Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

Net earnings attributable to Berkshire Hathaway shareholders for each of the past three years are disaggregated in the table that follows. Amounts are after deducting income taxes and exclude earnings attributable to noncontrolling interests (in millions).

		2019				2018				2017
Insurance – underwriting		$	325			$	1,566			$	(2,219	)
Insurance – investment income			5,530				4,554				3,887
Railroad			5,481				5,219				3,959
Utilities and energy			2,840				2,621				2,033
Manufacturing, service and retailing			9,372				9,364				7,282
Investment and derivative gains/losses			57,445				(17,737	)			1,377
Other			424				(1,566	)			(485	)
Tax Cuts and Jobs Act of 2017			—				—				29,106
Net earnings attributable to Berkshire Hathaway shareholders		$	81,417			$	4,021			$	44,940

Through our subsidiaries, we engage in a number of diverse business activities. We manage our operating businesses on an unusually decentralized basis. There are essentially no centralized or integrated business functions and there is minimal involvement by our corporate headquarters in the day-to-day business activities of the operating businesses. Our senior corporate management team participates in and is ultimately responsible for significant capital allocation decisions, investment activities and the selection of the Chief Executive to head each of the operating businesses. The business segment data (Note 27 to the accompanying Consolidated Financial Statements) should be read in conjunction with this discussion.

Beginning in 2018, our periodic net earnings include changes in unrealized gains and losses on our investments in equity securities. These gains and losses have been very significant given the size of our holdings and the inherent volatility in securities prices, producing extraordinary volatility in our reported net earnings for 2019 and 2018. Prior to 2018, the changes in unrealized gains and losses pertaining to such investments were recorded in other comprehensive income. The new accounting treatment has no effect on our consolidated shareholders’ equity.

Net earnings in 2017 included approximately $29.1 billion attributable to a one-time net benefit from the enactment of the Tax Cuts and Jobs Act of 2017 (“TCJA”) on December 22, 2017. This benefit included approximately $29.6 billion related to a one-time non-cash reduction of net deferred income tax liabilities from the reduction in the statutory U.S. corporate income tax rate from 35% to 21%, and a net benefit of approximately $900 million primarily attributable to our earnings from Kraft Heinz, partly offset by a one-time income tax expense of approximately $1.4 billion on the deemed repatriation of certain accumulated undistributed earnings of foreign subsidiaries. Due to the significance, we presented these one-time effects as a distinct item in the preceding table. Accordingly, the after-tax figures presented for 2017 in the discussion of our various operating businesses and other activities exclude the one-time effects of the TCJA.

After-tax earnings of our business operations in 2019 and 2018 were favorably affected by lower U.S. income tax expense compared to 2017, primarily attributable to a reduction in the statutory U.S. corporate income tax rate from 35% to 21%. The effect of the lower U.S. statutory income tax rate on the comparative after-tax earnings of our various business operations varied, reflecting the differences in the mix of earnings subject to income tax, income tax credits and the effects of state and local income taxes.

Our insurance businesses generated after-tax earnings from underwriting of $325 million in 2019 compared to earnings of $1.6 billion in 2018 and after-tax losses of approximately $2.2 billion in 2017. Insurance underwriting results included after-tax losses from significant catastrophe events of approximately $800 million in 2019, $1.3 billion in 2018 and $1.95 billion in 2017. Earnings from primary insurance operations were lower in 2019 and losses from reinsurance were higher than in 2018. After-tax underwriting earnings in 2019 included lower earnings from reductions of estimated ultimate liabilities for prior years’ property/casualty loss events as compared to 2018 and losses of $92 million from foreign currency exchange rate changes on certain non-U.S. Dollar denominated liabilities of U.S. subsidiaries. Underwriting results included after-tax foreign currency exchange rate gains of $207 million in 2018 and losses of $295 million in 2017.

After-tax earnings from insurance investment income in 2019 increased 21.4% over 2018, which increased 17.2% over 2017. These increases reflected increases in interest and dividend income.

K-32

Management’s Discussion and Analysis (Continued)

Results of Operations (Continued)

After-tax earnings of our railroad business increased 5.0% in 2019 compared to 2018. Earnings in 2019 benefitted from higher rates per car/unit, a curtailment gain related to an amendment to defined benefit retirement plans and ongoing operating cost control initiatives, partly offset by lower freight volumes and incremental costs associated with the persistent flooding conditions and severe winter weather in the first half of the year. All key routes impacted by flooding resumed service by the third quarter. Our railroad business generated a 31.8% increase in after-tax earnings in 2018 compared to 2017, reflecting an increase in unit volume, higher average revenue per car/unit and a lower effective income tax rate, partly offset by increased fuel and other operating costs.

After-tax earnings of our utilities and energy business increased 8.4% in 2019 compared to 2018 as all businesses produced higher earnings in 2019 versus 2018. Our utilities and energy businesses produced higher after-tax earnings in 2018 compared to 2017, primarily due to the effects of losses incurred in 2017 in connection with the prepayment of certain long-term debt, increased earnings at the natural gas pipelines and other energy businesses and the TCJA income tax benefits recognized in 2018.

Earnings from our manufacturing, service and retailing businesses were relatively unchanged from 2018. Operating results of our manufacturing, service and retailing businesses in 2019 were mixed, with several of these businesses experiencing lower earnings in 2019 from a variety of factors. Revenues and pre-tax earnings in 2019 of certain of these businesses were negatively affected by the unfavorable effects of foreign currency translation attributable to a stronger U.S. Dollar, international trade tensions and U.S. trade tariffs. After-tax earnings in 2018 of our manufacturing, service and retailing businesses increased 29% over 2017, due to lower effective income tax rates and a 13% increase in pre-tax earnings.

Investment and derivative gains/losses in 2019 and 2018 included significant unrealized gains and losses from market price changes on our holdings of equity securities. After-tax unrealized gains on equity securities were approximately $53.7 billion in 2019 compared to after-tax losses of $20.6 billion in 2018. After-tax investment gains in 2019 also included after-tax realized gains on sales of equity and fixed maturity securities of $2.6 billion compared to $3.1 billion in 2018. We believe that investment and derivative gains/losses, whether realized from dispositions or unrealized from changes in market prices of equity securities, are generally meaningless in understanding our reported results or evaluating the economic performance of our businesses. These gains and losses have caused and will continue to cause significant volatility in our periodic earnings.

After-tax other earnings included equity method investment earnings of $1.0 billion in 2019, losses of $1.4 billion in 2018 and earnings of $1.1 billion in 2017. The losses in 2018 were attributable to Kraft Heinz, partly offset by earnings from other equity method investments. Other earnings also included foreign currency exchange rate gains of $58 million in 2019, $289 million in 2018, and losses of $655 million in 2017 related to non-U.S. Dollar denominated debt issued by Berkshire and its U.S. based financing subsidiary, Berkshire Hathaway Finance Corporation (“BHFC”).

Insurance—Underwriting

Our management views our insurance businesses as possessing two distinct activities – underwriting and investing. Underwriting decisions are the responsibility of the unit managers, while investing decisions are the responsibility of Berkshire’s Chairman and CEO, Warren E. Buffett and Berkshire’s corporate investment managers. Accordingly, we evaluate performance of underwriting operations without any allocation of investment income or investment gains/losses. We consider investment income as a component of our aggregate insurance operating results. However, we consider investment gains and losses, whether realized or unrealized as non-operating, based on our long-held strategy of acquiring securities and holding those securities for long periods. We believe that such gains and losses are not meaningful in understanding the operating results of our insurance operations.

The timing and amount of catastrophe losses can produce significant volatility in our periodic underwriting results, particularly with respect to our reinsurance businesses. Generally, we consider pre-tax catastrophe losses in excess of $100 million from a current year event as significant. We incurred estimated pre-tax losses of approximately $1.0 billion in 2019, $1.6 billion in 2018 and $3.0 billion in 2017 from significant catastrophe events.

Changes in estimates for unpaid losses and loss adjustment expenses, including amounts established for occurrences in prior years, can also significantly affect our periodic underwriting results. Unpaid loss estimates, including estimates under retroactive reinsurance contracts, were approximately $115.5 billion as of December 31, 2019. Our periodic underwriting results may also include significant foreign currency transaction gains and losses arising from the changes in the valuation of non-U.S. Dollar denominated reinsurance liabilities of our U.S. based insurance subsidiaries due to foreign currency exchange rate fluctuations.

K-33

Management’s Discussion and Analysis (Continued)

Insurance—Underwriting (Continued)

We engage in both primary insurance and reinsurance of property/casualty, life and health risks. In primary insurance activities, we assume defined portions of the risks of loss from persons or organizations that are directly subject to the risks. In reinsurance activities, we assume defined portions of similar or dissimilar risks that other insurers or reinsurers have subjected themselves to in their own insuring activities. Our insurance and reinsurance businesses are GEICO, Berkshire Hathaway Primary Group and Berkshire Hathaway Reinsurance Group (“BHRG”).

Underwriting results of our insurance businesses are summarized below (dollars in millions).

		2019				2018				2017
Underwriting gain (loss):
GEICO		$	1,506			$	2,449			$	(310	)
Berkshire Hathaway Primary Group			383				670				719
Berkshire Hathaway Reinsurance Group			(1,472	)			(1,109	)			(3,648	)
Pre-tax underwriting gain (loss)			417				2,010				(3,239	)
Income taxes and noncontrolling interests			92				444				(1,020	)
Net underwriting gain (loss)		$	325			$	1,566			$	(2,219	)
Effective income tax rate			24.2	%			21.4	%			32.0	%

GEICO

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

		2019								2018								2017
		Amount				%				Amount				%				Amount				%
Premiums written		$	36,016							$	34,123							$	30,547
Premiums earned		$	35,572				100.0			$	33,363				100.0			$	29,441				100.0
Losses and loss adjustment expenses			28,937				81.3				26,278				78.8				25,497				86.6
Underwriting expenses			5,129				14.5				4,636				13.9				4,254				14.5
Total losses and expenses			34,066				95.8				30,914				92.7				29,751				101.1
Pre-tax underwriting gain (loss)		$	1,506							$	2,449							$	(310	)

2019 versus 2018

Premiums written and earned in 2019 increased 5.5% and 6.6%, respectively, compared to 2018. These increases were primarily attributable to voluntary auto policies-in-force growth of 6.4% over the past twelve months, partially offset by a decrease in average premiums per auto policy due to coverage changes and changes in state and risk mix. The increase in voluntary auto policies-in-force primarily resulted from an increase in new business sales of 10.9% and a decrease in the number of policies not renewed. Voluntary auto policies-in-force increased approximately 1,068,000 during 2019.

Losses and loss adjustment expenses in 2019 increased 10.1% to $28.9 billion. GEICO’s losses and loss adjustment expenses ratio in 2019 was 81.3%, an increase of 2.5 percentage points over 2018. The loss ratio increase in 2019 reflected continuing increases in loss severities, slightly offset by lower storm-related losses.

Claims frequencies in 2019 declined compared to 2018 for property damage and collision coverages (two to four percent range) and personal injury protection coverage (one to two percent range) and were relatively unchanged for bodily injury coverage. Average claims severities in 2019 were higher versus 2018 for property damage and collision coverages (four to six percent range) and bodily injury coverage (seven to nine percent range).

Losses and loss adjustment expenses regularly include changes in the ultimate claim loss estimates during the period for prior years’ loss events, which produce pre-tax underwriting earnings or losses in the period of the change. GEICO increased ultimate claim loss estimates for prior years’ loss events by $42 million in 2019 compared to a decrease of $222 million in 2018.

K-34

Management’s Discussion and Analysis (Continued)

Insurance—Underwriting (Continued)

GEICO (Continued)

Underwriting expenses in 2019 were $5.1 billion, an increase of $493 million (10.6%) over 2018. GEICO’s underwriting expense ratio in 2019 was 14.5%, an increase of 0.6 percentage points compared to 2018. The underwriting expense increase was primarily attributable to increases in advertising expenses and employee-related costs, which reflected wage and staffing increases.

2018 versus 2017

Premiums written were $34.1 billion in 2018, an increase of 11.7% compared to 2017. The increase reflected voluntary auto policies-in-force growth of 3.3% and increased premiums per auto policy of approximately 6.4%. The increase in premiums per policy was attributable to rate increases, coverage changes and changes in state and risk mix. The rate increases were in response to accelerating claim costs in previous years. Although policies-in-force increased 540,000 during 2018, the rate of increase slowed, as voluntary auto new business sales decreased 4.7% compared to 2017.

Losses and loss adjustment expenses in 2018 were $26.3 billion, an increase of $781 million (3.1%) compared to 2017. GEICO’s losses and loss adjustment expenses ratio for 2018 was 78.8%, a decline of 7.8 percentage points compared to 2017. Losses from significant catastrophe events were $105 million in 2018 (Hurricanes Florence and Michael and the wildfires in California) and approximately $450 million in 2017 (Hurricanes Harvey and Irma). GEICO reduced ultimate claim loss estimates for prior years’ loss events by $222 million in 2018 and increased estimated prior year ultimate liabilities by $517 million in 2017.

Claims frequencies in 2018 for property damage, collision, and bodily and personal injury protection coverages declined (two to four percent range) compared to 2017. Average claims severities in 2018 increased for property damage and collision coverages (four to six percent range) and bodily injury coverage (five to seven percent range) versus 2017.

Underwriting expenses in 2018 were approximately $4.6 billion, an increase of $382 million (9.0%) over 2017. GEICO’s underwriting expense ratio in 2018 was 13.9%, a decrease of 0.6 percentage points compared to 2017. The underwriting expense increase was primarily attributable to increases in advertising expenses, insurance premium taxes and employee-related costs, which reflected wage and staffing increases.

Berkshire Hathaway Primary Group

The Berkshire Hathaway Primary Group (“BH Primary”) provides a variety of commercial insurance solutions, including healthcare malpractice, workers’ compensation, automobile, general liability, property and various specialty coverages for small, medium and large clients. The largest of these insurers are Berkshire Hathaway Specialty Insurance (“BH Specialty”), Berkshire Hathaway Homestate Companies (“BHHC”), MedPro Group, Berkshire Hathaway GUARD Insurance Companies (“GUARD”), and National Indemnity Company (“NICO Primary”). Other BH Primary insurers include U.S. Liability Insurance Company, Applied Underwriters (sold in October 2019), Central States Indemnity Company and MLMIC Insurance Company, acquired October 1, 2018. A summary of BH Primary underwriting results follows (dollars in millions).

		2019								2018								2017
		Amount				%				Amount				%				Amount				%
Premiums written		$	9,843							$	8,561							$	7,483
Premiums earned		$	9,165				100.0			$	8,111				100.0			$	7,143				100.0
Losses and loss adjustment expenses			6,336				69.1				5,261				64.9				4,511				63.1
Underwriting expenses			2,446				26.7				2,180				26.9				1,913				26.8
Total losses and expenses			8,782				95.8				7,441				91.8				6,424				89.9
Pre-tax underwriting gain		$	383							$	670							$	719

Premiums written in 2019 increased approximately $1.3 billion (15.0%) compared to 2018. The increase was primarily attributable to volume increases from BH Specialty (30%), GUARD (28%) and MedPro Group (14%) and from the effects of the MLMIC acquisition, partially offset by the effects of the divestiture of Applied Underwriters and lower volume at BHHC. The increases in premiums earned in 2019 reflected the overall volume increase over the past year.

K-35

Management’s Discussion and Analysis (Continued)

Insurance—Underwriting (Continued)

Berkshire Hathaway Primary Group (Continued)

BH Primary produced pre-tax underwriting earnings of $383 million in 2019 and $670 million in 2018. BH Primary’s aggregate loss ratios were 69.1% in 2019 and 64.9% in 2018. Losses and loss adjustment expenses incurred included reductions for prior years’ loss events of $499 million in 2019 and $715 million in 2018. The decrease in 2019 was primarily attributable to lower than anticipated medical professional liability and workers’ compensation losses, partially offset by higher commercial auto and other liability losses. There were no losses from significant catastrophe events in 2019 that affected BH Primary. Underwriting results in 2018 included estimated losses from Hurricanes Florence and Michael and the wildfires in California of approximately $190 million.

Premiums written and earned in 2018 increased 14.4% and 13.6%, respectively, compared to 2017. The increases were primarily attributable to written premium growth at BH Specialty (33%), GUARD (19%), NICO Primary (14%) and BHHC (8%). BH Primary’s loss ratios were 64.9% in 2018 and 63.1% in 2017. Losses and loss adjustment expenses included losses from significant catastrophe events of $190 million in 2018 from Hurricanes Florence and Michael and the wildfires in California and $225 million in 2017 from Hurricanes Harvey, Irma and Maria. Losses and loss adjustment expenses also included net gains from the reductions of estimated ultimate liabilities for prior years’ loss events of $715 million in 2018 and $766 million in 2017. The liability reductions in each year primarily related to healthcare malpractice and workers’ compensation business.

BH Primary insurers write significant levels of commercial and professional liability and workers’ compensation insurance and the related claim costs may be subject to high severity and long claim-tails. Accordingly, we could experience significant increases in claims liabilities in the future attributable to higher than expected claim settlements, adverse litigation outcomes or judicial rulings and other factors not currently anticipated.

Berkshire Hathaway Reinsurance Group

We offer excess-of-loss and quota-share reinsurance coverages on property and casualty risks and life and health reinsurance to insurers and reinsurers worldwide through several subsidiaries, led by National Indemnity Company (“NICO”), Berkshire Hathaway Life Insurance Company of Nebraska (“BHLN”) and General Reinsurance Corporation, General Reinsurance AG and General Re Life Corporation (“General Re”). We also periodically assume property and casualty risks under retroactive reinsurance contracts written through NICO. In addition, we write periodic payment annuity contracts predominantly through BHLN.

Generally, we strive to generate underwriting profits. However, time-value-of-money concepts are important elements in establishing prices for retroactive reinsurance and periodic payment annuity businesses due to the expected long durations of the liabilities. We expect to incur pre-tax underwriting losses from such businesses, primarily through deferred charge amortization and discount accretion charges. We receive premiums at the inception of these contracts, which are then available for investment. A summary of BHRG’s premiums and pre-tax underwriting results follows (dollars in millions).

		Premiums written												Premiums earned												Pre-tax underwriting gain (loss)
		2019				2018				2017				2019				2018				2017				2019				2018				2017
Property/casualty		$	10,428			$	9,413			$	7,713			$	9,911			$	8,928			$	7,552			$	16			$	(207	)		$	(1,595	)
Life/health			4,977				5,446				4,846				4,883				5,343				4,808				326				216				(52	)
Retroactive reinsurance			684				517				10,755				684				517				10,755				(1,265	)			(778	)			(1,330	)
Periodic payment annuity			863				1,156				898				863				1,156				898				(549	)			(340	)			(671	)
		$	16,952			$	16,532			$	24,212			$	16,341			$	15,944			$	24,013			$	(1,472	)		$	(1,109	)		$	(3,648	)

K-36

Management’s Discussion and Analysis (Continued)

Insurance—Underwriting (Continued)

Property/casualty

A summary of property/casualty reinsurance underwriting results follows (dollars in millions).

		2019								2018								2017
		Amount				%				Amount				%				Amount				%
Premiums written		$	10,428							$	9,413							$	7,713
Premiums earned		$	9,911				100.0			$	8,928				100.0			$	7,552				100.0
Losses and loss adjustment expenses			7,313				73.8				6,929				77.6				7,217				95.6
Underwriting expenses			2,582				26.0				2,206				24.7				1,930				25.5
Total losses and expenses			9,895				99.8				9,135				102.3				9,147				121.1
Pre-tax underwriting gain (loss)		$	16							$	(207	)						$	(1,595	)

Property/casualty premiums written in 2019 of $10.4 billion represented an increase of 10.8% compared to 2018. Premiums earned in 2019 increased $983 million (11.0%) versus 2018. The increase in premiums written reflected overall growth in U.S. and international markets. The growth was primarily attributable to new business, net of non-renewals, and increased participations for renewal business, partly offset by the unfavorable foreign currency translation effects of a stronger U.S. Dollar. Property/casualty premiums written in 2018 were $9.4 billion, an increase of 22.0% over 2017. The increase was primarily attributable to new business and increased participations for renewal business in both property and casualty lines. Premiums earned included $1.7 billion in 2019 and $1.8 billion in both 2018 and 2017 from a 10-year, 20% quota-share contract with Insurance Australia Group Limited, which expires in 2025.

Losses and loss adjustment expenses were $7.3 billion in 2019, $6.9 billion in 2018 and $7.2 billion in 2017 and losses and loss adjustment expense ratios were 73.8% in 2019, 77.6% in 2018 and 95.6% in 2017. Losses and loss adjustment expenses included incurred losses from significant catastrophe events occurring each year, including approximately $1.0 billion in 2019 ($700 million in the fourth quarter), $1.3 billion in 2018 ($1.1 billion in the fourth quarter) and $2.4 billion in 2017. Losses in 2019 derived from Typhoons Faxia and Hagibis and wildfires in California and Australia. Losses in 2018 derived from Hurricanes Florence and Michael, Typhoon Jebi and wildfires in California. Losses in 2017 derived from Hurricanes Harvey, Irma and Maria, an earthquake in Mexico, a cyclone in Australia and wildfires in California.

Before the effects of significant catastrophe events, losses and loss adjustment expense ratios were 64% in 2019, 63% in 2018 and 64% in 2017. Losses and loss adjustment expenses also included gains from net decreases in estimated ultimate claim liabilities attributable to prior years’ loss events of approximately $295 million in 2019, $469 million in 2018 and $295 million in 2017. Such decreases as percentages of the related net unpaid claim liabilities as of the beginning of the applicable year were 1.0% in 2019, 1.7% in 2018 and 1.2% in 2017.

Life/health

A summary of our life/health reinsurance underwriting results follows (dollars in millions).

		2019								2018								2017
		Amount				%				Amount				%				Amount				%
Premiums written		$	4,977							$	5,446							$	4,846
Premiums earned		$	4,883				100.0			$	5,343				100.0			$	4,808				100.0
Life and health insurance benefits			3,757				76.9				4,226				79.1				4,276				88.9
Underwriting expenses			800				16.4				901				16.9				584				12.2
Total benefits and expenses			4,557				93.3				5,127				96.0				4,860				101.1
Pre-tax underwriting gain (loss)		$	326							$	216							$	(52	)

K-37

Management’s Discussion and Analysis (Continued)

Insurance—Underwriting (Continued)

Life/health (Continued)

Life/health premiums earned were $4.9 billion in 2019, a decrease of $460 million (8.6%) compared to 2018. In the first quarter of 2019, BHLN amended a yearly-renewable-term life reinsurance contract with a major reinsurer. The amendment effectively eliminated BHLN’s future exposures under the contract. BHLN recorded a reduction in earned premiums on this contract in 2019 of $49 million while premiums earned in 2018 related to this contract were $954 million. Life/health premiums earned in 2019 also included $228 million from a single reinsurance contract covering health insurance risks. We also experienced volume growth in several international life markets, partially offset by the unfavorable effects of foreign currency translation attributable to a stronger U.S. Dollar and lower U.S. life volumes.

The life/health business produced pre-tax underwriting earnings of $326 million in 2019. Underwriting results for 2019 included a one-time pre-tax gain of $163 million attributable to the yearly-renewable-term life reinsurance contract amendment. Pre-tax underwriting earnings in 2019 also included losses from increased disability benefit liabilities in Australia, attributable to higher claims experience and changes to various underlying assumptions, increased U.S. long-term care liabilities due to discount rate reductions and changes in other actuarial assumptions, and an increase in life claims in North America, partially offset by increased earnings from other international life business. Variable annuity guarantee reinsurance contracts produced pre-tax earnings of $167 million in 2019. Underwriting results from this business reflect changes in estimated liabilities for guaranteed benefits, which derive from changes in securities markets and interest rates and from the periodic amortization of expected profit margins.

Life/health premiums earned in 2018 were $5.3 billion, an increase of $535 million (11.1%) over 2017. The increase was primarily attributable to growth in the North America, Asia and Australia life insurance markets. Our life/health business produced pre-tax underwriting earnings of $216 million in 2018 and losses of $52 million in 2017. The underwriting earnings in 2018 reflected lower losses from the run-off of U.S. long-term care business, partially offset by lower earnings from the run-off of variable annuity guarantee contracts. In the fourth quarter of 2017, we recorded pre-tax losses of $450 million from discount rate reductions and changes in other actuarial assumptions associated with long-term care liabilities. Pre-tax earnings from variable annuity guarantee contracts were $34 million in 2018 and $256 million in 2017.

Retroactive reinsurance

Retroactive reinsurance premiums earned in 2019 and 2018 were $684 million and $517 million, respectively, and were attributable to a limited number of contracts in each year. Premiums earned in 2017 included $10.2 billion from an aggregate excess-of-loss retroactive reinsurance agreement with various subsidiaries of American International Group, Inc. (the “AIG Agreement”). At the inception of our retroactive reinsurance contracts, we record the estimated ultimate claim liabilities, and we also record the excess of such claim liabilities over the premiums received as a deferred charge asset. Thus, as of the inception dates of these contracts, there is no net underwriting gain or loss.

Pre-tax underwriting losses in each year derived from deferred charge amortization and changes in the estimated timing and amount of future claim payments, as well as from foreign currency gains/losses arising from the periodic remeasurement of liabilities related to contracts written by our U.S. subsidiaries that are denominated in foreign currencies. Foreign currency remeasurement produced pre-tax losses of $76 million in 2019, gains of $169 million in 2018 and losses of $264 million in 2017.

Retroactive reinsurance contracts generated pre-tax underwriting losses before foreign currency gains/losses of $1,189 million in 2019, $947 million in 2018 and $1,066 million in 2017. Losses included deferred charge amortization of $646 million in 2019, $611 million in 2018 and $527 million in 2017 related to the AIG Agreement. In 2019, we increased estimated ultimate liabilities for prior years’ retroactive reinsurance contracts by $378 million compared to a decrease of $341 million in 2018. After adjustments to the related unamortized deferred charges from changes in the estimated timing and amount of the future claim payments, such changes produced pre-tax underwriting losses of approximately $125 million in 2019 and earnings of $185 million in 2018.

Gross unpaid losses assumed under retroactive reinsurance contracts were $42.4 billion at December 31, 2019 and $41.8 billion at December 31, 2018. Unamortized deferred charge assets related to such reinsurance contracts were $13.7 billion at December 31, 2019 and $14.1 billion at December 31, 2018. Deferred charge assets will be charged to earnings over the expected remaining claims settlement periods through periodic amortization.

K-38

Management’s Discussion and Analysis (Continued)

Insurance—Underwriting (Continued)

Periodic payment annuity

Periodic payment annuity premiums earned in 2019 were $863 million, a decrease of $293 million (25.3%) compared to 2018, while premiums earned in 2018 increased $258 million (28.7%) compared to 2017. Periodic payment annuity business is price sensitive. The volumes written can change rapidly due to changes in prices, which are affected by prevailing interest rates, the perceived risks and durations associated with the expected annuity payments as well as the level of competition.

Periodic payment annuity contracts normally produce pre-tax underwriting losses deriving from the recurring discount accretion of annuity liabilities. Underwriting results also include the effects of mortality and interest rate changes and remeasurement gains and losses related to foreign currency denominated liabilities of certain contracts written by our U.S. subsidiaries. Foreign currency remeasurement losses were $40 million in 2019 compared to gains of $93 million in 2018 and losses of $190 million in 2017.

Excluding foreign currency remeasurement gains and losses, pre-tax underwriting losses from periodic payment annuity contracts were $509 million in 2019 compared to $433 million in 2018 and $481 million in 2017. These losses primarily derived from the recurring discount accretion of annuity liabilities, as well as the impact of mortality and interest rate changes. Discounted annuity liabilities were $13.5 billion at December 31, 2019 and $12.5 billion at December 31, 2018 and at December 31, 2019, the weighted average discount rate was approximately 4.1%.

Insurance—Investment Income

A summary of net investment income attributable to our insurance operations follows (dollars in millions).

		2019				2018				2017
Interest and other investment income		$	2,075			$	1,851			$	1,263
Dividend income			4,525				3,652				3,592
Investment income before income taxes and noncontrolling interests			6,600				5,503				4,855
Income taxes and noncontrolling interests			1,070				949				968
Net investment income		$	5,530			$	4,554			$	3,887
Effective income tax rate			16.1	%			17.2	%			19.9	%

Interest and other investment income in 2019 increased $224 million (12.1%) compared to 2018. The increase was primarily due to higher interest rates on short-term investments and interest from a term loan with Seritage Growth Properties, partially offset by lower income earned from fixed maturity securities and limited partnership investments. Dividend income in 2019 increased $873 million (23.9%) compared to 2018. The increase in dividend income was attributable to an overall increase in investment levels over the past year, including the investment in $10 billion liquidation value of 8% Cumulative Preferred Stock of Occidental Petroleum Corporation on August 8, 2019, and higher dividend rates on common stock investments. We continue to hold large balances of cash, cash equivalents and short-term U.S. Treasury Bills. While short-term interest yields in the U.S. were higher in the first half of 2019 compared to 2018, interest rates declined during the second half of the year. Accordingly, earnings from such balances will likely be lower in 2020 than in 2019. We believe that maintaining ample liquidity is paramount and we insist on safety over yield with respect to short-term investments.

Pre-tax interest and other investment income in 2018 increased $588 million (46.6%) compared to 2017. The increase reflected the effect of higher short-term interest rates in 2018 and higher other investment income, partly offset by lower interest income as a result of lower average investments in fixed maturity securities. Dividend income increased $60 million (1.7%) in 2018 as compared to 2017, reflecting the impact of increased investments in marketable equity securities and higher dividend rates on common stock holdings, partially offset by Restaurant Brands International’s redemption of our $3 billion investment in 9% preferred stock in December 2017.

Invested assets of our insurance businesses derive from shareholder capital, including reinvested earnings, and from net liabilities under insurance and reinsurance contracts or “float.” The major components of float are unpaid losses and loss adjustment expenses, including liabilities under retroactive reinsurance contracts, life, annuity and health insurance benefit liabilities, unearned premiums and other liabilities due to policyholders, less insurance premiums and reinsurance receivables, deferred charges assumed under retroactive reinsurance contracts and deferred policy acquisition costs. Float approximated $129 billion at December 31, 2019, $123 billion at December 31, 2018 and $114 billion at December 31, 2017. Our combined insurance operations generated pre-tax underwriting earnings of approximately $417 million in 2019 and $2.0 billion in 2018, and consequently, the average cost of float for each of those periods was negative. Pre-tax underwriting losses were approximately $3.2 billion in 2017 and our average cost of float in 2017 was approximately 3.0%.

K-39

Management’s Discussion and Analysis (Continued)

Insurance—Investment Income (Continued)

A summary of cash and investments held in our insurance businesses as of December 31, 2019 and 2018 follows (in millions).

		December 31,
		2019				2018
Cash, cash equivalents and U.S. Treasury Bills		$	64,908			$	64,548
Equity securities			240,126				166,385
Fixed maturity securities			18,537				19,690
Other			2,481				2,288
		$	326,052			$	252,911

Fixed maturity investments as of December 31, 2019 were as follows (in millions).

		Amortized cost				Unrealized gains/losses				Carrying value
U.S. Treasury, U.S. government corporations and agencies		$	3,047			$	35			$	3,082
Foreign governments			8,582				54				8,636
Corporate bonds, investment grade			5,408				441				5,849
Corporate bonds, non-investment grade			396				14				410
Other			492				68				560
		$	17,925			$	612			$	18,537

U.S. government obligations are rated AA+ or Aaa by the major rating agencies. Approximately 87% of all foreign government obligations were rated AA or higher. Non-investment grade corporate 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, with approximately 32,500 route miles of track in 28 states. BNSF also operates in three Canadian provinces. BNSF classifies its major business groups by type of product shipped. These business groups include consumer products, coal, industrial products and agricultural products. A summary of BNSF’s earnings follows (dollars in millions).

		2019				2018				2017
Revenues		$	23,515			$	23,855			$	21,387
Operating expenses:
Compensation and benefits			5,347				5,394				5,023
Fuel			2,944				3,346				2,518
Purchased services			2,700				2,870				2,514
Depreciation and amortization			2,403				2,317				2,352
Equipment rents, materials and other			1,801				2,024				1,636
Total operating expenses			15,195				15,951				14,043
Interest expense			1,070				1,041				1,016
			16,265				16,992				15,059
Pre-tax earnings			7,250				6,863				6,328
Income taxes			1,769				1,644				2,369
Net earnings		$	5,481			$	5,219			$	3,959
Effective income tax rate			24.4	%			24.0	%			37.4	%

2019 versus 2018

BNSF’s revenues were $23.5 billion in 2019, a decrease of $340 million (1.4%) versus 2018. During 2019, BNSF’s revenues reflected a 3.6% comparative increase in average revenue per car/unit and a 4.5% decrease in volume. Volume was 10.2 million cars/units compared to 10.7 million in 2018. The increase in average revenue per car/unit was attributable to increased rates per car/unit and a favorable outcome of an arbitration hearing. Pre-tax earnings in 2019 were approximately $7.3 billion, an increase of 5.6% over 2018. BNSF experienced severe winter weather and flooding on parts of the network, which negatively affected revenues, expenses and service levels. In addition to the impact of an increase in average revenue per car/unit, BNSF's earnings in 2019 benefitted from a reduction in total operating expenses.

K-40

Management’s Discussion and Analysis (Continued)

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

Revenues from consumer products were $7.9 billion in 2019, a decrease of 0.5% compared to 2018, reflecting higher average revenue per car/unit and volume decreases of 4.6%. The volume decreases were driven by moderated demand and the availability of truck capacity, as well as lower west coast imports.

Revenues from industrial products were $6.1 billion in 2019, an increase of 1.7% from 2018. The increase was attributable to higher average revenue per car/unit, partially offset by a volume decrease of 3.0%. Volumes decreased primarily due to overall softness in the industrial sector, lower sand volumes, and reduced car loadings due to the challenging weather conditions in 2019. Strength in the energy sector, which drove higher demand for petroleum products and liquefied petroleum gas, partially offset the decreases in volumes.

Revenues from agricultural products decreased 0.3% in 2019 to $4.7 billion compared to 2018. The decrease was due to lower volumes of 5.1% and higher average revenue per car/unit. The volume decreases were attributable to export competition from non-U.S. sources, the impacts of international trade policies, and the challenging weather conditions in 2019.

Revenues from coal decreased 7.4% in 2019 to $3.7 billion compared to 2018. This decrease reflected lower average revenue per car/unit and lower volumes of 5.3%. Volumes were negatively impacted by adverse weather conditions, as well as from the effects of lower natural gas prices.

Operating expenses were $15.2 billion in 2019, a decrease of $756 million (4.7%) compared to 2018. Our ratio of operating expenses to revenues decreased 2.3 percentage points to 64.6% in 2019 versus 2018. BNSF's expenses in 2019 reflected lower volume-related costs, lower fuel prices, the effects of cost control initiatives, and a retirement plan curtailment gain, partially offset by the costs associated with the adverse weather conditions.

Fuel expenses decreased $402 million (12.0%) compared to 2018, primarily due to lower average fuel prices, lower volumes, and improved fuel efficiency. Purchased services expense decreased $170 million (5.9%) compared to 2018. The decrease was due to lower purchased transportation costs of our logistics services business, lower drayage, lower services expense, and higher insurance recoveries. Equipment rents, materials and other expense decreased $223 million (11.0%) compared to 2018. The decrease was primarily due to a $120 million curtailment gain from the amendment to the company-sponsored defined benefit retirement plans, as well as from lower locomotive and various other costs associated with lower volumes and cost controls.

BNSF’s effective income tax rate was 24.4% in 2019, 24.0% in 2018 and 37.4% in 2017. The rate in 2017 excluded the effects of the TCJA, which reduced the U.S. statutory income tax rate.

2018 versus 2017

BNSF’s revenues were $23.9 billion in 2018, an increase of $2.5 billion (11.5%) over 2017. BNSF’s revenues in 2018 reflected a 6.2% comparative increase in average revenue per car/unit and a 4.1% increase in volume. Combined volume was 10.7 million cars/units compared to 10.3 million in 2017. The increase in average revenue per car/unit was attributable to increased rates per car/unit, higher fuel surcharge revenue driven by higher fuel prices, and business mix changes. Pre-tax earnings were approximately $6.9 billion in 2018, an increase of 8.5% compared to 2017.

Revenues from consumer products were $7.9 billion in 2018, an increase of 11.1% compared to 2017, reflecting higher average revenue per car/unit and volume increases of 2.9%. The volume increases were due to higher domestic intermodal volumes, as well as growth in imports and containerized agricultural product exports, partially offset by a sizable contract loss.

Revenues from industrial products were $6.0 billion in 2018, an increase of 16.2% from 2017. The increase was attributable to volume increases of 9.8% as well as higher average revenue per car/unit. Volumes in 2018 increased for petroleum products, building products, construction products, and plastics.

Revenues from agricultural products increased 8.8% in 2018 to $4.7 billion compared to 2017. The increase was due to higher volumes of 9.0%, partially offset by slightly lower average revenue per car/unit. Volumes increased due to strong export and domestic corn shipments, as well as higher fertilizer and other grain products volumes, partially offset by a reduction in soybean and wheat exports.

Revenues from coal in 2018 increased 4.3% to $4.0 billion compared to 2017, attributable to higher average revenue per car/unit, partially offset by lower volumes of 0.8%. The volume decrease in 2018 was due mainly to utility plant retirements combined with competition from natural gas and renewables, mostly offset by market share gains and increased export volumes.

K-41

Management’s Discussion and Analysis (Continued)

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

Total operating expenses were $16.0 billion in 2018, an increase of $1.9 billion (13.6%) compared to 2017. Our ratio of operating expenses to revenues increased 1.2 percentage points to 66.9% in 2018 versus 2017. Compensation and benefits expenses increased $371 million (7.4%) compared to 2017. The increase was primarily due to wage inflation and increased headcount and associated training costs. Fuel expenses increased $828 million (32.9%) compared to 2017 primarily due to higher average fuel prices and increased volumes. Purchased services expense increased $356 million (14.2%) compared to 2017, due to higher purchased transportation costs of our logistics services business, as well as increased intermodal ramping, drayage, and other volume-related costs. Equipment rents, materials and other expense increased $388 million (23.7%) compared to 2017, reflecting higher locomotive material expenses, personal injury expenses, derailment-related costs, and property taxes, as well as the impact of a benefit in 2017 from the enactment of the TCJA on an equity method investee.

Utilities and Energy (“Berkshire Hathaway Energy Company”)

We currently own 90.9% of the outstanding common stock of Berkshire Hathaway Energy Company (“BHE”), which operates a global energy business. BHE’s domestic regulated utility interests are comprised of PacifiCorp, MidAmerican Energy Company (“MEC”) and NV Energy. In Great Britain, BHE subsidiaries operate two regulated electricity distribution businesses referred to as Northern Powergrid. BHE also owns two domestic regulated interstate natural gas pipeline companies. Other energy businesses include a regulated electricity transmission-only business in Alberta, Canada (“AltaLink, L.P.”) and a diversified portfolio of mostly renewable independent power projects. BHE also operates the largest residential real estate brokerage firm and one of the largest residential real estate brokerage franchise networks in the United States.

The rates our regulated businesses charge customers for energy and services are based in large part on the costs of business operations, including income taxes and a return on capital, and are subject to regulatory approval. To the extent these regulated operations are not allowed to include such costs in the approved rates, operating results will be adversely affected. The TCJA reduced the U.S. federal statutory income tax rate from 35% to 21%. In 2018, BHE’s regulated subsidiaries began passing the benefits of lower income tax expense attributable to the TCJA to customers through various regulatory mechanisms, including lower rates, higher depreciation and reductions to rate base. A summary of BHE’s net earnings follows (dollars in millions).

		2019				2018				2017
Revenues:
Energy operating revenue		$	15,371			$	15,573			$	15,171
Real estate operating revenue			4,473				4,214				3,443
Other income			270				200				240
Total revenue			20,114				19,987				18,854
Costs and expense:
Energy cost of sales			4,586				4,769				4,518
Energy operating expense			6,824				6,969				6,354
Real estate operating costs and expense			4,251				4,000				3,229
Interest expense			1,835				1,777				2,254
Total costs and expense			17,496				17,515				16,355
Pre-tax earnings			2,618				2,472				2,499
Income tax expense (benefit)***			(526	)			(452	)			148
Net earnings after income taxes			3,144				2,924				2,351
Noncontrolling interests			18				23				40
Net earnings attributable to Berkshire Hathaway Energy			3,126				2,901				2,311
Noncontrolling interests			286				280				278
Net earnings attributable to Berkshire Hathaway shareholders		$	2,840			$	2,621			$	2,033
Effective income tax rate			(20.1	)%			(18.3	)%			5.9	%

*Includes significant production tax credits from wind-powered electricity generation.

K-42

Management’s Discussion and Analysis (Continued)

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

The discussion of BHE’s operating results that follows is based on after-tax earnings, reflecting how the energy businesses are managed and evaluated. A summary of net earnings attributable to BHE follows (in millions).

		2019				2018				2017
PacifiCorp		$	773			$	739			$	763
MidAmerican Energy Company			781				669				597
NV Energy			365				317				365
Northern Powergrid			256				239				251
Natural gas pipelines			422				387				270
Other energy businesses			608				489				404
Real estate brokerage			160				145				118
Corporate interest and other			(239	)			(84	)			(457	)
		$	3,126			$	2,901			$	2,311

PacifiCorp

PacifiCorp operates a regulated electric utility in portions of several Western states, including Utah, Oregon and Wyoming. Net earnings after income taxes were $773 million in 2019, an increase of $34 million (4.6%) compared to 2018, reflecting slightly higher utility margin (operating revenue less cost of sales) and higher other income, partly offset by higher depreciation expense from additional plant-in-service. Utility margin was $3.3 billion in 2019, an increase of $4 million compared to 2018, as higher retail revenue from a 0.4% increase in retail customer volumes, in part due to the favorable impact of weather, was largely offset by lower wholesale revenue mainly due to lower volumes.

Net earnings after income taxes decreased $24 million (3.1%) in 2018 as compared to 2017. The change in after-tax earnings reflected the unfavorable utility margin and higher operating expenses, partly offset by higher other income. Utility margin in 2018 was $3.3 billion, a decrease of $198 million (6%) versus 2017. The decrease was primarily due to a $197 million decline in retail revenues from the effects of lower average rates of $180 million (including the impact of the TCJA of $152 million) and a reduction in volumes (0.2%), largely attributable to the impacts of weather.

MidAmerican Energy Company

MEC operates a regulated electric and natural gas utility primarily in Iowa and Illinois. Net earnings after income taxes of $781 million in 2019 increased $112 million (16.7%) as compared to 2018, primarily attributable to increases in electric utility margin, income tax benefits from higher production tax credits and the effects of ratemaking, and other income. Electric utility margin in 2019 increased 2% to $1.8 billion, primarily due to higher wind generation and higher retail customer volumes of 1.4%, as an increase in industrial volumes of 4.0% was largely offset by lower residential volumes from the unfavorable impact of weather. These earnings increases were partially offset by increased depreciation expense from additional assets placed in-service (net of lower Iowa revenue sharing) and higher net interest expense.

Net earnings after income taxes were $669 million in 2018, an increase of $72 million (12.1%) compared to 2017, reflecting higher electric utility margin, higher depreciation and operating expenses and higher income tax benefits, partly due to higher production tax credits. Electric utility margin was $1.8 billion in 2018, an increase of $122 million (7%) compared to 2017, which was primarily due to higher retail revenues of $102 million, reflecting higher recoveries through bill riders and volumes, partially offset by lower rates, predominantly from the impact of the TCJA. The increase in depreciation expense included $65 million from additional wind generation and other plant placed in-service and $44 million from Iowa revenue sharing.

NV Energy

NV Energy operates regulated electric and natural gas utilities in Nevada. Net earnings after income taxes were $365 million in 2019, an increase of $48 million (15.1%) compared to 2018, as lower operating expenses were partly offset by lower electric utility margin. Electric utility margin in 2019 was $1.6 billion, representing a decrease of $58 million (3%) versus 2018. The decrease was primarily due to a 1.4% decline in retail customer volumes, largely attributable to the impacts of weather, and rate reductions from the impact of the TCJA, partially offset by retail customer growth.

Net earnings after income taxes decreased $48 million (13.2%) in 2018 as compared to 2017, reflecting lower electric utility margin and increased depreciation and operating expenses. Electric utility margin decreased $52 million in 2018 as compared to 2017 due to the effects of the TCJA, partially offset by higher retail sales volumes.

K-43

Management’s Discussion and Analysis (Continued)

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

Northern Powergrid

Net earnings after income taxes increased 7.1% in 2019 compared to 2018, reflecting higher distribution revenues and lower operating expenses, which were largely from lower pension settlement losses in 2019, partially offset by the unfavorable foreign currency translation effects of a strong average U.S. Dollar ($10 million). Distribution revenues increased $18 million, attributable to higher tariff rates, partly offset by lower distributed units.

Net earnings after income taxes were $239 million in 2018, a decrease of $12 million (4.8%) compared to 2017, reflecting higher distribution revenues, increased depreciation and operating expenses, including higher pension settlement losses, and a $9 million increase from the effects of a weaker U.S. Dollar.

Natural gas pipelines

Net earnings after income taxes increased $35 million (9.0%) in 2019 compared to 2018, primarily due to higher transportation revenues from generally higher volumes and rates, favorable margins from system balancing activities and a decrease in operating expenses, partly offset by higher depreciation expense due to increased spending on capital projects.

Net earnings after income taxes were $387 million in 2018, a 43.3% increase ($117 million) compared to 2017, reflecting higher transportation revenues from higher volumes and rates due to unique market opportunities and colder average temperatures, lower depreciation expense and a comparative increase in operating expenses.

Other energy businesses

Net earnings after income taxes in 2019 were $608 million, an increase of $119 million (24.3%) compared to 2018. The increase was primarily due to improved earnings from renewable wind energy projects ($49 million from tax equity investments and $25 million from new and existing projects and activities), higher after-tax income from geothermal and natural gas units of $53 million, largely due to higher generation and favorable margins and lower operating expenses, partly offset by lower earnings at a hydroelectric facility in the Philippines due to lower rainfall. The increase in earnings also reflected the effects of favorable regulatory decisions received in 2019 and the unfavorable impacts of a regulatory rate order received in 2018 at AltaLink L.P.

Net earnings after income taxes increased $85 million (21.0%) in 2018 compared to 2017, reflecting increased revenues from existing renewable energy projects from overall higher generation and pricing, increased earnings from wind tax equity investments of $34 million and earnings from additional wind and solar capacity placed in-service, partially offset by higher operating expenses at existing projects.

Real estate brokerage

Net earnings after income taxes increased 10.3% in 2019 compared to 2018. The increase was primarily due to higher after-tax earnings at existing mortgage businesses due to increased refinance activity and earnings attributable to recent business acquisitions, partially offset by lower after-tax earnings at existing brokerage businesses, primarily from lower units and margins.

Net earnings after income taxes were $145 million in 2018, an increase of $27 million (22.9%) compared to 2017. The increase reflected earnings from acquired businesses, higher comparative operating expenses and lower margins at existing businesses and lower income tax expense due to the impact of the TCJA.

Corporate interest and other

Net earnings after income taxes decreased $155 million in 2019 compared to 2018, primarily due to income tax benefits recognized in 2018 related to the reduction of accrued repatriation taxes on undistributed foreign earnings in connection with the TCJA, higher corporate interest and lower after-tax earnings from non-regulated energy services.

Net earnings after income taxes increased $373 million in 2018 compared to 2017, primarily due to an after-tax charge of $246 million recognized in 2017 from a tender offer completed in December 2017 to redeem certain long-term debt of BHE and the TCJA income tax benefits recognized in 2018.

K-44

Management’s Discussion and Analysis (Continued)

Manufacturing, Service and Retailing

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

		Revenues												Earnings *
		2019				2018				2017				2019				2018				2017
Manufacturing		$	62,730			$	61,883			$	57,645			$	9,522			$	9,366			$	8,324
Service and retailing			79,945				78,926				76,994				2,843				2,942				2,603
		$	142,675			$	140,809			$	134,639
Pre-tax earnings															12,365				12,308				10,927
Income taxes and noncontrolling interests															2,993				2,944				3,645
														$	9,372			$	9,364			$	7,282
Effective income tax rate															23.7	%			23.4	%			32.8	%

***

Excludes certain acquisition accounting expenses, which primarily related to the amortization of identified intangible assets recorded in connection with our business acquisitions. The after-tax acquisition accounting expenses excluded from earnings above were $788 million in 2019, $932 million in 2018 and $937 million in 2017. These expenses are included in “Other” in the summary of earnings on page K-32 and in the “Other” earnings section on page K-53.

Manufacturing

Our manufacturing group includes a variety of industrial, building and consumer products businesses. Industrial products group includes specialty chemicals (The Lubrizol Corporation (“Lubrizol”)), complex metal products for aerospace, power and general industrial markets (Precision Castparts Corp. (“PCC”)), metal cutting tools/systems (IMC International Metalworking Companies (“IMC”)), equipment and systems for the livestock and agricultural industries (CTB International (“CTB”)), and a variety of industrial products for diverse markets (Marmon, Scott Fetzer and LiquidPower Specialty Products (“LSPI”)). Marmon also provides various products and services (including equipment leasing) for the rail, intermodal container and mobile crane industries.

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

		Revenues												Pre-tax earnings
		2019				2018				2017				2019				2018				2017
Industrial products		$	30,594			$	30,679			$	28,566			$	5,635			$	5,822			$	5,065
Building products			20,327				18,677				16,946				2,636				2,336				2,147
Consumer products			11,809				12,527				12,133				1,251				1,208				1,112
		$	62,730			$	61,883			$	57,645			$	9,522			$	9,366			$	8,324

K-45

Management’s Discussion and Analysis (Continued)

Manufacturing, Service and Retailing (Continued)

Industrial products

2019 versus 2018

Revenues of the industrial products group were $30.6 billion in 2019, a slight decrease from 2018. Pre-tax earnings of the group were $5.6 billion in 2019 compared to $5.8 billion in 2018. Pre-tax earnings as a percentage of revenues for the group were 18.4% in 2019 compared to 19.0% in 2018.

PCC’s revenues were $10.3 billion in 2019, an increase of $74 million (0.7%) compared to 2018. PCC experienced increased sales in aerospace markets, which was partially offset by lower sales in the power markets compared to 2018. The increase in aerospace sales was tempered due to significant efforts focused on the ramp-up requirements for certain new aerospace programs, such as LEAP, that created manufacturing inefficiencies and slowed production cycles contributing to delays in product deliveries and sales. While we expect that Boeing’s decision to suspend production of its 737 MAX aircraft may reduce demand for certain of our aerospace products in 2020, we also anticipate a significant portion of this volume reduction will be offset by incremental volume for other programs. We are also seeing stabilization in demand for our industrial gas turbine products within the power markets after two years of declines.

PCC’s pre-tax earnings increased 5.1% in 2019 compared to 2018. The earnings increase reflected increased sales of aerospace products and higher earnings from various non-recurring items in 2019, which was partially offset by lower earnings from the power markets due to the decrease in sales. Temporary unplanned shutdowns of certain metals facilities and metal press outages also negatively impacted earnings in 2018. PCC continues to incur incremental costs to meet required deliveries to customers associated with the increased aerospace demand, which negatively affected margins and earnings. The production headwinds experienced were primarily attributable to shortages of qualified skilled labor and the rapid increase in requirements for newer, complex aerospace products. PCC implemented certain measures and intends to implement additional measures to address these issues and improve manufacturing efficiencies.

Lubrizol’s revenues were $6.5 billion in 2019, a decrease of $354 million (5.2%) compared to 2018. The decline reflected lower volumes and unfavorable foreign currency translation effects, partly offset by higher average selling prices which were necessitated by raw material cost increases in 2018 and the first quarter of 2019. A fire at Lubrizol’s Rouen, France manufacturing, blending and storage facility on September 26, 2019 resulted in the suspension of operations, which contributed significantly to the decline in Additives volumes. Those operations partially restarted in December 2019. Lubrizol’s consolidated volume in 2019 declined 4% from 2018, primarily due to volume decline of 6% in the Additives product lines.

Lubrizol’s pre-tax earnings in 2019 for the fourth quarter and year decreased 50.5% and 14.6%, respectively, compared to the same periods in 2018. Earnings in 2019 were significantly impacted by costs and lost business associated with the Rouen fire. Lubrizol’s operating results in 2019 were also negatively affected by lower sales volumes, higher manufacturing expenses and unfavorable foreign currency translation effects, partly offset by improved material margins.

Marmon’s revenues were $8.3 billion in 2019, an increase of $146 million (1.8%) compared to 2018. The revenue increase reflected the effects of business acquisitions over the past year, higher volumes in several business sectors, which were largely offset by lower distribution volumes in the Metals Services sector, unfavorable foreign currency translation, and the impact of lower metal prices in the Electrical and Plumbing & Refrigeration sectors. Marmon’s business acquisitions included the acquisition of the Colson Medical companies on October 31, 2019, resulting in a new Medical sector. Marmon’s Rail & Leasing and Crane Services sectors benefitted from higher railcar equipment sales, railcar fleet utilization, railcar repair services, intermodal container leasing revenue and improved crane rental demand in the U.S. and Australia.

Marmon’s pre-tax earnings in 2019 increased $12 million (1.0%) as compared to 2018. The earnings increase reflected the effects of business acquisitions, partly offset by lower gains from business divestitures. Earnings in 2019 also reflected increased earnings in several sectors that experienced sales volume increases, which were substantially offset by lower earnings in the Metal Services and certain other sectors, the unfavorable impacts of foreign currency translation and increased interest and other expenses.

IMC’s revenues in 2019 declined 1.3% in 2019 as compared to 2018, reflecting unfavorable foreign currency translation effects of a stronger U.S. Dollar and lower sales in several regions, including Asia and Europe, mostly offset by increased revenues from recent business acquisitions. IMC’s pre-tax earnings declined 12.8% in 2019 versus 2018, attributable to unfavorable foreign currency translation effects, changes in business mix to lower margin items and the effects of the U.S./China trade disputes.

K-46

Management’s Discussion and Analysis (Continued)

Manufacturing, Service and Retailing (Continued)

Industrial products (Continued)

CTB’s revenues decreased 1.5% in 2019 versus 2018. The comparative decline was primarily due to unfavorable foreign currency translation effects of a stronger U.S. Dollar and lower revenues from grain and protein equipment, partly offset by higher revenues from processing systems. CTB’s pre-tax earnings increased 11.7% in 2019 as compared to 2018. Earnings in 2019 benefitted from a combination of favorable changes in business mix, the moderation of cost increases of certain raw materials and better pricing efficiency.

2018 versus 2017

Revenues from industrial products businesses were approximately $30.7 billion in 2018, an increase of approximately $2.1 billion (7.4%) compared to 2017. Pre-tax earnings of the industrial products group were approximately $5.8 billion in 2018, an increase of $757 million (14.9%) compared to 2017. Pre-tax earnings as a percentage of revenues were 19.0% in 2018 and 17.7% in 2017. The comparative earnings increase was partially attributable to certain one-time charges at PCC and Lubrizol in 2017.

PCC’s revenues in 2018 were $10.2 billion, an increase of 7.2% compared to 2017, which reflected increased demand in aerospace markets in connection with new aircraft programs, partly offset by lower demand for industrial gas turbine products. In addition, PCC experienced lower sales of certain pipe products in 2018, primarily attributable to the U.S tariffs.

PCC’s pre-tax earnings increased 16.0% in 2018 compared to 2017. PCC’s earnings in 2017 included certain one-time inventory and impairment charges of $272 million. Results in 2018 were negatively affected by costs associated with the temporary unplanned shut-down of certain metals facilities, metal press outages and lower earnings from the industrial gas turbine business. The facilities that were shut-down gradually resumed production and were approximately 80% operational at the end of 2018. In addition, the new aircraft programs involve relatively complex manufacturing processes, negatively affecting earnings.

Lubrizol’s revenues in 2018 were $6.8 billion, an increase of 5.9% compared to 2017 due to higher average sales prices, favorable changes in product mix and foreign currency translation effects, and a 2% increase in aggregate unit volumes. Lubrizol experienced significant increases in average material unit costs during 2018 and 2017, necessitating increases in sales prices. Lubrizol’s consolidated volume included increases in the Advanced Materials (5%) and the Additives (1%) product lines.

Lubrizol’s pre-tax earnings in 2018 increased 43.5% compared to 2017, which included pre-tax losses of approximately $190 million related to Lubrizol’s disposition of an underperforming bolt-on business and related intangible asset impairments and restructuring charges. Before such charges, Lubrizol’s earnings increased 17%, reflecting the previously mentioned increases in sales volumes and selling prices, as well as lower other restructuring charges, lower net interest expense, and the favorable effects of foreign currency translation and ongoing expense control efforts, partly offset by higher raw material costs.

Marmon’s revenues in 2018 were $8.2 billion, an increase of 5.5% as compared to 2017. The revenue increase was primarily attributable to volume increases in the Transportation Products sector, higher average metals prices, and the effects of business acquisitions. These increases were partially offset by revenue decreases in the Beverage Technologies and Rail Products and Services sectors. Rail Products and Services sector revenues also decreased due to lower railcar lease revenues, partly offset by increased railcar equipment sales and repair services. Throughout 2018, the railcar leasing business experienced the negative effects of lower lease renewal rates for railcars versus the rates on expiring leases.

Marmon’s pre-tax earnings in 2018 decreased 5.6% compared to 2017. The decrease was primarily due to lower pre-tax earnings from the Rail Products and Services sector ($126 million) and the Foodservice Technologies and Retail Solutions sectors ($33 million), partially offset by increased earnings from the Transportation Products sector and a gain in 2018 from the sale of certain assets of the Beverage Technologies sector of $44 million. The Rail Products and Services earnings decline was attributable to lower railcar leasing revenues and higher lease fleet repair costs.

IMC’s revenues increased 16.1% in 2018 compared to 2017, due to a combination of factors, including higher unit sales, the effects of business acquisitions, and foreign currency translation effects from a weaker average U.S. Dollar in the first half of 2018. IMC’s pre-tax earnings increased significantly in 2018 compared to 2017, reflecting a combination of higher sales, increased manufacturing efficiencies, the effects of business acquisitions and ongoing expense control efforts, partly offset by higher raw material costs.

CTB’s revenues increased 4.0% in 2018 versus 2017, due to favorable foreign currency translation effects and modest sales growth in protein production and processing systems. CTB’s pre-tax earnings in 2018 were lower than 2017, primarily due to lower gross sales margins attributable to raw material cost increases and higher other operating expenses.

K-47

Management’s Discussion and Analysis (Continued)

Manufacturing, Service and Retailing (Continued)

Building products

2019 versus 2018

Revenues of the building products group were $20.3 billion in 2019, an increase of $1.65 billion (8.8%) compared to 2018. Pre-tax earnings of the group were $2.6 billion in 2019, an increase of 12.8% over 2018. Pre-tax earnings as percentages of revenues were 13.0% and 12.5% in 2019 and 2018, respectively.

Clayton Homes’ revenues were approximately $7.3 billion in 2019, an increase of $1.3 billion (21.5%) over 2018. The comparative increase was primarily due to increases in home sales of $1.16 billion (26%), reflecting a net increase in units sold and changes in sales mix. Unit sales of site-built homes increased 84% in 2019 over 2018, primarily due to business acquisitions, while average prices declined 5%. Manufactured home unit sales increased 5% and wholesale sales were 9% lower in 2019. Interest income from lending activities in 2019 increased 6.7% compared to 2018, attributable to increased originations and average outstanding loan balances. Aggregate loan balances outstanding were approximately $15.9 billion at December 31, 2019 compared to $14.7 billion as of December 31, 2018.

Pre-tax earnings of Clayton Homes were $1.1 billion in 2019, an increase of $182 million (20.0%) compared to 2018. The earnings increase in 2019 was attributable to home building activities, which reflected the increases in home sales, and manufactured housing lending activities. Pre-tax earnings from lending and finance activities in 2019 increased 12%, primarily due to an increase in interest income attributable to higher average loan balances, increased other financial services earnings and lower credit losses, partially offset by higher interest expense, attributable to higher average borrowings and interest rates, and by higher other operating costs.

Aggregate revenues of our other building products businesses were $13.0 billion in 2019, an increase of 2.8% versus 2018. Revenues increased for paint and coatings, hard surface flooring and roofing products, attributable to a combination of increased volumes, product mix changes and increased average selling prices, while sales of brick products declined, primarily attributable to lower volumes.

Pre-tax earnings of the other building products businesses were $1.5 billion in 2019, an increase of 8.2% over 2018. Earnings in 2019 benefitted from a combination of increases in selling prices in certain product categories, declining raw material costs for certain commodities and operating cost control initiatives, which were partly offset by the effects of increased facilities closure costs.

2018 versus 2017

Revenues of the building products group in 2018 were approximately $18.7 billion, an increase of 10.2% compared to 2017. Pre-tax earnings of the building products group were approximately $2.3 billion in 2018, an increase of 8.8% versus 2017. Overall, pre-tax earnings as a percentage of revenues were 12.5% in 2018 and 12.7% in 2017.

Clayton Homes’ revenues were $6.0 billion in 2018, an increase of 20.7% over 2017. The increase was driven by an increase in revenues from home sales of $971 million (28.2%), primarily due to a 105% increase in unit sales of site-built homes attributable to businesses acquired over the last two years. Unit sales of manufactured homes in 2018 also increased 4.9% compared to 2017. Average unit prices of site-built homes are considerably higher than traditional manufactured homes. In addition, interest income from lending activities increased 4% in 2018 compared to 2017, primarily due to increased average outstanding loan balances.

Clayton Homes’ pre-tax earnings were $911 million in 2018, an increase of $145 million (19.0%) compared to 2017. The increase was primarily attributable to a significant increase in earnings from home building (manufactured housing and site-built homes) activities, which reflected the impact of increased home sales and margins. Pre-tax earnings from lending activities in 2018 declined 2% compared to 2017, as increased interest expense, attributable to higher average debt balances and interest rates, and higher operating costs more than offset the increase in interest income. At December 31, 2018 and 2017, aggregate loan balances outstanding were approximately $14.7 billion and $13.7 billion, respectively.

Revenues of our other building products businesses increased 5.8% in 2018 to approximately $12.6 billion compared to 2017. In 2018, Shaw’s sales increased 7.9% and Johns Manville’s sales increased 7.2% as compared to 2017. The increases reflected higher average selling prices, product mix changes and overall unit volume increases.

K-48

Management’s Discussion and Analysis (Continued)

Manufacturing, Service and Retailing (Continued)

Building products (Continued)

Raw material and production costs in 2018 of our building products businesses were generally higher than in 2017. For instance, steel, titanium dioxide and petrochemicals costs were substantially higher in 2018 than in 2017, as were product delivery costs, due in part to the shortage of truck drivers in the U.S. These cost increases precipitated sales price increases, although such increases lagged the increases in raw materials costs.

Consumer products

2019 versus 2018

Consumer products revenues were $11.8 billion in 2019, a decrease of $718 million (5.7%) versus 2018. Revenues of Forest River declined 12.9% versus 2018, primarily due to lower unit sales. Revenues of Duracell increased 1.3% and apparel and footwear revenues declined 1.1% compared to 2018. Despite a comparative revenue increase of 3.5% in 2019, Brooks Sports operating results were negatively affected by lost sales associated with problems encountered at a distribution center that opened in the second quarter. In addition, our other apparel and other footwear businesses continue to experience lower sales volumes for certain products, reflecting the shift by major retailers towards private label products.

Consumer products pre-tax earnings were $1.25 billion in 2019, an increase of 3.6% compared to 2018. Pre-tax earnings as a percentage of revenues were 10.6% in 2019 and 9.6% in 2018. The increase in pre-tax earnings was primarily attributable to continuing cost containment efforts across several of the businesses and the effects of a new Duracell product launch, partially offset by the impact of lower recreational vehicle sales at Forest River.

2018 versus 2017

Consumer products revenues were approximately $12.5 billion in 2018, an increase of 3.2% compared to 2017, which was primarily due to revenue increases at Forest River and at our apparel and footwear businesses. Forest River’s revenues increased 2.6% in 2018, reflecting relatively unchanged unit sales versus 2017. However, over the second half of the year, comparative sales at Forest River declined 5%, reflecting a 7% decline in units sold. Apparel and footwear revenues increased 4.6% to approximately $4.3 billion, primarily due to increased sales volume at Brooks Sports and Garan.

Pre-tax earnings were $1.2 billion in 2018, an increase of 8.6% compared to 2017. Pre-tax earnings as a percentage of revenues were 9.6% in 2018 and 9.2% in 2017. The increase in earnings reflected increases from Duracell and the apparel and footwear businesses, partly offset by lower earnings from Forest River and Larson Juhl.

Forest River’s pre-tax earnings declined 9.0% compared to 2017. Operating results were adversely affected over the second half of 2018, and in the fourth quarter in particular, by higher material costs, which, together with the effects of lower sales volumes, contributed to a 28% reduction in fourth quarter pre-tax earnings.

Pre-tax earnings of the apparel and footwear businesses increased 6.4% in 2018 compared to 2017, primarily attributable to the overall increase in revenues and sales mix changes. Duracell’s pre-tax earnings increased in 2018 compared to 2017, reflecting the favorable effects of ongoing operational improvement efforts and a comparative decline in restructuring charges.

Service and retailing

A summary of revenues and pre-tax earnings of our service and retailing businesses follows (dollars in millions).

		Revenues												Pre-tax earnings
		2019				2018				2017				2019				2018				2017
Service		$	13,496			$	13,333			$	12,155			$	1,681			$	1,836			$	1,519
Retailing			15,991				15,606				15,064				874				860				785
McLane Company			50,458				49,987				49,775				288				246				299
		$	79,945			$	78,926			$	76,994			$	2,843			$	2,942			$	2,603

K-49

Management’s Discussion and Analysis (Continued)

Manufacturing, Service and Retailing (Continued)

Service

Our service business group offers fractional ownership programs for general aviation aircraft (NetJets) and high technology training products and services to operators of aircraft (FlightSafety). We also distribute electronic components (TTI) and franchise and service a network of quick service restaurants (Dairy Queen). Other service businesses include transportation equipment leasing (XTRA) and furniture leasing (CORT), electronic news distribution, multimedia and regulatory filings (Business Wire), publication of newspapers and other publications (Buffalo News and the BH Media Group) and operation of a television station in Miami, Florida (WPLG). We also offer third party logistics services that primarily serve the petroleum and chemical industries (Charter Brokerage).

2019 versus 2018

Service group revenues were $13.5 billion in 2019, an increase of 1.2% compared to 2018. Sales of TTI increased 2% in 2019 compared to the exceptionally high sales levels in 2018. Excluding the effects of acquisitions and foreign currency, TTI’s sales in 2019 were relatively unchanged from 2018. TTI’s sales began to slow in the fourth quarter of 2018 and continued to slow throughout 2019, attributable to softening customer demand, lower sales prices and the effects of U.S. trade tariffs.

Service group revenues in 2019 also reflected increases in aviation-related services (NetJets and to a lesser extent FlightSafety) and the leasing businesses, and decreases from the media businesses and Charter Brokerage, which divested a high revenue, low margin business in mid-2019. The increase in NetJets revenues in 2019 reflected increased lease revenue, primarily attributable to an increase in aircraft on lease and increased flight hours, partly offset by lower revenue from prepaid flight cards.

Pre-tax earnings of the service group were $1.7 billion in 2019, a decrease of $155 million (8.4%) compared to 2018. Pre-tax earnings of the group as a percentage of revenues were 12.5% in 2019 compared to 13.8% in 2018. The comparative declines in earnings in 2019 were primarily due to lower earnings from TTI and FlightSafety, partly offset by higher earnings from NetJets. TTI’s earnings decline was attributable to lower gross margin, unfavorable foreign currency translation effects and higher operating expenses, partly offset by earnings from businesses acquired. FlightSafety’s earnings decline was attributable to significant losses related to an existing government contract that were recorded in the fourth quarter, partly offset by lower training equipment impairment charges. Earnings from NetJets increased in 2019, primarily attributable to increased revenues and improved fleet and operating efficiencies, which improved operating margins.

2018 versus 2017

Revenues of the service group were approximately $13.3 billion in 2018, an increase of approximately 9.7% compared to 2017. TTI’s revenues increased approximately 33.7% compared to 2017, reflecting industry-wide increases in demand for electronic components in many geographic markets around the world, the effects of recent business acquisitions and favorable foreign currency translation effects. While TTI’s revenue increase in 2018 was significant, revenue growth began to moderate in the fourth quarter, in part attributable to the impact of U.S. trade tariffs. WPLG generated a revenue increase of 20.8% in 2018 over 2017, primarily due to increased political advertising revenue. Revenues of Charter Brokerage increased 53.3%, reflecting increased fees earned and product mix changes. Revenues of the CORT and XTRA leasing businesses increased 8.4% in 2018 compared to 2017 due to increased over-the road trailer units on lease and increased furniture rental income.

Pre-tax earnings of the service group in 2018 were approximately $1.8 billion, an increase of 20.9% compared to 2017. The comparative earnings increase was primarily due to TTI, which accounted for almost 84% of the increase. The earnings increase of TTI was primarily due to the effects of the sales volume increases. In addition, XTRA, Charter Brokerage and NetJets each generated increased earnings in 2018 compared to 2017. The increases in earnings of these businesses were partly offset by lower earnings at FlightSafety, primarily due to reduced margins from sales of flight simulators and training equipment impairment charges.

Retailing

Our retailers include Berkshire Hathaway Automotive (“BHA”). BHA includes over 80 auto dealerships that sell new and pre-owned automobiles and offer repair services and related products. BHA also operates two insurance businesses, two auto auctions and an automotive fluid maintenance products distributor. Our retailing businesses also include four home furnishings retailing businesses (Nebraska Furniture Mart, R.C. Willey, Star Furniture and Jordan’s), which sell furniture, appliances, flooring and electronics.

K-50

Management’s Discussion and Analysis (Continued)

Manufacturing, Service and Retailing (Continued)

Retailing (Continued)

Other retailing businesses include three jewelry retailing businesses (Borsheims, Helzberg and Ben Bridge), See’s Candies (confectionary products), Pampered Chef (high quality kitchen tools), Oriental Trading Company (party supplies, school supplies and toys and novelties) and Detlev Louis Motorrad (“Louis”), a Germany-based retailer of motorcycle accessories.

2019 versus 2018

Retailing group revenues were $16.0 billion in 2019, an increase of 2.5% compared to 2018. BHA’s revenues in 2019, which represented approximately 64% of our retailing revenues, increased 4.1% over 2018. BHA’s revenue increase reflected an 11.5% increase in pre-owned vehicle sales, vehicle pricing increases, improvement in vehicle finance and service contract activities and vehicle repair work as compared to 2018. New vehicle sales in 2019 were relatively unchanged from 2018.

Home furnishings group revenues, which represented about 20% of the aggregate retailing group revenues, declined 1.3% in 2019 compared to 2018. Sales in 2019 were relatively unchanged or lower in each of our home furnishings operations.

Retail group pre-tax earnings were $874 million in 2019, an increase of 1.6% over 2018. BHA’s pre-tax earnings increased 22.7%, primarily due to the increases in earnings from finance and service contract activities, partly offset by higher floorplan interest expense. Home furnishings group pre-tax earnings declined 14.7% versus 2018, reflecting the decline in revenues and generally higher operating expenses. Aggregate pre-tax earnings for the remainder of our retailing group declined 7.9% compared to 2018.

2018 versus 2017

Revenues of the retailing group were approximately $15.6 billion in 2018, an increase of 3.6% compared to 2017. BHA’s revenues, which represented approximately 63% of the aggregate retailing revenues, increased 4.0% as compared to 2017. The increase derived primarily from increased pre-owned vehicle sales and service contract revenues. Revenues from new vehicle sales were relatively unchanged. Louis revenues increased 7.8% in 2018 versus 2017, primarily due to the translation effects of a weaker average U.S. Dollar. Home furnishings revenues increased 4.7% in 2018 over 2017, reflecting increased sales in certain geographic markets and the effect of a new store.

Pre-tax earnings of the retailing group were $860 million in 2018, an increase of 9.6% over 2017. The earnings increase included higher earnings from BHA and Louis, partly offset by lower earnings from the home furnishings retailers. The earnings increase of BHA was primarily from finance and service contract activities, partly offset by higher floorplan interest expense. The earnings increase at Louis reflected the revenue increase and an increase in its operating margin rate. Earnings of the home furnishings businesses declined 2.4% in 2018 compared to 2017, partly due to increased inventory liquidation, delivery and occupancy costs at Star Furniture.

McLane Company

McLane operates a wholesale distribution business that provides grocery and non-food consumer products to retailers and convenience stores (“grocery”) and to restaurants (“foodservice”). McLane also operates businesses that are wholesale distributors of distilled spirits, wine and beer (“beverage”). The grocery and foodservice businesses generate high sales and very low profit margins. These businesses have several significant customers, including Walmart, 7-Eleven, Yum! Brands and others. Grocery sales comprised approximately 66% of McLane’s consolidated sales in 2019 with food service comprising most of the remainder. A curtailment of purchasing by any of its significant customers could have an adverse impact on periodic revenues and earnings.

Revenues were $50.5 billion in 2019, an increase of 0.9% compared to 2018. McLane operates on 52/53-week fiscal year and 2019 included an extra week compared to 2018. Otherwise, revenues in 2019 decreased roughly 3% in the grocery business and increased 3% in the foodservice business as compared to 2018. Pre-tax earnings increased $42 million (17.1%) as compared to 2018. The earnings increase in 2019 reflected an increase in average gross margin rates and changes in business mix, partly offset by increased operating expenses, the largest portion of which were employee costs. McLane continues to operate in an intensely competitive business environment, which is negatively affecting its current operating results. We expect these operating conditions will continue.

K-51

Management’s Discussion and Analysis (Continued)

Manufacturing, Service and Retailing (Continued)

McLane Company (Continued)

Revenues were approximately $50.0 billion in 2018, slightly higher than 2017, reflecting a slight increase in grocery sales (1%) and a slight decrease in foodservice sales (1%). The decline in foodservice revenues was primarily due to a net loss of customers. Pre-tax earnings were $246 million, a decline of 17.7%, compared to 2017. McLane’s grocery and foodservice businesses continue to operate in a highly competitive business environment, which negatively affected operating results. While gross margin rates increased slightly over 2018, increases in fuel, depreciation and certain other operating expenses more than offset the increase, producing a decline in pre-tax earnings compared to 2017.

Investment and Derivative Gains (Losses)

A summary of investment and derivative gains and losses follows (dollars in millions).

		2019				2018				2017
Investment gains (losses)		$	71,123			$	(22,155	)		$	1,410
Derivative gains (losses)			1,484				(300	)			718
Gains (losses) before income taxes and noncontrolling interests			72,607				(22,455	)			2,128
Income taxes and noncontrolling interests			15,162				(4,718	)			751
Net gains (losses)		$	57,445			$	(17,737	)		$	1,377
Effective income tax rate			20.9	%			20.8	%			34.9	%

Investment gains (losses)

Due to a new accounting pronouncement adopted as of January 1, 2018, pre-tax investment gains/losses reported in earnings include unrealized gains and losses arising from changes in market prices on investments in equity securities. Prior to 2018, investment gains/losses related to equity securities were generally recorded as the securities were sold, redeemed or exchanged based on the cost of the disposed securities and the unrealized gains and losses were recorded in other comprehensive income. While the new accounting pronouncement does not affect our consolidated shareholders’ equity or total comprehensive income, it has significantly increased the volatility of our periodic net earnings due to the magnitude of our equity securities portfolio and the inherent volatility of equity securities prices. Investment gains and losses from periodic changes in securities prices will continue to cause significant volatility in our consolidated earnings.

Pre-tax investment gains included net unrealized gains of approximately $69.6 billion in 2019 attributable to equity securities we held at December 31, 2019. By comparison, we recorded pre-tax investment losses of approximately $22.7 billion in 2018 attributable to unrealized losses with respect to the equity securities we held at December 31, 2018. Pre-tax net unrealized gains on equity securities of approximately $29 billion in 2017 was recorded in other comprehensive income.

Prior to 2018, investment gains/losses on equity securities were recorded when securities were sold based on the cost of the disposed securities. Taxable investment gains on equity securities sold during the year, which is the difference between sales proceeds and the original cost basis of the securities sold, were $3.2 billion in 2019 and $3.3 billion in 2018.

We believe that investment gains/losses, whether realized from sales or unrealized from changes in market prices, are often meaningless in terms of understanding our reported consolidated earnings or evaluating our periodic economic performance. We continue to believe the investment gains/losses recorded in earnings, including the changes in market prices for equity securities, in any given period has little analytical or predictive value.

Derivative gains (losses)

Derivative contract gains/losses include the changes in fair value of our equity index put option contract liabilities, which relate to contracts that were originated prior to March 2008. Substantially all remaining contracts will expire by February 2023. The periodic changes in the fair values of these liabilities are recorded in earnings and can be significant, primarily due to the volatility of underlying equity markets.

As of December 31, 2019, the intrinsic value of our equity index put option contracts was $397 million and our recorded liability at fair value was $968 million. Our ultimate payment obligations, if any, under our contracts will be determined as of the contract expiration dates based on the intrinsic value as defined under the contracts. Contracts with an aggregate notional value of $12.3 billion expired in 2019.

K-52

Management’s Discussion and Analysis (Continued)

Investment and Derivative Gains (Losses) (Continued)

Derivative gains (losses) (Continued)

Pre-tax gains from equity index put option contracts were $1.5 billion in 2019 compared to pre-tax losses of $300 million in 2018 and gains of $718 million in 2017. The gains in 2019 and 2017 reflected increases in the equity index values and shorter remaining contract durations while the losses in 2018 were primarily due to lower equity index values.

Other

A summary of after-tax other earnings (losses) follows (in millions).

		2019				2018				2017
Equity method earnings (losses)		$	1,023			$	(1,419	)		$	1,111
Acquisition accounting expenses			(884	)			(1,111	)			(936	)
Corporate interest expense, before foreign currency effects			(280	)			(311	)			(266	)
Foreign currency exchange rate gains (losses) on Berkshire and BHFC non-U.S. Dollar senior notes			58				289				(655	)
Income tax expense adjustment			(377	)			—				—
Other, principally corporate investment income			884				986				261
Net earnings (losses) attributable to Berkshire Hathaway shareholders		$	424			$	(1,566	)		$	(485	)

After-tax equity method earnings include Berkshire’s share of earnings attributable to Kraft Heinz, Pilot, Berkadia and Electric Transmission of Texas. After-tax equity method earnings related to our Kraft Heinz investment were earnings of $488 million in 2019, losses of $1,859 million in 2018 and earnings of $972 million in 2017. The after-tax equity method losses in 2018 included approximately $2.7 billion for our share of intangible asset impairment charges recorded by Kraft Heinz.

After-tax acquisition accounting expenses include charges arising from the application of the acquisition method in connection with certain of Berkshire’s past business acquisitions. Such charges arise primarily from the amortization or impairment of intangible assets recorded in connection with those business acquisitions.

Foreign currency exchange rate gains and losses pertain to Berkshire’s outstanding Euro denominated debt (€6.85 billion par) and Japanese Yen denominated debt (¥430 billion par), issued in September 2019, and BHFC’s Great Britain Pound denominated debt (£1.75 billion par), issued in June 2019. Changes in foreign currency exchange rates produced non-cash unrealized gains and losses from the periodic revaluation of these liabilities into U.S. Dollars. The gains and losses recorded in any given period can be significant due the magnitude of the borrowings and the inherent volatility in foreign currency exchange rates.

The income tax expense adjustment relates to investments that were made between 2015 and 2018 in certain tax equity investment funds. Our investments in these funds aggregated approximately $340 million. In December 2018 and during the first quarter of 2019, we learned of allegations by federal authorities of fraudulent conduct by the sponsor of these funds and in January 2020 the principals involved in creating the investment funds plead guilty to criminal charges related to the sale of the investments. As a result, we now believe that it is more likely than not that the income tax benefits that we recognized in prior years are not valid.

Financial Condition

Our consolidated balance sheet continues to reflect significant liquidity and a strong capital base. Consolidated shareholders’ equity at December 31, 2019 was $424.8 billion, an increase of $76.1 billion since December 31, 2018. Net earnings attributable to Berkshire shareholders in 2019 were $81.4 billion and included after-tax gains on our investments of approximately $56.3 billion, which were primarily from increases in market prices of the equity securities we owned at December 31, 2019.

At December 31, 2019, our insurance and other businesses held cash, cash equivalents and U.S. Treasury Bills of $125.0 billion, which included $101 billion in U.S. Treasury Bills. Investments in equity and fixed maturity securities (excluding our investment in Kraft Heinz) were $266.7 billion. In August 2019, we paid $10 billion to acquire preferred stock and warrants of Occidental Petroleum Corporation, as discussed in Note 4 to the accompanying Consolidated Financial Statements.

K-53

Management’s Discussion and Analysis (Continued)

Financial Condition (Continued)

Berkshire parent company debt outstanding at December 31, 2019 was $19.9 billion, an increase of $3.0 billion since December 31, 2018. In 2019, Berkshire repaid maturing senior notes of $750 million and issued ¥430 billion of senior notes (approximately $4.0 billion), which has a weighted average interest rate of 0.49% and maturity dates ranging from 2024 to 2049. In March 2020, Berkshire Euro debt of €1.0 billion will mature.

Berkshire’s insurance and other subsidiary outstanding borrowings were $17.7 billion at December 31, 2019, which included senior note borrowings of BHFC, a wholly-owned financing subsidiary, of approximately $11.0 billion. BHFC’s borrowings are used to fund a portion of loans originated and acquired by Clayton Homes and equipment held for lease by our UTLX railcar leasing business. In 2019, BHFC repaid $3.95 billion of maturing senior notes and issued $2.0 billion of 4.25% senior notes due in 2049, £1.0 billion of 2.375% senior notes due in 2039 and £750 million of 2.625% senior notes due in 2059. Berkshire guarantees the full and timely payment of principal and interest with respect to BHFC’s senior notes. In 2020, BHFC debt of $900 million matures, including $350 million that matured in January.

Our railroad, utilities and energy businesses (conducted by BNSF and BHE) maintain very large investments in capital assets (property, plant and equipment) and will regularly make significant capital expenditures in the normal course of business. Capital expenditures of these two operations in 2019 were $11.0 billion and we forecast additional capital expenditures of approximately $10.6 billion in 2020.

BNSF’s outstanding debt was $23.2 billion as of December 31, 2019, relatively unchanged since December 31, 2018. In 2019, BNSF issued $825 million of 3.55% senior unsecured debentures due in 2050 and repaid $750 million of maturing debentures. Outstanding borrowings of BHE and its subsidiaries were $42.6 billion at December 31, 2019, an increase of $3.3 billion since December 31, 2018. In 2019, BHE and its subsidiaries issued debt aggregating $4.6 billion with maturity dates ranging from 2029 to 2059 and repaid approximately $1.8 billion of maturing term debt. The proceeds from these financings were used to repay borrowings, fund capital expenditures and for other general corporate purposes. In January 2020, a BHE subsidiary issued $725 million of term debt consisting of $425 million of 2.4% notes due in 2030 and $300 million of 3.125% notes due in 2050. Berkshire does not guarantee the repayment of debt issued by BNSF, BHE or any of their subsidiaries and is not committed to provide capital to support BNSF, BHE or any of their subsidiaries.

Berkshire’s common stock repurchase program was amended on July 17, 2018, permitting Berkshire to repurchase its Class A and Class B shares at prices below Berkshire’s intrinsic value, as conservatively determined by Warren Buffett, Berkshire’s Chairman of the Board and Chief Executive Officer, and Charlie Munger, Vice Chairman of the Board. The program allows share repurchases in the open market or through privately negotiated transactions and does not specify a maximum number of shares to be repurchased. The program is expected to continue indefinitely. We will not repurchase our stock if it reduces the total amount of Berkshire’s consolidated cash, cash equivalents and U.S. Treasury Bill holdings below $20 billion. Financial strength and redundant liquidity will always be of paramount importance at Berkshire. In 2019, Berkshire repurchased shares of Class A and B common stock for an aggregate cost of $5.0 billion.

Contractual Obligations

We are party to contracts associated with ongoing business and financing activities, which will result in cash payments to counterparties in future periods. Certain obligations are included in our Consolidated Balance Sheets, such as notes payable, which require future payments on contractually specified dates and in fixed and determinable amounts. Other obligations pertaining to the acquisition of goods or services in the future, such as certain purchase obligations, are not currently reflected in the financial statements, will be recognized in future periods as the goods are delivered or services are provided. Beginning in 2019, operating lease obligations are included in the Consolidated Balance Sheet as a result of the adoption of a new accounting pronouncement. The timing and amount of the payments under certain contracts, such as insurance and reinsurance contracts, are contingent upon the outcome of future events. Actual payments will likely vary, perhaps materially, from the estimated liabilities currently recorded in our Consolidated Balance Sheet.

K-54

Management’s Discussion and Analysis (Continued)

Contractual Obligations (Continued)

A summary of our contractual obligations as of December 31, 2019 follows (in millions). Actual payments will likely vary, perhaps significantly, from estimates reflected in the table.

		Estimated payments due by period
		Total				2020				2021-2022				2023-2024				After 2024
Notes payable and other borrowings, including interest		$	164,116			$	14,174			$	17,358			$	20,602			$	111,982
Operating leases			6,879				1,374				2,133				1,384				1,988
Purchase obligations (1)			50,092				15,669				9,290				5,430				19,703
Unpaid losses and loss adjustment expenses (2)			115,460				26,381				27,818				15,246				46,015
Life, annuity and health insurance benefits (3)			35,891				1,903				114				392				33,482
Other			23,285				2,034				3,159				6,466				11,626
Total		$	395,723			$	61,535			$	59,872			$	49,520			$	224,796

(1)	Primarily related to fuel, capacity, transmission and maintenance contracts and capital expenditure commitments of BHE and BNSF and aircraft purchase commitments of NetJets.

(2)	Includes unpaid losses and loss adjustment expenses under retroactive reinsurance contracts.

(3)	Amounts represent estimated undiscounted benefits, net of estimated future premiums, as applicable.

Critical Accounting Policies

Certain accounting policies require us to make estimates and judgments in determining the amounts reflected in the Consolidated Financial Statements. Such estimates and judgments necessarily involve varying, and possibly significant, degrees of uncertainty. Accordingly, certain amounts currently recorded in the financial statements will likely be adjusted in the future based on new available information and changes in other facts and circumstances. A discussion of our principal accounting policies that required the application of significant judgments as of December 31, 2019 follows.

Property and casualty losses

We record liabilities for unpaid losses and loss adjustment expenses (also referred to as “gross unpaid losses” or “claim liabilities”) based upon estimates of the ultimate amounts payable for losses occurring on or before the balance sheet date. The timing and amount of ultimate loss payments are contingent upon, among other things, the timing of claim reporting from insureds and ceding companies and the final determination of the loss amount through the loss adjustment process. We use a variety of techniques in establishing claim liabilities and all techniques require significant judgments and assumptions.

As of the balance sheet date, recorded claim liabilities include provisions for reported claims, as well as claims not yet reported and the development of reported claims. The period between the loss occurrence date and loss settlement date is the “claim-tail.” Property claims usually have relatively short claim-tails, absent litigation. Casualty claims usually have longer claim-tails, occasionally extending for decades. Casualty claims may be more susceptible to litigation and the impact of changing contract interpretations. The legal environment and judicial process further contribute to extending claim-tails.

Our consolidated claim liabilities as of December 31, 2019 were approximately $115.5 billion (including liabilities from retroactive reinsurance), of which 84% related to GEICO and the Berkshire Hathaway Reinsurance Group. Additional information regarding significant uncertainties inherent in the processes and techniques of these businesses follows.

GEICO

GEICO predominantly writes private passenger auto insurance. As of December 31, 2019, GEICO’s gross unpaid losses were $22.0 billion. Claim liabilities, net of reinsurance recoverable were $20.9 billion.

GEICO’s claim reserving methodologies produce liability estimates based upon the individual claims. The key assumptions affecting our liability estimates include projections of ultimate claim counts (“frequency”) and average loss per claim (“severity”). We utilize a combination of several actuarial estimation methods, including Bornhuetter-Ferguson and chain-ladder methodologies.

Claim liability estimates for automobile liability coverages (such as bodily injury (“BI”), uninsured motorists, and personal injury protection) are more uncertain due to the longer claim-tails, so we establish additional case development estimates. As of December 31, 2019, case development liabilities averaged approximately 30% of the case reserves. We select case development factors through analysis of the overall adequacy of historical case liabilities.

K-55

Management’s Discussion and Analysis (Continued)

Property and casualty losses (Continued)

GEICO (Continued)

Incurred-but-not-reported (“IBNR”) claims liabilities are based on projections of the ultimate number of claims expected (reported and unreported) for each significant coverage. We use historical claim count data to develop age-to-age projections of the ultimate counts by quarterly accident period, from which we deduct reported claims to produce the number of unreported claims. We estimate the average costs per unreported claim and apply such estimates to the unreported claim counts, producing an IBNR liability estimate. We may record additional IBNR estimates when actuarial techniques are difficult to apply.

We test the adequacy of the aggregate claim liabilities using one or more actuarial projections based on claim closure models and paid and incurred loss triangles. Each type of projection analyzes loss occurrence data for claims occurring in a given period and projects the ultimate cost.

Our claim liability estimates recorded at the end of 2018 increased $42 million during 2019, which produced a corresponding decrease to pre-tax earnings. The assumptions used to estimate liabilities at December 31, 2019 reflect the most recent frequency and severity results. Future development of recorded liabilities will depend on whether actual frequency and severity are more or less than anticipated.

With respect to liabilities for BI claims, we believe it is reasonably possible that average severities will change by at least one percentage point from the severities used in establishing the recorded liabilities at December 31, 2019. We estimate that a one percentage point increase or decrease in BI severities would produce a $295 million increase or decrease in recorded liabilities, with a corresponding decrease or increase in pre-tax earnings. Many of the economic forces that would likely cause BI severity to differ from expectations would likely also cause severities for other injury coverages to differ in the same direction.

Berkshire Hathaway Reinsurance Group

BHRG’s liabilities for unpaid losses and loss adjustment expenses derive primarily from reinsurance contracts issued through NICO and General Re. A summary of BHRG’s property and casualty unpaid losses and loss adjustment expenses, other than retroactive reinsurance losses and loss adjustment expenses, as of December 31, 2019 follows (in millions).

		Property				Casualty				Total
Reported case liabilities		$	5,063			$	9,665			$	14,728
IBNR liabilities			4,631				12,825				17,456
Gross unpaid losses and loss adjustment expenses			9,694				22,490				32,184
Reinsurance recoverable			268				852				1,120
Net unpaid losses and loss adjustment expenses		$	9,426			$	21,638			$	31,064

Gross unpaid losses and loss adjustment expenses in the table above consist primarily of traditional property and casualty coverages written primarily under excess-of-loss and quota-share treaties. Under certain contracts, coverage can apply to multiple lines of business written and the ceding company may not report loss data by such lines consistently, if at all. In those instances, we allocated losses to property and casualty coverages based on internal estimates.

In connection with reinsurance contracts, the nature, extent, timing and perceived reliability of premium and loss information received from ceding companies varies widely depending on the type of coverage and the contractual reporting terms. Contract terms, conditions and coverages also tend to lack standardization and may evolve more rapidly than primary insurance policies.

The nature and extent of loss information provided under many facultative (individual risk) or per occurrence excess contracts may not differ significantly from the information received under a primary insurance contract. However, loss information is often less detailed with respect to aggregate excess-of-loss and quota-share contracts. Additionally, loss information we receive through periodic reports is often in a summary format rather than on an individual claim basis. Loss data includes recoverable paid losses, as well as case loss estimates. Ceding companies infrequently provide reliable IBNR estimates to reinsurers.

K-56

Management’s Discussion and Analysis (Continued)

Property and casualty losses (Continued)

Berkshire Hathaway Reinsurance Group (Continued)

Loss reporting to reinsurers is typically slower in comparison to primary insurers. In the U.S., such reporting is generally required at quarterly intervals ranging from 30 to 90 days after the end of the quarterly period, while outside of the U.S., reinsurance reporting practices may vary further. In certain countries, clients report annually from 90 to 180 days after the end of the annual period. Reinsurers may assume and cede underlying risks from other reinsurers, which may further delay the reporting of claims. The relative impact of reporting delays on the reinsurer may vary depending on the type of coverage, contractual reporting terms, the magnitude of the claim relative to the attachment point of the reinsurance coverage, and for other reasons.

As reinsurers, the premium and loss data we receive is at least one level removed from the underlying claimant, so there is a risk that the loss data reported is incomplete, inaccurate or the claim is outside the coverage terms. We maintain certain internal procedures in order to determine that the information is complete and in compliance with the contract terms. Generally, our reinsurance contracts permit us to access the ceding company’s books and records with respect to the subject business, thus providing the ability to audit the reported information. In the normal course of business, disputes occasionally arise concerning whether claims are covered by our reinsurance policies. We resolve most coverage disputes through negotiation with the client. If disputes cannot be resolved, our contracts generally provide arbitration or alternative dispute resolution processes. There are no coverage disputes at this time for which an adverse resolution would likely have a material impact on our consolidated results of operations or financial condition.

Establishing claim liability estimates for reinsurance requires evaluation of loss information received from our clients. We generally rely on the ceding companies reported case loss estimates. We independently evaluate certain reported case losses and if appropriate, we use our own case liability estimate. For instance, as of December 31, 2019, our case loss estimates exceeded ceding company estimates by approximately $2.0 billion for certain legacy workers’ compensation claims occurring over 10 years ago. We also periodically conduct detailed reviews of individual client claims, which may cause us to adjust our case estimates.

Although liabilities for losses are initially determined based on pricing and underwriting analysis, BHRG uses a variety of actuarial methodologies that place reliance on the extrapolation of actual historical data, loss development patterns, industry data, and other benchmarks as appropriate. The estimate of the required IBNR liabilities also requires judgment by actuaries and management to reflect the impact of additional factors like change in business mix, volume, claim reporting and handling practices, inflation, social and legal environment and the terms and conditions of the contracts. The methodologies generally fall into one of the following categories or are hybrids of one or more of the following categories:

Paid and incurred loss development methods – these methods consider expected case loss emergence and development patterns, together with expected loss ratios by year. Factors affecting our loss development analysis include, but are not limited to, changes in the following: client claims reporting and settlement practices; the frequency of client company claim reviews; policy terms and coverage (such as loss retention levels and occurrence and aggregate policy limits); loss trends; and legal trends that result in unanticipated losses. Collectively, these factors influence our selections of expected case loss emergence patterns.

Incurred and paid loss Bornhuetter-Ferguson methods – these methods consider actual paid and incurred losses and expected patterns of paid and incurred losses, taking the initial expected ultimate losses into account to determine an estimate of the expected unpaid or unreported losses.

Frequency and severity methods – these methods commonly focus on a review of the number of anticipated claims and the anticipated claims severity and may also rely on development patterns to derive such estimates. However, our processes and techniques for estimating liabilities in such analyses generally rely more on a per-policy assessment of the ultimate cost associated with the individual loss rather than with an analysis of historical development patterns of past losses.

Additional Analysis – in some cases we have established reinsurance claim liabilities on a contract-by-contract basis, determined from case loss estimates reported by the ceding company and IBNR liabilities that are primarily a function of an anticipated loss ratio for the contract and the reported case loss estimate. Liabilities are adjusted upward or downward over time to reflect case losses reported versus expected case losses, which we use to form revised judgement on the adequacy of the expected loss ratio and the level of IBNR liabilities required for unreported claims. Anticipated loss ratios are also revised to include estimates of known major catastrophe events.

K-57

Management’s Discussion and Analysis (Continued)

Property and casualty losses (Continued)

Berkshire Hathaway Reinsurance Group (Continued)

Our claim liability estimation process for short-tail lines, primarily property exposures, utilizes a combination of the paid and incurred loss development methods and the incurred and paid loss Bornhuetter-Ferguson methods. Certain catastrophe, individual risk and aviation excess-of-loss contracts tend to generate low frequency/high severity losses. Our processes and techniques for estimating liabilities under such contracts generally rely more on a per contract assessment of the ultimate cost associated with the individual loss event rather than with an analysis of the historical development patterns of past losses.

For our long-tail lines, primarily casualty exposures, we may rely on different methods depending on the maturity of the business, with estimates for the most recent years being based on priced loss expectations and more mature years reflecting the paid or incurred development pattern indications.

In 2019, certain workers’ compensation claims reported losses were less than expected. As a result, we reduced estimated ultimate losses for prior years’ loss events by $150 million. We estimate that increases of ten percent in the tail of the expected loss emergence pattern and in the expected loss ratios would produce a net increase of approximately $1.1 billion in IBNR liabilities, producing a corresponding decrease in pre-tax earnings. We believe it is reasonably possible for these assumptions to increase at these rates.

We also reduced estimated ultimate losses for prior years’ events for other casualty losses, excluding asbestos, environmental, and other latent injury claims, by $23 million, reflecting lower than expected reported losses. For certain significant casualty and general liability portfolios, we estimate that increases of five percent in the claim-tails of the expected loss emergence patterns and in the expected loss ratios would produce a net increase in our nominal IBNR liabilities and a corresponding reduction in pre-tax earnings of approximately $850 million, although outcomes of less than $850 million are quite possible given the diversification in worldwide business.

Estimated ultimate liabilities for asbestos, environmental and other latent injury claims were increased approximately $150 million in 2019, which produced a corresponding reduction in pre-tax earnings. Net liabilities for such claims, excluding amounts assumed under retroactive reinsurance contracts, were approximately $1.7 billion at December 31, 2019. Loss estimations for these exposures are difficult to determine due to the changing legal environment and increases may be required in the future if new exposures or claimants are identified, new claims are reported or new theories of liability emerge.

Retroactive reinsurance

Our retroactive reinsurance contracts cover loss events occurring before the contract inception dates. Claim liabilities relating to our retroactive reinsurance contracts are predominately related to casualty or liability exposures. We expect the claim-tails to be very long. Our gross unpaid losses, deferred charge assets, and net liabilities at December 31, 2019 were as follows (in millions).

Gross unpaid losses				Deferred charges				Liabilities, net of deferred charges
$	42,441			$	(13,747	)		$	28,694

Our contracts are generally subject to maximum limits of indemnifications and, as such, we currently expect that maximum remaining gross losses payable under our retroactive policies will not exceed $56 billion. Absent significant judicial or legislative changes affecting asbestos, environmental or latent injury exposures, we also currently believe it unlikely that losses will develop upward to the maximum losses payable or downward by more than 15% of our $42.4 billion estimated liability.

We establish liability estimates by individual contract, considering exposure and development trends. In establishing our liability estimates, we often analyze historical aggregate loss payment patterns and project expected ultimate losses under various scenarios. We assign judgmental probability factors to these scenarios and an expected outcome is determined. We then monitor subsequent loss payment activity and review ceding company reports and other available information concerning the underlying losses. We re-estimate the expected ultimate losses when significant events or significant deviations from expected results are revealed.

K-58

Management’s Discussion and Analysis (Continued)

Property and casualty losses (Continued)

Retroactive reinsurance (Continued)

Certain of our retroactive reinsurance contracts include asbestos, environmental and other latent injury claims. Our estimated liabilities for such claims were approximately $12.9 billion at December 31, 2019. We do not consistently receive reliable detailed data regarding asbestos, environmental and latent injury claims from all ceding companies, particularly with respect to multi-line or aggregate excess-of-loss policies. When possible, we conduct a detailed analysis of the underlying loss data to make an estimate of ultimate reinsured losses. When detailed loss information is unavailable, we develop estimates by applying recent industry trends and projections to aggregate client data. Judgments in these areas necessarily consider the stability of the legal and regulatory environment under which we expect these claims will be adjudicated. Legal reform and legislation could also have a significant impact on our ultimate liabilities.

We increased estimated ultimate liabilities for prior years’ retroactive reinsurance contracts by $378 million in 2019, which after the changes in related deferred charge assets, resulted in pre-tax losses of $125 million. In 2019, we paid losses and loss adjustment expenses of $909 million with respect to these contracts.

In connection with our retroactive reinsurance contracts, we also record deferred charge assets, which at contract inception represents the excess, if any, of the estimated ultimate liability for unpaid losses over premiums. We amortize deferred charge assets, which produces charges to pre-tax earnings in future periods based on the expected timing and amount of loss payments. We also adjust deferred charge balances due to changes in the expected timing and ultimate amount of claim payments. Significant changes in such estimates may have a significant effect on unamortized deferred charge balances and the amount of periodic amortization. Based on the contracts in effect as of December 31, 2019, we currently estimate that amortization expense in 2020 will approximate $1.2 billion.

Other Critical Accounting Policies

Our Consolidated Balance Sheet at December 31, 2019 included goodwill of acquired businesses of $81.9 billion and other indefinite-lived intangible assets of $19.0 billion. We evaluate these assets for impairment at least annually and we conducted our most recent annual review during the fourth quarter of 2019. Our review of goodwill includes determining the estimated fair values of our reporting units. Our review of other indefinite-lived intangible assets includes determining an estimated fair value of the asset.

We primarily use discounted projected future earnings or cash flow methods in determining fair values. The key assumptions and inputs used in such methods may include forecasting revenues and expenses, cash flows and capital expenditures, as well as an appropriate discount rate and other inputs. A significant amount of judgment is required in estimating the fair value of a reporting unit and in performing goodwill impairment tests.

Due to the inherent uncertainty in forecasting cash flows and earnings, actual results may vary significantly from the forecasts. If the carrying value of the indefinite-lived intangible asset exceeds fair value, the excess is charged to earnings as an impairment loss. If the carrying value of a reporting unit exceeds the estimated fair value of the reporting unit, then, as required by GAAP, the excess, limited to the carrying amount of goodwill, will be charged to earnings as an impairment loss.

Market Risk Disclosures

Our Consolidated Balance Sheets include substantial amounts of assets and liabilities whose fair values are subject to market risks. Our significant market risks are primarily associated with equity prices, interest rates, foreign currency exchange rates and commodity prices. The fair values of our investment portfolios and equity index put option contracts remain subject to considerable volatility. The following sections address the significant market risks associated with our business activities.

K-59

Management’s Discussion and Analysis (Continued)

Equity Price Risk

Equity securities represent a significant portion of our investment portfolio. Strategically, we strive to invest in businesses that possess excellent economics and able and honest management, and we prefer to invest a meaningful amount in each investee. Consequently, equity investments are concentrated in relatively few issuers. At December 31, 2019, approximately 67% of the total fair value of equity securities was concentrated in five issuers.

We often hold our equity investments for long periods and short-term price volatility has occurred in the past and will occur in the future. We also strive to maintain significant levels of shareholder capital and ample liquidity to provide a margin of safety against short-term price volatility.

We are also subject to equity price risk with respect to our equity index put option contracts. While our ultimate liability with respect to these contracts is determined from the movement of the underlying stock index between the contract inception date and expiration date, fair values of these contracts are also affected by changes in other factors such as interest rates, expected dividend rates and the remaining duration of the contracts.

The following table summarizes our equity securities and derivative contract liabilities with significant equity price risk as of December 31, 2019 and 2018 and the estimated effects of a hypothetical 30% increase and a 30% decrease in market prices as of those dates. The selected 30% hypothetical increase and decrease does not reflect the best or worst case scenario. Indeed, results from declines could be far worse due both to the nature of equity markets and the aforementioned concentrations existing in our equity investment portfolio. Dollar amounts are in millions.

		Fair Value				Hypothetical Price Change		Estimated Fair Value after Hypothetical Change in Prices				Hypothetical Percentage Increase (Decrease) in Shareholders’ Equity (1)
December 31, 2019
Investments in equity securities		$	248,027			30% increase		$	319,445			13.3%
						30% decrease			176,749			(13.3)
Equity index put option contract liabilities			968			30% increase			267			0.1
						30% decrease			2,776			(0.3)
December 31, 2018
Investments in equity securities		$	172,757			30% increase		$	224,584			11.7%
						30% decrease			120,930			(11.7)
Equity index put option contract liabilities			2,452			30% increase			1,131			0.3
						30% decrease			5,362			(0.7)

(1)	The hypothetical percentage increase (decrease) is after income taxes at the statutory rate in effect as of the balance sheet date.

Interest Rate Risk

We may also invest in bonds, loans or other interest rate sensitive instruments. Our strategy is to acquire or originate such instruments at prices considered appropriate relative to the perceived credit risk. We also issue debt in the ordinary course of business to fund business operations, business acquisitions and for other general purposes. We attempt to maintain high credit ratings, in order to minimize the cost of our debt. We infrequently utilize derivative products, such as interest rate swaps, to manage interest rate risks.

The fair values of our fixed maturity investments, loans and finance receivables, and notes payable and other borrowings will fluctuate in response to changes in market interest rates. In addition, changes in interest rate assumptions used in our equity index put option contract models cause changes in reported liabilities with respect to those contracts. Increases and decreases in interest rates generally translate into decreases and increases in fair values of these instruments. Additionally, fair values of interest rate sensitive instruments may be affected by the creditworthiness of the issuer, prepayment options, relative values of alternative investments, the liquidity of the instrument and other general market conditions.

K-60

Management’s Discussion and Analysis (Continued)

Interest Rate Risk (Continued)

The following table summarizes the estimated effects of hypothetical changes in interest rates on our significant assets and liabilities that are subject to significant interest rate risk at December 31, 2019 and 2018. We assumed that the interest rate changes occur immediately and uniformly to each category of instrument and that there were no significant changes to other factors used to determine the value of the instrument. The hypothetical changes in interest rates do not reflect the best or worst case scenarios. Actual results may differ from those reflected in the table. Dollars are in millions.

						Estimated Fair Value after Hypothetical Change in Interest Rates
						(bp=basis points)
		Fair Value				100 bp decrease				100 bp increase				200 bp increase				300 bp increase
December 31, 2019
Assets:
Investments in fixed maturity securities		$	18,685			$	19,008			$	18,375			$	18,075			$	17,787
Investments in equity securities***			10,314				11,016				9,671				9,081				8,539
Loans and finance receivables			17,861				18,527				17,240				16,660				16,116
Liabilities:
Notes payable and other borrowings:
Insurance and other			40,589				44,334				37,454				34,799				32,534
Railroad, utilities and energy			76,237				84,758				69,160				63,218				58,193
Equity index put option contracts			968				1,065				877				792				713
December 31, 2018
Assets:
Investments in fixed maturity securities		$	19,898			$	20,260			$	19,549			$	19,214			$	18,891
Loans and finance receivables			16,377				17,006				15,844				15,318				14,823
Liabilities:
Notes payable and other borrowings:
Insurance and other			35,361				37,559				33,380				31,691				30,208
Railroad, utilities and energy			66,422				73,063				60,840				56,107				52,063
Equity index put option contracts			2,452				2,669				2,249				2,057				1,877

(*)Occidental Petroleum Cumulative Perpetual Preferred Stock

Foreign Currency Risk

Certain of our subsidiaries operate in foreign jurisdictions and we transact business in foreign currencies. In addition, we hold investments in common stocks of major multinational companies, such as The Coca-Cola Company, who have significant foreign business and foreign currency risk of their own. We generally do not attempt to match assets and liabilities by currency and do not use derivative contracts to manage foreign currency risks in any meaningful way.

Our net assets subject to financial statement translation into U.S. Dollars are primarily in our insurance, utilities and energy and certain manufacturing and services subsidiaries. A portion of our financial statement translation-related impact from changes in foreign currency rates is recorded in other comprehensive income. In addition, we include gains or losses in net earnings related to certain liabilities of Berkshire and U.S. insurance subsidiaries that are denominated in foreign currencies, due to changes in exchange rates. A summary of these gains (losses), after-tax, for each of the years ending December 31, 2019 and 2018 follows (in millions).

		2019				2018
Non-U.S. denominated debt included in net earnings		$	58			$	289
Net liabilities under certain reinsurance contracts included in net earnings			(92	)			207
Foreign currency translation included in other comprehensive income			257				(1,424	)

K-61

Management’s Discussion and Analysis (Continued)

Commodity Price Risk

Our subsidiaries use commodities in various ways in manufacturing and providing services. As such, we are subject to price risks related to various commodities. In most instances, we attempt to manage these risks through the pricing of our products and services to customers. To the extent that we are unable to sustain price increases in response to commodity price increases, our operating results will likely be adversely affected. We do not utilize derivative contracts to manage commodity price risks to any significant degree.