Berkshire Hathaway 2008 Annual Report Download - page 68

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. BHRG’s underwriting results are summarized in
the table below. Amounts are in millions.
Premiums earned Pre-tax underwriting gain/loss
2008 2007 2006 2008 2007 2006
Catastrophe and individual risk ................................ $ 955 $ 1,577 $2,196 $ 776 $1,477 $1,588
Retroactive reinsurance ...................................... 204 7,708 146 (414) (375) (173)
Other multi-line ............................................ 3,923 2,617 2,634 962 325 243
$5,082 $11,902 $4,976 $1,324 $1,427 $1,658
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). 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 these risks to mitigate volatility as management accepts such potential volatility provided that
the long-term prospect of achieving underwriting profits is reasonable.
Premiums earned from catastrophe and individual risk contracts in 2008 declined 39% from 2007, which decreased 28%
versus 2006. Catastrophe and individual risk premiums written were approximately $1.1 billion in 2008, $1.2 billion in 2007
and $2.4 billion in 2006. The decreases in premium volume were principally attributable to increased industry capacity for
catastrophe reinsurance, which has produced increased price competition and fewer opportunities to write business at prices
considered adequate by BHRG management. 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.
During 2008, Berkshire entered into a contract under which it received a payment of $224 million and agreed to purchase,
under certain conditions, up to $4 billion of revenue bonds issued by the Florida Hurricane Catastrophe Fund Finance
Corporation. Berkshire’s obligation was conditioned upon, among other things, the occurrence of a specified amount of
hurricane losses in Florida during a period that expired on December 31, 2008. The minimum amount of hurricane losses
required to trigger Berkshire’s acquisition of the bonds was not met and the consideration received was earned as of December
31, 2008 and is included in the underwriting results of the catastrophe and individual risk business.
Underwriting results in 2008 for the catastrophe and individual risk business also included approximately $270 million of
estimated losses from Hurricanes Gustav and Ike. The underwriting results from catastrophe and individual risk business in
2007 and 2006 reflected no significant losses from catastrophe events occurring in 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.
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. Underwriting losses from
retroactive reinsurance include the amortization of deferred charges established on the contracts. At the inception of a contract,
deferred charges represent the difference between the premium received and the estimated ultimate losses 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 13 to the accompanying Consolidated Financial Statements. Otherwise,
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