Berkshire Hathaway 2007 Annual Report Download - page 55

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Management’s Discussion (Continued)
Insurance — Underwriting (Continued)
Berkshire Hathaway Reinsurance Group
The Berkshire Hathaway Reinsurance Group (“BHRG”) underwrites excess-of-loss reinsurance and quota-share
coverages for insurers and reinsurers worldwide. BHRG’ s business includes catastrophe excess-of-loss reinsurance and excess
direct and facultative reinsurance for large or otherwise unusual discrete property risks referred to as individual risk. Retroactive
reinsurance policies provide indemnification of losses and loss adjustment expenses with respect to past loss events. Other
multi-line refers to other business written on both a quota-share and excess basis, participations in and contracts with Lloyd’ s
syndicates as well as property, aviation and workers’ compensation programs. The timing and amount of catastrophe losses can
produce extraordinary volatility in BHRG’ s periodic underwriting results. BHRG’ s underwriting results are summarized below.
Amounts are in millions.
Premiums earned Pre-tax underwriting gain (loss)
2007 2006 2005 2007 2006 2005
Catastrophe and individual risk.............................. $ 1,577 $2,196 $1,663 $1,477 $1,588 $(1,178)
Retroactive reinsurance .......................................... 7,708 146 10 (375) (173) (214)
Other multi-line...................................................... 2,617 2,634 2,290 325 243 323
$11,902 $4,976 $3,963 $1,427 $1,658 $(1,069)*
* Includes losses of $2.5 billion from Hurricanes Katrina, Rita and Wilma.
Catastrophe and individual risk contracts may provide exceptionally large limits of indemnification, often several
hundred million dollars and occasionally in excess of $1 billion, and cover catastrophe risks (such as hurricanes, earthquakes or
other natural disasters) or other property risks (such as aviation and aerospace, commercial multi-peril or terrorism). Premiums
earned from catastrophe and individual risk contracts in 2007 declined 28% from 2006 which increased 32% over 2005.
Catastrophe and individual risk premiums written were approximately $1.2 billion in 2007, $2.4 billion in 2006 and $1.8 billion
in 2005. The decrease in written and earned premiums in 2007 was principally attributable to increased industry capacity for
catastrophe reinsurance which has produced increased price competition and fewer opportunities to write business. The level of
catastrophe and individual risk business written in a given period will vary significantly based upon market conditions and
management’ s assessment of the adequacy of premium rates.
The underwriting results from catastrophe and individual risk business in 2007 and 2006 reflected no significant losses
from catastrophe events during those years. In 2006, BHRG incurred losses of approximately $200 million attributable to prior
years’ events, primarily Hurricane Wilma which occurred in the fourth quarter of 2005. The underwriting results in 2005
included estimated losses of approximately $2.4 billion from Hurricanes Katrina, Rita and Wilma. The timing and magnitude of
losses produce extraordinary volatility in periodic underwriting results of BHRG’ s catastrophe and individual risk business.
BHRG does not cede catastrophe and individual risks to mitigate the volatility. Management accepts such potential volatility
provided that the long-term prospect of achieving underwriting profits is reasonable.
Retroactive policies normally provide very large, but limited, indemnification of unpaid losses and loss adjustment
expenses with respect to past loss events that are expected to be paid over long periods of time. The underwriting losses from
retroactive reinsurance are primarily attributable to the amortization of deferred charges established on the contracts. At the
inception of the contract, deferred charges represent the difference between the premium received and the estimated ultimate loss
reserves payable. Deferred charges are amortized over the estimated claims payment period using the interest method. The
amortization charges are based on the estimated timing and amount of loss payments and are recorded as a component of losses
and loss adjustment expenses.
Premiums earned from retroactive reinsurance in 2007 included $7.1 billion from the Equitas reinsurance agreement
which became effective on March 30, 2007. See Note 11 to the accompanying Consolidated Financial Statements. At the
inception of the Equitas contract, estimated liabilities for losses and loss adjustment expenses of $9.3 billion and an asset for
deferred charges reinsurance assumed of $2.2 billion were recorded. At December 31, 2007, unamortized deferred charges for
all of BHRG’ s retroactive contracts (including the Equitas contract) were approximately $3.8 billion and gross unpaid losses
were approximately $17.3 billion.
The underwriting loss from retroactive policies in 2007 included deferred charge amortization of $156 million on
contracts written in 2007 (primarily the Equitas contract). There were no significant reserve changes in 2007 related to pre-2007
contracts. Underwriting losses from retroactive reinsurance in 2006 are net of gains of approximately $145 million which
primarily derived from contracts that were commuted or amended during the last half of 2006. Underwriting losses in 2005 from
retroactive reinsurance are net of a gain of approximately $46 million related to the commutation of a contract.
Other multi-line premiums earned in 2007 reflect significant increases in property business and significant decreases in
casualty excess reinsurance. In addition, the management of certain workers’ compensation business was transferred to the
Berkshire Hathaway Primary Group and the results for this business are now included in that group’ s results. Premiums earned
from other multi-line business increased in 2006 as compared to 2005 due to growth in workers’ compensation business. Multi-
line business produced a pre-tax underwriting gain of $325 million in 2007 and $243 million in 2006 reflecting relatively low
loss ratios on property business and favorable loss experience on workers’ compensation business. Underwriting results in 2005
included estimated losses of approximately $100 million from Hurricanes Katrina, Rita and Wilma.