Berkshire Hathaway 2005 Annual Report Download - page 41

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Notes to Consolidated Financial Statements (Continued)
(11) Derivatives (Continued)
Master netting agreements are utilized to manage counterparty credit risk, where gains and losses are netted across other
contracts with that counterparty. In addition, Berkshire may receive cash or securities from counterparties as collateral. Likewise,
Berkshire may be required to post cash or securities as collateral with counterparties under similar circumstances. At December 31,
2005, Berkshire held collateral with a fair value of $422 million, including cash of $379 million to secure open contract assets. At
December 31, 2005, Berkshire posted collateral with a fair value of approximately $853 million (which includes $487 million in cash)
with counterparties as security on contract liabilities. Berkshire may be required to post collateral to cover derivative liabilities in the
event of a downgrade of its credit rating below specified levels. Assuming non-performance by all counterparties on all contracts
potentially subject to a credit loss, the maximum potential receivable loss, net of collateral held, at December 31, 2005 approximated
$379 million.
(12) Unpaid losses and loss adjustment expenses
The balances of unpaid losses and loss adjustment expenses are based upon estimates of the ultimate claim costs associated
with property and casualty claim occurrences as of the balance sheet dates including estimates for incurred but not reported (“IBNR”)
claims. Considerable judgment is required to evaluate claims and establish estimated claim liabilities, particularly with respect to
certain casualty or liability claims, which are typically reported over long periods of time and subject to changing legal and litigation
trends. This delay in claim reporting is exacerbated in reinsurance of liability or casualty claims as claim reporting by ceding
companies is further delayed by contract terms.
Supplemental data with respect to unpaid losses and loss adjustment expenses of property/casualty insurance subsidiaries is as
follows (in millions).
2005 2004 2003
Unpaid losses and loss adjustment expenses:
Gross liabilities at beginning of year.............................................................................. $45,219 $45,393 $43,771
Ceded losses and deferred charges at beginning of year................................................ (5,132) (5,684) (6,002)
Net balance at beginning of year.................................................................................... 40,087 39,709 37,769
Incurred losses recorded during the year:
Current accident year...................................................................................................... 15,839 13,043 13,135
All prior accident years................................................................................................... (357) 419 480
Total incurred losses....................................................................................................... 15,482 13,462 13,615
Payments during the year with respect to:
Current accident year...................................................................................................... (5,514) (4,746) (4,493)
All prior accident years................................................................................................... (7,793) (8,828) (8,092)
Total payments ............................................................................................................... (13,307) (13,574)(12,585)
Unpaid losses and loss adjustment expenses:
Net balance at end of year .............................................................................................. 42,262 39,597 38,799
Ceded losses and deferred charges at end of year .......................................................... 5,200 5,132 5,684
Foreign currency translation adjustment ........................................................................ (728) 490 910
Acquisitions.................................................................................................................... 1,300 — —
Gross liabilities at end of year ........................................................................................... $48,034 $45,219 $45,393
Prior accident years losses incurred in 2005 include amortization of deferred charges related to retroactive reinsurance contracts
incepting prior to January 1, 2005. Amortization charges included in prior accident years losses were $294 million in 2005, $451
million in 2004 and $432 million in 2003.
Certain workers’ compensation reserves are discounted. Net discounted liabilities at December 31, 2005 and 2004 were $2,434
million and $2,280 million, respectively, and are net of discounts totaling $2,798 million and $2,611 million. Periodic accretions of
these discounts are also a component of prior years losses incurred. The accretion of discounted liabilities was approximately $92
million in 2005, $87 million in 2004 and $85 million in 2003.
Incurred losses “all prior accident years” also 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. In both 2005 and 2004, Berkshire reduced the
beginning of the year net loss and loss adjustment expense liability by $743 million and $119 million respectively. In 2003,
Berkshire recorded a loss of $37 million related to prior years loss occurrences.
Berkshire’ s insurance subsidiaries are exposed 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 IBNR reserves. IBNR reserves are determined based upon
Berkshire’ s historic general liability exposure base and policy language, previous environmental loss experience and the assessment
of current trends of environmental law, environmental cleanup costs, asbestos liability law and judgmental settlements of asbestos
liabilities.