Berkshire Hathaway 2007 Annual Report Download - page 40

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(11) Unpaid losses and loss adjustment expenses (Continued)
exposure to environmental and latent injury claims under these contracts is, 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 increases in these liabilities.
Such development could be material to Berkshire’ s results of operations. It is not possible to reliably estimate the amount of
additional net loss or the range of net loss that is reasonably possible.
In November 2006, the Berkshire Hathaway Reinsurance Group’ s lead insurance entity, National Indemnity Company
(“NICO”) and Equitas, a London based entity established to reinsure and manage the 1992 and prior years’ non-life insurance and
reinsurance liabilities of the Names or Underwriters at Lloyd’ s of London, entered into an agreement for NICO to initially provide up
to $5.7 billion and potentially provide up to an additional $1.3 billion of reinsurance to Equitas in excess of its undiscounted loss and
allocated loss adjustment expense reserves as of March 31, 2006. The transaction became effective on March 30, 2007. The
agreement requires that NICO pay all claims and related costs that arise from the underlying insurance and reinsurance contracts of
Equitas, subject to the aforementioned excess limit of indemnification. On the effective date, the aggregate limit of indemnification,
which does not include unallocated loss adjustment expenses, was $13.8 billion. A significant amount of loss exposure associated
with Equitas is related to asbestos, environmental and latent injury claims.
NICO received substantially all of Equitas’ assets as consideration under the arrangement. The fair value of such consideration
was $7.1 billion and included approximately $540 million in cash and miscellaneous receivables plus a combination of fixed maturity
and equity securities which were delivered in April 2007. The cash and miscellaneous receivables received are included in the
accompanying Consolidated Statement of Cash Flows for 2007 as components of operating cash flows. The investment securities
received are reported as a non-cash investing activity.
The Equitas agreement was accounted for as reinsurance in accordance with SFAS No. 113 “Accounting for short duration and
long duration reinsurance contracts.” Accordingly, premiums earned of $7.1 billion and losses incurred of $7.1 billion are reflected
in the Consolidated Statement of Earnings. Losses incurred consisted of an estimated liability for unpaid losses and loss adjustment
expenses of $9.3 billion less an asset for unamortized deferred charges reinsurance assumed of $2.2 billion. The deferred charge
asset is being amortized over the expected remaining loss settlement period using the interest method and the periodic amortization is
being charged to earnings as a component of losses and loss adjustment expenses incurred.
(12) Notes payable and other borrowings
Notes payable and other borrowings of Berkshire and its subsidiaries are summarized below. Amounts are in millions.
2007 2006
Insurance and other:
Issued by Berkshire due 2025-2033.................................................................................................
.
$ 250 $ 894
Issued by subsidiaries and guaranteed by Berkshire:
Commercial paper and other short-term borrowings..................................................................
.
1,192 1,355
Other debt due 2009-2035..........................................................................................................
.
240 240
Issued by subsidiaries and not guaranteed by Berkshire due 2008-2041 .........................................
.
998 1,209
$ 2,680 $ 3,698
Notes payable and other borrowings issued by Berkshire includes several individual investment agreement borrowings under
which Berkshire is required to periodically pay interest over the contract terms. Under certain conditions, principal amounts may be
redeemed without premium prior to the contractual maturity date at the option of the counterparties. Commercial paper and other
short-term borrowings are utilized by certain subsidiaries as part of normal business operations. Weighted average interest rates as of
December 31, 2007 and 2006 were 4.6% and 5.4%, respectively.
2007 2006
Utilities and energy:
Issued by MidAmerican and its subsidiaries and not guaranteed by Berkshire:
MidAmerican senior unsecured debt due 2008-2037................................................................... $ 5,471 $ 4,479
Subsidiary and project debt due 2008-2037 ................................................................................. 13,227 12,014
Other ............................................................................................................................................ 304 453
$19,002 $16,946
Subsidiary and project debt of utilities and energy businesses represents amounts issued by subsidiaries of MidAmerican
pursuant to separate project financing agreements. All or substantially all of the assets of certain utility subsidiaries are or may be
pledged or encumbered to support or otherwise provide security. These borrowing arrangements generally contain various covenants
including, but not limited to, leverage ratios, interest coverage ratios and debt service coverage ratios. As of December 31, 2007,
MidAmerican and its subsidiaries were in compliance with all applicable covenants. During 2007, MidAmerican issued $3.55 billion
par amount of bonds and senior notes with maturities ranging from 2012 to 2037. The proceeds were used to repay existing debt or
otherwise are intended to be used to repay debt maturing subsequent to December 31, 2007, to finance planned capital expenditures
or for general corporate purposes. Berkshire has made a commitment until February 28, 2011 that allows MidAmerican to request up
to $3.5 billion of capital to pay its debt obligations or to provide funding to its regulated subsidiaries.