Our insurance businesses generated after-tax earnings from underwriting of $1.2 billion in 2015, a decline of $530 million from 2014, which reflected rising claim costs at GEICO and lower earnings from our reinsurers, partially offset by increased earnings from our other primary insurance operations. Our railroad business generated a 9.8% increase in after-tax earnings in 2015 compared to 2014, reflecting improved service levels and lower fuel costs. After-tax earnings of our utilities and energy businesses in 2015 increased 13.3% over 2014, attributable to the acquisition of AltaLink in December 2014 and higher earnings from several of our other energy businesses. After-tax earnings of our manufacturing, service and retailing businesses in 2015 increased 4.8% over 2014. The positive impacts of business acquisitions and higher earnings from our building products businesses were partly offset by lower earnings from certain of our industrial products and service businesses.
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, General Re, Berkshire Hathaway Reinsurance Group (“BHRG”) and Berkshire Hathaway Primary Group.
We hold a 90% 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 declined $36 million (1%) in 2015 compared to 2014. Wholesale and other revenues declined $129 million, principally due to lower wholesale prices and volumes and lower renewable energy credit revenue, while retail revenues increased compared to 2014, reflecting higher average rates partially offset by slightly lower volumes. EBIT increased $16 million (2%) in 2015 compared to 2014. Gross margins increased $109 million versus 2014, as energy costs declined more than revenues. The increase in gross margins substantially offset an increase in depreciation and amortization expense ($35 million) due to increased plant-in-service, lower allowances for equity funds used during construction ($18 million) and the impact of the recognition in 2014 of expected insurance recoveries on fire losses.
Consumer products pre-tax earnings increased $92 million (12.6%) in 2016 compared to 2015. The earnings increase reflected increased earnings from Forest River and apparel and footwear businesses, partly offset by pre-tax losses of Duracell. From its acquisition date, Duracell incurred approximately $109 million in transition, business integration and restructuring costs. Forest River generated a pre-tax earnings increase of 28%, primarily due to increased sales volumes and higher gross margins. Earnings of our apparel businesses increased 22% in 2016, primarily attributable to lower restructuring costs and a loss in 2015 from the disposition of a Fruit of the Loom operation, partly offset by lower earnings from our footwear businesses.
Revenues increased $347 million (3.5%) in 2015 as compared to 2014. The increase included a 5% increase in NetJets’ revenues and the impact of the acquisitions of Charter Brokerage and WPLG during 2014, partly offset by reduced revenues from our newspaper operations. The increase in NetJets’ revenues was attributable to a 50% increase in aircraft sales, partially offset by lower flight operations revenue.
As of any balance sheet date, recorded 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 contributes to extending claim-tails. Our liabilities as of December 31, 2016 were $76.9 billion, of which 85% related to GEICO, General Re and BHRG. Additional information regarding significant uncertainties inherent in the processes and techniques of GEICO, General Re and BHRG follows.
GEICO’s claim reserving methodologies produce liability estimates based upon the individual claims. The key assumptions affecting our liability estimates include projections of ultimate claim counts (“frequency”) and average loss per claim (“severity”). We utilize a combination of several actuarial estimation methods, including Bornhuetter-Ferguson and chain-ladder methodologies.
Certain of our contracts include significant exposures to asbestos, environmental and other latent injury claims. We estimate that our liabilities for such claims were approximately $13.7 billion at December 31, 2016. We do not receive consistently reliable information regarding asbestos, environmental and latent injury claims data from all ceding companies, particularly with respect to multi-line or aggregate excess-of-loss policies. Periodically, 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.
Liabilities for insurance benefits under life contracts are computed based upon estimated future investment yields, expected mortality, morbidity, and lapse or withdrawal rates and reflect estimates for future premiums and expenses under the contracts. 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. Periodic payment annuity liabilities are discounted 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%.
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.
In January 2016, the FASB issued ASU 2016-01 “Financial Instruments-Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 generally requires that equity investments (excluding equity method investments) be measured at fair value with changes in fair value recognized in net income. Under existing GAAP, changes in fair value of available-for-sale equity investments are recorded in other comprehensive income. Given the current magnitude of our equity investments, the adoption of ASU 2016-01 will likely have a significant impact on the periodic net earnings reported in our Consolidated Statement of Earnings, although it will not significantly impact our comprehensive income or shareholders’ equity. ASU 2016-01 is effective for reporting periods beginning after December 15, 2017, with the cumulative effect of the adoption made to the balance sheet as of the date of adoption. Thus, the adoption will result in a reclassification of the related accumulated unrealized appreciation currently included in accumulated other comprehensive income to retained earnings, with no impact on Berkshire’s shareholders’ equity.
In June 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.
Inventories at December 31, 2016 included approximately $3.5 billion related to PCC and Duracell.
Trade and other receivables at December 31, 2016 included approximately $1.8 billion related to PCC and Duracell.
Incurred losses and loss adjustment expenses attributable to retroactive reinsurance contracts included $1.26 billion in 2016 and $3.43 billion in 2014 from new contracts written in those years. Incurred losses related to retroactive reinsurance contracts written in prior years were $440 million in 2016, $631 million in 2015 and $831 million in 2014, which included recurring amortization of deferred charges and the effect of changes in the timing and amount of expected future loss payments.
Benefits payments expected over the next ten years are as follows (in millions): 2017-$992; 2018-$1,007; 2019-$987; 2020-$1,003; 2021-$994; and 2022 to 2026-$5,043. Sponsoring subsidiaries expect to contribute $224 million to defined benefit pension plans in 2017.
In the third quarter of 2016, our wholly-owned subsidiary, National Indemnity Company (“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’s assets and policyholders’ surplus determined under statutory accounting principles as of June 30, 2016 were approximately $5.5 billion and $1.9 billion, respectively. The acquisition price will be an amount equal to the sum of: (i) the tangible book value of MLMIC at the closing date (determined under U.S. GAAP); plus (ii) $100 million. 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, customary closing conditions and the approval of the MLMIC policyholders eligible to vote on the proposed demutualization and sale. The transaction is expected to be completed in late 2017.
The tabular information that follows shows data of reportable segments reconciled to amounts reflected in our Consolidated Financial Statements. Intersegment transactions are not eliminated from segment results when management considers those transactions in assessing the results of the respective segments. Furthermore, our management does not consider investment and derivative gains/losses or amortization of certain purchase accounting adjustments related to Berkshire’s business acquisitions in assessing the performance of reporting units. Collectively, these items are included in reconciliations of segment amounts to consolidated amounts.