BNSF operates various facilities and equipment to support its transportation system, including its infrastructure, locomotives and freight cars. It also owns or leases other equipment to support rail operations, such as vehicles. Support facilities for rail operations include yards and terminals throughout its rail network, system locomotive shops to perform locomotive servicing and maintenance, a centralized network operations center for train dispatching and network operations monitoring and management in Fort Worth, Texas, regional dispatching centers, computers, telecommunications equipment, signal systems and other support systems. Transfer facilities are maintained for rail-to-rail as well as intermodal transfer of containers, trailers and other freight traffic and include approximately 25 intermodal hubs located across the system. BNSF owns or holds under non-cancelable leases exceeding one year approximately 8,000 locomotives and 71,000 freight cars, in addition to maintenance of way and other equipment.
The electricity distribution network of Northern Powergrid (Northeast) and Northern Powergrid (Yorkshire) includes approximately 17,400 miles of overhead lines, approximately 42,000 miles of underground cables and approximately 750 major substations. AltaLink’s electricity transmission system includes approximately 8,100 miles of transmission lines and approximately 310 substations.
Net earnings attributable to Berkshire Hathaway shareholders for each of the past three years are disaggregated in the table that follows. Amounts are after deducting income taxes and exclude earnings attributable to noncontrolling interests (in millions).
Through our subsidiaries, we engage in a number of diverse business activities. We manage our operating businesses on an unusually decentralized basis. There are essentially no centralized or integrated business functions and there is minimal involvement by our corporate headquarters in the day-to-day business activities of the operating businesses. Our senior corporate management team participates in and is ultimately responsible for significant capital allocation decisions, investment activities and the selection of the Chief Executive to head each of the operating businesses. It also is responsible for establishing and monitoring Berkshire’s corporate governance practices. The business segment data (Note 23 to the accompanying Consolidated Financial Statements) should be read in conjunction with this discussion.
Our net earnings in 2017 included approximately $29.1 billion attributable to a one-time net benefit from the enactment of the Tax Cuts and Jobs Act (“TCJA”) on December 22, 2017. See Note 16 to the Consolidated Financial Statements. This benefit included approximately $29.6 billion related to a one-time non-cash reduction of our net deferred income tax liabilities that arose from the reduction in the statutory U.S. corporate income tax rate from 35% to 21%, as well as a net benefit of approximately $900 million primarily from our earnings from Kraft Heinz, partly offset by a one-time income tax expense of approximately $1.4 billion payable over eight years on the deemed repatriation of certain accumulated undistributed earnings of foreign subsidiaries. Due to their significance, we presented these one-time effects as a distinct item in the preceding table. Accordingly, the after-tax figures presented in the discussion of our various operating businesses and other activities in this section exclude the one-time effects of the TCJA.
Our insurance businesses generated after-tax losses from underwriting of $2.2 billion in 2017 compared to after-tax gains of $1.4 billion in 2016 and $1.2 billion in 2015. Underwriting results for 2017 included estimated pre-tax losses of approximately $3.0 billion ($1.95 billion after-tax), primarily attributable to three major hurricanes in the U.S. and Puerto Rico and wildfires in California. Underwriting results in each year also included after-tax foreign currency exchange rate gains and losses from the revaluation of certain non-U.S. Dollar denominated reinsurance liabilities. In 2017, such after-tax losses were $295 million compared to after-tax gains of $458 million in 2016 and $164 million in 2015.
After-tax investment and derivative gains were approximately $1.4 billion in 2017, $6.5 billion in 2016 and $6.7 billion in 2015. The gains in 2016 included approximately $2.7 billion from the redemptions of our Wrigley and Kraft Heinz preferred stock investments, sales of Dow Chemical common stock that we received upon conversion of our Dow Chemical preferred stock investment and a non-cash gain of approximately $1.9 billion related to the exchange of Procter & Gamble (“P&G”) common stock for 100% of the common stock of Duracell. Gains in 2015 included non-cash holding gains of approximately $4.4 billion in connection with our investment in Kraft Heinz common stock.
Other earnings in 2017 and 2016 included after-tax foreign currency exchange rate gains and losses related to parent company Euro-denominated debt. After-tax foreign exchange losses on our Euro-denominated debt were $655 million in 2017 compared to after-tax gains of $159 million in 2016. In addition, other earnings includes earnings from our investment in Kraft Heinz.
We engage in both primary insurance and reinsurance of property/casualty, life and health risks. In primary insurance activities, we assume defined portions of the risks of loss from persons or organizations that are directly subject to the risks. In reinsurance activities, we assume defined portions of similar or dissimilar risks that other insurers or reinsurers have subjected themselves to in their own insuring activities. Our insurance and reinsurance businesses are GEICO, Berkshire Hathaway Reinsurance Group (“BHRG”) and Berkshire Hathaway Primary Group.
Our management views insurance businesses as possessing two distinct operations - underwriting and investing. Underwriting decisions are the responsibility of the unit managers, while investing decisions are the responsibility of Berkshire’s Chairman and CEO, Warren E. Buffett and Berkshire’s corporate investment managers. Accordingly, we evaluate performance of underwriting operations without any allocation of investment income or investment gains/losses. We consider investment income as a component of our aggregate insurance operating results. However, we consider investment gains and losses, whether realized or unrealized as non-operating, based on our long-held philosophy of acquiring securities and holding those securities for long periods. Accordingly, we believe that such gains and losses are not predictable or necessarily meaningful in understanding the operating results of our insurance operations.
Underwriting expenses increased $277 million (7.0%) compared to 2016. Our expense ratios (underwriting expenses to premiums earned) in 2017 declined 1.1 percentage points compared to 2016. The largest components of underwriting expenses are employee-related (salaries and benefits) and advertising, which increased at lower rates than premiums earned.
Losses and loss adjustment expenses incurred in 2016 increased $2.4 billion (12.9%) to $21.0 billion and our loss ratio in 2016 increased 0.5 percentage points compared to 2015. In 2016, we experienced increases in storm losses (primarily from hail and flooding) and claims severity, partly offset by the effects of premium rate increases. Claims frequencies in 2016 were relatively unchanged from 2015 for property damage, collision, bodily injury and personal injury protection coverages. Average claims severities were higher in 2016 for bodily injury, physical damage and collision coverages (four to six percent range). Underwriting expenses in 2016 were $4.0 billion, an increase of $366 million (10.1%) over 2015. The increase in underwriting expenses in 2016 reflected the increase in policies-in-force.
A summary of premiums and underwriting results of our property/casualty reinsurance businesses follows (in millions).
NICO Group’s premiums earned were $4.4 billion, a decrease of $198 million (4%) in 2017 compared to 2016, while premiums written declined slightly. Roughly 40% of NICO Group’s premiums written and earned in 2017 and 2016 derived from a 10-year, 20% quota-share contract with Insurance Australia Group Ltd. (“IAG”) that incepted in July 2015. General Re Group’s premiums earned were $3.1 billion in 2017, an increase of $532 million (21%) compared to 2016. The increase reflected higher written premiums in both direct and broker markets, derived primarily from new business and increased participations for renewal business. Industry capacity dedicated to property and casualty markets remains high and price competition in most reinsurance markets persists. We continue to decline business when we believe prices are inadequate.
On a combined basis, we also decreased estimated ultimate claims liabilities for prior years’ loss events by $295 million in 2017 compared to $955 million in 2016. The comparative decline reflected higher than expected reported property claims and the effects of increases in certain United Kingdom (“U.K.”) claim liabilities attributable to the U.K. Ministry of Justice’s decision in the first quarter of 2017 to reduce the fixed discount rate required in lump sum settlement calculations of U.K. personal injury claims, known as the Ogden rate, from 2.5% to negative 0.75%. The Ogden rate is subject to adjustment in the future at the discretion of the U.K. Government and significant changes in that rate may have a significant effect on our claim liability estimates.
NICO Group’s premiums earned in 2016 increased $233 million (5%) compared to 2015 reflecting the impact of the IAG quota-share contract, partly offset by declines from other business, while General Re Group’s premiums earned declined $236 million (8%) versus 2015. The decline in General Re Group’s premiums earned was primarily due to lower volume in direct and broker market business.
Our property/casualty reinsurers produced pre-tax underwriting gains of $895 million in 2016 and $1,095 million in 2015. On a combined basis, we decreased estimated ultimate claims liabilities for prior years’ loss events by $955 million in 2016 and $1.2 billion in 2015. These decreases were primarily attributable to lower than expected reported losses from ceding companies with respect to property coverages. Pre-tax underwriting results in 2016 and 2015 included discount accretion related to certain workers’ compensation claim liabilities of $80 million in 2016 and $82 million in 2015. There was no effect from discounting on 2017 results, as the practice of discounting these related liabilities was discontinued in 2017.
Premiums earned in 2017 included $10.2 billion from an aggregate excess-of-loss retroactive reinsurance agreement with various subsidiaries of American International Group, Inc. (the “AIG Agreement”). At the inception of the AIG Agreement, we also recorded losses and loss adjustment expenses incurred of $10.2 billion, representing our initial estimate of the unpaid losses and loss adjustment expenses assumed of $16.4 billion, partly offset by an initial deferred charge asset of $6.2 billion. Thus, on the effective date, the AIG Agreement had no effect on our pre-tax underwriting results. In the fourth quarter of 2017, we increased our ultimate claim liability estimates related to the AIG Agreement by approximately $1.8 billion based on higher than expected loss payments being reported under the contractual retention, which affected our estimate of our liability. We also increased the related deferred charge asset by $1.7 billion based on our re-estimation of the amount and timing of our recorded liabilities.
Certain liabilities related to retroactive reinsurance contracts written by our U.S. subsidiaries are denominated in foreign currencies. Underwriting results included pre-tax losses of $264 million in 2017 and pre-tax gains of $392 million in 2016 and $150 million in 2015 associated with the re-measurement of such liabilities due to changes in foreign currency exchange rates, primarily related to the Great Britain Pound Sterling (“GBP”).
Pre-tax underwriting losses before foreign currency gains/losses were $1,066 million in 2017, $452 million in 2016 and $620 million in 2015 derived from deferred charge amortization and changes in the timing and amount of ultimate losses. Pre-tax losses in 2017 increased compared to 2016, due to amortization charges related to new contracts, including the AIG Agreement, partly offset by lower amortization on prior years’ contracts. Changes in estimated ultimate liabilities for prior years’ contracts were relatively insignificant in 2017 and 2016. During 2015, we increased estimated ultimate liabilities approximately $550 million for prior years’ contracts. The increase in estimated ultimate liabilities, net of related deferred charge adjustments, produced incremental pre-tax underwriting losses of approximately $90 million in 2015.
Before foreign currency gains and losses, pre-tax underwriting losses from periodic payment annuity contracts were $481 million in 2017, $441 million in 2016 and $305 million in 2015. These losses were primarily attributable to the recurring discount accretion on new business and existing liabilities and the impact of lower interest rates in 2017 and 2016, which increased expected future loss payments under certain reinsurance contracts in those years. Discounted annuity liabilities were approximately $11.2 billion at December 31, 2017 and $9.8 billion at December 31, 2016. The weighted average annual discount rate for these liabilities was approximately 4.1% as of December 31, 2017.
Premiums written in 2017 increased 12.0% compared to 2016. All of the significant BH Primary insurers generated increased premiums written, led by GUARD (26%), BH Specialty (23%) and BHHC (9%). Premiums earned were $7.1 billion in 2017, an increase of $886 million (14.2%) compared to 2016. BH Primary’s premiums written and earned in 2016 increased 13.2% and 16.0%, respectively, compared to 2015. The increases were primarily attributable to volume increases from BH Specialty, MedPro Group, BHHC and GUARD.
BH Primary produced pre-tax underwriting gains of $719 million in 2017, $657 million in 2016 and $824 million in 2015. BH Primary’s overall loss ratios were 63.1% in 2017, 61.8% in 2016 and 56.9% in 2015. Losses and loss adjustment expenses in 2017 included approximately $225 million (3% of premiums earned) related to the significant catastrophe events, primarily hurricanes Harvey and Irma. Losses and loss adjustment expenses also included net reductions of estimated ultimate liabilities for prior years’ loss events of $766 million in 2017, $503 million in 2016 and $643 million in 2015, which produced corresponding increases in pre-tax underwriting gains. The reductions of prior years’ estimates in each year primarily related to healthcare malpractice and workers’ compensation business. BH Primary writes significant levels of liability and workers’ compensation business and the related claim costs may be subject to higher severity and longer claims-tails, which could contribute to significant increases in claims liabilities in the future attributable to higher than expected claim settlements, adverse litigation or judicial rulings and other factors we have not anticipated.
U.S. government obligations are rated AA+ or Aaa by the major rating agencies. Approximately 88% of all state, municipal and political subdivisions, foreign government obligations and mortgage-backed securities were rated AA or higher. Non-investment grade securities represent securities rated below BBB- or Baa3. Foreign government securities include obligations issued or unconditionally guaranteed by national or provincial government entities.
Revenues from agricultural products increased 1.8% to $4.3 billion in 2017 compared to 2016, primarily due to higher average revenue per car/unit. Volumes were relatively flat, primarily due to higher shipments of domestic grain, as well as ethanol and other grain products, offset by lower grain exports.
Consolidated revenues were approximately $19.8 billion in 2016, a decrease of $2.1 billion (9.7%) compared to 2015. Pre-tax earnings were $5.7 billion in 2016, a decrease of $1.1 billion (16.0%) compared to 2015. Our total volume was approximately 9.8 million cars/units in 2016 compared to approximately 10.3 million in 2015. In 2016, we experienced declining demand, especially in our coal and crude oil categories. Coal had the largest decline, driven by structural changes in that business as well as competition from low natural gas prices. The decrease in revenue reflected comparative declines in average revenue per car/unit (5.2%) and volumes (5.0%). The decrease in average revenue per car/unit was primarily attributable to lower fuel surcharge revenue driven by lower fuel prices and business mix changes.
Revenues from industrial products were $4.8 billion in 2016, a decline of 14.2% compared with 2015. The decrease was attributable to lower volumes, primarily for petroleum products, reflecting pipeline displacement of U.S. crude rail traffic and lower U.S. oil production. In addition, we experienced lower demand for steel and taconite, partially offset by increased plastics products volume.
We hold a 90.2% ownership interest in Berkshire Hathaway Energy Company (“BHE”), which operates a global energy business. BHE’s domestic regulated utility interests are comprised of PacifiCorp, MidAmerican Energy Company (“MEC”) and NV Energy. In Great Britain, BHE subsidiaries operate two regulated electricity distribution businesses referred to as Northern Powergrid. BHE also owns two domestic regulated interstate natural gas pipeline companies. Other energy businesses include AltaLink, L.P. (“AltaLink”), a regulated electricity transmission-only business in Alberta, Canada and a diversified portfolio of independent power projects. In addition, BHE also operates the second-largest residential real estate brokerage firm and one of the largest residential real estate brokerage franchise networks in the United States.
Revenues were $5.25 billion in 2016, a slight decline from 2015, reflecting 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. Pre-tax earnings in 2016 increased $79 million (7.7%) from 2015, primarily due to increased gross margins, reflecting lower fuel prices and changes in fuel mix.
Revenues increased $114 million (4.5%) in 2016 compared to 2015, primarily due to increased electric revenues ($148 million), partially offset by lower natural gas revenues ($24 million). The increase in electric revenues resulted primarily from a 3.8% increase in customer volumes and higher rates. Wholesale and other revenues increased primarily due to increased average wholesale prices and higher transmission revenue. The natural gas revenue decline was primarily due to lower average per-unit costs of gas sold ($42 million), partly offset by higher wholesale volumes. Pre-tax earnings increased $100 million (34.2%) in 2016 compared to 2015. The increase in pre-tax earnings was primarily due to increased gross margins from electric revenues and lower operations and maintenance expenses, partially offset by higher depreciation and amortization from additional assets placed in service, and higher interest expense.
NV Energy operates regulated electric and natural gas utilities in Nevada. Revenues increased $123 million (4%) in 2017 compared to 2016. The increase was due primarily to an increase in retail electric operating revenues, which included a combination of increased rates from pass-through cost adjustments and higher volumes, partly offset by lower revenues from energy efficiency programs (offset by lower operating expenses). NV Energy also experienced retail electric revenue declines from the transition of certain commercial and industrial customers electing to purchase power from alternative sources and thus becoming distribution service only customers. Natural gas operating revenue declined $11 million in 2017, primarily due to lower rates, partially offset by higher customer usage. Pre-tax earnings increased $8 million (1%) in 2017 compared to 2016, primarily due to lower interest expenses.
Revenues were approximately $2.9 billion in 2016, a decrease of $457 million (13.5%) versus 2015. The decline was primarily attributable to lower electric retail rates resulting from lower energy costs. Electric retail volumes were relatively unchanged. Pre-tax earnings declined $27 million (4.6%) in 2016 compared to 2015. The decline was primarily due to an increase in operating expenses of $39 million, partly offset by a decrease in interest expense of $17 million. The increase in operating expenses reflected higher depreciation and amortization and reductions of certain accrued liabilities in 2015.
Revenues declined $47 million (5%) in 2017 compared to 2016. Unfavorable foreign currency translation effects of a comparatively stronger U.S. Dollar in 2017 resulted in a $48 million comparative decline in revenues, substantially all of which occurred in the first half of the year. Otherwise, we experienced comparative declines in distribution revenues, which were substantially offset by higher smart metering revenue. Pre-tax earnings declined $56 million (15%) in 2017 compared to the same period in 2016. The decline was primarily due to foreign currency translation effects, as well as from increased pension expenses and lower distribution revenues, partially offset by lower asset impairment charges and lower distribution costs.
Revenues declined $144 million (12.6%) in 2016 compared to 2015, primarily due to the impact of a stronger U.S. Dollar ($127 million) and lower distribution revenues. Pre-tax earnings 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. Pre-tax earnings 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 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. Pre-tax earnings increased $34 million (17.8%) in 2016 compared to 2015, primarily due to the increases in mortgage revenues.
Corporate interest includes interest on unsecured debt issued by BHE and borrowings from Berkshire insurance subsidiaries in connection with BHE’s acquisitions of NV Energy and AltaLink. Corporate interest in 2017 included pre-tax charges of $410 million from a tender offer completed in December 2017 to redeem certain long-term debt of BHE. Otherwise, corporate interest declined 7% in 2017 and 2016 compared to the corresponding prior years, primarily due to lower average borrowings.
BHE’s consolidated effective income tax rates were approximately 7% in 2017, 14% in 2016 and 16% in 2015. BHE’s effective income tax rates regularly reflect significant production tax credits from wind-powered electricity generation placed in service. In addition, income tax rates applicable to Northern Powergrid and AltaLink were lower than the U.S. statutory income tax rate. The effective tax rate in 2017 decreased primarily due to an increase in recognized production tax credits.
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 (“CTB”)), and a variety of industrial products for diverse markets (Marmon, Scott Fetzer and LiquidPower Specialty Products (“LSPI”)). 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.
Revenues of our manufacturers were approximately $50.4 billion in 2017, an increase of approximately $3.9 billion (8.5%) over 2016, which increased approximately $10.4 billion (28.7%) over 2015. Pre-tax earnings were approximately $6.9 billion in 2017, an increase of $650 million (10.5%) over 2016 and earnings in 2016 increased $1.3 billion (26.9%) compared to 2015.
Industrial products revenues were approximately $26.4 billion in 2017, an increase of approximately $1.7 billion (6.8%) versus 2016, reflecting increased revenues at several of our businesses. PCC’s revenues increased $754 million (9%) in 2017 compared to the eleven month post-acquisition period in 2016. On a comparable full year-to-date basis, PCC’s revenues increased approximately 2.3% compared to 2016, reflecting increases in aerospace and oil and gas markets, partially offset by declines in other power markets. In 2017, PCC produced revenue increases from structural castings, airfoils and forged products and from business acquisitions, partly offset by lower revenues from airframe products and industrial gas turbine products used in power markets. PCC continues to transition into product lines for new programs within the aerospace markets, which we expect will produce future revenue increases, but may have negative effects on revenues in the near term as prior programs wind down.
IMC’s revenues increased 13%, primarily due to increased customer demand and unit sales and from business acquisitions. The global demand for cutting tools was generally higher in 2017. Marmon’s revenues increased $349 million (7%) in 2017 versus 2016, primarily due to business acquisitions and higher average metal prices, partly offset by lower overall volumes and changes in mix. Marmon’s highway transportation, retail food and restaurant equipment businesses experienced volume-based revenue growth in 2017, which was more than offset by declines at the engineered wire/cable and retail store products businesses. Lubrizol’s revenues increased $165 million (3%) compared to 2016, primarily due to higher unit volumes, partly offset by effects of the disposition of an underperforming business in 2016. CTB’s revenues increased 5% in 2017 compared to 2016. The increase reflected the impact of a bolt-on business acquisition, partly offset by weak demand in the U.S. egg and poultry production markets and selling price pressures for grain storage systems.
PCC’s pre-tax earnings decreased 12.5% in 2017 compared to the post-acquisition period in 2016, primarily due to certain one-time inventory and impairment charges that were recorded in the fourth quarter of 2017. Pre-tax earnings from IMC and Marmon increased in 2017 compared to 2016, due to a combination of increased sales, increased manufacturing efficiencies, the effects of business acquisitions and ongoing expense control efforts. Lubrizol’s pre-tax earnings increased 17% in 2017 compared to 2016 due to comparatively lower earnings charges related to the disposition in 2016 of an underperforming bolt-on business and ongoing cost containment efforts, partly offset by lower gross sales margins, which were primarily attributable to higher average raw material prices. In 2017, average raw material prices at Lubrizol, including base oil feedstock and petrochemicals, increased about 9% versus 2016.
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 related to the aforementioned disposition 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 earnings in 2016 reflected the negative effects of a combination of weaker customer demand, sales price and mix changes, and increased restructuring costs, partially offset by the favorable effects of cost containment initiatives and lower average material prices.
Building products revenues were approximately $11.9 billion in 2017, an increase of approximately $1.2 billion (10.8%) compared to 2016. Approximately half of the increase was attributable to bolt-on business acquisitions by Shaw and MiTek. The remainder of the increase reflected sales volume increases at MiTek, Benjamin Moore and Johns Manville, partly offset by changes in prices and product mix.
Pre-tax earnings were $1.4 billion in 2017, an increase of $204 million (17.3%) compared to 2016. The comparative earnings increase reflected the fact that approximately $107 million of asset impairment, pension settlement and environmental claim charges were recorded in 2016 by Shaw and Benjamin Moore. The comparative earnings increase also was a result of bolt-on acquisitions, partly offset by comparative declines in average gross sales margin rates due to higher raw material and other production costs.
Pre-tax earnings increased $288 million (35%) in 2017 compared to 2016. The increase in earnings was primarily due to increased earnings from Duracell and Forest River. Pre-tax earnings from Duracell were $82 million in 2017, compared to a pre-tax loss of $89 million in 2016, which included significant transition costs arising from the acquisition. The improvement in operating results in 2017 reflects an overall reduction in transition costs and the positive effects of ongoing restructuring and business development efforts. Forest River’s earnings increased 23% in 2017, primarily attributable to the increase in sales and lower manufacturing overhead rates. Earnings from apparel and footwear businesses increased 5% in 2017 compared to 2016, primarily due to increased earnings from the footwear businesses.
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, primarily attributable to increased unit sales. Apparel revenues declined $81 million (1.9%) in 2016 compared to 2015, reflecting lower footwear sales and the impact of a divestiture by Fruit of the Loom.
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). Other service businesses include the electronic distribution of corporate news, multimedia and regulatory filings (Business Wire), publication of newspapers (Buffalo News and the BH Media Group) and operation of a television station in Miami, Florida (WPLG). Also included in this group is a third party logistics business that primarily serves the petroleum and chemical industries (Charter Brokerage).
Service business revenues were $11.2 billion in 2017, an increase of $863 million (8%) compared to 2016, primarily attributable to comparative increases at TTI and NetJets. TTI’s sales increased 16% in 2017 compared to 2016, primarily due to higher customer demand. NetJets’ revenues increased due to an increase in revenue flight hours and increased aircraft management service revenues.
Revenues increased 1.8% to $10.4 billion in 2016, 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.
Our retailers include Berkshire Hathaway Automotive (“BHA”), which we acquired in the first quarter of 2015. BHA includes over 80 auto dealerships that sell new and pre-owned automobiles, and offer repair services and related products. BHA also operates two insurance businesses, two auto auctions and an automotive fluid maintenance products distributor. Our retailing businesses also include four home furnishings retailing businesses (Nebraska Furniture Mart, R.C. Willey, Star Furniture and Jordan’s), which sell furniture, appliances, flooring and electronics.
Our other retailing businesses include three jewelry retailing businesses (Borsheims, Helzberg and Ben Bridge), See’s Candies (confectionary products), Pampered Chef (high quality kitchen tools), Oriental Trading Company (party supplies, school supplies and toys and novelties) and Detlev Louis Motorrad (“Louis”), a Germany-based retailer of motorcycle accessories acquired in the second quarter of 2015.
Retailing revenues were $15.1 billion in 2017, slightly lower than 2016. BHA’s aggregate revenues, which represented 63% of our total retailing revenues, declined 1.3% in 2017 compared to 2016, due primarily to a 3.7% decline in new and used cars sold, partly offset by higher service and finance and insurance revenues. Revenues of our other retailers increased 1.7% in 2017 compared to 2016.
Pre-tax earnings increased $126 million (19%) in 2017 as compared to 2016. The increase reflected comparatively higher earnings from BHA, primarily due to increased earnings from finance and insurance activities and lower selling and administrative expenses, partly offset by lower auto sales volumes and margins. Pre-tax earnings of our home furnishings retailers increased 6.5% in 2017 compared to 2016. Pampered Chef also produced comparatively higher earnings in 2017, primarily attributable to revenue increases and expense management efforts.
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 Walmart, 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.
Clayton Homes’ revenues were $5.0 billion in 2017, an increase of $780 million (18%) compared to 2016. The revenues increase was primarily due to higher home sales, attributable to an increase in overall unit sales (9%) and higher average prices. The increase in average prices was primarily due to sales mix changes, which reflected increases in site built home sales, a relatively new business for Clayton. Site built homes include higher land content and unit prices tend to be higher, although gross sales margin rates are typically lower than manufactured homes. Interest and financial services revenues increased 2% in 2017 compared to 2016.
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 and increased insurance losses.
Transportation equipment leasing revenues declined $41 million (2%) in 2017 compared to 2016. The revenue decline was due to lower railcar and trailer units on lease and lower railcar lease rates. We currently believe industry railcar capacity available for lease exceeds demand, which is contributing to lower lease rates. We also experienced increased other service revenues, primarily attributable to business acquisitions and favorable foreign currency translation effects.
Transportation equipment leasing revenues increased $110 million (4.3%) in 2016 compared to 2015, primarily from the acquisition of General Electric Company’s tank car fleet and its railcar repair services business in 2015 and increased rates and tank car additions. These revenue increases were partly offset by lower utilization rates, unfavorable foreign currency translation effects, lower crane lease demand in North America and reduced volume related to oil and gas markets.
Investment gains/losses arise primarily from the sale, redemption or exchange of investments. The timing of gains or losses can have a material effect on periodic earnings. Investment gains and losses included in earnings usually have minimal impact on the periodic changes in our consolidated shareholders’ equity since most of our investments are recorded at fair value with the unrealized gains and losses included in shareholders’ equity as a component of accumulated other comprehensive income.
While the adoption of this standard did not affect our consolidated shareholders’ equity, it will almost certainly produce a very significant increase in the volatility of our periodic net earnings in the future given the magnitude of our existing equity securities portfolio and the inherent volatility of equity securities prices. To illustrate the impact of this standard, our other comprehensive income for the year ending December 31, 2017 included after-tax net unrealized gains from equity securities of approximately $19 billion. Had the new accounting standard been in effect as of the beginning of 2017, this amount would have been included in our Consolidated Statements of Earnings. However, our consolidated comprehensive income for the period would have been unchanged.
As of December 31, 2017, the aggregate intrinsic value of our equity put option contracts was approximately $800 million and our recorded liability was approximately $2.2 billion. Our ultimate payment obligations, if any, under our equity index put option contracts will be determined as of the contract expiration dates (beginning in June 2018), and will be based on the intrinsic value as defined under the contracts.
After-tax other earnings (losses) also include charges arising from the application of the acquisition method in connection with Berkshire’s past business acquisitions. Such charges were primarily from the amortization of intangible assets recorded in connection with those business acquisitions.
In each of the last three years, Berkshire issued Euro-denominated debt and at December 31, 2017, the aggregate par amount outstanding was 6.85 billion. Changes in foreign currency exchange rates can produce sizable non-cash gains and losses from the periodic revaluation of these liabilities into U.S. Dollars. The increase in interest expense in 2016 over 2015 before those gains and losses was primarily attributable to increased average outstanding debt.
Our consolidated balance sheet continues to reflect significant liquidity and a strong capital base. Our consolidated shareholders’ equity at December 31, 2017 was $348.3 billion, an increase of $65.3 billion since December 31, 2016 (based upon shareholders’ equity as originally reported in our 2016 Form 10-K). Net earnings attributable to Berkshire shareholders in 2017 were $44.9 billion. Net unrealized appreciation of investments and foreign currency translation gains included in other comprehensive income in 2017 were approximately $18.9 billion and $2.2 billion, respectively.
At December 31, 2017, our insurance and other businesses held cash, cash equivalents and U.S. Treasury Bills of approximately $104.0 billion and investments (excluding our investment in Kraft Heinz) of $185.4 billion. In 2017, Berkshire issued 1.1 billion of senior notes and repaid $1.1 billion of maturing senior notes. Berkshire’s outstanding debt at December 31, 2017 was approximately $18.8 billion, an increase of $1.1 billion from December 31, 2016, of which $990 million was attributable to foreign currency exchange rate changes applicable to the 6.85 billion par amount of Euro-denominated senior notes. Berkshire term debt of $800 million matured in February 2018 and $750 million will mature in August 2018.
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. During 2017, BHE’s and BNSF’s capital expenditures were $4.6 billion and $3.3 billion, respectively. We forecast capital expenditures of these two operations will approximate $9.7 billion in 2018.
Berkshire’s Board of Directors has authorized Berkshire management to repurchase, at its discretion, Berkshire Class A and Class B common stock at prices no higher than a 20% premium over book value per share. We will not repurchase our stock if it reduces the total amount of Berkshire’s consolidated cash, cash equivalents and U.S. Treasury Bills holdings below $20 billion. There is no obligation to repurchase any stock and the program is expected to continue indefinitely. Financial strength and redundant liquidity will always be of paramount importance at Berkshire. There were no share repurchases in 2017.
The timing and/or amount of the payments under certain contracts are contingent upon the outcome of future events. Most significantly, the timing and amount of future payments of unpaid losses and loss adjustment expenses arising under property and casualty insurance and reinsurance contracts, including retroactive reinsurance contracts, are contingent upon the outcome of claim settlement activities or events. Obligations arising under life, annuity and health insurance benefits are also contingent on future premiums, allowances, mortality, morbidity, expenses and policy lapse rates. The amounts included in the following table are based on the liability estimates reflected in our Consolidated Balance Sheet as of December 31, 2017. Although certain insurance losses and loss adjustment expenses and life, annuity and health benefits are recoverable under reinsurance contracts, those receivables are not reflected in the table.
Certain accounting policies require us to make estimates and judgments in determining 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.
Our consolidated claim liabilities as of December 31, 2017 were $104 billion, of which 87% related to GEICO and the Berkshire Hathaway Reinsurance Group (General Re Group and NICO Group). Additional information regarding significant uncertainties inherent in the processes and techniques of these businesses follows.
The nature and extent of loss information provided under many facultative (individual risk), per occurrence excess or retroactive reinsurance contracts may not differ significantly from the information received under a primary insurance contract if reinsurer personnel either work closely with the ceding company in settling individual claims or manage the claims themselves. However, loss information is often less detailed with respect to aggregate excess-of-loss and quota-share contracts. Additionally, loss information we receive through periodic reports is often in a summary format rather than on an individual claim basis. Loss data includes recoverable paid losses, as well as case loss estimates. Ceding companies infrequently provide IBNR estimates to reinsurers.
A summary of BHRG’s property and casualty unpaid losses and loss adjustment expenses, other than retroactive reinsurance losses and loss adjustment expenses, as of December 31, 2017 follows (in millions).
General Re Group’s process for estimating unpaid losses and loss adjustment expenses starts with case loss estimates reported by ceding companies. We independently evaluate certain reported case losses and if appropriate, we use our own case liability estimate. As of December 31, 2017, our case loss estimates exceeded ceding company estimates by approximately $2.2 billion, which were concentrated in legacy workers’ compensation claims occurring over 10 years ago. We also periodically conduct detailed reviews of individual client claims, which may cause us to adjust our case estimates.
In estimating General Re Group’s 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 groups or portfolios of policies based primarily on product type (e.g., treaty, facultative and program), line of business (e.g., auto liability, property and workers’ compensation) and/or geographic jurisdiction, and in some cases contractual features or market segment. For each portfolio, we aggregate premiums and losses by accident year or coverage period and analyze the paid and incurred loss data over time. We estimate the expected development of reported claims, which, together with the expected loss ratios, are used to calculate IBNR liability estimates. Factors affecting our loss development analysis include, but are not limited to, changes in the following: client claims reporting and settlement 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 case loss emergence patterns.
We reduced General Re Group’s other casualty, excluding asbestos and environmental, estimated ultimate losses for prior years’ events by $114 million in 2017 reflecting lower than expected reported losses, resulting in a $114 million increase in pre-tax earnings. For our significant casualty and general liability portfolios, 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.
Our retroactive reinsurance contracts cover loss events occurring before the contract inception dates. Claim liabilities relating to our retroactive reinsurance contracts are predominately related to casualty or liability exposures. We expect the claim-tails to be very long. Our gross unpaid losses, deferred charge assets, and net liabilities at December 31, 2017 were as follows (in millions).
Our contracts are generally subject to maximum limits of indemnifications. We currently expect that maximum remaining gross losses payable under our retroactive policies will not exceed $57 billion due to the applicable aggregate contract limits. Absent significant judicial or legislative changes affecting asbestos, environmental or latent injury exposures, we also currently believe it unlikely that losses will develop upward to the maximum losses payable or downward by more than 15% of our $42.9 billion estimated liability at December 31, 2017.
Certain of our retroactive reinsurance contracts include asbestos, environmental and other latent injury claims. Our estimated liabilities for such claims were approximately $14.0 billion at December 31, 2017. We do not consistently receive reliable detailed data regarding asbestos, environmental and latent injury claims from all ceding companies, particularly with respect to multi-line or aggregate excess-of-loss policies. When possible, we conduct a detailed analysis of the underlying loss data to make an estimate of ultimate reinsured losses. When detailed loss information is unavailable, we develop estimates by applying recent industry trends and projections to aggregate client data. Judgments in these areas necessarily consider the stability of the legal and regulatory environment under which we expect these claims will be adjudicated. Legal reform and legislation could also have a significant impact on our ultimate liabilities.
Changes in ultimate estimated liabilities for prior years’ retroactive reinsurance contracts were relatively insignificant in 2017, as were changes in the estimated timing and amount of remaining unpaid losses. In 2017, we paid losses and loss adjustment expenses of approximately $1.0 billion with respect to these contracts.
We measure derivative contract liabilities at fair value. Our remaining significant derivative contract exposures relate to equity index put option contracts written between 2004 and 2008. Our recorded liabilities are based on models as there are essentially no observable prices for comparable contracts. Actual values in an exchange may differ significantly from the values produced by such models, as transaction values may also reflect the prevailing perceptions of individual buyers and sellers and other changes in market conditions.
We determine the fair values of equity index put option contracts using a Black-Scholes based option valuation model. Inputs to the model include the current index value, strike price, interest rate, dividend rate and contract expiration date. The weighted average interest and dividend rates used as of December 31, 2017 were 1.1% and 3.2%, respectively. The interest rates were approximately 40 basis points (on a weighted average basis) over benchmark interest rates at the end of 2017 and represented our estimate of our nonperformance risk.
The Black-Scholes based model also incorporates volatility inputs that estimate potential price changes over time. Our contracts have an average remaining maturity of about three years. The weighted average volatility used as of December 31, 2017 was approximately 17.4%. We determine the weighted average volatilities based on the volatility input for each contract weighted by the contract’s notional value. The potential impact from changes in our volatility assumptions are as follows. (Dollars in millions).
Equity securities represent a significant portion of our investment portfolio. Strategically, we strive to invest in businesses that possess excellent economics and able and honest management, and we prefer to invest a meaningful amount in each investee. Consequently, equity investments are concentrated in relatively few issuers. At December 31, 2017, approximately 65% of the total fair value of equity securities was concentrated in five issuers.
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 subsidiaries use commodities in various ways in manufacturing and providing services. As such, we are subject to price risks related to various commodities. In most instances, we attempt to manage these risks through the pricing of our products and services to customers. To the extent that we are unable to sustain price increases in response to commodity price increases, our operating results will likely be adversely affected. We may utilize derivative contracts to manage a portion of commodity price risks at BHE.
We have audited the accompanying consolidated balance sheets of Berkshire Hathaway Inc. and subsidiaries (the “Company”) as of December 31, 2017 and 2016, 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, 2017, and the related notes (collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Berkshire Hathaway Inc. (“Berkshire”) is a holding company owning subsidiaries engaged in a number of diverse business activities, including insurance and reinsurance, freight rail transportation, utilities and energy, manufacturing, service, retailing and finance. In these notes the terms “us,” “we,” or “our” refer to Berkshire and its consolidated subsidiaries. Further information regarding our reportable business segments is contained in Note 23. Significant business acquisitions completed over the past three years are discussed in Note 2.
The accompanying Consolidated Financial Statements include the accounts of Berkshire consolidated with the accounts of all subsidiaries and affiliates in which we hold a controlling financial interest as of the financial statement date. Normally a controlling financial interest reflects ownership of a majority of the voting interests. We consolidate a variable interest entity (“VIE”) when we possess both the power to direct the activities of the VIE that most significantly impact its economic performance and we are either obligated to absorb the losses that could potentially be significant to the VIE or we hold the right to receive benefits from the VIE that could potentially be significant to the VIE. Intercompany accounts and transactions have been eliminated.
Prior to 2017, the liability for unpaid losses and loss adjustment expenses related to workers’ compensation claims assumed under certain workers’ compensation reinsurance contracts were discounted for the time-value-of-money consistent with insurance statutory accounting principles. Estimated claim liabilities assumed under all other insurance and reinsurance contracts, including other workers’ compensation contracts are not discounted. In the fourth quarter of 2017, we discontinued the practice of discounting workers’ compensation claims liabilities assumed under all reinsurance contracts to achieve full consistency. In connection with this change, we increased our unpaid losses and loss adjustment expenses by $1.43 billion and reduced our income tax liabilities by $502 million and our shareholders’ equity by $931 million. The effect of this change on net earnings in 2015 and 2016 was immaterial and the aforementioned adjustment to retained earnings was recorded as of December 31, 2014 in the accompanying Consolidated Financial Statements. As a result, retained earnings and shareholder’s equity for the years 2014-2016 have been restated from the amounts previously reported.
The preparation of our Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. In particular, estimates of unpaid losses and loss adjustment expenses and related reinsurance recoverable on unpaid losses are subject to considerable estimation error due to the inherent uncertainty in projecting ultimate claim costs. In addition, estimates and assumptions associated with the amortization of deferred charges on retroactive reinsurance contracts, determinations of fair values of certain financial instruments and evaluations of goodwill and identifiable intangible assets for impairment require considerable judgment. Actual results may differ from the estimates used in preparing our Consolidated Financial Statements.
Investment gains and losses arise when investments are sold (as determined on a specific identification basis) or are other-than-temporarily impaired. If a decline in the value of an investment below cost is deemed other than temporary, the cost of the investment is written down to fair value, with a corresponding charge to earnings. Factors considered in determining whether an impairment is other than temporary include: the financial condition, business prospects and creditworthiness of the issuer, the relative amount of the decline, our ability and intent to hold the investment until the fair value recovers and the length of time that fair value has been less than cost. With respect to an investment in a fixed maturity security, we recognize an other-than-temporary impairment if we (a) intend to sell or expect to be required to sell the security before its amortized cost is recovered or (b) do not expect to ultimately recover the amortized cost basis even if we do not intend to sell the security. Under scenario (a), we recognize the loss in earnings and under scenario (b), we recognize the credit loss component in earnings and the difference between fair value and the amortized cost basis net of the credit loss in other comprehensive income.
Allowances for credit losses on loans include estimates of losses on loans currently in foreclosure and losses on loans not currently in foreclosure. Estimates of losses on loans in foreclosure are based on historical experience and collateral recovery rates. Estimates of losses on loans not currently in foreclosure consider historical default rates, collateral recovery rates and prevailing economic conditions. Allowances for credit losses also incorporate the historical average time elapsed from the last payment until foreclosure.
Property, plant and equipment and leased assets in use by our other businesses are depreciated to estimated salvage value primarily using the straight-line method over estimated useful lives. Ranges of estimated useful lives of depreciable assets used in our other businesses are as follows: buildings and improvements - 5 to 50 years, machinery and equipment - 3 to 25 years, furniture, fixtures and other - 3 to 15 years and assets held for lease - 6 to 35 years.
Insurance premiums for prospective property/casualty insurance and reinsurance are earned over the loss exposure or coverage period in proportion to the level of protection provided. In most cases, such premiums are recognized as revenues ratably over the term of the contract with unearned premiums computed on a monthly or daily pro-rata basis. Premiums for retroactive property/casualty reinsurance contracts are earned at the inception of the contracts, as all of the underlying loss events covered by these policies occurred prior to inception. Premiums for life reinsurance and annuity contracts are earned when due. Premiums earned are stated net of amounts ceded to reinsurers. Premiums earned on contracts containing experience rating provisions reflect estimated loss experience under contracts.
Operating revenues from the distribution and sale of electricity and natural gas to customers are recognized when the services are rendered or the energy is delivered. Revenues include unbilled as well as billed amounts. Rates charged are generally subject to federal and state regulation or established under contractual arrangements. When preliminary rates are permitted to be billed prior to final approval by the applicable regulator, certain revenue collected may be subject to refund and a liability for estimated refunds is recorded.
Liability estimates are based upon (1) reports of losses from policyholders, (2) individual case estimates and (3) estimates of incurred but not reported losses. Paid claims, claim settlement costs and changes in estimated claim liabilities are included in losses and loss adjustment expenses in the Consolidated Statements of Earnings. Provisions for losses and loss adjustment expenses are charged to earnings after deducting amounts recovered and estimates of recoverable amounts under ceded reinsurance contracts. Reinsurance contracts do not relieve the ceding company of its obligations to indemnify policyholders with respect to the underlying insurance and reinsurance contracts.
Incremental costs that are directly related to the successful sale of insurance contracts are capitalized, subject to ultimate recoverability, and are subsequently amortized to underwriting expenses as the related premiums are earned. Direct incremental acquisition costs include commissions, premium taxes and certain other costs associated with successful efforts. All other underwriting costs are expensed as incurred. The recoverability of capitalized insurance policy acquisition costs generally reflects anticipation of investment income. The unamortized balances are included in other assets and were $2,529 million and $1,991 million at December 31, 2017 and 2016, respectively.
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 period. Gains or losses from translating the financial statements of these subsidiaries are included in shareholders’ equity as a component of accumulated other comprehensive income. Gains and losses arising from transactions denominated in a currency other than the functional currency of the reporting entity, including gains and losses from the remeasurement of assets and liabilities due to changes in exchange rates, are included in earnings.
The FASB issued ASU 2014-09 “Revenue from Contracts with Customers” in 2014. ASU 2014-09 applies to contracts with customers, excluding, most notably, insurance, reinsurance and leasing contracts. Subsequently the FASB issued additional guidance that modified or clarified ASU 2014-09. All guidance is collectively referred to as Accounting Standard Codification (“ASC”) 606. The framework prescribed by ASC 606 includes a five-step process for recognizing revenue. A core principle is that revenues are recognized as the control of distinct goods or services are transferred to customers in amounts that reflect the consideration the seller expects to be entitled. Under ASC 606, revenues and related costs with respect to certain of our contracts with customers will be recognized over time rather than when the products or services are delivered. In addition, certain of our contracts will be treated as leases for accounting purposes, rather than contracts with customers subject to ASC 606. We adopted ASC 606 as of January 1, 2018, under the modified retrospective method. The principal impact of the initial adoption of ASC 606 resulted in an increase to both assets (primarily property, plant and equipment) and liabilities of approximately $3.5 billion.
In 2016, the FASB issued ASU 2016-13 “Financial Instruments-Credit Losses,” which provides for the recognition and measurement at the reporting date of all expected credit losses for financial assets held at amortized cost and available-for-sale debt securities. Currently, credit losses are recognized and measured when such losses become probable based on the prevailing facts and circumstances. ASU 2016-13 is effective for reporting periods beginning after December 15, 2019. We are currently evaluating the effect this standard will have on our Consolidated Financial Statements.
New accounting pronouncements to be adopted subsequent to December 31, 2017 (Continued)
In January 2017, the FASB issued ASU 2017-04 “Simplifying the Test for Goodwill Impairment.” ASU 2017-04 eliminates the requirement to determine the implied value of goodwill in measuring an impairment loss. Upon adoption, the measurement of a goodwill impairment will represent the excess of the reporting unit’s carrying value over fair value, limited to the carrying value of goodwill. ASU 2017-04 is effective for goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted.
Our long-held acquisition strategy is to acquire businesses 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.
In the first quarter of 2015, we acquired the Van Tuyl Group (now named Berkshire Hathaway Automotive), which included over 80 automotive dealerships and two related insurance businesses, two auto auctions and a distributor of automotive fluid maintenance products. In addition to selling new and pre-owned automobiles, the Berkshire Hathaway Automotive group offers repair and other services and products, including extended warranty services and other automotive protection plans. Consideration paid for the acquisition was $4.1 billion. The goodwill related to Berkshire Hathaway Automotive is amortizable for income tax purposes.
As of December 31, 2016, other investments included preferred stock and common stock warrants of Bank of America Corporation (“BAC”) and preferred stock of Restaurant Brands International, Inc. (“RBI”). In 2011, we acquired 50,000 shares of 6% Non-Cumulative Perpetual Preferred Stock of Bank of America Corporation (“BAC”) with a liquidation value of $100,000 per share (“BAC Preferred”) and warrants to purchase up to 700,000,000 shares of common stock of BAC (“BAC Warrants”) at $7.142857 per share (up to $5 billion in the aggregate). On August 24, 2017, we exercised all of our BAC Warrants and acquired 700,000,000 shares of BAC common stock. We also surrendered substantially all of our BAC Preferred as payment of the $5 billion cost to exercise the BAC Warrants and acquire the BAC common stock. Our investment in BAC is included in the banks, insurance and finance category at December 31, 2017 and in other investments at December 31, 2016.
As of December 31, 2017 and 2016, unrealized losses on equity securities in a continuous unrealized loss position for more than twelve consecutive months were $94 million and $551 million, respectively.
In June 2015, Berkshire exercised the aforementioned common stock warrants. On July 1, 2015, Berkshire and 3G acquired new shares of Heinz Holding common stock for $5.26 billion and $4.74 billion, respectively. After these transactions, Berkshire owned approximately 52.5% of the outstanding shares of Heinz Holding. On July 2, 2015, Heinz Holding acquired all of the outstanding common stock of Kraft Foods Group, Inc. (“Kraft”), at which time Heinz Holding was renamed The Kraft Heinz Company (“Kraft Heinz”). In connection with its acquisition of Kraft, Kraft Heinz issued one new share of Kraft Heinz common stock for each share of Kraft common stock, which reduced Berkshire’s and 3G’s ownership interests in Kraft Heinz to 26.8% and 24.2%, respectively. We accounted for our investment in Heinz Holding common stock and continue to account for our investment in Kraft Heinz common stock on the equity method. In applying the equity method, the investor treats an investee’s issuance of shares as if the investor had sold a proportionate share of its investment. As a result, we recorded a non-cash pre-tax holding gain of approximately $6.8 billion in 2015, representing the excess of the fair value of Kraft Heinz common stock at the date of the merger over the carrying value associated with the reduction in our ownership.
We record investments in equity and fixed maturity securities classified as available-for-sale at fair value and record the difference between fair value and cost in other comprehensive income. We recognize investment gains and losses when we sell or otherwise dispose of such securities. Gross gains from equity securities of approximately $1.0 billion in 2017 related to the surrender of substantially all of our BAC Preferred as described in Note 4. Gross gains from equity securities in 2016 included approximately $4.2 billion from the redemptions of our investments in Wm. Wrigley Jr. Company and Kraft Heinz preferred stock and from the sale of Dow Chemical Company common stock received in the conversion of our Dow Chemical preferred stock investment. In 2016, we also recorded a non-cash holding gain of approximately $1.1 billion from the exchange of P&G common stock in connection with the acquisition of Duracell. See Note 2. Gross gains from equity securities in 2015 included a non-cash holding gain of approximately $6.8 billion in connection with our investment in Kraft Heinz common stock. See Note 5.
Loans and finance receivables are predominantly installment loans originated or acquired by our manufactured housing business. Provisions for loan losses for 2017 and 2016 were $160 million and $144 million, respectively. Loan charge-offs, net of recoveries, were $162 million in 2017 and $144 million in 2016. At December 31, 2017, 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, 2017, we considered approximately 99% of the loan balances to be performing and approximately 95% of the loan balances to be current as to payment status. In June 2017, we agreed to provide a Canada-based financial institution with a C$2 billion (approximately $1.6 billion) one-year secured revolving credit facility. The agreement expires on June 29, 2018. There was no outstanding loan balance as of December 31, 2017.
A summary of property, plant and equipment of our railroad and our utilities and energy businesses follows (in millions). The utility generation, transmission and distribution systems and interstate natural gas pipeline assets are owned by regulated public utility and natural gas pipeline subsidiaries.
Depreciation expense for each of the three years ending December 31, 2017 is summarized below (in millions).
(1) Represents the aggregate undiscounted amounts payable assuming that the value of each index is zero at each contract’s expiration date. Certain of these contracts are denominated in foreign currencies. Notional amounts are based on the foreign currency exchange rates as of each balance sheet date.
Incurred losses and loss adjustment expenses in the preceding table were recorded in earnings in each period and related to insured events occurring in the current year (“current accident year”) and events occurring in all prior years (“prior accident years”). We incurred current accident year losses of approximately $3 billion in 2017 with respect to hurricanes Harvey, Irma and Maria, an earthquake in Mexico, a cyclone in Australia and wildfires in California.
Incurred losses and loss adjustment expenses also included net reductions of estimated ultimate liabilities for prior accident years of $544 million, $1.5 billion and $2.0 billion in 2017, 2016 and 2015, respectively. Overall, we decreased estimated ultimate liabilities with respect to primary insurance by $249 million in 2017, $569 million in 2016 and $793 million in 2015. In each year, estimated ultimate claim liabilities for prior accident years were generally lower for medical malpractice and workers’ compensation insurance. For primary private passenger automobile insurance claims, we increased liabilities for prior years’ claims in 2017, primarily due to increased average claims severities, and decreased liabilities for prior years’ claims in 2016 and 2015. We decreased estimated ultimate liabilities with respect to property and casualty reinsurance by $295 million in 2017, $955 million in 2016 and $1.2 billion in 2015. The decrease in 2017 included increased losses from a United Kingdom government-mandated change to the computation of certain personal injury lump sum settlements and higher than expected property losses.
Estimated claim liabilities for environmental, asbestos and other latent injury exposures, net of reinsurance recoverables, were approximately $1.6 billion at December 31, 2017 and 2016. These liabilities are subject to change due to changes in the legal and regulatory environment as described in Note 14. We are unable to reliably estimate additional losses or a range of losses that are reasonably possible for these claims.
GEICO’s claim liabilities predominantly relate to various types of private passenger auto liability and physical damage claims. 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. Claim liabilities include average, case, case development and IBNR estimates.
Estimates for liability coverages are more uncertain primarily due to the longer claim-tails, the greater chance of protracted litigation and the incompleteness of facts at the time the case estimate is first established. The “claim-tail” is the time period between the claim occurrence date and settlement date. As a result, we establish additional case development liabilities, which are usually percentages of the case liabilities. For unreported claims, IBNR liabilities are estimated by projecting the ultimate number of claims expected (reported and unreported) for each significant coverage and deducting reported claims to produce estimated unreported claims. The product of the average cost per unreported claim and the number of unreported claims produces the IBNR liability estimate. We may record supplemental IBNR liabilities in certain situations when actuarial techniques are difficult to apply.
We disaggregated net losses and ALAE for BHRG based on losses that are expected to have shorter claim-tails (property) and those expected to have longer claim-tails (casualty). Under certain contracts, the coverage can apply to multiple lines of business written by the ceding company, whether property, casualty or combined, and the ceding company may not report loss data by such lines consistently, if at all. In those instances, we allocated losses to property and casualty coverages based on internal estimates. In the following tables, BHRG’s incurred and paid loss and ALAE data is separately presented for property and casualty coverage by accident year, net of reinsurance. IBNR and case development liabilities are as of December 31, 2017. Dollars are in millions.
BH Primary’s incurred and paid loss and ALAE data by accident year, net of reinsurance, is presented in the following tables. IBNR and case development liabilities are as of December 31, 2017. Dollars are in millions.
In 2017, we entered into an agreement through a Berkshire subsidiary, National Indemnity Company (“NICO”), with various subsidiaries of American International Group, Inc. (collectively, “AIG”), which became effective on February 2, 2017. Under this agreement, NICO agreed to indemnify AIG for 80% of up to $25 billion of losses and allocated loss adjustment expenses in excess of $25 billion retained by AIG, with respect to certain commercial insurance loss events occurring prior to 2016. As of the effective date, we recorded premiums earned of $10.2 billion, and we also recorded a liability for unpaid losses and loss adjustment expenses of $16.4 billion and a deferred charge reinsurance assumed asset of $6.2 billion. Berkshire agreed to guarantee the timely payment of all amounts due to AIG under the agreement.
Incurred losses and loss adjustment expenses related to contracts written in prior years were $458 million in 2017, $451 million in 2016 and $631 million in 2015, which included recurring amortization of deferred charges and the effect of changes in the timing and amount of expected future loss payments.
In establishing retroactive reinsurance claim liabilities, we analyze historical aggregate loss payment patterns and project losses into the future under various probability-weighted scenarios. We expect the claim-tail to be very long for many contracts, with some lasting several decades. We monitor claim payment activity and review ceding company reports and other information concerning the underlying losses. We reassess and revise the expected timing and amounts of ultimate losses periodically or when significant events are revealed through our monitoring and review processes.
In January 2017, Berkshire issued 1.1 billion in senior unsecured notes. The notes consisted of 550 million of 0.25% notes due in 2021 and 550 million of 0.625% notes due in 2023. In January 2017, senior notes of $1.1 billion matured. In 2017, the carrying value of Berkshire’s Euro denominated senior notes increased $990 million due to changes in the Euro/U.S. Dollar exchange rates. This increase produced a corresponding charge to pre-tax earnings of $990 million which was recorded as additional non-cash interest expense.
BNSF’s borrowings are primarily senior unsecured debentures. In March 2017, BNSF issued $1.25 billion of senior unsecured debentures consisting of $500 million of 3.25% debentures due in 2027 and $750 million of 4.125% debentures due in 2047. As of December 31, 2017, BNSF, BHE and their subsidiaries were in compliance with all applicable debt covenants. Berkshire does not guarantee any debt, borrowings or lines of credit of BNSF, BHE or their subsidiaries.
On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act of 2017 (“TCJA”). Among its provisions, the TCJA reduces the statutory U.S. Corporate income tax rate from 35% to 21% effective January 1, 2018. The TCJA also provides for a one-time tax on certain accumulated undistributed post-1986 earnings of foreign subsidiaries. Further, the TCJA includes provisions that, in certain instances, impose U.S. income tax liabilities on future earnings of foreign subsidiaries and limit the deductibility of future interest expenses. The TCJA also provides for accelerated deductions of certain capital expenditures made after September 27, 2017 through bonus depreciation. The application of the TCJA may change due to regulations subsequently issued by the U.S. Treasury Department.
In December 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin 118 (“SAB 118”) to provide clarification in implementing the TCJA when registrants do not have the necessary information available to complete the accounting for an element of the TCJA in the period of its enactment. SAB 118 provides for tax amounts to be classified as provisional and subject to remeasurement for up to one year from the enactment date for such elements when the accounting effect is not complete, but can be reasonably estimated.
We consider our estimate of the tax on accumulated undistributed earnings of foreign subsidiaries to be provisional and subject to remeasurement when we obtain the necessary additional information to complete the accounting. While we believe our estimate to be reasonable, it will take additional time to validate the inputs to the foreign earnings and profits calculations, the basis on which the repatriation tax is determined, and how the applicable states will address the U.S. repatriation tax. We currently expect that our accounting for the repatriation tax under the TCJA will be completed by the end of 2018.
We file income tax returns in the United States and in state, local and foreign jurisdictions. We are under examination by the taxing authorities in many of these jurisdictions. We have settled income tax liabilities with U.S. federal taxing authorities (the “IRS”) for years before 2010. The IRS continues to audit Berkshire’s consolidated U.S. federal income tax returns for the 2010 through 2013 tax years and we currently believe it is reasonably possible that these examinations will be settled during 2018. We are also under audit or subject to audit with respect to income taxes in many state and foreign jurisdictions. It is reasonably possible that certain of these income tax examinations will be settled within the next twelve months. We currently do not believe that the outcome of unresolved issues or claims will be material to our Consolidated Financial Statements.
At December 31, 2017 and 2016, net unrecognized tax benefits were $554 million and $485 million, respectively. Included in the balance at December 31, 2017, were $445 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 income 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, 2017, 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 $16 billion as ordinary dividends during 2018.
Our financial assets and liabilities are summarized below as of December 31, 2017 and December 31, 2016 with fair values shown according to the fair value hierarchy (in millions). The carrying values of cash and cash equivalents, U.S. Treasury Bills, receivables and accounts payable, accruals and other liabilities are considered to be reasonable estimates of their fair values.
Reconciliations of assets and liabilities measured and carried at fair value on a recurring basis with the use of significant unobservable inputs (Level 3) for each of the three years ending December 31, 2017 follow (in millions).
Gains and losses included in earnings are included as components of investment gains/losses, derivative gains/losses and other revenues, as appropriate and are primarily related to changes in the values of derivative contracts and settlement transactions. Gains and losses included in other comprehensive income are primarily the net change in unrealized appreciation of investments and the reclassification of investment appreciation in net earnings, as appropriate in our Consolidated Statements of Comprehensive Income.
Changes in Berkshire’s issued, treasury and outstanding common stock during the three years ending December 31, 2017 are shown in the table below.
Each Class A common share is entitled to one vote per share. Class B common stock possesses dividend and distribution rights equal to one-fifteen-hundredth (1/1,500) of such rights of Class A common stock. Each Class B common share possesses voting rights equivalent to one-ten-thousandth (1/10,000) of the voting rights of a Class A share. Unless otherwise required under Delaware General Corporation Law, Class A and Class B common shares vote as a single class. Each share of Class A common stock is convertible, at the option of the holder, into 1,500 shares of Class B common stock. Class B common stock is not convertible into Class A common stock. On an equivalent Class A common stock basis, there were 1,644,846 shares outstanding as of December 31, 2017 and 1,644,321 shares outstanding as of December 31, 2016. In addition to our common stock, 1,000,000 shares of preferred stock are authorized, but none are issued.
Berkshire’s Board of Directors has approved a common stock repurchase program permitting Berkshire to repurchase its Class A and Class B shares at prices no higher than a 20% premium over the book value of the shares. The program allows share repurchases in the open market or through privately negotiated transactions and 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 specific 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.
The accumulated benefit obligation is the actuarial present value of benefits earned based on service and compensation prior to the valuation date. The projected benefit obligation (“PBO”) is the actuarial present value of benefits earned based upon service and compensation prior to the valuation date and, if applicable, includes assumptions regarding future compensation levels. Benefit obligations under qualified U.S. defined benefit pension plans are funded through assets held in trusts. Pension obligations under certain non-U.S. plans and non-qualified U.S. plans are unfunded and the aggregate PBOs of such plans were approximately $1.3 billion and $1.2 billion as of December 31, 2017 and 2016, respectively.
The funded status of our defined benefit pension plans at December 31, 2017 reflected in assets was $1,176 million and in liabilities was $2,986 million. At December 31, 2016, the funded status included in assets was $644 million and in liabilities was $2,997 million.
Weighted average interest rate assumptions used in determining PBOs and net periodic pension expense were as follows.
A reconciliation of the pre-tax accumulated other comprehensive income (loss) related to defined benefit pension plans for each of the two years ending December 31, 2017 follows (in millions).
We are parties in a variety of legal actions that routinely arise out of the normal course of business, including legal actions seeking to establish liability directly through insurance contracts or indirectly through reinsurance contracts issued by Berkshire subsidiaries. Plaintiffs occasionally seek punitive or exemplary damages. We do not believe that such normal and routine litigation will have a material effect on our financial condition or results of operations. Berkshire and certain of its subsidiaries are also involved in other kinds of legal actions, some of which assert or may assert claims or seek to impose fines and penalties. We believe that any liability that may arise as a result of other pending legal actions will not have a material effect on our consolidated financial condition or results of operations.
In 2016, NICO entered into a definitive agreement to acquire Medical Liability Mutual Insurance Company (“MLMIC”), a writer of medical professional liability insurance domiciled in New York. MLMIC reported assets and policyholders’ surplus determined under statutory accounting principles as of September 30, 2017 were approximately $5.8 billion and $2.2 billion, respectively. The acquisition price will be approximately $2.5 billion. The acquisition will involve the conversion of MLMIC from a mutual company to a stock company. The closing of the transaction is subject to various regulatory approvals and customary closing conditions and the approval of the MLMIC policyholders eligible to vote on the proposed demutualization and sale. We currently expect this acquisition will be completed in the third quarter of 2018.
Pursuant to the terms of agreements with noncontrolling shareholders in our less than wholly-owned subsidiaries, we may be obligated to acquire their equity interests. If we acquired all outstanding noncontrolling interests as of December 31, 2017, we estimate the cost would have been approximately $5.3 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.
Our operating businesses include a large and diverse group of insurance, finance, manufacturing, service and retailing businesses. We organize our reportable business segments in a manner that reflects how management views those business activities. Certain businesses are grouped together for segment reporting based upon similar products or product lines, marketing, selling and distribution characteristics, even though those business units are operated under separate local management.
Consolidated sales and service revenues were $132.9 billion in 2017, $125.7 billion in 2016 and $112.4 billion in 2015. In 2017 and 2016, 85% of such revenues were attributable to the United States compared to 87% in 2015. The remainder of sales and service revenues were primarily in Europe, Canada and the Asia Pacific. Consolidated sales and service revenues included sales to Walmart Stores, Inc. of approximately $14 billion in 2017 and 2016 and $13 billion in 2015. 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, 2017, approximately 89% of our consolidated net property, plant and equipment was located in the United States with the remainder primarily in Canada and Europe.