Berkshire Hathaway 2012 Annual Report Download - page 73

Management’s Discussion (Continued)
Insurance—Underwriting (Continued)
Berkshire Hathaway Reinsurance Group (Continued)
Multi-line property/casualty underwriting results regularly include foreign currency transaction gains or losses associated
with the changes in the valuation of certain reinsurance liabilities of U.S. based subsidiaries (including liabilities arising under
retroactive reinsurance contracts) denominated in foreign currencies as a result of foreign currency exchange rate fluctuations.
Underwriting results included foreign currency transaction losses of $123 million in 2012, gains of $140 million in 2011 and
losses of $168 million in 2010.
Life and annuity premiums earned in 2012 increased $672 million (31%) over 2011, which was attributable to new annuity
contracts. Premiums earned in 2011 and 2010 primarily derived from a life reinsurance contract entered into in January 2010
with Swiss Re Life & Health America Inc. (“SRLHA”) and a life reinsurance business acquired as of December 31, 2010 from
Sun Life Assurance Company of Canada.
In 2012, the life reinsurance business produced underwriting losses of $12 million versus $582 million in 2011 and $83
million in 2010. In 2011, we recorded a pre-tax underwriting loss of $642 million with respect to the SRLHA contract.
Mortality rates under that contract have persistently exceeded the assumptions we made at the inception of the contract. During
the fourth quarter of 2011, after considerable internal actuarial analysis, our management concluded that future mortality rates
are expected to be greater than our original assumptions. As a result, we increased our estimated liabilities for future
policyholder benefits to reflect the new assumptions. The liabilities established in connection with the SRLHA contract reflect
our best estimates for expected mortality, lapse rates, future premiums on the underlying policies and discount rates. We do not
currently believe significant additional net underwriting losses under this contract are likely.
The annuity business generated underwriting losses of $178 million in 2012, $118 million in 2011 and $114 million in
2010. Annuity underwriting losses reflect the periodic discount accretion of the discounted liabilities established for such
contracts as well as adjustments for mortality experience. At December 31, 2012, annuity liabilities were approximately $3.8
billion, an increase of approximately $1.7 billion since December 31, 2011, reflecting the aforementioned increase in new
business in 2012.
Berkshire Hathaway Primary Group
Our primary insurance group consists of a wide variety of independently managed insurance businesses that principally
write liability coverages for commercial accounts. These businesses include: Medical Protective Company (“MedPro”) and
Princeton Insurance Company (acquired effective December 31, 2011), providers of healthcare malpractice insurance to
physicians, dentists and other healthcare providers and healthcare facilities; National Indemnity Company’s primary group,
writers of commercial motor vehicle and general liability coverages; U.S. Investment Corporation, whose subsidiaries
underwrite specialty insurance coverages; a group of companies referred to internally as “Berkshire Hathaway Homestate
Companies,” providers of commercial multi-line insurance, including workers’ compensation; Central States Indemnity
Company, a provider of credit and disability insurance to individuals nationwide through financial institutions; Applied
Underwriters, a provider of integrated workers’ compensation solutions; and BoatU.S., a writer of insurance for owners of boats
and small watercraft. In the fourth quarter of 2012, we acquired Clal U.S. Holdings, which owns GUARD Insurance Group
(“GUARD”), a provider of commercial property and casualty insurance coverage to small and mid-sized businesses.
Premiums earned in 2012 by our various primary insurers were $2,263 million, an increase of $514 million (29%), over
2011. The increase was primarily due to increased volume of workers’ compensation insurance from the Berkshire Hathaway
Homestate Companies and premiums from Princeton Insurance Company and GUARD. Premium volume of certain of our other
primary insurers continues to be constrained by market conditions. We have the capacity and desire to write substantially more
volume when market conditions improve. In 2012, our primary insurers produced underwriting gains of $286 million, an
increase of $44 million (18%) over 2011. Underwriting gains as percentages of premiums earned were approximately 13% in
2012 and 14% in 2011.
Earned premiums by our primary insurance businesses in 2011 were approximately $1.7 billion, which was relatively
unchanged from 2010. The underwriting gain in 2011 reflects favorable loss experience at MedPro and Applied Underwriters,
including overall reductions of estimated liabilities for prior years’ losses, partially offset by increased underwriting losses of
the Berkshire Hathaway Homestate Companies.
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