Berkshire Hathaway 2011 Annual Report Download - page 65

Management’s Discussion (Continued)
Insurance—Underwriting
We engage in both primary insurance and reinsurance of property and casualty risks. In primary insurance activities, we
assume defined portions of the risks of loss from persons or organizations that are directly subject to the risks. In reinsurance
activities, we assume defined portions of similar or dissimilar risks that other insurers or reinsurers have subjected themselves to
in their own insuring activities. Our insurance and reinsurance businesses are: (1) GEICO, (2) General Re, (3) Berkshire
Hathaway Reinsurance Group (“BHRG”) and (4) Berkshire Hathaway Primary Group. Through General Re and BHRG, we also
reinsure life and health risks.
Our management views insurance businesses as possessing two distinct operations – underwriting and investing.
Underwriting decisions are the responsibility of the unit managers; investing, with limited exceptions, is the responsibility of
Berkshire’s Chairman and CEO, Warren E. Buffett. Accordingly, we evaluate performance of underwriting operations without
any allocation of investment income.
The timing and amount of catastrophe losses can produce significant volatility in our periodic underwriting results,
particularly with respect to BHRG and General Re. In 2011, we recorded aggregate pre-tax losses from catastrophe events of
approximately $2.6 billion, arising primarily from the earthquakes in Japan and New Zealand, as well as weather related events
in the Pacific Rim and the U.S.
Our periodic underwriting results are often affected significantly by changes in estimates for unpaid losses and loss
adjustment expenses, including amounts established for occurrences in prior years. In 2011, we reduced estimated liabilities
related to certain retroactive reinsurance contracts which resulted in an increase in pre-tax underwriting earnings of
approximately $875 million. These reductions were primarily due to lower than expected loss experience of one ceding
company. Actual claim settlements and revised loss estimates will develop over time, which will likely differ from the liability
estimates recorded as of year-end (approximately $64 billion). Accordingly, the unpaid loss estimates recorded as of
December 31, 2011 may develop upward or downward in future periods with a corresponding decrease or increase, respectively,
to pre-tax earnings.
Our periodic underwriting results may also include significant foreign currency transaction gains and losses arising from
the changes in the valuation of certain non-U.S. Dollar denominated reinsurance liabilities into U.S. Dollars as a result of
foreign currency exchange rate fluctuations. In recent years, currency exchange rates have been volatile and the resulting impact
on our underwriting earnings has been significant.
A key marketing strategy followed by all of our insurance businesses is the maintenance of extraordinary capital strength.
Statutory surplus of our insurance businesses was approximately $95 billion at December 31, 2011. 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 the unique needs of insurance and reinsurance buyers.
Underwriting results from our insurance businesses are summarized below. Amounts are in millions.
2011 2010 2009
Underwriting gain (loss) attributable to:
GEICO ....................................................................... $576 $1,117 $ 649
General Re .................................................................... 144 452 477
Berkshire Hathaway Reinsurance Group ............................................. (714) 176 250
Berkshire Hathaway Primary Group ................................................ 242 268 84
Pre-tax underwriting gain (loss) ....................................................... 248 2,013 1,460
Income taxes and noncontrolling interests ................................................ 94 712 511
Net underwriting gain (loss) .................................................. $154 $1,301 $ 949
63