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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Identification Number)
3555 Farnam Street, Omaha, Nebraska 68131
(Zip Code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
☒ Accelerated filer ☐
Non-accelerated filer
☐ Smaller reporting company ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
Number of shares of common stock outstanding as of October 25, 2018:
Class A —
Class B —
Page No.
Consolidated Balance Sheets—September 30, 2018 and December 31, 2017 2-3
Consolidated Statements of Earnings—Third Quarter and First Nine Months 2018 and 2017 4
Consolidated Statements of Comprehensive Income— Third Quarter and First Nine Months 2018 and 2017 5
Consolidated Statements of Changes in Shareholders' Equity—First Nine Months 2018 and 2017 5
Consolidated Statements of Cash Flows—First Nine Months 2018 and 2017 6
Notes to Consolidated Financial Statements 7-25
Management's Discussion and Analysis of Financial Condition and Results of Operations 26-44
Quantitative and Qualitative Disclosures About Market Risk 45
Controls and Procedures 45
Part II – Other Information
Legal Proceedings 45
Item 1A.
Risk Factors 45
Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Repurchases of Equity Securities 45
Defaults Upon Senior Securities 46
Mine Safety Disclosures 46
Other Information 46
Exhibits 46
Part I Financial Information
and Subsidiaries
2018 December 31,
Insurance and Other:
Cash and cash equivalents*
Short-term investments in U.S. Treasury Bills
Investments in fixed maturity securities
Investments in equity securities
Investment in The Kraft Heinz Company
Deferred charges under retroactive reinsurance contracts
Railroad, Utilities and Energy:
Regulatory assets
Finance and Financial Products:
Loans and finance receivables
Property, plant and equipment and assets held for lease
Cash and cash equivalents includes U.S. Treasury Bills with maturities of three months or less when purchased of $14.7 billion at September 30, 2018 and $5.7 billion at December 31, 2017.
See accompanying Notes to Consolidated Financial Statements
Unpaid losses and loss adjustment expenses
Unpaid losses and loss adjustment expenses under retroactive reinsurance contracts
Life, annuity and health insurance benefits
Other policyholder liabilities
Accounts payable, accruals and other liabilities
Notes payable and other borrowings
Regulatory liabilities
Derivative contract liabilities
Income taxes, principally deferred
Capital in excess of par value
(3,927) 58,571
Treasury stock, at cost
(2,691) (1,763)
Berkshire Hathaway shareholders' equity
Noncontrolling interests
CONSOLIDATED STATEMENTS OF EARNINGS
(dollars in millions except per share amounts)
Third Quarter First Nine Months
(Unaudited) (Unaudited)
Insurance premiums earned
Sales and service revenues
Interest, dividend and other investment income
49,201 46,724 144,451 145,290
Railroad, Utilities and Energy operating and other revenues
Investment and derivative contract gains/losses:
Investments gains (losses)
14,569 657 12,750 1,262
Derivative contract gains (losses)
Insurance losses and loss adjustment expenses
9,932 12,137 28,296 39,450
Insurance underwriting expenses
Cost of sales and services
Cost of sales and operating expenses
Total costs and expenses
Earnings before income taxes and equity method earnings
22,831 5,325 35,678 16,515
Equity method earnings
316 305 1,044 932
Earnings before income taxes
Net earnings
Earnings attributable to noncontrolling interests
Net earnings attributable to Berkshire Hathaway shareholders
$ 18,540 $ 4,067 $ 29,413 $ 12,389
Net earnings per average equivalent Class A share*
$ 11,280 $ 2,473 $ 17,885 $ 7,533
Net earnings per average equivalent Class B share*
$ 7.52 $ 1.65 $ 11.92 $ 5.02
Average Class A shares outstanding
Average Class B shares outstanding
1,360,940,890 1,332,192,917 1,350,588,758 1,317,463,821
Class B shares are economically equivalent to one-fifteen-hundredth of a Class A share. Accordingly, net earnings per average equivalent Class B share outstanding is equal to one-fifteen-hundredth of the equivalent Class A amount. See Note 19.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net change in unrealized appreciation of investments
5 4,952 (132) 18,040
Applicable income taxes
(1) (1,716) 19 (6,247)
Reclassification of investment appreciation in net earnings
(34) (646) (299) (1,235)
(79) 771 (842) 2,127
9 (24) 46 (116)
Prior service cost and actuarial gains/losses of defined benefit pension plans
(13) (3) 50 (57)
Other, net
(21) 32 (57) 38
Other comprehensive income, net
(124) 3,598 (1,152) 13,013
Comprehensive income attributable to noncontrolling interests
Comprehensive income attributable to Berkshire Hathaway shareholders
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Berkshire Hathaway shareholders' equity Total
and capital in
excess of par
income Retained
earnings Treasury
stock Non-
First nine months 2017:
Balance at December 31, 2016
$ 35,689 $ 37,298 $ 210,846 $ (1,763) $ 3,358 $ 285,428
— — 12,389 — 308 12,697
— 12,885 — — 128 13,013
Issuance of common stock
58 — — — — 58
Transactions with noncontrolling interests
(55) — — — (220) (275)
Balance at September 30, 2017
Adoption of new accounting pronouncements
— (61,375) 61,304 — — (71)
— (1,123) — — (29) (1,152)
Issuance (acquisition) of common stock
54 — — (928) — (874)
$ 35,721 $ (3,927) $ 346,503 $ (2,691) $ 3,813 $ 379,419
First Nine Months
Adjustments to reconcile net earnings to operating cash flows:
Investment gains/losses
(12,750) (1,262)
(677) 1,110
Losses and loss adjustment expenses
Deferred charges reinsurance assumed
827 (5,525)
Receivables and originated loans
Purchases of U.S. Treasury Bills and fixed maturity securities
(85,502) (106,597)
Purchases of equity securities
(38,552) (14,936)
Sales of U.S. Treasury Bills and fixed maturity securities
Redemptions and maturities of U.S. Treasury Bills and fixed maturity securities
Sales and redemptions of equity securities
Purchases of loans and finance receivables
Collections of loans and finance receivables
Acquisitions of businesses, net of cash acquired
(521) (2,640)
Purchases of property, plant and equipment
Proceeds from borrowings of insurance and other businesses
Proceeds from borrowings of railroad, utilities and energy businesses
Proceeds from borrowings of finance businesses
Repayments of borrowings of insurance and other businesses
Repayments of borrowings of railroad, utilities and energy businesses
Repayments of borrowings of finance businesses
Changes in short term borrowings, net
Acquisition of treasury stock
(928) —
(277) (108)
Effects of foreign currency exchange rate changes
Increase in cash and cash equivalents and restricted cash
Cash and cash equivalents and restricted cash at beginning of year
Cash and cash equivalents and restricted cash at end of third quarter *
* Cash and cash equivalents and restricted cash are comprised of the following:
Beginning of year—
Insurance and Other
Railroad, Utilities and Energy
Finance and Financial Products
Restricted cash, included in other assets
End of third quarter—
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. General
The accompanying unaudited Consolidated Financial Statements include the accounts of Berkshire Hathaway Inc. ("Berkshire" or "Company") consolidated with the accounts of all its subsidiaries and affiliates in which Berkshire holds controlling financial interests as of the financial statement date. In these notes, the terms "us," "we" or "our" refer to Berkshire and its consolidated subsidiaries. Reference is made to Berkshire's most recently issued Annual Report on Form 10-K ("Annual Report"), which includes information necessary or useful to understanding Berkshire's businesses and financial statement presentations. Our significant accounting policies and practices were presented as Note 1 to the Consolidated Financial Statements included in the Annual Report. Changes to those policies due to the adoption of new accounting standards effective January 1, 2018 are described in Note 2. Certain immaterial amounts related to equity method earnings were reclassified in the accompanying 2017 Consolidated Financial Statements to conform to current presentations.
Financial information in this Quarterly Report reflects all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary to a fair statement of results for the interim periods in accordance with accounting principles generally accepted in the United States ("GAAP"). For a number of reasons, our results for interim periods are not normally indicative of results to be expected for the year. The timing and magnitude of catastrophe losses incurred by insurance subsidiaries and the estimation error inherent to the process of determining liabilities for unpaid losses of insurance subsidiaries can be more significant to results of interim periods than to results for a full year. Changes in market prices of the equity securities we own can produce significant effects on our consolidated shareholders' equity. Beginning in 2018, those effects are included in our Consolidated Statements of Earnings, whereas in pre-2018 periods, such effects were included in other comprehensive income. In addition, changes in the fair values of certain derivative contract liabilities and gains and losses from the periodic revaluation of certain assets and liabilities denominated in foreign currencies can cause significant variations in our periodic net earnings.
Note 2. New Accounting Pronouncements
On January 1, 2018, we adopted Accounting Standards Update ("ASU") 2016-01 "Financial Instruments—Recognition and Measurement of Financial Assets and Financial Liabilities" ("ASU 2016-01"), ASU 2018-02 "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" ("ASU 2018-02") and Accounting Standards Codification ("ASC") 606 – "Revenues from Contracts with Customers" ("ASC 606"). A summary of the effects of the initial adoption of ASU 2016-01, ASU 2018-02 and ASC 606 follows (in millions).
ASU 2016-01 ASU 2018-02 ASC 606 Total
Increase (decrease):
$ — $ — $ 3,382 $ 3,382
— — 3,453 3,453
(61,459) 84 — (61,375)
61,459 (84) (71) 61,304
— — (71) (71)
With respect to ASU 2016-01, beginning in 2018, we are including unrealized gains and losses arising from the changes in the fair values of our equity securities during the period as a component of investment gains 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, based on the difference between the sale proceeds and the cost of the securities, and for other-than-temporary impairment losses. We recorded unrealized gains and losses from the changes in fair value of available-for-sale equity securities in other comprehensive income. We continue to carry our investments in equity securities at fair value and there is no change to the asset values or total shareholders' equity amounts we would have otherwise recorded. ASU 2016-01 prohibited the restatement of prior year financial statements. However, as of January 1, 2018, we reclassified net after-tax unrealized gains on equity securities from accumulated other comprehensive income to retained earnings.
Notes to Consolidated Financial Statements (Continued)
Note 2. New Accounting Pronouncements (Continued)
In connection with our adoption of ASU 2018-02, we reclassified the stranded deferred income tax effects that were included in accumulated other comprehensive income as of January 1, 2018 to retained earnings. These stranded income tax effects arose from the reduction in the U.S. statutory income tax rate under the U.S. Tax Cuts and Jobs Act enacted on December 22, 2017. The effect of the reduction in the statutory income tax rate on accumulated other comprehensive income items was recorded in earnings in December 2017. Prior year financial statements were not restated.
We adopted ASC 606 using the modified retrospective method, whereby the cumulative effect of the adoption was recorded as an adjustment to retained earnings. Prior year financial statements were not restated. The initial adoption of ASC 606 as of January 1, 2018 resulted in increases to assets and other liabilities, with a relatively minor reduction in 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 and not ASC 606. The principal effects of this re-characterization were to increase both property, plant and equipment and other liabilities by approximately $3.5 billion. The re-characterization of these fractional ownership interests as operating leases did not have a material effect on our consolidated revenues or earnings for the first nine months of 2018.
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02 "Leases," which together with subsequent amendments is included in ASC 842. 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 intend to adopt ASC 842 as of January 1, 2019 under the modified retrospective method.
We are party to contracts where we are the lessee and other contracts where we are the lessor. For contracts where we are the lessee, we will record lease liabilities and right of use assets for contracts in effect on January 1, 2019 based on the facts and circumstances as of that date. While we continue to evaluate certain provisions of ASC 842, based on our current estimates, we expect to recognize right of use assets and lessee lease liabilities of approximately $6 billion with respect to operating leases. We do not believe the adoption of ASC 842 will have a material effect on our consolidated financial position, results of operations or cash flows.
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.
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 of ASU 2017-04, 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.
In August 2018, the FASB issued ASU 2018-12 "Targeted Improvements to the Accounting for Long-Duration Contracts." ASU 2018-12 requires periodic reassessment of actuarial and discount rate assumptions used in the valuation of policyholder liabilities and deferred acquisition costs arising from the issuance of long-duration insurance and reinsurance contracts, with the effects of changes in cash flow assumptions reflected in earnings and the effects of changes in discount rate assumptions reflected in other comprehensive income. Under current accounting guidance, the actuarial and discount rate assumptions are set at the contract inception date and not subsequently changed, except under limited circumstances. ASU 2018-12 also requires new disclosures and is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. We are evaluating the effect this standard will have on our Consolidated Financial Statements.
Note 3. Revenues from contracts with customers
As discussed in Note 2, on January 1, 2018, we adopted ASC 606 "Revenues from Contracts with Customers." Except as described in Note 2, 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. Our accounting policies related to revenue from contracts with customers follow.
We manufacture and/or distribute a wide variety of industrial, building and consumer products. Our sales contracts provide customers with these products through wholesale and retail channels in exchange for consideration specified under the contracts. Contracts generally represent customer orders for individual products at stated prices. Sales contracts may contain either single or multiple performance obligations. In instances where contracts contain multiple performance obligations, we allocate the revenue to each obligation based on the relative stand-alone selling prices of each product or service.
Sales revenue reflects reductions for returns, allowances, volume discounts and other incentives, some of which may be contingent on future events. In certain customer contracts of our grocery distribution business, sales revenue includes certain state and local excise taxes billed to customers on specified products when those taxes are levied directly upon us by the taxing authorities. Sales revenue excludes sales taxes and value-added taxes collected on behalf of taxing authorities. Sales revenue includes consideration for shipping and other fulfillment activities performed prior to the customer obtaining control of the goods. We also elect to treat consideration for such services performed after control has passed to the customer as sales revenue.
Our product sales revenues are generally recognized at a point in time when control of the product transfers to the customer, which coincides with customer pickup or product delivery or acceptance, depending on terms of the arrangement. We recognize sales revenues and related costs with respect to certain contracts over time, primarily from certain castings, forgings and aerostructures contracts. Control of the product units under these contracts transfers continuously to the customer as the product is manufactured. These products generally have no alternative use and the contract requires the customer to provide reasonable compensation if terminated for reasons other than breach of contract.
Our energy revenue derives primarily from tariff based sales arrangements approved by various regulatory bodies. These tariff based revenues are mainly comprised of energy, transmission, distribution and natural gas and have performance obligations to deliver energy products and services to customers which are satisfied over time as energy is delivered or services are provided. Our nonregulated energy revenue primarily relates to our renewable energy business. Energy revenues are equivalent to the amounts we have the right to invoice and correspond directly with the value to the customer of the performance to date and include billed and unbilled amounts. As of September 30, 2018 and December 31, 2017, trade receivables were approximately $2.2 billion and $2.0 billion, respectively, and were included in other assets of our railroad, utilities and energy businesses on the Consolidated Balance Sheets. Such amounts substantially relate to customer revenue and included unbilled revenue of $624 million as of September 30, 2018 and $665 million as of December 31, 2017. Payments from customers are generally due from the customer within 30 days of billing. Rates charged for energy products and services are established by regulators or contractual arrangements that establish the transaction price, as well as the allocation of price amongst the separate performance obligations. When preliminary regulated 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 accrued.
The primary performance obligation under our freight rail transportation service contracts is to move freight from a point of origin to a point of destination. The performance obligations are represented by bills of lading which create a series of distinct services that have a similar pattern of transfer to the customer. The revenues for each performance obligation are based on various factors including the product being shipped, the origin and destination pair, and contract incentives which are outlined in various private rate agreements, common carrier public tariffs, interline foreign road agreements and pricing quotes. The transaction price is generally a per car amount to transport railcars from a specified origin to a specified destination. Freight revenues are recognized over time as the service is performed because the customer simultaneously receives and consumes the benefits of the service. Revenues recognized represent the proportion of the service completed as of the balance sheet date. Receivables related to customer contracts were approximately $1.3 billion at September 30, 2018 and $1.2 billion at December 31, 2017 and were included in other assets of our railroad, utilities and energy businesses. Invoices for freight transportation services are generally issued to customers and paid within thirty days or less. Customer incentives, which are primarily provided for shipping a specified cumulative volume or shipping to/from specific locations, are recorded as a reduction to revenue on a pro-rata basis based on actual or projected future customer shipments.
Other service revenues derive from contracts with customers in which performance obligations are satisfied over time, where customers receive and consume benefits as we perform the services, or at a point in time when the services are provided. Other service revenues primarily derive from real estate brokerage, automotive repair, aircraft management, aviation training, franchising and news distribution services.
Note 3. Revenues from contracts with customers (Continued)
The following table summarizes customer contract revenues disaggregated by reportable segment and the source of the revenue for the three and nine months ending September 30, 2018 (in millions). Other revenues included in our consolidated revenues were primarily insurance premiums earned, interest, dividend and other investment income and lease income which are not within the scope of ASC 606.
Manufacturing McLane
Company Service and
Retail BNSF Berkshire
Energy Finance and
Products Insurance,
and other Total
Three months ending September 30, 2018
Manufactured products:
Industrial and commercial products
$ 6,384 $ — $ 47 $ — $ — $ 82 $ — $ 6,513
3,473 — — — — 4 — 3,477
2,838 — — — — 1,170 — 4,008
Grocery and convenience store distribution
— 8,709 — — — — — 8,709
Food and beverage distribution
— — 2,083 — — — — 2,083
Other retail and wholesale distribution
521 — 3,117 — — 23 — 3,661
262 16 965 6,099 1,140 148 — 8,630
— — — — 4,267 — — 4,267
13,478 12,804 6,212 6,099 5,407 1,427 — 45,427
51 18 743 13 299 1,004 15,895 18,023
$ 13,529 $ 12,822 $ 6,955 $ 6,112 $ 5,706 $ 2,431 $ 15,895 $ 63,450
Nine months ending September 30, 2018
$ 19,306 $ — $ 155 $ — $ — $ 503 $ — $ 19,964
9,817 — — — — 11 — 9,828
8,734 — — — — 3,124 — 11,858
— 25,128 — — — — — 25,128
1,533 — 8,734 — — 65 — 10,332
759 53 2,912 17,510 3,026 174 — 24,434
— — — — 11,357 — — 11,357
40,149 37,384 17,888 17,510 14,383 3,877 — 131,191
132 54 2,664 37 885 2,980 46,180 52,932
$ 40,281 $ 37,438 $ 20,552 $ 17,547 $ 15,268 $ 6,857 $ 46,180 $ 184,123
A summary of the transaction price allocated to the significant unsatisfied remaining performance obligations relating to contracts with expected durations in excess of one year as of September 30, 2018 follows (in millions).
Performance obligations
expected to be satisfied:
12 months Greater than
12 months Total
$ 50 $ 2,549 $ 2,599
Note 4. Investments in fixed maturity securities
Our investments in fixed maturity securities as of September 30, 2018 and December 31, 2017 are summarized by type below (in millions).
Amortized
Cost Unrealized
Gains Unrealized
Losses Fair
U.S. Treasury, U.S. government corporations and agencies
$ 3,626 $ 8 $ (35) $ 3,599
U.S. states, municipalities and political subdivisions
276 15 (1) 290
7,362 45 (37) 7,370
6,029 436 (7) 6,458
Mortgage-backed securities
$ 17,795 $ 560 $ (84) $ 18,271
847 19 (12) 854
8,572 274 (24) 8,822
Investments in foreign government securities include securities issued by national and provincial government entities as well as instruments that are unconditionally guaranteed by such entities. As of September 30, 2018, approximately 89% of foreign government holdings were rated AA or higher by at least one of the major rating agencies.
The amortized cost and estimated fair value of fixed maturity securities at September 30, 2018 are summarized below by contractual maturity dates. Amounts are in millions. Actual maturities may differ from contractual maturities due to early call or prepayment rights held by issuers.
Due in one
year or less Due after one
year through
five years Due after five
years through
ten years Due after
ten years Mortgage-
securities Total
Amortized cost
$ 7,275 $ 9,057 $ 387 $ 574 $ 502 $ 17,795
7,274 9,108 435 900 554 18,271
Note 5. Investments in equity securities
Our investments in equity securities as of September 30, 2018 and December 31, 2017 are summarized based on the primary industry of the investee as follows (in millions).
Cost Basis Net Unrealized
Gains Fair
September 30, 2018 *
Banks, insurance and finance
Commercial, industrial and other
$ 101,838 $ 105,494 $ 207,332
Approximately 69% of the aggregate fair value was concentrated in five companies (American Express Company – $16.1 billion; Apple Inc. – $57.6 billion; Bank of America Corporation – $26.5 billion; The Coca-Cola Company – $18.5 billion and Wells Fargo & Company – $24.4 billion).
Note 5. Investments in equity securities (Continued)
December 31, 2017 *
$ 74,676 $ 95,864 $ 170,540
Investments in equity securities are reflected in our Consolidated Balance Sheets as follows (in millions).
Railroad, utilities and energy *
Finance and financial products *
Included in other assets.
Note 6. Equity Method Investments
Berkshire holds 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. Berkshire currently owns 325,442,152 shares of Kraft Heinz common stock representing 26.7% of the outstanding shares. The carrying value and fair value of this investment at September 30, 2018 was approximately $17.5 billion and $17.9 billion, respectively, and at December 31, 2017 was $17.6 billion and $25.3 billion, respectively. Our earnings determined under the equity method during the first nine months of 2018 and 2017 were $635 million and $800 million, respectively. We received dividends on the common stock of $610 million in the first nine months of 2018 and $594 million in the first nine months of 2017, which we recorded as reductions of our investment.
Summarized consolidated financial information of Kraft Heinz follows (in millions).
$ 6,378 $ 6,280 $ 19,368 $ 19,241
Net earnings attributable to Kraft Heinz common shareholders
$ 630 $ 944 $ 2,379 $ 2,996
Other investments accounted for pursuant to the equity method include our investments in Berkadia Commercial Mortgage LLC ("Berkadia"), Pilot Travel Centers LLC, d/b/a Pilot Flying J ("Pilot Flying J"), and Electric Transmission Texas, LLC ("ETT"). Our investments in these entities were approximately $3.6 billion as of September 30, 2018 and $3.4 billion as of December 31, 2017 and were included in other assets. Our equity method earnings in these entities for the first nine months were $409 million in 2018 and $132 million in 2017. Additional information concerning these investments follows.
Note 6. Equity Method Investments (Continued)
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. 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.
On October 3, 2017, we entered into an investment agreement and an equity purchase agreement whereby we acquired a 38.6% interest in Pilot Flying J, headquartered in Knoxville, Tennessee. Pilot Flying J is one of the largest operators of travel centers in North America, with more than 28,000 team members, 750 locations across the U.S. and Canada and more than $20 billion in annual revenues. The Haslam family currently owns a 50.1% interest in Pilot Flying J and a third party owns the remaining 11.3% interest. We also entered into an agreement to acquire in 2023 an additional 41.4% interest in Pilot Flying J with the Haslam family retaining a 20% interest. As a result, Berkshire will become the majority owner of Pilot Flying J in 2023.
Our consolidated effective income tax rates for the third quarter and first nine months of 2018 were 19.2% and 19.1%, respectively, and 25.3% and 27.2% in the third quarter and first nine months of 2017, respectively. Our effective income tax rate normally reflects recurring benefits from: (a) dividends received deductions applicable to certain investments in equity securities and (b) income production tax credits related to wind-powered electricity generation placed in service in the U.S. In 2018, our effective income tax rate reflects the current U.S. statutory rate of 21%, while the rate for 2017 reflects the then current U.S. statutory rate of 35%. The relative mix of pre-tax earnings or losses and underlying income tax rates applicable to the various taxing jurisdictions can also affect our periodic consolidated effective income tax rate.
In December 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin 118 ("SAB 118") to provide clarification in implementing the Tax Cuts and Jobs Act of 2017 ("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 recorded income tax expense of approximately $1.4 billion in the fourth quarter of 2017, representing our provisional estimate of the U.S. Federal and state income taxes on the deemed repatriation of accumulated undistributed earnings of foreign subsidiaries. We continue to consider this estimate to be provisional and subject to remeasurement when we obtain the necessary additional information to complete the measurement. As of September 30, 2018, we had not finalized the inputs to the foreign earnings and profits calculations, the basis on which income taxes are determined. Our accounting for the repatriation tax under the TCJA will be completed during the fourth quarter of 2018. We do not anticipate significant adjustments to the provisional estimates.
Note 8. Investment gains/losses
A summary of investment gains and losses in the third quarter and first nine months of 2018 and 2017 follows (in millions).
Equity securities:
Unrealized investment gains/losses on securities held at the end of the period
$ 14,294 $ — $ 12,126 $ —
Investment gains/losses during 2018 on securities sold in 2018
244 — 307 —
Gross realized gains
— 1,011 — 1,795
Gross realized losses
— (419) — (626)
Fixed maturity securities:
(10) (2) (152) (16)
(3) 11 18 27
$ 14,569 $ 657 $ 12,750 $ 1,262
Note 8. Investment gains/losses (Continued)
Prior to 2018, we recognized investment gains and losses in earnings when we sold or otherwise disposed of equity securities based on the difference between the proceeds from the sale and the cost of the securities and also when we recognized other-than-temporary impairment losses. Beginning in 2018, equity securities gains and losses include unrealized gains and losses from changes in fair values during the period on equity securities we still own. Prior to 2018, we recorded the changes in unrealized gains and losses on our investments in equity securities in other comprehensive income. See Note 2.
During the first nine months of 2018, as reflected on the Consolidated Statement of Cash Flows, we received proceeds of approximately $14.2 billion from sales of equity securities. In the table above, 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 the third quarter and first nine months of 2018, which are generally the difference between the proceeds from sales and our original cost, were $1,329 million and $2,688 million, respectively.
Note 9. Receivables
Receivables of insurance and other businesses are comprised of the following (in millions).
Insurance premiums receivable
Reinsurance recoverable on unpaid losses
Trade receivables
Allowances for uncollectible accounts
A summary of loans and finance receivables of our finance and financial products businesses follows (in millions).
Loans and finance receivables before allowances and discounts
Allowances for uncollectible loans
Unamortized acquisition discounts
Loans and finance receivables are predominantly installment loans originated or acquired by our manufactured housing business. Provisions for loan losses in the first nine months of 2018 and 2017 were $109 million and $124 million, respectively. Loan charge-offs, net of recoveries, in the first nine months were $106 million in 2018 and $126 million in 2017. At September 30, 2018, we evaluated approximately 98% of the loan balances collectively for impairment. As part of the evaluation process, credit quality indicators were reviewed and loans were designated as performing or non-performing. At September 30, 2018, 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.
Note 10. Inventories
Inventories are comprised of the following (in millions).
Work in process and other
Finished manufactured goods
Goods acquired for resale
Note 11. Property, plant and equipment and assets held for lease
A summary of property, plant and equipment of our insurance and other businesses follows (in millions).
Furniture, fixtures and other
In conjunction with the adoption of ASC 606, we recorded a net asset of approximately $3.5 billion related to aircraft sold under fractional aircraft ownership programs in machinery and equipment. Such amount included cost of approximately $5.3 billion, net of accumulated depreciation of $1.8 billion. We also recorded other liabilities of approximately $3.5 billion for estimated aircraft repurchase obligations and unearned lease revenues, substantially offsetting the amount recorded in machinery and equipment. See Note 2.
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.
Railroad:
Land, track structure and other roadway
Locomotives, freight cars and other equipment
Utilities and energy:
Utility generation, transmission and distribution systems
Interstate natural gas pipeline assets
Independent power plants and other assets
Note 11. Property, plant and equipment and assets held for lease (Continued)
Assets held for lease and property, plant and equipment of our finance and financial products businesses are summarized below (in millions). Assets held for lease include railcars, intermodal tank containers, cranes, over-the-road trailers, storage units and furniture.
Assets held for lease
Buildings, machinery and other
A summary of depreciation expense for the first nine months of 2018 and 2017 follows (in millions).
Note 12. Goodwill and other intangible assets
A reconciliation of the change in the carrying value of goodwill is as follows (in millions).
Balance at beginning of year
Acquisitions of businesses
Other, including foreign currency translation
Balance at end of period
Other intangible assets are summarized as follows (in millions).
Gross carrying
amount Accumulated
amortization Gross carrying
1,026 362 988 324
Trademarks and trade names
$ 5,396 $ 744 $ 5,381 $ 692
Patents and technology
28,343 4,351 28,322 3,722
Amortization expense in the first nine months was $1,052 million in 2018 and $1,108 million in 2017. Intangible assets with indefinite lives were approximately $18.9 billion as of September 30, 2018 and December 31, 2017.
Note 13. Derivative contracts
We are party to derivative contracts primarily through our finance and financial products and our utilities and energy businesses. Currently, the derivative contracts of our finance and financial products businesses consist of equity index put option contracts written between 2004 and 2008. The liabilities and related notional values of such contracts follows (in millions).
Liabilities Notional
Value Liabilities Notional
Equity index put options
$ 1,869 $ 27,434(1) $ 2,172 $ 28,753 (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.
We record equity index put option contract liabilities at fair value and include the changes in the fair values of such contracts in earnings as derivative contract gains/losses. A summary of derivative contract gains/losses included in our Consolidated Statements of Earnings follows (in millions).
$ 137 $ 308 $ 303 $ 703
The equity index put option contracts are European style options written prior to March 2008 on four major equity indexes. The remaining contracts expire between April 2019 and January 2026. At September 30, 2018, the remaining weighted average life of all contracts was approximately 2.25 years. In the second quarter of 2018, one equity index put option contract expired with no payment to the counterparty.
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 approximately $4.1 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 $919 million at September 30, 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 limited number of our equity index put option contracts contain collateral posting requirements with respect to changes in the fair value or intrinsic value of the contracts and/or a downgrade of Berkshire's credit ratings. As of September 30, 2018, we did not have any collateral posting requirements. If Berkshire's credit ratings (currently AA from Standard & Poor's and Aa2 from Moody's) are downgraded below either A- by Standard & Poor's or A3 by Moody's, collateral of up to $1.1 billion could be required to be posted.
Our regulated utility subsidiaries are exposed to variations in the prices of fuel required to generate electricity, wholesale electricity purchased and sold and natural gas supplied for customers. We may use forward purchases and sales, futures, swaps and options to manage a portion of these price risks. Most of the net derivative contract assets or liabilities of our regulated utilities are probable of recovery through rates and are offset by regulatory liabilities or assets. Derivative contract assets are included in other assets and were $154 million as of September 30, 2018 and $142 million as of December 31, 2017. Derivative contract liabilities are included in other liabilities and were $80 million as of September 30, 2018 and $82 million as of December 31, 2017.
Note 14. Supplemental cash flow information
Supplemental cash flow information follows (in millions).
Cash paid during the period for:
Insurance and other businesses
Railroad, utilities and energy businesses
Finance and financial products businesses
Non-cash investing and financing activities:
Liabilities assumed in connection with business acquisitions
Equity securities surrendered in connection with warrant exercise
— 4,965
Note 15. Unpaid losses and loss adjustment expenses
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. Reconciliations of the changes in claim liabilities, excluding liabilities under retroactive reinsurance contracts (see Note 16), for the nine months ending September 30, 2018 and 2017 follow (in millions).
Balances – beginning of year:
Gross liabilities
Net liabilities
Incurred losses and loss adjustment expenses:
Current accident year events
Prior accident years' events
(1,566) (461)
Total incurred losses and loss adjustment expenses
Paid losses and loss adjustment expenses:
Balances – September 30:
Incurred losses and loss adjustment expenses in the first nine months of 2018 and 2017 included net reductions of estimated ultimate claim liabilities for prior accident years of $1,566 million and $461 million, respectively. We reduced estimated ultimate claim liabilities for prior accident years related to primary insurance by $985 million in the first nine months of 2018 and $569 million in the first nine months of 2017, which included reductions of $478 million in 2018 and increases of $37 million in 2017 related to private passenger automobile insurance coverages. We also reduced estimated ultimate claim liabilities with respect to prior accident years for property and casualty reinsurance by $581 million in the first nine months of 2018, compared to an increase of $108 million in the first nine months of 2017.
Note 16. Retroactive reinsurance contracts
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 the nine months ending September 30, 2018 and 2017 follows (in millions).
Unpaid losses
and loss
expenses Deferred
assumed Unpaid losses
$ 42,937 $ (15,278) $ 24,972 $ (8,047)
Incurred losses and loss adjustment expenses
Current year contracts
— — 17,213 (6,170)
Prior years' contracts
(36) 827 (409) 645
(36) 827 16,804 (5,525)
Paid losses and loss adjustment expenses
(966) — (783) —
$ 41,935 $ (14,451) $ 40,993 $ (13,572)
Incurred losses and loss adjustment expenses, net of deferred charges
$ 791 $ 11,279
In the preceding table, classifications of incurred losses and loss adjustment expenses are based on the inception dates of the contracts. We do not believe that analysis of losses incurred and paid by accident year of the underlying event is relevant or meaningful given that our exposure to losses incepts when the contract incepts. Further, we believe the classifications of reported claims and case development liabilities has little or no practical analytical value.
In the first quarter of 2017, National Indemnity Company ("NICO"), a wholly-owned subsidiary, 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 losses incurred of $10.2 billion, which consisted of liabilities for unpaid losses and loss adjustment expenses of $16.4 billion and deferred charge reinsurance assumed assets of $6.2 billion. Berkshire agreed to guarantee the timely payment of all amounts due to AIG under the agreement. Our estimated ultimate claim liabilities with respect to the AIG contract at September 30, 2018 and at December 31, 2017 were $18.2 billion, which reflected an increase of $1.8 billion in estimated ultimate claim liabilities recorded in the fourth quarter of 2017. Deferred charge assets related to the AIG contract were approximately $7.1 billion at September 30, 2018 and $7.5 billion at December 31, 2017, which included an additional $1.7 billion arising from the aforementioned increase to ultimate claim liabilities in the fourth quarter.
Incurred losses and loss adjustment expenses related to contracts written in prior years were $791 million in the first nine months of 2018 and $236 million in the first nine months of 2017. Such losses included recurring amortization of deferred charge assets and net gains from reductions of estimated ultimate claim liabilities.
Note 17. Notes payable and other borrowings
Notes payable and other borrowings are summarized below (dollars in millions). The weighted average interest rates and maturity date ranges shown in the following tables are based on borrowings as of September 30, 2018.
Interest Rate September 30,
Issued by Berkshire:
U.S. Dollar denominated borrowings due 2018-2047
3.1 % $ 9,058 $ 10,603
Euro denominated borrowings due 2020-2035
1.1 % 7,897 8,164
Short-term subsidiary borrowings
Other subsidiary borrowings due 2018-2045
Note 17. Notes payable and other borrowings (Continued)
The carrying value of Berkshire's Euro denominated senior notes reflects the Euro/U.S. Dollar exchange rate as of the balance sheet date. The gains or losses arising from the changes in the Euro/U.S. Dollar exchange rate during the period are recorded in earnings as a component of interest expense. The change in the Euro/U.S. Dollar exchange rate in the first nine months of 2018 resulted in reductions of $273 million in interest expense and to the carrying value of the Euro denominated senior notes compared to increases of $860 million in interest expense and to the carrying value of the notes in the first nine months of 2017.
Issued by Berkshire Hathaway Energy Company ("BHE") and its subsidiaries:
BHE senior unsecured debt due 2018-2049
4.5% $ 8,970 $ 6,452
Subsidiary and other debt due 2019-2064
4.7% 28,588 28,739
3.0% 1,784 4,488
Issued by BNSF due 2018-2097
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, which pertain to leverage ratios, interest coverage ratios and/or debt service coverage ratios, among other covenants. During the first nine months of 2018, BHE and its subsidiaries issued approximately $5.5 billion of long-term debt, including $2.05 billion in the third quarter. 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.
BNSF's borrowings are primarily senior unsecured debentures. In the first nine months of 2018, BNSF issued $1.5 billion of senior unsecured debentures due in 2048, including $750 million in the third quarter. These debentures have a weighted average interest rate of 4.1%. In 2018, BNSF repaid $650 million of maturing debentures. As of September 30, 2018, 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.
Issued by Berkshire Hathaway Finance Corporation ("BHFC") due 2019-2048
3.3% $ 10,649 $ 12,926
Issued by other subsidiaries due 2018-2028
3.6% 121 159
Borrowings of BHFC, a wholly owned finance subsidiary of Berkshire, consist of senior unsecured notes used to fund manufactured housing loans originated or acquired and assets held for lease of certain finance subsidiaries. In August 2018, BHFC issued $2.35 billion of 4.2% senior notes due in 2048. Such borrowings are fully and unconditionally guaranteed by Berkshire. During the first nine months of 2018, BHFC repaid $4.6 billion of maturing senior notes.
As of September 30, 2018, our subsidiaries had unused lines of credit and commercial paper capacity aggregating approximately $8.4 billion to support short-term borrowing programs and provide additional liquidity. Such unused lines of credit included approximately $6.8 billion related to BHE and its subsidiaries. In addition to BHFC's borrowings, Berkshire guaranteed approximately $1.7 billion of other subsidiary borrowings at September 30, 2018. Generally, Berkshire's guarantee of a subsidiary's debt obligation is an absolute, unconditional and irrevocable guarantee for the full and prompt payment when due of all payment obligations.
Note 18. Fair value measurements
Our financial assets and liabilities are summarized below as of September 30, 2018 and December 31, 2017 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.
Value Fair Value Quoted
(Level 1) Significant Other
Observable Inputs
(Level 2) Significant
Unobservable Inputs
(Level 3)
Investments in fixed maturity securities:
$ 3,599 $ 3,599 $ 2,378 $ 1,221 $ —
290 290 — 290 —
7,370 7,370 5,162 2,208 —
6,458 6,458 — 6,453 5
207,332 207,332 206,985 47 300
Investment in Kraft Heinz common stock
17,453 17,935 17,935 — —
14,477 14,735 — 59 14,676
Derivative contract assets (1)
154 154 3 41 110
Derivative contract liabilities:
Railroad, utilities and energy (1)
1,869 1,869 — — 1,869
Notes payable and other borrowings:
24,271 24,422 — 24,422 —
10,770 10,979 — 10,953 26
170,540 170,540 170,494 46 —
13,085 13,582 — 13,577 5
Assets are included in other assets and liabilities are included in accounts payable, accruals and other liabilities.
Note 18. Fair value measurements (Continued)
The fair values of substantially all of our financial instruments were measured using market or income approaches. The hierarchy for measuring fair value consists of Levels 1 through 3, which are described below.
Level 1 – Inputs represent unadjusted quoted prices for identical assets or liabilities exchanged in active markets.
Level 2 – Inputs include directly or indirectly observable inputs (other than Level 1 inputs), such as quoted prices for similar assets or liabilities exchanged in active or inactive markets or quoted prices for identical assets or liabilities exchanged in inactive markets. In addition, other inputs considered in fair value determinations may include interest rates and yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates, and inputs derived principally from or corroborated by observable market data by correlation or other means. Pricing evaluations generally reflect discounted expected future cash flows, which incorporate yield curves for instruments with similar characteristics, such as credit ratings, estimated durations and yields for other instruments of the issuer or entities in the same industry sector.
Level 3 – Inputs include unobservable inputs used in the measurement of assets and liabilities. Management is required to use its own assumptions regarding unobservable inputs because there is little, if any, market activity in the assets or liabilities and it may be unable to corroborate the related observable inputs. Unobservable inputs require management to make certain projections and assumptions about the information that would be used by market participants in valuing assets or liabilities.
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 the nine months ending September 30, 2018 and 2017 follow (in millions).
in equity
and fixed
securities Net
$ 6 $ (2,069)
Gains (losses) included in:
Regulatory assets and liabilities
Acquisitions, dispositions and settlements
(1) (141)
$ 17,321 $ (2,824)
Other comprehensive income
(58) (78)
Transfers into/out of Level 3
(18,413) —
Gains and losses included in earnings are reported as components of investment gains/losses, derivative gains/losses and other revenues, as appropriate. In 2017, gains and losses included in other comprehensive income were primarily the net change in unrealized appreciation of investments and the reclassification of investment appreciation in net earnings in our Consolidated Statements of Comprehensive Income.
On June 30, 2017, we announced our intention to exercise our investment in Bank of America Corporation Warrants ("BAC Warrants") for common stock in the third quarter of 2017 and that we expected to use our investment in Bank of America Corporation Preferred Stock as consideration. In the second quarter of 2017, Restaurant Brands International, Inc. ("RBI") announced its intention to redeem our investment in RBI Preferred Shares in the fourth quarter of 2017. As of June 30, 2017, we based our valuations of these investments on such expectations and we significantly reduced expected durations and effectively eliminated the discounts for transferability and other restrictions. As a result, we concluded the Level 3 inputs used in the previous fair value determinations of our investments in BAC Warrants and RBI Preferred Shares were not significant and that the valuations of such investments were deemed Level 2 measurements.
Quantitative information as of September 30, 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).
Value Principal Valuation
Techniques Unobservable Inputs Weighted
Derivative contract liabilities – Equity index put options $ 1,869 Option pricing model Volatility 16%
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 measure fair values 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 our longer duration contracts 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.
Note 19. Common stock
Changes in Berkshire's issued, treasury and outstanding common stock during the nine months ending September 30, 2018 are shown in the table below. In addition to our common stock, 1,000,000 shares of preferred stock are authorized, but none are issued.
Class A, $5 Par Value
(1,650,000 shares authorized) Class B, $0.0033 Par Value
(3,225,000,000 shares authorized)
Issued Treasury Outstanding Issued Treasury Outstanding
762,755 (11,680) 751,075 1,342,066,749 (1,409,762) 1,340,656,987
Conversions of Class A common stock to Class B common stock and exercises of replacement stock options issued in a business acquisition
(16,850) — (16,850) 25,886,063 — 25,886,063
Treasury stock acquired
— (225) (225) — (4,139,192) (4,139,192)
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 1,642,269 shares outstanding as of September 30, 2018 and 1,644,846 shares outstanding as of December 31, 2017.
Since we have two classes of common stock, we provide earnings per share data on the Consolidated Statements of Earnings for average equivalent Class A shares outstanding and average equivalent Class B shares outstanding. Class B shares are economically equivalent to one-fifteen-hundredth (1/1,500) of a Class A share. Average equivalent Class A shares outstanding represents average Class A shares outstanding plus one-fifteen-hundredth (1/1,500) of the average Class B shares outstanding. Average equivalent Class B shares outstanding represents average Class B shares outstanding plus 1,500 times average Class A shares outstanding.
For several years, Berkshire had a common stock repurchase program, which permitted 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. On July 17, 2018, Berkshire's Board of Directors authorized an amendment to the program, permitting Berkshire to repurchase shares any time that Warren Buffett, Berkshire's Chairman of the Board and Chief Executive Officer, and Charlie Munger, a Vice-Chairman of the Board, believe that the repurchase price is below Berkshire's intrinsic value, conservatively determined. The program continues to allow 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.
Note 20. Accumulated other comprehensive income
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 the nine months ending September 30, 2018 and 2017 follows (in millions).
Unrealized
appreciation of
investments, net Foreign
translation Prior service
and actuarial
gains/losses of
defined benefit
pension plans Other Accumulated
$ 62,093 $ (3,114) $ (420) $ 12 $ 58,571
Reclassifications to retained earnings upon adoption of new accounting standards
(61,340) (65) 36 (6) (61,375)
Other comprehensive income, net before reclassifications
(142) (776) (33) (19) (970)
Reclassifications into net earnings
(236) — 76 7 (153)
$ 375 $ (3,955) $ (341) $ (6) $ (3,927)
Reclassifications into net earnings:
Reclassifications before income taxes
$ (299) $ — $ 101 $ 10 $ (188)
(63) — 25 3 (35)
$ (236) $ — $ 76 $ 7 $ (153)
$ 43,176 $ (5,268) $ (593) $ (17) $ 37,298
11,734 1,946 (90) 19 13,609
(803) — 61 18 (724)
$ (1,235) $ — $ 82 $ 32 $ (1,121)
$ (803) $ — $ 61 $ 18 $ (724)
Note 21. Contingencies and Subsequent Event
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, ("Medical Liability Mutual"), a writer of medical professional liability insurance domiciled in New York. The acquisition price was approximately $2.5 billion. The acquisition involved the conversion of Medical Liability Mutual from a mutual company to a stock company. The closing of the transaction was subject to various regulatory approvals, customary closing conditions and the approval of the Medical Liability Mutual policyholders eligible to vote on the proposed demutualization and sale. The acquisition closed on October 1, 2018, at which time, Medical Liability Mutual's name was changed to the MLMIC Insurance Company ("MLMIC"). The results of MLMIC will be included in Berkshire's consolidated results beginning as of that date. As of the acquisition date, the preliminary fair values of MLMIC's assets were approximately $6.3 billion, consisting primarily of cash and investments, and liabilities were approximately $3.8 billion, consisting primarily of unpaid losses and loss adjustment expenses and unearned insurance premiums. We believe goodwill arising from this acquisition will be insignificant. MLMIC's premiums earned for the first nine months of 2018 were approximately $300 million.
Note 22. Business segment data
Our operating businesses include a large and diverse group of insurance, railroad, utilities and energy, finance, manufacturing, service and retailing businesses. Our reportable business segments are organized in a manner that reflects how management views those business activities. Certain businesses have been 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. Revenues by segment for the third quarter and first nine months of 2018 and 2017 were as follows (in millions).
Operating Businesses:
Underwriting:
Berkshire Hathaway Reinsurance Group
Berkshire Hathaway Primary Group
Investment income
Total insurance
Berkshire Hathaway Energy
McLane Company
Service and retailing
Reconciliation of segments to consolidated amount:
Corporate, eliminations and other
38 (52) 32 (256)
$ 63,450 $ 59,507 $ 184,123 $ 181,133
Earnings before income taxes by segment for the third quarter and first nine months of 2018 and 2017 were as follows (in millions).
$ 627 $ (416) $ 1,977 $ (122)
(163) (1,845) (124) (2,963)
2,054 (963) 6,373 1,046
Investment and derivative contract gains/losses
Interest expense, not allocated to segments
(60) (386) (77) (1,243)
Equity method investments
(127) (278) (558) (833)
Net earnings attributable to Berkshire Hathaway shareholders are disaggregated in the table that follows. Amounts are after deducting income taxes and exclude earnings attributable to noncontrolling interests (in millions).
Insurance – underwriting
$ 441 $ (1,439) $ 1,791 $ (1,728)
Insurance – investment income
Utilities and energy
Manufacturing, service and retailing
Investment and derivative gains/losses
229 (168) 520 (455)
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. 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, changes in unrealized gains and losses were recorded in other comprehensive income. Thus, the new accounting treatment has no effect on consolidated shareholders' equity. The business segment data (Note 22 to the accompanying Consolidated Financial Statements) should be read in conjunction with this discussion.
Our after-tax earnings in the third quarter and first nine months of 2018 were favorably affected by lower U.S. income tax expense, primarily attributable to a reduction in the U.S. statutory income tax rate from 35% to 21% effective January 1, 2018 in connection with the Tax Cuts and Jobs Act of 2017 ("TCJA") enacted on December 22, 2017. The effect of the lower U.S. statutory income tax rate in 2018 generally resulted in increased comparative after-tax earnings of our various business operations, although the effects varied, reflecting the differences in the mix of earnings subject to income tax, income tax credits and the varying effects of state and local income taxes.
Our insurance businesses generated after-tax earnings from underwriting of $441 million and $1.8 billion in the third quarter and first nine months of 2018, respectively, compared to losses of $1.4 billion and $1.7 billion, respectively, in the corresponding 2017 periods. Results in 2018 included reductions of estimated ultimate liabilities for prior years' property/casualty loss events, gains from foreign currency exchange rate changes on certain non-U.S. Dollar denominated liabilities of U.S subsidiaries and a lower effective income tax rate. Underwriting results in the third quarter of 2017 included estimated pre-tax losses of approximately $3.0 billion ($1.95 billion after-tax) attributable to three major hurricanes in the U.S. and Puerto Rico and an earthquake in Mexico. Underwriting results in 2017 also included foreign currency exchange rate losses from the revaluation of certain non-U.S. Dollar denominated liabilities.
Our railroad business generated increased after-tax earnings in the third quarter and first nine months of 2018 compared to 2017, reflecting an increase in unit volume, higher average revenue per car/unit and a lower effective income tax rate, partly offset by increased fuel and other operating costs. Our utilities and energy businesses produced higher after-tax earnings in the third quarter and first nine months of 2018 compared to 2017, primarily due to a lower overall effective income tax rate and increased pre-tax earnings from renewables and natural gas pipelines. After-tax earnings from our manufacturing, service and retailing businesses in the third quarter and first nine months of 2018 increased 24% and 30%, respectively, over 2017, due to lower effective income tax rates and a 13% increase in year-to-date pre-tax earnings.
After-tax gains in the third quarter and first nine months of 2018 from investments and derivative contracts were $11.7 billion and $10.4 billion, respectively. Investment gains/losses included after-tax gains of approximately $11.4 billion in the third quarter and $9.6 billion in the first nine months from changes in market values of our investments in equity securities held at September 30, 2018. In 2017, after-tax investment gains on equity securities arose from the disposition or exchange of securities during the period based on the cost of the disposed security. In the first nine months of 2017, we recorded after-tax unrealized gains on our investments in equity securities of approximately $10.9 billion in other comprehensive income. We believe that investment and derivative gains/losses, whether realized from dispositions or unrealized from changes in market prices of equity securities, are generally meaningless in understanding our reported results or evaluating the economic performance of our businesses. These gains and losses have caused and will continue to cause significant volatility in our periodic earnings.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Insurance—Underwriting
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 businesses.
The timing and amount of catastrophe losses can produce significant volatility in our periodic underwriting results, particularly with respect to our reinsurance businesses. Generally, we consider catastrophe losses in excess of $100 million (pre-tax) from a current year event as significant. We incurred estimated pre-tax losses of $372 million from two significant catastrophe events in the third quarter of 2018. In the third quarter of 2017, we incurred pre-tax losses of approximately $3.0 billion from four significant catastrophe events. In October 2018, Hurricane Michael hit the Southeastern United States. Incurred losses in the fourth quarter from this event are currently estimated to be in the $350 million to $550 million range.
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 $106 billion as of September 30, 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 (in millions).
Underwriting gain (loss):
Pre-tax underwriting gain (loss)
599 (2,209) 2,321 (2,612)
Income taxes and noncontrolling interests
Net underwriting gain (loss)
Effective income tax rate
GEICO writes private passenger automobile insurance, offering coverages to insureds in all 50 states and the District of Columbia. GEICO markets its policies mainly by direct response methods where most customers apply for coverage directly to the company via the Internet or over the telephone. A summary of GEICO's underwriting results follows (dollars in millions).
Amount % Amount % Amount % Amount %
Premiums earned
$ 8,506 100.0 $ 7,543 100.0 $ 24,705 100.0 $ 21,632 100.0
6,725 79.1 6,933 91.9 19,305 78.1 18,631 86.1
Underwriting expenses
1,154 13.5 1,026 13.6 3,423 13.9 3,123 14.5
Total losses and expenses
7,879 92.6 7,959 105.5 22,728 92.0 21,754 100.6
Insurance—Underwriting (Continued)
GEICO (Continued)
Premiums written in the third quarter and first nine months of 2018 were approximately $9.0 billion and $25.9 billion, respectively, representing increases of 10.1% and 12.6%, respectively, compared to 2017. These increases reflected increases in voluntary auto policies-in-force of 3.7% and premiums per auto policy of approximately 7.8% over the past twelve months. The increase in premiums per policy was attributable to rate increases, coverage changes and changes in state and risk mix. The rate increases were in response to accelerating claim costs in recent years. Although policies-in-force increased 461,000 during the first nine months of 2018, the rate of increase slowed, as voluntary auto new business sales decreased 6.6% compared to 2017.
Losses and loss adjustment expenses decreased $208 million (3.0%) in the third quarter and increased $674 million (3.6%) in the first nine months of 2018 compared to 2017. Our ratios of losses and loss adjustment expenses to premiums earned (the "loss ratio") for the third quarter and first nine months of 2018 were 79.1% and 78.1%, respectively, declines of 12.8 and 8.0 percentage points compared to the third quarter and first nine months of 2017, respectively. In the third quarter of 2018, we recorded estimated losses of $30 million related to Hurricane Florence. In the third quarter of 2017, we incurred estimated losses related to Hurricanes Harvey and Irma of approximately $500 million (6.6% of premiums earned in the third quarter and 2.3% in the first nine months).
Our losses and loss adjustment expenses incurred in the first nine months of 2018 also included reductions of $478 million with respect to ultimate claim loss estimates for prior years' loss events, which produced a corresponding increase in pre-tax underwriting gains. By comparison, we increased loss estimates for prior years' events by $37 million in the first nine months of 2017. Claims frequencies in the first nine months of 2018 for property damage, collision, and bodily and personal injury protection coverages declined (two to three percent range) compared to 2017. Average claims severities in the first nine months of 2018 increased for property damage and collision coverages (four to six percent range) and bodily injury coverage (five to seven percent range).
Our underwriting expenses in the first nine months of 2018 were approximately $3.4 billion, an increase of $300 million (9.6%) over 2017. Our expense ratio (underwriting expenses to premiums earned) for the first nine months of 2018 decreased 0.6 percentage points compared to 2017. The increases in underwriting expenses were primarily attributable to increases in advertising expenses, insurance premium taxes and employee-related costs, which included wage and staffing increases.
We offer excess-of-loss and quota-share reinsurance coverages on property and casualty risks and life and health reinsurance to insurers and reinsurers worldwide through several legal entities, led by National Indemnity Company ("NICO Group"), Berkshire Hathaway Life Insurance Company of Nebraska ("BHLN Group"), and General Reinsurance Corporation, General Reinsurance AG and General Re Life Corporation (collectively, "General Re Group"). We also periodically assume property and casualty risks under retroactive reinsurance contracts written through NICO. In addition, the BHLN Group writes periodic payment annuity contracts.
With the exception of our retroactive reinsurance and periodic payment annuity businesses, we strive to generate pre-tax underwriting profits. Time-value-of-money concepts are important elements in establishing prices for our retroactive reinsurance and periodic payment annuity businesses due to the expected long durations of the liabilities. We expect to incur pre-tax underwriting losses from such businesses, primarily through deferred charge amortization and discount accretion charges. We receive premiums at the inception of these contracts, which are then available for investment. A summary of the premiums and pre-tax underwriting results of our reinsurance business follows (in millions).
Premiums earned Pre-tax underwriting gain (loss)
Third Quarter First Nine Months Third Quarter First Nine Months
Property/casualty
$ 2,157 $ 2,061 $ 6,479 $ 5,763 $ 67 $ (1,486) $ 535 $ (1,856)
Retroactive reinsurance
1 550 1 10,736 (246) (287) (704) (881)
2,158 2,611 6,480 16,499 (179) (1,773) (169) (2,737)
1,307 1,146 3,855 3,404 108 113 324 302
Periodic payment annuity
312 197 894 647 (92) (185) (279) (528)
1,619 1,343 4,749 4,051 16 (72) 45 (226)
$ 3,777 $ 3,954 $ 11,229 $ 20,550 $ (163) $ (1,845) $ (124) $ (2,963)
A summary of premiums and underwriting results of our property/casualty reinsurance businesses follows (in millions).
NICO Group
$ 1,077 $ 1,217 $ 3,394 $ 3,488 $ (29) $ (927) $ 272 $ (1,144)
General Re Group
1,080 844 3,085 2,275 96 (559) 263 (712)
NICO Group's premiums earned in the third quarter and first nine months of 2018 decreased 11.5% and 2.7%, respectively, compared to 2017. Premiums earned in the third quarter of 2017 included additional amounts related to certain contracts where policy limits were fully exhausted due to catastrophe losses during the quarter. Such amounts would have been earned in future periods. The effect of significant catastrophe losses in 2018 on the timing of premiums earned was relatively insignificant. For the first nine months of 2018, approximately 40% of NICO Group's premiums earned derived from a 10-year, 20% quota-share contract with Insurance Australia Group Ltd. that expires in 2025. General Re Group's premiums earned in the third quarter and first nine months of 2018 increased $236 million (28.0%) and $810 million (35.6%), respectively, compared to 2017. The increases reflected higher direct and broker markets business, derived primarily from new business and increased participations for renewal business in both property and casualty lines.
On a combined basis, our property/casualty reinsurance business generated pre-tax underwriting gains of $67 million and $535 million in the third quarter and first nine months of 2018, respectively, and pre-tax losses of approximately $1.5 billion in the third quarter and $1.9 billion in the first nine months of 2017. We incurred estimated losses of approximately $267 million in the third quarter of 2018 related to Hurricane Florence and Typhoon Jebi and approximately $2.29 billion in the third quarter of 2017 related to Hurricanes Harvey, Irma and Maria and an earthquake in Mexico. Our losses from significant catastrophe events were approximately $2.45 billion for the first nine months of 2017.
In addition, we reduced estimated ultimate claims liabilities in the first nine months of 2018 for prior years' loss events by $581 million. We increased estimated ultimate liabilities for prior years' loss events by $108 million in the first nine months of 2017, which reflected the U.K. Ministry of Justice's decision in the first quarter to reduce the fixed discount rate required in lump sum settlement calculations of U.K. personal injury claims and unanticipated property claims from events in 2016.
Premiums earned in the first nine months of 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"), which became effective on February 2, 2017. We also recorded losses and loss adjustment expenses incurred of $10.2 billion at the inception of the AIG Agreement, 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.
Pre-tax underwriting losses from retroactive reinsurance contracts in the third quarter and first nine months of 2018 were $246 million and $704 million, respectively, compared to $287 million and $881 million, respectively, in the same periods in 2017. Certain liabilities relating to retroactive reinsurance contracts written by our U.S. subsidiaries are denominated in foreign currencies. Underwriting results include gains and losses from the re-measurement of such liabilities due to changes in foreign currency exchange rates. Changes in exchange rates generated pre-tax gains of $35 million and $99 million in the third quarter and first nine months of 2018, respectively, compared to pre-tax losses in the third quarter and first nine months of $60 million and $251 million, respectively, in 2017.
Pre-tax underwriting losses before foreign currency gains/losses in the first nine months of 2018 and 2017 were $803 million and $630 million, respectively. The increase in pre-tax losses was primarily due to amortization charges related to the AIG Agreement, which included the effects of increases to our ultimate claim liability estimates (approximately $1.8 billion) and related deferred charge asset (approximately $1.7 billion) in the fourth quarter of 2017.
Gross unpaid losses assumed under retroactive reinsurance contracts were approximately $41.9 billion at September 30, 2018 and $42.9 billion at December 31, 2017. Unamortized deferred charge assets related to such reinsurance contracts were approximately $14.5 billion at September 30, 2018 and $15.3 billion at December 31, 2017. Deferred charge asset balances will be amortized as charges to pre-tax earnings over the expected remaining claims settlement periods.
Premiums earned and pre-tax underwriting results of our life/health reinsurance businesses are further summarized as follows (in millions).
$ 964 $ 786 $ 2,819 $ 2,324 $ 38 $ 57 $ 152 $ 96
BHLN Group
343 360 1,036 1,080 70 56 172 206
$ 1,307 $ 1,146 $ 3,855 $ 3,404 $ 108 $ 113 $ 324 $ 302
General Re Group's premiums earned in the third quarter and first nine months of 2018 increased $178 million (22.6%) and $495 million (21.3%), respectively, compared to 2017. The increases were primarily attributable to growth in Asia and Australia markets and foreign currency translation effects of a comparatively weaker U.S. Dollar. The General Re Group produced pre-tax underwriting gains in the first nine months of $152 million in 2018 and $96 million in 2017. The comparative increase in the first nine months reflected increased earnings from international business, primarily due to increased volumes and foreign currency translation, improved earnings from life business in North America and lower losses from the run-off of long-term care and disability business.
BHLN Group's life reinsurance premiums earned in the third quarter and first nine months of 2018 were $340 million and $1,025 million, respectively, compared to $355 million and $1,067 million, respectively, in the corresponding 2017 periods. BHLN Group's business during the last two years covered predominantly life risks in North America, with approximately two-thirds of the premiums earned deriving from one reinsurance contract. BHLN Group's life reinsurance business produced near break-even results in each of the first nine months of 2018 and 2017.
BHLN Group's pre-tax underwriting results in the first nine months of 2018 and 2017 included pre-tax gains of $166 million and $197 million, respectively, from the run-off of variable annuity reinsurance contracts that provide guarantees on closed blocks of variable annuity business. Periodic underwriting results from this business reflect changes in estimated liabilities for guaranteed benefits, which result from changes in securities markets and interest rates and from the periodic amortization of expected profit margins. Underwriting results from variable annuity contracts can be volatile, reflecting the volatility of securities markets, interest rates and foreign currency exchange rates. Estimated variable annuity guarantee liabilities were approximately $1.6 billion at September 30, 2018 and $1.8 billion at December 31, 2017.
Periodic payment annuity premiums earned in the third quarter and first nine months of 2018 increased $115 million (58.4%) and $247 million (38.2%), respectively, compared to 2017. Periodic payment annuity contracts produced pre-tax losses of $92 million and $279 million in the third quarter and first nine months of 2018, respectively, compared to pre-tax losses of $185 million and $528 million, respectively, for the same periods in 2017. Certain contracts written by our U.S. subsidiaries are denominated in foreign currencies, primarily the Great Britain Pound Sterling. Pre-tax underwriting results in 2018 included pre-tax gains of $21 million in the third quarter and $57 million in the first nine months from the re-measurement of such liabilities due to changes in exchange rates compared to pre-tax losses of $63 million in the third quarter and $173 million in the first nine months of 2017. Before the effect of foreign currency gains and losses, this business generated pre-tax underwriting losses of $336 million in the first nine months of 2018 and $355 million in the first nine months of 2017. These losses were primarily attributable to the recurring discount accretion of annuity liabilities. Discounted annuity liabilities approximated $12.2 billion at September 30, 2018 and $11.2 billion at December 31, 2017, reflecting a weighted average discount rate of approximately 4.1%.
The Berkshire Hathaway Primary Group ("BH Primary") consists of a wide variety of independently managed insurance underwriting businesses that primarily provide a variety of commercial insurance solutions, including healthcare malpractice, workers' compensation, automobile, general liability, property and various specialty coverages for small, medium and large clients. The largest of these insurers include Berkshire Hathaway Specialty Insurance ("BH Specialty"), Berkshire Hathaway Homestate Companies ("BHHC"), MedPro Group, Berkshire Hathaway GUARD Insurance Companies ("GUARD") and National Indemnity Company ("NICO Primary"). Other BH Primary insurers include U.S. Liability Insurance Company, Applied Underwriters and Central States Indemnity Company.
A summary of BH Primary underwriting results follows (dollars in millions).
$ 2,227 $ 1,995 $ 6,498 $ 5,645
$ 2,050 100.0 $ 1,852 100.0 $ 5,921 100.0 $ 5,287 100.0
496 24.2 458 24.7 1,569 26.5 1,388 26.3
Pre-tax underwriting gain
$ 135 $ 52 $ 468 $ 473
Premiums written in the third quarter and first nine months of 2018 increased 11.6% and 15.1%, respectively, compared to the corresponding 2017 periods. These increases were primarily attributable to BH Specialty, MedPro Group, GUARD and BHHC. Premiums earned in the first nine months of 2018 increased $634 million (12.0%) compared to the first nine months of 2017, reflecting the written premium increases of these businesses.
BH Primary produced pre-tax underwriting gains of $135 million and $468 million in the third quarter and first nine months of 2018, respectively, compared to $52 million and $473 million in the third quarter and first nine months of 2017, respectively. Underwriting results in the third quarter included estimated losses of approximately $75 million in 2018 from Hurricane Florence and $225 million in 2017 from Hurricanes Harvey, Irma and Maria.
Losses and loss adjustment expenses in the first nine months also included net reductions of estimated ultimate liabilities for prior years' loss events of $507 million in 2018 and $606 million in 2017, which produced corresponding increases in pre-tax underwriting gains. The liability reductions in each year primarily related to healthcare malpractice and workers' compensation business. BH Primary writes significant levels of commercial and professional liability and workers' compensation insurance and the related claim costs may be subject to higher severity and longer claim-tails, which could give rise to significant increases in claims liabilities in the future attributable to higher than expected claim settlements, adverse litigation outcomes or judicial rulings and other factors not currently anticipated.
Insurance—Investment Income
A summary of net investment income generated from investments held by our insurance operations follows (in millions).
Interest and other investment income
$ 495 $ 344 $ 1,346 $ 870
Investment income before income taxes and noncontrolling interests
Insurance—Investment Income (Continued)
Pre-tax interest and other investment income in the third quarter and first nine months of 2018 increased $151 million (43.9%) and $476 million (54.7%), respectively, compared to the same periods in 2017. The increases reflected the effect of higher short-term interest rates in 2018 and income from a limited partnership investment in the first quarter, partly offset by lower interest from reduced investments in fixed maturity securities. Our invested assets continue to include significant levels of short-term investments. We believe that maintaining ample liquidity is paramount and we insist on safety over yield with respect to such investments.
Dividend income increased $58 million (6.4%) in the third quarter and decreased $82 million (2.9%) in the first nine months of 2018 as compared to the same periods in 2017. The comparative changes in dividend income reflected the impact of Restaurant Brands International's redemption of our $3 billion investment in 9% preferred stock in December 2017 and increases in our portfolio of marketable equity securities.
Invested assets of our insurance businesses derive from shareholder capital, including reinvested earnings, and from net liabilities under insurance and reinsurance contracts or "float." The major components of float are unpaid losses and loss adjustment expenses, including liabilities under retroactive reinsurance contracts, life, annuity and health insurance benefit liabilities, unearned premiums and other liabilities due to policyholders, less premium and reinsurance receivables, deferred charges assumed under retroactive reinsurance contracts and deferred policy acquisition costs. Float approximated $118 billion at September 30, 2018 and $114 billion at December 31, 2017. Our combined insurance operations generated pre-tax underwriting earnings of $2.3 billion in the first nine months of 2018, and consequently, the average cost of float for that period was negative. Our average cost of float for the year ending December 31, 2017 was approximately 3%, reflecting pre-tax underwriting losses of approximately $3.2 billion, most of which was incurred in the second half of the year.
A summary of cash and investments held in our insurance businesses as of September 30, 2018 and December 31, 2017 follows (in millions).
Cash, cash equivalents and U.S. Treasury Bills
Fixed maturity securities
Fixed maturity investments as of September 30, 2018 were as follows (in millions).
gains/losses Carrying
$ 3,618 $ (26) $ 3,592
States, municipalities and political subdivisions
Corporate bonds, investment grade
Corporate bonds, non-investment grade
$ 17,578 $ 479 $ 18,057
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.
Railroad ("Burlington Northern Santa Fe")
Burlington Northern Santa Fe, LLC ("BNSF") operates one of the largest railroad systems in North America. BNSF operates approximately 32,500 route miles of track in 28 states, as well as in three Canadian provinces. BNSF classifies its major business groups by type of product shipped, which include consumer products, coal, industrial products and agricultural products. A summary of BNSF's earnings follows (in millions).
Purchased services
Equipment rents, materials and other
Pre-tax earnings
BNSF's revenues in the third quarter and first nine months of 2018 were $6.1 billion and $17.6 billion, respectively, representing increases of $833 million (15.7%) and $1.9 billion (12.1%), respectively, versus the corresponding periods in 2017. During the first nine months of 2018, our overall average revenue per car/unit increased 6.1% and our aggregate volume increased 4.6%. Our year-to-date volume was approximately 8.0 million cars/units compared to 7.6 million in 2017. The increase in average revenue per car/unit was attributable to business mix changes, higher fuel surcharge revenue driven primarily by higher fuel prices, and increased rates per car/unit. Pre-tax earnings were approximately $1.9 billion and $5.0 billion in the third quarter and first nine months of 2018, respectively, increases of 9.9% compared to the corresponding periods in 2017.
Revenues from consumer products were $2.0 billion in the third quarter and $5.8 billion in the first nine months of 2018, representing increases of 11.7% and 12.0%, respectively, from 2017. The increases reflected higher average revenue per unit and volume increases of 0.9% in the third quarter and 3.9% in the first nine months. The volume increases were attributable to the intermodal business, due 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 industrial products in 2018 were $1.6 billion in the third quarter and $4.4 billion for the first nine months, or increases of 24.3% and 17.3%, respectively, from the comparable 2017 periods. These increases were attributable to volume increases of 13.1% in the third quarter and 10.9% in the first nine months as well as higher average revenue per car. Volumes in 2018 were higher primarily due to strength in the industrial and energy sectors, which drove higher demand for petroleum products, rocks, steel, and plastics. Volumes in the first nine months of 2018 were also higher for sand and taconite.
Revenues from agricultural products in 2018 increased 17.4% in the third quarter to $1.2 billion and increased 10.2% to $3.5 billion for the first nine months when compared to the same periods in 2017. The third quarter revenue increase reflected a 16.3% increase in volumes and higher average revenue per car. In the first nine months, the increase in revenues was attributable to volume increases of 10.5%, partially offset by slightly lower average revenue per car. Volumes in 2018 increased due to strong export and domestic grain shipments, as well as higher fertilizer and other grain products volumes.
Revenues from coal in 2018 increased 5.9% in the third quarter to $1.1 billion and 1.6% in the first nine months to $2.9 billion compared to 2017. These increases reflected higher average revenue per car partially offset by lower volumes of 4.6% in the third quarter and 2.6% year-to-date. The volume decreases in 2018 were due mainly to plant retirements combined with competition from natural gas and renewables, partially offset by market share gains and improved export volumes.
Operating expenses in the third quarter and first nine months of 2018 were $4.0 billion and $11.8 billion, respectively, increases of $655 million (19.5%) and $1.4 billion (13.8%), respectively, compared to the same periods in 2017. Our ratios of operating expenses to revenues were 65.2% in the third quarter and 67.0% for the first nine months of 2018, or increases of 2.1 and 1.0 percentage points, respectively, versus the corresponding prior year periods.
Railroad ("Burlington Northern Santa Fe") (Continued)
Compensation and benefits expenses increased $205 million (17.5%) for the third quarter of 2018 and $296 million (7.9%) for the first nine months of 2018, primarily due to wage inflation, including a change in estimate of the effect of a pending labor agreement recorded in 2017, increased headcount and higher training costs. Fuel expenses increased $264 million (44.4%) for the third quarter and $679 million (38.2%) for the first nine months of 2018, primarily due to higher average fuel prices and increased volumes.
Purchased services expenses increased $110 million (18.1%) in the third quarter and $281 million (15.2%) in the first nine months of 2018 as compared to 2017. The increases were due to higher purchased transportation costs of our logistics services business, as well as increased intermodal ramping, drayage and other volume-related costs.
In the third quarter and first nine months of 2018, equipment rents, materials and other expense increased $87 million (22.7%) and $206 million (15.9%), respectively, compared to 2017. These increases resulted from higher locomotive materials, personal injury expenses and property taxes. The first nine months also included higher derailment-related costs.
BNSF's effective income tax rate was 25.9% and 23.8% for the third quarter and first nine months of 2018, respectively, as compared to 39.1% and 38.2%, respectively, in the corresponding periods in 2017. 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 reduction. In addition, certain states enacted income tax rate reductions in 2018.
Utilities and Energy ("Berkshire Hathaway Energy Company")
We currently own 90.4% of the outstanding common stock of 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 a regulated electricity transmission-only business in Alberta, Canada ("AltaLink, L.P.") and a diversified portfolio of mostly renewable 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.
The rates our regulated businesses charge customers for energy and services are based, in large part, on the costs of business operations, including income taxes and a return on capital, and are subject to regulatory approval. To the extent these regulated operations are not allowed to include such costs in the approved rates, operating results will be adversely affected. Among its provisions, the TCJA reduced the U.S. federal statutory income tax rate of our domestic regulated utilities from 35% to 21%. BHE's regulated subsidiaries anticipate passing the benefits of lower income tax expense attributable to the TCJA to customers through regulatory mechanisms, including lower rates and reductions to rate base, which would produce lower revenue and pre-tax earnings in 2018 and future years when compared to 2017. We do not expect the TCJA and related regulatory treatment to have a material adverse impact on BHE's long-term operating cash flows, subject to actual rulings by regulatory commissions that are expected in 2018 and 2019. Revenues and earnings of BHE are summarized below (in millions).
Revenues Earnings Revenues Earnings
$ 1,386 $ 1,443 $ 319 $ 389 $ 3,786 $ 3,991 $ 704 $ 912
MidAmerican Energy Company
857 832 251 250 2,354 2,209 347 402
NV Energy
1,071 1,057 268 347 2,456 2,412 403 539
Northern Powergrid
233 220 58 48 756 685 217 215
268 198 104 60 889 706 376 303
Other energy businesses
Real estate brokerage
1,222 965 83 81 3,263 2,511 180 197
Corporate interest
— — (102) (111) — — (307) (332)
$ 1,091 $ 952 $ 2,257 $ 1,941
(4.2)% 14.2% (12.5)% 11.9%
Utilities and Energy ("Berkshire Hathaway Energy Company") (Continued)
PacifiCorp operates a regulated electric utility in portions of several Western states, including Utah, Oregon and Wyoming. Revenues in the third quarter and first nine months of 2018 decreased 4% and 5%, respectively, compared to the same periods in 2017. Retail revenues in the third quarter of 2018 decreased $40 million and $218 million in the first nine months, compared to 2017. The declines reflected the effects of lower average rates ($185 million year-to-date), including the impact of the TCJA ($53 million in the third quarter and $159 million in the first nine months), and a year-to-date reduction in volumes (0.9%), largely attributable to the impacts of weather.
Pre-tax earnings decreased $70 million (18%) in the third quarter and $208 million (23%) in the first nine months of 2018 as compared to the same periods in 2017. Utility margin (operating revenues less fuel and purchased energy costs) in the third quarter and first nine months of 2018 were $904 million and $2,446 million, respectively, representing decreases of $61 million (6%) and $205 million (8%), respectively, versus the comparable periods in 2017. These decreases were primarily due to the declines in revenues, which included the effects of the TCJA. PacifiCorp's after-tax earnings in the third quarter and first nine months of 2018 were $270 million and $603 million, respectively, representing an increase of $7 million (3%) in the third quarter and a decrease of $15 million (2%) from the first nine months of 2017.
MEC operates a regulated electric and natural gas utility primarily in Iowa and Illinois. Revenues in the third quarter and first nine months of 2018 increased $25 million (3%) and $145 million (7%), respectively, as compared to the same periods in 2017. Electric operating revenues in 2018 increased $20 million in the third quarter and $108 million in the first nine months versus 2017. The third quarter increase was due to higher wholesale and other revenues due to increases in volumes and average prices. The increase in the first nine months was primarily attributable to higher retail revenues of $96 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. In the first nine months of 2018, natural gas revenues increased $20 million, primarily due to increased volumes, partially offset by a lower average per-unit price and the effects of the TCJA.
Pre-tax earnings in the third quarter of 2018 were relatively unchanged and in the first nine months decreased $55 million (14%) compared to the same periods in 2017. Electric utility margin in the third quarter and first nine months of 2018 was $587 million and $1,419 million, respectively, increases of $10 million and $84 million, respectively, over the corresponding 2017 periods, which were primarily due to the net increase in retail revenues in the first nine months. However, the year-to-date increase in electric utility margin was more than offset by increased depreciation, maintenance and other operating expenses. The year-to-date increase in depreciation expense included $83 million from Iowa revenue sharing and $47 million from additional wind generation and other plant placed in-service.
MEC's after-tax earnings in the third quarter and first nine months of 2018 were $479 million and $685 million, respectively, increases of $96 million (25%) and $69 million (11%), respectively, as compared to the same periods in 2017. MEC's after-tax earnings in 2018 and 2017 were significantly greater than pre-tax earnings due to the significant production income tax credits received relating to wind-powered generating facilities.
NV Energy operates regulated electric and natural gas utilities in Nevada. Revenues in the third quarter and first nine months of 2018 increased 1% and 2%, respectively, compared to the same periods in 2017. Electric operating revenues increased $12 million in the third quarter and $34 million in the first nine months of 2018, reflecting increased pass-through cost adjustments and higher volumes largely attributable to the impacts of weather and retail customer growth, partly offset by reductions from the impact of the TCJA and lower retail rates resulting from a 2017 regulatory rate review. Natural gas operating revenue increased $8 million in the first nine months of 2018, primarily due to a higher average per-unit price, partially offset by lower customer usage.
NV Energy (Continued)
Pre-tax earnings in the third quarter and first nine months of 2018 decreased $79 million (23%) and $136 million (25%), respectively, compared to the same periods in 2017. The decreases were primarily due to lower electric utility margin and increased depreciation, maintenance and other operating costs. Electric utility margin in the third quarter and first nine months of 2018 was $623 million and $1,366 million, respectively, representing decreases of $17 million (3%) and $38 million (3%) versus the comparable periods in 2017. The decreases were primarily due to the effects of the TCJA offset by the higher sales volumes. NV Energy's after-tax earnings in the third quarter and first nine months of 2018 were $201 million and $311 million, respectively, declines of 10% from each of the corresponding 2017 periods.
Revenues increased $13 million and $71 million in the third quarter and first nine months of 2018 compared to same periods in 2017, primarily due to the favorable foreign currency translation effects of a weaker U.S. Dollar in the first nine months of 2018 and increased smart meter and distribution revenues. Pre-tax earnings in the third quarter of 2018 increased $10 million (21%) and $2 million (1%) in the first nine months of 2018 compared to 2017, primarily due to favorable foreign currency translation effects and the increases in revenues, partly offset by higher depreciation and other operating expenses, including higher pension settlement losses in 2018.
Revenues increased $70 million (35%) in the third quarter and $183 million (26%) in the first nine months of 2018 compared to 2017, primarily due to higher transportation revenues of $58 million and $102 million, respectively, from higher volumes and rates due to unique market opportunities and increased gas sales volumes related to system balancing activities, which were largely offset in cost of sales. Pre-tax earnings increased $44 million (73%) and $73 million (24%) in the third quarter and first nine months of 2018, respectively, compared to 2017. The increases were primarily due to the increases in transportation revenues and lower depreciation expense, partly offset by comparative increases in operations and maintenance expenses.
Revenues increased $33 million (5%) in the third quarter and $94 million (6%) in the first nine months of 2018 compared to the same periods in 2017, reflecting comparative year-to-date increases from renewable energy of 10% and from AltaLink, L.P. of 4%. Pre-tax earnings in the third quarter and first nine months of 2018 increased $5 million and $73 million, respectively, compared to the same periods in 2017. The increases were primarily attributable to the increased revenues from renewable energy and AltaLink, L.P., partly offset by increased depreciation expense and higher other operating expenses.
Revenues in the third quarter and first nine months of 2018 increased 27% and 30%, respectively, as compared to the same periods in 2017, primarily due to recent business acquisitions. Pre-tax earnings decreased $17 million in the first nine months of 2018 compared to 2017, primarily due to higher operating costs and interest expense, partially offset by higher margin.
Corporate interest includes interest on unsecured debt issued by the BHE holding company and borrowings from Berkshire insurance subsidiaries in connection with certain of BHE's business acquisitions. The borrowings from Berkshire insurance subsidiaries were repaid in the third quarter of 2017. Corporate interest declined 7.5% in the first nine months of 2018 as compared to 2017, primarily due to lower average borrowings.
BHE's consolidated effective income tax rate for the first nine months of 2018 and 2017 was (12.5)% and 11.9%, respectively. BHE's effective income tax rates regularly reflect significant production tax credits from wind-powered electricity generation placed in service by our domestic regulated utilities and other energy businesses. The effective tax rate in the first nine months of 2018 decreased primarily due to the reduction in the U.S. federal corporate income tax rate, as well as from lower state income tax expense, an increase in recognized production tax credits, lower U.S. income taxes on foreign earnings and impacts of rate making.
A summary of revenues and earnings of our manufacturing, service and retailing businesses follows (in millions).
Revenues Earnings * Revenues Earnings *