Through BNSF Railway, BNSF operates approximately 32,500 route miles of track (excluding multiple main tracks, yard tracks and sidings) in 28 states, and also operates in three Canadian provinces. BNSF owns over 23,000 route miles, including easements, and operates over 9,000 route miles of trackage rights that permit BNSF to operate its trains with its crews over other railroads’ tracks. The total BNSF system, including single and multiple main tracks, yard tracks and sidings, consists of over 50,000 operated miles of track, all of which are owned by or held under easement by BNSF except for over 10,000 miles operated under trackage rights.
The electricity distribution network of Northern Powergrid (Northeast) and Northern Powergrid (Yorkshire) includes approximately 17,400 miles of overhead lines, approximately 42,300 miles of underground cables and approximately 780 major substations. AltaLink’s electricity transmission system includes approximately 8,200 miles of transmission lines and approximately 310 substations.
(2) Represents net earnings per average equivalent Class A share outstanding. Net earnings per average equivalent Class B common share outstanding is equal to 1/1,500 of such amount.
Through our subsidiaries, we engage in a number of diverse business activities. We manage our operating businesses on an unusually decentralized basis. There are essentially no centralized or integrated business functions and there is minimal involvement by our corporate headquarters in the day-to-day business activities of the operating businesses. Our senior corporate management team participates in and is ultimately responsible for significant capital allocation decisions, investment activities and the selection of the Chief Executive to head each of the operating businesses. The business segment data (Note 26 to the accompanying Consolidated Financial Statements) should be read in conjunction with this discussion.
Beginning in 2018, our periodic net earnings include changes in unrealized gains and losses on our investments in equity securities. These gains and losses are likely to be very significant given the size of our current holdings and the inherent volatility in securities prices. Prior to 2018, the changes in unrealized gains and losses pertaining to such investments were recorded in other comprehensive income. The new accounting treatment has no effect on our consolidated shareholders’ equity.
After-tax losses from investments and derivative contracts were $17.7 billion in 2018, which included after-tax losses of approximately $18 billion from changes in market values of our investments in equity securities held at December 31, 2018. Prior to 2018, after-tax investment gains or losses on equity securities arose from the sale of securities during the period based on the cost of the disposed security or through the recording of other-than-temporary impairment losses. In 2017, we recorded after-tax unrealized gains on our investments in equity securities of approximately $19 billion in other comprehensive income.
Our management views our insurance businesses as possessing two distinct activities - 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 necessarily meaningful in understanding the operating results of our insurance operations.
Changes in estimates for unpaid losses and loss adjustment expenses, including amounts established for occurrences in prior years, can also significantly affect our periodic underwriting results. Unpaid loss estimates, including estimates under retroactive reinsurance contracts, were approximately $110 billion as of December 31, 2018. Our periodic underwriting results may also include significant foreign currency transaction gains and losses arising from the changes in the valuation of non-U.S. Dollar denominated reinsurance liabilities of our U.S. based insurance subsidiaries due to foreign currency exchange rate fluctuations.
Underwriting results of our insurance businesses are summarized below (dollars in millions).
Losses and loss adjustment expenses were $26.3 billion in 2018, an increase of $781 million (3.1%) compared to 2017. GEICO’s ratio of losses and loss adjustment expenses to premiums earned (the “loss ratio”) for 2018 was 78.8%, a decline of 7.8 percentage points compared to 2017. Losses from significant catastrophe events were $105 million in 2018 (Hurricanes Florence and Michael and the wildfires in California) and approximately $450 million in 2017 (Hurricanes Harvey and Irma).
Premiums written were $30.5 billion in 2017, an increase of 16.1% over 2016, and premiums earned were $29.4 billion, an increase of approximately $4.0 billion (15.5%). During 2017, our voluntary auto policies-in-force grew approximately 8.6% and premiums per auto policy increased 6.9%. The increase in average premiums per policy was attributable to rate increases, coverage changes and changes in state and risk mix. Voluntary auto new business sales in 2017 increased 10.5% compared to 2016. Voluntary auto policies-in-force increased approximately 1,276,000 during 2017.
Losses and loss adjustment expenses in 2018 decreased $288 million (4.0%) compared to 2017, and the loss ratio declined 18 percentage points to 77.6%. Losses incurred from significant catastrophe events in 2018 were approximately $1.3 billion, which derived from Hurricanes Florence and Michael, Typhoon Jebi and the wildfires in California, including $1.1 billion in the fourth quarter. Losses from significant catastrophe events in 2017 were approximately $2.4 billion, which derived from Hurricanes Harvey, Irma and Maria, an earthquake in Mexico, a cyclone in Australia and wildfires in California. There were no significant catastrophe loss events in 2016. In addition, losses and loss adjustment expenses reflected net gains of $469 million in 2018, $295 million in 2017 and $874 million in 2016 from reductions of estimated ultimate losses for prior years’ events. The net gain in 2018 was primarily due to lower than expected property losses. The net gain from prior years’ loss events in 2017 reflected losses from higher than expected property claims and increases in certain United Kingdom (“U.K.”) claim liabilities attributable to the U.K. Ministry of Justice’s decision to reduce the fixed discount rate required in lump sum settlement calculations of personal injury claims from 2.5% to negative 0.75%.
In 2018, we decreased estimated ultimate liabilities $341 million for prior years’ retroactive reinsurance contracts, which after adjustments to the related unamortized deferred charges from changes in the estimated timing and amount of the future claim payments, produced pre-tax underwriting gains of approximately $185 million. Changes in estimated ultimate liabilities for prior years’ contracts had a relatively insignificant effect on pre-tax underwriting results in 2017 and 2016.
Life/health premiums earned were $5.3 billion, an increase of $535 million (11.1%) over 2017, which increased $221 million (4.8%) compared to 2016. The increases in each year were primarily attributable to growth in the North America, Asia and Australia life insurance markets. In each of the last three years, premiums earned of approximately $1.0 billion derived from a BHLN reinsurance contract with a major reinsurer covering predominantly life risks in North America.
Periodic payment annuity premiums earned in 2018 were $1,156 million, an increase of $258 million (28.7%) compared to 2017, which declined $184 million (17.0%) from 2016, reflecting a corresponding increase and decrease in new business volumes. Periodic payment business is price sensitive, and the volume we write can change rapidly due to changes in prices, which are affected by prevailing interest rates, the perceived risks and durations associated with the expected annuity payments, and the level of competition.
The Berkshire Hathaway Primary Group (“BH Primary”) provides 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 are Berkshire Hathaway Specialty Insurance (“BH Specialty”), Berkshire Hathaway Homestate Companies (“BHHC”), MedPro Group, Berkshire Hathaway GUARD Insurance Companies (“GUARD”), and National Indemnity Company (“NICO Primary”). Other BH Primary insurers include U.S. Liability Insurance Company, Applied Underwriters, Central States Indemnity Company and MLMIC Insurance Company, acquired October 1, 2018. A summary of BH Primary underwriting results follows (dollars in millions).
Pre-tax investment income increased $373 million (8.3%) in 2017 compared to 2016, attributable to higher interest rates on short-term investments and increased other investment income. Dividend income in 2017 was relatively unchanged compared to 2016 reflecting increased dividend rates and increased overall investment levels, offset by the impact of the conversion of our $3 billion investment in Dow Chemical Company (“Dow”) 8.5% preferred stock into Dow common stock at the end of 2016. Prior to its conversion, we received dividends of $255 million per annum.
A summary of cash and investments held in our insurance businesses as of December 31, 2018 and 2017 follows (in millions).
U.S. government obligations are rated AA+ or Aaa by the major rating agencies. Approximately 87% 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 consumer products were $7.9 billion in 2018, an increase of 11.1% compared to 2017, reflecting higher average revenue per car/unit and volume increases of 2.9%. The volume increases were due to higher domestic intermodal volumes, primarily attributable to general economic growth and tight truck capacity leading to conversion from highway to rail, as well as growth in imports and containerized agricultural product exports, partially offset by a sizable contract loss.
Revenues from coal in 2018 increased 4.3% to $4.0 billion compared to 2017, attributable to higher average revenue per car/unit, partially offset by lower volumes of 0.8%. The volume decreases in 2018 were due mainly to utility plant retirements combined with competition from natural gas and renewables, mostly offset by market share gains and improved export volumes.
BNSF’s effective income tax rate was 24.0% for 2018 as compared to 37.4% for 2017 which excludes the effects of the TCJA. The reduction in the U.S. statutory income tax rate under the TCJA, effective January 1, 2018, drove most of the effective income tax rate decrease.
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, ethanol and other grain products, offset by lower grain exports.
Total operating expenses were $14.0 billion in 2017, an increase of $899 million (6.8%) compared to 2016. Our ratio of operating expenses to revenues decreased 0.6 percentage points to 65.7% in 2017 versus 2016. Compensation and benefits expenses increased $214 million (4.4%) compared to 2016. The increase was primarily due to higher health and welfare costs and volume-related increases, partially offset by lower headcount. Fuel expenses increased $584 million (30.2%) compared to 2016 primarily due to higher average fuel prices and increased volumes. Depreciation and amortization expense increased $224 million (10.5%) compared to 2016 due to a larger base of depreciable assets in service. Equipment rents, materials and other expense declined $219 million (11.8%) compared to 2016. These declines resulted from the impact of the enactment of the TCJA on an equity method investee, as well as lower personal injury and casualty costs.
PacifiCorp operates a regulated electric utility in portions of several Western states, including Utah, Oregon and Wyoming. Revenues in 2018 decreased 4% compared to 2017. Retail revenues in 2018 decreased $197 million compared to 2017. The decline reflected the effects of lower average rates ($180 million, including the impact of the TCJA of $152 million), and a reduction in volumes (0.2%), largely attributable to the impacts of weather.
Revenues increased 1% in 2017 compared to 2016. Wholesale and other revenues increased, reflecting higher volumes and average rates, and retail revenues decreased slightly, attributable to lower average rates, partly offset by higher volumes. Pre-tax earnings increased $26 million (2%) in 2017 as compared to 2016. The increase in earnings reflected higher utility margin, lower operations and maintenance expenses, and increased depreciation and amortization attributable to additional plant in-service. PacifiCorp’s after-tax earnings in 2017 were $763 million, a decrease of $1 million from 2016.
MEC operates a regulated electric and natural gas utility primarily in Iowa and Illinois. Revenues in 2018 increased $211 million (7%) compared to 2017. Electric operating revenues increased $175 million (8%) and natural gas revenues increased $35 million (5%) in 2018 versus 2017. The increase in electric revenues was primarily attributable to higher retail revenues of $102 million, reflecting higher recoveries through bill riders (substantially offset in cost of sales, operating expenses and income tax expense) and volumes, partially offset by lower average rates, predominantly from the impact of the TCJA, and higher wholesale and other revenues of $73 million from higher volumes and average prices. The increase in natural gas revenues was primarily due to increased volumes, partially offset by a lower average per-unit price and the effects of the TCJA.
Pre-tax earnings in 2018 increased $35 million (9%) compared to 2017. Electric utility margin in 2018 was $1,796 million, an increase of $122 million (7%) over 2017, which was primarily due to the net increase in retail revenues. However, the increase in electric utility margin was mostly offset by increased depreciation, maintenance and other operating expenses. The increase in depreciation expense included $65 million from additional wind generation and other plant placed in-service and $44 million from Iowa revenue sharing.
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. NV Energy’s after-tax earnings in 2017 were $365 million, an increase of 2% from 2016.
Revenues declined $47 million (5%) in 2017 compared to 2016. Foreign currency translation effects of a comparatively stronger average U.S. Dollar in 2017 resulted in a $48 million comparative decline in revenues. In addition, 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 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 increased $23 million (2%) in 2017 compared to 2016. Northern Natural Gas produced higher transportation revenues and higher gas sales, primarily from system balancing activities, which were partly offset by lower transportation revenues at Kern River. Pre-tax earnings increased $33 million (8%) in 2017 compared to 2016. The increase was primarily due to the increase in transportation revenues and a reduction in expenses and regulatory liabilities related to the impact of an alternative rate structure approved by Kern River’s regulators in the first quarter of 2017, partially offset by higher operating expenses.
Revenues in 2018 increased $43 million (2%) compared to 2017, reflecting a comparative increase from renewable energy. Pre-tax earnings in 2018 were unchanged from 2017 as the increased revenues from renewable energy were offset by increased depreciation expense and higher other operating expenses.
Revenues in 2018 increased 22% as compared to 2017, primarily due to recent business acquisitions. Pre-tax earnings decreased $16 million in 2018 compared to 2017, as higher operating costs and interest expense more than offset the revenue increase.
A summary of revenues and earnings of our manufacturing, service and retailing businesses follows (dollars in millions).
Our manufacturing group includes a variety of industrial, building and consumer products businesses. Industrial products group includes specialty chemicals (The Lubrizol Corporation (“Lubrizol”)), complex metal products for aerospace, power and general industrial markets (Precision Castparts Corp. (“PCC”)), 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”)). Marmon includes UTLX Company (“UTLX”), which provides various products and services (including equipment leasing) for the rail and mobile crane industries.
The building products group includes homebuilding and manufactured housing finance (Clayton Homes), flooring (Shaw), insulation, roofing and engineered products (Johns Manville), bricks and masonry products (Acme Building Brands), paint and coatings (Benjamin Moore), and residential and commercial construction and engineering products and systems (MiTek). The consumer products group includes leisure vehicles (Forest River), several apparel and footwear operations (including Fruit of the Loom, Garan, H.H. Brown Shoe Group and Brooks Sports) and the Duracell Company (“Duracell”), a manufacturer of high performance alkaline batteries. This group also includes custom picture framing products (Larson Juhl) and jewelry products (Richline). A summary of revenues and pre-tax earnings of our manufacturing operations follows (dollars in millions).
Revenues from industrial products businesses were approximately $30.7 billion in 2018, an increase of approximately $2.1 billion (7.4%) compared to 2017. PCC’s revenues in 2018 were $10.2 billion, an increase of 7.2% compared to 2017. The increase reflected increased demand in aerospace markets in connection with new aircraft programs, partly offset by lower demand for industrial gas turbine products. PCC is in the process of repurposing certain manufacturing assets previously used to support industrial gas turbine business to accommodate aerospace products. In addition, PCC experienced lower sales of certain pipe products in 2018, primarily attributable to the U.S tariffs.
IMC’s revenues increased 16.1% in 2018 compared to 2017, due to a combination of factors, including higher unit sales, the effects of business acquisitions during 2017 and 2018, and foreign currency translation effects from a weaker average U.S. Dollar in the first half of 2018. CTB’s revenues increased 4.0% in 2018 versus 2017, due to favorable foreign currency translation effects and modest sales growth in protein production and processing systems.
Lubrizol’s pre-tax earnings in 2018 increased 43.5% compared to earnings in 2017, which included pre-tax losses of approximately $190 million related to Lubrizol’s disposition of an underperforming bolt-on business and related intangible asset impairments and restructuring charges. Before such charges, Lubrizol’s earnings increased 17%, reflecting the previously mentioned increases in sales volumes and selling prices, as well as lower other restructuring charges, lower net interest expense, and the favorable effects of foreign currency translation and ongoing expense control efforts, partly offset by higher raw material costs.
In 2017, PCC generated 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. Revenue increases associated with PCC’s transition into products for new aerospace programs were partly offset by revenue decreases from the winding down of prior programs. Lubrizol’s revenues increased $165 million (2.6%) compared to 2016, primarily due to higher unit volumes, partly offset by effects of the disposition of an underperforming business.
Marmon’s revenues increased $305 million (4.1%) in 2017 versus 2016, primarily due to business acquisitions and higher average metal prices, partly offset by lower overall volumes, changes in mix and lower leasing revenues from the Rail Products and Services sector. Railcar leasing revenues declined due to fewer railcars on lease at lower rates. During 2017, railcars available for lease exceeded demand, which contributed to the lower lease rates.
IMC’s revenues increased 13.3%, primarily due to increased customer demand and from business acquisitions. The global demand for cutting tools was generally higher in 2017. CTB’s revenues increased 5.3% 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.
Industrial products pre-tax earnings were approximately $5.1 billion in 2017, an increase of $76 million (1.5%) compared to 2016. Overall, pre-tax earnings as a percentage of revenues were 17.7% in 2017 and 18.5% in 2016.
PCC’s pre-tax earnings declined 12.5% in 2017 compared to the post-acquisition period in 2016, primarily due to certain one-time inventory and impairment charges. Lubrizol’s pre-tax earnings increased 17.3% in 2017 compared to 2016, due 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.
Clayton Homes pre-tax earnings were $911 million in 2018, an increase of $145 million (19.0%) compared to 2017. The increase in earnings in 2018 was primarily attributable to a significant increase in earnings from home building (manufactured housing and site built homes) activities, which reflected the impact of increased home sales and margins, as well as increased earnings from lending activities. A significant part of Clayton Homes’ earnings derives from manufactured housing lending activities. Pre-tax earnings from lending activities in 2018 declined 2% compared to 2017, reflecting increased interest expense, attributable to higher average debt balances and interest rates and higher operating costs, which more than offset the increase in interest income. As of December 31, 2018 and 2017, aggregate loan balances outstanding were approximately $14.7 billion and $13.7 billion, respectively.
Raw material and production costs of our building products businesses were generally higher in 2018. In particular, costs for steel, titanium dioxide and petrochemicals were substantially higher in 2018 than in 2017, as were product delivery costs, due in part to the shortage of truck drivers in the U.S. These cost increases precipitated sales price increases, although such increases have lagged the increases in raw materials costs. As a result, the increase in pre-tax earnings in 2018 of our other building products businesses ($43 million or 3.1%) lagged the 5.8% increase in revenues.
Building products revenues were approximately $16.9 billion in 2017, an increase of approximately $1.9 billion (13.0%) compared to 2016. The increase was primarily attributable to bolt-on business acquisitions by Clayton, 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.
Building products pre-tax earnings were $2.1 billion in 2017, an increase of $225 million (11.7%) compared to 2016. Pre-tax earnings as a percentage of revenues were 12.7% in 2017 and 12.8% in 2016. Clayton Homes’ pre-tax earnings increased $21 million (2.8%) in 2017 compared to 2016. Pre-tax earnings in 2017 from manufacturing, retailing and site built activities increased, while earnings from finance activities declined slightly. Clayton Homes’ earnings in 2017 also included a gain from a legal settlement, offset by increased employee healthcare, technology, marketing and other expenses. The comparative earnings increase reflected the effects of asset impairment, pension settlement and environmental claim charges of $107 million 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 of the apparel and footwear businesses increased 6.4% in 2018 compared to 2017, primarily attributable to the overall increase in revenues and sales mix changes. Duracell’s pre-tax earnings increased in 2018 compared to 2017, reflecting the favorable effects of ongoing operational improvement efforts and a comparative decline in restructuring charges. Since its acquisition in 2016, Duracell has undertaken significant transition and restructuring initiatives intended to restore and maintain adequate profit levels over the long-term.
Our service business group offers 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 transportation equipment leasing (XTRA) and furniture leasing (CORT), electronic news distribution, multimedia and regulatory filings (Business Wire), publication of newspapers and other publications (Buffalo News and the BH Media Group) and operation of a television station in Miami, Florida (WPLG). We also offer third party logistics services that primarily serve the petroleum and chemical industries (Charter Brokerage).
Pre-tax earnings of the service group in 2018 were approximately $1.8 billion, an increase of $317 million (20.9%) compared to 2017. The comparative earnings increase was primarily due to TTI, which accounted for almost 84% of the increase. The earnings increase of TTI was primarily due to the effects of the sales volume increases. In addition, XTRA, Charter Brokerage and NetJets each generated increased earnings in 2018 compared to 2017. The increases in earnings of these businesses were partly offset by lower earnings at FlightSafety, primarily due to reduced margins from sales of flight simulators and impairment charges of $41 million related to certain fixed assets.
Service business revenues were approximately $12.2 billion in 2017, an increase of $855 million (7.6%) compared to 2016. The increase was primarily attributable to TTI and NetJets. TTI’s revenues increased 16.4% 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 services.
Pre-tax earnings were approximately $1.5 billion in 2017, an increase of $120 million (8.6%) compared to 2016. The comparative increase in earnings was primarily attributable to increased earnings of NetJets and TTI, partly offset by comparatively lower earnings from FlightSafety, and from our leasing, media and logistics businesses.
Our retailers include Berkshire Hathaway Automotive (“BHA”). 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.
Pre-tax earnings of the retailing group were $860 million in 2018, an increase of $75 million (9.6%) over 2017. The earnings increase included higher earnings from BHA and Louis, partly offset by lower earnings from the home furnishings retailers. The earnings increase of BHA was primarily from finance and service contract activities, partly offset by higher floorplan interest expense. The earnings increase at Louis reflected the revenues increase and an increase in operating margin rate. Earnings of the home furnishings businesses declined 2.4% in 2018 compared to 2017, partly due to increased inventory liquidation, delivery and occupancy costs at Star Furniture.
Retailing revenues were $15.1 billion in 2017, slightly lower than in 2016. BHA’s aggregate revenues declined 1.3% in 2017 compared to 2016, due primarily due to a 3.7% decline in new and used cars sold, partly offset by higher service and finance revenues. Revenues of our other retailers increased 1.7% in 2017 compared to 2016.
McLane’s revenues were approximately $49.8 billion in 2017, an increase of 3.5% compared to 2016. The increase in revenues was primarily due to a 4.7% increase in grocery business sales. Pre-tax earnings in 2017 were $299 million, a decrease of $132 million (30.6%) compared to 2016. The earnings decline reflected a 57% decline in earnings from our grocery operations, partly offset by a $39 million increase in gains from asset sales. Throughout 2017, significant pricing pressures and an increasingly competitive business environment negatively affected McLane’s operating results, particularly with respect to the grocery business.
As discussed in Note 1(w) to the accompanying Consolidated Financial Statements, on January 1, 2018, we adopted a new accounting pronouncement (“ASU 2016-01”), which requires the recognition of unrealized gains and losses arising from changes in market values of investments in equity securities in the Consolidated Statements of Earnings. Prior to 2018, investment gains/losses related to equity securities were generally recorded as the securities were sold, redeemed or exchanged based on the cost of the disposed securities. While ASU 2016-01 does not affect our consolidated shareholders’ equity or total comprehensive income, it has significantly increased the volatility of our periodic net earnings due to the magnitude of our equity securities portfolio and the inherent volatility of equity securities prices. Investment gains and losses from periodic changes in securities prices will continue to cause significant volatility in our consolidated earnings.
Pre-tax investment gains/losses reflected in earnings in 2018 included net unrealized losses of approximately $22.7 billion from investments in equity securities still held at December 31, 2018, reflecting the declines in securities prices in the fourth quarter. Prior to the adoption of ASU 2016-01, such unrealized gains and losses were included in other comprehensive income. Pre-tax net unrealized gains on equity securities recorded in other comprehensive income were approximately $29 billion in 2017 and $7 billion in 2016.
Pre-tax investment gains were approximately $1.4 billion in 2017 and $7.6 billion in 2016. Investment gains in 2016 included $4.2 billion from the redemptions of our Wrigley and Kraft Heinz preferred stock investments and from the sales of Dow Chemical common stock that was received upon the conversion of our Dow Chemical preferred stock investment. We also realized pre-tax gains of $1.1 billion in connection with the tax-free exchange of our shares of P&G common stock for 100% of the common stock of Duracell. Income tax expense allocated to investment gains in 2016 included a benefit from the reduction of certain deferred income tax liabilities in connection with the exchange of P&G common stock for Duracell. Our after-tax gain from this transaction was approximately $1.9 billion.
We believe that investment gains/losses, whether realized from sales or unrealized from changes in market prices, are often meaningless in terms of understanding our reported consolidated earnings or evaluating our periodic economic performance. We continue to believe the amount of investment gains/losses included in earnings, including the changes in market prices for equity securities, in any given period has little analytical or predictive value.
Derivative contract gains/losses include the changes in fair value of our equity index put option contract liabilities. These liabilities relate to contracts entered into before March 2008. Substantially all of these contracts will expire between April 2019 and February 2023. The periodic changes in the fair values of these liabilities are recorded in earnings and can be significant, reflecting the volatility of underlying equity markets and the changes in the inputs used to measure such liabilities.
As of December 31, 2018, the intrinsic value of our equity index put option contracts was approximately $1,653 million and our recorded liabilities at fair value were approximately $2,452 million. Our ultimate payment obligations, if any, under our contracts will be determined as of the contract expiration dates based on the intrinsic value as defined under the contracts. Contracts with an aggregate notional value of approximately $12.2 billion will expire in 2019.
Derivative contracts produced pre-tax losses in 2018 of $300 million, which were primarily due to lower index values. Equity index put option contracts produced pre-tax gains of $718 million in 2017 and $662 million in 2016, which reflected the effects of shorter remaining contract durations and overall higher index values. In July 2016, our last credit default contract was terminated by mutual agreement with the counterparty and we paid the counterparty $195 million. This contract produced pre-tax earnings of $89 million in 2016.
Our consolidated balance sheet continues to reflect significant liquidity and a strong capital base. Consolidated shareholders’ equity at December 31, 2018 was approximately $349 billion, a decrease of $26.9 billion since September 30, 2018 and an increase of $407 million since December 31, 2017. Net earnings attributable to Berkshire shareholders in 2018 were $4.0 billion, which included after-tax losses on our investments of approximately $17.5 billion. After-tax losses on investments were approximately $27.6 billion in the fourth quarter of 2018, reflecting the declines in market prices of the equity securities we owned at December 31, 2018.
Borrowings of Berkshire’s insurance and other subsidiaries declined $3.5 billion in 2018 to approximately $18.1 billion at December 31, 2018, primarily attributable to a net decrease in borrowings of Berkshire Hathaway Finance Corporation (“BHFC”), a wholly-owned financing subsidiary. During 2018, BHFC repaid $4.6 billion of maturing senior notes and issued $2.35 billion of 4.2% senior notes due in 2048. BHFC’s senior note borrowings are used to fund loans originated and acquired by Clayton Homes and a portion of assets held for lease by our UTLX railcar leasing business. In January 2019, BHFC repaid $950 million of maturing senior notes and issued $1.25 billion of 4.25% senior notes due in 2049. An additional $3.0 billion of BHFC senior notes will mature in 2019. Berkshire guarantees the full and timely payment of principal and interest with respect to BHFC’s senior notes.
Berkshire’s common stock repurchase program was amended on July 17, 2018, permitting Berkshire to repurchase its Class A and Class B shares at prices below Berkshire’s intrinsic value, as conservatively determined by Warren Buffett, Berkshire’s Chairman of the Board and Chief Executive Officer, and Charlie Munger, Vice Chairman of the Board. 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. The program is expected to continue indefinitely. 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. Financial strength and redundant liquidity will always be of paramount importance at Berkshire. Subsequent to the program amendment, in 2018, Berkshire repurchased shares of Class A and B common stock for an aggregate cost of approximately $1.3 billion.
A summary of our contractual obligations as of December 31, 2018 follows (in millions). Actual payments will likely vary, perhaps significantly, from estimates reflected in the table.
(1) Primarily related to fuel, capacity, transmission and maintenance contracts and capital expenditure commitments of BHE and BNSF and aircraft purchase commitments of NetJets.
(2) Includes unpaid losses and loss adjustment expenses under retroactive reinsurance contracts.
As of the balance sheet date, recorded claim liabilities include provisions for reported claims, as well as claims not yet reported and the development of reported claims. The period between the loss occurrence date and loss settlement date is the “claim-tail.” Property claims usually have relatively short claim-tails, absent litigation. Casualty claims usually have longer claim-tails, occasionally extending for decades. Casualty claims may be more susceptible to litigation and the impact of changing contract interpretations. The legal environment and judicial process further contribute to extending claim-tails.
Our claim liability estimates recorded at the end of 2017 decreased $222 million during 2018, which produced a corresponding increase to pre-tax earnings. We modified the assumptions used to estimate liabilities at December 31, 2018 to reflect the most recent frequency and severity results. Future development of recorded liabilities will depend on whether actual frequency and severity are more or less than anticipated.
With respect to liabilities for BI claims, our most significant claim category, we believe it is reasonably possible that average severities will change by at least one percentage point from the severities used in establishing the recorded liabilities at December 31, 2018. We estimate that a one percentage point increase or decrease in BI severities would produce a $275 million increase or decrease in recorded liabilities, with a corresponding decrease or increase in pre-tax earnings. Many of the economic forces that would likely cause BI severity to differ from expectations would likely also cause severities for other injury coverages to differ in the same direction.
BHRG’s liabilities for unpaid losses and loss adjustment expenses derive primarily from reinsurance contracts issued through NICO and General Re. In connection with reinsurance contracts, the nature, extent, timing and perceived reliability of premium and loss information received from ceding companies varies widely depending on the type of coverage and the contractual reporting terms. Contract terms, conditions and coverages also tend to lack standardization and may evolve more rapidly than primary insurance policies.
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, 2018 follows (in millions).
With respect to General Re, we use a variety of actuarial methodologies to establish unpaid losses and loss adjustment expenses. Certain methodologies, such as paid and incurred loss development techniques, incurred and paid loss Bornhuetter-Ferguson techniques and frequency and severity techniques, are utilized, as well as ground-up techniques when appropriate. The critical processes involved in estimating unpaid losses and loss adjustment expenses include the establishment of case liability estimates, the determination of expected loss ratios and loss reporting patterns, which drive IBNR liability estimates, and the comparison of reported activity to the expected loss reporting patterns.
In estimating IBNR liabilities, General Re considers 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.
General Re’s reported losses for prior years’ workers’ compensation claims were less than expected. After reevaluating expected remaining IBNR estimates, liabilities were reduced by $117 million. An increase of ten percent in the tail of the expected loss emergence pattern and an increase of ten percent in the expected loss ratios would produce a net increase of approximately $1 billion in General Re’s workers’ compensation IBNR liabilities, producing a corresponding decrease in pre-tax earnings. We believe it is reasonably possible for these assumptions to increase at these rates.
Estimated ultimate liabilities for asbestos, environmental and other latent injury claims were increased approximately $145 million in 2018, which produced a corresponding reduction in pre-tax earnings. Net liabilities for such claims, excluding amounts assumed under retroactive reinsurance contracts, were approximately $1.7 billion at December 31, 2018. We may use industry-wide loss experience data and informed judgment when internal loss data is of limited reliability in making estimates for such losses. Loss estimations for these exposures are difficult to determine due to the changing legal environment, and increases may be required in the future if new exposures or claimants are identified, new claims are reported or new theories of liability emerge. In addition to the previously described methodologies, we consider “survival ratios,” which is the average net claim payments in recent years in relation to net unpaid losses, as a rough guide to reserve adequacy. Our survival ratio was approximately 16 years as of December 31, 2018.
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, 2018 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 $55 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 $41.8 billion estimated liability at December 31, 2018.
The following table summarizes our equity securities and derivative contract liabilities with significant equity price risk as of December 31, 2018 and 2017 and the estimated effects of a hypothetical 30% increase and a 30% decrease in market prices as of those dates. The selected 30% hypothetical increase and decrease does not reflect the best or worst case scenario. Indeed, results from declines could be far worse due both to the nature of equity markets and the aforementioned concentrations existing in our equity investment portfolio. Dollar amounts are in millions.
We may also invest in bonds, loans or other interest rate sensitive instruments. Our strategy is to acquire or originate such instruments at prices considered appropriate relative to the perceived credit risk. We also issue debt in the ordinary course of business to fund business operations, business acquisitions and for other general purposes. We attempt to maintain high credit ratings, in order to minimize the cost of our debt. We infrequently utilize derivative products, such as interest rate swaps, to manage interest rate risks.
Our net assets subject to financial statement translation into U.S. Dollars are primarily in our insurance, utilities and energy and certain manufacturing and services subsidiaries. This translation related impact may be offset by gains or losses included in net earnings related to net liabilities of Berkshire and certain of its U.S. subsidiaries that are denominated in foreign currencies, due to changes in exchange rates. A summary of these gains (losses), after-tax, for each of the years ending December 31, 2018 and 2017 follows (in millions).
We have audited the accompanying consolidated balance sheets of Berkshire Hathaway Inc. and subsidiaries (the “Company”) as of December 31, 2018 and 2017, 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, 2018, 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, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
* Cash and cash equivalents includes U.S. Treasury Bills with maturities of three months or less when purchased of $3.9 billion at December 31, 2018 and $5.7 billion at December 31, 2017.
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 variable interest entities (“VIE”) when we possess both the power to direct the activities of the VIE that most significantly affect its economic performance, and we (a) are obligated to absorb the losses that could be significant to the VIE or (b) hold the right to receive benefits from the VIE that could be significant to the VIE. Intercompany accounts and transactions have been eliminated.
Cash and cash equivalents and short-term investments in U.S. Treasury Bills
Investment gains and losses arise when fixed maturity securities are sold (as determined on a specific identification basis) or are other-than-temporarily impaired with respect to securities classified as available-for-sale. If the value of a fixed maturity investment declines to below amortized cost and the decline is deemed to be other than temporary, the amortized cost of the investment is reduced to fair value, with a corresponding charge to earnings. 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.
We carry substantially all of our investments in equity securities at fair value and record the subsequent changes in fair values in the Consolidated Statement of Earnings as a component of investment gains/losses. Prior to January 1, 2018, substantially all of our equity security investments were classified as available-for-sale and were also carried at fair value. However, we recorded the periodic changes in fair value of these securities as components of other comprehensive income and we recorded gains and losses in the Consolidated Statements of Earnings when equity securities were sold (on a specific identification basis) or were other-than-temporarily impaired.
Receivables primarily consists of balances due from customers, insurance premiums receivable and reinsurance recoverable on unpaid losses. Receivables are stated net of estimated allowances for uncollectible balances. Allowances for uncollectible balances are provided when it is probable counterparties or customers will be unable to pay all amounts due based on the contractual terms. We write-off receivables against the allowances after all reasonable collection efforts are exhausted.
Inventories consist of manufactured goods, goods acquired for resale, homes constructed for sale, and materials consumed in business operations. Manufactured inventory costs include raw materials, direct and indirect labor and factory overhead. We used the last-in-first-out (“LIFO”) method to value approximately 39% of consolidated inventories at December 31, 2018 with the remainder primarily determined under first-in-first-out and average cost methods. Non-LIFO inventories are stated at the lower of cost or net realizable value. The excess of current or replacement costs over costs determined under LIFO were approximately $1.0 billion as of December 31, 2018.
Depreciation of assets of our regulated utilities and railroad is generally determined using group depreciation methods where rates are based on periodic depreciation studies approved by the applicable regulator. Under group depreciation, a single depreciation rate is applied to the gross investment in a particular class of property, despite differences in the service life or salvage value of individual property units within the same class. When such assets are retired or sold, no gain or loss is recognized. Gains or losses on disposals of all other assets are recorded through earnings.
We base liability estimates on (1) reports of losses from policyholders, (2) individual case estimates and (3) estimates of incurred but not reported losses. Losses and loss adjustment expenses in the Consolidated Statements of Earnings include paid claims, claim settlement costs and changes in estimated claim liabilities. Losses and loss adjustment expenses charged to earnings are net of 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.
We compute our liabilities for insurance benefits under life contracts based upon estimated future investment yields, expected mortality, morbidity, and lapse or withdrawal rates as well as estimates of premiums we expect to receive and expenses we expect to incur in the future. These assumptions, as applicable, also include a margin for adverse deviation and may vary with the characteristics of the contract’s date of issuance, policy duration and country of risk. The interest rate assumptions used may vary by contract or jurisdiction. We discount periodic payment annuity liabilities based on the implicit rate as of the inception of the contracts such that the present value of the liabilities equals the premiums. Discount rates range from less than 1% to 7%.
On January 1, 2018, we adopted Accounting Standards Update (“ASU”) 2016-01 “Financial Instruments-Recognition and Measurement of Financial Assets and Financial Liabilities,” ASU 2018-02 “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” and ASC 606. Prior year financial statements were not restated. A summary of the effects of the initial adoption of ASU 2016-01, ASU 2018-02 and ASC 606 follows (in millions).
With respect to ASU 2016-01, beginning in 2018, unrealized gains and losses from the changes in the fair values of our equity securities during the period are included within investment gains (losses) in the Consolidated Statements of Earnings. For periods ending prior to January 1, 2018, we recognized gains and losses in earnings when we sold equity securities and for other-than-temporary impairment losses and we recorded unrealized gains and losses from the changes in fair value of such securities in other comprehensive income. As of January 1, 2018, we reclassified net after-tax unrealized gains on equity securities from accumulated other comprehensive income to retained earnings.
In adopting ASU 2018-02, we reclassified the stranded deferred income tax effects arising from the reduction in the U.S. statutory income tax rate under the U.S. Tax Cuts and Jobs Act that were included in accumulated other comprehensive income as of January 1, 2018 to retained earnings. The effect of the reduction in the U.S statutory income tax rate on other comprehensive income items was recorded in earnings in December 2017.
In adopting ASC 606, we recorded increases to certain assets and other liabilities, with the cumulative net effect recorded to retained earnings. Prior to January 1, 2018, we recognized revenues from the sales of fractional ownership interests in aircraft over the term of the related management services agreements, as the transfers of the ownership interests were inseparable from the management services agreements. These agreements also include provisions that require us to repurchase the fractional interest at fair market value at contract termination or upon the customer’s request following the end of a minimum commitment period. ASC 606 provides that such contracts are subject to accounting guidance for lease contracts. The principal effects of this re-characterization were to increase equipment held for lease and aircraft repurchase liabilities and unearned lease revenues by approximately $3.5 billion.
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02 “Leases,” which together with subsequent amendments is included in ASC 842 “Leases.” Most significantly, ASC 842 requires a lessee to recognize a liability to make lease payments and an asset with respect to its right to use the underlying asset for the lease term. ASC 842 also addresses accounting and reporting by lessors, which is not significantly different from current accounting and reporting, and further provides for qualitative and quantitative disclosures. We adopted ASC 842 as of January 1, 2019 under the modified retrospective method with respect to lease contracts in effect as of the adoption date.
On January 29, 2016, Berkshire acquired all outstanding common stock of Precision Castparts Corp. (“PCC”) for cash of approximately $32.7 billion, which included the value of PCC shares we already owned. We funded the acquisition with a combination of existing cash balances and proceeds from a temporary credit facility. PCC is a worldwide, diversified manufacturer of complex metal components and products, serving the aerospace, power and general industrial markets. PCC also produces titanium and nickel superalloy melted and mill products for the aerospace, chemical processing, oil and gas and pollution control industries, and manufactures extruded seamless pipe, fittings and forgings for power generation and oil and gas applications.
Investments in equity securities as of December 31, 2018 and 2017 are summarized based on the primary industry of the investee in the table below (in millions).
* Approximately 68% of the aggregate fair value was concentrated in five companies (American Express Company - $14.5 billion; Apple Inc. - $40.3 billion; Bank of America Corporation - $22.6 billion; The Coca-Cola Company - $18.9 billion and Wells Fargo & Company - $20.7 billion).
* Approximately 65% of the aggregate fair value was concentrated in five companies (American Express Company - $15.1 billion; Apple Inc. - $28.2 billion; Bank of America Corporation - $20.7 billion; The Coca-Cola Company - $18.4 billion and Wells Fargo & Company - $29.3 billion).
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.
Berkshire and its subsidiaries hold investments in certain businesses that are accounted for pursuant to the equity method. Currently, the most significant of these is our investment in the common stock of The Kraft Heinz Company (“Kraft Heinz”). Kraft Heinz is one of the world’s largest manufacturers and marketers of food and beverage products, including condiments and sauces, cheese and dairy, meals, meats, refreshment beverages, coffee and other grocery products.
We own a 50% interest in Berkadia, with Jefferies Financial Group Inc. (“Jefferies”), formerly known as Leucadia National Corporation, owning the other 50% interest. Berkadia is a servicer of commercial real estate loans in the U.S., performing primary, master and special servicing functions for U.S. government agency programs, commercial mortgage-backed securities transactions, banks, insurance companies and other financial institutions. A source of funding for Berkadia’s operations is through its issuance of commercial paper, which is currently limited to $1.5 billion. On December 31, 2018, Berkadia’s commercial paper outstanding was $1.47 billion. The commercial paper is supported by a surety policy issued by a Berkshire insurance subsidiary. Jefferies is obligated to indemnify us for one-half of any losses incurred under the policy. In addition, a Berkshire Hathaway Energy Company subsidiary owns a 50% interest in ETT, an owner and operator of electric transmission assets in the Electric Reliability Council of Texas footprint. American Electric Power owns the other 50% interest.
During 2018, as reflected in the Consolidated Statement of Cash Flows, we received proceeds of approximately $18.8 billion from sales of equity securities. In the preceding table, investment gains/losses on equity securities sold during 2018 reflect the difference between proceeds from sales and the fair value of the equity security sold at the beginning of the period or the purchase date, if later. Our taxable gains on equity securities sold during 2018, which are generally the difference between the proceeds from sales and our original cost, were $3.3 billion.
Additionally, during 2018, an insurance subsidiary entered into an agreement with Seritage Growth Properties to provide a $2.0 billion term loan facility, which matures on July 31, 2023. As of December 31, 2018, the outstanding loans under the facility were approximately $1.6 billion.
Depreciation expense for each of the three years ending December 31, 2018 is summarized below (in millions).
Depreciation expense for equipment held for lease was $1,102 million in 2018, $751 million in 2017 and $755 million in 2016. As of December 31, 2018, the minimum future lease rentals to be received on equipment held for lease were as follows (in millions): 2019 - $2,493; 2020 - $1,771; 2021 - $1,222; 2022 - $779; 2023 - $421; and thereafter - $377.
Intangible asset amortization expense was $1,393 million in 2018, $1,469 million in 2017 and $1,490 million in 2016. Estimated amortization expense over the next five years is as follows (in millions): 2019 - $1,318; 2020 - $1,224; 2021 - $1,136; 2022 - $1,063 and 2023 - $1,018. Intangible assets with indefinite lives as of December 31, 2018 and 2017 were $18.9 billion and primarily related to certain customer relationships and trademarks and trade names.
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 aggregate premiums of $4.0 billion on the remaining contracts at the contract inception dates and 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) was $1,653 million at December 31, 2018 and $789 million at December 31, 2017. These contracts may not be unilaterally terminated or fully settled before the expiration dates and the ultimate amount of cash basis gains or losses on these contracts will not be determined until the contract expiration dates.
A summary of supplemental cash flow information for each of the three years ending December 31, 2018 is presented in the following table (in millions).
Our liabilities for unpaid losses and loss adjustment expenses (also referred to as “claim liabilities”) under short duration property and casualty insurance and reinsurance contracts are based upon estimates of the ultimate claim costs associated with claim occurrences as of the balance sheet date and include estimates for incurred-but-not-reported (“IBNR”) claims. A reconciliation of the changes in claim liabilities, excluding liabilities under retroactive reinsurance contracts (see Note 16), for each of the three years ending December 31, 2018 is as follows (in millions).
Incurred losses and loss adjustment expenses from the net reductions of estimated ultimate liabilities for prior accident years were $1,406 million in 2018, $544 million in 2017 and $1,443 million in 2016. These reductions, as percentages of the net liabilities at the beginning of each year, were 2.4% in 2018, 1.1% in 2017 and 3.1% in 2016.
Estimated ultimate liabilities for prior years’ loss events related to primary insurance were decreased $937 million in 2018, $249 million in 2017 and $569 million in 2016. These decreases were primarily attributable to lower than anticipated medical malpractice and workers’ compensation losses. Liabilities for prior years’ private passenger auto claims were also reduced in 2018 and 2016, but were increased in 2017.
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. Consequently, 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.
Our claims liabilities are principally a function of reported losses from ceding companies, case development and IBNR liability estimates. Case loss estimates are reported under our contracts either individually or in bulk as provided under the terms of the contracts. We may independently evaluate case losses reported by the ceding company, and if deemed appropriate, we may establish case liabilities based on our estimates. Estimated IBNR liabilities are driven by expected case loss emergence patterns and expected loss ratios, which may be evaluated as groups or portfolios of contracts with similar exposures, or on an individual contract-by-contract basis. Case and IBNR liability estimates for major catastrophe events may be based on a per-contract assessment of the ultimate cost associated with the individual loss event. Claim count data is not provided, as such information is not provided consistently by ceding companies under our contracts or is otherwise considered unreliable.
We estimate the ultimate expected incurred losses and loss adjustment expenses for medical professional claim liabilities using commonly accepted actuarial methodologies such as the paid and incurred development method, Bornhuetter-Ferguson based methods, hindsight outstanding severity method, trended severity method and trended pure premium method. Using a combination of these methodologies produces a range of loss estimates from which we determine our best estimate. Periodically, we study developments in older accident years and adjust initial loss estimates to reflect recent development based upon claim age, coverage and litigation experience. As previously noted, MLMIC was acquired on October 1, 2018. MLMIC’s incurred and paid losses and ALAE are included for all years presented retrospectively.
Retroactive reinsurance policies provide indemnification of losses and loss adjustment expenses of short-duration insurance contracts with respect to underlying loss events that occurred prior to the contract inception date. Claims payments may commence immediately after the contract date or, if applicable, once a contractual retention amount has been reached. Reconciliations of the changes in estimated liabilities for retroactive reinsurance unpaid losses and loss adjustment expenses (“claim liabilities”) and related deferred charge reinsurance assumed assets for each of the three years ended December 31, 2018 follows (in millions).
In 2017, NICO entered into an agreement 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.
BHE subsidiary debt represents amounts issued pursuant to separate financing agreements. Substantially all of the assets of certain BHE subsidiaries are, or may be, pledged or encumbered to support or otherwise secure debt. These borrowing arrangements generally contain various covenants, including covenants which pertain to leverage ratios, interest coverage ratios and/or debt service coverage ratios. During 2018, BHE and its subsidiaries issued approximately $5.5 billion of long-term debt. The debt issued in 2018 has maturity dates ranging from 2020 to 2049 and a weighted average interest rate of 3.6%. Proceeds from these debt issuances were used to repay debt, to fund capital expenditures and for general corporate purposes.
As of December 31, 2018, our subsidiaries had unused lines of credit and commercial paper capacity aggregating approximately $7.3 billion to support short-term borrowing programs and provide additional liquidity. Such unused lines of credit included approximately $6.1 billion related to BHE and its subsidiaries.
The liabilities for income taxes reflected in our Consolidated Balance Sheets are as follows (in millions).
At December 31, 2018 and 2017, net unrecognized tax benefits were $549 million and $554 million, respectively. Included in the balance at December 31, 2018, were $452 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, 2018, 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 2019.
Combined shareholders’ equity of U.S. based insurance subsidiaries determined pursuant to statutory accounting rules (Surplus as Regards Policyholders) was approximately $162 billion at December 31, 2018 and $170 billion at December 31, 2017. Statutory surplus differs from the corresponding amount based on GAAP due to differences in accounting for certain assets and liabilities. For instance, deferred charges reinsurance assumed, deferred policy acquisition costs, unrealized gains on certain investments and related deferred income taxes are recognized for GAAP but not for statutory reporting purposes. In addition, the carrying values of certain assets, such as goodwill and the carrying values of non-insurance entities owned by our insurance subsidiaries, are not fully recognized for statutory reporting purposes.
Level 1 - Inputs represent unadjusted quoted prices for identical assets or liabilities exchanged in active markets.
As disclosed in Note 4, we exercised our BAC Warrants to acquire BAC common stock on August 24, 2017. As payment of the cost to acquire the BAC common stock, we surrendered substantially all of our BAC Preferred. Additionally, Restaurant Brands International Inc. (“RBI”) in December 2017, redeemed a $3 billion private placement security that we acquired in 2014. Accordingly, during 2017, we concluded the Level 3 inputs used in the previous fair value determinations of the BAC Warrants, BAC Preferred Stock and RBI investment were not significant and we transferred these measurements from Level 3 to Level 2.
Quantitative information as of December 31, 2018, with respect to assets and liabilities measured and carried at fair value on a recurring basis with the use of significant unobservable inputs (Level 3) follows (in millions).
Our equity index put option contracts are illiquid and contain contract terms that are not standard in derivatives markets. For example, we are not required to post collateral under most of our contracts and certain of the contracts have relatively long durations. For these and other reasons, we classified these contracts as Level 3 measurements. The methods we use to value these contracts are those that we believe market participants would use in determining exchange prices with respect to our contracts.
We value equity index put option contracts based on the Black-Scholes option valuation model. Inputs to this model include index price, contract duration and dividend and interest rate inputs (including a Berkshire non-performance input) which are observable. However, we believe that the valuation of long-duration options using any model is inherently subjective and, given the lack of observable transactions and prices, acceptable values may be subject to wide ranges. Volatility inputs represent our expectations, which consider the remaining duration of each contract and assume that the contracts will remain outstanding until the expiration dates. Increases or decreases in the volatility inputs will produce increases or decreases in the fair values of the liabilities.
A summary of the net changes in after-tax accumulated other comprehensive income attributable to Berkshire Hathaway shareholders and amounts reclassified out of accumulated other comprehensive income for each of the three years ending December 31, 2018 follows (in millions).
As discussed in Note 1(w), on January 1, 2018, we adopted ASC 606 “Revenues from Contracts with Customers.” Except as described in Note 1, our revenue recognition practices for contracts with customers under ASC 606 do not differ significantly from prior practices. Under ASC 606, revenues are recognized when a good or service is transferred to a customer. A good or service is transferred when (or as) the customer obtains control of that good or service. Revenues are based on the consideration we expect to receive in connection with our promises to deliver goods and services to our customers.
The following table summarizes customer contract revenues disaggregated by reportable segment and the source of the revenue for the year ended December 31, 2018 (in millions). Other revenues included in our consolidated revenues were primarily insurance premiums earned, interest, dividend and other investment income and leasing revenues which are not within the scope of ASC 606.
Several of our subsidiaries sponsor defined benefit pension plans covering certain employees. Benefits under the plans are generally based on years of service and compensation, although benefits under certain plans are based on years of service and fixed benefit rates. Our subsidiaries may make contributions to the plans to meet regulatory requirements and may also make discretionary contributions. The components of our net periodic pension expense for each of the three years ending December 31, 2018 were as follows (in millions).
The funded status of our defined benefit pension plans at December 31, 2018 reflected in assets was $510 million and in liabilities was $2,473 million. At December 31, 2017, the funded status included in assets was $1,176 million and in liabilities was $2,986 million.
Fair value measurements of plan assets as of December 31, 2018 and 2017 follow (in millions).
We lease certain manufacturing, warehouse, retail and office facilities as well as certain equipment. Rent expense under operating leases was $1,649 million in 2018, $1,579 million in 2017 and $1,573 million in 2016. 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, 2018, estimated future payments under such arrangements were as follows: $15.7 billion in 2019, $4.5 billion in 2020, $3.7 billion in 2021, $3.2 billion in 2022, $2.9 billion in 2023 and $17.3 billion after 2023.
Consolidated sales, service and leasing revenues were $139.1 billion in 2018, $132.8 billion in 2017 and $125.6 billion in 2016. In 2018, 84% of such revenues were attributable to the United States compared to 85% in 2017 and 2016. The remainder of sales, service and leasing revenues were primarily in Europe, Canada and the Asia Pacific. Consolidated sales, service and leasing revenues included sales to Walmart Stores, Inc. of approximately $13 billion in 2018 and $14 billion in 2017 and 2016. In 2018, approximately 96% of our revenues from railroad, utilities and energy businesses were in the United States compared to 95% in 2017 and 2016. At December 31, 2018, approximately 89% of our consolidated net property, plant and equipment and equipment held for lease was located in the United States with the remainder primarily in Canada and Europe.