Berkshire Hathaway 2002 Annual Report Download - page 57

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Management's Discussion (Continued)
Insurance — Underwriting (Continued)
General Re (Continued)
million net of reinsurance). As of December 31, 2001 such amounts totaled $1,248 million ($966 million net of
reinsurance). Net paid losses on such claims were $59 million in 2002. The changing legal environment
concerning asbestos claims together with the widespread use of asbestos related products in the U.S. over the past
century has made quantification of potential exposures very difficult. Future changes to the legal environment may
precipitate significant changes in reserves.
Due to the long-tail nature of casualty business, a very high degree of estimation is involved in establishing
loss reserves for current accident year occurrences. Thus, the ultimate level of underwriting gain or loss with
respect to the 2002 accident year will not be fully known for many years. North American property/casualty loss
reserves were $16.2 billion ($14.9 billion net of reinsurance) at December 31, 2002 and $15.1 billion ($13.6 billion
net of reinsurance) at December 31, 2001. About 50% of these amounts represent estimates of IBNR losses.
Although loss reserve levels are now believed to be adequate, there can be no guarantees. A relatively
small change in the estimate of net reserves can produce large changes in annual underwriting results. For instance,
a one percentage point change in net reserves at year end 2002 would produce a pre-tax underwriting gain or loss of
$149 million, or roughly 4% of premiums earned in 2002. In addition, the timing and magnitude of catastrophes
and large individual property losses are expected to continue to contribute to volatile periodic underwriting results
in the future.
International property/casualty
The international property/casualty operations write quota-share and excess reinsurance on risks around the
world. International property/casualty business is written on a direct reinsurance basis (primarily through Cologne
Re) and in the London market (through Faraday). In recent years, General Re’ s largest international markets have
been in Western Europe.
Overall premiums earned in 2002 exceeded 2001 amounts by $250 million (10.4%). Adjusting for the
effects of foreign exchange rates, premiums earned in local currencies increased 8.5% in 2002. In local currencies,
premiums earned in the direct markets declined 2.1% in 2002, primarily due to a substantial decline in premiums in
Argentina, the non-renewal of under-performing business in continental Europe and parts of Asia, partially offset by
increases in the United Kingdom and Australia. London market premiums in local currencies increased 41.9%
primarily due to increased participation in Faraday Syndicate 435 from 60.6% in 2001 to 96.7% in 2002. Premiums
earned in 2001 declined $649 million from 2000. The primary reason for the decline was the elimination of the
one-quarter lag in reporting by this business in the fourth quarter of 2000. As a result, 2000’ s fourth quarter
included two quarters of activity for the international property/casualty operations. Otherwise, international
property/casualty premiums earned in 2001 reflected growth in the London market operations from increased
participation in Faraday Syndicate 435 (60.6% in 2001 versus 39.7% in 2000).
The direct market reinsurance operations produced an underwriting loss of $315 million for 2002.
Significantly impacting 2002 results were $240 million of net losses on prior years’ loss estimates, where claims
reported exceeded actuarial expectations, and approximately $107 million in catastrophe and other large individual
property losses, principally European flood losses in August and European storm Jeanette in October. The
underwriting loss of $568 million in 2001 included $247 million of net losses related to the September 11th terrorist
attack and $143 million resulting from other large individual property losses. Large individual property losses for
2000 aggregated $80 million.
London market operations produced an underwriting loss in 2002 of $4 million, compared with an
underwriting loss of $178 million in 2001. Underwriting results in 2002 benefited from improved market
conditions and below normal property losses in the current accident year, but were adversely impacted by $17
million of European flood losses and $80 million of increases in prior years’ loss reserve estimates. The London
market underwriting loss in 2001 included $66 million from the September 11th terrorist attack as well as relatively
high property losses.