Berkshire Hathaway 2000 Annual Report Download - page 38

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(7) Finance and financial products businesses (Continued)
The derivative financial instruments involve, to varying degrees, elements of market, credit, and legal risks. Market
risk is the possibility that future changes in market conditions may make the derivative financial instrument less valuable.
Credit risk is defined as the possibility that a loss may occur from the failure of another party to perform in accordance
with the terms of the contract which exceeds the value of existing collateral, if any. The derivative’s risk of credit loss is
generally a small fraction of notional value of the instrument and is represented by the fair value of the derivative
financial instrument. Legal risk arises from the uncertainty of the enforceability of the obligations of another party,
including contractual provisions intended to reduce credit exposure by providing for the offsetting or netting of mutual
obligations.
With respect to Berkshire’s life insurance business, annuity reserves and policyholder liabilities are carried at the
present value of the actuarially determined ultimate payment amounts discounted at market interest rates existing at the
inception of the contracts. Such interest rates range from 5% to 8%. Periodic accretions of the discounted liabilities are
charged against income from finance and financial products businesses.
Investments in securities with fixed maturities held by Berkshire’s life insurance business are classified as held-to-
maturity. Investments classified as held-to-maturity are carried at amortized cost reflecting the Company’s ability and
intent to hold such investments to maturity. Such items consist predominantly of mortgage loans and collateralized
mortgage obligations.
(8) Unpaid losses and loss adjustment expenses
Supplemental data with respect to unpaid losses and loss adjustment expenses of property/casualty insurance
subsidiaries (in millions) is as follows: 2000 1999 1998
Unpaid losses and loss adjustment expenses:
Balance at beginning of year ....................................................................... $26,802 $23,012 $6,850
Ceded liabilities and deferred charges.......................................................... (3,848) (2,727) (754)
Net balance ................................................................................................ 22,954 20,285 6,096
Incurred losses recorded:
Current accident year.................................................................................. 15,252 11,275 4,235
All prior accident years............................................................................... 211 (192) (195)
Total incurred losses................................................................................... 15,463 11,083 4,040
Payments with respect to:
Current accident year.................................................................................. 4,589 3,648 1,919
All prior accident years............................................................................... 5,890 4,532 1,834
Total payments........................................................................................... 10,479 8,180 3,753
Unpaid losses and loss adjustment expenses:
Net balance at end of year........................................................................... 27,938 23,188 6,383
Ceded liabilities and deferred charges.......................................................... 5,590 3,848 2,727
Foreign currency translation adjustment ...................................................... (722) (234) —
Net liabilities assumed in connection with business acquisitions................... 216 — 13,902
Balance at end of year ................................................................................... $33,022 $26,802 $23,012
Incurred losses “all prior accident years” reflects the amount of estimation error charged or credited to earnings in
each year with respect to the liabilities established as of the beginning of that year. This amount includes amortization
of deferred charges regarding retroactive reinsurance assumed and accretion of discounted liabilities. See Note 1 for
additional information regarding these items. Additional information regarding incurred losses will be revealed over
time and the estimates will be revised resulting in gains or losses in the periods made.
The balances of unpaid losses and loss adjustment expenses are based upon estimates of the ultimate claim costs
associated with claim occurrences as of the balance sheet dates. Considerable judgment is required to evaluate claims
and establish estimated claim liabilities, particularly with respect to certain lines of business, such as reinsurance
assumed, or certain types of claims, such as environmental or latent injury liabilities.