Berkshire Hathaway 2006 Annual Report Download - page 56

55
Insurance — Underwriting (Continued)
A key marketing strategy followed by all of these businesses is the maintenance of extraordinary capital strength.
Statutory surplus of Berkshire’s insurance businesses was approximately $59 billion at December 31, 2006. This superior capital
strength creates opportunities, especially with respect to reinsurance activities, to negotiate and enter into insurance and
reinsurance contracts specially designed to meet unique needs of insurance and reinsurance buyers. Additional information
regarding Berkshire’s insurance and reinsurance operations follows.
GEICO
GEICO provides primarily private passenger automobile coverages to insureds in 49 states and the District of
Columbia. GEICO policies are marketed mainly by direct response methods in which customers apply for coverage directly to
the company via the Internet, over the telephone or through the mail. This is a significant element in GEICO’s strategy to be a
low-cost insurer. In addition, GEICO strives to provide excellent service to customers, with the goal of establishing long-term
customer relationships.
GEICO’s underwriting results for the past three years are summarized below. Dollars are in millions.
2006 2005 2004
Amount %Amount %Amount %
Premiums written ............................................................... $11,303 $10,285 $9,212
Premiums earned................................................................ $11,055 100.0 $10,101 100.0 $8,915 100.0
Losses and loss adjustment expenses ................................. 7,749 70.1 7,128 70.6 6,360 71.3
Underwriting expenses....................................................... 1,992 18.0 1,752 17.3 1,585 17.8
Total losses and expenses................................................... 9,741 88.1 8,880 87.9 7,945 89.1
Pre-tax underwriting gain................................................... $ 1,314 $ 1,221* $ 970
* Net of losses of $200 million from Hurricanes Katrina, Rita and Wilma.
Premiums earned in 2006 and 2005 increased 9.4% and 13.3%, respectively, over the corresponding prior year
amounts. The growth in premiums earned in 2006 for voluntary auto was 9.3% and reflects a 10.7% increase in policies-in-force
during the past year. During 2006, policies-in-force increased 11.3% in the preferred risk markets and 8.6% in the standard and
nonstandard markets. Voluntary auto new business sales in 2006 increased 8.8% compared to 2005. Voluntary auto policies-in-
force at December 31, 2006 were 721,000 higher than at December 31, 2005. Premium rates have been reduced and
underwriting guidelines have been adjusted in certain markets to better match price with the underlying risk resulting in
relatively lower premiums per policy.
Losses and loss adjustment expenses in 2006 were $7,749 million, an increase of 8.7% over 2005. The loss ratio
declined to 70.1% in 2006 compared to 70.6% in 2005 and 71.3% in 2004 primarily due to decreasing claim frequencies across
all markets and most coverage types. In 2006, claims frequencies for physical damage coverages decreased in the two to five
percent range from 2005 while frequencies for injury coverages decreased in the two to five percent range. Injury severity in
2006 increased in the two to five percent range over 2005 while physical damage severity increased in the four to seven percent
range. Incurred losses from catastrophe events were approximately $54 million in 2006, $227 million in 2005 (primarily from
the hurricanes in the third and fourth quarters) and $71 million in 2004.
Underwriting expenses in 2006 were $1,992 million, an increase of 13.7% over 2005, which increased 10.5% over
2004. The increase in expenses in 2006 reflected higher advertising costs as well as incremental underwriting and policy
issuance costs associated with new business sales.
General Re
General Re conducts a reinsurance business offering property and casualty and life and health coverages to clients
worldwide. In North America, property and casualty reinsurance is written on a direct basis through General Reinsurance
Corporation. Internationally, property and casualty reinsurance is written on a direct basis through 95% owned Cologne Re
(based in Germany) and other wholly-owned affiliates as well as through brokers with respect to Faraday in London. Life and
health reinsurance is written for clients worldwide through Cologne Re. General Re’s pre-tax underwriting results are
summarized for the past three years in the following table. Amounts are in millions.
Pre-tax underwriting
Premiums written Premiums earned gain (loss)
2006 2005 2004 2006 2005 2004 2006 2005 2004
Property/casualty:
North American ......... $1,731 $1,988 $2,747 $1,799 $2,201 $3,012 $ 127 $ (307) $ 11
International............... 1,850 1,864 2,091 1,912 1,939 2,218 246 (138) (93)
Life/health ....................... 2,368 2,303 2,022 2,364 2,295 2,015 153 111 85
$5,949 $6,155 $6,860 $6,075 $6,435 $7,245 $ 526 $ (334)* $ 3
* Includes losses of $685 million related to Hurricanes Katrina, Rita and Wilma.