Berkshire Hathaway 2001 Annual Report Download - page 39

38
Notes to Consolidated Financial Statements (Continued)
(10) Unpaid losses and loss adjustment expenses (Continued)
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. 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 accompanying Consolidated Statement of Earnings for 2001 includes estimated pre-tax underwriting losses of
approximately $2.4 billion resulting from the terrorist attack in the U.S. on September 11, 2001. This amount is
included in the table as incurred loss – current accident year. Berkshire’ s management believes it will literally take
years to resolve complicated coverage issues, which could produce a material change in the ultimate loss amount.
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. During 2001, Berkshire’ s insurance
subsidiaries recorded additional losses of $1,165 million in connection with losses occurring in years prior to 2001. This
amount includes $878 million arising from General Re’ s traditional North American property/casualty business. The net
effect of General Re’ s prior year reserve adjustments was a reduction of pre-tax income of approximately $800 million
due to additional premiums triggered by the losses. Most of the reserve increases were taken in several casualty lines of
businesses.
Prior accident years’ losses incurred also include amortization of deferred charges related to retroactive
reinsurance contracts incepting prior to the current year. Amortization charges included in prior accident years’ losses
were $328 million in 2001, $145 million in 2000 and $59 million in 1999. The increases in such charges in 2001 and
2000 are the result of several new contracts written over the past three years. The unamortized balance of deferred
charges was $3,232 million at December 31, 2001 compared to $2,593 million at December 31, 2000. Net discounted
liabilities at December 31, 2001 and 2000 were $1,834 million and $1,531 million, respectively. Periodic accretions of
these liabilities are also a component of prior year losses incurred. See Note 1 for additional information.
Berkshire has exposure to environmental, asbestos and other latent injury claims arising from insurance and
reinsurance contracts. Loss reserve estimates for environmental and asbestos exposures include case basis reserves,
which also reflect reserves for legal and other loss adjustment expenses and incurred but not reported (“IBNR”)
reserves. IBNR reserves are determined based upon Berkshire’ s historic general liability exposure base and policy
language, previous environmental and loss experience and the assessment of current trends of environmental law,
environmental cleanup costs, asbestos liability law and judgmental settlements of asbestos liabilities.
The liabilities for environmental and latent injury claims and claims expenses net of reinsurance recoverables were
approximately $6.3 billion at December 31, 2001. Approximately, $5.0 billion of these reserves were assumed under
retroactive reinsurance contracts written by the Berkshire Hathaway Reinsurance Group. Claims arising from these
contracts are subject to aggregate policy limits. Thus, Berkshire’ s exposure to environmental and latent injury claims
under these contracts are, likewise, limited.
Berkshire monitors evolving case law and its effect on environmental and latent injury claims. Changing
government regulations, newly identified toxins, newly reported claims, new theories of liability, new contract
interpretations and other factors could result in significant amounts of adverse development of the balance sheet
liabilities. Such development could be material to Berkshire’ s results of operations. It is not possible to estimate
reliably the amount of additional net loss, or the range of net loss, that is reasonably possible.
(11) Borrowings under investment agreements and other debt
Liabilities as of December 31, 2001 and 2000 for this balance sheet caption are as follows (in millions).
2001 2000
Commercial paper and other short-term borrowings.................................................................... $1,777 $ 991
Borrowings under investment agreements ................................................................................... 478 508
General Re Corporation 9% debentures due 2009 (non-callable) ................................................ 150 150
GEICO Corporation 7.35% debentures due 2023 (non-callable) ................................................. 160 160
Other debt due 2002 – 2028 ......................................................................................................... 920 854
$3,485 $2,663
Commercial paper and other short-term borrowings are obligations of several Berkshire subsidiaries that utilize
short-term borrowings as part of their day-to-day business operations. Berkshire affiliates have approximately $4 billion
available unused lines of credit to support their short-term borrowing programs and, otherwise, provide additional
liquidity.