Berkshire Hathaway 2007 Annual Report Download - page 39

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Notes to Consolidated Financial Statements (Continued)
(10) Derivatives (Continued)
Berkshire is also exposed to variations in the market prices of natural gas and electricity as a result of its regulated utility
operations and uses derivative instruments, including forward purchases and sales, futures, swaps and options to manage these
commodity price risks. Gains and losses under these contracts are either probable of recovery through rates and therefore are
recorded as a regulatory net asset or liability or are accounted for as cash flow hedges and therefore are recorded as accumulated
other comprehensive income.
(11) 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.
Supplemental data with respect to unpaid losses and loss adjustment expenses of property/casualty insurance subsidiaries is as
follows (in millions).
2007 2006 2005
Unpaid losses and loss adjustment expenses:
Gross liabilities at beginning of year.............................................................................. $47,612 $48,034 $45,219
Ceded losses and deferred charges at beginning of year................................................ (4,833) (5,200) (5,132)
Net balance at beginning of year .................................................................................... 42,779 42,834 40,087
Incurred losses recorded during the year:
Current accident year...................................................................................................... 22,488 13,680 15,839
Prior accident years ........................................................................................................ (1,478) (612) (357)
Total incurred losses....................................................................................................... 21,010 13,068 15,482
Payments during the year with respect to:
Current accident year...................................................................................................... (6,594) (5,510) (5,514)
Prior accident years ........................................................................................................ (8,865) (9,345) (7,793)
Total payments ............................................................................................................... (15,459) (14,855) (13,307)
Unpaid losses and loss adjustment expenses:
Net balance at end of year .............................................................................................. 48,330 41,047 42,262
Ceded losses and deferred charges at end of year .......................................................... 7,126 4,833 5,200
Foreign currency translation adjustment ........................................................................ 534 608 (728)
Acquisitions.................................................................................................................... 12 1,124 1,300
Gross liabilities at end of year ........................................................................................... $56,002 $47,612 $48,034
Incurred losses “prior accident years” reflects the amount of estimation error charged or credited to earnings in each calendar
year with respect to the liabilities established as of the beginning of that year. The beginning of the year net losses and loss
adjustment expenses liability was reduced by $1,793 million in 2007, $1,071 million in 2006 and $743 million in 2005. In each year,
the reductions in loss estimates for occurrences in prior years were primarily due to lower than expected frequencies and severities on
reported and settled claims in the primary private passenger and commercial auto lines and lower than expected reinsurance losses in
various property and casualty lines. Developed frequencies were generally more favorable than originally expected, particularly for
liability coverages, and claim severity increases were generally less than originally estimated. In 2006, prior years’ loss estimates
were reduced for certain casualty reinsurance claims as a result of lower than expected losses reported during the year. Accident year
loss estimates are regularly adjusted to consider emerging loss development patterns of prior years losses, whether favorable or
unfavorable.
Prior accident years incurred losses also include amortization of deferred charges related to retroactive reinsurance contracts
incepting prior to the beginning of the year. Amortization charges included in prior accident years’ losses were $213 million in 2007,
$358 million in 2006 and $294 million in 2005. Certain workers’ compensation loss reserves are discounted. Net discounted
liabilities at December 31, 2007 and 2006 were $2,436 million and $2,705 million, respectively, reflecting net discounts of $2,732
million and $2,793 million, respectively. Periodic accretions of these discounts are also a component of incurred prior accident years
losses. The accretion of discounted liabilities related to prior years’ losses was approximately $102 million in 2007, $101 million in
2006 and $92 million in 2005.
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 and 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.
The liabilities for environmental, asbestos and latent injury claims and claims expenses net of reinsurance recoverables were
approximately $11.2 billion at December 31, 2007 and $5.1 billion at December 31, 2006. These liabilities included approximately
$9.7 billion at December 31, 2007 and $3.8 billion at December 31, 2006, of liabilities assumed under retroactive reinsurance
contracts. The increase during 2007 is primarily as a result of the Equitas agreement (see following paragraphs). Liabilities arising
from retroactive contracts with exposure to claims of this nature are generally subject to aggregate policy limits. Thus, Berkshire’ s