes in discounts, workers’ compensation losses for prior years’ occurrences had a minimal impact on pre-tax earnings. 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 discounted workers’ compensation IBNR liabilities of approximately $889 million, producing a corresponding decrease in pre-tax earnings. We believe it is reasonably possible for these assumptions to increase at these rates.
Other casualty and general liability reported losses (excluding mass tort losses) were less than expected in 2016, resulting in a $205 million increase in pre-tax earnings. However, casualty losses tend to be long-tailed and it should not be assumed that favorable loss experience in a given period will continue in the future. For our significant casualty and general liability cells, we estimate that an increase of five percent in the claim-tails of the expected loss emergence patterns and a five percent increase in expected loss ratios would produce a net increase in our nominal IBNR liabilities and a corresponding reduction in pre-tax earnings of approximately $900 million. While we believe it is reasonably possible for these assumptions to increase at these rates, more likely outcomes are less than $900 million given the diversification in worldwide business.
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.
We currently believe that maximum losses payable under our retroactive policies will not exceed $40 billion due to the aggregate contract limits that are applicable to most of these contracts. 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 loss payable or downward by more than 15% of our year-end estimate.
Gross unpaid losses and loss adjustment expense liabilities related to property and casualty contracts, other than retroactive reinsurance, were approximately $11.7 billion as of December 31, 2016 and consisted primarily of traditional property and casualty coverages written primarily under excess-of-loss and quota-share treaties. These coverages included catastrophe and aviation contracts that tend to generate low frequency/high severity losses, although such liabilities have diminished in recent years due to declines in business written. Reserving techniques for catastrophe and individual risk 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.
Our Consolidated Balance Sheet at December 31, 2016 included goodwill of acquired businesses of $79.5 billion. We evaluate goodwill for impairment at least annually and we conducted our most recent annual review during the fourth quarter of 2016. 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 and will occur. We are not necessarily disturbed by market price declines provided the underlying business, economic and management characteristics of the investees remain favorable. We strive to maintain significant levels of shareholder capital and ample liquidity to provide a margin of safety against short-term price volatility.
Market prices for equity securities are subject to fluctuation and consequently, the amount realized in the subsequent sale of an investment may significantly differ from the reported market value. Fluctuation in the market price of a security may result from perceived changes in the underlying economic characteristics of the investee, the relative price of alternative investments and general market conditions.
Excludes other investments that do not possess significant equity price risk.
We regularly invest in bonds, loans or other interest rate sensitive instruments. Our strategy is to acquire securities that are attractively priced relative to the perceived credit risk. Our management recognizes and accepts that 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 so as to minimize the cost of our debt. We rarely utilize derivative products, such as interest rate swaps, to manage interest rate risks.
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 hedge or manage foreign currency price changes in any meaningful way. 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 related to net liabilities of Berkshire and certain of its U.S. subsidiaries that are denominated in foreign currencies, including gains and losses from the remeasurement of such liabilities due to changes in exchange rates.
To mitigate a portion of the price volatility, BHE uses derivative instruments, including forwards, futures, options, swaps and other agreements, to effectively secure future supply or sell future production generally at fixed prices. The settled cost of these contracts is generally recoverable from customers in regulated rates. Financial results would be negatively impacted if the costs of wholesale electricity, fuel or natural gas are greater than what is permitted to be recovered in rates. The table that follows summarizes commodity price risk on energy derivative contracts of BHE as of December 31, 2016 and 2015 and shows the effects of a hypothetical 10% increase and a 10% decrease in forward market prices by the expected volumes for these contracts as of each date. The selected hypothetical change does not reflect the best or worst case scenarios. Dollars are in millions.
Actual events and results may differ materially from those expressed or forecasted in forward-looking statements due to a number of factors. The important risk factors that could cause our actual performance and future events and actions to differ materially from such forward-looking statements include, but are not limited to, changes in market prices of our investments in fixed maturity and equity securities, losses realized from derivative contracts, the occurrence of one or more catastrophic events, such as an earthquake, hurricane, act of terrorism or cyber attack that causes losses insured by our insurance subsidiaries and/or losses to our business operations, changes in laws or regulations affecting our insurance, railroad, utilities and energy and finance subsidiaries, changes in federal income tax laws, and changes in general economic and market factors that affect the prices of securities or the industries in which we do business.
We have audited the accompanying consolidated balance sheets of Berkshire Hathaway Inc. and subsidiaries (the “Company”) as of December 31, 2016 and 2015, and 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, 2016. We also have audited the Company’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.
Cash equivalents consist of demand deposit and money market accounts, U.S. Treasury Bills with a maturity of three months or less when purchased and other investments with a maturity of three months or less when purchased. During 2016, we acquired significant amounts of U.S. Treasury Bills with maturity dates more than three months from their purchase dates. In prior years, such investments were not material and were classified as cash equivalents. We believe that in substance these U.S. Treasury Bills are like cash as they are readily convertible to known amounts of cash and present an insignificant risk of change in value because of changes in interest rates. In determining the appropriate accounting classification under GAAP, we considered the relevant accounting literature. We also consulted with our independent auditors who shared with us certain insights into commonly applied practice today. We have concluded that, notwithstanding our view of the substance of such instruments, these U.S. Treasury Bills technically do not meet a “bright line” definition of cash equivalents under GAAP. Accordingly, we are now presenting all U.S. Treasury Bills with maturity dates greater than three months from their purchase dates separately in the accompanying Consolidated Balance Sheets. Additionally, we have revised the 2014 and 2015 Consolidated Statements of Cash Flows to reflect this change. We believe that these changes have no effect whatsoever on our financial condition.
overcome based on specific facts and circumstances that demonstrate that the ability to exercise significant influence is restricted. We apply the equity method to investments in common stock and to other investments when such other investments possess substantially identical subordinated interests to common stock.
Inventories consist of manufactured goods and goods acquired for resale. Manufactured inventory costs include raw materials, direct and indirect labor and factory overhead. Inventories are stated at the lower of cost or market. As of December 31, 2016, approximately 55% of our consolidated inventory cost was determined using the last-in-first-out (“LIFO”) method, 28% using the first-in-first-out (“FIFO”) method, and the remainder primarily using the average cost method. The difference between costs determined under LIFO and current costs was not significant as of December 31, 2016.
Service revenues are recognized as the services are performed. Services provided pursuant to a contract are either recognized over the contract period or upon completion of the elements specified in the contract depending on the terms of the contract. Revenues related to the sales of fractional ownership interests in aircraft are recognized ratably over the term of the related management services agreement, as the transfer of ownership interest in the aircraft is inseparable from the management services agreement.
Liabilities for losses and loss adjustment expenses are established under property/casualty insurance and reinsurance contracts issued by our insurance subsidiaries for loss events that have occurred as of the balance sheet date. The liabilities for losses and loss adjustment expenses are recorded at the estimated ultimate payment amounts, except that
The estimated liabilities of workers’ compensation claims assumed under certain reinsurance contracts are discounted based upon an annual discount rate of 4.5% for claims arising prior to January 1, 2003 and 1% for claims arising thereafter, consistent with insurance statutory accounting principles. The change in such discounts, including the periodic discount accretion is included in earnings as a component of losses and loss adjustment expenses.
The accounts of our non-U.S. based subsidiaries are measured, in most instances, using functional currencies other than the U.S. Dollar. Revenues and expenses of these subsidiaries are translated into U.S. Dollars at the average exchange rate for the period and assets and liabilities are translated at the exchange rate as of the end of the reporting
(t) New accounting pronouncements to be adopted subsequent to December 31, 2016 (Continued)
In January 2017, the FASB issued ASU 2017-04 “Simplifying the Test for Goodwill Impairment.” ASU 2017-04 eliminates the requirement to determine implied goodwill in measuring an impairment loss. Upon adoption, a goodwill impairment will be measured as the excess of the reporting unit’s carrying value over fair value, limited to the amount of goodwill. ASU 2017-04 is effective for goodwill impairment tests in fiscal years beginning after December 15, 2019 and early adoption is permitted. We are currently evaluating the effect this standard will have on our Consolidated Financial Statements.
Our long-held acquisition strategy is to acquire businesses at sensible prices that have consistent earning power, good returns on equity and able and honest management. Financial results attributable to business acquisitions are included in our Consolidated Financial Statements beginning on their respective acquisition dates.
Investments in securities with fixed maturities as of December 31, 2016 and 2015 are summarized by type below (in millions).
The amortized cost and estimated fair value of securities with fixed maturities at December 31, 2016 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.
* Approximately 56% of the aggregate fair value was concentrated in the equity securities of four companies (American Express Company-$11.2 billion; Wells Fargo & Company-$27.6 billion; International Business Machines Corporation (“IBM”)-$13.5 billion; and The Coca-Cola Company-$16.6 billion).
* Approximately 59% of the aggregate fair value was concentrated in the equity securities of four companies (American Express Company-$10.5 billion; Wells Fargo & Company-$27.2 billion; IBM-$11.2 billion; and The Coca-Cola Company-$17.2 billion).
We currently own 50,000 shares of 6% Non-Cumulative Perpetual Preferred Stock of BAC (“BAC Preferred”) with a liquidation value of $100,000 per share and warrants to purchase 700,000,000 shares of common stock of BAC (“BAC Warrants”). The BAC Preferred is redeemable at the option of BAC beginning on May 7, 2019 at a redemption price of $105,000 per share (or $5.25 billion in aggregate). The BAC Warrants expire in 2021 and are exercisable for an additional aggregate cost of $5 billion ($7.142857/share).
On July 1, 2015, Berkshire acquired 262.9 million shares of newly issued common stock of Heinz Holding for $5.26 billion and 3G acquired 237.1 million shares of newly issued common stock of Heinz Holding for $4.74 billion. Immediately thereafter, Heinz Holding executed a reverse stock split at a rate of 0.443332 of a share for each share. As of that date, Berkshire owned 52.5% of Heinz Holding’s outstanding common stock.
A summary of our investments in Kraft Heinz follows (in millions).
Our equity method earnings (losses) on the common stock were $923 million in 2016, $(122) million in 2015 and $(26) million in 2014. Common stock dividends received were $952 million in 2016 and $366 million in 2015.
Loans and finance receivables are predominantly installment loans originated or acquired by our manufactured housing business. Provisions for loan losses for 2016 and 2015 were $144 million and $148 million, respectively. Loan charge-offs, net of recoveries, were $144 million in 2016 and $177 million in 2015. At December 31, 2016, approximately 98% of the loan balances were evaluated collectively for impairment. As part of the evaluation process, credit quality indicators are reviewed and loans are designated as performing or non-performing. At December 31, 2016, approximately 98% of the loan balances were determined to be performing and approximately 94% of the loan balances were current as to payment status.
(10) Property, plant and equipment and assets held for lease (Continued)
Assets held for lease includes railcars, intermodal tank containers, cranes, over-the-road trailers, storage units and furniture. As of December 31, 2016, the minimum future lease rentals to be received on assets held for lease (including rail cars leased from others) were as follows (in millions): 2017 - $1,251; 2018 - $992; 2019 - $744; 2020 - $543; 2021 - $358; and thereafter - $525.
Depreciation expense for each of the three years ending December 31, 2016 is summarized below (in millions).
Amortization expense was $1,490 million in 2016, $1,106 million in 2015 and $1,155 million in 2014. Estimated amortization expense over the next five years is as follows (in millions): 2017 - $1,383; 2018 - $1,349; 2019 - $1,229; 2020 - $1,131 and 2021 - $1,042. Intangible assets with indefinite lives as of December 31, 2016 and 2015 were $18,705 million and $2,964 million, respectively. Other intangible assets at December 31, 2016 included assets of PCC and Duracell of approximately $24.8 billion, which included approximately $13.6 billion in customer relationships and $2.3 billion in trade names that were determined to have indefinite lives.
Derivative contracts have been entered into primarily through our finance and financial products and our utilities and energy businesses. A summary of the liabilities and related notional values of derivative contracts of our finance and financial products businesses follows (in millions).
with the expectation that the premiums received would exceed the amounts ultimately paid to counterparties. A summary of the derivative gains/losses included in our Consolidated Statements of Earnings in each of the three years ending December 31, 2016 follows (in millions).
The equity index put option contracts are European style options written between 2004 and 2008 on four major equity indexes. These contracts expire between June 2018 and January 2026. Future payments, if any, under any given contract will be required if the prevailing index value is below the contract strike price at the expiration date. We received the premiums on these contracts at the inception dates and therefore we have no counterparty credit risk.
The aggregate intrinsic value (the undiscounted liability assuming the contracts are settled based on the index values and foreign currency exchange rates as of the balance sheet date) of our equity index put option contracts was approximately $1.0 billion at December 31, 2016 and $1.1 billion at December 31, 2015. However, these contracts may not be unilaterally terminated or fully settled before the expiration dates. Therefore, the ultimate amount of cash basis gains or losses on these contracts will not be determined for several years. The remaining weighted average life of all contracts was approximately four years at December 31, 2016.
The liabilities for unpaid losses and loss adjustment expenses (also referred to as “claim liabilities”) under our 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 for each of the three years ending December 31, 2016 is as follows (in millions).
Incurred losses and loss adjustment expenses in the preceding table reflect the losses and loss adjustment expenses recorded in earnings in each year related to insured events occurring in the current year and in prior years. We present incurred and paid losses under retroactive reinsurance contracts and discount accretion separately. Such amounts relate to prior years’ underlying loss events. Additionally, we discount unpaid losses from certain workers’ compensation reinsurance contracts. Discounted workers’ compensation liabilities at December 31, 2016 and 2015 were approximately $1.9 billion and $2.0 billion, respectively, reflecting net discounts of $1.4 billion and $1.6 billion.
Estimated claim liabilities for environmental, asbestos and other latent injury exposures, net of reinsurance recoverables, were approximately $15.3 billion at December 31, 2016 and $14.0 billion at December 31, 2015, and included approximately $13.7 billion at December 31, 2016 and $12.4 billion at December 31, 2015 from retroactive reinsurance contracts. 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. Such development 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.
For GEICO, we establish and evaluate unpaid claim liabilities using standard actuarial loss development methods and techniques. The actuarial methods utilize historical claims data, adjusted when deemed appropriate to reflect perceived changes in loss patterns.
GEICO’s claims are counted 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” in the table which follows includes the combined number of reported claims for all policy coverages and excludes projected IBNR claims.
GEICO’s claim liabilities predominantly relate to various types of private passenger auto liability and physical damage claims. 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, 2016. Dollars are in millions.
General Re’s liabilities for unpaid losses and loss adjustment expenses include case and IBNR estimates and primarily relate to casualty and workers’ compensation coverages. Case losses are reported under reinsurance contracts either individually or in bulk as provided under the terms of the contracts. We independently evaluate reported loss amounts and if deemed appropriate, we establish case liabilities based on our estimates.
We primarily use Bornhuetter-Ferguson methods to estimate IBNR amounts for claims liabilities. The expected case loss emergence patterns and expected loss ratios are the critical assumptions applicable to these estimates. Once the annual IBNR liabilities are determined, we estimate the expected case loss emergence for the next calendar year based on the prior year-end expected loss emergence patterns and expected loss ratios. Liability estimates also include estimates of the impact of major catastrophe events as they become known, which rely more on a per-policy assessment of the ultimate cost associated with the individual loss event. Claim count data is excluded, as such information is not provided consistently by ceding companies under our contracts or is otherwise considered unreliable.
BHRG’s liabilities for losses and ALAE are principally a function of reported losses from ceding companies and IBNR and case development liability estimates which are based on expected loss ratios established on a portfolio basis. Liability estimates also include estimates of the impact of major catastrophe events, as they become known, which rely more on a per-policy assessment of the ultimate cost associated with the individual loss event. The expected loss ratios are based upon management’s judgment considering the type of business covered, analysis of each ceding company’s loss history and evaluation of the portion of the underlying contracts that we reinsure. Claim count data is excluded, as such information is not provided consistently by ceding companies under our contracts or is otherwise considered unreliable.
Supplemental unaudited average historical claims duration information based on the net losses and ALAE incurred and paid accident year data in the preceding tables follows. The percentages show the average portions of net losses and ALAE paid by each succeeding year, with year 1 representing the current accident year.
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. In 2016, BHE subsidiaries issued approximately $1.8 billion of debt with maturity dates ranging from 2025 to 2046 and a weighted average interest rate of 3.0%.
In March 2016, BHFC issued $3.5 billion of senior notes consisting of $750 million of 1.45% notes due in 2018, $1.0 billion of floating rate notes due in 2018, $1.25 billion of 1.70% notes due in 2019 and $500 million of floating rate notes due in 2019. In August 2016, BHFC issued $1.25 billion of senior notes consisting of $1 billion of 1.30% notes due in 2019 and $250 million of floating rate notes due in 2019, primarily to replace $1 billion of maturing debt. The borrowings of BHFC, a wholly owned finance subsidiary of Berkshire, are fully and unconditionally guaranteed by Berkshire.
Income tax expense reflected in our Consolidated Statements of Earnings for each of the three years ending December 31, 2016 is as follows (in millions).
Income tax expense is reconciled to hypothetical amounts computed at the U.S. federal statutory rate for each of the three years ending December 31, 2016 in the table below (in millions).
At December 31, 2016 and 2015, net unrecognized tax benefits were $485 million and $570 million, respectively. Included in the balance at December 31, 2016, were $369 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 such recognition. Because of the impact of deferred tax accounting, the differences in recognition periods would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period. As of December 31, 2016, we do not expect any material changes to the estimated amount of unrecognized tax benefits in the next twelve months.
Payments of dividends by our insurance subsidiaries are restricted by insurance statutes and regulations. Without prior regulatory approval, our principal insurance subsidiaries may declare up to approximately $13 billion as ordinary dividends during 2017.
Changes in Berkshire’s issued, treasury and outstanding common stock during the three years ending December 31, 2016 are shown in the table below.
Berkshire’s Board of Directors (“Berkshire’s Board”) has approved a common stock repurchase program under which Berkshire may repurchase its Class A and Class B shares at prices no higher than a 20% premium over the book value of the shares. Berkshire may repurchase shares in the open market or through privately negotiated transactions. Berkshire’s Board authorization does not specify a maximum number of shares to be repurchased. However, repurchases will not be made if they would reduce the total value of Berkshire’s consolidated cash, cash equivalents and U.S. Treasury Bills holdings below $20 billion. The repurchase program does not obligate Berkshire to repurchase any dollar amount or number of Class A or Class B shares and there is no expiration date to the program. There were no share repurchases under the program over the last three years. In 2014, we acquired WPLG, whose assets included 2,107 shares of Berkshire Hathaway Class A Common Stock and 1,278 shares of Class B Common Stock, which are included in treasury stock.
A summary of the net changes in after-tax accumulated other comprehensive income attributable to Berkshire Hathaway shareholders and significant amounts reclassified out of accumulated other comprehensive income for each of the three years ending December 31, 2016 follows (in millions).
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 net periodic pension expense for each of the three years ending December 31, 2016 are as follows (in millions).
Refer to Note 18 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.
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 $944 million in 2016, $739 million in 2015 and $737 million in 2014.
We lease certain manufacturing, warehouse, retail and office facilities as well as certain equipment. Rent expense under operating leases was $1,573 million in 2016, $1,516 million in 2015 and $1,484 million in 2014. Future minimum rental payments for operating leases having non-cancellable terms in excess of one year are as follows (in millions).
Our subsidiaries regularly make commitments in the ordinary course of business to purchase goods and services used in their businesses. The most significant of these relate to our railroad, utilities and energy businesses and our fractional aircraft ownership business. As of December 31, 2016, estimated future payments under such arrangements are as follows: $11.1 billion in 2017, $4.1 billion in 2018, $3.5 billion in 2019, $2.9 billion in 2020, $2.0 billion in 2021 and $14.6 billion after 2021.
Pursuant to the terms of agreements with noncontrolling shareholders in our less than wholly-owned subsidiaries, we may be obligated to acquire their equity ownership interests. If we had acquired all outstanding noncontrolling interests as of December 31, 2016, we estimate the cost would have been approximately $5.0 billion. However, the timing and the amount of any such future payments that might be required are contingent on future actions of the noncontrolling owners.
Consolidated sales and service revenues were $125.7 billion in 2016, $112.4 billion in 2015 and $102.2 billion in 2014. In 2016, 85% of such revenues were attributable to the United States compared to 87% in 2015 and 85% in 2014. The remainder of sales and service revenues were primarily in Europe, Canada and the Asia Pacific. Consolidated sales and service revenues included sales to Wal-Mart Stores, Inc. of approximately $14 billion in 2016 and $13 billion in 2015 and 2014. Approximately 95% of our revenues for each of the last three years from railroad, utilities and energy businesses were in the United States. At December 31, 2016, approximately 89% of our consolidated net property, plant and equipment was located in the United States with the remainder primarily in Canada and Europe.