10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 001-14905

 

BERKSHIRE HATHAWAY INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware   47-0813844

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

3555 Farnam Street, Omaha, Nebraska 68131

(Address of principal executive office)

(Zip Code)

(402) 346-1400

(Registrant’s telephone number, including area 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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.

 

Large accelerated filer       ☒    Accelerated filer       ☐
Non-accelerated filer       ☐    Smaller reporting company       ☐
     Emerging growth company       ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐

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 July 27, 2017:

 

  Class A —   755,437  
  Class B —   1,333,772,187  

 

 

 


Table of Contents

BERKSHIRE HATHAWAY INC.

 

     Page No.   

Part I – Financial Information

 

Item 1. Financial Statements

 
    

Consolidated Balance Sheets—June 30, 2017 and December  31, 2016

    2-3  
    

Consolidated Statements of Earnings—Second Quarter and First Six Months 2017 and 2016

    4  
     Consolidated Statements of Comprehensive Income—Second Quarter and First Six Months 2017 and 2016     5  
    

Consolidated Statements of Changes in Shareholders’ Equity—First Six Months 2017 and 2016

    5  
    

Consolidated Statements of Cash Flows—First Six Months 2017 and 2016

    6  
    

Notes to Consolidated Financial Statements

    7-24  

Item 2.

    

Management’s Discussion and Analysis of Financial Condition and Results of Operations

    25-42  

Item 3.

    

Quantitative and Qualitative Disclosures About Market Risk

    43  

Item 4.

    

Controls and Procedures

    43  

Part II – Other Information

 

Item 1.

    

Legal Proceedings

    43  

Item 1A.

    

Risk Factors

    43  

Item 2.

     Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Repurchases of Equity Securities     43  

Item 3.

    

Defaults Upon Senior Securities

    43  

Item 4.

    

Mine Safety Disclosures

    43  

Item 5.

    

Other Information

    43  

Item 6.

    

Exhibits

    44  

Signature

    44  

 

1


Table of Contents

Part I Financial Information

Item 1. Financial Statements

BERKSHIRE HATHAWAY INC.

and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(dollars in millions)

 

     June 30,
2017
     December 31,
2016
 
     (Unaudited)         

ASSETS

     

Insurance and Other:

     

Cash and cash equivalents

     $      20,142         $  23,581   

Short-term investments in U.S. Treasury Bills

     66,008         47,338   

Investments in fixed maturity securities

     23,381         23,432   

Investments in equity securities

     135,355         120,471   

Investment in The Kraft Heinz Company (Fair Value: June 30, 2017 – $27,871; December 31, 2016 – $28,418)

     15,584         15,345   

Other investments

     16,838         14,364   

Receivables

     28,953         27,097   

Inventories

     16,442         15,727   

Property, plant and equipment

     19,790         19,325   

Goodwill

     54,471         53,994   

Other intangible assets

     33,220         33,481   

Deferred charges reinsurance assumed

     13,597         8,047   

Other

     7,560         7,126   
  

 

 

    

 

 

 
     451,341         409,328   
  

 

 

    

 

 

 

Railroad, Utilities and Energy:

     

Cash and cash equivalents

     4,962         3,939   

Property, plant and equipment

     125,328         123,759   

Goodwill

     24,306         24,111   

Regulatory assets

     4,644         4,457   

Other

     14,129         13,550   
  

 

 

    

 

 

 
     173,369         169,816   
  

 

 

    

 

 

 

Finance and Financial Products:

     

Cash and cash equivalents

     1,314         528   

Short-term investments in U.S. Treasury Bills

     7,323         10,984   

Investments in equity and fixed maturity securities

     408         408   

Other investments

     3,396         2,892   

Loans and finance receivables

     14,559         13,300   

Property, plant and equipment and assets held for lease

     9,791         9,689   

Goodwill

     1,398         1,381   

Other

     2,691         2,528   
  

 

 

    

 

 

 
     40,880         41,710   
  

 

 

    

 

 

 
     $    665,590         $620,854   
  

 

 

    

 

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

2


Table of Contents

BERKSHIRE HATHAWAY INC.

and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(dollars in millions)

 

     June 30,
2017
    December 31,
2016
 
     (Unaudited)        

Insurance and Other:

    

Losses and loss adjustment expenses

     $      95,307       $    76,918  

Unearned premiums

     16,129       14,245  

Life, annuity and health insurance benefits

     16,663       15,977  

Other policyholder liabilities

     7,357       6,714  

Accounts payable, accruals and other liabilities

     21,024       22,164  

Notes payable and other borrowings

     27,781       27,175  
  

 

 

   

 

 

 
     184,261       163,193  
  

 

 

   

 

 

 

Railroad, Utilities and Energy:

    

Accounts payable, accruals and other liabilities

     11,273       11,434  

Regulatory liabilities

     3,156       3,121  

Notes payable and other borrowings

     60,701       59,085  
  

 

 

   

 

 

 
     75,130       73,640  
  

 

 

   

 

 

 

Finance and Financial Products:

    

Accounts payable, accruals and other liabilities

     1,510       1,444  

Derivative contract liabilities

     2,494       2,890  

Notes payable and other borrowings

     13,788       15,384  
  

 

 

   

 

 

 
     17,792       19,718  
  

 

 

   

 

 

 

Income taxes, principally deferred

     84,314       77,944  
  

 

 

   

 

 

 

  Total liabilities

     361,497       334,495  
  

 

 

   

 

 

 

Shareholders’ equity:

    

Common stock

     8       8  

Capital in excess of par value

     35,663       35,681  

Accumulated other comprehensive income

     46,652       37,298  

Retained earnings

     220,099       211,777  

Treasury stock, at cost

     (1,763     (1,763
  

 

 

   

 

 

 

 Berkshire Hathaway shareholders’ equity

     300,659       283,001  

Noncontrolling interests

     3,434       3,358  
  

 

 

   

 

 

 

 Total shareholders’ equity

     304,093       286,359  
  

 

 

   

 

 

 
     $    665,590       $  620,854  
  

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

3


Table of Contents

BERKSHIRE HATHAWAY INC.

and Subsidiaries

CONSOLIDATED STATEMENTS OF EARNINGS

(dollars in millions except per share amounts)

    Second Quarter     First Six Months  
    2017     2016     2017     2016  
    (Unaudited)     (Unaudited)  

Revenues:

       

Insurance and Other:

       

Insurance premiums earned

   $ 12,367       $ 10,799        $ 34,120      $ 21,923    

Sales and service revenues

    31,733        30,542         61,962       58,821    

Interest, dividend and other investment income

    1,322        1,411         2,484       2,562    

Investment gains/losses

    287        640         599       2,486    
 

 

 

   

 

 

   

 

 

   

 

 

 
    45,709        43,392         99,165       85,792    
 

 

 

   

 

 

   

 

 

   

 

 

 

Railroad, Utilities and Energy:

       

Revenues

    9,843        8,851         19,247       17,696    
 

 

 

   

 

 

   

 

 

   

 

 

 

Finance and Financial Products:

       

Sales and service revenues

    1,664        1,577         3,178       2,969   

Interest, dividend and other investment income

    364        411         714       743   

Investment gains/losses

          3         6        

Derivative gains/losses

    (65)       20         395       (790)  
 

 

 

   

 

 

   

 

 

   

 

 

 
    1,966        2,011         4,293       2,929   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    57,518        54,254         122,705       106,417   
 

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

       

Insurance and Other:

       

Insurance losses and loss adjustment expenses

    8,747        7,178         27,313       14,710   

Life, annuity and health insurance benefits

    1,263        1,241         2,490       2,408   

Insurance underwriting expenses

    2,378        1,870         4,717       3,947   

Cost of sales and services

    25,419        24,349         49,779       47,145   

Selling, general and administrative expenses

    4,020        4,066         8,136       7,788   

Interest expense

    700        28         970       415   
 

 

 

   

 

 

   

 

 

   

 

 

 
    42,527        38,732         93,405       76,413   
 

 

 

   

 

 

   

 

 

   

 

 

 

Railroad, Utilities and Energy:

       

Cost of sales and operating expenses

    6,940        6,339         13,694       12,658   

Interest expense

    697        596         1,390       1,281   
 

 

 

   

 

 

   

 

 

   

 

 

 
    7,637        6,935         15,084       13,939   
 

 

 

   

 

 

   

 

 

   

 

 

 

Finance and Financial Products:

       

Cost of sales and services

    962        875         1,829       1,643   

Selling, general and administrative expenses

    469        443         911       836   

Interest expense

    103        103         207       204   
 

 

 

   

 

 

   

 

 

   

 

 

 
    1,534        1,421         2,947       2,683   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

    51,698        47,088         111,436       93,035   
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings before income taxes and equity in earnings of Kraft Heinz Company

    5,820        7,166         11,269       13,382   

Equity in earnings of Kraft Heinz Company

    309        206         548       446   
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings before income taxes

    6,129        7,372         11,817       13,828   

Income tax expense

    1,774        2,290         3,323       3,089   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

    4,355        5,082         8,494       10,739   

Less: Earnings attributable to noncontrolling interests

    93        81         172       149   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings attributable to Berkshire Hathaway shareholders

   $ 4,262       $ 5,001        $ 8,322      $ 10,590   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings per share attributable to Berkshire Hathaway shareholders *

   $ 2,592       $ 3,042        $ 5,060      $ 6,443   

Average equivalent Class A Shares outstanding *

    1,644,580        1,643,745         1,644,503       1,643,616   

 

  *

Equivalent Class B shares outstanding are 1,500 times the equivalent Class A amount. Net earnings per equivalent Class B share outstanding are one-fifteen-hundredth (1/1,500) of the equivalent Class A amount.

See accompanying Notes to Consolidated Financial Statements

 

4


Table of Contents

BERKSHIRE HATHAWAY INC.

and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(dollars in millions)

 

     Second Quarter            First Six Months  
     2017      2016            2017        2016  
     (Unaudited)            (Unaudited)  
                     

Net earnings

    $ 4,355        $ 5,082          $ 8,494         $   10,739  
  

 

 

    

 

 

      

 

 

      

 

 

 

Other comprehensive income:

               

Net change in unrealized appreciation of investments

     4,711         (271)           13,088          (2,962

Applicable income taxes

     (1,659)        94            (4,531        993  

Reclassification of investment appreciation in net earnings

     (284)        (9)           (589        (1,816

Applicable income taxes

     99         4            206          636  

Foreign currency translation

     798         (607)           1,356          (114

Applicable income taxes

     (23)        44            (92        14  

Prior service cost and actuarial gains/losses of defined benefit pension plans

     (44)        51            (54        55  

Applicable income taxes

     18         (19)           25          (19

Other, net

            16            6          (6
  

 

 

    

 

 

      

 

 

      

 

 

 

Other comprehensive income, net

     3,619         (697)           9,415          (3,219
  

 

 

    

 

 

      

 

 

      

 

 

 

Comprehensive income

     7,974         4,385            17,909          7,520  

Comprehensive income attributable to noncontrolling interests

     130         61            233          135  
  

 

 

    

 

 

      

 

 

      

 

 

 

Comprehensive income attributable to Berkshire Hathaway shareholders

    $     7,844        $     4,324           $   17,676         $ 7,385  
  

 

 

    

 

 

      

 

 

      

 

 

 

 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

(dollars in millions)

 

     Berkshire Hathaway shareholders’ equity                       Total  
   Common stock
and capital in
excess of par
value
    Accumulated
other
comprehensive
income
     Retained
earnings
     Treasury
stock
         Non-
controlling
interests
          

Balance at December 31, 2015

    $ 35,628         $ 33,982          $ 187,703         $ (1,763)         $ 3,077         $ 258,627  

Net earnings

           —            10,590                   149          10,739  

Other comprehensive income, net

           (3,205)        —                   (14        (3,219

Issuance of common stock

     52       —            —                            52  

Transactions with noncontrolling interests

     38       —            —                   21          59  
  

 

 

   

 

 

    

 

 

    

 

 

      

 

 

      

 

 

 

Balance at June 30, 2016

    $ 35,718         $ 30,777          $ 198,293         $ (1,763)         $ 3,233         $ 266,258  
  

 

 

   

 

 

    

 

 

    

 

 

      

 

 

      

 

 

 

Balance at December 31, 2016

    $ 35,689         $ 37,298          $ 211,777           $(1,763)         $ 3,358         $ 286,359  

Net earnings

           —            8,322                   172          8,494  

Other comprehensive income, net

           9,354          —                   61          9,415  

Issuance of common stock

     40       —            —                            40  

Transactions with noncontrolling interests

     (58     —            —                   (157        (215
  

 

 

   

 

 

    

 

 

    

 

 

      

 

 

      

 

 

 

Balance at June 30, 2017

    $ 35,671         $ 46,652          $ 220,099         $   (1,763)         $ 3,434         $   304,093  
  

 

 

   

 

 

    

 

 

    

 

 

      

 

 

      

 

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

5


Table of Contents

BERKSHIRE HATHAWAY INC.

and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in millions)

 

     First Six Months  
     2017     2016  
     (Unaudited)  

Cash flows from operating activities:

    

Net earnings

   $ 8,494     $ 10,739    

Adjustments to reconcile net earnings to operating cash flows:

    

Investment gains/losses

     (605     (2,493)   

Depreciation and amortization

     4,539       4,359    

Other

     403       (119)   

Changes in operating assets and liabilities:

    

Losses and loss adjustment expenses

     18,075       1,769    

Deferred charges reinsurance assumed

     (5,550     35    

Unearned premiums

     1,830       1,444    

Receivables and originated loans

     (1,608     (2,716)   

Derivative contract assets and liabilities

     (395     790    

Income taxes

     1,893       1,822    

Other

     (449     (366)   
  

 

 

   

 

 

 

Net cash flows from operating activities

     26,627       15,264    
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of U.S. Treasury Bills and fixed maturity securities

     (68,547     (33,029)   

Purchases of equity securities

     (13,628     (4,129)   

Sales of U.S. Treasury Bills and fixed maturity securities

     20,164       2,625    

Redemptions and maturities of U.S. Treasury Bills and fixed maturity securities

     34,164       8,828    

Sales and redemptions of equity securities

     7,815       12,444    

Purchases of loans and finance receivables

     (1,350     (188)   

Collections of loans and finance receivables

     393       174    

Acquisitions of businesses, net of cash acquired

     (1,721     (30,440)   

Purchases of property, plant and equipment

     (5,149     (6,144)   

Other

     (112     (397)   
  

 

 

   

 

 

 

Net cash flows from investing activities

     (27,971     (50,256)   
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from borrowings of insurance and other businesses

     1,295       8,600    

Proceeds from borrowings of railroad, utilities and energy businesses

     2,413       2,211    

Proceeds from borrowings of finance businesses

     1,298       3,494    

Repayments of borrowings of insurance and other businesses

     (1,180     (1,148)   

Repayments of borrowings of railroad, utilities and energy businesses

     (1,768     (1,781)   

Repayments of borrowings of finance businesses

     (2,897     (195)   

Changes in short term borrowings, net

     462       618    

Other

     (92     (46)   
  

 

 

   

 

 

 

Net cash flows from financing activities

     (469     11,753    
  

 

 

   

 

 

 

Effects of foreign currency exchange rate changes

     183       2    
  

 

 

   

 

 

 

Increase in cash and cash equivalents

     (1,630     (23,237)   

Cash and cash equivalents at beginning of year *

     28,048       67,161    
  

 

 

   

 

 

 

Cash and cash equivalents at June 30 *

   $ 26,418     $ 43,924    
  

 

 

   

 

 

 

* Cash and cash equivalents are comprised of the following:

    

Beginning of year—

    

Insurance and Other

   $ 23,581      $ 56,612    

Railroad, Utilities and Energy

     3,939        3,437    

Finance and Financial Products

     528        7,112    
  

 

 

   

 

 

 
   $ 28,048      $ 67,161    
  

 

 

   

 

 

 

June 30—

    

Insurance and Other

   $ 20,142      $ 33,033    

Railroad, Utilities and Energy

     4,962        3,036    

Finance and Financial Products

     1,314        7,855    
  

 

 

   

 

 

 
   $ 26,418      $ 43,924    
  

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

6


Table of Contents

BERKSHIRE HATHAWAY INC.

and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

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. At December 31, 2016, we began presenting U.S. Treasury Bills with maturity dates greater than three months from their purchase dates separately in our Consolidated Balance Sheets. Accordingly, we revised the comparative 2016 Consolidated Statement of Cash Flows to reflect this change.

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. Variations in the amount and timing of investment gains/losses can cause significant variations in periodic net earnings. In addition, changes in the fair values of liabilities associated with derivative contracts and gains and losses associated with the periodic revaluation of certain assets and liabilities denominated in foreign currencies can cause significant variations in periodic net earnings.

Note 2. New accounting pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09 “Revenue from Contracts with Customers.” ASU 2014-09 applies to contracts with customers, excluding, most notably, insurance and leasing contracts. The framework prescribed by ASU 2014-09 includes (a) identifying the contract, (b) identifying the related performance obligations, (c) determining the transaction price, (d) allocating the transaction price to the identified performance obligations and (e) recognizing revenues as the identified performance obligations are satisfied. Based on our evaluations to-date, we do not currently believe the adoption of ASU 2014-09 will have a material effect on our Consolidated Financial Statements. However, timing of the recognition of revenue and related costs may change with respect to certain of our contracts with customers. For instance, revenues and costs for certain contracts may be recognized over time rather than when the product or service is delivered, as is the current practice. In addition, certain contracts may be treated as leases for accounting purposes, rather than contracts with customers subject to ASU 2014-09. Our evaluations of these and other issues and implementation efforts concerning ASU 2014-09 are ongoing and also include consideration of the new disclosure requirements. We will adopt ASU 2014-09 as of January 1, 2018, under the modified retrospective method.

In January 2016, the FASB issued ASU 2016-01 “Financial Instruments—Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 generally requires that equity securities (excluding equity method investments) be measured at fair value with changes in fair value recognized in net income. Under existing GAAP, changes in fair value of available-for-sale equity investments are recorded in other comprehensive income. Given the current magnitude of our investments in equity securities, the adoption of ASU 2016-01 will have a significant impact on the periodic net earnings reported in our Consolidated Statement of Earnings, although it will not significantly affect our comprehensive income or total shareholders’ equity. We will adopt ASU 2016-01 as of January 1, 2018. As of that date, the accumulated unrealized appreciation relating to our investments in equity securities, which is currently included in accumulated other comprehensive income, will be reclassified to retained earnings.

In February 2016, the FASB issued ASU 2016-02 “Leases.” ASU 2016-02 requires a lessee to recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term, along with additional qualitative and quantitative disclosures. ASU 2016-02 is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the effect this standard will have on our Consolidated Financial Statements.

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.

 

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Table of Contents

Notes to Consolidated Financial Statements (Continued)

 

Note 2. New accounting pronouncements (Continued)

 

In January 2017, the FASB issued ASU 2017-04 “Simplifying the Test for Goodwill Impairment.” ASU 2017-04 eliminates the requirement to determine the implied value of goodwill in measuring an impairment loss. Upon adoption, the measurement of a goodwill impairment will represent the excess of the reporting unit’s carrying value over fair value, limited to the carrying value of goodwill. ASU 2017-04 is effective for goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted.

Note 3. Significant business acquisitions

Our long-held acquisition strategy is to acquire businesses at sensible prices that have consistent earning power, good returns on equity and able and honest management. Financial results attributable to business acquisitions are included in our Consolidated Financial Statements beginning on their respective acquisition dates.

On January 29, 2016, Berkshire acquired all outstanding common stock of Precision Castparts Corp. (“PCC”) for $235 per share in cash pursuant to a merger agreement dated August 8, 2015. The aggregate consideration paid was approximately $32.7 billion, which included the value of PCC shares we already owned. We funded the acquisition with a combination of existing cash balances and proceeds from a short-term credit facility. PCC is a worldwide, diversified manufacturer of complex metal components and products. It serves the aerospace, power and general industrial markets. PCC is a market leader in manufacturing complex structural investment castings and forged components for aerospace markets, machined airframe components and highly engineered critical fasteners for aerospace applications, and in manufacturing airfoil castings for the aerospace and industrial gas turbine markets. PCC also is a leading producer of titanium and nickel superalloy melted and mill products for the aerospace, chemical processing, oil and gas and pollution control industries, and manufactures extruded seamless pipe, fittings and forgings for power generation and oil and gas applications.

On February 29, 2016, we acquired the Duracell business from The Procter & Gamble Company (“P&G”) pursuant to an agreement entered into in November 2014. Pursuant to the agreement, we received a recapitalized Duracell Company in exchange for shares of P&G common stock held by Berkshire subsidiaries, which had a fair value of approximately $4.2 billion. Duracell is a leading manufacturer of high-performance alkaline batteries and is an innovator in wireless charging technologies.

Pro forma consolidated revenues and net earnings data for 2016 was not materially different from the amounts reflected in the accompanying Consolidated Financial Statements. Goodwill from these acquisitions is not amortizable for income tax purposes. The fair values of identified assets acquired and liabilities assumed and residual goodwill of PCC and Duracell at their respective acquisition dates are summarized as follows (in millions).

 

     PCC      Duracell  

Cash and cash equivalents

     $ 250       $ 1,807  

Inventories

     3,430        319  

Property, plant and equipment

     2,765        359  

Goodwill

     16,011        866  

Other intangible assets

     23,527        1,550  

Other assets

     1,916        242  
  

 

 

    

 

 

 

Assets acquired

     $ 47,899       $ 5,143  
  

 

 

    

 

 

 

Accounts payable, accruals and other liabilities

     $ 2,442       $ 410  

Notes payable and other borrowings

     5,251         

Income taxes, principally deferred

     7,548        494  
  

 

 

    

 

 

 

Liabilities assumed

     $ 15,241       $ 904  
  

 

 

    

 

 

 

Net assets

     $ 32,658       $ 4,239  
  

 

 

    

 

 

 

 

8


Table of Contents

Notes to Consolidated Financial Statements (Continued)

 

Note 4. Investments in fixed maturity securities

Investments in securities with fixed maturities as of June 30, 2017 and December 31, 2016 are summarized by type below (in millions).

 

     Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
    Fair
Value
 

June 30, 2017

          

U.S. Treasury, U.S. government corporations and agencies

     $ 4,800        $ 6        $ (14     $ 4,792  

States, municipalities and political subdivisions

     1,050        54        (1     1,103  

Foreign governments

     8,726        223        (27     8,922  

Corporate bonds

     6,897        668        (6     7,559  

Mortgage-backed securities

     924        115        (4     1,035  
  

 

 

    

 

 

    

 

 

   

 

 

 
     $   22,397        $ 1,066        $ (52     $  23,411  
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2016

          

U.S. Treasury, U.S. government corporations and agencies

     $ 4,519        $ 16        $ (8     $ 4,527  

States, municipalities and political subdivisions

     1,159        58        (1     1,216  

Foreign governments

     8,860        207        (66     9,001  

Corporate bonds

     6,899        714        (9     7,604  

Mortgage-backed securities

     997        126        (6     1,117  
  

 

 

    

 

 

    

 

 

   

 

 

 
     $ 22,434        $     1,121        $ (90     $ 23,465  
  

 

 

    

 

 

    

 

 

   

 

 

 

Investments in fixed maturity securities are reflected in our Consolidated Balance Sheets as follows (in millions).

 

      June 30, 
2017
      December 31, 
2016
 

Insurance and other

    $   23,381      $ 23,432  

Finance and financial products

     30        33  
  

 

 

    

 

 

 
    $ 23,411       $   23,465  
  

 

 

    

 

 

 

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 June 30, 2017, approximately 93% of foreign government holdings were rated AA or higher by at least one of the major rating agencies. Approximately 81% of foreign government holdings were issued or guaranteed by the United Kingdom, Germany, Australia or Canada.

The amortized cost and estimated fair value of securities with fixed maturities at June 30, 2017 are summarized below by contractual maturity dates. Actual maturities may differ from contractual maturities due to early call or prepayment rights held by issuers. Amounts are in millions.

 

     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- 
backed
securities
            Total  

Amortized cost

     $8,690               $10,009               $  607                $2,167            $   924              $22,397    

Fair value

     8,762               10,280               660                2,674            1,035             23,411    

 

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Table of Contents

Notes to Consolidated Financial Statements (Continued)

 

Note 5. Investments in equity securities

Investments in equity securities as of June 30, 2017 and December 31, 2016 are summarized based on the primary industry of the investee in the table below (in millions).

 

     Cost Basis      Unrealized
Gains
     Unrealized
Losses
    Fair
Value
 

June 30, 2017 *

          

Banks, insurance and finance

    $ 20,887       $ 32,754       $ —       $ 53,641  

Consumer products

     19,495        22,267        —        41,762  

Commercial, industrial and other

     31,540        10,946        (776     41,710  
  

 

 

    

 

 

    

 

 

   

 

 

 
    $     71,922       $     65,967       $   (776    $   137,113  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

  *

Approximately 62% of the aggregate fair value was concentrated in the equity securities of five companies: American Express Company - $12.8 billion, Apple Inc. - $19.4 billion, The Coca-Cola Company - $17.9 billion, International Business Machines Corporation (“IBM”) - $8.3 billion and Wells Fargo & Company - $27.3 billion.

 

     Cost Basis      Unrealized
Gains
     Unrealized
Losses
    Fair
Value
 

December 31, 2016*

          

Banks, insurance and finance

    $ 19,852       $ 30,572       $ —        $ 50,424  

Consumer products

     10,657        16,760        (9     27,408  

Commercial, industrial and other

     35,868        9,033        (701     44,200  
  

 

 

    

 

 

    

 

 

   

 

 

 
    $     66,377       $     56,365       $   (710    $   122,032  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

  *

Approximately 62% of the aggregate fair value was concentrated in the equity securities of five companies: American Express Company - $11.2 billion, Apple Inc. - $7.1 billion, The Coca-Cola Company - $16.6 billion, IBM - $13.5 billion and Wells Fargo & Company - $27.6 billion.

As of June 30, 2017 and December 31, 2016, unrealized losses on equity securities in a continuous unrealized loss position for more than twelve consecutive months were $110 million and $551 million, respectively.

Investments in equity securities are reflected in our Consolidated Balance Sheets as follows (in millions).

 

     June 30,
2017
       December 31,  
2016
 

Insurance and other

     $  135,355        $  120,471  

Railroad, utilities and energy *

     1,380        1,186  

Finance and financial products

     378        375  
  

 

 

    

 

 

 
     $  137,113        $  122,032  
  

 

 

    

 

 

 

 

  *

Included in other assets.

Note 6. Investments in The Kraft Heinz Company

In June 2013, Berkshire invested $12.25 billion in a newly-formed company, H.J. Heinz Holding Corporation (“Heinz Holding”), consisting of 425 million shares of common stock, warrants to acquire approximately 46 million additional shares of common stock at $0.01 per share and cumulative compounding preferred stock (“Preferred Stock”) with a liquidation preference of $8 billion. An affiliate of the global investment firm 3G Capital (such affiliate, “3G”) also acquired 425 million shares of Heinz Holding common stock for $4.25 billion. At that time, Berkshire and 3G each owned a 50% share of Heinz Holding common stock. Heinz Holding then acquired H.J. Heinz Company.

 

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Table of Contents

Notes to Consolidated Financial Statements (Continued)

 

Note 6. Investments in The Kraft Heinz Company (Continued)

 

In March 2015, Heinz Holding entered into an agreement to acquire all of the outstanding common stock of Kraft Foods Group, Inc. (“Kraft”). In June 2015, Berkshire exercised the aforementioned common stock warrants. On July 1, 2015, Berkshire and 3G also acquired new shares of Heinz Holding common stock for $5.26 billion and $4.74 billion, respectively. After these transactions, Berkshire owned approximately 52.5% of the outstanding shares of Heinz Holding. On July 2, 2015, Heinz Holding completed its acquisition of Kraft, at which time Heinz Holding was renamed The Kraft Heinz Company (“Kraft Heinz”). In connection with its acquisition of Kraft, Kraft Heinz issued one new share of Kraft Heinz common stock for each share of Kraft common stock, which reduced Berkshire’s and 3G’s ownership interests in Kraft Heinz to 26.8% and 24.2%, respectively.

Berkshire currently owns 26.7% of the outstanding shares of Kraft Heinz common stock. We account for our investment in Kraft Heinz common stock pursuant to the equity method. The carrying value of this investment was approximately $15.6 billion at June 30, 2017 and $15.3 billion at December 31, 2016. Our earnings determined under the equity method for the first six months were $548 million in 2017 and $446 million in 2016. We received dividends on the common stock of $391 million in the first six months of 2017 and $374 million in the first six months of 2016, which we recorded as reductions of our investment. In the second quarter of 2016, we also received dividends of $180 million on our Preferred Stock investment, which Kraft Heinz redeemed for cash of $8.32 billion on June 7, 2016.

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. Summarized consolidated financial information of Kraft Heinz follows (in millions).

         July 1, 2017              December 31, 2016      

Assets

     $119,416          $120,480        

Liabilities

     60,870          62,906        

 

     Second Quarter        First Six Months  
     2017        2016        2017        2016  

Sales

    $     6,677          $     6,793          $     13,041         $  13,363  
  

 

 

      

 

 

      

 

 

      

 

 

 

Net earnings attributable to Kraft Heinz common shareholders

    $     1,159          $     770          $ 2,052         $ 1,666  
  

 

 

      

 

 

      

 

 

      

 

 

 

Note 7. Other investments

Other investments include preferred stock of Bank of America Corporation (“BAC”), warrants to purchase common stock of BAC and preferred stock of Restaurant Brands International, Inc. (“RBI”). Other investments are classified as available-for-sale and carried at fair value and are shown in our Consolidated Balance Sheets as follows (in millions).

 

     Cost          Fair Value  
      June 30, 
2017
      December 31, 
2016
          June 30, 
2017
      December 31, 
2016
 

Insurance and other

    $   6,720       $ 6,720         $   16,838       $ 14,364  

Finance and financial products

     1,000        1,000          3,396        2,892  
  

 

 

    

 

 

      

 

 

    

 

 

 
    $   7,720       $ 7,720         $   20,234       $ 17,256  
  

 

 

    

 

 

      

 

 

    

 

 

 

We currently own 50,000 shares of 6% Non-Cumulative Perpetual Preferred Stock of BAC (“BAC Preferred”) with a liquidation value of $100,000 per share and warrants to purchase 700,000,000 shares of common stock of BAC (“BAC Warrants”). The BAC Preferred is redeemable at the option of BAC beginning on May 7, 2019 at a redemption price of $105,000 per share (or $5.25 billion in aggregate). The BAC Warrants expire in 2021 and are exercisable for an aggregate cost of $5 billion ($7.142857/share). On June 28, 2017, BAC’s Board of Directors announced plans to increase the quarterly dividend on BAC’s common stock to $0.12 per share, beginning in the third quarter of 2017. On June 30, 2017, we announced our intention to exercise all of the BAC Warrants we currently own when the BAC quarterly dividend increase occurs. We currently expect to use substantially all of our BAC Preferred as consideration for the $5 billion cost to exercise the BAC Warrants.

We currently own Class A 9% Cumulative Compounding Perpetual Preferred Shares of RBI (“RBI Preferred”) having a stated value of $3 billion. RBI, domiciled in Canada, franchises and operates quick service restaurants. The RBI Preferred is entitled to dividends on a cumulative basis of 9% per annum plus an additional amount, if necessary, to produce an after-tax yield to Berkshire as if the dividends were paid by a U.S.-based company. The RBI Preferred is redeemable at the option of RBI beginning on December 12, 2017. In the second quarter of 2017, RBI announced its intention to redeem all or a portion of our RBI Preferred investment. If not redeemed prior to December 12, 2024, we can cause RBI to redeem the RBI Preferred. In either case, the redemption price will be 109.9% of the stated value of such shares.

 

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Table of Contents

Notes to Consolidated Financial Statements (Continued)

 

Note 8. Income taxes

Our consolidated effective income tax rates for the second quarter and first six months of 2017 were 28.9% and 28.1%, respectively, and 31.1% and 22.3%, respectively, in the second quarter and first six months of 2016. Our effective income tax rate normally reflects recurring benefits from: (a) dividends received deductions applicable to certain investments in equity securities, (b) income production tax credits related to wind-powered electricity generation placed in service in the U.S. and (c) lower income tax rates applicable to earnings of certain foreign subsidiaries.

On February 29, 2016, we exchanged our long-held investment in P&G common stock for the common stock of Duracell. This exchange produced a pre-tax gain of $1.1 billion for financial reporting purposes. The exchange transaction was structured as a tax-free reorganization under the Internal Revenue Code. As a result, no income taxes were payable on the excess of the fair value of the business received over the tax basis of the P&G shares exchanged, and we recorded a one-time reduction of certain deferred income tax liabilities (approximately $750 million) that were recorded in 2005 in connection with our exchange of The Gillette Company common stock for P&G common stock upon the merger of those two companies. The P&G/Duracell exchange produced an 8.3 percentage point reduction in our consolidated effective income tax rate for the first six months of 2016.

Note 9. Investment gains/losses

Investment gains/losses included in earnings are summarized below (in millions).

     Second Quarter      First Six Months  
           2017                  2016                  2017                  2016        

Fixed maturity securities—

           

Gross gains from sales and redemptions

   $ 15       $ 20       $ 26       $ 39    

Gross losses from sales and redemptions

     (8)        (14)        (14)        (17)   

Equity securities—

           

Gross gains from sales and redemptions

     359         740         784         2,547    

Gross losses from sales and redemptions

     (82)        (53)        (207)        (63)   

Other-than-temporary impairment losses

     —         (63)        —         (63)   

Other

            13         16         50    
  

 

 

    

 

 

    

 

 

    

 

 

 
   $     290       $     643       $ 605       $ 2,493    
  

 

 

    

 

 

    

 

 

    

 

 

 

We record investments in equity and fixed maturity securities classified as available-for-sale at fair value and record the difference between fair value and cost in other comprehensive income. We recognize investment gains and losses when we sell or otherwise dispose such securities. Gains from sales and redemptions of equity securities in the second quarter of 2016 included $610 million from the redemption of our investment in Kraft Heinz Preferred Stock. Gains in the first six months of 2016 also included approximately $1.1 billion from the exchange of our P&G common stock in connection with the acquisition of Duracell.

Note 10. Inventories

Inventories are comprised of the following (in millions).

     June 30,
2017
     December 31,
2016
 

Raw materials

   $ 2,935        $ 2,789    

Work in process and other

     2,787        2,506    

Finished manufactured goods

     4,199        4,033    

Goods acquired for resale

     6,521        6,399    
  

 

 

    

 

 

 
   $ 16,442        $ 15,727    
  

 

 

    

 

 

 

Note 11. Receivables

Receivables of insurance and other businesses are comprised of the following (in millions).

     June 30,
2017
    December 31,
2016
 

Insurance premiums receivable

   $ 11,124     $ 10,462    

Reinsurance recoverable on unpaid losses

     3,076       3,338    

Trade and other receivables

     15,089       13,630    

Allowances for uncollectible accounts

     (336     (333)   
  

 

 

   

 

 

 
   $ 28,953     $ 27,097    
  

 

 

   

 

 

 

 

12


Table of Contents

Notes to Consolidated Financial Statements (Continued)

 

Note 11. Receivables (Continued)

 

A summary of loans and finance receivables of finance and financial products businesses follows (in millions).

 

      June 30, 
2017
     December 31, 
2016
 

Loans and finance receivables before allowances and discounts

    $ 14,967      $ 13,728  

Allowances for uncollectible loans

     (177     (182

Unamortized acquisition discounts

     (231     (246
  

 

 

   

 

 

 
    $  14,559      $     13,300  
  

 

 

   

 

 

 

Loans and finance receivables are primarily installment loans originated or acquired by our manufactured housing business. In June 2017, we agreed to provide a Canada-based financial institution with a C$2 billion (approximately $1.5 billion) one-year secured revolving credit facility. The agreement expires on June 29, 2018. The outstanding loan balance of C$1.4 billion at June 30, 2017 was repaid during July. Provisions for loan losses in both the first six months of 2017 and 2016 were $78 million. Loan charge-offs, net of recoveries, in the first six months were $83 million in 2017 and $78 million in 2016. At June 30, 2017, we evaluated approximately 98% of the manufactured housing loan balances collectively for impairment. As a part of the evaluation process, credit quality indicators are reviewed and loans are designated as performing or non-performing. At June 30, 2017, we considered approximately 99% of the loan balances to be performing and approximately 95% of the loan balances current as to payment status.

Note 12. 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).

 

     Ranges of
 estimated useful life 
     June 30, 
2017
     December 31, 
2016
 

Land

          $ 2,213      $ 2,108  

Buildings and improvements

     5 – 40 years       8,538       8,360  

Machinery and equipment

     3 – 25 years       21,220       20,463  

Furniture, fixtures and other

     2 – 15 years       4,395       4,080  
    

 

 

   

 

 

 
       36,366       35,011  

Accumulated depreciation

       (16,576     (15,686
    

 

 

   

 

 

 
      $ 19,790      $  19,325  
    

 

 

   

 

 

 

A summary of property, plant and equipment of our railroad and our utilities and energy businesses follows (in millions).

 

     Ranges of
  estimated useful life  
      June 30, 
2017
      December 31, 
2016
 

Railroad:

        

Land

           $ 6,074         $ 6,063    

Track structure and other roadway

     7 – 100 years        50,344          48,277    

Locomotives, freight cars and other equipment

     6 – 41 years        12,264          12,075    

Construction in progress

            896          965    
     

 

 

    

 

 

 
        69,578          67,380    

Accumulated depreciation

        (7,936)         (6,130)   
     

 

 

    

 

 

 
        61,642          61,250    
     

 

 

    

 

 

 

Utilities and energy:

  

Utility generation, transmission and distribution systems

     5 – 80 years        72,317          71,536    

Interstate natural gas pipeline assets

     3 – 80 years        6,969          6,942    

Independent power plants and other assets

     3 – 30 years        7,044          6,596    

Construction in progress

            2,607          2,098    
     

 

 

    

 

 

 
        88,937          87,172    

Accumulated depreciation

        (25,251)         (24,663)   
     

 

 

    

 

 

 
        63,686          62,509   
     

 

 

    

 

 

 
       $     125,328         $     123,759    
     

 

 

    

 

 

 

 

13


Table of Contents

Notes to Consolidated Financial Statements (Continued)

 

Note 12. Property, plant and equipment and assets held for lease (Continued)

 

The utility generation, transmission and distribution systems and interstate natural gas pipeline assets are owned by regulated public utility and natural gas pipeline subsidiaries.

Assets held for lease and property, plant and equipment of our finance and financial products businesses are summarized below (in millions).

 

     Ranges of
estimated useful life
      June 30, 
2017
     December 31, 
2016
 

Assets held for lease

     5 – 35 years       $ 12,110      $ 11,902  

Land

            226       224  

Buildings, machinery and other

     3 – 50 years        1,365       1,302  
     

 

 

   

 

 

 
        13,701       13,428  

Accumulated depreciation

        (3,910     (3,739
     

 

 

   

 

 

 
       $     9,791      $   9,689  
     

 

 

   

 

 

 

A summary of depreciation expense follows (in millions).

 

     First Six Months  
     2017      2016  

Insurance and other

    $  1,089       $  1,037  

Railroad, utilities and energy

     2,389        2,298  

Finance and financial products

     321        308  
  

 

 

    

 

 

 
    $  3,799       $  3,643  
  

 

 

    

 

 

 

Note 13. Goodwill and other intangible assets

A reconciliation of the change in the carrying value of goodwill is as follows (in millions).

 

      June 30, 
2017
      December 31, 
2016
 

Balance at beginning of year

    $ 79,486      $ 62,708  

Acquisitions of businesses

     616        17,650  

Other, including foreign currency translation

     73        (872
  

 

 

    

 

 

 

Balance at end of period

    $  80,175       $  79,486  
  

 

 

    

 

 

 

Other intangible assets are summarized as follows (in millions).

 

    June 30, 2017       December 31, 2016
    Gross carrying
amount
          Accumulated
amortization
      Gross carrying
amount
      Accumulated
amortization

Insurance and other

      $40,419                   $7,199                   $39,976                     $6,495    

Railroad, utilities and energy

      903                   312                   898                     293    
   

 

 

                 

 

 

                 

 

 

                 

 

 

     
      $41,322                   $7,511                   $40,874                     $6,788    
   

 

 

                 

 

 

                 

 

 

                 

 

 

     

Trademarks and trade names

      $  5,275                   $   653                   $  5,175                     $   616    

Patents and technology

      4,435                   2,512                   4,341                     2,328    

Customer relationships

      28,457                   3,299                   28,243                     2,879    

Other

      3,155                   1,047                   3,115                     965    
   

 

 

                 

 

 

                 

 

 

                 

 

 

     
      $41,322                   $7,511                   $40,874                     $6,788    
   

 

 

                 

 

 

                 

 

 

                 

 

 

     

Amortization expense in the first six months was $740 million in 2017 and $716 million in 2016. Intangible assets with indefinite lives were approximately $18.8 billion as of June 30, 2017 and $18.7 billion as of December 31, 2016.

 

14


Table of Contents

Notes to Consolidated Financial Statements (Continued)

 

Note 14. 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 include equity index put option contracts written between 2004 and 2008. The liabilities and related notional values of such contracts follows (in millions).

 

     June 30, 2017      December 31, 2016  
      Liabilities      

 

  Notional  

Value

      Liabilities      

 

  Notional  

Value

 

Equity index put options

    $   2,494          $27,911(1)       $   2,890          $26,497(1)  

 

(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 derivative contract liabilities at fair value and include the changes in the fair values of such contracts in earnings as derivative gains/losses. We entered into these contracts with the expectation that the premiums received would exceed the amounts ultimately paid to counterparties. A summary of the derivative gains/losses included in our Consolidated Statements of Earnings follows (in millions).

 

     Second Quarter      First Six Months  
    

 

2017

     2016      2017      2016  

Equity index put options

    $ (65)         $     (83)         $ 395        $ (879)    

Credit default

     —           103           —           89     
  

 

 

    

 

 

    

 

 

    

 

 

 
    $     (65)         $     20          $     395        $     (790)    
  

 

 

    

 

 

    

 

 

    

 

 

 

The equity index put option contracts are European style options written on four major equity indexes and expire between June 2018 and January 2026. Future payments, if any, under any given contract will be required if the prevailing index value is below the contract strike price at the expiration date. We received aggregate premiums of $4.2 billion on these contracts at the contract inception dates and therefore we have no counterparty credit risk. The aggregate intrinsic value (the undiscounted liability assuming the contracts are settled based on the index values and foreign currency exchange rates as of the balance sheet date) was $842 million at June 30, 2017 and $1.0 billion at December 31, 2016. However, these contracts may not be unilaterally terminated or fully settled before the expiration dates. Therefore, the ultimate amount of cash basis gains or losses on these contracts will not be determined for several years. The remaining weighted average life of all contracts was approximately 3.4 years at June 30, 2017.

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 June 30, 2017, 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.

In July 2016, our last remaining credit default contract was terminated by mutual agreement with the counterparty. We paid $195 million upon termination of the contract.

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. Derivative instruments, including forward purchases and sales, futures, swaps and options, are used to manage a portion of these price risks. Derivative contract assets are included in other assets and were $123 million as of June 30, 2017 and $142 million as of December 31, 2016. Derivative contract liabilities are included in accounts payable, accruals and other liabilities and were $139 million as of June 30, 2017 and $145 million as of December 31, 2016. Net derivative contract assets or liabilities of our regulated utilities that are probable of recovery through rates, are offset by regulatory liabilities or assets. Unrealized gains or losses on contracts accounted for as cash flow or fair value hedges are recorded in other comprehensive income or in net earnings, as appropriate.

 

15


Table of Contents

Notes to Consolidated Financial Statements (Continued)

 

Note 15. Supplemental cash flow information

Supplemental cash flow information follows (in millions).

 

       First Six Months  
    

 

  2017  

               2016      

Cash paid during the period for:

       

Income taxes

    $     1,082      $       1,055      

Interest:

       

Insurance and other businesses

     390          253      

Railroad, utilities and energy businesses

     1,410          1,406      

Finance and financial products businesses

     211          184      

Non-cash investing and financing activities:

       

Liabilities assumed in connection with business acquisitions

     167          16,997      

Equity securities exchanged in connection with business acquisition

              4,239      

Note 16. Unpaid losses and loss adjustment expenses

The liabilities for unpaid losses and loss adjustment expenses (also referred to as “claim liabilities”) under our short duration property and casualty insurance and reinsurance contracts are based upon estimates of the ultimate claim costs associated with claim occurrences as of the balance sheet date and include estimates for incurred-but-not-reported (“IBNR”) claims. Reconciliations of the changes in claim liabilities for the six months ending June 30, 2017 and 2016 follows (in millions).

 

     2017      2016  

Unpaid losses and loss adjustment expenses—beginning of year:

     

Gross liabilities

     $   76,918           $ 73,144   

Reinsurance recoverable and deferred charges

     (11,385)          (10,994)  
  

 

 

    

 

 

 

Net balance

     65,533           62,150   
  

 

 

    

 

 

 

Incurred losses and loss adjustment expenses with respect to:

     

Current accident year events

     16,980           14,898   

Prior accident years’ events

     (199)          (1,071)  

Retroactive reinsurance and discount accretion

     10,532           883   
  

 

 

    

 

 

 

Total incurred losses and loss adjustment expenses

         27,313           14,710   
  

 

 

    

 

 

 

Paid losses and loss adjustment expenses with respect to:

     

Current accident year events

     (6,656)          (6,049)  

Prior accident years’ events

     (7,265)          (6,512)  

Retroactive reinsurance

     (618)          (534)  
  

 

 

    

 

 

 

Total payments

     (14,539)          (13,095)  
  

 

 

    

 

 

 

Foreign currency translation adjustment

     327           (168)  
  

 

 

    

 

 

 

Unpaid losses and loss adjustment expenses—June 30:

     

Net balance

     78,634               63,597   

Reinsurance recoverable and deferred charges

     16,673           11,111   
  

 

 

    

 

 

 

Gross liabilities

     $ 95,307           $ 74,708   
  

 

 

    

 

 

 

Incurred losses and loss adjustment expenses in the preceding table reflect the losses and loss adjustment expenses recorded in earnings in each period related to insured events occurring in the current year and in prior years. We present incurred and paid losses under retroactive reinsurance contracts and discount accretion separately. Such amounts relate to prior accident years.

 

16


Table of Contents

Notes to Consolidated Financial Statements (Continued)

 

Note 16. Unpaid losses and loss adjustment expenses (Continued)

 

Incurred losses and loss adjustment expenses in the first six months of 2017 and 2016 reflected decreases of $199 million and $1,071 million, respectively, in the estimated ultimate liabilities for prior accident years’ events. In the first six months of 2017, the decrease included a $532 million decrease related to primary insurance operations (primarily private passenger automobile, healthcare malpractice and workers’ compensation coverages), which was partly offset by an increase attributable to reinsurance operations. The increase related to our reinsurance operations included $215 million with respect to certain personal injury claims in the United Kingdom due to a regulatory decision that increases calculated lump sum settlement amounts. In addition, during 2017, we increased ultimate liability estimates under certain reinsurance contracts due to higher than expected reported losses from hurricane and earthquake events that occurred in 2016. In the first six months of 2016, we reduced estimated ultimate liabilities for prior accident years’ events for reinsurance operations ($619 million) and primary insurance ($452 million). The reductions related to reinsurance operations were primarily attributable to lower than expected reported losses, while the reductions for primary insurance primarily related to private passenger automobile, healthcare malpractice and workers’ compensation coverages.

In January 2017, a Berkshire subsidiary, National Indemnity Company (“NICO”), entered into a retroactive reinsurance agreement with various subsidiaries of American International Group, Inc. (collectively, “AIG”). NICO received cash consideration of $10.2 billion and agreed to indemnify AIG for 80% of up to $25 billion, excess of $25 billion retained by AIG, of losses and allocated loss adjustment expenses with respect to certain commercial insurance loss events occurring in years prior to 2016. The transaction became effective on February 2, 2017. Berkshire agreed to guarantee the timely payment of all amounts due to AIG under the agreement.

We accounted for the AIG agreement as retroactive reinsurance of short-duration insurance contracts. As of the effective date, we recorded premiums earned and losses and loss adjustment expenses incurred of $10.2 billion. We also recorded a liability for unpaid losses and loss adjustment expenses of $16.4 billion, representing the estimated ultimate liabilities assumed, and a deferred charge reinsurance assumed asset of $6.2 billion, representing the excess of the liability over the premiums earned. This deferred charge asset will be amortized over the estimated claims settlement period using the interest method based on the estimated timing and amount of future loss payments. Amortization charges are included in losses and loss adjustment expenses in the Consolidated Statements of Earnings.

Note 17. Notes payable and other borrowings

Notes payable and other borrowings are summarized below (in millions). The weighted average interest rates and maturity date ranges shown in the following tables are based on borrowings as of June 30, 2017.

 

     Weighted
Average
  Interest Rate  
      June 30, 
2017
       December 31,  
2016
 

Insurance and other:

        

Issued by Berkshire:

        

U.S. Dollar denominated borrowings due 2017-2047

     2.8%              $10,615        $11,709  

Euro denominated borrowings due 2020-2035

     1.1%              7,766        5,994  

Short-term subsidiary borrowings

     3.0%              2,013        2,094  

Other subsidiary borrowings due 2017-2045

     3.9%              7,387        7,378  
     

 

 

    

 

 

 
         $27,781         $27,175  
     

 

 

    

 

 

 

In January 2017, Berkshire issued €1.1 billion in senior unsecured notes. The notes consisted of €550 million of 0.25% notes due in 2021 and €550 million of 0.625% notes due in 2023. In January 2017, senior notes of $1.1 billion matured. The increase in the carrying value of Berkshire’s Euro denominated senior notes in the first six months of 2017 included $597 million that was charged to earnings as additional interest expense for the first six months of 2017 (including $526 million in the second quarter) and resulted from the revaluation attributable to changes in foreign currency exchange rates.

 

17


Table of Contents

Notes to Consolidated Financial Statements (Continued)

 

Note 17. Notes payable and other borrowings (Continued)

 

 

     Weighted
Average
 Interest Rate 
    June 30,
2017
      December 31, 
2016
 

Railroad, utilities and energy:

    

Issued by Berkshire Hathaway Energy Company (“BHE”) and its subsidiaries:

       

BHE senior unsecured debt due 2018-2045

     5.4%     $ 7,420        $ 7,818  

Subsidiary and other debt due 2017-2064

     4.6%       30,729        29,223  

Issued by BNSF due 2017-2097

     4.8%       22,552        22,044  
    

 

 

    

 

 

 
     $ 60,701        $ 59,085  
    

 

 

    

 

 

 

BHE subsidiary debt represents amounts issued pursuant to separate financing agreements. Substantially all of the assets of certain BHE subsidiaries are, or may be, pledged or encumbered to support or otherwise secure debt. These borrowing arrangements generally contain various covenants including, but not limited to, leverage ratios, interest coverage ratios and debt service coverage ratios. During the first six months of 2017, BHE and its subsidiaries issued approximately $1.275 billion of debt with maturity dates ranging from 2027 to 2057 and a weighted average interest rate of 3.7%.

BNSF’s borrowings are primarily senior unsecured debentures. In March 2017, BNSF issued $1.25 billion of senior unsecured debentures consisting of $500 million of 3.25% debentures due in 2027 and $750 million of 4.125% debentures due in 2047. In May 2017, $650 million of BNSF debentures matured. As of June 30, 2017, BNSF, BHE and their subsidiaries were in compliance with all applicable debt covenants. Berkshire does not guarantee any debt, borrowings or lines of credit of BNSF, BHE or their subsidiaries.

 

     Weighted
Average
 Interest Rate 
     June 30, 
2017
      December 31, 
2016
 

Finance and financial products:

    

Issued by Berkshire Hathaway Finance Corporation (“BHFC”) due 2017-2043

     2.7%      $ 13,323       $ 14,423  

Issued by other subsidiaries due 2017-2036

     4.7%       465        961  
    

 

 

    

 

 

 
      $ 13,788       $ 15,384  
    

 

 

    

 

 

 

In January 2017, BHFC issued $1.3 billion of senior notes consisting of $950 million of floating rate notes due in 2019 and $350 million of floating rate notes due in 2020. In the first six months of 2017, senior notes of $2.4 billion matured. The borrowings of BHFC, a wholly owned finance subsidiary of Berkshire, are fully and unconditionally guaranteed by Berkshire.

As of June 30, 2017, 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 about $4.8 billion related to BHE and its subsidiaries. In addition to BHFC’s borrowings, at June 30, 2017, Berkshire guaranteed approximately $2.6 billion of other subsidiary borrowings. 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.

 

18


Table of Contents

Notes to Consolidated Financial Statements (Continued)

 

Note 18. Fair value measurements

Our financial assets and liabilities are summarized below as of June 30, 2017 and December 31, 2016 with fair values shown according to the fair value hierarchy (in millions). The carrying values of cash and cash equivalents, U.S. Treasury Bills, receivables and accounts payable, accruals and other liabilities are considered to be reasonable estimates of their fair values.

 

    Carrying
Value
  Fair Value   Quoted
Prices
 (Level 1) 
  Significant Other
 Observable Inputs 
(Level 2)
  Significant
 Unobservable Inputs 
(Level 3)

June 30, 2017

                   

Investments in fixed maturity securities:

                   

U.S. Treasury, U.S. government corporations and agencies

      $    4,792       $    4,792           $    3,326         $    1,466           $    —  

States, municipalities and political subdivisions

      1,103       1,103           —           1,103           —  

Foreign governments

      8,922       8,922           7,143         1,779           —  

Corporate bonds

      7,559       7,559           —           7,552           7

Mortgage-backed securities

      1,035       1,035           —           1,035           —  

Investments in equity securities

      137,113       137,113           137,104         8           1  

Investment in Kraft Heinz common stock

      15,584       27,871           27,871         —             —  

Other investments

      20,234       20,234           —           20,234           —  

Loans and finance receivables

      14,559       15,015           —           1,095           13,920

Derivative contract assets (1)

      123       123           2         15           106

Derivative contract liabilities:

                   

Railroad, utilities and energy (1)

      139       139           2         120           17

Equity index put options

      2,494       2,494           —           —             2,494

Notes payable and other borrowings:

                   

Insurance and other

      27,781       28,489           —           28,489           —  

Railroad, utilities and energy

      60,701       68,603           —           68,603           —  

Finance and financial products

      13,788       14,296           —           13,973           323

December 31, 2016

                   

Investments in fixed maturity securities:

                   

U.S. Treasury, U.S. government corporations and agencies

      $    4,527       $    4,527           $    3,099         $    1,428           $—  

States, municipalities and political subdivisions

      1,216       1,216           —           1,216           —  

Foreign governments

      9,001       9,001           7,237         1,764           —  

Corporate bonds

      7,604       7,604           —           7,540           64

Mortgage-backed securities

      1,117       1,117           —           1,117           —  

Investments in equity securities

      122,032       122,032           122,031         —             1

Investment in Kraft Heinz common stock

      15,345       28,418           28,418         —             —  

Other investments

      17,256       17,256           —           —             17,256

Loans and finance receivables

      13,300       13,717           —           13           13,704

Derivative contract assets (1)

      142       142           5         43           94

Derivative contract liabilities:

                   

Railroad, utilities and energy (1)

      145       145           3         114           28

Equity index put options

      2,890       2,890           —           —             2,890

Notes payable and other borrowings:

                   

Insurance and other

      27,175       27,712           —           27,712           —  

Railroad, utilities and energy

      59,085       65,774           —           65,774           —  

Finance and financial products

      15,384       15,825           —           15,469           356

 

  (1)

Assets are included in other assets and liabilities are included in accounts payable, accruals and other liabilities.

 

19


Table of Contents

Notes to Consolidated Financial Statements (Continued)

 

Note 18. Fair value measurements (Continued)

 

The fair values of substantially all of our financial instruments were measured using market or income approaches. Considerable judgment may be required in interpreting market data used to develop the estimates of fair value. Accordingly, the fair values presented are not necessarily indicative of the amounts that could be realized in an actual current market exchange. The use of alternative market assumptions and/or estimation methodologies may have a material effect on the estimated fair value. 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; quoted prices for identical assets or liabilities exchanged in inactive markets; other inputs that may be considered in fair value determinations of the assets or liabilities, such as interest rates and yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates; and inputs that are 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 six months ending June 30, 2017 and 2016 follow (in millions).

 

     Investments 
in fixed
maturity
securities
      Investments
in equity
securities
and other
 investments 
      Net
 derivative 
contract
liabilities

Six months ending June 30, 2017

                   

Balance at December 31, 2016

      $  64           $ 17,257          $  (2,824

Gains (losses) included in:

                   

Earnings

      —              —             473

Other comprehensive income

                1,156           (2 )

Regulatory assets and liabilities

      —              —             (2 )

Acquisitions, dispositions and settlements

      (58)             —             (50 )

Transfers into/out of Level 3

      —              (18,412 )           —  
   

 

 

         

 

 

         

 

 

 

Balance at June 30, 2017

      $    7           $ 1          $   (2,405
   

 

 

         

 

 

         

 

 

 

Six months ending June 30, 2016

                   

Balance at December 31, 2015

      $100           $ 21,403          $ (3,785 )

Gains (losses) included in:

                   

Earnings

      —              —             (737 )

Other comprehensive income

                (927 )           —  

Regulatory assets and liabilities

      —              —             (11 )

Acquisitions, dispositions and settlements

                —             (35 )

Transfers into/out of Level 3

      (1)             —             195
   

 

 

         

 

 

         

 

 

 

Balance at June 30, 2016

      $105           $   20,476          $   (4,373
   

 

 

         

 

 

         

 

 

 

Gains and losses included in earnings are included as components of investment gains/losses, derivative gains/losses and other revenues, as appropriate and are primarily related to changes in the values of derivative contracts and settlement transactions. Gains and losses included in other comprehensive income are primarily the net change in unrealized appreciation of investments and the reclassification of investment appreciation in net earnings, as appropriate in our Consolidated Statements of Comprehensive Income.

 

20


Table of Contents

Notes to Consolidated Financial Statements (Continued)

 

Note 18. Fair value measurements (Continued)

 

As disclosed in Note 7, we expect to exercise our BAC Warrants in the third quarter of 2017 using the BAC Preferred as consideration and additionally, RBI intends to redeem our RBI Preferred investment. As of June 30, 2017, we based our valuations of these investments on these 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 were not significant and that the valuations of such investments were Level 2 measurements as of June 30, 2017.

Quantitative information as of June 30, 2017, with respect to significant 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).

 

     Fair
  Value  
    

Principal Valuation

        Techniques         

   Unobservable Inputs      Weighted
    Average    
 

Derivative contract liabilities:

           

Equity index put options

   $ 2,494      Option pricing model      Volatility        19%  

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. The methods we use to value these contracts are those that we believe market participants would use in determining exchange prices with respect to our contracts.

We value equity index put option contracts based on the Black-Scholes option valuation model. Inputs to this model include index price, contract duration and dividend and interest rate inputs (including a Berkshire non-performance input) which are observable. However, we believe that the valuation of long-duration options using any model is inherently subjective and, given the lack of observable transactions and prices, acceptable values may be subject to wide ranges. Volatility inputs represent our expectations, which consider the remaining duration of each contract and assume that the contracts will remain outstanding until the expiration dates. Increases or decreases in the volatility inputs will produce increases or decreases in the fair values of the liabilities.

Note 19. Common stock

Changes in Berkshire’s issued, treasury and outstanding common stock during the first six months of 2017 are shown in the table below.

 

     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  

Balance at December 31, 2016

     788,058         (11,680)        776,378       1,303,323,927         (1,409,762)        1,301,914,165    

Conversions of Class A common stock to Class B common stock and exercises of replacement stock options issued in a business acquisition

     (8,124)        —          (8,124     12,609,748         —           12,609,748    
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Balance at June 30, 2017

     779,934         (11,680)        768,254       1,315,933,675         (1,409,762)        1,314,523,913    
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Each Class A common share is entitled to one vote per share. Class B common stock possesses dividend and distribution rights equal to one-fifteen-hundredth (1/1,500) of such rights of Class A common stock. Each Class B common share possesses voting rights equivalent to one-ten-thousandth (1/10,000) of the voting rights of a Class A share. Unless otherwise required under Delaware General Corporation Law, Class A and Class B common shares vote as a single class. Each share of Class A common stock is convertible, at the option of the holder, into 1,500 shares of Class B common stock. Class B common stock is not convertible into Class A common stock. On an equivalent Class A common stock basis, there were 1,644,603 shares outstanding as of June 30, 2017 and 1,644,321 shares outstanding as of December 31, 2016. In addition to our common stock, 1,000,000 shares of preferred stock are authorized, but none are issued.

 

21


Table of Contents

Notes to Consolidated Financial Statements (Continued)

 

Note 19. Common stock (Continued)

 

Berkshire’s Board of Directors (“Berkshire’s Board”) has approved a common stock repurchase program under which Berkshire may repurchase its Class A and Class B shares at prices no higher than a 20% premium over the book value of the shares. Berkshire may repurchase shares in the open market or through privately negotiated transactions. Berkshire’s Board authorization does not specify a maximum number of shares to be repurchased. However, repurchases will not be made if they would reduce the total value of Berkshire’s consolidated cash, cash equivalents and U.S. Treasury Bills holdings below $20 billion. The repurchase program does not obligate Berkshire to repurchase any dollar amount or number of Class A or Class B shares and there is no expiration date to the program.

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 significant amounts reclassified out of accumulated other comprehensive income for the six months ending June 30, 2017 and 2016 follows (in millions).

 

    Unrealized
 appreciation of 

investments, net
 

  

  Foreign
currency
 translation 
       Prior service
and actuarial
gains/losses of
 defined benefit 

pension plans
 

  

  Other        Accumulated
other
 comprehensive 
income

2017

                                   

Balance at December 31, 2016

     $ 43,176            $ (5,268 )          $ (593)            $ (17)            $   37,298

Other comprehensive income, net before reclassifications

      8,540             1,221           (64)             (7)             9,690

Reclassifications from accumulated other comprehensive income into net earnings

      (383           —               34             13              (336 )
   

 

 

         

 

 

         

 

 

         

 

 

         

 

 

 

Balance at June 30, 2017

     $ 51,333          $ (4,047 )          $ (623 )          $ (11)            $ 46,652
   

 

 

         

 

 

         

 

 

         

 

 

         

 

 

 

Reclassifications into net earnings:

                                   

Investment gains/losses

     $ (589 )          $ —              $ —             $  —             $ (589 )

Other

      —             —               45            24            69
   

 

 

         

 

 

         

 

 

         

 

 

         

 

 

 

Reclassifications before income taxes

      (589 )           —               45            24            (520 )

Applicable income taxes

      (206 )           —               11            11            (184 )
   

 

 

         

 

 

         

 

 

         

 

 

         

 

 

 
     $ (383          $ —              $ 34             $ 13           $ (336 )
   

 

 

         

 

 

         

 

 

         

 

 

         

 

 

 

2016

                                   

Balance at December 31, 2015

     $ 38,598            $ (3,856)            $ (762)            $ 2            $ 33,982  

Other comprehensive income, net before reclassifications

      (1,971           (78 )           (5)             (22)              (2,076 )

Reclassifications from accumulated other comprehensive income into net earnings

      (1,180           —               35             16              (1,129 )
   

 

 

         

 

 

         

 

 

         

 

 

     

 

 

 

Balance at June 30, 2016

     $ 35,447            $ (3,934)            $ (732)            $ (4)             $ 30,777  
   

 

 

         

 

 

         

 

 

         

 

 

     

 

 

 

Reclassifications into net earnings:

                                   

Investment gains/losses

     $ (1,816 )          $ —              $ —            $ —           $ (1,816 )

Other

      —             —               51            35            86
   

 

 

         

 

 

         

 

 

         

 

 

     

 

 

 

Reclassifications before income taxes

      (1,816 )           —               51           35            (1,730 )

Applicable income taxes

      (636 )           —               16           19            (601 )
   

 

 

         

 

 

         

 

 

         

 

 

     

 

 

 
     $ (1,180          $ —                $ 35             $ 16           $  (1,129
   

 

 

         

 

 

         

 

 

         

 

 

     

 

 

 

 

22


Table of Contents

Notes to Consolidated Financial Statements (Continued)

 

Note 21. Contingencies and Commitments

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 the third quarter of 2016, NICO entered into a definitive agreement to acquire Medical Liability Mutual Insurance Company (“MLMIC”), a writer of medical professional liability insurance domiciled in New York. MLMIC’s assets and policyholders’ surplus determined under statutory accounting principles as of March 31, 2017 were approximately $5.6 billion and $2.1 billion, respectively. The acquisition price will be an amount equal to the sum of: (i) the tangible book value of MLMIC at the closing date (determined under U.S. GAAP); plus (ii) $100 million. The acquisition will involve the conversion of MLMIC from a mutual company to a stock company. The closing of the transaction is subject to various regulatory approvals, customary closing conditions and the approval of the MLMIC policyholders eligible to vote on the proposed demutualization and sale. We currently expect this transaction will be completed in late 2017.

We own a 50% interest in a joint venture, Berkadia Commercial Mortgage LLC (“Berkadia”), with Leucadia National Corporation (“Leucadia”) owning the other 50% interest. Berkadia is a servicer of commercial real estate loans in the U.S. A significant source of funding for Berkadia’s operations is through the issuance of commercial paper, which is limited to $1.5 billion. Berkadia’s commercial paper outstanding is supported by a surety policy issued by a Berkshire insurance subsidiary. Leucadia has agreed to indemnify us for one-half of any losses we incur under the policy.

On July 7, 2017, Berkshire Hathaway Energy Company (“BHE”) agreed to acquire 80.03% of the outstanding equity interests of Oncor Electric Delivery Company LLC (“Oncor”) for $9 billion pursuant to an agreement between BHE and Energy Future Holdings Corp. (“EFH”). Since April 2014, EFH and the substantial majority of its direct and indirect subsidiaries, excluding Oncor, have operated as debtors-in-possession under the jurisdiction of the U.S. Bankruptcy Court and pursuant to Chapter 11 of the U.S. Bankruptcy Code.

Oncor is a regulated electricity transmission and distribution company that operates the largest transmission and distribution system in Texas, delivering electricity to more than 3.4 million homes and businesses and operating more than 122,000 miles of transmission and distribution lines. Texas Transmission Investment LLC owns 19.75% and certain Oncor directors, employees and retirees own the remaining 0.22% of Oncor’s equity interests. BHE intends to acquire the remaining 19.97% minority interest positions in Oncor through transactions separate from the agreement with EFH.

The completion of this transaction is subject to numerous approvals, rulings and conditions, including those from the U.S. Bankruptcy Court, the Public Utility Commission of Texas and the Federal Energy Regulatory Commission (“FERC”), and the expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. Subject to obtaining the necessary approvals, we expect the transaction between BHE and EFH will close in the fourth quarter of 2017.

 

23


Table of Contents

Notes to Consolidated Financial Statements (Continued)

 

Note 22. Business segment data

Our operating businesses include a large and diverse group of insurance, 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 second quarter and first six months of 2017 and 2016 were as follows (in millions).

 

    Second Quarter     First Six Months  
    2017     2016     2017     2016  

Operating Businesses:

       

Insurance group:

       

Underwriting:

       

GEICO

   $ 7,244        $ 6,247       $ 14,089        $ 12,297    

General Re

    1,578         1,389         2,969         2,779    

Berkshire Hathaway Reinsurance Group

    1,786         1,652         13,627         3,895    

Berkshire Hathaway Primary Group

    1,759         1,511         3,435         2,952    

Investment income

    1,284         1,236         2,416         2,385    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total insurance group

    13,651         12,035         36,536         24,308    

BNSF

    5,250         4,585         10,435         9,352    

Berkshire Hathaway Energy

    4,623         4,299         8,880         8,417    

Manufacturing

    12,738         12,201         24,835         22,755    

McLane Company

    12,581         12,049         24,682         23,850    

Service and retailing

    6,550         6,385         12,643         12,276    

Finance and financial products

    2,033         1,989         3,898         3,715    
 

 

 

   

 

 

   

 

 

   

 

 

 
    57,426         53,543         121,909         104,673    

Reconciliation of segments to consolidated amount:

       

Investment and derivative gains/losses

    225         663         1,000         1,703    

Eliminations and other

    (133)        48         (204)        41    
 

 

 

   

 

 

   

 

 

   

 

 

 
   $             57,518         $             54,254        $             122,705        $             106,417    
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings before income taxes by segment were as follows (in millions).

 

   
    Second Quarter     First Six Months  
    2017     2016     2017     2016  

Operating Businesses:

       

Insurance group:

       

Underwriting:

       

GEICO

   $ 119      $ 150      $ 294      $ 414  

General Re

    25       2       (118)      44  

Berkshire Hathaway Reinsurance Group

    (400)      184       (1,000)      105  

Berkshire Hathaway Primary Group

    232       174       421       295  

Investment income

    1,283       1,235       2,412       2,377  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total insurance group

    1,259       1,745       2,009       3,235  

BNSF

    1,537       1,238       2,882       2,496  

Berkshire Hathaway Energy

    670       666       1,285       1,235  

Manufacturing

    1,939       1,687       3,426       3,169  

McLane Company

    69       129       157       265  

Service and retailing

    555       457       948       781  

Finance and financial products

    508       583       974       1,061  
 

 

 

   

 

 

   

 

 

   

 

 

 
    6,537       6,505       11,681       12,242  

Reconciliation of segments to consolidated amount:

       

Investment and derivative gains/losses

    225       663       1,000       1,703  

Income from Kraft Heinz

    309       386       548       626  

Interest expense, not allocated to segments

    (646)      31       (857)      (317)   

Eliminations and other

    (296)      (213)      (555)      (426)   
 

 

 

   

 

 

   

 

 

   

 

 

 
   $               6,129      $               7,372      $               11,817      $               13,828  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

24


Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

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).

 

    Second Quarter     First Six Months  
    2017     2016     2017     2016  

Insurance – underwriting

    $ (22)       $ 337       $ (289)       $ 550   

Insurance – investment income

    965        978       1,873        1,897   

Railroad

    958        772       1,796        1,556   

Utilities and energy

    516        482       1,017        923   

Manufacturing, service and retailing

    1,662        1,493       2,979        2,759   

Finance and financial products

    332        396       635        707   

Investment and derivative gains/losses

    143        394       647        2,246   

Other

    (292)       149       (336)       (48)  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings attributable to Berkshire Hathaway shareholders

    $     4,262        $     5,001       $     8,322        $   10,590   
 

 

 

   

 

 

   

 

 

   

 

 

 

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 (such as sales, marketing, purchasing, legal or human resources) and there is minimal involvement by our corporate headquarters in the day-to-day business activities of the operating businesses. Our senior corporate management team participates in and is ultimately responsible for significant capital allocation decisions, investment activities and the selection of the Chief Executive to head each of the operating businesses. It also is responsible for establishing and monitoring Berkshire’s corporate governance practices, including, but not limited to, communicating the appropriate “tone at the top” messages to employees and associates, monitoring governance efforts, including those at the operating businesses, and participating in the resolution of governance-related issues as needed. The business segment data (Note 22 to the accompanying Consolidated Financial Statements) should be read in conjunction with this discussion.

Our insurance businesses generated after-tax losses from underwriting in the second quarter and first six months of 2017. These losses included foreign currency exchange rate losses from the revaluation of reinsurance liabilities denominated in foreign currencies of $122 million in the second quarter and $196 million in the first six months of 2017. Our after-tax underwriting earnings in 2016 included foreign currency exchange rate gains of $185 million in the second quarter and $223 million in the first six months. Additionally, underwriting results in 2017 declined as compared to 2016 due to decreased earnings from the re-estimation of ultimate liabilities for prior years’ loss events, higher losses from current year catastrophe events and increased deferred charge amortization on retroactive reinsurance contracts. Our railroad business generated comparative increases in earnings in the second quarter and first six months of 2017 compared to 2016, reflecting increased unit volume, partly offset by increased fuel and other costs. Our utility and energy business produced higher earnings in the second quarter and first six months of 2017 compared to 2016, reflecting lower effective income tax rates. Earnings of our manufacturing, service and retailing businesses in 2017 increased 11.3% in the second quarter and 8.0% in the first six months compared to the same periods in 2016. These increases reflected comparatively higher earnings from several of our larger operations and the impact of businesses acquired in 2016 (PCC and Duracell), partly offset by losses and impairment charges related to the disposition of a prior bolt-on acquisition by one of our manufacturing businesses.

After-tax investment and derivative gains in the second quarter and first six months of 2017 were $143 million and $647 million, respectively, and $394 million and $2.25 billion in the second quarter and first six months of 2016, respectively. After-tax investment gains in the first six months of 2016 included a non-cash gain of approximately $1.9 billion related to the exchange of P&G common stock for 100% of the common stock of Duracell. We believe that investment and derivative gains/losses are often meaningless in terms of understanding our reported results or evaluating our economic performance. Investment and derivative gains and losses have caused and will likely continue to cause significant volatility in our periodic earnings. Other earnings in 2017 are net of after-tax foreign currency exchange rate losses of $342 million in the second quarter and $399 million for the first six months from the revaluation of parent company Euro denominated notes payable. In 2016, other earnings included after-tax foreign currency exchange rate gains of $101 million in the second quarter and losses of $60 million in the first six months from the revaluation of Euro denominated notes payable.

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 disaggregated as follows: GEICO, General Re, Berkshire Hathaway Reinsurance Group (“BHRG”) and Berkshire Hathaway Primary Group.

 

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Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Insurance—Underwriting (Continued)

 

Our management views insurance businesses as possessing two distinct operations – underwriting and investing. Underwriting decisions are the responsibility of the unit managers; investing decisions, with limited exceptions, are the responsibility of Berkshire’s Chairman and CEO, Warren E. Buffett. Accordingly, we evaluate performance of underwriting operations without any allocation of investment income or investment gains/losses.

The timing and amount of catastrophe losses can produce significant volatility in our periodic underwriting results, particularly with respect to our reinsurance businesses. Our periodic underwriting results may be affected significantly by changes in estimates for unpaid losses and loss adjustment expenses, including amounts established for occurrences in prior years. Actual claim settlements and revised loss estimates will develop over time and the unpaid loss estimates recorded as of the balance sheet date will develop upward or downward in future periods, producing a corresponding decrease or increase to pre-tax earnings. Our periodic underwriting results may also include significant 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 as a result of foreign currency exchange rate fluctuations. Foreign currency exchange rates can be volatile and the resulting impact on our underwriting earnings can be relatively significant. Underwriting results of our insurance businesses are summarized below. Amounts are in millions.

 

     Second Quarter        First Six Months  
     2017      2016        2017      2016  

Underwriting gain (loss) attributable to:

             

GEICO

    $ 119          $ 150             $ 294         $ 414  

General Re

     25          2             (118)        44  

Berkshire Hathaway Reinsurance Group

     (400)         184               (1,000)            105  

Berkshire Hathaway Primary Group

     232          174             421         295  
  

 

 

    

 

 

      

 

 

    

 

 

 

Pre-tax underwriting gain (loss)

     (24)         510             (403)        858  

Income taxes and noncontrolling interests

     (2)         173             (114)        308  
  

 

 

    

 

 

      

 

 

    

 

 

 

Net underwriting gain (loss)

    $      (22)         $   337             $ (289)        $ 550  
  

 

 

    

 

 

      

 

 

    

 

 

 

GEICO

GEICO writes private passenger automobile insurance, offering coverages to insureds in all 50 states and the District of Columbia. GEICO’s policies are marketed mainly by direct response methods in which most customers apply for coverage directly to the company via the Internet or over the telephone. GEICO’s underwriting results are summarized below (dollars in millions).

 

    Second Quarter     First Six Months  
    2017     2016     2017     2016  
    Amount     %     Amount     %     Amount     %     Amount     %  

Premiums written

   $ 7,270          $ 6,229          $   14,857          $   12,794      
 

 

 

     

 

 

     

 

 

     

 

 

   

Premiums earned

   $   7,244           100.0        $ 6,247           100.0        $ 14,089           100.0       $ 12,297           100.0    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Losses and loss adjustment expenses

    6,108         84.3         5,173         82.8         11,698         83.0         9,996         81.3    

Underwriting expenses

    1,017         14.1         924         14.8         2,097         14.9         1,887         15.3    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total losses and expenses

    7,125         98.4             6,097         97.6         13,795         97.9         11,883         96.6    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pre-tax underwriting gain

   $ 119          $ 150          $ 294          $ 414      
 

 

 

     

 

 

     

 

 

     

 

 

   

Premiums written in the second quarter and first six months of 2017 increased $1.0 billion (16.7%) and $2.1 billion (16.1%), respectively, compared to 2016. Over the past year, voluntary auto policies-in-force grew approximately 10.2% and premiums per auto policy increased 5.0%. The increase in average premiums per policy was attributable to rate increases, coverage changes and changes in state and risk mix. Voluntary auto new business sales in 2017 increased 17.8% in the second quarter and 24.1% in the first six months compared to the same periods in 2016. Voluntary auto policies-in-force increased approximately 876,000 during the first six months of 2017. Premiums earned in 2017 increased 16.0% in the second quarter and 14.6% in the first six months compared to the same periods in 2016.

 

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Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Insurance—Underwriting (Continued)

 

GEICO (Continued)

 

In the second quarter and first six months of 2017, our pre-tax underwriting gains declined compared to 2016, as claim costs grew faster than premiums earned. Losses and loss adjustment expenses in 2017 increased $935 million (18.1%) in the second quarter and $1.7 billion (17.0%) in the first six months over the corresponding periods in 2016. Our loss ratio (the ratio of losses and loss adjustment expenses to earned premiums) increased 1.5 percentage points in the second quarter and 1.7 percentage points in the first six months of 2017 as compared to 2016. Claims frequencies in the first six months of 2017 were relatively flat for property damage and collision coverages, increased approximately three percent for bodily injury coverage and decreased about two percent for personal injury protection coverage compared to 2016. Average claims severities were higher in the first six months of 2017 for property damage and collision coverages (four to five percent range) and bodily injury coverage (four to six percent range). Losses and loss adjustment expenses in the first six months of 2017 and 2016 included reductions of $106 million and $216 million, respectively, from the re-estimation of liabilities for prior years’ claims. In addition, in the first six months of 2017, we incurred storm losses of approximately $268 million (1.9% of premiums earned), compared to $290 million (2.4% of premiums earned) in the first six months of 2016.

Underwriting expenses in the second quarter and first six months of 2017 increased $93 million (10.1%) and $210 million (11.1%), respectively, compared to 2016. Our expense ratios (underwriting expenses to premiums earned) in 2017 declined 0.7 percentage points in the second quarter and 0.4 percentage points in the first six months compared to 2016. The largest components of underwriting expenses are employee-related expenses (salaries and benefits) and advertising costs.

General Re

General Re conducts a reinsurance business offering property and casualty coverages to clients worldwide through General Reinsurance Corporation, Germany-based General Reinsurance AG, Faraday Holdings in London and other wholly-owned affiliates. We also write life and health reinsurance primarily on a direct basis through General Re Life Corporation and General Reinsurance AG. We strive to generate underwriting profits in essentially all of our product lines. General Re’s underwriting results are summarized in the following table (in millions).

 

        Premiums earned     Pre-tax underwriting gain (loss)  
        Second Quarter     First Six Months     Second Quarter     First Six Months  
        2017     2016     2017     2016     2017     2016     2017     2016  
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property/casualty

      $ 777           $   624           $ 1,431             $ 1,276         $   (14)        $ 23         $ (157)      $ 53    

Life/health

      801           765           1,538           1,503           39         (21)        39         (9)   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
      $ 1,578           $ 1,389           $ 2,969             $ 2,779         $ 25         $ 2         $     (118)      $     44    
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property/casualty

In the second quarter and first six months of 2017, property/casualty premiums earned increased $153 million (25%) and $155 million (12%), respectively, as compared to 2016. The increases reflected higher written premiums in both direct and broker markets, primarily attributable to new business and increased participations for renewals. Despite the increase in premiums in 2017, industry capacity dedicated to property and casualty markets remains high and price competition in most reinsurance markets persists. We continue to decline business when we believe prices are inadequate.

Our property/casualty operations generated pre-tax underwriting losses of $14 million in the second quarter and $157 million in the first six months of 2017 compared to pre-tax underwriting gains of $23 million and $53 million, respectively, in the comparable 2016 periods. In the first six months of 2017, we increased our estimates for unpaid losses approximately $140 million with respect to certain United Kingdom (“U.K.”) liability business written in prior years. The increase was the result of 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. The discount rate, referred to as the Ogden rate, was reduced from 2.5% to negative 0.75%. We expect the Ogden rate decrease will significantly increase claim costs associated with currently unsettled cases, as well as for future cases. Underwriting results in the first six months of 2017 also included estimated losses of $50 million from a cyclone in Australia. General Re incurred no losses from significant catastrophe loss events in the first six months of 2016.

 

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Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Insurance—Underwriting (Continued)

 

General Re (Continued)

 

Life/health

Life/health premiums earned in the second quarter and first six months of 2017 increased $36 million (5%) and $35 million (2%), respectively, compared to 2016. The increases reflected growth in North America and certain international markets. Our life/health operations produced pre-tax underwriting gains of $39 million in the second quarter and first six months of 2017 compared to pre-tax underwriting losses of $21 million in the second quarter and $9 million in the first six months of 2016. The improved underwriting results in 2017 reflected lower underwriting expenses and the impact of increasing liabilities for estimated premium deficiencies on certain disability business in 2016. Underwriting results in the first six months of 2017 and 2016 included pre-tax losses from the runoff of U.S. long-term care and disability business of $38 million and $37 million, respectively, which were primarily due to the periodic discount accretion on long-term care liabilities.

Berkshire Hathaway Reinsurance Group

BHRG underwrites excess-of-loss reinsurance and quota-share coverages on property and casualty risks for insurers and reinsurers worldwide, including property catastrophe insurance and reinsurance. BHRG also writes retroactive reinsurance on property/casualty exposures as well as life reinsurance and periodic payment annuity business. A summary of BHRG’s underwriting results follows (in millions).

    Premiums earned        Pre-tax underwriting gain (loss)  
    Second Quarter        First Six Months        Second Quarter        First Six Months  
    2017        2016        2017        2016        2017        2016        2017        2016  

Property/casualty

    $ 1,183            $ 1,067            $ 2,271            $ 2,194          $ 52           $ 249           $ (217)          $ 375   

Retroactive reinsurance

    1            2            10,186            582          (331)                   (590)          (82)  

Life and annuity

    602            583            1,170            1,119          (121)          (74)          (193)          (188)  
 

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 
    $   1,786            $   1,652            $   13,627            $   3,895          $     (400)          $     184           $ (1,000)          $ 105   
 

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Property/casualty

In the second quarter and first six months of 2017, premiums earned increased $116 million (11%) and $77 million (4%), respectively, compared to 2016. Approximately half of our premiums written and earned in the first six months of 2017 derived from two contracts. Our premium volume was constrained for most reinsurance coverages, as rates, in our view, were generally inadequate. We have the capacity and desire to write more business when prices are appropriate.

Our property/casualty business generated pre-tax underwriting gains of $52 million in the second quarter and pre-tax losses of $217 million in the first six months of 2017, compared to pre-tax gains of $249 million in the second quarter and $375 million in the first six months of 2016. In the first six months of 2017, we incurred losses of approximately $250 million related to prior years’ loss events, which included losses from unanticipated reported claims from hurricane and earthquake events in 2016 and increased liability estimates attributable to the Ogden discount rate decrease. In the first six months of 2016, we reduced estimated ultimate liabilities for prior years’ loss events by approximately $375 million, primarily due to lower than expected reported losses. In the first six months of 2017, we also incurred estimated losses of approximately $115 million from a cyclone in Australia. In the first six months of 2016, we incurred no significant losses from catastrophe loss events.

Retroactive reinsurance

We periodically write retroactive reinsurance contracts, which provide indemnification of losses and loss adjustment expenses with respect to past loss events. In January 2017, NICO entered into an aggregate excess-of-loss retroactive reinsurance agreement with AIG (the “AIG Agreement”) that became effective on February 2, 2017. In connection with the AIG Agreement, we received cash premiums of $10.2 billion. As of the effective date, we recorded losses and loss adjustment expenses incurred of $10.2 billion, representing our initial estimate of the unpaid losses and loss adjustment expenses assumed of $16.4 billion, partly offset by a deferred charge asset of $6.2 billion. Thus, on the effective date, the AIG Agreement had no effect on our pre-tax underwriting results. See Note 16 to the accompanying Consolidated Financial Statements.

Pre-tax underwriting results in 2017 included losses of $102 million in the second quarter and $191 million in the first six months from changes in foreign currency exchange rates, which increased foreign currency denominated liabilities of U.S subsidiaries. In 2016, foreign currency exchange rate changes reduced such liabilities and resulted in pre-tax gains of $158 million in the second quarter and $177 million in the first six months.

 

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Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Insurance—Underwriting (Continued)

 

Berkshire Hathaway Reinsurance Group (Continued)

 

Retroactive reinsurance (Continued)

 

Before foreign currency gains/losses, retroactive reinsurance contracts produced pre-tax underwriting losses of $229 million and $399 million in the second quarter and first six months of 2017, respectively, and $149 million and $259 million, respectively, in the comparable 2016 periods. The comparative increases in such losses in 2017 were primarily due to deferred charge amortization related to the AIG Agreement and another retroactive reinsurance contract written in December 2016, partly offset by a small net gain from a contract commuted in the first quarter of 2017 and comparatively lower deferred charge amortization from other contracts. We currently estimate pre-tax deferred charge amortization for the year ending December 31, 2017 will approximate $975 million, which includes the aforementioned AIG Agreement.

Liabilities for losses and loss adjustment expenses associated with our retroactive reinsurance contracts were approximately $40.1 billion at June 30, 2017 and $24.7 billion at December 31, 2016. Unamortized deferred charges related to these contracts were approximately $13.5 billion at June 30, 2017 and $8.0 billion at December 31, 2016.

Life and annuity

A summary of BHRG’s life and annuity underwriting results follows (in millions).

 

    Premiums earned     Pre-tax underwriting gain (loss)  
    Second Quarter     First Six Months     Second Quarter     First Six Months  
    2017     2016     2017     2016     2017     2016     2017     2016  

Periodic payment annuity

    $ 230       $ 195         $ 450         $ 404         $ (198)       $ 8          $ (343)       $ (62)  

Life reinsurance

            368       383         712         706               3          (2)       14   

Variable annuity guarantee

    4       5         8         9         74        (85)         152        (140)  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    $ 602       $         583         $         1,170         $         1,119         $         (121)       $         (74)         $         (193)       $         (188)  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Periodic payment annuity premiums consist of upfront consideration received under direct and assumed contracts that provide for structured settlement annuity payments, typically over very long periods. Pre-tax underwriting losses in 2017 included losses of $86 million in the second quarter and $110 million in the first six months from changes in foreign currency exchange rates. In 2016, foreign currency exchange rate changes resulted in pre-tax gains of $126 million in the second quarter and $166 million in the first six months.

Before foreign currency gains and losses, pre-tax underwriting losses from periodic payment annuity contracts were $112 million in the second quarter and $233 million in the first six months of 2017 and $118 million and $228 million, respectively, in the second quarter and first six months of 2016. We expect these contracts will generate pre-tax underwriting losses over time attributable to the accretion of discounted annuity liabilities. Discounted periodic payment annuity liabilities were approximately $10.6 billion at June 30, 2017, reflecting a weighted average interest rate of approximately 4.1%.

Our underwriting results in 2017 from life reinsurance included higher than expected mortality, partially offset by decreased benefit liabilities for certain blocks of business. Underwriting gains in 2016 reflected lower claims and underwriting expenses.

Underwriting results of our variable annuity business (reinsurance contracts that provide guarantees on closed blocks of variable annuity business) in the second quarter and first six months of 2017 produced pre-tax underwriting gains of $74 million and $152 million, respectively, and pre-tax underwriting losses of $85 million and $140 million, respectively, in the corresponding periods of 2016. Underwriting gains and losses in each period reflected changes in liabilities for guaranteed benefits, resulting from changes in securities markets and interest rates and from the periodic recognition of expected profit margins, which together, affected our liability estimates. Our estimated liabilities for variable annuity guarantees were approximately $1.9 billion at June 30, 2017 and $2.1 billion at December 31, 2016. Periodic underwriting results from these contracts can be volatile reflecting the volatility of securities markets.

Berkshire Hathaway Primary Group

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 products, including healthcare malpractice, workers’ compensation, automobile, general liability, property and various specialty coverages for small, medium and large clients. The largest of these insurers include the MedPro Group, National Indemnity Company (“NICO Primary”), Berkshire Hathaway Homestate

 

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Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Insurance—Underwriting (Continued)

 

Companies (“BHHC”), Berkshire Hathaway Specialty Insurance (“BH Specialty”) and Berkshire Hathaway GUARD Insurance Companies (“GUARD”). Other BH Primary insurers include U.S. Liability Insurance Company, Applied Underwriters and Central States Indemnity Company. A summary of BH Primary’s underwriting results follows (dollars in millions).

 

    Second Quarter     First Six Months  
    2017     2016     2017     2016  
    Amount     %     Amount     %     Amount     %     Amount     %  

Premiums written

    $       1,801           $       1,654           $       3,650           $       3,223      
 

 

 

     

 

 

     

 

 

     

 

 

   

Premiums earned

    $ 1,759           100.0         $ 1,511           100.0         $ 3,435           100.0         $ 2,952           100.0    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Losses and loss adjustment expenses

    1,047         59.5         921         61.0         2,084         60.7         1,832         62.1    

Underwriting expenses

    480         27.3         416         27.5         930         27.0         825         27.9    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total losses and expenses

    1,527         86.8         1,337         88.5         3,014         87.7         2,657         90.0    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pre-tax underwriting gain

    $ 232           $ 174           $ 421           $ 295      
 

 

 

     

 

 

     

 

 

     

 

 

   

Premiums written in the second quarter and first six months in 2017 increased 8.9% and 13.2%, respectively, over the same periods in 2016. All of the BH Primary insurers generated increased premiums written in the first six months of 2017, led by BH Specialty (23%), GUARD (28%) and BHHC (11%). Premiums earned increased $248 million (16.4%) in the second quarter and $483 million (16.4%) in the first six months as compared to 2016 reflecting the increases in premiums written.

The BH Primary insurers produced pre-tax underwriting gains of $232 million in the second quarter and $421 million in the first six months of 2017. Losses and loss adjustment expenses for the first six months of 2017 included net reductions of estimated ultimate liabilities for prior years’ loss events of $426 million, which produced a corresponding increase in pre-tax underwriting gains. Underwriting results in the first six months of 2016 included gains of $236 million from the net reductions of estimated ultimate claims liabilities for prior years’ events. The gains from the development of prior years’ claim estimates in 2017 were primarily attributable to healthcare malpractice and workers’ compensation business. Many of our businesses write primarily liability and workers’ compensation business and the related claim costs may be subject to higher severity and longer-claims tails, which may contribute to significant claims development gains or losses in the future.

Insurance—Investment Income

A summary of net investment income generated by investments held by our insurance operations follows (in millions).

 

    Second Quarter     First Six Months  
    2017     2016     2017     2016  

Interest income

    $ 280         $ 214         $ 526        $ 444   

Dividend income

    1,003         1,021         1,886        1,933   
 

 

 

   

 

 

   

 

 

   

 

 

 

Investment income before income taxes and noncontrolling interests

    1,283         1,235         2,412        2,377   

Income taxes and noncontrolling interests

    318         257         539        480   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

    $     965         $ 978         $ 1,873       $ 1,897   
 

 

 

   

 

 

   

 

 

   

 

 

 

Pre-tax investment income in the second quarter and first six months of 2017 increased $48 million (4%) and $35 million (1%), respectively, from the same periods in 2016. These increases reflected increased interest income, partly offset by lower dividend income. We continue to hold significant amounts of cash and cash equivalents and U.S. Treasury Bills earning very low yields. While still historically low, the yields were higher in 2017 than in 2016. We believe that maintaining ample liquidity is paramount and we insist on safety over yield with respect to such balances. The decrease in dividends in 2017 reflected Dow Chemical Company’s redemption of our $3 billion investment in 8.5% preferred stock in December 2016, partly offset by increased dividend income from investments in other equity securities attributable to increased dividend rates of certain issuers and increased overall investment levels.

Invested assets of our insurance businesses derive from shareholder capital, including reinvested earnings, and from net liabilities under insurance contracts or “float.” The major components of float are unpaid losses, life, annuity and health benefit liabilities, unearned premiums and other liabilities to policyholders less premium and reinsurance receivables, deferred charges assumed under retroactive reinsurance contracts and deferred policy acquisition costs. Float approximated $107 billion at June 30, 2017 and $91 billion at December 31, 2016. The increase in float in 2017 was primarily attributable to the AIG Agreement. Our average cost of float was approximately 0.4% in the first six months of 2017, as we generated an aggregate pre-tax underwriting loss of $403 million.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Insurance—Investment Income (Continued)

 

A summary of cash and investments held in our insurance businesses follows (in millions).

 

     June 30,
2017
     December 31,
2016
 

Cash and cash equivalents and U.S. Treasury Bills

     $ 60,198          $ 48,888    

Equity securities

     134,525          119,780    

Fixed maturity securities

     22,696          22,778    

Other investments

     16,838          14,364    
  

 

 

    

 

 

 
     $ 234,257          $ 205,810    
  

 

 

    

 

 

 

Fixed maturity securities as of June 30, 2017 were as follows (in millions).

 

     Amortized
cost
     Unrealized
gains(losses)
     Carrying
value
 

U.S. Treasury, U.S. government corporations and agencies

     $ 4,444        $ (7)        $ 4,437  

States, municipalities and political subdivisions

     1,022        52         1,074  

Foreign governments

     8,724        196         8,920  

Corporate bonds, investment grade

     5,715        441         6,156  

Corporate bonds, non-investment grade

     989        219         1,208  

Mortgage-backed securities

     793        108         901  
  

 

 

    

 

 

    

 

 

 
     $ 21,687        $     1,009         $ 22,696  
  

 

 

    

 

 

    

 

 

 

U.S. government obligations are rated AA+ or Aaa by the major rating agencies and approximately 88% of all state, municipal and political subdivisions, foreign government obligations and mortgage-backed securities were rated AA or higher by the major rating agencies. 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’s major business groups are classified by type of product shipped and include consumer products, coal, industrial products and agricultural products. A summary of BNSF’s earnings follows (in millions).

 

     Second Quarter     First Six Months  
     2017      2016     2017      2016  

Revenues

     $ 5,250          $ 4,585         $   10,435        $     9,352    
  

 

 

    

 

 

   

 

 

    

 

 

 

Operating expenses:

          

Compensation and benefits

     1,242          1,134         2,525        2,342    

Fuel

     577          431         1,182        826    

Purchased services

     609          589         1,235        1,227    

Depreciation and amortization

     592          530         1,165        1,050    

Equipment rents, materials and other

     437          414         938        917    
  

 

 

    

 

 

   

 

 

    

 

 

 

Total operating expenses

         3,457          3,098         7,045        6,362    

Interest expense

     256          249         508        494    
  

 

 

    

 

 

   

 

 

    

 

 

 
     3,713          3,347         7,553        6,856    
  

 

 

    

 

 

   

 

 

    

 

 

 

Pre-tax earnings

     1,537          1,238         2,882        2,496    

Income taxes

     579          466         1,086        940    
  

 

 

    

 

 

   

 

 

    

 

 

 

Net earnings

     $ 958          $     772         $ 1,796        $ 1,556    
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Railroad (“Burlington Northern Santa Fe”) (Continued)

 

Consolidated revenues in the second quarter and first six months of 2017 were $5.3 billion and $10.4 billion, respectively, representing increases of $665 million (14.5%) and $1,083 million (11.6%), respectively, versus the corresponding periods in 2016. Pre-tax earnings in the second quarter and first six months of 2017 increased 24.2% and 15.5%, respectively, compared to the same periods in 2016.

In the first six months of 2017, revenues reflected a 4.1% comparative increase in average revenue per car/unit and a 7.6% increase in volume. Our year-to-date volume was 5.0 million cars/units compared to 4.7 million in 2016. We currently expect our overall volume growth will moderate in the second half of 2017 compared to the growth experienced in the first six months of 2017. The increase in average revenue per car/unit was primarily attributable to higher fuel surcharge revenue and business mix changes, as well as increased rates per car/unit.

Freight revenues from consumer products in 2017 were $1.7 billion in the second quarter and $3.4 billion in the first six months, representing increases of 8.4% and 8.6%, respectively, compared to 2016. The revenue increases reflected volume increases of 5.8% in the second quarter and 5.7% in the first six months as well as higher average revenue per car/unit. The volume increases were primarily attributable to higher market share, improving economic conditions, and normalizing of retail inventories, which benefited domestic intermodal, international intermodal and automotive volumes.

Freight revenues from industrial products in 2017 were $1.3 billion in the second quarter and $2.5 billion for the first six months, or increases of 7.4% and 5.7%, respectively, from the comparable 2016 periods. The increases were attributable to higher average revenue per car/unit, as well as volume increases of 4.1% in the second quarter and 2.3% in the first six months. Volumes in 2017 were higher for minerals, steel and other commodities that support domestic drilling activity as well as higher taconite, partly offset by lower petroleum products volume, due to pipeline displacement of U.S. crude traffic, and lower plastics volume.

Freight revenues from agricultural products in 2017 increased 18.0% in the second quarter to $1.1 billion and increased 11.4% to $2.2 billion in the first six months compared to the same periods in 2016. The revenue growth reflected higher volumes, 14.5% in the second quarter and 7.8% for the first six months, as well as higher revenue per car/unit. The volume growth in 2017 was primarily due to higher grain exports.

Freight revenues from coal in 2017 increased 39.2% in the second quarter to $912 million and 30.5% in the first six months to $1.9 billion compared to 2016. The increase in revenues reflected higher volumes, 20.7% in the second quarter and 19.5% year-to-date, as well as higher average revenue per car/unit. The volume increases in 2017 were due to mild winter weather in the first quarter of 2016 and higher natural gas prices in the first half of 2017. Together, these factors led to increased utility coal usage in 2017, which were partly offset by the effects of unit retirements of coal generating facilities.

Operating expenses in the second quarter and first six months of 2017 were $3.5 billion and $7.0 billion, respectively, increases of $359 million (11.6%) and $683 million (10.7%), respectively, compared to the same periods in 2016. Our ratios of operating expenses to revenues decreased 1.7 percentage points to 65.8% in the second quarter and 0.5 percentage points to 67.5% for the first six months of 2017 versus the corresponding 2016 periods.

Compensation and benefits expenses increased $108 million (9.5%) for the second quarter and $183 million (7.8%) for the first six months compared to 2016. The increases were primarily due to higher health and welfare costs, wage inflation and volume-related increases. Fuel expenses increased $146 million (33.9%) for the second quarter and $356 million (43.1%) for the first six months compared to 2016, due to higher average fuel prices and increased volumes, partially offset by improved efficiency. Depreciation and amortization expense increased $62 million (11.7%) for the second quarter and $115 million (11.0%) for the first six months compared to 2016 due to a larger base of depreciable assets in service.

Utilities and Energy (“Berkshire Hathaway Energy Company”)

We hold a 90.2% ownership interest in Berkshire Hathaway Energy Company (“BHE”), which operates a global energy business. BHE’s domestic regulated utility interests are comprised of PacifiCorp, MidAmerican Energy Company (“MEC”) and NV Energy. In Great Britain, BHE subsidiaries operate two regulated electricity distribution businesses referred to as Northern Powergrid. BHE also owns two domestic regulated interstate natural gas pipeline companies. Other energy businesses include AltaLink, L.P. (“AltaLink”), a regulated electricity transmission-only business in Alberta, Canada and a diversified portfolio of independent power projects. In addition, BHE also operates the second-largest residential real estate brokerage firm and one of the largest residential real estate brokerage franchise networks in the United States.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Utilities and Energy (“Berkshire Hathaway Energy Company”) (Continued)

 

The rates our regulated businesses charge customers for energy and services are based, in large part, on the costs of business operations, including a return on capital, and are subject to regulatory approval. To the extent these operations are not allowed to include such costs in the approved rates, operating results will be adversely affected. Revenues and earnings of BHE are summarized below (in millions).

 

    Second Quarter     First Six Months  
    Revenues     Earnings     Revenues     Earnings  
    2017     2016     2017     2016     2017     2016     2017     2016  

PacifiCorp

    $ 1,256           $ 1,243         $ 258         $ 258         $ 2,548         $ 2,507         $ 523         $ 502    

MidAmerican Energy Company

    669           593         90         95         1,377         1,225         152         148    

NV Energy

    761           714         141         118         1,355         1,338         192         150    

Northern Powergrid

    220           250         64         92         465         529         167         217    

Natural gas pipelines

    190           189         43         49         508         505         243         229    

Other energy businesses

    568           466         72         78         1,081         974         113         132    

Real estate brokerage

    959           844         113         95         1,546         1,339         116         98    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    $   4,623           $      4,299             $   8,880         $      8,417        
 

 

 

   

 

 

       

 

 

   

 

 

     

Earnings before corporate interest and income taxes (“EBIT”)

 

           781                785               1,506           1,476    

Corporate interest

 

    111         119             221         241    

Income taxes and noncontrolling interests

 

    154         184             268         312    
 

 

 

   

 

 

       

 

 

   

 

 

 

Net earnings attributable to Berkshire Hathaway shareholders

 

    $ 516         $ 482             $ 1,017         $ 923    
 

 

 

   

 

 

       

 

 

   

 

 

 

PacifiCorp

PacifiCorp operates a regulated electric utility in portions of several Western states, including Utah, Oregon and Wyoming. Revenues in the second quarter and first six months of 2017 increased $13 million (1%) and $41 million (2%), respectively, compared with 2016. In the second quarter and first six months of 2017, wholesale and other revenues increased due to higher volumes and average rates. In the second quarter of 2017, retail revenues declined slightly and for the first six months increased $14 million, due to higher volumes, partly offset by lower average rates.

EBIT in the second quarter of 2017 was unchanged from 2016, as a slight increase in gross margins and lower operations and maintenance expenses were substantially offset by increased depreciation and amortization expense. EBIT increased $21 million (4%) in the first six months of 2017, as compared to 2016. The comparative increase in EBIT was primarily due to an increase in gross margins ($18 million) and lower operations and maintenance expenses ($22 million), partially offset by increased depreciation, amortization and property tax expenses ($18 million).

MidAmerican Energy Company

MEC operates a regulated electric and natural gas utility primarily in Iowa and Illinois. Revenues in the second quarter of 2017 increased $76 million (13%) compared to 2016. The increase was primarily due to increases in electric operating revenues ($56 million), due principally to higher wholesale volumes and rates, and natural gas revenues ($18 million) due to higher average per-unit cost of gas sold (offset in cost of sales). EBIT in the second quarter of 2017 decreased $5 million (5%) compared to 2016. Although revenues and gross margin dollars increased in the second quarter, average gross margin percentages declined due to higher coal-fueled generation and purchased power costs. In addition, in the second quarter of 2017, operating expenses increased $42 million compared to 2016, which included an increase in depreciation and amortization expense of $31 million attributable to higher regulatory provisions and increased assets in service.

Revenues in the first six months of 2017 increased $152 million (12%) compared to 2016. The increase reflected increases in electric operating revenues ($90 million) and natural gas operating revenues ($54 million). The increase in electric revenues was attributable to higher wholesale and other revenue ($67 million), substantially due to higher wholesale volumes and average rates, and increased retail revenues ($23 million). The increase in retail revenues reflected increased recoveries through bill riders (which are substantially offset by increases in costs and expenses) and from non-weather usage and rate factors, partially offset by the unfavorable impact of temperatures in 2017. EBIT in the first six months of 2017 increased $4 million (3%) compared to 2016. The increase in EBIT reflected the increases in revenues substantially offset by higher coal-fueled generation and purchased power costs, higher per-unit cost of natural gas sold and increased depreciation, maintenance and other operating expenses.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Utilities and Energy (“Berkshire Hathaway Energy Company”) (Continued)

 

NV Energy

NV Energy operates regulated electric and natural gas utilities in Nevada. Revenues increased $47 million (7%) in the second quarter and $17 million (1%) in the first six months of 2017 compared to the same periods in 2016. These increases were due primarily to increases in retail electric operating revenues, which reflected a combination of increased rates from pass-through cost adjustments and higher volumes, partly offset by lower revenues from energy efficiency programs, which are offset by lower operating expenses. In 2017, NV Energy also experienced declines in operating revenues from commercial and industrial customers electing to purchase power from alternative sources and, thus, becoming distribution service only customers. Natural gas operating revenue decreased in the first six months of 2017 primarily due to lower rates, partially offset by higher customer usage.

EBIT increased $23 million (19%) in the second quarter and $42 million (28%) in the first six months of 2017 compared to the corresponding 2016 periods. These increases were primarily due to increased gross margins and lower interest expense.

Northern Powergrid

Revenues in the second quarter and first six months of 2017 declined $30 million (12%) and $64 million (12%) compared to 2016, primarily due to the unfavorable currency translation effect of a comparatively stronger U.S. Dollar in 2017 and lower distribution revenue, partially offset by higher smart metering revenue. Changes in the average foreign currency exchange rates accounted for $27 million and $65 million of the comparative revenue declines in the second quarter and first six months of 2017, respectively. Distribution revenues in the first six months of 2017 declined primarily due to the recovery in the first quarter of 2016 of the December 2013 customer rebate ($11 million), unfavorable movements in regulatory provisions and lower distribution volumes ($12 million), partially offset by higher tariff rates ($15 million). EBIT in the first six months of 2017 declined $50 million (23%) compared to 2016, primarily due to foreign currency translation effects, as well as higher depreciation expense from additional assets placed in-service and increased pension expenses.

Natural gas pipelines

Revenues in the second quarter and first six months of 2017 were relatively unchanged from 2016. In the first six months of 2017, higher gas sales, primarily from system balancing activities (largely offset in cost of sales), and higher transportation revenues at Northern Natural Gas were offset by lower transportation revenues at Kern River. EBIT in the first six months of 2017 increased $14 million (6%) compared to 2016. The increase was primarily due to a reduction in expenses and regulatory liabilities related to the impact of an alternative rate structure approved by Kern River’s regulators in the first quarter of 2017 and from the changes in transportation revenues.

Other energy businesses

Revenues in the second quarter and first six months of 2017 increased $102 million (22%) and $107 million (11%), respectively, compared to the same periods in 2016. These increases were primarily due to the effects of a decision in May 2016 by AltaLink’s regulator, which changed the timing of when construction-in-progress expenditures included in rate base are billable to customers and earned in revenues. The decision resulted in a one-time net reduction in revenue in the second quarter of 2016, with an offsetting reduction in expenses. Otherwise, operating revenues from renewable energy increased 18% in the first six months of 2017 due to increased assets in service and increased solar generation, while revenues from the unregulated retail services business declined 9%. EBIT in the second quarter and first six months of 2017 declined 8% and 14%, respectively, compared to 2016. The declines reflected higher other operating costs, partly offset by increased earnings from renewable energy.

Real estate brokerage

Revenues in the first six months of 2017 increased $207 million (15%) compared to 2016. The increase was primarily due to recent business acquisitions, and modest increases in closed sales units and average transaction prices for existing businesses. EBIT in the first six months of 2017 increased $18 million as compared to 2016.

Corporate interest and income taxes

Corporate interest includes interest on unsecured debt issued by BHE and borrowings from certain Berkshire insurance subsidiaries. BHE’s consolidated effective income tax rates for the first six months of 2017 and 2016 were approximately 11% and 16%, respectively. The effective tax rate decreased primarily due to an increase in production tax credits recognized and lower consolidated deferred state income tax expenses due to changes in the tax status of certain subsidiaries.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Manufacturing, Service and Retailing

 

A summary of revenues and earnings of our manufacturing, service and retailing businesses follows (in millions).

 

    Second Quarter     First Six Months  
    Revenues     Earnings *     Revenues     Earnings *  
    2017     2016     2017     2016     2017     2016     2017     2016  

Manufacturing

   $ 12,738      $ 12,201      $ 1,939      $ 1,687      $ 24,835      $ 22,755      $ 3,426        $ 3,169    

Service and retailing

    19,131       18,434       624       586       37,325       36,126       1,105         1,046    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $   31,869      $   30,635          $   62,160     $   58,881      
 

 

 

   

 

 

       

 

 

   

 

 

     

Pre-tax earnings

          2,563         2,273           4,531         4,215    

Income taxes and noncontrolling interests

 

    901       780           1,552         1,456    
     

 

 

   

 

 

       

 

 

   

 

 

 
       $ 1,662      $ 1,493          $     2,979        $     2,759    
     

 

 

   

 

 

       

 

 

   

 

 

 
*

Excludes certain acquisition accounting expenses, which were primarily from the amortization of identified intangible assets recorded in connection with our business acquisitions. The after-tax acquisition accounting expenses excluded from earnings above for the second quarter and first six months of 2017 were $169 million and $301 million, respectively, compared to $114 million and $205 million for the second quarter and first six months of 2016, respectively. These expenses are included in “other” in the summary of earnings on page 25 and in the “other” earnings section on page 40.

Manufacturing

Our manufacturing group includes a variety of businesses that produce industrial, building and consumer products. Industrial products businesses include specialty chemicals (The Lubrizol Corporation (“Lubrizol”)), metal cutting tools/systems (IMC International Metalworking Companies (“IMC”)), equipment and systems for the livestock and agricultural industries (CTB International (“CTB”)), and a variety of industrial products for diverse markets (Marmon, Scott Fetzer and LiquidPower Specialty Products (“LSPI”)). Beginning on January 29, 2016, our industrial products group also includes Precision Castparts Corp. (“PCC”), a leading manufacturer of complex metal products for aerospace, power and general industrial markets.

Our building products businesses include flooring (Shaw), insulation, roofing and engineered products (Johns Manville), bricks and masonry products (Acme Building Brands), paint and coatings (Benjamin Moore), and residential and commercial construction and engineering products and systems (MiTek). Our consumer products businesses include leisure vehicles (Forest River), several apparel and footwear operations (including Fruit of the Loom, Garan, H.H. Brown Shoe Group and Brooks Sports), and beginning on February 29, 2016, the Duracell Company (“Duracell”), a leading manufacturer of high performance alkaline batteries. This group also includes custom picture framing products (Larson Juhl) and jewelry products (Richline). A summary of revenues and pre-tax earnings of our manufacturing operations follows (in millions).

 

    Second Quarter     First Six Months  
    Revenues     Pre- tax earnings     Revenues     Pre- tax earnings  
    2017     2016     2017     2016     2017     2016     2017     2016  

Industrial products

   $ 6,637        $ 6,505        $ 1,267        $ 1,133        $ 13,145        $ 12,199        $ 2,261        $ 2,187    

Building products

    3,125         2,847         401         305         5,859         5,308         650         547    

Consumer products

    2,976         2,849         271         249         5,831         5,248         515         435    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     $  12,738        $12,201        $  1,939        $  1,687        $  24,835        $  22,755        $  3,426        $  3,169    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Aggregate revenues from manufacturing increased $537 million (4%) in the second quarter and $2.1 billion (9%) in the first six months of 2017 compared to the same periods in 2016. Pre-tax earnings in the second quarter and first six months of 2017 were $1.9 billion and $3.4 billion, respectively, representing increases of $252 million (15%) and $257 million (8%), respectively, over earnings in the corresponding 2016 periods. In 2016, operating results