Berkshire Hathaway 1999 Annual Report Download - page 35

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Notes to Consolidated Financial Statements (Continued)
(7) Finance and financial products businesses (Continued)
The derivative financial instruments involve, to varying degrees, elements of market, credit, and legal risks. Market risk is
the possibility that future changes in market conditions may make the derivative financial instrument less valuable. Credit risk is
defined as the possibility that a loss may occur from the failure of another party to perform in accordance with the terms of the
contract which exceeds the value of existing collateral, if any. The derivative’s risk of credit loss is generally a small fraction of
notional value of the instrument and is represented by the fair value of the derivative financial instrument. Legal risk arises from
the uncertainty of the enforceability of the obligations of another party, including contractual provisions intended to reduce credit
exposure by providing for the offsetting or netting of mutual obligations.
With respect to Berkshire’s life insurance business, annuity reserves and policyholder liabilities are carried at th e
present value of the actuarially determined ultimate payment amounts discounted at market interest rates existing at the
inception of the contracts. Such interest rates range from 5% to 8%. Periodic accretions of the discounted liabilities are
charged against income from finance and financial products businesses.
Investments in securities with fixed maturities held by Berkshire’s life insurance business are classified as held-to-
maturity. Investments classified as held-to-maturity are carried at amortized cost reflecting the Company’s ability and intent
to hold such investments to maturity. Such items consist predominantly of mortgage loans and collateralized mortgage
obligations.
(8) Unpaid losses and loss adjustment expenses
Supplemental data with respect to unpaid losses and loss adjustment expenses of property/casualty insurance
subsidiaries (in millions) is as follows:
1999 1998 1997
Unpaid losses and loss adjustment expenses:
Balance at beginning of year ....................................... $23,012 $6,850 $6,274
Less ceded liabilities and deferred charges ............................. 2,727 754 586
Net balance ................................................... 20,285 6,096 5,688
Incurred losses recorded:
Current accident year ............................................ 11,275 4,235 3,551
All prior accident years ........................................... (192) (195) (131)
Total incurred losses ............................................. 11,083 4,040 3,420
Payments with respect to:
Current accident year ............................................ 3,648 1,919 1,602
All prior accident years ........................................... 4,532 1,834 1,410
Total payments ................................................. 8,180 3,753 3,012
Unpaid losses and loss adjustment expenses:
Net balance at end of year ......................................... 23,188 6,383 6,096
Ceded liabilities and deferred charges ................................. 3,848 2,727 754
Foreign currency translation adjustment ............................... (234) — —
Net liabilities assumed in connection with business acquisitions .............. — 13,902 —
Balance at end of year ............................................. $26,802 $23,012 $6,850
Incurred losses “all prior accident years” reflects the amount of estimation error charged or credited to earnings in each
year with respect to the liabilities established as of the beginning of that year. This amount includes amortization of deferred
charges regarding retroactive reinsurance assumed and accretion of discounted liabilities. See Note 1 for additional
information regarding these items. Additional information regarding incurred losses will be revealed over time and the
estimates will be revised resulting in gains or losses in the periods made.